Through years of hard work and a smart wealth-building strategy, you can amass a small fortune. Passive investing enables you to ultimately enjoy a comfortable lifestyle. Income may be coming in regularly from real estate investing activities and other types of passive investments. Once your passive income streams are established, you will not have to spend so much of your free time working.
Friends and family members will undoubtedly admire your lifestyle. At the same time, when they need extra cash, they may immediately think about asking you. An important aspect of building wealth involves making savvy financial decisions. Regardless of how wealthy you are, you understandably cannot lend money to everyone who asks for a helping hand. How can you handle these requests without burning bridges with those who are close to you?
Establish a Personal Policy
It is easier for some people to lay down firm personal rules about lending money. After all, the alternative is to potentially look like the bad guy because you do not lend money to everyone who asks for it. When your friends and family members know that you hold a hard line about not making personal loans or simply handing out cash, the requests for handouts and loans will dry up.
Avoid Giving an Explanation
Whether you establish a strict personal policy or you analyze each request on a case-by-case basis, you will need to turn down at least a few people over the years. Some people give a long, drawn-out explanation about why they cannot give out their money. They want the other party to know that all of their money is tied up in other ventures or that other factors are pending so that they do not look like a bad guy.
In reality, you do not owe anyone an explanation regardless of how close they are to you. Your finances are your business, and what you do with your money is not their concern. In some cases, providing an explanation can actually result in ill will. For example, if you are honest that you do not believe the person can pay you back, you may step on toes. In many cases, a better approach is to simply state that you are not interested in considering or available to satisfy their request.
Be Blunt and Swift
As soon as somebody asks you for a handout or a loan, you need to know how to respond. Answering bluntly and swiftly may work best for some people. After all, you do not want to create false hope by giving the illusion that you are seriously considering the request. However, this approach may not work well in all situations. If you always maintain a policy of not lending or giving money to friends and family members, this is a great approach. On the other hand, if you have a solid desire to help the person, you need to try a different approach.
Pause Before Responding
An alternative to the blunt approach to turning down requests is to take a day or two to actually consider the option. Only use this approach if you have the means to follow through and if you are giving it serious thought. When you tell the person that you will respond in a day or two, you are no longer placed on the spot. Nobody should make hasty financial decisions, and this extends to making personal loans or offering large financial gifts to friends and family members.
When you give yourself this extra time, you can review your finances to ensure that the loan or gift will not impact your wealth building goals. At the same time, you can determine if it is a worthy request or if the funds will likely be squandered. Because you have worked so hard amassing wealth and passive income, you do not want to essentially throw it away.
Schedule a time to circle back around to the individual in the next day or two. Generally, this type of conversation should be completed in person when possible. If you intend to agree to the request, you must have firm terms in mind. The person must agree to those terms, and you may want to put the agreement in writing. On the other hand, if you decline the request, you should develop the right strategy before the meeting. Will you deliver the news in a blunt manner without an explanation? Otherwise, how much of an explanation are you willing to provide?
Suggest Alternatives
Regardless of how frivolous or serious the financial request is, you are not the only solution available to your friend or family member in need. The reality is that there are several alternatives that may work well in different situations. When you present these options to your friend or family member, you can offer to assist with their efforts in these ways. For example, you can offer to contribute a limited amount of money and to spread the word through your network to raise awareness.
Crowdfunding
Does the individual need money to start a new venture? Crowdfunding is a way of obtaining funds from both individuals and organizations. In some cases, the money is given as a gift. It may also be invested. For example, if the person is starting a business, they may use crowdfunding to offer a small share of ownership in the business.
Peer-to-Peer Loans
Whether the person is trying to start a business or needs funds for personal reasons, applying for a bank loan could be a feasible option. When bank funds are not available, peer-to-peer loans are a smart alternative. Through a peer-to-peer lending platform, the full amount of funds needed may be raised by small loans from many people.
Private Donations
Has the individual experienced significant hardship recently? These events can pull at your heartstrings, but you do not need to be the only person who pulls the person up out of their situation. There are several reputable websites that facilitate private donations, such as GoFundMe.
Offer Other Types of Support
Giving money is not the only way that you can help out your friend or family member. Whether you extend a loan, offer an alternative or simply say no, you can offer various other types of support. By doing so, you can maintain great terms with the individual and may legitimately help him or her to achieve essential goals. How can you support your friend or family member without handing over cash?
Mentoring
Is the person trying to start a business or to pursue a project that you have some experience with? For example, is investing in real estate his or her goal? Rather than extending funds, offer to provide ongoing guidance and support. This may even extend to helping the individual make connections through your network.
Part-Time Employment
Does your friend or family member need extra cash to get by? A cash shortage may be tied to overspending, unexpected bills and many other things. Rather than give the person money, give him or her the opportunity to earn much-needed cash. For example, do you need a maintenance person at one of your investment properties? If you do not have a job opening in mind, put out some feelers to help your friend or family member find extra cash. Some people are able to work, but they are not willing to do the hard work and lift themselves up.
Know When and How to Give
There are several ways to give money if you decide to do so. For example, you can pass generational wealth down to an heir through a gift. Generational wealth can also be passed through several types of trusts. On the other hand, you could become a real estate investing partner with the individual. By doing so, you can contribute half of the down payment so that her or she can begin passive investing activities more easily.
If the individual has an urgent need for cash, you must decide if you are offering a gift or if you expect the money to be repaid. It may be advisable to have a formal loan agreement drafted and notarized. This way, you have some means to obtain the money through the court system if he or she does not honor the terms of the agreement.
Wealthy individuals who enjoy the benefits of passive income streams can feel proud of their accomplishments. After spending so much time and energy building income streams, you are in the driver’s seat regarding how you manage your funds. While a family member or friend may ask for a straight loan or a gift of funds, you can see that there are many alternatives available. Keep all of these options in mind the next time you are faced with this type of situation.
About the Author:
Joe Fairless is the co-founder of Ashcroft Capital, a fully integrated multifamily investment firm with more than $2.7 billion in assets under management, and the founder of Best Ever CRE. His podcast, the Best Real Estate Investing Advice Ever Show, is the world's longest-running daily real estate podcast with more than 500,000 monthly downloads.