Why You Should Never Lend Money to Anyone (Ever)

A lesson that I’ve learned the hard way

Have you ever lent money to someone? Probably yes. Did they repay it on time? Or did they even repay it? Probably not. And for some weird reason, we keep repeating the same mistake, isn’t it?

I have made this mistake for not just years but decades. We always have people around us who are in a bad financial state. Most of the time, their bad financial state is not because of bad luck (very rare) but because they mismanaged their finances and are not capable of facing the consequences themselves.

If you have managed your finances well, been frugal, said no to wasteful expenses, and accumulated capital, that’s not because you were in good luck (sometimes luck plays a role, but not consistently). Building wealth and capital takes time and patience. It takes discipline and hard work. It is earned, not given.

However, when we come to a little bit of a good state (not even Ferraris or Lambos level rich), we are already made to feel guilty because most of the people around us are in a worse financial state. We feel a sense of moral obligation to help them out, and we feel guilty if we don’t. So we transfer them the money. But remember that is a one-way transfer and takes a lot of time and energy to get it back.

When we “help” other people financially, we make the following mistakes:

• We think that we have a moral obligation to help them (we do not)
• We feel guilty for being in a relatively good state and feel sorry for them for being in a bad state – we think it was their bad luck (but it was the consequences of their own actions – you cannot face it for them).
• We fool ourselves that it’s good for the relationship and relationship is more important than money. But what really happens is that both the money and the relationship is lost.

People who ask for “emergency” financial help from friends, co-workers, and relatives are rarely in an emergency. They are kind of in an “always emergency” because that’s their financial habit.

That’s how they have learned to live, from edge to edge. If they have not made a habit out of it, they will have emergency funds for themselves and they won’t even ask you for any money.

If you say NO to their request, you are going to help them rather than hurt them because:

• The relationship won’t be hurt. Any sane person will not be angry at you because you have money and you are not giving it to them. If they are getting angry for you honestly working hard and accumulating some capital, then you don’t need to have a relationship with such a person anyway. If that’s the case, we should all be angry at successful entrepreneurs.
• By saying NO to them, you are going to train them to be self-sufficient. If you give them money, you are training them to just do a temporary fix through loaned money and they are bound to do it again with another person. They have enough people to ask and they will always be in an emergency.

Your capacity to focus on your work and earn money also gets impacted because even if it’s a small amount of money, you are going to spend a lot of mental energy following up about it. If they say they will send money on a specific date, and if they do not – it’s extremely energy-draining and frustrating. Because you have not lent the money to a stranger. If you are a loan shark, you can send collection agents and not have any emotions attached to the collection process.

You are not a loan shark. You are a loan puppy. Instead of making them feel guilty about taking money from you and not giving back on time – you end up feeling guilty about even asking for the interest – forget the principal.

That’s the problem with the whole process. The people who take money from you are:

• Friends
• Family
• Co-workers
• Employees

You can’t adjust their credit score with you. Emotions are tangled up in the entire process.

You work hard and accumulate capital so that you can live a better life. Never feel guilty for that. The whole point is to live a more peaceful life. Take it from my experience. Think twice before loaning out money.

Instead do charity. Give away the money and forget about it. If someone asks for 1 Lakh from you, send them 10,000 as charity and never expect it back. If it comes back, then great. If it doesn’t, then you don’t even remember about it.

That’s why you should:

• Never flaunt your wealth
• Always act poor
• Be frugal
• Keep your friends circle small
• Keep a very professional relationship with your co-workers and business partners. Don’t convert them into friends. Build a separate friends circle where you do not have any transactional relationships.

It took me 15 years to learn this lesson. Hopefully, you won’t make the same mistakes that I did. Learn from my experience.