I would compare it to how a boss gives constructive criticism to one of his employees. You surround the negative with things that are positive. For example, if you have to say "no" to doing someone a favor, you could say something like this: "I really would like to help you, but I am so busy now and just don't have the time. Next time when I'm not so tied up, I would be glad to help you."
Hearing the word "no" saves everyone time. I think people have more respect for those who let them know up front where they stand as oppose to stringing them along with a "maybe" or "I'll think about it" over a few days only to finally "no" in the end anyway. You don't have to be rude when you say "no" and if it makes you feel better you can always offer the person an alternative idea or suggestion for getting what they want from someone else or resolving the issue on their own. Life is a personal journey. Everyone is entitled to make decisions based upon their wants, needs, and comfort level. If someone only likes you when you say "yes" then they are not your true friend.
Be sincere, tactful, polite, yet firm. Let your yes be yes, and your no be no.
As a standard rule, allow the person to leave with their dignity in tact, unless this someone will not allow you to graciously let them down. In this case, a more direct and stern approach is needed.
But before you say anything, try to guage the personality type you are dealing with and use this knowledge to help guide your words.
It's helpful to begin by mentioning the good things first, such as 'you have great ideas', or, 'you are such a positive influence on our group', or 'You are the most helpful, or energetic, or astute, or kind person I have ever known...' In other words before a 'No' it's important to list the 'what is good, what is OK, what is noteworthy' - to share the experience of knowing each other responsibly, so the person gets a fuller picture of your mutual 'whole reality' and doesn't feel like a complete No No.
The list of what is good should be quite long and meaningful, so by saying No, it means that by weighing ALL things up, you have to decide to say 'No' on this one after all.
I'm a parent so I'm quite fluent in the word "no" as well as many other forms of the word.
The tone of your voice helps soften the blow but you should never be hesitant to use the word, it is very important.
You can't help offending some people because they take everything personally. The best thing to do is tell them no as soon as possible. The later you wait, the worse it is. Don't ever say yes and then say no later. Just say no and be polite about it (the tone of your voice is very important) but don't give too many, if any excuses because it makes you look flaky. You don't have to explain yourself if you don't want to.
If your goal is not to offend someone, first you commend the person for whatever is the offer, thank him for that. Then say you it is not for me or say sorry but I must say no.
I hope that works
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