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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
Will you be among the thousands of taxpayers who get a big
tax refund this year? While most Americans happily accept their tax refund
checks, smart taxpayers understand that refunds actually cost them money. Here's
why:
* The government pays no interest on refunds. Kept in your
hands, those dollars could have been productive. For example, you could have
invested the money or used it to pay off your debt during the year. If the
money had been added to a 401(k) plan, tax would have been deferred on both the
investment and its earnings. Even better, your employer might have matched all
or part of your investment, adding to your retirement savings.
* Refunded cash is not available for use until actually
received. Even though most taxpayers get their checks promptly, circumstances
or errors can delay (or stop) a refund.
To prevent losing money on tax refunds, consider reducing
your withholding or estimated tax payments. For most taxpayers, withholding
must equal either the prior year's tax or 90% of the current year's liability.
If your annual income changes little, it's relatively easy to avoid
overwithholding. You should consider filing a revised Form W-4 withholding
statement with your employer if you're having too much withheld.
For taxpayers with fluctuating income or multiple sources of
income, the problem is more complex. The IRS provides a worksheet with Form
W-4, but many people find the form complicated. If you'd like assistance
adjusting your withholding, contact our office.
Last Updated by Noel Dalmacio on 2013-03-27 01:05:26 PM