Monday, June 03, 2013

I Need Money, Help!!!

Have you ever helped a friend or a relative by lending your money to them to solve their financial problems especially related debt? If yes, you may want to continue to read on because I don't think you're helping them. You're probably making their financial condition even worst and eventually ruin their life!

Why Lending Money Does Not Work?

The obvious answer is it doesn't solve the root cause of the problem which is due to "lack of  financial planning knowledge".  If this is not solved, no matter how you help that person, they always come back to you with a same problem again and again. What you really want is "teach him/her how to solve their own problem!" so that they're independent enough to solve their financial problems next time. This solution is forever and will last. :)

So, don't straight away lend your money first...

Explore Alternatives Instead

Although it seems like lending your money is the only solution and it is often not the case. The first thing that what you need to do is guide them ask themselves this question - "if no one is going to help you, what else can you do"? Explore the alternatives together with them.  Here are some I can think of:

  • List down all expenses and see which one can be cut down. Insurance is the tricky one because often being understood as necessity which is not true especially when one fails to pay their own debts. Let it go although it is a lost (due to insurance is not mature yet) and start thinking to switch them to term-life insurance if really need to be insured. Know more about term-life insurance, visit here. I talked about it at very high level. :)
  • Start looking at their assets and see which one are not necessary. If the debt interest is 15%, can the assets generate 15% of return? If no, then it is probably time to let go of these assets. Sell them and use the money to pay the debts to reduce the principal. Some time you need to force them to sell. :) Assets are those include houses, properties, real estates, cars and investments (e.g. unit trust and stocks).
  • Get a spreadsheet to work out a monthly cash flow. Make sure it is not deficit, your expenses cannot be more than your income. If yes, you need to redo the above 2 steps. Find a way to make it surplus (i.e. income more than expenses). Put 10% of your income for saving and the rest is the remaing amount (after deduct all your expenses) that  you can use to pay your monthly debt installment, let's say RM 1K. 
  • Finally, look for AKPK (specific to Malaysia only) to reduce debt interest. The good thing about AKPK is it stops them from accumulating more debts immediately. I documented down the whole AKPK application process here for your reference. Use this RM 1K as your negotiation with the counselor on amount of money that they can pay in order get an optimum reduced interest rate.

You Still Can Lend Them Money

Ultimately, you shouldn't lend your money if possible but sometime no choice. :)

You still can lend them money only after a proper financial planning has been done on how and when the debt can be settled. In other words, a sustainable plan needs to be came out first. Your money should be a minimum amount money that able to help them have surplus cash flow starting from now for example. Don't lend them more than that.

For the money that you lend to them, I would suggest you charge them interest rather than giving them zero interest and ask them to come out a proposal on how they can pay you back. Your money should be included as one of their debts in their financial planning.  From this exercise, you can assess how much they know about financial planning.

If it is negative, the problem is not solved yet. You need to pay more effort. It is not easy to get everyone understand financial planning. Good luck!


kampunginvestor said...

Wow from the steps above, I don't think its quite possible to follow it as it seems very tedious job.

I did have some bad experience in giving loan to "some friends" Until today never return and act stupid always. Most of it do return it because at that moment of them, they really need to extra cash to settle their problem.

Charging interest upon the money we lend to people from my point of view is not healthy. When people financial help, they are already in deep trouble and by charging interest, it won't really help the cause. If that person is your friends or relative just loan them some and see their sincerity in paying back. If they are not sincere, then there will not be anymore second time.

sorry for writing too long and its just my 2 cents! :)

ChampDog said...

Hey bro, how are you lately? Yes, I have to agree with you it is a very tedious job but think of it gain it is worth the effort if it does solve the root cause of the problem in long term (not just short term).

About charging the interest, it is a different perspective here. We used to think we should just lend our money to our loves one unconditionally when they need help but I may think otherwise. It depends on the root cause of the financial problem. If it is due to lack of financial awareness or financial planning, lending money without any interest won’t help. Sooner or later, they mostly will get back to you to ask more simply because they fail to manage their money again.

We don’t need to charge high interest but as low as fixed deposit or even lower than that because the intention here is not to give more trouble to them but rather to educate them on managing their money. To be very frank, a lot of people do not even know how to calculate the interest. For instant, the interest is 5% per annum, what is the daily interest? What about monthly? If I pay certain amount today, how much interest I reduce? How much do I still to pay to settle the loan? Should I settle my loan now if I have the money or I should wait? And many more analysis needs to be done. Basically, it is more on the exercise for them to go through it and understand how this interest game is. If they fail to understand this game, it is very likely they will fail in managing their money some point in future.

However if the person has nothing to do with lack of financial planning, then probably I will agree with you. We can give them a favor depends on how close you’re with him/her. Yes, 2 cents too and I think mine is longer than yours! LoL! :)

kampunginvestor said...

You didn't state your what is longer than mine? ^+^

I usually loan to my real buddies that thus far will return back the $ to me when they have it. At times, they are just too tight to fork out money. Some even until not enough money to eat.. How to charge interest leh? -,-!

ChampDog said...

lol, my text is longer than yours! Maybe there also longer than yours! lol

Still can charge interest just it will be accumulated if they don't have money to pay. Then a "plan" needs to be come out to pay you back. Similar to when you take any loan. Up to you to decide, you can also say first 3 months is free of interest. Again, the intention is not to earn money here but teaching them on personal finance indirectly and hopefully.

Bottom line, I think sustainable is the key. If we are sure is one time deal kind of thing, then it is okay. I just heard too many cases already that one time deal always doesn't work out.

maveric said...

These are my experiences on loaning money to friends and relatives.Nothing came out of it the amount voluntarily & in all cases,no interest is involved.If the amount is >rm1k, I may kind of 'remind' politely but the issue is how many times can one remind..? We are talking about consenting adults here,not 'Kiddy' stuff ..By right,the borrower should 1)away remember the debt 2)onus on him to tell the lender of alternate plan of payment etc2 instead of acting stupid.

From the above,my philosophy on the above are as follow....;
1)Lender does not lend to borrower,later gets angry. Lender doesn't get repaid by borrower,former gets angry...better borrower gets angry than lender.


2)Readiness to accept that the loan will not be repaid at all especially for smaller amounts...the values of the friendship or kinship is probably worth that much only...!??

ChampDog said...

If you don't lend them, how are you going to help them? or you mean the relationship will just end? or you agree to my suggested method?

For the second bullet, true friendship worth unlimited. :) That means you will lend them money again and again as long as they need it. That is what I have seen so far especially for closed relatives.

maveric said...

@ CD

I do strongly believe that a 'normal & rational' adult would be in dire straits if that person opens the mouth to borrow money..!

I also believe that a principled adult will repay the debt when due.

We are talking about a spread of values here...integrity,trustworthiness,honesty etc2

I do not quite understand your 2nd para..;'true friendship is worth unlimited..that means you will lend them money again & again as long as they need it..especially for closed relatives' Really..? You do not like lending them,do they know it?

Empathy should be both ways..!

ChampDog said...

Sometimes when they fail to manage their money, they won't able to pay you but step in further. That's why the fail to repay the debt when due or probably borrow from someone else to repay you. I have seen cases like that.

For my second paragraph, I meant for those who you love very much, it is hard for you to reject borrowing them money if they borrow again. Again, I have seen cases like that but not on friendship but on closed relatives instead.

ChampDog said...

To add on, in fact a lot of "normal & rational" adults fail to manage their money and finance.

I think that is the bottom-line problem unless you are really expecting all will do?

maveric said...

@ CD

Point doesn't matter if the relatives are from your side or the wife's side but normally,she will ok the money to her borrowing relatives but could 'yak2' a bit if the borrower is from your own side...ya..very complicated & touchy wor....!!

Whatever the are blessed to be the lender & the relatives borrower is blessed to have a kaya lender like you too...:D..!!

ChampDog said...

I know exactly what you meant about the "yak2". lol Anyway, I'm not kaya lah, just less dependencies. :D

As my original intention of my article said, just don't blindly lend your money IF you really want to help your loves one. Unless you really can "Confirm" it is one time deal of thing which usually don't happen.

Ultimately, don't lend it at all if possible but still facing the problem together in a different way. :D

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