How do you simultaneously help out a loved one who needs a loan while protecting your hard-earned money? Can you mix family and finances without stirring the pot? These questions can be stressful to answer without a guide. Enter: Eric and family finance expert Elle Martinez of Couple Money. Eric and Elle share simple strategies that can safeguard your relationships and your wallet at the same time. 

Continue listening to their conversation or read the transcript below: 

Eric Rosenberg:

Hello, welcome back to the PayActiv podcast. Here’s a quick reminder that this show is for entertainment and education purposes only and should not be considered tax, financial, or legal advice. Thank you.

Hello everyone. Welcome back to the PayActiv podcast. As always, I’m your host Eric Rosenberg, and I am so excited to have you back with my long-term friend Elle Martinez. She’s here helping us continue our awesome discussions around the Latino and Latinx communities. And today, we are talking about a topic that has hit many of us at home, myself included, that is lending with family and friends. So we’ll talk with Elle and learn some tips on how to make sure these loans work out well and don’t turn into surprise gifts that cost you more money than you expect. So let’s dive in.

All right everyone. I am so excited to be here with my old friend Elle Martinez from Couple Money. She knows money inside and out, specifically focused on how you deal with money in relationships and families. So she is a pro at this topic that I am excited to talk about today, though a little nervous because I know some of us have been burned before in lending with family and friends. So Elle, welcome to the show. We’re excited to have you.

Elle Martinez:

Oh, I’m excited to be here. Thanks, Eric. And yeah, I’ve learned from personal experience in interviewing other couples just how tricky it can be making marriage money work, your relationships and building up your finances. So this is a really important topic that I’m happy to talk about.

Eric Rosenberg:

And it’s funny, right before we hit record, we were talking a little bit about what it’s like lending and borrowing with family and friends because it’s such a common thing. And something that Elle mentioned that I hadn’t really thought much about, especially from the relationship perspective is what happens when you get married and your mother-in-law or sister-in-law or brother-in-law or cousin from your marriage pops up and asks money questions. So this isn’t just something that might happen with your parents and your siblings. It could come from any direction as your family grows. To start, do you have any personal stories that you can share when somebody might have put in a call and said, “Hey, I want to borrow something.”

Elle Martinez:

I do have experience and I’ll be honest, just upfront, I’ve had good and bad experience with this with family. The past two and a half years definitely has done a number on a lot of people’s finances. And even before then, we’ve had family and really close friends get hit with an emergency, something unexpected. I will say in most cases that it was truly something that they didn’t expect. It was something that they had no control over, layoffs, cutbacks. And so we were happy to help. But I think the tricky part with most couples is what do you do when it’s someone who keeps having these emergencies? When you’re in this situation of you’re part of their financial safety net, where do you draw that line? Or if it’s your spouse and the family, most couples I know they don’t talk about this before they get married and they don’t know that this has been happening. “Oh, I’ve been loaning,” for example, “My brother-in-law or my mom…” Because this is a cultural thing or even a family thing that they’ve been doing.

So for us, it was a wake-up call that we needed to have a conversation about boundaries to protect our finances and, of course, still respect each other in the relationships that you’re melding together with finances.

Eric Rosenberg:

Yeah, that makes a lot of sense. We don’t want to be our family’s ATM card or credit card. We want them to be able to stand on their own two feet and not look for us regularly, especially. And in my mind, I think about those one-off questions, but there definitely are those situations where people habitually ask to borrow money from certain people again and again. And yeah, I imagine family members the most common target. But to flip that, I know one time I was getting ready to make a big purchase, I actually borrowed a little money from my dad and I was able to pay him back a few months later. Have you ever been a borrower on the family and friend lending side?

Elle Martinez:

Growing up, I did. And I think this was also, not that I represent every Latin family in America or whatever, but at least in my culture with my family, it’s common small amounts. Getting my first car, I had the money to take care of it, gas, insurance, and set that up. But initially, I needed some help with getting the state inspection. So I asked my grandmother for help. When I was in college, I was a working college student. Unfortunately, I got into an accident and my car was totaled, so I got a car loan and had my mom co-sign on that. I made all the payments and I paid it off early, but still, it was that safety net of having that family.

Would I do that now? I think we’ll get into this conversation. Wouldn’t co-sign, but that does happen in families. Realistically things pop up and so there’s always been that connection and I think there’s always a desire to help out those closest to you, whether that’s a small or larger amount. But when you’re in a relationship, especially when you’re married and legally your numbers are tied up together, you have to have a conversation of this is what we need to do to stay on our financial track, and this is how we can help if we decide we’re going to help out our loved ones in that circle. And the best time to do that, Eric, is before someone asks you. 

Anytime-

Eric Rosenberg:

Yeah, that’s a great idea.

Elle Martinez:

Yeah. You get those emotions involved, it’s hard to make an objective decision. It’s hard to find that balance and respect. So if it hasn’t come up, you might think it might never come up, still have that conversation. Hey, if something happened, your brother asked for help with something, what would you say yes to? Why or why not? And at least initially start those conversations.

Eric Rosenberg:

Yeah, that makes a lot of sense. So one of the biggest issues with family and friend loans is when they’re intended to be a loan, and they actually turn out to be a gift. So there are those awkward times when you expect that you’ve lent money to someone and they are not upholding their side of the bargain. We’re going to assume that you are always good borrowers and pay back as agreed. But let’s say you are the lender here. Let’s say you’re the rich uncle or aunt or brother or sister-in-law, whoever in the family that people keep coming to for money. When I say rich, I mean you in quotation marks, just the one who’s doing a little better than the others is usually the rich one in the family. So how do you go in upfront to avoid those situations where someone doesn’t pay back or there are misaligned expectations, something like that? Because there can be so many problems that come out of family and friend lending. What would you do to avoid that from the start?

Elle Martinez:

Yeah, absolutely. This is something that I think we don’t do enough of because we think, oh no, this is icky. This is making a family situation more difficult. But one of the best things you can do to protect yourself and actually the person that’s borrowing is to put it in writing and no, it does not have to be a formal contract. I’m not saying you have to do that. But like you mentioned, expectations. What are the terms? When do you think you want to be paid back or need to be paid back? I think you hit the nail on the head sometimes in a family someone’s seen as a rich person and it could be that they are better well off compared to someone else, but it could also be they have a very generous spirit. You have a generous heart that you want to help.

But the reality is you also have certain goals that you’re trying to reach in your family. I know a lot of families are trying to pay off debt, and so not having that money as a safety cushion, maybe they gave a little bit of their emergency fund or safety net to help someone else out. Now they get an emergency, what are they going to do? So I think being very clear about the expectation, saying, “I can give you this much, but I do need to have this paid back,” and be firm with it. Don’t go, “Oh, whenever you can.” Just say, “In two months,” or if it was now, “By 1st of December, I need to have this money because it’s part of my emergency fund.”

Eric Rosenberg:

One thing that I’d love to point out what we’re talking about, just getting it written down, that’s something I learned in school. A lot of people don’t know is a contract doesn’t have to be some fancy long document done by a lawyer. You could sit down at your kitchen table and say, “I,” put your name, “Lend this amount to this person and expect it to be paid back on this date.” And if you both sign it, that’s a contract. And it might not uphold in court the exact same way as one of those really long ones, but it probably will if you really record it and write it down and make an agreement, it would hold up in court. But hopefully, it doesn’t get to the point where you have to sue or go after somebody.

Elle Martinez:

Yeah, we don’t want that.

Eric Rosenberg:

But if you get it in writing, I think it also just makes it feel more formal, so the person borrowing knows, okay, I did agree to this. They’re not just treating me, they’re not lending me $5 for lunch. This is a bigger deal. So we wrote it down and it feels official. So as the borrower I want to feel like I’m doing my part and pay you back as my family. I don’t want to let you down. There’s a couple benefits of having the written-down agreement and it doesn’t have to be fancy. It could be on a restaurant napkin if you’re out at dinner.

Elle Martinez:

Well, don’t use the napkin though. Don’t use the napkin because then you can’t read it.

Eric Rosenberg:

You can, but I don’t advise doing it. But it would technically count. It’s always a joke they say in law school, a restaurant napkin contract counts. But ideally you use a real piece of paper at home.

Elle Martinez:

But when you say that, that does remind me of two scenarios and two things to consider both as a borrower and as the lender in a family is one, like you mentioned, that expectation. “No, listen, I do need to have this paid back by a certain time.” And I think also the other person, depending on how it is with the family and the dynamics might make you feel bad. “Wait, we’re family, why are we writing this down?” But to be fair, if they went to a bank or if they went to any kind of lender, what are they going to do? They’re going to do a credit check. They’re going to have terms, they’re going to have interest, they’re going to have all these things. All you’re asking is to have these basic terms. I need to have this paid back by a certain time. And so I think-

Eric Rosenberg:

That seems reasonable, doesn’t it?

Elle Martinez:

Yeah, it changes the mindset. But I know in some families there’s a little bit of that guilt trip. “How could you do this to me, writing it down? That just doesn’t seem right.” And then the second thing is expectations. What if, and this has happened. People have written to me about this. It’s an emergency, you help them cover rent. And then three weeks later you’re on Facebook or Instagram and you see them on vacation and it could have been that something they already paid for upfront. You don’t know what that is. But how would you feel? And I feel like there’s a lot of tension there because, “Wait a minute, you made it sound like an emergency. You had no money and I see you taking a vacation and you haven’t paid me back yet.”

Eric Rosenberg:

And now you’re off in Mexico sipping on margaritas and I’m going off to work to pay your rent. That’s what it feels like.

Elle Martinez:

Yeah. So it just lays it out. It really is a protection. And I think also something that you should talk about as a couple is what can we comfortably give if, first of all, I don’t want it to go bad, but if it goes bad, what can we give that we can afford to lose? And be very clear about that. I know we love our family and in most cases, they do pay back but it might be slower or they don’t pay all of it back. I really don’t want to see a family discouraged by the progress they were making, and now it’s thrown off because they were trying to be generous. So be very clear about okay, we can help out, but they want this, but this is what we can comfortably give.

Eric Rosenberg:

And that’s good. It can be, yeah, when you are handing somebody money, it can definitely be a negotiation. You don’t just, if they walk up and say, “I need $10,000.” You don’t have to say, “Okay, here’s $10,000.” You might say, “Oh well, I can afford to lend you $2,000,” and that might be what they have to get by with.

So speaking of that $2,000, so we’ve talked now about what to do in advance, having that good conversation around expectations and getting paid back. So then to get a little more strategic, let’s say it’s time to… More tactical, not more strategic. Let’s say it’s time to disperse the loan. Let’s say your sister-in-law and you have decided on an amount and you’re going to let your sister-in-law borrow a little money. Do you write her a check? Do you give her a big stack of cash so it feels like a rap music video, make it rain? What do you do to give that money over and how do you make sure you collect it?

Elle Martinez:

Wouldn’t it be, it would probably feel good having that money, all your ones in a briefcase and hand that over. I’m a fan, now online you can transfer it, but I always like having a trail. It’s again, having that protection. I know we have different apps that you can use. Personally, I would go the check route and write down on the check what is this loan for? So and so, make it very clear. Again, when you treat it… It is a business transaction to a degree. You’re giving them very favorable terms because you’re family. But again, giving that mentality of this is a serious transaction. And then if, I always hate thinking of the worst-case scenario, but when it happens, at least you have a paper trail to protect you. And like you said, if we have something in writing, those two things can be tremendously helpful.

Eric Rosenberg:

Yeah, so basically for listeners who don’t know what the term paper trail means, just means pretty much anything but cash. So anything but cash. If you use, let’s say your PayActiv account and you make a transfer to a family member right from there, you will have a digital record in your account when the money moved. Where if you went over and gave them an envelope with cash in it, it’s just word of mouth. So the check makes that even more formal.

Elle Martinez:

And I do want to point that out, yeah-

Eric Rosenberg:

Transfer apps. Something like PayPal or Zelle or there’s a handful of different ways you can send money now. Any of those offer at least some kind of record, some kind of trail where you can go back and say, “Look, this is where I gave you the money.” And having that record is important if you ever have a dispute later down the road.

Elle Martinez:

And I did have a small claims, I went to small claims court and not for loaning money to a family, but it actually was a car mechanic issue. And having the documentation was absolutely meant everything. So everything we had documented, I think we just couldn’t find a receipt for one thing. We got the money back and it was specifically the judge had said, because we had the record. So whether it’s digital or paper, having a record on hand is a protection for you down the line. So it’s your hard earned money. It really is. I don’t know. Or at least all my friends and family that we work hard for our money and so we want to make sure that it’s protected.

Eric Rosenberg:

Yeah. Well, thank you so much. It’s really great advice and really good insights. We’ve gone over a few important things to think about today. I’ll do a quick summary. So make sure you set good expectations, have good conversations so everyone knows when they are expecting to be paid or paid back. And then get it in writing if you can. And have a record, have some kind of paper trail, whether that’s a check or digital record to keep track of your transactions. So thank you for all those great tips and tricks. So everyone, Elle is such a cool money podcaster and blogger. She’s been doing this a while. If you want to check out her podcast called Couple Money, could you tell us a little bit more about your show and where we can find you?

Elle Martinez:

Sure. So Couple Money is, you gathered by the name, is really about working together as a couple on your finances. The tagline is, “Pay off debt, get on the path to financial freedom together.” And so when you get on that same page, it makes things a lot less stressful. So I interview financial experts, but I also interview couples who have gone through a lot of things like paying massive amounts of debt or retiring early. And I’m asking them what made the difference? What habits, what conversations did you have? So couples and families can get inspired with those conversations and start making progress with their money.

Eric Rosenberg:

So everyone, if you want to subscribe, which I highly recommend, wherever you are listening right now, just type in Couple Money and it should come up. You should be able to find it. So thank you everyone for listening and thank you, Elle, for spending the time with us today and sharing your wonderful wisdom. Have a great rest of your day.

Elle Martinez:

You too. Take care.

Eric Rosenberg:

Wow, that was a great, informative discussion. Thank you so much, Elle, for being on the show. And thank you listeners for hanging out with us to the end. As we mentioned during the show, make sure you check out the goals savings feature in the PayActiv app. If you’re not already a member, sign up right now. Just go to the Apple App Store or Google Play Store and you can download or you might be able to get to PayActiv through your employer’s HR system.

So check it out if you have ADP for your payroll, work for Walmart or any big employer, you might already have PayActiv as a benefit. And if not, make sure to email or call your HR representative and let them know you want it. PayActiv is a great alternative to expensive payday loans or credit cards or risking paying late fees on things like your rent or utility bills. So definitely make sure to check PayActiv out if you have not already. And thanks for hanging out with us till the end. As always, we want to help you make the most of your money and live the life you’ve earned. Thank you so much. Talk to you next time. Bye bye.