Wednesday, August 9, 2017

The Risks Of Borrowing Money From Family And Friends

Wazzup Pilipinas!

Sure, you have a stable job, a bit of money tucked away in a time deposit account and a few pieces of prized jewelry you consider as investments. However, an unforeseen event happens and you find yourself illiquid. Broke is too harsh a word. In Filipino customs, the first number to call is family. Then, friends. If all else fails, there's the neighborhood creditor on motorcycle. The Philippines is composed of close-knit communities that offer support during times of need. Who needs a good standing in the bank if you have generous grandparents and aunts?

While it is a blessing to have a long list of contacts for your Call-A-Friend moments, borrowing money from family and friends has its downside. We're not talking about predatory interest rates nor tight repayment schemes. To borrow money from these people means to expose yourself to possible mental and emotional stress. Here's why you should take caution in dealing with money matters in your personal relationships.

“I told you so!”
Photo courtesy of Matthias Zomer via Pexels
Financial stability sometimes becomes a measure of a Filipino's success. Your parents may not 100% agree with your life choices, such as your career preference, but once you're able to prove that you can manage on your own, eventually you can earn their blessing. Sadly, an emergency can strike anytime. Your family will likely run to your rescue especially if it involves an accident or illness. But expect to hear tirades from your mother that may start off as concern and end in an “I told you so” note. Hold on tight for a trip down memory lane from your childhood mischiefs to where you are now: borrowing money from your parents.

The perpetual “utang na loob”
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“Utang na loob” is a concept uniquely Filipino which Wikipedia translates to “a debt of one's inner self (loob).” It is a debt that may or may not need to be repaid in money form, but will definitely carry with it favors you're expected to deliver sometime in the future. It can be a job recommendation in your office, an errand out-of-town or your utmost allegiance in times of family conflict. Think of it as a perpetual loan. If your cousin lends you money with no questions about repayments, tread carefully. It may involve an unwritten utang na loob provision.

The emotionally-charged convos

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When you apply for a bank loan, the loan officer will ask for certain documentary requirements, investigate on your credit standing and interview you about your finances. There are no painful phone calls on how you've exhausted all your options nor dramatic reenactments of how things went awry. Borrowing money from family and friends can be emotionally challenging. Your pitch will depend on your relations with your potential creditor. With your strict elder sister, you may need data to back up your repayment promises. With your best friend, you may need to offer a bit of your (too) personal secrets in return. You should be ready for the intrusive questions and the subtle insults.

The inevitable rejection

Photo by Kinkazoid

Why do some people avoid borrowing money from loved ones at all costs? It because of the agony of rejection. Getting your bank loan application turned down can be disheartening, but there's nothing more distressing than being refused by family or a close friend. Before you dial up your uncle, you've already made a projection on how he will react on your call for assistance. Your forecast is influenced by your relations with him, the past favors you've extended (this is utang na loob in the works), among others. So if you're rejected, you feel that it's not just your plea that was turned down, but your relations with this person. Somehow, you feel entitled to your family and friend's assistance as if a loan can measure your endearment for one another. Maybe they're just as illiquid as you.

Prepping yourself for the unforeseen
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No matter how financially stable you think you are, there are instances that can wipe clean your savings such as medical emergencies, accidents, and the sudden loss of income. How can you protect yourself from these risks?

First, make sure you have ample emergency funds in the bank. This pot is separate from your savings, which is primarily reserved for large purchases and your retirement. As a rule of thumb, an emergency fund should at least be equivalent to your living expenses for 6 months. You can easily build up this pot by setting aside a portion of your paycheck. Place the money in a bank product that you can liquidate at a moment's notice such as a savings account.

Second, get yourself insured. An insurance is your buffer against debilitating expenses. This will protect you against the risk of loss of income due to prolonged disability or death of your household's breadwinner. Insurance is really important to have; especially, here in the Philippines where few people can afford to be insured. But in reality, Filipinos actually have wide choices for this kind of benefit whatever their living condition is, rich or poor they can be insured. One example is the accident insurance offered by a known pawnshop in the Philippines. It won’t cost you a thousand pesos to be insured. You can’t really make excuses. If you still think this as too much to have, remember that you're essentially buying peace of mind when getting an insurance product.

Next, invest for your future. Nothing is guaranteed in life (except death and taxes). Your paycheck may not be as handsome a couple of years from now. Who knows? Start building various sources of passive income such as a stock portfolio or a small business.

Finally, live within your means. Make a habit to create a monthly accounting of your income and expenses. Jot down your disposable income (your earnings net of taxes and other charges), and set aside 10% to 20% for your savings fund. The rest shall cover your rent, utilities and daily sundry expenses. This personal finance habit can help you decide whether you really need that overpriced coffee every afternoon.

Your family and friends consist of your most important support group. When the proverbial stuff hits the fan, you know who to call. However, you should draw a line somewhere. You can expect words of wisdom from your grandparents when you need guidance, but this doesn't mean that they can be as open when it comes to money matters. Don't let money taint your beautiful relations. Avoid borrowing money from family and friends if you're risking an emotionally-charged encounter. It's just not worth it, and you know it.

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1 comment:

  1. I don't borrow, if I need money I just earn. As an extra income source I use sports betting and with it's not that hard to make a few precise predictions.


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