Before lending money or cosigning a loan for a friend, ask yourself “What is the value of our relationship?”.
If you lend money or cosign a loan for a friend, you are a bank. Realize that banks don’t always get paid back.
Investing in companies is like lending money to a friend; it’s important to know the potential rewards outweigh the potential risks before you invest/lend.
Here’s where investing in companies is not like lending money to a friend or family member:
RELATIONSHIPS ARE PRICELESS.
An investment loss pales in comparison to a relationship damaged by money.
When it comes to lending money and cosigning loans for friends and family, stick to these rules:
Don’t lend more money than you can afford to lose.
Don’t lend more than the amount that could ruin your relationship with that person if they don’t pay you back.
Don’t lend money to the same friend more than once. Tell him/her it is a ONE TIME LOAN and you will absolutely never lend to them again.
I wish I didn’t have to say this, but since some of you are terrible at saying NO: don’t add to an existing loan. One loan at a time, or, even better, ONE TIME LOAN (see rule 3!). Explain to your friends that you value their friendship more than money, and you would rather they borrow from someone else to keep the worst type of stress away from your friendship: money stress.
If your friend ditches you because you won’t lend him/her money, he/she isn’t really your friend.
Don’t make your friend feel awkward for asking. The friendship is most important. If you know they are really hurting, buy them a few bags of groceries and send a text/email to him/her that says simply: “Check out mint.com ASAP!!!”.
By the way, you'll find more on this topic and many other money topics in my brand-spanky new book.
Back to relationships and money, a family dinner or birthday party gets pretty awkward when that person who stiffed you on a loan shows up. What’s worse is when the person paying you back in small installments shows up with an over-the-top $100 gift. Grrrrrrr.
A relationship damaged by money is difficult if not impossible to mend. I know. I’ve borrowed money from my folks many times. I’ve even borrowed money from my sister and brother a few times. It was awful. I hated it. Thank God I finally discovered some great books and a handy little app to help me take control of my money.
I’m sure being a “family bank” doesn’t sound appealing to you. On the contrary, if being A BANK doesn’t sound appealing to you, I suspect you don’t realize how much banks profit. Banks have towers in the sky while most people live payday to payday.
Imagine a perfect world where you can be a bank for folks other than your nephew or cousin. Imagine these folks are successful business owners who, from time to time, find themselves in a bit of a pinch. Would you want to lend money to these folks to help them get out of the pinch and potentially make yourself a profit? I sure would and I suspect you would too. Being part of a company’s (potential) growth is exciting, but it’s not that simple or we’d all be doing it.
There are many considerations to research and understand before lending money - whether or not the transaction involves your cousin. The same goes for borrowing. I won’t get into these considerations in this article, but here's a link to another article where I dive into investing in neat opportunities you may not have heard of before.
If you find yourself in a financial bind, and you’re considering asking a friend or family member for a loan, look at all your options before asking for the loan. I bet there are other solutions you haven’t thought of, and I’d be glad to help you discover them. Send me a message.
Thanks for reading, and even better, thanks for letting me know which money topics you think the world's moms could use more help with.