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Difficult money conversations

Discussions you should be having with your parents, children and friends.

With many individuals facing financial distress and a seemingly long road ahead for us as we battle this pandemic, many South Africans are having to make tough financial decisions and have difficult money conversations with close friends and family.

Asking to borrow money from your retired parents

If the pandemic and lockdown have affected your employment status or income, you may be tempted to ask your retired parents for financial assistance. Assuming that your parents are sufficiently funded for their retirement can be dangerous and, before asking them for financial help, you may want to first ensure that they are in fact in a financial position to do so.

Most parents will do anything to help their children and, while this may be admirable, it should not be done to the detriment of their retirement plan. If your parents are not adequately funded for retirement, borrowing money from them can be counterintuitive in that it will ultimately place an added financial burden on you in the long-term. Having said that, if you do need to approach your parents for a loan to tide you through this crisis, this could be the perfect time to get all parties to embrace a more transparent approach to family finances and to encourage multi-generational planning.

If your parents haven’t had a proper retirement plan prepared for them, this could a good time to talk to them about engaging with an independent advisor – preferably one who has experience with generational financial planning. If your parents are adequately funded for their retirement and are in a position to assist you, a qualified financial advisor will be able to develop an appropriate strategy – bearing in mind that there may be tax and CGT consequences when accessing their invested capital. Your advisor will also be able to structure a loan repayment agreement to ensure that the transaction is formalised.

Ideally, your engagements with an advisor should include estate planning discussions around your parents’ objectives for the transference of their wealth to you and your siblings. Knowledge is power and understanding your parents’ intentions regarding how they wish for their estates to be distributed among their heirs and what their estate planning goals are will place you and your siblings in a stronger position.

Asking friends to repay loans

If you’ve previously made a soft loan to a friend or family member, you may be regretting that decision and contemplating asking for the money back. With most South Africans experiencing some form of financial pressure, now could be an awkward time to ask for your money back. Having said that, if the money is due and owing, you are within your rights to request that the loan is repaid.

The problem with soft loans to family and friends is that they are seldom reduced to writing. Further, you may have given the borrower some leeway in the past creating the impression that you are not in a rush to get your money back. If you are aware that the pandemic has impacted your friend or family member, calling in the loan may be a particularly difficult subject to broach.

First prize is to keep the discussions as non-confrontational as possible. Lockdown stress and financial pressure mean that tensions are likely to be high on both sides. Avoid resorting to a letter of demand or threat of legal proceedings. Rather, begin with outlining your financial circumstances and the reasons you need the loan repaid. Further, rather than demanding full repayment of the loan, suggest reasonable loan repayment terms that can be considered fair to both parties. Keep discussions as transparent and amicable as possible and make it clear that you are open to discussion and compromise.

Talking to your children about your financial position

If your financial position has been adversely affected as a result of the coronavirus, you will likely need to make major adjustments to your standard of living. Discussing the new reality of the family’s financial position with your children may be a particularly difficult conversation to have. If your children have grown up in a financially secure home with few money worries, coming to terms with your new financial reality may be a shock to them. No job is secure and everything about the future seems uncertain at this point, and this uncertainty can make these conversations even more difficult.

Talking to your children about the need to cut back expenditure, contain unnecessary costs and possibly do without certain things can be tough. However, many valuable lessons should not be lost and, as a parent, you can use these discussions to teach your children about budgeting, saving, emergency funding, investing and the importance of financial planning. There is no shame in making your children aware that the family’s finances have been impacted by the pandemic. Using every day teachable moments and age-appropriate discussions, take the opportunity to have open conversations with your children about the family’s financial situation. Frame all conversations positively and draw your children in to help find solutions rather than focusing on the problems. Together, how can we cut costs? As a family, what can we do without? What role can we all play in reducing expenses? Bear in mind that your child’s relationship with money is developed in their formative years, so set the tone for money-related discussions and focus on creating solutions.

Asking your retired parents if they need financial assistance

Global investment markets have experienced five unprecedented years of low market returns, exacerbated by the coronavirus pandemic over the past few months. If you have retired parents drawing a fixed income from their retirement investments, they may be somewhat stressed about the fall in market values and the effects on their retirement plan. As the coronavirus continues to spread and make re-appearances in some countries threatening a second wave, markets remain volatile and no one can predict when they will recover.

If your parents haven’t discussed their finances with you, don’t assume they don’t want to. Financial planning is a relatively new profession and it is unlikely they would have had the opportunity to engage with a qualified, independent retirement planning expert. Find an opportunity to open the dialogue with your parents about their finances. The sooner you know if your parents are set to run out of money, the better. Forewarned is forearmed and early notification means you can help them take steps to seek investment advice, cut back expenditure, adjust their drawdowns, move to more affordable accommodation or sell the property to create liquidity. It also means you will have more time to review your financial plan and make provision to help them financially at some point in the future if necessary.

Taking control of your parents’ financial affairs

As your parents age, they may need someone to assist them with managing their finances, especially if they’ve fallen behind with technology. Sadly, the elderly are often soft targets for online banking and investment fraud as they are generally less tech-savvy and more susceptible to falling for scams. For digital natives, identifying online investment and banking scams may come naturally, but for those who grew up in an era without technology, online scams may not be that obvious to identify. Further, if your parents are physically ailing, they may find it more and more difficult to handle their own affairs. Banks all over are decreasing their physical presence and moving most services online, leaving the elderly trapped between waiting in long queues at the bank or having to navigate their way online.

With the elderly being advised to remain in lockdown until September or beyond, a general power of attorney can be a valuable document in helping your aged parents’ affairs to be managed by a trusted family member. A power of attorney would allow your parent (the principal) to appoint you (the agent) to transact, sign and contract on their behalf, although it should be remembered that a power of attorney is only valid for as long as the principal has mental capacity. Approaching the topic with your elderly parent may be a sensitive topic as it may lead them to feel incompetent, incapable and a burden on their family.

ADVISOR PROFILE

Gareth Collier

Crue Invest (Pty) Ltd

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