Ask Paco: “Should I Lend My Friend Money?”

No “loans”. To family or friends. Period.
If it’s $100 or less just make it as a gift to them and be done with it. No papers drawn up, no broken promises. Saves friendships and family relations. You’ll be relieved and so will they.

Over $100 and it’s a deal breaker whether I can afford it or not.
Merely say no. You owe them no explanation. Fib only if you must.

If their nose gets out of joint and they take their marbles and play somewhere else then so be it. It will be a priceless life lesson that cost you nothing.

I LOVE this series!! Paco, thank you so much for sharing your expertise and ideas.

Several years ago, my husband came to me to discuss lending money to a friend. I told him that I had only one question: Is the need of the friend worth losing the friendship? We could afford the amount to be a gift, but both knew that if it was not paid back, the friend would feel weird around him and it would probably end the friendship. Husband reflected and decided that the need was worth the risk. Unfortunately, it did lead to the demise of the friendship, but my husband has not ever regretted the loss of the money – only the loss of the friend.

Thanks for that mini pep talk, Paco. As I try to figure out where to move my checking account and feeling slightly overwhelmed by APY’s, minimum account balances, and the discussion around credit union vs banks, realizing I just gotta take it one step at a time helped calm my brain.

If I could go back to my younger self in my 20s when I was fresh out of college and actually be wise about anything related to housing, I would have used the 30-32% rule as Paco advises. This should be the guideline for anyone at any age, no matter if it’s your mortgage payment or monthly rent. I was definitely one of those people earning $40K in NYC and spending at least 50% on my rent.

It’s true the early years of our career don’t leave much room for savings, but if possible these are the times to make the sacrifices. Prior to living in the city, I did live with my parents to save on rent and therefore had a commute of 1 – 1.5 hrs EACH WAY from the suburbs. Do everything you can to save on rent: put up with a longer commute to get cheaper rent, don’t shop unnecessarily, and if you can find a job in a city or area that has significantly lower costs of living compared to NY or SF…DO IT! You have your whole life to move later to these cities if you desire to do so, after saving on rent and moving up in your career.

I’ve seen others maintain their standard of living in expensive cities by securing the lease on a dwelling with 3 or more bedrooms and renting out the other rooms. Especially if you can invest in furnishing and decorating the main areas, you can charge a good price for the other rooms and all live well beyond your current means.

Lots of people want housemates to alleviate loneliness, not because they are trying to save money. I haven’t done this since my 20’s but I remember the best thing we did was hire a cleaner to come once a week so that discord about housekeeping was a non issue! We just added the extra to our rent and even on my very tight budget, it was worth every penny.

The other thing we did was carefully vet people in group interviews to determine compatibility – male or female, (we had mixed households of up to 7 people in those big old mansions in DC), that was most important.

Now, in my 50’s I’m planning to buy a house and do this very same thing for a while, until I feel financially secure enough to handle it all and live alone.

So happy to hear it’s okay to spend more money on rent, even if it goes against the 30% rule — if that feels important to you. Living with roommates isn’t the best choice for everyone. While some people find it beneficial (and even fun), or view it as a way to live somewhere they might not be able to otherwise afford, others view it as stressful, tiring, scary, upsetting, etc. If you think you’d benefit from having your own space, and full control over that space, then it may be worth it to spend a little (or a lot) more. Just my two cents :)

I have a money question for Paco! My fiancé makes significantly more money than me and we have an informal agreement as to how we split up finances that works for us. The sticking point is my credit card debt. I am working on paying off a credit card but it’s slow going. My fiancé has enough money that he could pay it off in one lump sum and he has offered to do so. I’m reluctant to take him up on the offer because this is my mess and I feel like I need to take care of it myself. Additionally, my fiancé has student loans and aggressive saving goals that I feel his money would be better spent on. Pride aside, what is the most financially responsible option here?

My biggest question right now is: if you have extra cash, do you add more to your savings or do you make an extra payment on your student loan? I realize that it’s an oxymoron to build wealth while $75k in debt, but I constantly waffle back and forth between using my extra cash to increase my savings/investments or make an extra payment on my loans.

For some context, I have about 3-4 months in straight savings and a healthy 401k. I’m not hard up for cash, but sometimes I just want permission to stop feeling that pressure to get rid of my student loans ASAP and instead save for something like a home. It feels like we laud edge cases who manage to save 50% of their income and can reduce sizeable debt in a few years, but I’m just not sure I *want* to live that poorly… I like nice things and want to enjoy the money I work for. Am I making a bad financial decision by sticking to my long-term repayment plan so that I can enjoy my short-term?!

Love Paco’s advice.
I have a burning question that I’ve been pondering for a few years: should I prioritize saving for my kids college fund or my own retirement? Thanks!

With regards to the first question about rent, the advice I always give to younger people starting out in NYC or anywhere is: roommates, roommates, roommates. This coming from a total introvert who really values her privacy! It was scary the first time I had to move in with a total stranger — and that one did NOT work out — but eventually I ended up living with people who didn’t drive me insane, some of whom even became friends, and I never spent more than $1100/month on rent, in NYC, which enabled me to save way more than other people I knew over the years. In general I found you should go with your gut — if the person you’re moving in with seems nice but something’s telling you no, don’t do it. Make sure your actual room is private — I couldn’t share an actual room with someone! — and consider living in “up-and-coming” neighborhoods, as long as they’re relatively safe. Also, the more roommates, the less the rent, in general, and I actually found it easier to live with 2-4 people as opposed to just 1, then if there’s tension there’s more people to diffuse it. Oh, and pitch in on the occasional cleaning person!

I spent more than 32% of my income on rent when I was in grad school. I think Paco is right–it really depends on the rest of your situation. In my case, I didn’t have a lot of other debt, and did not have any car payments. My health insurance was comparatively inexpensive because it was subsidized by the university. On the other hand, I did do some of the standard “grad student saving money” stuff–taking advantage of random free food events on campus, signing up for various studies that paid for participation…

For anyone who is interested in learning more about being financially literate, there’s a podcast called The Pineapple Project that focuses on just this- getting to grips with budgeting and money and how to make better decisions. It’s funny and very accessible to people who normally shy away from money and numbers. (If you can stand the Australian accent! Our $50 notes are yellow =pineapples)

I just love these posts. They’re important. They’re smart. They’re making financial literacy seem very cool. These posts have helped me knuckle up lately when it comes to facing credit card bills, etc. Money has made me uncomfortable my whole life, and this frank (yet also approachable and somehow cute?) discussion about it is super sexy. Thanks, Paco!!

My grandma always said “Never lend money to friends. If you want to help them out, consider it as a gift so if/when you never see it, you’ll still love them.”
I’m not one to necessarily give money to people but I ask what I can do to help like feeding them, paying them to watch my dog, or refer them for better jobs, etc.

Love Paco’s monthly finance post! Practical, enjoyable, and useful.

Do not lend money to family or friends. If, and only if, you can afford it, simply give it to them with no expectations of being paid back. If you cannot afford to give money away, don’t.

COJ team, I want to thank you so much for tackling money in these monthly posts. I have never been the wisest spender, but recently I was getting SO frustrated with my finances. My husband and I kept running into a wall every pay period where our bank was alerting us about a week before payday that our account had less than $200 in it, and we weren’t saving a dime! Your approach to tackling money head on inspired me to take a harder look at our spending and saving.

As someone who has FOREVER been deathly afraid of looking at my bank account, I finally decided enough was enough. I sat down with our bank statements and made a simple spreadsheet for every single recurring monthly expense and our carrying balance. I decided to make some aggressive payments to our highest balance credit card and only gave us a set amount to live off of during the month, from which we had to pull groceries, gas, and any other discretionary spending. Each evening, I take any receipts from the day and add them to the spreadsheet, deduct them from the balance, and categorize them according to food, gas, toiletries, etc. Once I have a few months under my belt, I’ll use these categorizations to build a more informed budget!

It hasn’t taken us long to realize that we have been hemorrhaging money with tiny purchases here and there that added up to A LOT, as well as eating out more than we thought we had (and man, those bills add up, especially when you tip 15-20%!).

Taking a good, hard look at our cash flows have helped us recognize monthly recurring expenses we don’t need (like my husband’s monthly car wash membership) and better helped us time the flow of cash through the account, so we don’t get low enough to warrant those low balance alerts. Plus, we will have our credit card paid off in a few months and can start putting more money towards our honeymoon fund!

The biggest change is that I actually feel *empowered* every time I log into our bank account, because I know what to expect. It feels good to be in charge!

I signed up for You Need a Budget from the first time you had Paco on and WOW! I *did* need a budget, and it’s fantastic. So, thanks Paco!