Thursday, 14 November 2013

What Would I Do if I Fell On Hard Times (and Importantly How Would I Recover)

It’s been a surreal week.  Midway through it I received a phone call from a good friend who has just returned from the third family holiday of the year.  However this time instead of talk of how great the holiday was I was greeted with an “I'm in financial difficulty and could I borrow some money from you?”  A little clarification revealed we weren't talking about twenty quid until next payday but thousands of pounds.  I was dumbstruck.  Why?

My friend is intelligent, has a very similar educational background to my own and has been working a similar amount of time.  We have similar jobs, albeit at different companies, but I would guess our salaries are probably within 10% of each others.  We do however live very different lifestyles.  To give some examples:
  • In my friend’s family only 1 of them works.  In my family 2 of us choose to work.  
  • My friend’s family chooses to live in a lovely part of London in a very nice rented house.  I live with my family in a small rented flat in a less salubrious part of town which is actually perfectly adequate for or needs.
  • That lovely house above is not well insulated and so already has the heating on where I'm still yet to even consider it.
  • My friend’s family choose to holiday at least 3 times per year.  My family has a single holiday each year along with a family visit for Christmas.
  • My friend’s family is always dressed like they've just walked off a catwalk.  My family while wearing clean, neatly pressed clothes are a little out of fashion and contain the odd darned sock.

I must be clear here.  I don’t begrudge my friend’s family any of the above.  Everyone in this world is entitled to live their own lives and make their own choices.  I've chosen to Save Hard, Invest Wisely and Retire Early which today means I have accrued 72% of the wealth I need to secure financial independence.  My friend’s family has chosen to live for today.  I’d never really thought about the differences between us previously but when you look at the differences above we are at very different stages in life and on a very different life path.  The now clear disparity in wealth really did bring the book The Millionaire Next Door by Thomas Stanley into the forefront of my mind.  The only difference is that I don’t have a million pounds nor do I think I will need that much for financial independence as I've found plenty of ways to live well while spending less.


Before I go on I also must emphasise that I believe my family and I are incredibly fortunate.  Sure we have our problems but they are nothing compared to some who have genuinely fallen on hard times.  Were my friend in that situation I wouldn't think twice about whether or not to lend the money.  I’d likely be giving it unconditionally with no repayment required if it could help recovery.  The problem is I believe my friend is like me also incredibly fortunate.

Over the past couple of days I've tried to put myself in my friend’s shoes in an attempt to try and understand how this situation has arisen so that I can try and help.  What would I have done?  I must say I'm struggling to understand this situation as it’s just so far from how I live but here goes.  I'm no longer living the Retirement Investing Today lifestyle and don’t even have an Emergency Fund in place.  I fall a little short in one month through an unplanned surprise and find that I have annual income of twenty pounds per annum but am spending twenty pounds and sixpence.  Provided my income was relatively secure (if it wasn't I’d probably be queuing at the Citizens Advice Bureau tomorrow) I’d probably apply for a personal loan or reach for my cash back credit card depending on how long I thought I would be in debt for and how quickly I needed to find the cash.  If I didn't have such a good credit record when I fell into this situation I’d likely be looking for a personal loan or reaching for my credit card for those with poor credit both of which will carry higher interest rates than a person with a good credit rating as I'm now a more risky borrower.

To now I think my friend and I are on the same path.  The next step is where we would however diverge greatly.  I’d be treating the situation as a family emergency! Sirens would be sounding, lights would be flashing and I honestly would not be sleeping until the problem had been solved and the money repaid.  As a family we’d be cutting costs and quick.  The method I developed previously would serve us well here however this time it would be A Method to Help Us All Save More Extreme.  In the short term any non-food, energy related or transport for work only purchase would be banned.  Good bye all holidays and any non-essential expenditure including that quick High Street snack would be banned.  The food purchases would be back to the very bare essentials that would keep us healthy.  The heating would also be off and multiple jumpers would be on.  Lights would also be used sparingly.  Any fun that costs money would be off limits.  I’d review transport to work costs to get them down at the expense of extended travel times.  A long term review of where we live and can we afford to stay would also be undertaken.  I’d also be looking for a weekend job to try and find some more short term money.  All of this would be used to pay off the debt in the shortest possible of time.  In parallel I’d also be trying to understand how it all went and implementing solutions to prevent it all happening again.

My friend has apparently done none of the above.  Apparently the problem has been building for some time resulting in significant debts including personal loans and credit cards.

Which brings me back to the question - “I'm in financial difficulty and could I borrow some money from you?”  I really do not know what to do as I can’t see any of my options ending well:
  • Simply hand over the money.  Given that this has built up over time and involves multiple sources of credit I can’t help think that I'm just the next source of credit for somebody who hasn't accepted they have a problem.  Once that’s exhausted maybe some other friends and family will stump up.  This looks like a spiral which could even end with the disaster that is payday loans.  Every day that passes with no action really does make it more difficult to recover, with recovery also taking longer.  This route is easy for me and will keep the friendship, as I'm prepared to write the money off, but I can’t see how it helps my friend which is what I'm trying to do here.
  • Hand over the money with conditions.  Those conditions would probably be along the lines that we agree to sit down together and work out a plan on how to recover the situation with that plan then being followed.  I fear this will result in a perception that I'm arrogant, self righteous and trying to control my friend’s life.  It might help solve the problem but I fear it is likely to destroy the friendship.  I just can’t see it ending well but it might actually be the right thing to do even if it does destroy the friendship.
  • Don’t hand over the money allowing my friend to move on to the next credit source (if one exists).  I can’t see that ending well either as it probably won’t enable the problem to be solved and I’ll likely not be seen as a true friend thereby also destroying the friendship.

In summary I'm really not sure what to do next.  Have you been in this situation?  What did you do?  Even if you haven’t been in this situation as always I’d still appreciate your viewpoint.

37 comments:

  1. Don't even consider lending him the money. They guy is clearly so irresponsible with money that he's struggling to borrow commercially. To lend him money would endanger your own finances & our friendship.

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    1. You would end your friendship over this? Seems harsh...

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    2. What friendship? Thats not a friendship, thats a parasite. A true friend would not ask for money to fund extravagance. Its an affront to friendship.

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  2. Hi RIT,

    Tough dilema.

    My gut feeling would be to be to say no to your friend - if you lend him the money, he's unlikely to change his spendthrift lifestyle and in due course will be back for a further 'loan'.

    If refusal leads to losing a friend, I would question the basis of the friendship.

    The phrase 'tough love' comes to mind - maybe instead of lending money you could help him to explore the lifestyle choices which have led to the current situation and help him to find ways to change.

    You have probably heard the saying - give a man a fish and you feed him for one day, teach how to fish and you feed him for the rest of his life.

    Good luck with whatever you feel is best!

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  3. My sister came to me two years ago for help with a similar problem with credit card debt. Despite misgivings I lent her about 25% of the debt on an open-ended interest free loan and used this to pay off the higher-interest debt. We then worked out a plan that included lifestyle changes/cost cutting combined with paying down the remaining debt to give a clear goal of reaching debt-free in about 4 years.

    Now she has the saving bug, looks likely to be debt free early and is mighty relieved to find a way out of the trap. I didn't expect ever to see my money back but now I'm starting to believe.

    I guess it really comes down to how close you are to your friend and whether you think they are serious about changing their life/habits. Lots of people don't seem to have a clue how to manage money so in the end perhaps they just need help and some good financial advice might be all they need to put them on the right track.

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  4. He's a friend. He's asking for help (presumably he's desperate) You are able to help. You're effectively his lender of last resort. I'd probably take his wife as collateral though until the loan is repaid.

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  5. You will be in trouble with the tax authorities- they will treat this as a loan and expect you pay tax on the minimum level of interest. Also, as you liquidate your investments, you will generate capital gains with tax consequences. Please consider explaining the tax ramifications to your friend and show him that this can not work.

    Even if you give him the money, he will be unable/unwilling to return it. He will avoid you on account of this and you will develop resentment since his habit of overspending (at your expense) will probably continue until he goes bankrupt. What ever you do , the friendship will not last.

    Best to invent a face saving white lie and say you had to lend money to your mother-in-law and have no money left at this time. This is the only way your friendship can remain.

    All the best.

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  6. On no account lend money to your profligate and feckless friend. He will not repay the debt, and will hate you for being his creditor. Indeed, he has jeopardised the friendship by tapping you in this way.

    So now, you find out what the friendship is worth to him, by refusing to lend. Instead, you should offer him your excellent advice on how to reorder his finances to regain solvency. If he takes it & succeeds, he will forever thank you. But if he takes your money and blows it, he will forever despise you.

    Yours, OlderButWiser

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  7. Give the money - don't lend it.

    Just tell him you don't borrow or lend money ever; as it wrecks friendships.

    He won't come back for more.

    Horrible situation. Good luck.

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    Replies
    1. If he's given the money, he'll certainly be back for more. LOL.

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  8. Agree with other responses to not lend the money but also agree with diy investor. Offer to go through all his finances with him, help him work out monthly budgets etc. Then jointly decide if he really does need a loan (but not from you), if he’s got that much disposable income lenders will fall over themselves to give him money. If they don’t that implies he’s got too many outstanding debts and backs up the argument for you not to get involved financially.

    All the best.

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  9. You (and your family) have chosen to go without many of the pleasures of your friend's lifestyle because you put a high value on the opportunities your saving will give you in future, but that doesn't mean you wouldn't enjoy the pleasures he indulges in: I imagine you would live as well as he does if you had the income of a FTSE100 CEO.

    Your friend's request suggests that he doesn't understand that you really are 'going without', or what your carefully-accumulated savings mean to you. To him, money is just stuff you spend, and with his spending pattern the 'thousands of pounds' he wants probably seems a small thing to ask, and he would value a loan correspondingly slightly - a bit like asking to 'borrow' the proverbial cup of sugar.

    I suspect you may even be underestimating its emotional significance to yourself - and if not to yourself, to other members of your family to whom this friendship is less rewarding. What we casually regard as friendships between families are often principally a friendship between one person on each side, and either less valued, or even no better than tolerated, by other family members. Who knows what hidden resentments your family might develop when they see your friend's family spending your money on pleasures they've had to do without?

    Your analysis of the options sounds about right to me, except that I'm not convinced that option 1 ('simply hand over the money') would actually 'keep the friendship'. As you say, your friend would probably carry on spending in the same old way, using credit from one source after another until they've all dried up. I can't help thinking the crashing change in his lifestyle would be the end of the friendship anyway.

    On your analysis two of the three options finish the friendship, and I suspect the third does too. Those are bad odds!

    Just say no.

    And good luck, whatever you do!

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  10. I like the "indenture the wife" suggestion, historically accurate. I'm kind of waiting for the finance industry to bring it back.

    Money / debt mean different things to different people, while you (and indeed I) value what you define as freedom, others don't see it. There's no wrong or right, many people in the UK are as you say, free to make their own choices.

    Playing devils advocate; if you want to piss away thousands of pounds making yourself feel good, then that sort of money would make a huge (life or death) difference to entire communities of people in most places in the world.

    On past performance what I'd likely do; loan the money, hope for the best, then feel betrayed for a couple of decades after...Which is why I don't give advice :)

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  11. I feel we are missing one important bit of information; is your friend still in denial?

    If so then for all the suggested actions regarding giving advice, the phrase "you can take a horse to water but you can not make it drink" comes to mind. I'd leave him my card (metaphorically speaking) and tell him to give me a call for advice when he realises he needs it.

    If he is truly repentant (and how can you tell?) then the advice suggestions are viable. For me, this would be the best advised course of action, and a strong prerequisite to any loan / gift options (and I'd still strongly advise against the loan / gift options for all the reasons already covered by others).

    Good luck.

    Please post updates as this story unfolds if you are able and if appropriate. It is something we can all learn from.

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  12. He'll never forgive you if you do him a good turn.

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  13. A very tough decision and I don't envy you in the slightest. I can only suggest investigating how open he would be to reforming his lifestyle and allowing you to impose changes. If it looks like he is resistant, don't lend the money.

    Although this case is horribly proximate, I do think we frugalistas should celebrate spendthrifts from time to time, since without their overspending we would not be making such good investment returns.

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  14. There is no way you are keeping him a close friend except by writing him an unconditional cheque

    He doesn't want your advice/help he just wants your money

    Probably you've been a bit loose lipped how about how much you have saved

    Even if you do give him a check, you might just get asked again in a while

    I would just not get involved

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  15. This is one of the curses of the rich, and one reason why it's not quite as easy as it looks, although we all laugh at that when we don't have money.

    Horrible situation, with no easy answers. :(

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  16. Hello RIT,
    Here is what I would do in this situation.
    Considering that he is asking for more than you can afford to lose and he is good friend, I would trim the amount to the sum which I considered I can risk without much of impact on my life.

    Then I would offer this lesser amount excusing myself by something like "my wife does not allow me to lend large amount, this is what I can offer to you instead".

    K.


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  17. No point beating around the bush with excuses.
    Ive been there before. A simple no, Im not going to for these reasons will suffice.
    Id then offer to help him get himself back on his feet by going over his finances and outgoings. If he isnt prepared to do that then why on earth would you even consider giving him money unless you never expect it back. Take an axe to their expenses!

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  18. If you lend the money you're extremely unlikely to get it back ast all, and even if you do it will harm the friendship because it shifts the power balance. He's taken a long time to get to this point, you don't turn something like that around without an extreme shock to the system - and the whole family has to change their ways, not just your friend.

    So you now have two choices - either no, or you give him some money, maybe less than he's after, and say why it's a gift - because you don't believe he will change his ways but you'll make a one-off assistance. And stick to that - never give him any money again.

    Don't become the hate figure that makes him downgrade his lifestyle. That's why we have banks, why we have Ocean Finance and ultimately why we have Wonga.

    Become his lender and you gotta fight his excessive lifestyle to get your money back. I had to fight consumerism on my own behalf in order to retire early. It's not easy and it's not fun, it's doubky hard if you are already in debt and you want to avoid being part of that process.

    Take a look at some of the horror stories on Martin Lewis's site about people who have 'lent' money for family or friends. It's a world of hurt - even if you have a written agreement that details the loan and repayment schedule your only recourse in the case of default is the small claims court and what's the point of getting the money back at a rate lower than the rot due to inflation? Assessing the risks of lending money in a consumer society, particularly for consumption, is a complicated business. Leave it to the professionals ;)

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  19. I have a related issue - a relative who I would like to support when he has genuine need but do not want to encourage dependency or for him to view me as an easy bailout fund. He has insecure employment that depends on him remaining in good physical health, and whilst he does live within his means, he is not very good at saving so has limited reserves and minimal pension provision. Any thoughts about the best approach to help him, when the time comes that he is too old or unfit to work, while preserving our relationship?

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  20. Say 'Oh dear, I was wondering about asking you for a loan myself. But it sounds like you are stretched, so I won't. Can I do anything to help you sort the budget out?'

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  21. The last thing your friend needs is another debt. Don't do it to him. Don't be another creditor, he has got enough. Help him get some proper debt advice and find a good solution

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  22. No - do not loan him the money - it will not end well.
    Say - sorry, I can't do that but I know places for advice and refer him to the Money Advice Service and MoneySavingExpert and CAB.
    Then if he shows some sense - the more philosophical sites such as Monevator, Simple Living in Suffolk (hi Guys) and even MMM.
    I can understand ending up in this situation on minimum wage or unemployment but otherwise he just needs a good slap.

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  23. What about a lateral approach?
    - Invite them over for dinner regularly, telling them not to bring wine etc or to host in return. (Heh - they could even turn their heating off while over)
    - Buy all his beers if you meet for a drink.
    - Pay their entry if you head out and do things that aren't free.
    - Do any other little things where you become a mate helping out rather than a usurer.

    This would be far cheaper and you'd probably become better friends - you might even get invited over for dinner / bought beers etc.later on when his situation has improved, but as long as you don't _expect_ him to then you won't feel ripped off.

    Greg

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  24. More liquidity is not the answer to these problems.

    If you feel tempted to hand money over, ask him to talk you through his financial situation, and show you his bank and credit-card statements first.

    If you don't feel you can ask him for that level of intimacy, then he's not a close enough friend for you to lend money to him.

    Some stories from my experience:

    * I lent a friend half a thousand pounds a decade ago. She's got her own flat now, but somehow, she hasn't got my money to return. Our friendship's not in great shape either.

    * I heard of someone who needed a replacement (second-hand) car to replace the ageing, unsafe one because a new baby was coming, but strangely had not enough savings despite having been working in a professional job for a decade. The family rallied round and provided the capital for the better vehicle. The better vehicle was bought, but the old one was also kept, because it was even more convenient to have two cars. (If one can't afford the depreciation/replacement savings on one car, how can one possibly afford them on two?)

    * Somewhere, I read an account written by a CAB debt counsellor, who said that, while some of his or her clients took note of the practical and helpful steps that CAB was able to suggest, a hardcore minority were bitterly disappointed to find that the counsellor wasn't able to provide them with access to further lines of credit, in effect, to avoid having to pay the true price of the lifestyle lived. (Getting out of debt is doubly horrible, because one must first stop enjoying the pleasant, comfortable lifestyle to reduce outgoings to the level of income, and then reduce it even more, to start making the repayments for the unearned luxuries consumed in the past).

    The best thing you can do is offer to help, and that doesn't mean feeding the spending addiction. It means helping the unfortunate to see what has to be done.

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  25. Horrible for you. I suggest you print out your article and all the comments and get him to read them all with you over a cup of coffee in a neutral venue. You say nothing except that he has put you in this difficult position and having read everything what does he suggest you do? I hope he would have the decency to thank you and walk away without the loan and with your friendship still intact.

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  26. Thanks for the article, it's really thought provoking. None of my friends have ever asked me for more than £100 (which got paid back) but from the little I can glean about their disastrous finances it may be only a matter of time.

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  27. This is the kind of situation for which the word 'invidious' was invented. I would suggest that you might have several priorities:
    1) Not risking your own family - either its finances or its internal relationships: I am sure that some people above may be right in observing that not all of your family may value the friendship in the same way that you do.
    2) Being honest. Nothing corrodes trust faster than dishonesty. If your friendship is important, it is important that you give your friend a chance at least to understand your reasons. Given his current attitude to money, that may be tough for him to grasp, but if you don't give him a chance, he won't and might simply resent an unpopular decision. Elizabeth's idea of showing him your post and perhaps all the comments is excellent. He may not like it, but you won't lose integrity. And it may help to start sketching a map for him out of his financial cul-de-sac, and offer him some hope - if he has the courage to face up to it.
    3) Being generous. Showing that you have understood that he is in difficulty might be important. There are some good suggestions made by other people. I will only add one here: You might feel you could _give_ (not lend) him a month's rent/grocery bill to keep the roof over his head/family fed while they start to sort himself out.

    But don't expect him to take lessons from you easily. And if he does, it may profoundly change the relationship anyway. Heck, the dynamic has already changed anyway: your article shows you are thinking differently about him, and he probably is about you. The challenge is that friendship is grounded in mutual trust and respect, and as your article shows, your view of him has diminished; if you are not honest and don't help him, then his view of you will diminish.

    Your friendship can come through this, but it may require some moral courage from both you and him, and some really honest conversations. He may come to respect your example, help and advice, and you may come to respect him for turning the situation around. Be under no illusions: the relationship won't be the same as it was before, but it will be stronger. Good luck.

    Oliver

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  28. You say if you don't lend the money, 'I’ll likely not be seen as a true friend'. I dont see why true friendship necessarily involves becoming a creditor. Is that the definition of a friend? I don't think so.

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  29. @All

    Wow! Thanks to everyone for the valued comments and suggestions. What I find particularly interesting is that there were very few duplications of ideas which just shows how horrible and difficult this type of situation is.

    An update:
    - I’ve agreed with my friend that I will lend about half of the original sum asked for. This will be an interest free loan and we have agreed a date by which the money needs to be paid back.
    - The money has come from my Emergency Fund which is mainly in a UK Savings Account. This leaves this fund a little short which exposes my family to some risk for the next few months while I rebuild the fund value. I think this is manageable.
    - The agreement is verbal and made on trust between us. I did this as I didn’t want the possible resentment that might come with the perception of “having one over my friend” if we went to a formal written “contract”.
    - My intention is to say nothing more about the loan itself unless it is not repaid on the agreed date. If that scenario occurs I will remind my friend once. If the repayment is still not made then I am prepared to lose the amount. This will push my financial independence date out by a few months which again is manageable.
    - Should this occur then I see that the friendship will be lost as it will tell me that my friend places self gratification over trust. I can’t have a friendship with somebody that I can’t trust. I really hope it doesn’t come to this and today predict that it won’t.
    - In our discussions I have said that he’ll have to find the other half. Here I’ve said that I’m reasonably savvy with money and that I would be happy to devote significant time to work through the problem together. In response my friend clearly wasn’t ready to open up all his financial details to me at that point. We left it with my friend would look through the family finances to find the money. I just hope it comes in the form of savings rather than tapping up another friend...

    Cheers
    RIT

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    1. Please let us know whether or not he repays the debt in full on the date agreed. You who know him think that he will. I who am detached from the situation predict that he won't (or at best will come up with a small part ~ repayment and an excuse ~ probably that some fresh unexpected problem has since occurred. That he wasn't prepared to come clean about his finances is a tellingly bad sign.

      They say there's a mug born every minute. I do hope it's not you:

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  30. Part of being a friend is not to encourage feckless behavior. Lending more money is only adding to his debt mountain. Only lend if he's got creditors literally knocking at the door who won't wait for payment rather than to encourage more trappings of wealth.

    Jess

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    Replies
    1. ...but the bigger part of being a friend is to accept him as he is without trying to moralize... if you cannot, why would you be friends? I bet there are other things which make you both friends other than financial responsibility..
      K.

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  31. Everybody no matter where he is living is the only one responsible for his future.

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  32. Thanks for the content, it's really believed invoking. None of my buddies have ever requested me for more than £100 (which got compensated back) but from the little I can obtain about their terrible financial situation it may be only a issue of your energy and effort.

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