Neither a Borrower Nor a Lender Be - Ep #69

Aug 26

Welcome to episode 69 of the One for the Money podcast. I am so very grateful you have taken the time to listen. In this episode, I shared whether it is wise to lend money to family or friends.

In the tips, tricks, and strategies portion, I share a tip regarding loans from a 401k.

In This Episode
- Just Say No [1:24]
- If You Can’t Say No [6:06]
- 401k Emergency Loan [9:20]
MAIN
Recently I re-read The Tragedy of Hamlet by William Shakespeare. There are so many great quotes from this play. Just a few of these include:
- Brevity is the soul of wit
- there is nothing good or bad but thinking makes it so
- and one of the more famous lines - to be or not to be, that is the question.
But the quote most relevant to the subject of this podcast episode comes from Polonius’ counsel to his son Laertes.
Amongst other sage advice he provides his son, he tells him t0 “Neither a borrower nor a lender be; for loan oft loses both itself and friend.”
Over the course of life, we will invariably all experience times when friends and family will ask us for money. It’s important to prepare prior to such a request as the wrong approach could ruin some of our closest relationships.
Charles Barkley shared his thoughts on giving money to family.
Barkley and the rest of the Team USA basketball players were in Atlanta preparing for the 1996 Olympic Games when he heard a conversation between his teammate Grant Hill and Hill’s mother. Janet Hill told her son that she was only staying in town for a few days because she had to return to work. Barkley wondered why she was still working, considering that her son was making tens of millions of dollars playing in the NBA.
And Grant Hill’s mom said the following:
“Do not start taking care of your family and friends. They never gonna stop, and it’s gonna ruin all your relationships,” She also said. “When you start giving people money, they never gonna ask for money [just] one time. No matter what you do for them, the first time you tell them no, they hate you.”
Barkley took the advice to heart and started to tell people no when they asked for money, which temporarily led to some ruined friendships.
“It was a tough and painful lesson for me,” Barkley said.
Some would think that professional athletes should share. Here is why most shouldn’t:
Nearly 80% of NFL players go bankrupt or are under financial stress within two years of retirement and 60% of NBA players go broke or are bankrupt within five years of retirement. Just look at the sad cases of Antoine Walker, Bernie Kosar, and others.
When a family or friend asks for money, there could be a variety of reasons. Investing in their startup or helping them during a financially hard time.
-The first thing I recommend is to thank them for coming to you and before you can consider helping them you will need to ask them for more details.
- For those wanting you to invest in their startup or small business, you have every right to ask for their business plan. How will they generate profits, what sort of experience do they have in that line of business, how many others have invested, what is their path to profitability, etc.
- If they can’t answer those basic business questions, they are likely doomed to failure as most businesses fail. Better planning isn’t just for a better life but for better businesses as well and you want to ensure they have robust and well-thought-out plans.
- For those wanting to borrow money to get through a hard time, that one is more challenging. But you should ask them what the money is needed for. Was it because they lost their job, had an unexpected medical expense, or did they get in a financial bind? You have a right to ask what they have done already to make ends meet. There are things they may not have considered.. There may be a way for them to cut expenses, sell some assets, etc. It can make for a very challenging conversation but if you approach it with sincere concern and a willingness to help them they will hopefully understand.
- In addition, to show your concern you can buy their groceries and/or make them meals and help with work around their house.
- For those thinking of giving much larger sums of money or providing assistance over any period of time, it is often better to not provide them with assistance. People are tremendously capable but sometimes it’s only through adversity where the conditions exist to discover them. I worked with a remarkable gentleman a few years ago. He overcame stints in prison to eventually get his PhD. A motto of his was “Rock bottom will teach you things mountain tops never will”. It can be heartbreaking to see your loved ones struggle, but sometimes the nicest thing you can do is withhold financial help
- Lastly, for my clients, I tell them to refer their friends and family to me and I can have an introductory conversation with them about their financial situation and provide recommendations. Any information shared with me is confidential and cannot be shared with the referring family member, but it’s a way for them to provide their family member or friend with objective advice in private.
TIPS, TRICKS AND STRATEGIES
The Internal Revenue Service has now made it easier to take a limited amount of money out of a traditional retirement account penalty-free. While previously you could tap your savings without penalty in more limited ways and often with more paperwork, (adoption, first-time home buyer, etc), you can now take out up to $1,000 of your funds for any self-defined emergency.
The $1,000 provision is different from other retirement account withdrawal options because you can just say that you have an emergency, without specifying what it is. So you can get the money faster. It is one of several ways Congress keeps making it easier for people to use their retirement savings as emergency funds.
You’ll still owe income tax on the $1,000 you take out if you don’t pay it back.
References
Charles Barkely - Don’t Give Money to Friends
Jr Bridgemen - $600 million Dollar NBA Man
WSJ - 401k Loan