Shakespeare might not be at the top of the list of people to take financial advice from. Yet his guidance of “neither a borrower nor a lender be” is pretty sound when it comes to monetary agreements between family and friends, experts say.
Last year, a survey from CreditCards.com of 2,304 adults revealed that 59% of those who had lent money or paid a group expense with the expectation of getting it back found the exchange had resulted in something “bad”. Four in 10 lenders said they never got their money back at all, while a further 26% said it resulted in damaged relationships.
Meanwhile data from the U.S. Federal Reserve System shows that the number of people who are unable—or close to being unable—to pay an unexpected $400 bill is around 24% of the population. Of those, 8% said they would try to cover it by asking a family or friend for a loan—despite the potential upset.
For many families, that unplanned request for cash may comes on top of existing financial support already being handed out to kids—with one in two U.S. parents still helping prop up their kids’ bank account in some form or other.
Start by setting your own financial boundaries
Your financial boundaries begin with your plans for your money, said Carrie Galloway, head of J.P. Morgan Private Bank’s Global Advice Lab. Galloway explained that people should establish four “buckets” for their money: liquidity (cash), lifestyle (spending), legacy and perpetual growth.
By monitoring spending out of each of these buckets, individuals can build up a better picture of where they put their money and why. She added that having learned about your own spending patterns, it’s time to write down your goals, time frames and set priority levels.
With your goals set, you might realize there’s no wriggle room to lend to friends or your children. Saying no to the latter might be more difficult, which is why it’s key to start early, Galloway said: “Model the behavior you want to see in your children. For example, if making thoughtful, planned decisions is an important value to impart in your children, then avoid making and celebrating impulse purchases yourself.”
Beyond learning about delayed gratification and saving, kids should also be taught early on about loans, Galloway said. “If you extend a bridge loan to your child before the next month’s allowance is paid, establish an interest rate and repayment schedule. How does the family interest rate compare to the interest would a bank charge? What is the consequence if your child misses a payment?” she added.
Saying no to expensive events
According to research carried out in the U.K. by accommodation chain Hotels.com, the average cost of attending a bachelor or bachelorette party is between £150 to £242—around $180 to $295.
Then comes the big day, which is even more expensive. The average price of attending a wedding is $460 per person, according to the latest Wedding Report, which goes up to $660 a head for an out-of-town ceremony which you have to drive to. The Wedding Wire calculates the average bridesmaid spends $1,200 per wedding.
The onus therefore should be on the hosts to set a reasonable financial bar, said Paul Denley, chief executive of London-based Oakham Wealth Management.
“If you’re throwing a party it is worth considering what it is really about,” he said. “Let’s face it, it should be about getting friends and loved ones together for the human social element. In that context it shouldn’t be about presenting a challenge to guest’s finances. Encourage guests not to bring presents, find a restaurant that isn’t expensive or perhaps pay for the booze. Ease the financial burden on your friends if you want everyone to feel equally as welcome.
“An invitation to a wedding often comes with a big cost implication,” Denley added. “Opening that fancy envelope may not always be met with a smile of unbridled joy, however generally these financial issues are put aside because they are dwarfed in comparison to the emotion value of relationships.”
People may therefore want to apply a risk/reward methodology to their friendships: the risk of spending the money versus the reward of the relationship. An Oakham Wealth expert added people may sometimes be prepared to burn friendships to protect their finances, or may have to mentally “resize” the cost of an event in order to maintain the friendship.
Rejecting loans to friends
The advice from the experts is clear: if you can’t afford to lose it, don’t loan it—even to friends you really trust. Kevin Philip, managing director at Bel Air Investment Advisors, say if you’re lending money you can’t afford to live without then you must “stop immediately”.
“Be realistic about whether you will be repaid,” he added. “Get comfortable with the reality as quickly as possible and do not torment yourself over past bad decisions that cannot be changed. Instead, learn not to repeat them.”
Rejecting a loan in the first place is easy but can hurt your ego, he said: “Simply say something along the lines of, ‘I can’t afford to help you’ or ‘It isn’t in my budget.’ While people could perceive you to have plenty of extra financial resources, it isn’t necessarily true.
“Everyone deserves the right to privacy about their financial priorities and how they allocate their finite resources. If you have the luxury of a close financial advisor willing to play the gatekeeper, you can always direct requests to that person to say ‘no’ for you.”
Help this way instead
If you don’t have the capacity to contribute financially then time can be of equal value, Philip added. “If you can contribute with a skill like baking a cake or arranging flowers, perhaps that would be equally appreciated,” he said.
He was echoed by author Howard Dvorkin, chairman of Debt.com, who advises people to help their friends with work such as setting up the venue for a social gathering, instead of leaving money: “There are ways to meet your social obligations without ruining your bottom line.”
“Financial boundaries resemble personal boundaries,” he added. “If you don’t set them early, everyone will cross them often. The problem is, crossing personal boundaries is uncomfortable. Crossing financial boundaries is costly.”
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