Lending money to someone you care about? Ask questions!

Not too long ago, I blogged about how anyone should have to think like a donor if he was to be a lender of money. 

If we are not comfortable with donating, say, $2,000 to a charity, then, we should not feel comfortable lending $2,000 to anyone! To me, it is quite simple. Why complicate things?



However, a friend who took my advice to heart, quite surprisingly, told me that he lent $10,000 to a cousin recently. Now, he worries that he will not see his money again since the cousin has been borrowing from other relatives as well in the last few months.

I asked him why does his cousin need to constantly borrow so much money. He said he didn't know. Huh?

Why did he lend $10,000 to his cousin if he did not know the reason why the cousin needs to borrow? "Oh, because we are family and we are very close."

I told him to write off the debt right away. He struggled with this idea and I don't know if he has managed to do this.

It makes perfect sense to write off the debt and it is consistent with my belief.

Imagine that the money has vaporised and gone to a better place. If it should come back one day, well, go celebrate!

I am not heartless. I quite understand that there could be certain situations when we might feel obliged to lend money especially to family members.

However, as a prospective lender of money, I have the right to know why a loan is required and why the would be borrower is short of money.

Of course, knowing the answers to these questions will not guarantee loan repayment. Then, why ask the questions? 

Well, if you are asking me this question, then, my earlier point about thinking like a donor when lending money is lost on you.

Just throwing money at a problem might not make it go away. If we understand the problem, we might be able to offer a better or more permanent solution. 

If we truly care for the borrower (why would we even contemplate lending money to the person, otherwise?), we would ask the questions that need asking. 

There is nothing to be embarrassed about.

Related post:
The difference between lending and donating.

A war chest called "SRS".

I have blogged about the advantages of having an SRS account before. Basically, if we are paying income tax, we should think of contributing to our SRS account. It is quite simple.

Now, I am holding a fair bit of cash in my SRS account. Excluding what I will be contributing by the end of this year, the cash portion of my SRS account is about $60,000 now.

Some might wonder why I am not putting the money to work. Even putting the money in a fixed deposit might get me $300 a year in interest income.



http://www.ecitizen.gov.sg/Topics/Pages/Tax-free-investments-with-the-SRS-scheme.aspx

Well, I really want to keep the liquidity on hand to take advantage of any deep correction in the stock market which could happen anytime. Could something like this happen in the next 5 years? It could, couldn't it?

So, over a 5 year period, I would "lose" $1,500 for holding on to cash in my SRS account. Can I afford this? I think so. For me, this is the cost of holding on to liquidity.

However, the cost of not having liquidity could be higher since I could potentially make much more money by deploying the cash during a deep correction in the stock market.

The cash portion in my SRS account now forms one of my 4 war chests. The other 3 war chests are money in my savings accounts, money in my CPF-OA and money in my CPF-SA.

Related posts:
1. SRS: A brief analysis.
2. SRS, CPF-OA, CPF-SA. (Note publishing date.)
3. CPF or SGS.
4. Don't see money, won't spend money.