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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
Over the coming years, millions of baby boomers will reach
age 62, the minimum threshold for receiving social security retirement
benefits. If recent history is any indication, most of these people (over 70%
by some estimates) will take their benefits as early as possible.
But whether you should take social security retirement
benefits at the earliest possible age, or defer them until reaching normal
retirement age (or even age 70), depends on several factors. Among these are
your overall health and life expectancy, your plans to earn income before
reaching normal retirement age, anticipated returns on other investments, even
your guesses about the future of social security. Like most retirement planning
choices, this decision isn't one-size-fits-all.
For some people, deferring social security benefits isn't an
option. If your savings won't cover ongoing expenses, you may need to rely on
social security income to make ends meet.
But if your circumstances offer more financial flexibility,
you may want to consider deferring social security benefits. For each year you
delay taking benefits, the payouts increase, up to age 70. Also, if you plan to
earn significant income between age 62 and your normal retirement age (age 65
to age 67, depending on the year you were born), putting off your social
security benefits may make sense. That's because any benefits in excess of
specified limits ($15,120 in 2013) will be reduced. You'll lose $1 of benefits
for every $2 in earnings above the limits. Fortunately, you won't lose any
social security benefits (regardless of earnings) once you reach full
retirement age.
On the other hand, let's say you've accumulated $500,000 in
your 401(k) account and expect that account to generate an 8% annual return.
Under such a scenario, you might be better off leaving your retirement savings
alone and taking your social security benefits early to cover living expenses.
Or perhaps your family has a history of health problems and you don't
realistically expect to live into your 80s. Again, taking social security
benefits at age 62 might be a good choice.
Last Updated by Noel Dalmacio on 2013-02-27 11:15:04 AM