YW Blogcast 42 - Money Management Might Mean Don’t Loan To A Friend

In these stormy economic times, you might be called upon by a friend in crisis for a loan. Young Wealth would normally say “Bad idea!” at the top of our voices and remind you that doing so would qualify as dicey money management on your part. There is, however, one situation where we don’t think this kind of loan is risky. We’ll get into that later.

It’s not that loaning money to a friend is always a bad idea. After all, you may have a better idea about their propensity (or lack of) for paying off debt incurred. Actually, you should put on your banker’s hat when considering the request. Maybe it’s a loan to get out of debt, cover the month’s rent or open a business. Maybe it’s your friend’s money management skills that should be called into question. Do you believe it’s a one time occurrence or is there evidence of a continuing pattern?

If it’s a pattern, you might not want to get involved. After all, it’s easy to tell a little white lie and claim financial exhaustion yourself from “unexpected” expenses. But it’s long been an American tradition to turn to friends and family when economic times get tough. It’s part of the informal economy. Do a good favor and it might be returned down the road.

The downside is that there is a distinct possibility the money will never be paid back. Keeping that in mind, we suggest that any money you decide to loan to friends or family should be considered a gift. Don’t expect to ever get it back and don’t get touchy if you never see it again. Better not to lose a friendship over a little money. If you can’t afford to never have it paid back, you can’t afford to loan it in the first place. That’s real money management.