Money Management
November 11, 2024
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As you become more financially stable and increase your earnings, your family, friends, and colleagues will start coming to you whenever they're in a financial fix. They'll be on your doorstep or messages when their kids have been sent home for school fees and when the landlord threatens to throw them out. How will you deal with such a situation?
The best way to help someone experiencing instability is to offer help that will get them back on their feet and provide a long-term solution. Help that can encourage them to be more accountable. Provide help with prerequisites, and let them know you'll withdraw your support or there'll be consequences when they don't keep their end of the deal.
So, what are some of the ways you can help them? This article will explore five strategies you can use to support someone going through financial instability, starting with why you shouldn't give them free money.
Read Also: What is Financial Instability in Your 30s? (What Causes it?)
Offering donations and charity to loved ones is not a bad thing. But it is not necessarily the best way to help someone going through financial instability.
Financial instability happens when someone loses control of their finances when they can't maintain a healthy balance between their income and expenses. When you give such a person money, what's to stop them from mismanaging it? This is why to help them, you must think outside the box.
Giving them free money isn’t the best option for several reasons. The two main ones are:
It's not sustainable - Assume you give your struggling friend Ksh10,000 today without strings attached. They don’t have to repay and can use it as they deem fit. Do you know what will happen next month? They’ll be back asking for more. And before you know it, you have a leech on you.
It's better to teach a man how to fish - Instead of offering free money, it's better you help them find a way to get out of their instability. Free money can encourage their bad money habits and cause them to find comfort in their situation.
Establish the root cause of the instability and help them address it. If the problem is solved, they can help themselves, and you won’t have to budget for the expenses of supporting them every month.
Depending on the cause of instability, you can choose to offer personal loans to a struggling loved one. This type of help is suitable for people focused on getting stable and looking to start a business, get a professional certificate, or learn a technical/vocational skill.
Such people might have a hard time getting a loan from credit institutions because they don’t have enough income, lack assets they can use as collateral, or can’t afford the expensive processing fees and interest banks charge. But that doesn't mean you should blindly lend them money.
Loaning to family or friends can be risky, especially if the loan is unsecured and the borrower has no assets you can repossess. If this is the case, ensure you don’t loan out more than you are willing to lose.
Here are some ground rules you can use when giving short-term loans:
Set a repayment schedule: Agree on when the loan will be paid, the grace period you will offer, and all necessary terms before providing the loan. Ensure all the terms of the loan are in writing and if not legally binding, have at least two witnesses who can help recover your money later.
Restrict how they use the money: First, ask how they intend to use the loan. How they will use the funds will determine their ability to pay. Only offer a loan if they can explain how they intend to use it and how they’ll repay. Then follow up and ensure they keep their promise.
Agree on Interest: Just because you are loaning to a loved one doesn’t mean you can give money and get nothing in return. There’s inflation to think about, after all. So, if you are not feeling a bit generous, ensure you agree on the interest they will pay before you transfer the cash.
Read Also: Money and Me: Ups and Downs of Lending to my Family Members
So, you want to help a friend, but you have no cash at hand. Your money is tied up in other investments, and it could be long before they mature. So how do you help them in such a scenario? You could cosign a loan for them.
Cosigning a loan involves taking responsibility for a loan by guaranteeing the creditor that the borrower will not default. And if they do, you will assume liability and pay the loan. It is a great strategy for helping a loved one experiencing financial instability but doesn't have access to loans because of their creditworthiness or high income-to-debt ratio.
Cosigning a loan is a risky business you should approach with caution. Any mistakes can expose you to severe financial losses. Therefore, before you take this bold step, here is how you can lower your loss exposure:
Read Also: The Dangers of Co-signing a Loan in your 30s
One of the most devastating problems people dealing with financial instability face is paying for basic needs; food, housing, and education for their kids. These bills often stress them and force them to live paycheque to paycheque. It can prevent them from saving, giving their dependant decent living, and taking risks like a career change or quitting a low-paying job to look for another.
One of the best ways to help such a person is by giving them breathing room as they try to put their finances in order. You can do this by paying some of their most pressing bills like rent and utilities. This will leave them with the extra cash they can use to do other essential things like paying debts or acquiring new skills.
By paying their bills and not giving them free cash they can use as they like, you'll also be sure that your money isn't going to waste. But remember to follow up on them and ensure they put the extra money they've been left with into good use. Also, let them know how long you'll be paying the bill so they can jump in smoothly when you withdraw your support.
Apart from paying bills, you can also offer other nonmonetary help like buying them a month's worth of food supplies and, if they're parents, helping them with childcare costs. You can let your babysitter baby seat their kids as well.
Read Also: The 7 Stages of Financial Freedom
Hey, this is not a time to give them complex financial advice like investing, allocating assets, or creating a financial plan. Leave that for the licensed experts (unless you are one, of course.) So what financial education can you give them without going overboard and trying to take over or control their finances? Start with the basics.
Too many responsibilities and financial obligations coupled with underearning are among the biggest causes of financial instability. The increasingly high cost of living is driving some people to spend all their income on necessities and still falling short. Whether your loved one is unemployed or underearning, helping them develop a new source of income will help them become more self-sufficient and ensure they bounce back on their feet faster.
The first step you can take is to teach them how they can leverage their skills to develop new incomes. For instance, if your friend is a paralegal earning less salary to meet all their needs, you can recommend they start offering freelance services. They can take virtual assistant gigs and help lawyers manage their workload online, or they can begin writing legal content for law websites. This is work they can do part-time and earn extra money.
Another way to teach them how to make extra income is to help them set up a business, whether it is a consulting service or something they're passionate about. You can also use your network to find better-paying jobs or a second job they can take and make extra cash.
Read Also: 8 Ideas to Create Multiple Sources of Income
Having to help a loved one through instability or any other financial struggle is something you will face as you grow older and become more successful. But this kind of help can easily get out of hand and affect your finances if not done properly.
Financially irresponsible people within your cycle will start taking advantage of your kindness and start exploiting you. Whether it's by constantly soliciting free money from you, not repaying short-term debts you offer, or defaulting on loans, you cosign for them. This is why you should always ensure you carry out enough research and don’t stake more than you are willing to lose.
A good start would be to help those committed to getting out of instability and have shown it through their actions. And of those who doubt their commitment, don’t be afraid to say no to them.
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