Why I Forgave a Big Debt

Doc's note: Emotional investing is a recipe for disaster. Longtime readers know getting attached to an investment is a quick way to lose money.

One of the most emotional investment decisions you could ever make is loaning money to a friend or family member. Today, my friend and colleague Steve Sjuggerud talks about the pitfalls of loaning money to a friend... and how he decided to end it.

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"Never loan money to your friends. It's a good way to lose your money... and your friend."

A friend of mine owed me a lot of money...

I gave my friend, Jack, a personal loan a few years ago as he was starting his own business.

As a financial guy, I take loans seriously. If you borrow, then you owe.

As a moral human being, you pay your debts, both financial and personal. Gotta keep the karma police away. Can't let the scales tip too far away from you.

Jack's business was promising. I was excited for him. But sometimes life doesn't roll the way you think it should...

In time, this debt loomed large over Jack and me. In our relationship, this loan eventually became the elephant in the room.

My brother (an attorney) wrote up the original loan properly, so legally I was protected. My brother filed a "UCC" with the state – in short, I could legally take Jack's assets (his collateral) to cover myself, as part of our loan agreement.

But the assets I could "take" (his patents) weren't really worth anything – to me, personally, anyway. Those were just collateral for a loan. I didn't want to use them to start a business like Jack did.

It was clear the loan couldn't be paid. Jack's business hadn't taken off yet.

Jack felt terrible about it. Meanwhile, I really didn't want to collect on my friend – and bankrupt him and take his patents.

What was I supposed to do?

Then I remembered something my grandmother told me a quarter of a century ago...

"Never loan money to your friends. It's a good way to lose your money... and your friend."

I never forgot that. (Well, up until Jack.)

I don't know where she came up with that nugget of wisdom. My grandparents didn't have a lot of money. And she wasn't known for her financial advice.

I assume she heard it from somewhere else... But back then, she said it with such authority, I felt like it came from her. And it sounded right.

I had forgotten Grandma's advice with this loan to Jack. But now I had a decision to make.

The money was already gone... At this point, the question is: "Am I going to lose a friend, too?"

I remembered Grandma's advice. And I forgave the loan.

I lost the money, but not the friend.

A loan shark – it turns out – I am not.

Then a surprising thing happened... I felt better.

The weight was supposed to be lifted off of my friend...

And it was. His debt was wiped out. Right out of the blue.

But a big burden was lifted off of me, too, in a way that I didn't expect.

I didn't realize it, but I had been stressing over this debt, too. And I felt like I was stuck in it with Jack.

Now, I am free, too, in some way. And I won't lose a friend. And I don't resent him for not being able to pay. It is simply reality.

My feeling here might not be morally consistent. But I am OK with that. Here's what I'm thinking:

1) I strongly believe morally in paying your debts – in fulfilling your promises.

2) I wiped out my friend's debt to me, breaking his promise.

3) Somehow, I feel a lot better.

While I "feel better," this is not something I want to go through again.

Next time, I'll remember this experience. And I'll remember Grandma's advice...

"Never loan money to your friends. It's a good way to lose your money... and your friend."

Don't forget it.

Good investing,

Steve

P.S. Emotions can lose you money, but you can also use them to make money. Recently, I told my readers about a group of hated stocks. I've been waiting for the right moment to get into this sector for months, and now it's finally time. Click here to learn more.