Who Needs You? The Change in Family Finances

Girl giving boy a dandelion clock

We’ve all heard of (and, no doubt, used) ‘The Bank of Mum and Dad’, but it looks like this well-known institution may be franchising! ‘The Bank of Brother and Sister’, ‘The Bank of Grandma and Grandad’ and even ‘The Bank of Sons and Daughters’ all appear to have opened for business recently, as new research shows the traditional arrangement of children borrowing money from their parents seems to be evolving.

In contrast to the linear idea of parents only supporting children financially, research now shows that 25% of families share their money across multiple generations to help one another, with money being lent not only between parents and offspring, but also between brothers and sisters, grandparents and even children helping their parents financially.

According to the research, nearly half of parents (46%) have given money to their children, which probably wouldn’t come as much of a surprise to most of us. More unusual, perhaps, are the statistics showing that 1 in 5 (20%) have lent money to their parents and 10% have provided monetary assistance to their siblings.

The idea of ‘personal finances’ is evolving into a wider approach of ‘family finances’ with financial interactions becoming ever more intertwined, but it’s not without implications. Lending, giving or borrowing money from a family member can be tricky territory as both money – and family – are emotionally fraught subjects. Important conversations that could help minimise any potential pitfalls in the arrangement, are often avoided through awkwardness or fear of offending.

If you have any hesitation about a financial arrangement, it’s always worth seeking professional help from a qualified financial adviser, but for those who are thinking about supporting, or taking support, from a family member, these areas are worthy of careful consideration from the start:

1) Don't be afraid to discuss money openly

As a nation, us Brits are famously tight-lipped when it comes to talking about money. One study showed that British people are more likely to talk about their bedroom secrets (yes, those) rather than talk openly about their finances. The severity of the taboo has reduced in recent years as our culture changes, but still only a fifth of UK families know how much each member earns.

This reticence to discuss finances can make frank conversations about the details of a lending or borrowing arrangement difficult to initiate and, as a result, potential problems can crop up further down the line when participants in the arrangement may have differing ideas on how, when or even if, the money is to be paid back.

Man and woman discussing finances
Money itself is an emotive subject, tied up together with pride, independence and self-worth. If you are the lender in the arrangement, you may need to consider that the borrower may be feeling emotional about having to borrow money in the first place, so tread carefully. Likewise, lenders will have their own emotions tied up in handing over their hard-earned cash.

Especially in the case of parents needing to borrow money from their children, it can be a difficult conversation to lead. But even though it may feel intrusive to ask questions about your parent’s finances or when they can pay you back, you need to tackle the discussion calmly and rationally without family power-dynamics interfering with what should be a business-like arrangement.

However awkward, don’t be afraid to discuss money openly with your family members.

2) Know when to set boundaries

Once you’ve broached the topic of money and overcome any awkwardness, it’s sensible to have a plan to focus your discussion. While most boundaries within a family are created organically over many years, financial arrangements may need to be more explicitly laid out with clear, defined boundaries in place.

Each family member involved should come to the table with an understanding of their own finances, how they manage money, what comes in and goes out and what their financial goals are in the future. There’s no point lending a large sum of money to your sister, for example, if you leave yourself short of a deposit for a much-desired mortgage a few years down the line. Any financial goals need to align so it’s worth taking the time to think ahead.

You may like to create a written plan of what happens once you have borrowed, or loaned, the money. Discuss things like when, how and if the money will be paid back; what the money will be used for; whether there will be interest added if the loan is long-term; whether the money is a gift or needs repaying; whether the loan will be paid back in part or in full etc.

Being upfront about the arrangements from the start will help identify trouble spots, misunderstandings, or areas of disagreement early on. Less ambiguity can make everyone involved feel more secure about the arrangement and help keep family relationships friendly.

3) Consider Life Insurance/Income Protection to protect yourself and them

With personal finances and family finances becoming increasingly intertwined, the idea of who is dependent on you may also need to be re-considered.

If the income you provide to your family suddenly disappeared, whether through death or simply being unable to work, the ‘dependants’ who relied on that income may well extend beyond just your partner and children, to any siblings, parents or other relations who need the money you provide. Making sure you – and they – are protected through your life insurance or income protection policy is vital.

A life insurance policy that is written in trust usually lets you name anyone you have a relationship with as a beneficiary. So even if you don’t have people who would traditionally be defined as a ‘Dependent’ (i.e. a partner or spouse), there may still be somebody in your life who will need the money, so it’s still worth considering whether you want to take out life insurance to look after them when you’re not able to do it.

Likewise, Income Protection pays a regular income if you can’t work due to illness or accidental injury which would allow you to go on meeting your financial obligations – whether in paying back money you have borrowed from a family member, or continuing to offer financial support. Income Protection is paid tax free and directly to you and can provide 50-60% of your normal gross income . So if other people are depending on your income, it’s worth thinking about.

The ability to support, and be supported by, members of your own family can be invaluable and doesn’t have to sour relations. By taking the time to think through the arrangement, protecting yourself and your loved ones with insurance, and overcoming any hesitancy they may have around talking about money, the arrangement can work well for all involved.

The Bank of Mum and Dad is expanding…now it’s a whole family affair!