It might seem like a no-brainer to help out people in need, but it can be tricky to really know if you are actually in a position to help out. When it comes to people close to you, like family, things can get especially tricky.
“The most important thing is to understand your own financial picture and to know what you need, you need to do in order to be successful and reach your own financial goals,” said Jonathan Shenkman, president and Chief Investment Officer of Park Bridge Wealth Management in New York, who joined Rob Hart on the WBBM Noon Business Hour this week.
In some cases, being “nice” can result in the giver then needing financial help, Shenkman said. However, there are ways to avoid that outcome – what he calls “adding a little friction.”
“First of all, make sure you’re not giving more than 5% of your nest egg,” Shenkman explained. “This way, if things go south, things don’t work out… you have 95% of assets that are protected from this. But also, you’ve got to make sure the other party has skin in the game. So, if you’re going to co-sign on a loan or if you are going to give a gift, make sure the other party has started a business before, has had income, or if they are giving a gift let them put some of the money up as well.”
Regarding helping out family members, Shenkman warns that loans between relatives can be “very, very tricky,” and can even end up ruining Thanksgiving dinner or causing estrangement. He recommends getting an attorney involved whenever lending money is involved.
“This way they could just formalize their relationship and set up a payment schedule so everybody’s held accountable in that regard,” Shenkman told Hart. “That would be the first thing I would do, especially with lending money.”
Overall, Shenkman recommends not getting involved in loans if they aren’t absolutely necessary. For people in a financial position that allows them to gift money, he says go ahead – but not to expect getting the money back.
“This way, it keeps the relationship intact, which is much more important, in some respects than the financial aspect, you want your family to remain intact,” he said. For those who can’t, he said its best to be honest: “Be upfront with them and say, frankly, from a financial perspective, I wish I could do this, but I can’t… and that's a much safer situation to be in.”
