As a financial adviser, Elyse Foster helps clients navigate tricky personal issues around managing their money. But the coronavirus has brought an extra layer of complexity — especially where family is concerned.
One client lent a newly unemployed sibling $10,000. But that good intention went awry quickly when the client later learned that his son needed money, too. “The son resented the father for not realizing” it, said Ms. Foster, chief executive of Harbor Wealth Management in Boulder, Colo.
Other gainfully employed clients who have relatives in sudden need of financial help are also confronting minefields over whether and how to lend.
“We’ve had parents who are maybe considering making loans to one child, and another child will say, ‘So he’s getting rewarded for spending too much, or not working, or making bad decisions?’ Ms Foster said. “We’ve seen families almost torn apart since the pandemic.”
As the coronavirus continues to dismantle livelihoods across the country, advisers can expect family financial dramas to keep surfacing, according to a new survey from Commonwealth, a nonprofit group that researches financial opportunities and security for the financially vulnerable.
The survey, conducted in late April, collected responses from 944 people throughout the United States with household incomes under $75,000. Among them, 16 percent of those who had been permanently laid off reported receiving more financial support from family or friends than they had before Feb. 1.
The rules for how much to lend and when, if ever, to expect repayment are being written in real time, like so much of life during the pandemic. “Twenty percent of people will call and say, ‘Can I afford to do this?’” Ms. Foster said. “But the other 80 percent are very determined and have already committed to making a loan. So we’re immediately thrown into ‘Where are you in the process, and how is the loan going to be paid back?’”
Worries that relatives will be more generous than they can afford to be may not be misplaced.
“It depends on how close the family members are, but some won’t bat an eye to lend more than they should,” said William Carrington, an adviser in Fort Lauderdale, Fla., who works with U.S. Foreign Service workers.
For example, when one of his moderate-income clients was asked to lend hundreds of dollars to a sibling in her 40s who had been laid off from a blue-collar job because of the virus, the response was an instant yes.
“There was a real expectation on the part of the sibling, like, ‘You have a steady job, so you kind of owe me,’” Mr. Carrington said. His client, also in her 40s, had been saving to send her children to college. But she immediately set that goal aside.
Mr. Carrington did not try to dissuade her. “As a certified financial planner, I’m not allowed to convince,” he said. “You just explain the consequences.” But like Ms. Foster, he would have preferred that his client tell her relative the ramifications of her loan in specific detail, to avoid misunderstandings.
Relatives “should make it known what they gave, and the effect on them of what they gave,” Ms. Foster said. “Let’s say I have six to nine months of emergency reserve money. If I gave you three months of it, I could tell you: ‘This is what I saved, and this is why I need it back. I could be in trouble without it.’ That way the recipient understands this isn’t funny money.”
Mr. Carrington recommends a tight cap on dollar amounts. “If you get a call that so-and-so can’t make rent this month, and you have $35,000 in emergency funds and the rent is $2,000, you could draw a red line where you say, ‘I can’t get below $25,000 in emergency funds, so I can afford to help you another four months if you need it, but that’s as far as I can go,’” he said. “If you have that kind of conversation, you’re not in the position where you get a call one day and you have to abruptly say, ‘I can’t help anymore.’”
Repayment plans should also be laid out before money leaves a bank account, financial professionals say. But even then, lenders should prepare for lapses.
“In this situation, with Covid specifically, reflecting on would you be OK if you never got this money back is probably a good idea,” said Mariel Beasley, co-founder of the Common Cents Lab, a financial behavior research lab at Duke University. “People tend to be over-optimistic. They plan a best-case scenario, where they say, ‘Great, they’ll be back to work in two months and they’ll be able to pay me back 50 bucks a month.’ They forget unexpected expenses and setbacks can happen.”
They may also forget that resentments can pile up alongside them. Mr. Carrington has seen clients whose relatives begrudge them their savings for a post-virus vacation.
“They’ll say, ‘Why can’t you cancel that?’” he said. “When that happens, mostly you want to calm them down and say, ‘I’m not going to let you starve.’”
Self-scrutiny, Ms. Foster said, can go a long way toward preserving relationships tested by newly rocky financial ground.
“Before you make the loan, think about what your intent is,” she said. “Is it a gift, or is it a loan?” If it’s a loan, she advises writing a formal note about the terms and filing it with a third party. “And then let it go. Don’t bring it up at holiday dinners. Don’t give reminders. If you can’t do that, we suggest you not make the loan at all.”
A sliding scale of expectations may be key to keeping the peace, she added. When a client recently asked her to transfer $10,000 to his stepchildren, who had agreed to a loan with interest attached, he told her that he didn’t expect the stepchildren to comply.
“He said he thinks he isn’t ever going to get the money back,” she said. “And I bet he’s right. With familial lending, oftentimes it doesn’t.”
Still, Ms. Beasley said people financially hobbled by the virus should borrow from family if they could.
“If the person lending is going to be OK if that money doesn’t get paid back, I say by all means, that is a better loan option for people than going through a formal financial institution, which won’t provide as much flexibility,” she said.
As the Covid recession deepens and Americans turn to whatever resources they can tap to pay bills, they may find that relatives’ flexibility is cushioned with greater compassion.
“What’s unique about this financial crisis is its cause — a virus beyond any individual’s control,” said Melissa Gopnik, senior vice president at Commonwealth, the organization that found the uptick in borrowing among laid-off workers. “It appears to be bringing people around to the idea that everyone has a role to play in people’s financial challenges, including the government, employers and financial institutions.”
Despite what Mr. Carrington predicted would be years of hurt feelings within families, especially if one relative is perceived to have more money than the rest, Ms. Gopnik sees a silver lining. “I think this crisis has brought us to a moment of collective empathy,” she said.
More than a dozen advisers affiliated with the XY Planning Network are offering pro bono services to people whose finances have been hurt during the pandemic.
Free financial guidance is available to underserved populations affected by the coronavirus through the Financial Planning Association. A list of certified financial planner professionals who have signed up to help is available on the group’s website.
The nonprofit National Foundation for Credit Counseling offers free initial budget counseling sessions online or on the phone.