No one likes a Scrooge, and it can be extremely rewarding to be able to help someone with your hard-earned cash. However, generosity with your finances is a careful balance. If you find yourself dispensing funds to friends and family like you’re the new neighborhood ATM, it might be time to analyze your habits. You won’t be much help to anyone if you’re broke, after all. Despite your best intentions, there can come a time when you need to start saying no to the “Money, please” requests from your children, friends, and community members.
It’s one thing to float a friend or family member $100 in a tight pinch every now and then — especially when you view it as a gift instead of a loan. However, it can become a problem when your tendency toward generosity begins to put a financial strain on yourself as well. You gave away a substantial loan, and now your own bank account looks a little lean. You might have offered that money in good faith, but it can start to cause resentment when you have trouble with your own bills coming due.
Typically, people who seek to please others also have a greater tendency to be overly generous with their assets. “Over-givers use gifts as a way to gain and keep friends, because they think they need to be overly generous to be liked,” psychotherapist and executive coach Jonathan Alpert told LearnVest. “People pleasers are afraid of disappointing others, to the point where they neglect their own needs.”
Maybe that sounds like you, or perhaps you made a split-second decision to be generous and it backfired on you. Either way, here are five questions to assess whether you’re too generous with your money.
1. Your friend asks to borrow $1,000 to put toward his dream of owning a boat — without mentioning the $500 he never repaid from a few months ago. What do you do?
A. Write him the check. Everyone should get their yacht, right?
B. Kindly find a way to say no, explaining that your own budget doesn’t have the room for lending money right now.
C. Lend the money, but establish a repayment plan up front. You’ll get your money back within the year, no problem.
D. Slap the hand that asked, and walk away. You don’t need beggars for friends.
Best Answer: B
Let’s not be a miser, and eliminate D right away. It’s not wrong of your friend to ask if they’ve been working toward this goal for a while. However, you also don’t have to oblige the request. Friends and family are often the toughest people to say no to in terms of giving money away, but it’s important to realize that those “loans” really do end up being gifts, more often than not. While you might be asked to fund more dire situations than a fanciful powerboat, remember that only about half of those loans are paid back in full, statistically. About 14% of lenders never see a dime of the money they lent to family or friends — made worse when there’s no interest charged and there’s no firm due date.
If most of your earnings are already spoken for in your own budget, your best choice is B. Saying no shouldn’t harm your relationship, especially if it’s built on mutual respect over a significant period of time. If you do feel compelled to give the money, setting up a repayment plan like in option C is worth a try. Just realize that the chances of seeing that money are slim — and be prepared to view the money as a gift when you’re not repaid.
2. Your preferred charity is having a fundraiser, and they ask you to donate $100 toward their year-end giving goal. What’s your response?
A. After checking your budget, you write the check. You’ve allocated the money already, and this is the cause you’d like to support.
B. You give the money on the spot. You’re not sure how much is left in your bank account, but you’ll figure it out.
C. You don’t get a tax deduction for this one. Pass.
D. There’s no Ebenezer here. One donation of $100 goes to that charity, and another $100 goes to that new organization that was fundraising the other day.
Best answer: A
Your ability to give to charity will likely depend on your unique financial situation. If giving to causes is important to you, that’s fantastic. However, make sure you’ve set up a budget and know how much you can afford to give — without compromising your own ability to pay for housing and food. If that amount is $100, great. If it’s less or more, that’s fine too. Following a budget can seem confining when you’d like to give to every good cause out there, but staying within your guidelines frees you up to make responsible decisions.
There’s nothing wrong with giving generously to multiple organizations, either. However, it’s important to check out exactly how your money will be spent. If you’re comfortable with how a charitable organization allocates their funds, go ahead and write those checks. But be aware that some seemingly upright organizations have a sketchy side — and can scam you out of money you think you’re giving to people in need. Sites like Charity Navigator can help you decide which organizations will use your donations in a responsible way.
3. Your children are heading to college soon. What do you do?
A. Stop contributing to your retirement funds so you can afford their tuition payments.
B. You saved a little bit to help them out. The best you can offer now is to help them apply for student loans to cover the rest.
C. Your Parent Plus loans, a second mortgage on the house, and that $15,000 in credit card debt should cover the private school your first child has their eye on. You’ll figure out funding for Kids 2 and 3 later.
D. You set up a savings plan for them when they were born, and now it’s mature with enough money for four years at a respectable college.
Best Answer: D
If you’re following a budget, you should have been able to set it up to allow for college savings ahead of time. Not every parent will choose to assist their children in this way, but for those who do, it’s important to have a plan. Best-laid plans can be derailed by unexpected roadblocks, however. If you don’t have enough saved to cover your child’s college costs, the best choice becomes B — give them what your budget and savings allows, but help them rely responsibly on student loans for the rest.
Putting yourself into major debt to pay for a child’s college costs is extremely risky, since you don’t have an entire career ahead of you to pay them off. Any credit card debt you accrue for that purpose is especially worrisome, since paying that high-interest debt can become a burden all on its own. The worst option above, however, is to stop contributing to your retirement plans in lieu of covering college costs. Ideally, you’ll be able to save for both costs at the same time. However, there are no loans available for retirement. If you want to stop working before you’re 80, you might have to face the tough truth that saving for your future takes precedence over footing the entire bill of your child’s college education.
4. Your brother asks you to co-sign a loan for him. Do you give your John Hancock?
A. Sure, why not? There’s really no harm in co-signing it.
B. You already co-signed a loan for your daughter’s new car, so you need to decline. Maybe next time!
C. Your financial Golden Rule is to never co-sign a loan. You respectfully say no.
D. Funny thing; you were about to ask him to co-sign one of your own! Guess you’ll both need to ask someone else.
Best Answer: C
Banks require a co-signer on a loan when they believe the borrower is a risk for not repaying the loan. Fairly or not, most college students require a co-signer if they take out private loans, and younger people often need a co-signer if they have yet to establish much of a credit history. When it comes to adults — like that brother of yours — it’s often a sign they have a poor credit history or don’t have sustainable income for the amount of the loan.
When you co-sign a loan, there are potential consequences. If the borrower doesn’t cough up their payments on time, you’re on the hook for the entire bill. In the meantime, your own credit score can be dinged significantly, depending on the amount of the loan. As the co-signer, you would be the reason he got the loan in the first place. As Bankrate explains, if anything goes wrong, the lender will sue you for the money first.
You might be willing to co-sign loans for your child, but most experts will even advise against that. If you need to use your credit anytime soon — to purchase another home, buy a new car, or start your own business — you might not be able to get the funding you need while the other loan is still outstanding. While this no co-signing rule might seem harsh, it’s a reality that up to 75% of primary borrowers default on co-signed loans. At that rate, you’re better off just giving the person the money in the first place.
5. The holidays are coming up, and you’re deciding how much to spend. What do you do?
A. Put off saving for that emergency fund for another month. Your parents deserve that island vacation.
B. You’ve set aside enough money in your budget to cover your needs (and your kids’ wants).
C. “Deciding” to spend doesn’t happen when it’s the gifts-under-the-tree season. Your money has sprouted wings on its own.
D. That holiday dinner tab with friends won’t cover itself. You’ve got it — for the the fourth time in a row.
Best Answer: B
We’re back to the budget again. Though it’s natural to want to indulge during the holidays and other special occasions, it’s important to stick to healthy priorities and keep track of your spending. Surprising loved ones with a trip to Hawaii sounds wonderful, but it shouldn’t be prioritized over saving for your own dire needs — even if those needs aren’t yet discovered. Emergencies don’t wait to pop up until your savings are in order, as far too many people have found out the hard way. If you don’t have three to six month’s worth of savings in order, that should be your first priority, even if it means cutting back on spending for a little while.
If you’re in a financial position where you can cover the dinner tab, that’s great. However, keep in mind that consistently covering expenses for friends can lead to resentment, either from you or from your buddies. Picking up the tab every now and then is fine, but you might not want to make it a habit.