I always talk about “ready-to-use” savings which means “liquid” savings that are kept in cash or a bank account that you can just withdraw from for an emergency. It’s the cash you have around for a rainy day. Not retirement, college funds, house equity, investments, bonds, or investment items (art, antiques etc). Always know what your “ready-to-use” savings are so you know what you have for a rainy day or relative in need. Sign up for my newsletter and get special access to a video on “ready-to-use” savings.
To be conservative, you should only lend up to 10% of your ready-to-use savings. I say 10%, because you have to assume you will never see this money again, especially, if the family member is not herself waiting for a payment (say, insurance or child support). If the amount you need to lend is more than 10% of your ready-to-use savings, say you’re not comfortable lending more than 10% because it could cause a hardship to your family. It is a hardship because everyone should have at least 6 months of expenses in ready-to-use savings and only 25% of Americans do. If you’re not in the 25% then even a loan of 10% of your ready-to-use savings is a hardship. Try to get more relatives involved if it’s a bigger number.
- Ready-to-use savings = $5000 for your whole family
- 10% of ready-to-use savings = $500
- You should only be willing to “lend/give” up to $500 to a relative in need
Obviously, there are emergency and extenuating circumstances, which might require greater hardship for your family to help family member such as natural disasters, sudden illness and others. But if it is a relative who’s put the pinch on you or other family members before, or tends to go in and out of financial security, the 10% rule is a good one.