How to Decide If You Should Borrow Money from Friends or Family

January 21, 2025

Perhaps you’ve heard the cliché that goes something like, “the best way to make sure someone remembers you is to borrow money from them.” There’s a reason that it’s generally not a great idea to borrow from those you care about, but as long as you go into it fully prepared to accept the consequences, it can be done.

Assuming you wish to maintain a friendly relationship with the person you’re borrowing from after the fact, here are some tips for doing it successfully.

Tips on borrowing money from family and friends without losing both forever

Make a plan to pay it back before you ask. You’re much more likely to get help if you attach the request to a plan to pay it back. Decide how much you can afford to pay each month, if possible, and share that plan with the person you’re asking. If you’re not able to make monthly payments, give them a timeline for when you’ll expect to have the money. The sooner, the better. To sweeten the deal, offer to pay interest, ideally in an amount that’s slightly higher than they’d earn in a savings account. This is still likely to be lower than you’d pay on a credit card or personal loan.
Sign a promissory note. First of all, this puts your agreement in writing, so there can be no dispute in the future about what’s expected. Also, if for some reason you end up not being able to stick to the agreement, the person you borrowed from will at least be able to write the loss off on their taxes. You can find free templates for promissory notes online – here’s one site, or check to see if your EAP has an online legal library.
Consider putting up a form of collateral. One way to add some security to your lender is to offer them a back-up plan if you’re unable to make payments. For example, if you’re asking your girlfriend to loan you money to pay tuition, and you have some valuable art that you’d rather not sell unless absolutely necessary, offer the art as collateral. You’ll have to put this in the promissory note, then be prepared that if you end up defaulting on the loan, she can sell the art to recover her money. In the meantime, this could take some of the pressure off your relationship.
Be aware of perceptions. If you borrow money from someone in a moment of great need, you should expect that they are going to be very sensitive to future displays of excess from you until they are paid back. It’s probably not a great idea to show up with a luxury handbag on your arm or a pair of $200 shoes on your feet if you still owe someone money. The expectation when borrowing from family and friends should be that it’s an absolute last resort, so if you can afford to buy new stuff beyond your basic needs (or you’re not willing to sell items of value), it’s best to pay them back first.
Expect awkward holidays until you’ve paid back. Unless you’ve borrowed from someone who views their help to you as a gift rather than a loan, as long as money is outstanding, gatherings with the person you owe could be awkward. This is why it’s super important to prioritize paying them back above all else except your basic needs like shelter, food, and basic transportation.
Be willing to explain large purchases. Buying a new home or pulling up in a new car while still owing someone in your inner circle can seem like a slap in the face to them. However, there are legitimate reasons you may do either of those things before you’re able to pay the money back that you owe. Maybe your car lease ran out, and you just traded it in for the same payment or better, or perhaps you’re moving into a new home that was sold to you for way below market value. Whatever the reason, make an effort to explain it unless you’re able to pay your loan off right away.
Try to pay them back earlier than expected. Even if you can’t pay the loan off in its entirety, paying more than the monthly agreed-upon amount will go a long way toward proving your intent not to take advantage. Consider adding even an additional $10 to your monthly payment as a sign of goodwill when you’re able (just make sure you adjust your payment schedule to reflect the earlier pay-off!).

When it’s a bad idea to borrow from family or friends

Generally speaking, if you’re often finding yourself in a financial pinch, you may want to avoid turning to family or friends for help unless you see a clear light at the end of the tunnel and know for sure you can pay them back. As a popular proverb goes, “Before borrowing money from a friend, decide which you need the most.”

The Basics of Unemployment Benefits

January 21, 2025

A fact of life in today’s world is that job loss can happen to practically anyone. Finding yourself unexpectedly unemployed is the chief reason financial planners recommend keeping an emergency fund of cash equal to between three and six months of essential living expenses. Fortunately, our individual cash resources are not the only resource we can fall back on if we find ourselves suddenly out of work due to a layoff or downsizing.

What are unemployment benefits?

Thanks to a joint program between the federal government and the states, unemployment insurance provides a limited amount of financial benefits payable to workers who find themselves out of a job through no fault of their own. These benefits are largely funded by payroll taxes levied on employers by the states. Voluntarily leaving a job, retiring, or accepting an early retirement package, however, would not qualify one to receive unemployment benefits.

How much can you receive?

Unemployment payments are not designed to replace all of the income lost due to a job displacement, but they can provide cash flow to help pay for some essential expenses, such as food, rent, etc. The amount of one’s benefit can vary substantially from state to state.

In general, you might receive an amount up to approximately half of your previous salary, although this amount may be further capped by the average earnings of workers in your state. Unemployment benefits are also subject to federal income tax. At the time you file your claim, you may request to have up to 10% of your benefit withheld for federal income tax purposes.

How long can you get benefits?

Workers in most states can generally receive unemployment benefits for up to 26 weeks. Massachusetts and Montana provide a few weeks more. Nine states currently provide fewer than 26 weeks of benefits, although this often changes with the economy: Arkansas, Michigan, South Carolina, Missouri, Idaho, Kansas, Alabama, Florida, and North Carolina. There are also periods when Congress has voted to extend the availability of unemployment benefits in particularly difficult economic times. You can find more on unemployment benefit periods at the Center on Budget and Policy Priorities.

How to apply for unemployment benefits

Immediately after becoming unemployed, contact your state’s unemployment office to file your unemployment claim. You can find web links and contact information for each state’s unemployment agency at the CareerOneStop website managed by the U.S. Department of Labor. Even if you know your termination date is coming, you cannot file for unemployment benefits until after you actually work your last day.

If you worked in a state other than the state where you reside, or if you worked in more than one state, contact the state unemployment office where you live for guidance.

Should You Take a Hardship Withdrawal?

January 21, 2025

If you are considering a hardship withdrawal, by definition you have a challenging, time-sensitive financial problem. You are probably feeling very worried and anxious about your situation. When money is tight, it is tempting to look to your retirement plan for resources to solve the problem.

Under certain limited circumstances, you may be able to access funds in your 401(k) or 403(b). However, just because you could withdraw funds doesn’t mean that you should do it. A hardship withdrawal should only be used as a last resort, in a truly urgent situation. Why?

It is expensive both now and later. You will pay income taxes on the amount you withdraw, as well as an additional 10% penalty if you are under age 59½. If the withdrawal is large, it could bump you up into a higher marginal income tax rate. Plus, you’re taking away funds that should grow to provide income in retirement for your future self.

Here are some questions to help you to find the best choice for your situation:

1. Does this have to be paid right away?

Sometimes a need is urgent, very important and immediate. Some examples include preventing eviction or foreclosure, paying for medical treatment, or repairing your home after a natural disaster so you can live in it. In those cases, a hardship withdrawal for the amount of the need may be the only way you could stay in your home or get the care you or a family member needs. If the bill does not have to be paid all at once, such as a past-due medical expense or a home purchase you could defer, it may be better not to take a hardship withdrawal.

2. Do I have any other sources of funds?

Have you considered all your options? While your cash situation isn’t ideal, make sure you have thought about all things you could sell or places you could borrow from to raise funds:

Do you have any non-retirement investments you could liquidate such as stocks, bonds, or CDs even if it means you would take a loss? Taking a loss on an investment is usually much less costly over the long run than withdrawing funds from your retirement plan.
Do you have a Roth IRA? If so, you can withdraw the contributions – but not the earnings – without taxes or penalty.
Can you borrow against your home equity or take a personal loan?
Do you have non-essential personal property you could sell to raise some cash? Some examples might include a second car, motorcycle, art, collectibles or jewelry.

3. Could you take a retirement plan loan?

Before deciding on a hardship withdrawal, explore taking a loan from your 401(k) or 4013(b). Many, but not all, employer-sponsored plans permit loans that allow you to borrow up to fifty percent of your vested balance up to a cap, whichever is less, for a one to five year period. Some plans also permit longer term loans for the purchase of a home.

The interest rate is usually low and paid into your own account, payments are deducted from your paycheck, and it’s not reported to the credit bureaus. A retirement plan loan has downsides, but they’re not as impactful as a hardship withdrawal.

4. Would the IRS consider your situation an allowed “hardship?”

A hardship is something that causes suffering or privation. The IRS allows hardship withdrawals from qualified retirement plans when the employee has immediate and heavy financial need, limited to certain:

Medical expenses incurred by you, your spouse or dependents
Payments to avoid eviction from or foreclosure of your primary residence
Post-secondary education expenses for you, your spouse, children or other dependents
Funeral expenses for you, your spouse, children or other dependents
Expenses to repair damage to your primary residence
Costs to purchase a primary residence

Note that credit-related needs such as satisfying payday loans, title loans or credit card debts are not covered under the definition, nor are tax bills or business expenses. See IRS guidelines here.

5. Are you taking out funds to purchase a home or pay tuition?

Finally, just because the IRS considers a home purchase or tuition payment a hardship does not mean it’s always wise to take a withdrawal for those reasons. A hardship withdrawal is meant for a true emergency. If the only way you can purchase a home is by taking a hardship withdrawal from your retirement plan for the down payment, you may not be financially ready yet to be a homeowner. As for tuition, consider exploring other options listed in #2 and #3 first, such as borrowing against your home equity or taking a retirement plan loan.

Once you’ve worked through these questions, if it seems like a hardship withdrawal is the best choice for you, know that you’ll have to go through an application process to move forward. You may be required to demonstrate heavy and immediate financial need, that you’ve considered a retirement plan loan but the payments would be burdensome, and that your financial need can’t be satisfied through other channels. Expect the process to take a few weeks.

If you do take a hardship distribution, you won’t be able to pay the money back and you may be precluded from contributing to your plan for six months. Your distribution will be included in your taxable income, plus you’ll pay an additional 10% penalty if you’re younger than 59½. If you have access, consider contacting your workplace financial wellness or employee assistance program (EAP) for financial coaching, to help you put together a plan to manage your cash flow so you can get back on track.