Financial guru Dave Ramsey has been warning for years that borrowing money from family members makes Thanksgiving dinner taste different, and now a study is backing him up.
According to the PayPal Money Habits Study released this month, 35 percent of U.S. adults under age 55 say an unpaid IOU has damaged at least one of their relationships. It doesn’t take much money to cause a rift either. Among the 1,041 people surveyed, it was an average $450 unpaid debt that ruined a friendship or family bond .
“I’m not really surprised,” says Neil Krishnaswamy, a certified financial planner with Exencial Wealth Advisors in Plano, Texas. “[Unpaid IOUs] hurt the trust factor in a relationship.”
Owing money you can’t pay back puts you in a sticky situation, one that unfortunately has no easy fix.
Why Money Ruins Relationships
Ryan Howell, an associate professor of psychology at San Francisco State University, says money can cause stress even between those who are sure their relationship is strong enough to withstand an IOU. “A lot of people think we can control our emotions,” he says, “but when we’re in the position where we’re owed money, we become resentful or angry.”
On the flip side, lending money can also change the dynamic of a relationship. “Once you borrow funds from a family member or friend, they often feel entitled to give unsolicited advice,” says Gretchen Cliburn, senior managing advisor at BKD Wealth Advisors in Springfield, Missouri.
What’s more, that change could end up being permanent.
“Even if debts are paid back, maybe the relationship takes on a new dimension,” Krishnaswamy says. That means a friend or family member may no longer want to share details of their life that could reflect on their money management skills or financial situation.
Other Options to Consider
The best way to avoid broken friendships is to not borrow from family or friends in the first place. David Weliver, founder of financial website MoneyUnder30.com, suggests selling items at a pawn shop or going through an online loan service, such as LendingClub or Prosper, if you have a decent credit score.
However, he warns some sources of cash should be avoided. “I would never recommend a payday loan,” Weliver says, noting they can result in a cycle of taking out new loans to pay off old loans. “You get trapped.”
Cliburn says people in dire straits may even be better off taking money from a retirement fund than someone they know. “Personally, I would prefer to borrow from a 401(k) than a friend,” she says, “but neither is a good solution.” While pulling money from a 401(k) can prevent a friendship from becoming collateral damage, raiding a retirement fund could be detrimental to your quality of life later. Plus, if you leave your job for any reason, 401(k) loans must be repaid immediately. Failure to do so means the money becomes taxable and is subject to a 10 percent tax penalty.
Basics of IOU Etiquette
If you don’t have any other option than to borrow from someone you know, you can take steps to minimize the negative effects of an IOU. “If you’re a borrower: communicate, communicate, communicate,” Cliburn says. “If you’re a lender: document, document, document.”
Lenders should keep careful records of what they are owed, any interest charges and when payments are made. Borrowers should try to make timely payments and let the other party know as soon as possible if they expect to miss one. Howell notes some people might find online payment services like Paypal.me helpful since they automate the process and eliminate the awkward money conversations that can occur when cash is changing hands.
In addition, you can takes steps upfront to reassure a lender you aren’t taking advantage of his or her generosity. “From a borrower’s point of view, a great gesture you can make is to write up a promissory note,” Weliver says. “It’s basically a written IOU.” Putting the details in writing can signal to the lender you’re serious about paying the money back.
Still, if you’re on the lending side of the equation, recognize that anyone approaching you for money is at high-risk of not paying you back. “If you’re willing to lend, you have to expect to never get it back,” Weliver says.
It’s not that they don’t want to repay the debt, but the fact that they had to resort to borrowing cash from you means they may be in serious financial trouble or have poor money management skills. Cliburn’s rule of thumb is “don’t lend money you can’t afford to lose.”
Howell, who studies money and happiness, says people should keep their eyes focused on what is important: the friendship, not the money. “Don’t let an IOU damage a friendship,” he says. “Friendships are the most important part of happiness.”
Copyright 2015 U.S. News & World Report
Written by Maryalene LaPonsie of US News & World Report
(Source: US News & World Report)