You trust your friends with your secrets, rely on them for emotional support, and celebrate their successes, while they celebrate yours. But when it comes to money, things can get tangled more quickly than you think.
First, because it’s your friend, emotions are always involved the way they aren’t among strangers, which could lead to you being taken advantage of. Even if your friend has the best intentions, they could still end up hurting you and your finances, especially if they’re struggling to keep it together themselves.
At the very least, tangling friends with money can lead to lopsided power dynamics, hurt feelings, and just general weirdness. Don’t believe me? Here are five ways in which friends can hurt your finances.
You never get paid back.
Opportunities abound to lend your friends money: when they’re out of cash and you’re at a cash-only restaurant downtown; when it’s easier for you to just pay the entire bill with your card rather than figure out how to split it; or when they need to move and don’t have enough to put down a security deposit.
Some of these situations are no big deal – what’s $13 for late-night Japanese fried chicken among friends? But as you start to get into bigger sums or the bar tabs add up, an unpaid debt can become a sticking point.
And it’s a frustrating situation, maybe for them, but especially for you! Their broken promise to pay you back makes you trust them less. Every time you hang out with them, it’s hanging over your head, but you don’t want to seem like a Scrooge. Plus, you don’t have any recourse to collect, because you didn’t make them sign an agreement.
How to handle it: If your friend always seems to forget their wallet, be up front with them about how that makes you feel: annoyed and used, most likely. Offer to go to meet up at more affordable places or do free activities, if you think they’re struggling with money. But if they’re just a cheapskate? You might have to either decide that’s the cost of friendship, break it off, or start leaving your own credit card at home and bringing just enough to pay for yourself.
If your friend comes to you asking for a large sum of money, you can handle this two different ways. If they truly need it and you want to support them, consider it a gift instead of a loan. You can ask them to pay you back, but make sure you can afford to lose it, so if they don’t pay you back, you can absorb that and continue to be friends with them. Or, you can tell them a loving but firm no. Here are some example reasons:
“I wish I could, but that money is earmarked for our wedding/my children’s private school/to take care of my parents.”
“I value our friendship too much to get money involved. But I will support you in any other way that I can. I’ll help you move/help you find a lawyer/pass your résumé along to my network.” If your friend tries to guilt you into loaning them money even after you’ve said no, that’s not a good friend, so stand firm.
Your credit is ruined and you get saddled with debt.
Many large financial transactions require a co-signer, especially if the lendee has less than stellar credit, or can’t put up a big deposit or down payment. That’s when your friend might turn to you and ask you to co-sign. Beware! This is an easy way to ruin your finances.
If your friend needs a co-signer, that’s a sign that they have been deemed a financial risk by the bank or landlord. By co-signing, you’re saying that if they stop making payments, you’ll step in to take care of it. First, your credit score will get battered. Then, the financial institution will turn to you and demand you start paying for the loan.
Going to your friend and asking them to start paying the loan again probably won’t work – if they could pay it, they would be. So now you have terrible credit, and a new payment to take care of every month. Awesome.
How to handle it: It’s best to never co-sign for a loan for a friend, ever. Again, you can offer to help in non-monetary ways. You don’t need to offer an excuse for this one, but, “I’m sorry, but I’m planning on getting my own loan for a house/car/graduate school, and I need my credit report to be clean,” or “My financial advisor has advised me not to, I hope you understand,” should do the trick. If you do feel compelled to help, offer to lend them money instead (again, think of it as a gift) so that your credit doesn’t get ruined if they fall behind.
You lose your security deposit.
Taking a trip with friends or sharing an apartment often involves a security deposit. If you both behave perfectly, then no problem! But what if your friend makes a big mistake and causes your security deposit to – poof! – disappear? Or you split the security deposit and they abscond with the whole thing?
How to handle it: In some situations, there’s not much you can do. If you were the one who found the AirBnB rental and your friend is the one who broke the hot tub, well, you just have to hope they own up and pay you back, since the security deposit will come out of your credit card afterward.
But in situations where a security deposit is required up front, cover your bases before anything ever gets broken. Insist they split the security deposit with you on an apartment rental, the boat rental, or the beach house. If you can, get it in writing that you are splitting the security deposit, so you have proof of how much you each put in and can show that to the rental agency and can ask for separate checks.
You collect faux friends.
If you enjoy fair-weather friends, by all means, insist on paying for everything – the tab, the Uber, the tickets, the grand gestures. You’ll quickly rack up friends who are happy to get dinner with you or hang out in your beach house. Just know they probably won’t stick around when you need a shoulder to cry on, or someone to babysit your kid.
This can be especially hard when you have friends that aren’t earning as much as you, or you want to share in your recent success. Treating everyone to champagne after your promotion is cool every once in a while. But paying for friends consistently – even a childhood friend that you trust completely – can create an uncomfortable power dynamic. They might feel awkward and guilty about it. You might find yourself getting to make all the decisions, since you paid. In the worst situation, they could be silently stewing about your behavior, but won’t ever tell you for fear of losing a meal ticket. Or you could find yourself overspending, as you throw twice as much money at every vacation. That’s unhealthy, expensive, and not the kind of nourishing friendship that deserves your time.
How to handle it: The strategy to avoid this starts at the beginning of each outing, not the end when the bill comes. When making plans with friends, ask them to be forthcoming about what they can afford. If you suggest an expensive restaurant, make sure you mention the price and double-check that’s OK with them. Same thing with vacations you are planning – be up front about the total price tag, plus what kind of activities and restaurants you would like to hit up while you’re there. If it’s out of their budget, be a true friend by getting creative and choosing another place their budget can handle, or let them gracefully decline and follow up on your promise to plan something else affordable with them soon. If you notice some friends drift away when you stop paying, well, then you’ve just dodged a bullet … and saved your budget.
You lose a valued friendship.
You might have picked up on this theme already, but it deserves a specific mention, mixing finances with friends can ruin your friendship. You could be the godmother to your friends’ children, but if you co-signed a loan and they defaulted … well, it’s hard to come back from that. And that is even sadder than the $5,000 missing from your bank account.
So be careful about mixing money with amigos. “I’ll pay for this beer and you pay for that cocktail” is great. But when it comes to bigger sums, a good friend should support you in any way they can, except financially.