- Personal Finance
Financial Wisdom: Loaning Money
The Big Rule
Sometimes we find ourselves in situations where we want to lend or borrow money to friends or family. In a word: Don't.
Let me elaborate. I learned all I know about budgeting and finances from my dad, who's both an accountant and an attorney specializing in family law. One lesson my dad hammered into me -- into all his kids -- was a very simple, straightforward rule:
Don't lend or borrow money to or from family and friends. Ever.
Of course, being kids and ever-questioning, we used to come up with all these hypothetical what-if emergency situations -- What if it's an emergency? What if it's just a little bit? What if you know you'll pay them back? Seeing that we were determined to find a loophole, and fearing for our future financial woes, my dad added some caveats to his hard-and-fast don't lend money rule.
The 3 Caveats
To soften the strictly binary instruction of, "Don't lend or borrow money from family and friends, ever," the three following guidelines were added:
- If you must lend money, keep it to an amount you can afford to say goodbye to. Consider it a gift, and never expect repayment as a given, even if it is promised.
- If you must lend or borrow money and repayment is expected or required, write up a document recording the parties involved, the amount loaned, and the date the funds must be repaid by. Have both parties sign the document in front of a notary.
- If the money is tied up in a business venture, make sure to have a lawyer involved every step of the way, and document, document, document. Don't trust to family ties or friendly goodwill when it comes to your livelihood.
The biggest thing to keep in mind is protection. Protecting yourself, protecting your loved ones, and protecting your financial stability. And this goes both way -- you can be the borrower and not live up to your own ideals of repayment. You may have every intention of paying back some funds borrowed from a loved one, but when it comes down to the wire and you have to choose whether or not to pay them or pay your creditors, well. Let's be honest. You're going to pay the guy who will hit you with an overdraft fee, not the guy who will just trash-talk you to your circle of friends and stop talking to you for a bit.
Examples and Solutions
Now, dad wasn't being a cold-hearted Scrooge with this advice. With his experience as both a family lawyer and an accountant, he had ample opportunity to observe situations where finances turned relationships sour.
These are all fairly common situations, and while the advice of "Don't lend money, and protect yourself legally if you must," is pretty easy to give (or follow), it's not very useful if you're already mired in financial woe. Since the four posited situations are pretty common, give or take a few details, here's some advice for how to get yourself out of the mess you've found yourself in.
The Business Venture
- Two brothers, "John" and "Sam", go into business together. John is supposed to run the business, Sam is a "silent partner." Each brother has slightly different expectations of what the other will contribute; over time the stress of small-business ownership strains their relationship and the financial aspect of sunk cost and repayment adds further strain. Family members take sides, and eventually there is a split, a divided, resentful family, and a failed business.
If you find yourself losing money or wages in a family business venture or employment situation, the first step is to start documenting everything, and gather any past documentation you have. Then next step is to consult a lawyer and follow the lawyer's advice to recuperate as much of your losses as possible.
This may seem extreme, and you may be worried about alienating your family members. If you can eat the sunk cost and/or lost wages, and you're willing to do so for family peace, then just extricate yourself from the money pit and inform your family that you are no longer involved with the project for personal reasons. Change the subject if they try to pursue it.
The Favorite Child
- A couple has two adult children, "Mary" and "Sue". Both children are, by every societal measure, successful: Married, employed, no criminal or drug history. The parents favor Sue over Mary, and treat them differently when it comes to matters of finances and gifts. Sue is loaned money regularly with no expectation of repayment, showered with gifts, and given access to the parent's bank accounts or credit cards for emergencies. Mary is scolded for not being financially responsible, harassed to repay loans, and treated as non-trustworthy. Over time, the disparity in the treatment between the two breeds resentment and a divide between not only the Mary and her parents, but between Mary and Sue. In addition, the obvious favoritism of Sue comes off as a favoritism towards Sue's spouse and children, which breeds further resentment on the part of Mary's spouse and children toward Mary's parents and sister.
This one is trickier. It has less to do with finances, and more to do with favoritism, obviously. So long as one child (and by extension, their spouse and children) is favored over another, there are a myriad of ways for such favoritism to be expressed. Ultimately, it's up to the parents to recognize their favoritism and take concrete steps to address it, but by the time "Sue" and "Mary" have reached adulthood, most of those behaviors are so ingrained in habit that it's unlikely they'll be changed even if they are recognized. So the only relationship that can really be saved is between the siblings and their families, which requires some pretty significant strength of character.
The favored child, the best response is to stop asking for any financial assistance and gently refusing offers of financial assistance. Another option might be to continue accepting the financial assistance and favoritism, but "pay it forward" to Mary and her family. The problem with this is that is can come across as pity or charity, or (worse), flaunting her favored status. The best response is to simply acknowledge that her financial favoritism is unfair, and take steps to mitigate that unfairness.
This obviously requires strength of character because even if Sue is employed and in a place where her family can support themselves without the financial aid of her parents, they have likely still come to rely on that financial aid in their daily lifestyle, and to voluntarily abstain from it would require changing their lifestyle. Not many people will give up "free" money, even if it means losing a sibling or friend over it.
It's also necessary for everyone involved to recognize that favoritism is illogical, and neither child (the favored or the non-favored) is at fault. Favoritism is an accident of circumstance. Maybe it's birth order, or personalities, or something as simple as looks. Maybe (in a real-world equivalent) it has to do with gender, gender expression, or sexual identification. Maybe it has to do with the dynamics of a combined family. Maybe it's just as simple as where your parents were, emotionally and financially, when you were born.
Whatever it is, parents who sow discord by expressing clear and obvious favoritism are simply bad parents. They may be good people, just bad parents who are emotionally traumatizing their children (and often continuing it in the grandchildren). Favoritism is in no way an indicator of which child is actually "better," and it's necessary for the children involved to recognize this failure of their parents to move on with having healthy, loving, and beneficial sibling relationships.
If you're the Mary in this situation, and neither your parents or sibling are willing to ameliorate their culpability in the situation, then the best advice I have is to either break ties completely, or take steps to significantly distance yourself from your family. You can always try and repair the sibling relationships later in life, after your parents have passed away. But in the long-run, you need to put the emotional health of yourself and your family first, and subjecting yourself, your spouse and children to the emotional trauma of being "never good enough" for reasons outside of their control is simply unnecessary.
The Mooching Friend
- "Megan" grew up with "Nellie" and the two have always been best friends. When Nellie got married, she and her husband let Megan live with them rent-free while Megan looked for work and place of her own. They also bought Megan a car, with an agreement between friends that Megan would pay them back. Megan never did, and when Nellie and her husband hit a financial bump and approached their friend for help, Megan berated them for being greedy and overly focused on money.
If you lent money, co-signed any loans, or bought expensive goods for a friend, you should always consider that money to be sunk cost. Always. Be grateful if the friend repays you. If the friend swears up and down they will repay you, then becomes evasive, defensive, or angry when you bring up the matter of repayment, then you pretty much just need to assess whether or not you feel the friendship is worth the cost of whatever they owe you. If it's not worth the cost and you have documentation/ evidence of the unpaid loans, you could take them to small claims court. Otherwise, just write it off as a sunk cost and remember in the future not to lend money to friends.
The Mooching Family Member
- "Greg," an only child, has parents who are irresponsible with money. They are otherwise great parents. They paid for Greg to go to college, bought him his first car, and co-signed the lease on his first apartment. Now Greg is a grown man, starting out in life with a young family and a new mortgage of his own. Unlike his parents, Greg is careful with his finances and budgeting, and chooses to live within his means. When the economic downturn effects his parents, and his dad finds himself unemployed, they turn to Greg for financial assistance and support. Greg buys them a car so they can go job hunting and lends them credit cards for short-term, emergency funds; but he expects monthly payments in return. He is surprised and dismayed when his parents tell him he is ungrateful and selfish, and refuse to pay him back.
- or "Cody" is the son of a single mom. His mom has devoted her life to taking care of Cody, and now that Cody is an adult with kids of his own, she sees nothing wrong with what she sees as offering occasional financial assistance when he falls on tough times. She's co-signed all his loans -- his apartment lease, his vehicle loans, and a few personal bank loans. She found him a job at her company, and when he violated company policy once too often, she leveraged her influence to prevent him from being fired. She helps with his medical and court bills, and floats him personal loans whenever he's short on funds because he called in to work again. Of course, her door is always open if Cody needs a place to crash.
- or "Callie" is the ex-wife of Eddie. They have a daughter named Pam. Although Callie cheated on Eddie and is an absent mother, alcoholic, and chronic drug user, Eddie is still emotionally attached to Callie and wants to help her get back on her feet -- for Pam's sake. So he lends Callie money constantly, lets her be listed as the legal guardian of Pam (even though Pam actually lives with him), and pays child custody payments -- even though he's taking care of Pam.
If you find yourself in any situation where you are essentially supporting a family member, then just stop. Right now. You're not doing them or yourself any favors.
If you are a young adult, starting out in life with your own family and financial responsibilities, and your fiscally irresponsible parents are pressuring you to take care of their financial missteps, just keep reminding yourself that they didn't raise you just to push you into financial misery and debt. Resist any pressure they put on you to go outside your financial means to support them. Enroll them in debt management and budgeting classes and set clear boundaries. If necessary, go to the financial management classes with them.
If you're financially supporting an adult child -- perhaps managing their finances and keeping them employed through the judicious use of nepotism -- then you're really doing your kid a disservice. It's generally the nature of the world for parents to pass on before their children, and if you're financially supporting your child into their late 20's, 30's, and 40's, then how do you expect them to support themselves after you're gone? You're just delaying the inevitable lesson about fiscal responsibility. Worse, you're setting this necessary life-lesson to go off at the worst possible time -- their financial woes will coincide nearly exactly with the grief and depression caused by your loss. In case I'm not being clear, when you die, your child will lose not only a beloved parent, but their sole source of financial stability. You will have screwed your child for life. You may think you're being a good, accepting, loving, understanding parent, but really? You're being a very bad parent, and setting up your child for failure and misery.
If you're helping an ex-spouse "get back on their feet," then stop. Not only does this set a bad precedent for later on down the line, it's actually setting legal precedent, too. You will regret this a few years down the line, guaranteed. Imagine being back on the dating scene, or having found a new SO. You and your new SO are planning on moving in together, but you can't support or contribute to a third person when you're already voluntarily sending most of your income toward your ex. So you decide to stop with the non-court-ordered financial assistance. In response, your ex -- who has gotten used to a certain level of financial assistance from your quarter -- has a few options. They can try going to court and proving that you've been maintaining a certain standard of living. They can use the child as leverage to force you to maintain the financial status quo -- custody arrangements can be very difficult to change, and if the sole custody was awarded to an ex and you got to see your kids primarily through non-court-ordered financial assistance, then you'll be up a creek without a paddle.
If you're in any of these situations, stop allowing yourself to be taken advantage of, immediately. Get your credit cards back. Repossess any vehicles or property that is being paid for in installments and is in your name. Get your name taken off any co-signed loans, or see if you can take sole possession of the loan as the financially responsible party. Consult a lawyer to protect your rights. It may be difficult, but in the long run it's not only the right thing to do, it's the kindest thing to do.