How to Help A Friend With Their Finances

Posted By Paul

Over the years I've had friends who were in bad financial situations ask me to help them get back on track. If you ever get approached by someone to do this, here are a few bits of advice from my own experiences:

1) Make sure this is a REALLY close friend since the only way to be helpful to someone in this situation is to really look at the normally private details of their financial life, and to put someone under the microscope like that can be a real test of a friendship.

2) Get all of the info on their financial situation. Credit card bills, paychecks, housing costs, utility bills, and so on. Lay it all out and see how it looks.

3) Look for problems. Usually if you do step two properly something will just jump out at you like their take home pay barely covers their rent and car payment, or they spend hundreds of dollars on a hobby every month.

4) Make recommendations. Give them honest blunt advice that is based on reality, like: "You can't afford your current apartment and car, consider getting a cheaper apartment or a cheaper car." This step may also include helping them set up a budget.

5) Once you've made your initial recommendations, wash your hands of it and do nothing more.

Step 5 does seem like an abrupt end to the process, but that's on purpose. The problem I've seen is that if you continue to be involved after step 4, things can get messy quickly.

For example, I had a friend who came to me and asked me to help them get their finances sorted out. After step 2 and 3 it was obvious was that their biggest problem was that they bought far too many "luxury items" (little things like CD's, meals out, stuff like that). I helped them come up with a budget that included a nice payment towards their credit card debt, and they tackled it enthusiastically.

What happened? Well after a month they started to fall into their old patterns, specifically spending money on impulse purchases. We had planned to sit down once a month to see how they were progressing, but when I started pointing out some poor spending choices at these progress meetings, they gradually started resenting me. I ended up being the "angel on their shoulder" that they wanted to ignore. Every time they did something financially irresponsible they would grow a little more resentful of me (as if I were the reason they had money problems). The end result? I'm not really sure because this friend and I don't talk anymore.

That's why I suggest making your suggestions and then be done with it. You can't be the "budget police" for someone else. Make your suggestions and then let them do it (or not do it) don't try to be their self-control.

Any other stories like this out there? Has anyone managed to help a friend out of financial dire straits with success?