I’m a big advocate of giving back and sharing wealth. I know that my successes in life have come in large part due to the help of people around me. So I give my time and my money to community projects that I believe will improve the lives of others. I’m sure many of you feel the same. And thanks to websites like www.charitynavigator.org and www.guidestar.org, we are able to evaluate the legitimacy and effectiveness of charitable organizations before we write our checks.
But what do you do when it’s not charity that is requesting financial assistance. What do you do when a friend or family member needs some funds? Many of you have received calls from loved ones asking for some financial help: “Just a little bit until I get to pay day” or “This deal is a sure thing! I’ll pay you back double your money!” They’re probably just asking for a loan rather than an outright donation so there’s less risk, right?
It may be difficult, but in this situation, you may have to think more like a bank and less like a family member or friend. I’m not suggesting you run a credit check or request collateral if it’s a small amount of money. But you do need to think about who you are lending your money to and how that person treats his or her money. If you find that you’re a little stressed out when someone asks you for money, consider some basic information that you should think about when you’re considering lending money to loved ones.
- Don’t lend more than you can afford to lose. Realize that when you make a personal loan to a friend or family member, you may not get that money back. If your cousin asks you for $5,000 and you know you need that money in three months so you can pay your son’s tuition bill, you have no business lending that money to anyone.
- Money can destroy a good relationship. Here’s the basic truth: People lose their mind when it comes to money. Seriously. People have killed friends and family over money. That best friend you’ve known since you were in diapers may stop taking your calls when you start asking for that loan back. Consider the ramifications of lending before you hand that money over.
- Think about who is borrowing the money and why they are borrowing the money. Is it your responsible best friend who just needs a little extra to get out of a jam? Or is it your deadbeat brother who has never repaid a loan in his life? If the borrower will be return in a few months for more funds and there’s no sign of repayment down the road, consider confronting that person about their money issues rather than just throwing money at an unsustainable situation. I know the borrower doesn’t want to hear a lecture but you won’t improve anyone’s situation by being an enabler.
- If you are serious about getting your money back, determine a reasonable interest rate and draw up an agreement. I’ve watched enough episodes of Judge Judy to know that if you try to get your money returned to you, a family member’s response may be, “What? I thought it was a gift!” Drafting an agreement that all parties understand can minimize confusion and future dishonesty by either party. If the person is offended that you want an agreement, just explain that your accountant or tax advisor or financial advisor insists that you put these things in writing. Also remember that there may be tax implications so you may need to consult www.irs.gov, an accountant or an attorney.
- Finally, if you don’t what to deal with lending money to people close to you, make it a rule to never lend money to friends and family. People WILL be mad about your rule but at least you won’t be accused of playing favorites. Just shut everyone out. Decide that you will not be swayed when family members talk about your big, fancy job and your big, fat paycheck and how much they’re struggling. Your money has nothing to do with them. It’s not their money and they aren’t entitled to it just because they know you. I know this is harsh but it may be the right option for you.
And if you are the borrower, consider what you’re doing when you ask someone for money. Do you actually intend to pay that person back? Are you willing to damage relationships by mistreating someone else’s money?
I realize that relationships are complicated and it’s not easy to refuse help to people you love and care about. But try to remember the bigger picture. If lending money is going to worsen your situation and/or the borrower’s situation, think twice before you open your wallet. And it’s not just a question of whether you can spare the money. You should also think about whether you are allowing a person to continue making poor money decisions. Just as you would not want to supply drugs or alcohol to an addict or a bacon double cheeseburger to a person with heart disease, be careful about lending money to people with serious financial issues. Think about whether there are better ways to help that person.
People don’t like to be told what to do, especially when it comes to money. But remember that money problems often stem from much deeper psychological issues and emotional issues and perhaps that person needs assistance that does not involve you and your ATM card. But smart about lending your money to loved ones and don’t be afraid to say “no.”
Kimberly Allman, Esq. is a financial planner and the President of Allman Financial Planning, LLC where she assists individuals who are seeking to improve their financial health. She is also the Manager of Homeownership Preservation for the New York Mortgage Coalition where she provides assistance to homeowners in distress through seminars, informational workshops and one-on-one counseling. She started her career as a corporate lawyer where she advised clients on a variety of investment products including hedge funds, mutual funds, structured products and real estate investment trusts.
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