“Neither a borrower nor a lender be, for loan oft loses both itself and friend, and borrowing dulls the edge of husbandry.”
Polonius, Hamlet Act I, Scene 3, 75 – 77
Do Not Loan Money
I never loan money. Ever. At first glance, that statement might strike you as miserly. Nothing could be further from the truth. I am not suggesting that you should never help friends and family in the form of monetary assistance. I am simply saying that you should consider it a gift vice a loan. A loan implies that the money should be repaid at some point in the future. There are two reasons why I believe this is a practice better avoided.
First, money has a tendency to put a strain on relationships, particularly if the recipient has a difficult time repaying the loan or is late with repayment. They are stressed because of their desire to repay the loan, and the lender is stressed because they had expectations of repayment, and likely, a plan for using the loaned funds for some other purpose.
Impact to Retirement Planning
Second, the practice can be disruptive to your retirement planning. Just as it can dull the edge of husbandry (management and conservation of resources; thrift), it can dull the edge of retirement planning. Once you establish your retirement plan and have identified the amount you need to invest on a monthly basis to meet your goals, your first priority should be to pay yourself first.
If a situation arises and you have determined that a family or friend has a sincere need for financial assistance, and providing that assistance will not impact your plan, you should assist with a gift vice a loan.
I assure you that if you loan a family member $300 of the $500 you were going to commit to your Roth IRA one particular month and they are not able to repay you, they are going to feel bad, you are going to feel resentment, and you will be $300 – not even counting the compound interest you will not have earned – further from your objective.
Give a Gift
Conversely, if you find that you have an additional $150 at your disposal after meeting your monthly financial goals, and you can assist a family member with a gift of half the $300 they may need, they will be very appreciative, you will be glad you could assist, and there is no chance for resentment and strain on the relationship. Once you write that check for $150 it is forgotten forever and you move on and prepare to meet your next month’s financial goal.