Growth for Loved Ones

How to set boundaries when spending with others, strategies for helping loved ones in need, and an introduction to estate planning. 

This is a chapter preview. To read the full chapter, click here. 

TL;DR

1. Have conversations with your family to understand what they pay for on your behalf today and what they plan to pay for in the future. Understanding their financial expectations can help you set yours.
2. Any request to share an expense with a loved one should be fair, transparent, and time-bound. 
3. You can save for a loved one’s education, disability expenses, and extenuating circumstances using tax-advantaged accounts, emergency savings, and crowdsourced funds. 
4. Trusts, wills, and life insurance are three approaches to estate planning, which concerns the transfer of property upon death (as well as a variety of other personal matters that may involve tax planning). 

Through childhood into adulthood, our relationship with money depends on our relationship with  family. Families are expected to provide for their children financially by paying for food, clothing, and shelter expenses. There are even tax benefits for doing so. However, as children grow up and earn their own income, this financial relationship changes. Your family may expect you to begin supporting yourself or contributing to shared expenses. When this happens, relationships can strain if expectations aren’t fair and clearly communicated. 

Similarly, relationships with friends and partners can both help and complicate your financial situation when they influence your spending, saving, and investing behavior. Loved ones can alleviate financial burdens and serve as a resource in times of need. However, involving yourself financially with others carries risks for your relationships and your wallet. When loved ones and money intertwine, it pays to be prepared. 

Spending with loved ones 

Family 

Your financial relationship with others begins with parents or guardians who pay for all or most of the expenses necessary for your upbringing. As you grow older and start earning your own income, it’s essential to understand their role in your journey toward financial independence. Doing so will guide the types of financial goals you set entering adulthood and your timeline to reach them. 

For example, one of your financial goals may be to move out and live in an apartment you rent. Do you know if your family will support you in this endeavor? Understanding the amount of money they currently pay for your housing and the amount they expect to pay in the future will influence your approach to achieving this goal. 

Another common example is healthcare. Depending on the health insurance plan your parents have, you could be covered under their policy until age 26. However, your parents may not have health insurance or include you in their policy. It’s, therefore, just as important to know their goals concerning your healthcare as it is to set your own. 

 

 

 

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Having discussions about money with your family can be difficult. If they don’t initiate the conversation, make a list of the subjects you want to talk about. Consider the categories of spending they currently pay for and think of questions to ask about their plans to cover these expenses moving forward. If you’re unsure where to start, consider some of your financial goals and ask how they think they’ll be involved as you get older. Consider writing your questions in advance and giving your family time to prepare. The more prepared you both are, the more productive the conversation will be. 

Smaller shared expenses, like phone plans or streaming services, may provide an easier entry point to the discussion. For example, many phone service providers offer bundles that reduce the per-person cost of a phone plan when you add family members. Your family may expect you to contribute to this expense when you begin earning money, or they may be comfortable continuing to pay for it well into adulthood. Ultimately, knowing their expectations will help you set yours. 

In some instances, your family may ask for financial assistance before you are financially independent. For example, if the total family phone plan costs $100/month, and your portion costs $25/month, your family may ask that you start paying them this amount until you are on your own plan. Any request to share an expense should be fair, transparent, and time-bound. In this instance, the request is fair because the amount of money they request is commensurate with your portion of the expense. Additionally, this shared expense is affordable, even for a minimum wage earner. Lastly, the expense has an appropriate end date. If you wish to have a different phone plan, you can stop paying your family and begin paying a phone service provider directly. 

Other expenses may be more nuanced. For example, your family may ask for help with rent or a mortgage payment despite earning significantly more money than you. In these instances, work together to determine an amount you can afford. One approach is to pay the percentage of the shared expense equal to your percentage of household income. Hypothetically, if you earn 25% percent of the total household income, it may be unfair to pay more than 25% of this monthly expense. 

Another consideration is how sharing these expenses impacts your ability to reach other financial goals. For instance, your family may be more willing to cover your share of rent if you use your money instead to put a downpayment on your own apartment. Similarly, they may be more inclined to continue covering your fixed expenses if you begin paying for your own discretionary expenses such as dining and entertainment. Doing so is another means of supporting your family and demonstrates your determination to become financially independent.

During any money conversation, try to remain objective and curious — you don’t want your relatives to feel pressured to have all the answers at once. Making an effort early to have healthy conversations regarding your money goals can lay the groundwork for when they involve you in their financial goals, such as retirement, estate planning, or assisted living. 

Try to be receptive if your family proposes sharing expenses. After all, they provided some level of financial support up to this point, and the timeline to reach your financial independence likely depends on the support that they continue to provide. If you have an amicable relationship with your family, helping them now builds trust and could set a precedent should you need financial assistance from them in the future. If you don’t have a healthy rapport, setting financial boundaries can be an uncomfortable but necessary path toward independence. 

Friends & roommates

In the same way your family can benefit from sharing the burden of mutual expenses, you can as well by entering financial relationships with others. Common examples include splitting rent with roommates or a check after dining with friends. 

Thanks to peer-to-peer payment platforms like Zelle and Venmo, sharing discretionary expenses is easy. These platforms allow for small exchanges of money between members via connected bank accounts. Although cheaper than a wire and more convenient than cash, these services still charge fees, such as when transferring money to your bank account. As with any app that can access your banking information, users should understand these fees and risks to their personal information before downloading. 

Sharing fixed expenses takes coordination. Renting an apartment, for example, is a serious financial commitment made cheaper by living with roommates. Each roommate signs a lease agreement with the landlord, but this agreement may not cover the relationship(s) between roommates. For this reason, reaching a mutual understanding with potential roommates is essential before choosing to live together. At a minimum, all parties should agree to the duration of the lease, the amount paid by each roommate, and the process for moving out. Consider codifying these terms in a roommate agreement, such as this free template provided by eForms. Having a written agreement level sets expectations and can offer some protection. While it may seem excessive, consider the personal financial ramifications should your roommate decide to leave the lease early or without proper notice. Doing so could put you in financial jeopardy, so preparing for this risk is an appropriate precaution. 

 

 

 

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Having roommates can help or hurt

Romantic Partners

When you begin a romantic relationship with someone, you may decide to keep finances separate or share some expenses. Keeping funds separate is ultimately the safer option as it protects your wallet in case you break up. 

If you choose to share expenses, consider starting with fixed expenses, as this allows both parties to discuss beforehand and budget accordingly. Sharing funds for discretionary expenses can be more complicated because one partner may contribute or use more money than the other, causing friction. For this reason, it can be healthy to set limits on the amount of money shared between partners. Each person should have an equal say in deciding what expenses should be shared, the information they choose to disclose, and how shared expenses should be paid for, whether using a joint bank account, peer-to-peer payment platform, or other means.

As a rule of thumb, never let money be used as leverage in a relationship. If you and another person agreed to the terms of an expense before sharing it, neither party should use those terms to shame or coerce the other. Because you can’t control someone else’s behavior, always know your exit options before agreeing to share an expense and prepare accordingly. An overview of dos and don’ts when sharing expenses with others is below.

Do

• Understand how shared expenses contribute to financial goals 
• Ensure agreements to share expenses are fair, transparent, and time bound 
• Consider how the other party or parties could fail to meet their commitment 
• Understand the cost of paying shared expenses yourself should the other party or parties fail to meet their commitment
• Enter a written agreement if the other party’s failure to meet their commitment would cause you financial hardship 

Don’t

• Enter an agreement you couldn’t afford should the other party abandon it
• Share recurring expenses with people you don’t trust 
• Assume others won’t act in their best interest if circumstances change
• Use shared expenses as leverage in a relationship 

Saving for loved ones

You can save for a loved one’s education, disability expenses, and extenuating circumstances using tax-advantaged accounts, emergency savings, and crowdsourced funds. 

Education

Education in America, like healthcare, is expensive. Although tuition for public school from kindergarten through grade 12 is free, school supplies and extracurriculars are not. According to the National Retail Federation (NRF), the typical family spent $849 on back-to-school shopping for the 2021 school year. Private school, by comparison, is much more expensive. In 2022, the average annual tuition for private schools was $12,119, which does not include related expenses for transportation, meals, and after-school activities. After high school, college education costs an average of $27k for public schools and $37k for private, but even college alternatives can be expensive. 

To help save for educational expenses, Americans can take advantage of UTMA, Coverdell, and 529 savings accounts. Each account offers tax advantages to reduce the financial burden of saving for educational expenses.  

A Coverdell Education Savings Account (CESA) is a trust or custodial account set up solely for paying qualified education expenses for the account's designated beneficiary. It can be used to save for kindergarten through grade 12 expenses and college costs. Contributions to an account are non-deductible, but withdrawals for qualified education expenses are income tax-free. 

Although the assets in a Coverdell account grow tax-deferred, earnings on nonqualified withdrawals are subject to ordinary income taxes and may be subject to a 10% penalty tax. Keep in mind that there are annual contribution limits for individuals and eligibility requirements based on the contributor’s Adjusted Gross Income (AGI) for the year.

A 529 Education Savings Plan, by comparison, offers similar tax benefits with significantly more flexibility. Anyone can open and contribute to a 529 Plan; you do not need to be related to the beneficiary. Like a Coverdell account, earnings are tax-deferred, and withdrawals used to pay for qualified education expenses are free from federal income tax. In contrast, earnings on any non-qualified withdrawals are subject to ordinary income taxes as well as a potential 10% penalty. The annual maximum contribution limit for a 529 account is significantly higher than that of a Coverdell account – $300,000 compared to $2,000 – and the expenses covered by a 529 account are generally more varied. Qualifying expenses for a 529 account include up to $10,000 a year in tuition, fees, and supplies for K-12 and accredited post-secondary schools. Money can also be spent on qualifying student loans and even certain apprenticeship program expenses. If needed, the beneficiary of a 529 Plan can change to another eligible member of the beneficiary's family.

Although not created exclusively for educational savings, the Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) allowed for the creation of custodian accounts as another means to save for child expenses. UTMA and UGMA accounts are custodial accounts that allow you to save and transfer financial assets to a minor without establishing a trust. Both types of accounts are held in the name of the minor but controlled by a parent or relative until the child reaches adulthood (the age of majority in your state). These accounts don’t offer the same tax benefits as Coverdell or 529 Savings accounts, but they do provide more flexibility in how the funds can be used. UTMA/UGMA accounts typically allow stock, bond, and mutual fund investments, but not higher-risk investments like stock options or buying on margin. Because the assets are considered the property of the minor, a certain amount of investment income may go untaxed. Subject to conditions, if the minor’s unearned income exceeds certain thresholds, it may be taxed at the tax rate of the minor’s parents. Be sure to consult with a tax advisor to understand the nuances of your situation. 

 

 

 

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A selection of savings plan differences

Additional government resources

Beyond education, other specialized accounts recognized by the government can help families save for loved ones. For example, ABLE accounts, created in 2014 by the Achieving a Better Life Experience (ABLE) Act, are tax-advantaged savings accounts for people with disabilities. ABLE accounts allow people with disabilities to save money without losing their eligibility for federally funded benefits such as Medicaid or Supplemental Security Income (SSI). 

Contributions up to $15k annually can be made by anyone to an individual’s ABLE account. Funds in the account may be used for qualified disability expenses including but not limited to housing, employment training and support, assistive technology, personal health and support services, and basic living expenses. ABLE accounts are meant to supplement, not supplant, benefits provided through private insurance, Medicaid, Supplemental Security Income (SSI) benefits, employment, and other sources.

If a loved one needs support to afford healthcare, nutrition, shelter, or insurance, other forms of government assistance may be available to help. Read below for more information on 11 social safety net programs in five different assistance areas:

• Health assistance: Medicaid, including the Children’s Health Insurance Program (CHIP).
• Nutrition assistance: Supplemental Nutrition Assistance Program (SNAP, formerly known as Food Stamps); Special Supplemental Nutrition Program for Women, Infants, and Children (WIC); and free or reduced-price school meals.
• Cash assistance: Supplemental Security Income (SSI) and Temporary Assistance for Needy Families (TANF).
• Shelter assistance: Rental subsidies (including Section 8 Housing vouchers and public housing) and energy assistance (including the Low Income Home Energy Assistance Program).
• Social insurance: Social Security, Medicare, and unemployment compensation.

Additional resources regarding government services are listed in the U.S. Department of Health & Human Services website. To learn more about resources available to you or a loved one, visit the American Social Security website or search their local social security offices datase for in-person assistance.   

Extenuating circumstances

Loved ones may occasionally ask for money to help pay for extenuating circumstances such as job loss, illness, or essential repairs. If you have surplus money, consider sending an amount you would be financially comfortable losing. For example, if you have more than six months' worth of cash in an emergency savings fund, you could gift a portion of your excess capital without significant risk to your financial situation. If a loved one requests financial assistance over time, consider the amount of money you could budget for this person monthly while still addressing your own needs and financial goals. Don’t volunteer more money than you can afford, and don’t go into debt to provide cash. Because the chances of being reimbursed for money lent to a loved one are meager, you should not expect the recipient to repay any loan you extend. 

 

 

 

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Additionally, if loved ones request money for unhealthy spending behaviors like gambling or shopping addiction, giving them money may actually do more harm than good, as enabling poor behavior could contribute to prolonged hardship. Instead, guide them towards financial resources that can help, such as a credit counselor or financial advisor. In any case, be aware of your own financial boundaries before agreeing to send money. If you cannot provide assistance because of your personal financial situation, you don’t owe any further explanation for not sending money. 

If a loved one needs a lump sum of cash quickly, consider leveraging their network to help source funds. For example, the crowdfunding platform GoFundMe allows users to raise money for themselves or a loved one in need. Establishing a public campaign could make coordinating support online and facilitating donations from strangers easier. Remember that these campaigns are susceptible to fraud, so exercise good judgment when setting up or donating to a personal crowdfunding effort. 

Investing for loved ones