Being careful about lending money to friends and family

If you regularly make investments in real estate, stocks, bonds, and other investment types, you may feel like investing some of your money with friends and family members if ever they request it. As a high net-worth individual, it’s important to understand that the only way to maintain the lifestyle of an accredited investor is to build your wealth by making smart investments. While it’s possible to make smart investments with friends and family members, it’s also important that you’re careful about lending money to these individuals. The following provides a detailed guide to the precautions you should take when lending money if you want to maintain your generational wealth.

 

Why You Should Be Careful About Lending Money to Friends and Family

 

To effectively maintain and grow your wealth, it’s essential that you make wise investments that can generate a reasonable return. At the very least, it’s important that you don’t make bad investments that cause you to lose all of the money that you’ve invested. No matter the type of investment you make, you always run the risk of losing some or all of the money that you’ve invested. The same is true when making investments with friends and family members.

 

Before you lend some of your money to a friend or family member, it’s important to understand that making these investments should be a financial decision only, which means that your emotions shouldn’t be a factor in the decision you make. Many investors make the mistake of providing their friends or family members with a kind of informal loan, which means that nothing is put into writing and that the terms of the loan are only spoken. If you want your loan to be repaid and possibly provide you with a return, every facet of the loan needs to be in writing.

 

In the event that the terms aren’t put into writing, it’s possible for relationships to be ruined if the individual doesn’t repay you. Before you make this type of investment, it’s highly recommended that you treat this investment like any other that you make. You’ll want to perform the usual due diligence while also making sure that the terms of the deal are in writing. Without placing these terms into writing, you should merely consider your loan to be a gift that won’t be repaid.

 

The way you go about lending money to friends and family members also depends on what the money is needed for. If a family member requests $500 for some medical bills, consider providing the funds as a gift if you can afford to. On the other hand, there are times when people close to you will take business and investment opportunities to you. If a friend of yours requires a loan to help them invest in a property, the terms of this loan should be written down to ensure that this transaction is treated as an official investment. Before you consider lending some of your money to a friend or family member, there are some tips that you should adhere to.

 

Set a Deadline for Repayment

 

The loans that you provide to people close to you should never be open-ended, which only serves to damage your efforts in regards to wealth building. While the friend or family member you provide the loan to may not repay you, it’s still very important that you set a deadline for repayment to occur.

 

If the borrower doesn’t know when the loan should be repaid, they will likely avoid repaying it in a timely manner. Before you lend money to friends or family members, make sure that you write down the exact date when all of the money needs to be repaid by. This document should also include guidelines for monthly payments if the loan is a sizable sum of money. While this form of investment is less formal than most, it should still follow some simple guidelines.

 

Clearly Communicate Loan Restrictions

 

Whenever you lend money to friends or family, you should be prepared for the possibility that this individual will eventually ask you for more money. This is particularly common when the individual in question is starting a business venture and runs out of cash to support business operations. Before you provide anyone with a loan, it should be clear that this is a one-time deal.

 

Understand That These Loans Don’t Typically Earn Interest

 

Lending money to a friend or family member is a very straightforward process when compared to traditional loans. For instance, these loans don’t typically earn interest, which means that you may be unable to obtain a return on your initial investment. However, there’s no reason that you can’t charge interest on the loan in the event that the amount of money you’re lending is substantial.

 

If the money is going towards a real estate investment or a business that the individual is starting, there’s a possibility that they will receive a return from this investment, which is why you should consider charging interest on the loan. Let’s say that a friend of yours is starting a business and wants you to provide them with a short-term loan that will allow them to cover the initial operating costs. If the business venture is a successful one, the company will likely make money, which you should benefit from through interest payments.

 

How to Effectively Engage in Wealth Building

 

Wealth building is a practice of accumulating wealth over a certain period of time. Even if you’re currently considered to be an accredited investor with a net worth that tops $1 million, you could easily drop below this threshold if you don’t understand how to increase your assets. There are three primary components that are involved in building up your assets, which include making money, saving money, and investing money. In order to increase your total assets, you will need to make enough money to cover the necessities of daily life and any debts that you owe.

 

Once your income is able to cover your basic expenses, you can start saving money by crafting a detailed savings plan. Eventually, you should be able to start meeting some of the savings goals you’ve set, after which you can start looking into various investment opportunities. Different investment opportunities provide different return amounts. The top low-risk investments include savings bonds, high-yield savings accounts, and corporate bonds. On the other hand, it’s possible to net high returns through hedge funds, crowdfunding, and making investments into private companies.

 

Lending money to friends and family would be considered a riskier investment. These investments likely wouldn’t be backed up by collateral, which means that you won’t have any recourse in the event that your loan isn’t repaid. Even when you’re loaning to people close to you, it’s essential that you continue to make prudent investments.

 

If you want to make this type of loan but find that the risk is higher than you’re comfortable with, consider balancing your investment portfolio with a couple of low-risk investments that will net you consistent returns. In order to build generational wealth that you’ll be able to pass down to your family members, every investment you make should be a wise one even if the loan is being provided to a friend of yours.

 

Utilizing Passive Investing When Lending Money to Friends and Family

 

If you want to increase your net worth and maintain the lifestyle that you currently lead, it’s highly recommended that you utilize passive investing, which is a form of investment that makes it possible to generate returns without being actively involved in managing the investment. Passive investments are entirely different than the active ones that occur in hedge funds and mutual funds. If you decide to make this kind of investment, you won’t need to deal directly with the usual buying and selling that takes place with active investments.

 

While the passive investing strategy has become increasingly popular on the stock market, it is also commonly used with real estate investments. These investments include everything from crowdfunding and remote ownership to trust deed investing and REITs. For instance, making an investment in an REIT gives you the opportunity to invest your money with income-producing properties. The returns that you obtain from these investments may make it easier for you to lend money to your friends and family. If you can generate steady returns from your passive investments, it’s possible that you could branch out into riskier investments.

 

Lending money to your friends and family members should never be taken lightly. Even if you trust this individual completely, you always run the risk that your money won’t be repaid on time or in the full amount. If the loan is a sizable one, every detail of the loan should be recorded to ensure that you don’t lose money in the process. By taking certain precautions and by knowing what to expect from this process, you should be better equipped to handle any frustrations that occur along the way.

 

Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.

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Joe Fairless