Government Bailouts Set Bad Example

Much of the news over the past couple weeks has been dominated by the financial markets, specifically the $700 billion bailout plan proposed by the current administration.  There are many personal finance lessons to be learned from the recent bank failures, and the regulations pushed by the last two administrations, both of whom are largely responsible for this mess.  One of the most important lessons is to avoid lending money to others in an effort to bail them out of their own problems.

Abraham Lincoln Set a Good Example

The story of Abraham Lincoln’s refusal to lend his step-brother money is well documented, and it emphasizes the idea that others should first try to dig out of their own mess.  In Lincoln’s letter he advises his stepbrother to find an honest day’s work, for which he will reward him by matching his earnings.

Apply that same logic to today’s fiscal crisis makes a lot of sense.  Perhaps if these companies that are folding right and left cleaned up some of their own mess by asking for the millions paid to outgoing CEOs back, and using it to write down at least a portion of the losses, this bailout could help clean up what’s left outstanding.  As it is, many of the top dogs are bailing out in golden parachutes while taxpayers are going to clean up the mess they leave behind.

Lending Money to Friends and Family is a Bad Idea

I don’t like the idea of lending money to friends or family in need.  However, that doesn’t mean I’m against giving money to loved ones in troubled times.  When we give we should expect nothing in return.  When money is loaned there is an expectation of repayment, and that creates a debt between the lender and the borrower–not a good relationship to have with a family member or friend.  Like Dave Ramsey says, “Thanksgiving dinner just doesn’t taste the same.”

If you decide to give money to someone to help them out, be sure to set the proper expectation that this is a one-time thing.  If not, the person may come to expect the money on an ongoing basis, and then it will only serve to further enable their bad habits.

Comments

  1. Gov’t can’t always stay in a budget… lots of historic examples there. We do need a set repayment plan for those times when borrowing money is the only way, and force that borrowing to be minimized. This bailout idea shows lots of poor planning leading to an expensive end.

  2. Mostly I agree with the no-lending statements above. However, I do make small loans to my children, with a payment schedule, and have always received the payments back – probably because they were told that any loan not repaid on schedule would result in no more loans. I do not loan for any/all reasons tho… it must be an emergency, in my book – like an unepected car repair. etc. And yes, they do all have emergency funds, but sometimes, with their own kids, they get in a bit of a bind. Mom’s loans are never over $300, by the way.

    I will, however, co-sign for an emergency, provided that the amount is not over what I feel comfortable writing a check for if my grown child were to default. I also insist on a monthly update on the loan status. I feel it is important for them to build up their own credit, and sometimes it takes Mom’s signing for that loan to happen. While I am sure that they have the ability to pay the loan back, and their credit is good due their having paid back loans to me, sometimes the bank doesn’t take those things into consideration. I will say, never co-sign for more than you can write a check for to pay off – because it is YOUR credit on the line also.

  3. I made the mistake of lending my younger brother $3000 to replace his house’s heat pump. He paid me $1000 when he got his tax refund, and he said he would pay me $100 a month after that. The money stopped coming. There always was some reason, many of which were legit expenses. But there also was the Wii, the riding lawnmower, the hydroponic herb garden, the new TV set, and on it went. Some of this money he earned by being frugal himself. I was impressed by his shrewdness. But he never was frugal to repay me. Finally, I threatened to tell my older brother to give me $100 a month out of the money he was giving my younger brother to pay off his substantial student debt. So he paid me $100 two months in a row. But he will not be on schedule the next month. Dentist appointment, etc. Always something. So I’m reneging on my threat. He still owes me $1400. I have no idea how long it will take him to repay me. And I’m not even charging interest. And he and his wife make substantially more money than I make. I’ve learned my lesson, though. I am not loaning him any more money.

  4. The only people in the family I will gift money to is children (nieces, nephews, etc). Here’s why. Years ago when I was still dating my husband but living together, his family decided to spend Christmas in a rented condo by a lake. His parents (who are THE definition of cheap) were in charge of finding the place and letting everyone else know their share. Included in the vacation was my husband’s sister, who’d had a child young (she thought after only knowing the baby’s father six weeks, they’d marry, and proceeded to pick out china – separate story), and didn’t have a job, was living on public assistance, etc. Everyone agreed that we’d each pay a little extra to cover his sister’s cost of the condo. My husband and I were told our share ($432 for the weekend), and I didn’t bat an eye, being the naive sucker I was in those days. A few months later I was discussing the vacation with my father-in-law and the issue of how much each of us contributed came up. I found out that my husband and I paid more than anyone else, including his parents. Why? His father said it was because we could afford it, and that we essentially paid for his sister. That was lesson one of mixing money with family.

    Lesson two was many years after we married, the family decided to do another vacation rental for the Christmas holiday. This time, I said I wanted to see the bill and that everyone, per person pays the same. And I wanted to be in charge of getting all the food (the CHEAP parents always went for literally the cheapest food, which unfortunately sometimes meant the worst quality). I was able to buy food for 3 dinners (one of which was a Christmas dinner), 4 lunches, 3 breakfasts, plus snacks, drinks, etc., for $35/person, and we still ended up taking food home. Everyone was ecstatic that the food bill was so small and they liked the food I selected, except the parents. They complained the whole time that I overspent, I bought all the wrong [expensive] foods, etc. That was the final lesson in mixing money with family. I’ll never do it again under any circumstances (and I haven’t, and that was only 7 years ago). Some people, if they don’t take advantage of you, they’ll nitpick you to death.

  5. Maha, I hear ya. I sometimes wish that my wife had been an orphin. You get the whole family when you marry. The first 8 1/2 years we were away from family in HI and Guam. Ah, wedded bliss!

  6. Another excelling article. I may have to help a few family members, but I’m not going to loan them the money. I going to give it to them. I would hope for the same if I was in financial trouble.

  7. I share your beliefs about loaning money to family and friends. Not a good practice. I’ve had family loan a parent money and when they couldn’t pay back, the loaner came trying to collect from me. Sometimes we get upside down with our finances but helping others to become independent and responsible is the greater way to lend a hand.

  8. I’m the first in my family to climb the class ladder and become a relatively high earner. As such I’m constantly being pestered for things by my mum.

    Now she’s getting a divorce and a huge payout she’s suddenly become quite cold towards me.

    Its amazing what money does to people.

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