By: Leon | MakeSaveInvestMoney.com
Some people might read this and wonder why you should not lend friends and family money. Especially if you love them and care for them, you should lend them money, right? Wrong. It can be considered as helping, but it can also lead to being an enabler and doing more harm than good. Continue reading to find out why you should not lend friends and family money.
If you are finally getting control of your personal finances, getting out of debt (or already out of debt) and learning to manage your money better. A part of this learning process is to also learn how to manage your relationships with other people and money too. You need to know how to talk to others and set boundaries. I have learnt this myself through my own experiences and research, which is proving to be very beneficial.
Why you should not lend friends and family money
You are trying to get out of debt
If you are trying to get out of debt yourself and working a plan. It means that you are not in a position to lend money to others. Sort out your finances before you attempt to help others. It is like those announcements that you hear on the plane as part of the safety briefing “If oxygen masks appear, please put on your own mask before attempting to help others with theirs”. You cannot help others if you are struggling to breathe and the same applies to your finances. If you are to struggling to breathe financially, help yourself before you help others.
For example, if you have credit card debt that you are paying down and you then lend a friend some money. It is almost as if you have borrowed money on the credit card to lend it to a friend. If you think that is an ok thing to do, maybe I cannot help you. If that has made you stop and think for a second, we may be getting somewhere.
It gets your friends and family into debt
You might be trying to get out of debt or even in a position where you are actually out debt. Either way, you feel you are well placed to lend money to your friends and family. It is hypocritical to want to be out of debt or actually be debt free but prepared to put a friend or family member into debt, to you. I would not be able to sleep easy at night knowing I have no consumer debt but have put someone I know into debt, to me.
Instead, you should offer support to your friends and family by managing their own personal finances. Of course, you should approach this topic sensitively because some people can get easily offended when talking about personal finances. If someone asks to borrow money from you and you want to turn them down. You should not say something like “No, your spending is out of control and you need to manage your money better”. Instead say “I am getting myself out of debt, which means I am not in a position to lend you money”. Tell them about all the things that are working for you (success stories) and the personal finance resources that you are using. Share the books and blogs that you are reading, the podcasts that you listen to and the YouTube videos that you watch. Even offer to be their accountability partner.
If your friends and family are asking to borrow money from you. They have either had one very unlucky financial event happen to them. Or they are bad at managing their money and you should not fund this behavior. If their attitude to debt and borrowing money remains unchanged and you do not see their behaviour improving. Do not fund stupidity. If someone is bad at handling money and does not want to change, it will not help them if you give them your money to borrow. This will only harm them and you will be their enabler. This is exactly the same as someone who gives a drink to an alcoholic and drugs to a drug addict.
The relationship changes
There is something about lending to or borrowing money from, a friend or relative that changes the dynamics of the relationship. It does not matter who the two parties are in the relationship, something changes. It can be parent and child, siblings, friends or even work colleagues, all of these relationships change to something that resembles a master and slave when money is lent or borrowed.
When you are the lender, you worry about if you will get paid back the money you are owed. If the person you lent money goes on holiday, it can make you feel anger and resentment towards them. You may even regret lending them the money in the first place. You hold some power over the person that has borrowed money from you and they have to work to pay you back.
When you are the borrower, you can feel as though you owe something to the person that has lent you money. Of course, you do owe them money but sometimes you can feel as though you owe them more. If you have borrowed money from your parents or in-laws, when you visit them for dinner the mood can be different (like a white elephant is in the room!). The food can even taste different. You might feel as though you need to tell them before you buy toilet paper because your spending comes under scrutiny. And how do you feel after you have borrowed money from someone, you want to go on holiday but are concerned about what they think? The truth is you shouldn’t go on holiday if you are in debt or owe money to someone you know.
Being a co-signer or a guarantor is a bad idea
Even Michelle from Making Sense of Cents highlighted this point in her most recent post, that being a co-signer or guarantor is a bad idea. As I am against lending money to anyone, it should go without saying that I am also against co-signing or being a guarantor for other people. For example, if someone you know wants to buy a car, but they cannot get approved for finance by themselves. The finance company may reject them completely or ask for a guarantor. There is a reason why the finance company is asking for a guarantor. It is because they deem your friend or relative high risk and highly likely to default on their payments. Just make sure that when (not if) they default on their payments, you are prepared for the finance company to tap you on the shoulder and demand you to make the payments.
Most of the time it goes wrong
In my experience, people do not pay you back on time or in full as promised. Sometimes they do not pay you back at all because they disappear, avoid you or simply get themselves into a bigger financial mess.
When I talk about not lending money, I do not mean the odd £1 that you give to someone. Probably because they do not have enough change to buy themselves some lunch. This is insignificant and you should give this to someone without the expectation of being paid back.
I understand that you may have lent money to someone in past. You agreed on an amount and date for it to be paid back and they paid you in full and on time. This is very rare. How often has this happened, if you think back to every single time you have lent someone a significant amount of money?
Boundaries are broken and people feel entitled
Another reason why you should not lend friends and family money is that boundaries are broken. An overlap forms between your personal finances their personal finances. This happens especially if you have co-signed on some debt. But even if you have just allowed them to borrow money from you there is nowhere for you to draw the line. The floodgates open up to how much and how many times they ask you for money. Also, your money becomes entangled with theirs and that should only happen with your spouse or partner.
Often there is also a sense of entitlement, that you should feel obliged to lend money to those around you. Egos get bruised easily if you refuse to lend them money. Despite the fact that they could be terrible at managing their money. Why would you fund mismanagement of money?
Why you should GIVE friends and family money instead
Although I am against lending (and consequently borrowing) any amount of money unless it is an affordable mortgage for a home. I am however a strong believer in giving. You should give money, instead of lending money, in the right situations. If you have enough disposable income to give money and not miss it, then give generously.
You are in a strong and stable financial position
Assuming you are in a good financial position, this could be a good reason you should lend friends and family money. If you have control over your personal finances and they are not controlling you, go ahead and give. How much wealth and income you have should, of course, dictate the amount that you can give. There is no rule of thumb to how much you should give, but don’t let it stop your wealth building or drag you into debt.
Related post: 5 Tips to build wealth and manage your money better
Your friends and family want to improve their personal finances
If your friends and family have decided that they are tired of being in debt. They want to manage their money better by living on a budget and getting out of debt. Then it should be ok for you to give them money to help them get started. Just as alongas you are certain that the mismanagement of money has stopped.
There is no sense of entitlement
When you give money, it should be because you want to do it out of the kindness of your heart. It is extremely humbling when you give money to someone who is not expecting it. You can see the appreciation and gratefulness on their face. Very often, genuine people want to give the money back to you. This is because they feel as though they are not worthy of this gift and they are the complete opposite of entitled.
You want to do more giving
It may be the case that you want to do more giving. If you feel that you do not give enough at the moment. You may seek out friends and family members who could benefit from the gift of money. Giving does not have to be limited to money. It can be extended to other things such as; food, clothes and even time. Giving your time to help others can be extremely rewarding.
Most people mean well when they lend money to family and friends. They feel as though it is the right thing to do. It is completely understandable that they want to help a loved one in the time of need. The issue is that most often this is not the right type of help. In fact, it can be another burden weighing the shoulders of family and friends. Whereas, giving money in the right circumstances can be the bit of help that is needed. Financial support without the ball and chain. Even better if they manage to improve their finances for the future and avoid the same problems. My message is simple. Lend less and give more…
Republished with the permission of MakeSaveInvestMoney.com.
Steve handles the operational side of Rockstar by keeping the systems running smoothly, social media accounts active and curation buttery smooth. He also answers to the name “Do-It-All Boy”.
Steve is also the founder of ThinkSaveRetire.com – a site where he shares ideas and techniques on how to retire from your 9-5 job and start to enjoy the virtues that life has to offer outside of full-time work. Life is about more than fluorescent lights and gray cubicles!