Real friends do what they can to help others when they need it. However, finances can be a touchy and personal subject, so how do you help a friend who is unemployed, unable to pay the bills, or is deep in debt? While there are no hard and fast rules when it comes to personal relationships and money troubles, here are a few general guidelines to follow so that your instinct to help can be well-placed, effective, and not backfire on you and your finances.
DON’T Loan Them Money
Loaning money to a friend can introduce a perception of inequality and breed resentment in a relationship, increasing as time goes on and the debt remains unpaid. If you can afford it, feel free to make a monetary gift so you can help without introducing business into a personal relationship or holding a grudge that can ruin a friendship.
If you feel you must disregard this advice and loan money to a friend, make it a formal agreement. A financial planner can help simplify the process and iron out the details. A loan between friends can actually be beneficial for both parties; the borrower gets a lower interest rate than he or she would have from a bank and the lender gets a rate of return higher than a CD or money market account. While this benefit makes the situation seem appealing, consider the risk you assume both financially and personally. If the deal goes sour, you could lose your trust in a friend as well as all your money. Ask yourself, is it worth the risk and do you trust the person not to let business affect your personal relationship?
DON’T Cosign On A Loan
Cosigning on a loan is essentially equal to loaning someone money. Cosigning means that you give your word that the debt will be repaid in a timely manner, and if not, you are liable for the debt as well. Just to reiterate, cosigning means taking responsibility for someone else’s debt in the event that he or she ca not pay for any reason. Maybe you really trust that your friend has his or her finances in order and just needs a cosigner to get the loan. If this best-case scenario does unfold, great, but if not, then what? If the borrower goes into default, whether by unfortunate circumstances or through poor money management habits, the outcome will complicate or even damage the friendship. If you still feel the urge to cosign, make sure that your friend has positive money management skills, has a backup plan, and that you have a backup plan as well. Remember, cosigning a loan that has a chance of defaulting could end up hurting your own credit score and history.
In addition, help your friend explore all possible options; by comparing rates, terms and conditions from different lenders, you may find that having a cosigner isn’t really necessary at all. Furthermore, if your credit is not significantly better than your friend’s, cosigning on the loan won’t increase the likelihood of approval. If your friend has no close family members or others who would cosign, consider a service that helps match borrowers to cosigners. Furthermore, you may need to ask yourself why family members aren’t willing to cosign with this person?
DO Start A Conversation About Money
Start a conversation to discuss their financial problems and potential solutions, but approach the topic carefully. Would you want a friend to tell you that your diet is all wrong and offer unsolicited advice on how to fix it? Money is a subject as personal and sensitive as weight. Try opening a conversation by talking about your own finances and gauge how receptive your friend seems to be. Talk about your own budget, and be sure to mention what you need to improve as well as what you’ve done well with your finances. Maybe your friend will be able to relate. Depending on the response, you might be able to help by making personal finance and money management a regular topic of discussion.
If your friend avoids the subject or becomes defensive, he or she is not ready to discuss their issues. You could remind your friend that the first step toward finding help is to be honest and open about the situation. Maybe there’s too much guilt, anger or other negative emotions to talk objectively about money. In that case, separating the emotions from the numbers must come first. Perhaps a financial advisor or consumer credit specialist could help him or her, since many find it easier to talk to a stranger about sensitive issues than to a friend.
DO Help Them In Other Ways
Consider what your friend needs besides money – transportation, childcare, or housekeeping? Offer what resources you can, such as a night of watching the kids, offering a ride to job interviews, or just inviting your friend over for dinner and sending the leftovers home with him or her. There are many ways you can help besides forking over cash. For example, introduce them to the many ways to make a budget. Money is a means to fulfill needs, and any way you can help fill a need cuts expenses and saves a step. Also, be sure to have a brainstorming session on ways that your friend can cut back on the expenses he or she is currently making. It’s always easier to cut back than it is to try and earn more.
The burden of solving financial problems belongs to your friend, but as a good friend and human being, your support and encouragement can go a long way. You can help your friend find a job using your own network and knowledge of recent job openings, even offering to proofread a resume or practice interview skills.
Personal finance problems don’t happen overnight; those with fine-tuned money management skills will bounce back from job loss or financial catastrophe. What is keeping your friend from achieving financial security? The answer won’t be easy or instant, and finding it will mean questioning some long-established habits, life choices and goals. Many people learn financial management skill from their parents, for better or worse, or from previous experience, good or bad. Simply being available to talk might help more than you could imagine.