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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
Employees often have too much of their employer's company
stock in their 401(k) or other retirement plan. Employees feel they know their
company best, overlooking the risks of having too much of an investment in any
one company, including their own.
What are some of the risks of loading up on your employer's
stock?
* Tremendous bet in a "safe haven." Overweighting
investment holdings in any company minimizes diversification, exposing your
portfolio to increased risk. The belief that employer shares are less risky is
an illusion.
* Double whammy potential. No company is protected from
economic downturns. If your employer's performance weakens, you may lose your
job, as well as growth in your retirement portfolio from the company's market
value.
* Lock-up periods. Some companies prohibit employees from
converting the employer retirement match contributions in company stock into
other investments until after a number of years. In this case, use your own
contributions to diversify your holdings.
* Tendency to forget. As you move closer to retirement, you
may forget the riskiness of your employer's stock to your portfolio. At the
same time, contributions of company stock may be growing, based on higher
benefit matches - just when portfolio reallocation is becoming more important.
Your goal should be to create a well-balanced portfolio that
suits your age (investment horizon) and your risk tolerance. Call us for
assistance in reviewing your retirement situation.
Last Updated by Tax on 2013-10-23 12:06:37 PM