On Generosity and Risk

20 Jul

I wrote this a while back, but forgot to post it. Sorry <wink>

A few days ago, someone said that I could be remarkably generous when I wanted to be.

To put that in some context, I was collecting pieces of old cardboard – cereal boxes, for example – for my son’s nursery. I don’t see it as a stunning example of generosity because I would have bought the cereal in any case (I have to eat <grin>) and it doesn’t cost me anything extra to give them to the kids. It does cause me some minor inconvenience, as I have to carry a bag of cardboard to the school, but the only other options are throwing it out or giving it to the council for recycling. And let’s face it – I feel better about giving it to the kids.

The trouble with generosity, however, lies in how you balance generosity with risk.

One of the best pieces of advice I have ever received, when it comes to managing money, is never loan money you cannot afford to lose. If you, for example, loan money to a friend which is not repaid on time (the borrower cannot or will not repay you), you have to cope with the consequences of losing that money. If you need that money to pay your own debts, you’re in trouble. The landlord (or anyone else you might happen to owe money to) is not going to be pleased with an excuse of ‘I loaned my money to Bob and he didn’t repay me on time.’ No, Bob has left you holding the bag.

Pretend, for the sake of argument, that you earn £1500 a month. Your monthly living costs (anything you cannot put off; food, rent, tax, etc) are £1000. You may earn £1500 per month, but your actual free cash is £500. You can save this for a rainy day or you can go wild and spend madly – it’s fine, as long as you keep money in reserve to meet your expenses, the money you cannot afford to lose. If someone asks you to loan him £1000, you need to think long and hard about what you’ll do if he doesn’t repay you.

This causes problems for both personal borrowers and lenders – families have been torn apart over money – and international banking. If you owe the bank £1000, as someone (Heinlein) said, you have a problem; if you owe the bank £1’000’000, the bank has a problem. Bankers need to be careful who they loan money to because it is pretty much always a gamble. The borrower might repay the mortgage or they might not. If they don’t, the bank may not be able to recover the money. There is a certain requirement for due diligence (i.e. a risk assessment) before loaning anyone any money. Someone who has a good job and excellent prospects is a better risk than a drug addict who hasn’t been able to keep a job for more than a week.

Indeed, one of the reasons I dislike the EU is because the EU failed to do any kind of due diligence (let alone a risk assessment) before allowing new EU members like Greece and Spain to join. They were, put bluntly, bad risks; they literally cannot pay back the money they borrowed, leaving their creditors holding the bag. The politics of EU expansion trumped cold business sense. This might also be true (this is hotly disputed, for obvious reasons) of the housing bubble in the US. The banks were encouraged to make loans to people who were bad risks in the hopes this would help first-time homeowners. Unsurprisingly, most of the loans failed and the bankers were left holding the bag.

I am, by nature, a naturally cautious person. If someone came to me and asked for a loan, I would consider – first – what would happen if the money was not repaid. I would not assume that the money would be deliberately held back – accidents happen, as I know all too well – but I have to assume the worst. It would be easy to say no to a request for a million pounds – I don’t have a million pounds – but a smaller sum might be doable. However, I would still want to know just how exposed I was if things went badly wrong.

For example, I recently discovered that landlords require parents (or someone with a good job) to underwrite student accommodation. If a student fails to pay his rent, for whatever reason, the landlord can claim it from the parents. The paperwork was a little vague about how far this actually went. Would the parents be responsible for damage? If so, how much damage? If the apartment is completely trashed, are the parents on the hook for everything? It’s possible, at least. The average student simply doesn’t have the kind of money necessary to repair and renovate an apartment.

If my kids asked me to underwrite their accommodation, I would insist on performing a great deal of due diligence first. That’s basic common sense. I’d want a solid upper limit on just how much I’d be expected to pay, if the worst happened, and I’d want to be sure the other parents (if we’re talking about a shared apartment) could pay their share. And I’d want to know who else was going to be living in the flat. If my kid is sharing with five or six others of the same age and so on, I’d be more concerned about exposure than if the kid was living alone. (Apparently, teenage boys are regarded as a higher risk. Who knew? <grin>)

And if I thought the risk was too high, I’d say no.

Someone reading this is probably going to call me heartless. That’s exactly what happens, by and large, when someone is trying to stampede someone else into making a decision without carefully considering all the ramifications. It might be an enthusiastic stockbroker telling you to put all your money into Mr. Burns Holdings because the price is going up and what goes up could not possibly go down. Or it might be a relative, because relatives always help each other out, or it might be a wastrel friend who pours on the emotional blackmail until you either give in or harden your heart. And this always leads to trouble, because people come to resent emotional blackmail and eventually turn bitter and jaded.

What makes this worse is that people who consider the money theirs feel that they have a right to control how it’s spent. If you loan a friend some money to support himself until he gets back on his feet – and he then spurges on luxuries rather than getting himself another job – how long is it going to be before your relationship turns sour? Would you loan him another penny? Would you – or would you not – be demanding your money back, particularly if it’s clear his bad habits are actually harming his chances of getting another job and being able to repay you? How long would it be before generosity turns to bitter rage?

What makes this even worse is that there are few legal ways to recover the money. Can you afford a lawyer? Can you prove the loan even existed in the first place? Does he even own something that can be seized and sold to pay your expenses? If he has nothing … what then? You can win in court – you can get a judgement that is wholly in your favour – and still be left holding the bag.

I understand the urge to be generous. I also understand the urge to help. But generosity must be balanced with a risk assessment if it is not to turn sour – or, for that matter, to do more damage than it sets out to fix.

11 Responses to “On Generosity and Risk”

  1. Paul (Drak Bibliophile) Howard July 20, 2019 at 4:45 am #

    Then there is the person who if you loaned them money once, expects you to keep “loaning” them money when they have not ever paid you back. 😦

    My parents (and their church) ran into a person like that.

    They thought that she was a “good risk” as she talked about turning her life around.

    As it turned out, she kept “needing” money and never paid back anything.

    After Dad died, she didn’t (IIRC) attempt to get more money from Mom but she left town and nobody knows where she went.

    Oh, there was a period where businesses wanting to get a hold of her called our family’s phone number.

  2. MishaBurnett July 20, 2019 at 10:52 am #

    My ex-wife made a career out of having bad luck. She made an excellent first impression. When people met her they would think (as I did when I first met her) “Someone who is so obviously intelligent and outgoing and personable should have no trouble taking care of herself and making a living.”

    So everyone would accept her tale of just needing a little help to get back on her feet. She appeared to be a good risk, as defined above. She didn’t do drugs, or drink, and made every impression of being willing and able to work.

    But she had bad luck. Constantly. And after a while it became evident that her bad luck had a lot more to do with her own choices than any external forces. She always had big plans that were almost practical, and schemes that would allow her to pay everyone back if she could just get a little help to make them work.

    It was exhausting living with her and trying to cover for her. It would usually take about a year and a half to two years for everything to unravel, and then we’d need a whole new social circle, which usually involved moving, often in the middle of the night.

    Today my policy is that I don’t loan money. If I have it and somebody I know needs it, I’ll give them money. They may say they’ll pay me back, but in my mind, it’s a gift. If they do pay me back, I accept the repayment as a gift from them, gratefully.

    I don’t expect repayment, though.

  3. Billy July 20, 2019 at 12:02 pm #

    One of my relatives(Who has a high paying job) tried to help the kids of one of my other relatives.

    Buying each one a car , helping pay for college / etc

    She learned some things

    If you say * Here is 50.00 now next week come over and rake the leaves in my yard.

    She was just out the 50.00 because they would do nothing – or it would take a major gripe out to get them to do anything and everyone mad on all sides.

    Better is to say * Rake the leaves in he yard and after you do that THEN you can have 50.00

    Also she has had major problems with those kids, because they feel like she is not dumping more cash into thier laps so those kids feel rage at times towards her for not raining money on them.

    I feel she would have had a much better relationship with them by doing and giving them much less that she has.

    If that makes any sense

    PS
    She has changed her Will (because of one of those ungrateful kids that throw fits wanting more) leaving everything she has to charity so they get nothing when she dies.

    • Ken July 27, 2019 at 5:52 am #

      When I was around 8 yrs old, a friend of my Grandma would sometimes buy me an ice cream from the Good Humor truck at the local park. She liked me. I thought she was poor and I always thanked her for the treat. She always dressed in 2nd hand clothes and bought dented cans (half price discounted) and sometimes pet food for her to eat and walking a couple of miles to go grocery shopping instead of taking the bus to save money. Anyway, I remember going to her funeral and my mother and grandma talking about how she had so much money but never enjoyed it. She was an adult during the Great Depression. She owned several large apartment buildings. Her kids and grandkids were greedy and did not appreciate her. She gave them nothing in her will. She left her millions to charity.

  4. Anarchymedes July 20, 2019 at 12:41 pm #

    Chris, you said it yourself, in one of your earlier posts: if you’re not a socialist at fifteen, you have no heart; if you’re still a socialist at twenty-five, you have no brain. So no, I don’t think anyone—except maybe some under-fifteen socialists or over-twenty-five cerebrally-challenged individuals—is going to call you heartless for not throwing your money away.
    Having said that, people with billions on their names could be a little more open-handed on certain matters without much risk: for example, the biggest problem of the modern medicine is its cost — especially if you remember that those who need it most—the ghetto-dwellers—are the least able to pay for it.
    But then again: some people are like cassowaries. Here, the tour guides always warn the tourists not to feed the birds, because they quickly become demanding and if someone refuses them their treat, a kick from a cassowary can gut a human, or dent or car. Some people are like that: quick to become addicted and demanding when someone feels generous toward them once in a while.
    Besides, I, for one, would find certain forms of generosity that smell too much like pity plain insulting: like young Katniss Everdeen, I hate owing people. 😉

  5. Ron July 20, 2019 at 3:36 pm #

    “Indeed, one of the reasons I dislike the EU is because the EU failed to do any kind of due diligence (let alone a risk assessment) before allowing new EU members like Greece and Spain to join. They were, put bluntly, bad risks.”

    You are absolutely right there.
    But, between the two of us, you forgot to add yet a third country: Great Britain.

    • chrishanger August 16, 2019 at 5:51 am #

      Objectively speaking, Britain wasn’t a bad risk – money-wise, at least

      Chris

  6. Big Ben July 23, 2019 at 8:15 pm #

    While I mostly agree with your premise, my pet peeve is how businesses do everything (legal and quasi-legal) to limit their liability at everyone else’s expense.
    The best example in modern history is the bank bailouts of the last 15 years. They made horrible lending decisions and when they inevitably went sour most of the multi-national multi-billion dollar banks demanded bailouts from the common taxpayer. We the people should have let every one of those banks fail and damn the consequences. As has been mentioned, if you loan someone money once they’ll keep coming back to the trough. Those bankers haven’t learned a damn thing, because there were no consequences to their actions. I don’t think anyone in America went to jail for fraud or malfeasance, despite a considerable amount of evidence. Every CEO, manager and board member should have been personally on the hook for their decisions … instead they crashed the global economy and in many cases still got paid their annual bonuses while tens of thousands of families lost their homes.
    Your example of landlords wanting the parents of a college student to essentially co-sign their rental agreement, or car loan, or whatever … the lender should factor the risks into the payment scheme and charge the individual accordingly. As you said, if the parents agree to assume SOME liability, where does it stop? If the student accidentally burns down the apartment complex or wrecks the car that the parents co-signed for, does the injured party have the right to sue the parents, too?
    Oh well, if the answers were simple anyone could be President or Prime Minister … ohhh, wait …

    • Ann July 26, 2019 at 1:47 am #

      Actually the government pushed the banks into making ‘softer’ loans to more people to increase home ownership and underwrote the business. So while the banks colluded and profited it wasn’t their idea or business model and many banks failed or were taken over. Now the packaging of risk loans and good loans was a banker’s idea..

  7. bret July 25, 2019 at 12:57 am #

    Chrishanger wrote: “I’d want to be sure the other parents (if we’re talking about a shared apartment) could pay their share.”

    The sting in the tail with that is the concept of “joint and severally liability.” That means the landlord can go after you ONLY for ALL damages (missed rent, property destruction, etc.). For kids in college, this is especially a problem because if the room mates drop out and move out, the landlord comes after YOU for their missed rents. Even worse, there might be a “NO SUBLEASE” clause in the lease which means your child can’t get new room mates.

  8. Bewildered July 26, 2019 at 12:56 am #

    Once burnt twice shy! Years ago when I was still in school, or shortly thereafter, I went out with a group of friends and one of them was short of cash. Several of us forked over $5 or so to help out. Later when I followed up the money my loan had become a ‘gift’. As annoying as that was it was a valuable lesson about lending and I never lent him a thing again.

    Many years later another friend had rent issues – didn’t have the funds on hand to pay her final month’s rent, but could get funds if she jumped through a costly hurdle. As a valued platonic friend I was comfortable giving her the few hundred dollars she needed knowing that it was a risk, that I might never see the money again, but deciding it was worth helping her out. A couple of weeks later her lease finished, she collected her bond back, and immediately repaid what I’d lent her. We remain great friends to this day despite being opposite parts of the globe. By contrast I can’t even remember the name of that first ‘friend’ and have had no contact in years.

    Generosity, assuming that’s the right term, and risk are a 2 way street. You risk your money true, but you’re also testing intangible things like trust, integrity and honesty. I won’t risk what I can’t afford to lose, and if I can’t see any value to taking the risk\sacrifice then I simply won’t. I also have no interest in associating with those who are untrustworthy, lack integrity, and are dishonest.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: