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Can I Borrow Some Money? Grandpa Moneybags Lesson #6

Loaning money to family and friends is tricky. On the one hand, you might want to lend a helping hand, but you don't want the debt to interfere with the relationship, especially if the borrower struggles to repay the loan or if the recipient of the loan feels entitled to the money. The Hurlow Wealth Management Group created the Grandpa Moneybags series to introduce financial concepts, including budget and financial management, to the next generation of wealth holders.

Can I Borrow Some Money? Grandpa Moneybags Lesson #6

by Theresa Claire, CFP®, CAP®

As Jessica stirred the spaghetti into the boiling water for dinner, she thought about her upcoming 30th birthday. She and her boyfriend, Jake, moved in together six years ago. At first, she was okay with no future wedding, but during a recent trip to visit her dad, sisters, and nephews, Jessica realized that she wanted children and to get married, but she started to doubt if Jake was the one.

In April 2020, Jake's employer laid him off from his marketing job. Since then, he has yet to find a new job. Instead, he's been working on his "business," which had yet to produce revenue.  

A few nights ago, Jessica was paying the utility bills and exclaimed out of frustration, "Jake, you need to get a job. I can't keep paying all the bills myself. I'm paying the electric and internet bills with my Amex and already maxed out my Visa." 

"Call your dad and ask for some money." came Jake's reply from behind his computer screen. 

"Why don't you get a job? I'm not going to ask my dad to bail us out again. Employers would hire you in a second! So why are you not working?" 

"I am working on my business." 

"That is not a business, Jake; it's a hobby. Businesses make money. You make videos that no one watches. No one cares!" 

"People watch." Jake protested.

"Oh, really? How many views did you get for your last video? Let's see, 12? Wow, honey, that's amazing. I'm sorry I wasn't more supportive. Yes, please let me call my dad and ask him to sponsor your video-making business." Jessica snapped back sarcastically. 

"Ask him for a loan. We'll pay him back. I need one video to go viral, and then I can get real sponsorships."

"Jake, let's be realistic. You've gone from one subscriber to 30 in two years. That's not good. I will call my dad because I don't know what else to do, but you need to contribute to our finances." 

Jake didn't respond. He just kept looking at his computer screen. Jessica went into the bedroom to cry. 

It took a few days, but Jessica finally worked up the courage to call her dad. She decided to call him right after dinner. 

"I'm going for a walk," Jessica announced after opening the door to their third-story walk-up apartment. She didn't wait for a reply before shuffling down the stairs, plugging her AirPods into her ears. "Hey Siri, call dad," she requested and took a deep breath to calm her nerves. Her parents raised her to be independent and self-sufficient. What would he think of her now?

Charlie picked up on the second ring. "Hi sweetheart, how's my baby girl?" 

"I'm fine, dad. How are you?" 

"Good. And how's Jake?"   

"Well, dad, that's the reason I'm calling. Jake's not working and I'm behind on the bills." Upon saying these words, Jessica's voice broke. She didn't want her father to feel disappointed. 

"Can I please borrow $5,000?" She blurted out between sobs. 

"Oh honey, I'm sorry you're having trouble. But it sounds like Jake needs to pull his weight. I want to talk to him too. Is he around?" 

"No, he's inside. I'll get him. Hold on." 

Jessica ran up the stairs, two at a time. When she clambered through the door, breathing heavily, she made such a ruckus that Jake startled and came to see what was the matter. 

He looked at Jessica's tear-streaked face and asked, "What's wrong?" 

Through panting breaths, she replied, "My father's on the phone and wants to talk to both of us." 

She pressed speakerphone and said, "Dad, are you still there?" 

"Yes, I'm here. Is Jake with you?" Yes, I'm here." He said while handing Jessica a glass of water. 

"Are you both sitting down?" Charlie asked.

Jessica and Jake looked at each other. Jake frowned and shook his head, insinuating they were about to hear bad news. After taking adjoining seats on the sofa, Jake answered, "we are now." 

Charlie sighed audibly before speaking again, "Let me tell you a story. In the late summer, my neighbor Bill borrowed my wheelbarrow. For weeks I saw him moving mulch around his garden and pulling weeds. He made the yard look nice and improved the curb appeal. But then summer turned to fall, and I expected Bill to return my wheelbarrow, but he didn't. Then, last week we had a snowstorm. I cleared my driveway and the walkway with my snowblower, then later in the day, Bill came over and asked to borrow the snowblower. I said, 'sure, Bill, as soon as you bring back my wheelbarrow.' Do you know what he said to me?"

Jessica and Jake looked at each other and replied almost in unison, "No."

"He said, 'I thought you would have asked for it back when you needed it.' Well, that's not quite how loans work. You should have seen Bill trying to push, then pull that wheelbarrow down his driveway through six inches of snow. It was quite amusing. 

Now Jake, you got laid off a couple of years ago. I felt bad for you two, and I gave Jessica some money. That was a gift and I didn't expect to be paid back. Now tonight, Jessica asked me for a loan, but it's going to benefit you too, Jake, isn't that right? 

"Yes, sir," Jake replied sheepishly.

"Well, here's the deal. I will loan you $5,000, Jake. But it's going to come with some conditions. First, you need a job. You will not get a loan from the bank without a job, and plenty of jobs are available. I'm not a bank, but that is one of the requirements. 

Secondly, Jake, I will ask you to sign a simple promissory note. You will not need to start making any payments for six months so you can get caught up on your bills, and start rebuilding your savings. After that time, you can pay me $100 per month. I'll charge you a very modest 4% interest rate which is just about what I would receive if I kept this money in the bank. How does that sound?" 

Jessica didn't speak. She cupped her hand over her mouth and looked at Jake, pleading with her eyes that he would accept the offer but also take responsibility for his share of the household expenses. 

"It's going to take some time to get a job, Mr. Kest." 

"How much time, do you think?" 

"A few months?" 

"Really? It doesn't have to be a career, Jake. Any job will do? Let's shoot for a week. How many jobs will you apply to in the next 24 hours?"

Jake hesitated, "Maybe 10?" 

"How about you shoot for 20? I'll call you tomorrow to see how it goes. Then, we can talk about the next steps for the loan, son."  

"Alright," Jake agreed.

Jessica realized she had been holding her breath and sighed in relief at Jake's decision.  

"Thank you, daddy." Jessica exclaimed in a somber voice, not wanting to sound excited about Jake's decision to finally get a job. "I love you!" 

"I love you too, sweetheart. Goodnight." 

Next Steps
The decision to gift money or extend a loan to a family member involves a power dynamic and can negatively impact the future of the dynamic if not handled with care. Nevertheless, requests for gifts or loans may inevitably arise when there is a need. Communication is key when setting expectations to avoid irreparable damage to the relationship.

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