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What to consider before lending money to family and friends
When your best friend views your
nest egg as a source of start-up funds for his latest business venture, or your
nephew hits you up for a car loan, your first impulse may be to reach into your
bank account to help. But it's a fact that loans to family and friends often
end up straining both finances and relationships. As Shakespeare said,
"Loan oft loses both itself and friend." In other words, if you lend
money to friends, you often don't get paid back, and the friendship itself may
disintegrate.
It's best to consider a loan to
someone you love as an "arm's length" transaction. If you're
pondering such a loan, keep the following in mind:
* You can just say "no."
It's your money, after all. Do you really want to raid an emergency fund or dip
into your child's college account to finance a friend's business idea? Think
like a bank. It's reasonable to ask tough questions about the person's bank
accounts, potential sources of income, planned use of loan proceeds, and
spending habits before extending credit.
* Consider a gift. If you're
comfortable sharing your resources, you may want to provide a monetary gift
with no strings attached. In many cases, this is the best solution because
neither you nor your friend expect the money to be paid back. Unlike a loan, this
type of arrangement can forestall misunderstandings and hurt feelings later on.
Of course, you should not give money if doing so would unduly strain your own
finances.
* Formalize loans. If you decide to
lend more than a small amount to a friend or family member, it's generally best
to draft a written agreement. This can be as simple as filling out a promissory
note (available online or at office supply stores). Such forms spell out the
basic terms of the loan -- amount, interest rate, payback period -- and provide
some limited protection should you and the borrower end up in small claims
court. Another recent innovation is the use of direct lending (also called
social lending or peer-to-peer lending) websites to facilitate loans between
family and friends. For a fee, such sites can prepare loan documentation, send
payment reminders, issue regular reports, even facilitate electronic fund
transfers. If the loan involves a significant amount of money, check with your
attorney.
Remember: Many personal relationships
have been damaged when loans go awry. So proceed with caution.
Posted in tax
A college education. Retirement. What do these major life
events have in common?
One shared characteristic is that each comes with a price
tag. Here's another: If you have school-age kids, you might be facing the
challenge of having to decide which goal to save for. They're both important.
So how do you make the choice?
Here are some suggestions that can help you reach a sensible
solution.
* Eliminate excuses for not making a decision.
Procrastination can be costly. For example, to accumulate $100,000 in five
years, you'd have to deposit a little over $1,500 every month in an account
that earns 4%. But with a ten-year time horizon, assuming the same return, you
can build up $100,000 by socking away less than half that amount, or
approximately $700 per month.
What you need to know: Estimate the total amount required
for both goals, how much time you have, and how much cash you'll need to set
aside on a regular basis.
* Expand your resource horizon. Once you've computed the
expense side of the equation, figure out how much you can afford to save. You
may find that, with one pool of income and two goals, there's not enough money
to fully fund both goals.
But who says you have to pay for everything yourself? Turn
an obstacle into an opportunity by searching out alternatives. For instance,
while your income in retirement may be dependent in large part on your savings,
there are plenty of options for paying
college tuition.
Where to look: Investigate the possibility of advanced
placement credits while your child is still in high school. Other potential
sources of help include scholarship prospects, federal work/study programs, and
summer internships.
* Adopt a flexible approach. Broadly speaking, you have
three alternatives for divvying up your available savings between the two
goals. You can save for retirement only, save for college only, or opt to do
both.
Yet within each alternative are creative strategies. As an
illustration, you could start out by saving strictly for retirement, shift
toward saving for college when your child reaches a certain age, then switch
back after graduation.
Caution: Be careful of falling into the deadline trap. It's
likely your kids will attend college before you retire. Since the tuition
deadline is closer, you might be tempted to reduce or eliminate retirement plan
contributions in the early years of your savings plan in order to focus on
education savings.
But consider this: A typical retirement will generally last
longer and cost more than your child's education. By putting college tuition
first, you could end up with less than you need in your retirement nest egg.
Instead, take your overall time horizon into account.
For assistance with the numbers, give us a call.
Last Updated by Noel Dalmacio on 2012-08-08 10:29:10 AM