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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 general
Hi guys, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
The stock market may not be the right place for all of your money at all times. Here are two situations when cash accounts can be a better solution.
#1. Usually, the stock market is not a good place to invest funds you will need during the next two to three years, such as when you need to pay ongoing living expenses in retirement. In that case, your cash is better invested in money market funds, bank CDs, or bonds with maturities matched to your needs. The plan is to eliminate the risk that you'll be taking withdrawals when the stock market is depressed.
#2. Maintain your emergency fund – three to six months of current living expenses – has only one purpose: to provide the cash you might need for unforeseen events like job loss, illness, or major unexpected repairs. These are situations when you can't afford to wait until the market recovers to get your funds.
However, cash savings has some drawbacks like losing your purchasing power during inflation. And historically, the stock market has provided better returns over long time periods. But those returns come at the price of volatility. If you need to withdraw your savings during a market downturn, you might NOT recover your investment. Wherever you choose to invest your other savings, consider keeping some of the funds you will need in the short-term in less volatile, old-fashioned cash investments.
If you like to learn more, click the link lowermytaxnow.com and subscribe to my weekly blog.
Until then, this is Noel Dalmacio, your ultimate CPA at lowermytaxnow.com
Last Updated by Admin on 2015-12-03 10:21:41 AM