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Lending to Friends Can Be Bad Business

By Dave Says FOXBusiness

Dear Dave,

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I’m in college, but I’m not the typical college student. I’ve gone back to law school after working for several years. My wife and I have followed your plan, and we’re completely debt-free. I’m cash flowing school, and we’ve been fortunate enough to build up about $2 million in investments. The other day I saw what I consider to be a collectible car I’d love to have — a 1988 Pontiac Fiero that’s in excellent condition for $10,000.

Should we wait until I finish school, or is it okay to buy it now?

Rick

Dear Rick,

Wow, I’m impressed. You guys are in great shape. You’re totally debt-free, cash flowing law school and you have $2 million sitting there. My advice? As long as you’ve got the cash on hand, and it won’t hinder your college plans, your lifestyle or come out of your investments, buy the car!

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You’ve worked your butts off to the point that $10,000 is nothing in your world. It’s like most people buying a biscuit for breakfast. I mean, a purchase like this doesn’t even move the financial meter.

Remember, there are three things you can do with money — save, spend and give. You’re in an incredible position here, so there’s no reason not to have a little fun. You’ve earned it. Now, you might have to open your own practice when you’re through. I remember the Fiero, and owning something like that might make you unemployable …

I’m kidding, of course. But you guys have done a fantastic job. You’ve been smart with your money, and now there’s nothing wrong with having some fun and buying a little toy.

Congratulations, Rick!

—Dave

Dear Dave,

I loaned some money to a good friend recently. He’s going to help me with a job I’m working on, so do you think I should pay him for the work or just forgive the debt instead?

Charlie

Dear Charlie,

The big question is whether or not you’ve already agreed to pay him for the work. Another is how he views the situation. In his mind, he may just be helping a friend and looking at it as he still owes you the money.

If you don’t already have an agreement, my advice would be to ask him what his expectations are. Just talk to him, find out what he’s thinking and figure out what seems fair to you both. The big thing at this point is that you’re on the same page. If you have already agreed on a certain amount, and the value of the work is pretty close to the amount you loaned him, you might talk to him about the possibility of knocking out the debt that way. He could work off the debt while helping you on this project.

There’s really no right or wrong answer to this question, Charlie. However, I would recommend not loaning money to friends or family in the future. Sometimes things work out and everyone’s happy. But in most cases it changes the dynamics of the relationship. The Bible says that the borrower is a slave to the lender, and there’s a lot of truth to that statement financially and emotionally.

I’ve seen situations like this go bad and even ruin friendships. It sounds like you two are good buddies and have a great bond, but if someone close to you really needs help, and you’re not enabling bad financial behavior in the process, just make the money a gift. Sooner or later this kind of thing will mess up a relationship.

—Dave

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