Financial advice for friends

Last week I told a friend he should make a choice which would result in him having a lower net worth.

Should you ever give financial advice to a friend?

He asked me for some advice on a financial decision he was considering. When I say he ‘asked’, I mean that he told me about a choice he was considering, and I then gave him my opinion. But after all, this is the season for giving….

Let me start by giving my friend a name. Not his real name – as he may be a little vindictive which would shorten my lifespan. But let’s go with something that would protect his real name and avoid giving away any key information like his nationality. Let’s call him Dundee. Crocodile Dundee.

Dundee is incredibly talented, but his company is likely to be taken over by another company in the next couple of months. If the takeover goes ahead, his role would disappear. He’s got a 3 month emergency fund, and a number of other investments that are relatively liquid. All in, he’s got about 6 months of living expenses that he could access. Not an ideal position, but he’s got some margin to support his young family until he can find a new job. And he’s way better off than most people today.

Right now 69% of Americans have less than $1,000 in savings and 34% have no savings at all…. 78% of US workers are living paycheck to paycheck. That’s astonishing and demoralizing at every single level

Jonathan Mendonsa (Playing with FIRE documentary)

Liquidity vs maximising net worth

Dundee’s issue is that his home needs some remodelling to better suit his young family. The remodel would wipe out most of their liquid assets. The upside is that it would add more value to the home than it would cost – so their net worth would increase. And surely it makes sense to choose any option that increases your net worth?

Dundee is incredibly astute financially though had not previously come across the financial independence movement. We used to bounce personal finance ideas off each other when we were in touch more regularly a couple of years ago – and he often came up with solutions I had not considered. But in this case, he was seriously considering giving the contractor the green light to start the remodel work.

It’s worth highlighting that he’s in a senior role at work, earning a great salary. And his mortgage repayments are over $4,000 / month. Yes choke on that price, but that’s the cost of a 3-bedroom in a high cost of living area. So if his role were to come to an end, he wouldn’t be able to cover his bills by picking up a temporary gig working at Starbucks.

Walking the tightrope

But I’m not about to endanger a good friendship over some financial advice – I’m nothing if not subtle. My response when he told me what he was considering went something like this:

‘That sounds like a tough choice Dundee. I mean, on the one hand you can use every cent on remodelling your house and play Russian roulette with your family’s well-being. And on the other hand you could choose the responsible option. Not sure what I’d do. I’m leaning towards delaying the remodel and avoiding the risk that my family end up living in a cardboard box under a bridge. Or worse than the bridge option, asking an opinionated friend if I could stay with him and listening to him repeatedly telling me ‘I told you so!’.’

I was so subtle that I wasn’t sure he’d make the ‘right’ choice. But ultimately, he did made the decision to put the remodel on hold for a year. I felt like celebrating by putting a couple of shrimp on the barbie and popping open a couple of tinnies.

Money doesn’t make you immune to the little speed bumps in life, but it can easily turn an emergency into an inconvenience.

Dave Ramsey

Deferring the remodel feels like the sensible choice, and to be honest, he’d have gotten there even without me sticking my nose in. Even as we were talking about it, I could hear in his voice that he knew what the sensible choice was.

Iron sharpens iron

And this is one of my learning points here. We find it very difficult to talk to others about money. But talking through big decisions often helps us clarify in our own minds what the right decision is. We need to find ways to discuss money matters without feeling awkward. So that we can benefit by making better decisions.

I’d advocate speaking to people that are not in our echo chamber. Find someone who you think may have an alternative view. Not so that you can have an argument, but so that you can listen to their concerns. I’m not saying you have to take their advice, but if you have no counter to their points then you should seriously consider whether you’re making a sensible choice.

I think its also worth noting that I’ve made some poor financial decisions over the years. Decisions that Crocodile Dundee would have counselled me out of had I asked him about them.

Honesty and friendship

In giving Dundee my advice, I was a lot less restrained than I’ve been in the past. I think that most people who know me on a personal level would highlight that I’m not someone who forces his opinion on others. I’ve definitely seen friends making financial decisions that I didn’t think were wise, and in an effort to avoid offending, I’ve been too subtle / passive in how I presented my view.

That’s not fair on them and not what they should expect from a real friend. This is not to say that I’m going to be offensive in providing my views going forwards. But I am now looking at how I can be a better friend by asking more questions about finances, finding out about the underlying rationale for decisions, and helping them reflect on factors they may not have considered.

Ultimately we are all responsible for our own decisions. I’ve had situations where I’ve counselled friends and family about certain financial decisions and watched them ignore the advice. I’m learning to shrug my shoulders and move on.

Was deferring the remodel the right choice?

Would you have made a different choice? It could be that the take-over falls through and Dundee could have safely gone ahead with the remodel. That would have meant a higher net worth and a better living environment for his family.

Whilst a large part of sensible personal finance is trying to grow our net worth, in my view, it’s not sensible to take big gambles on getting there earlier. Slow and steady wins the race. I mean, you could cut 10 years off your journey by going to Vegas when you’re half way to your financial independence number and putting everything on black. And half of the time it would pay off.

Whilst you can simplify the pursuit of financial independence down to ‘spend less than you earn, and invest the difference’, I also think there’s a further point around ‘protecting what you have’. This might be by having appropriate insurance in place to avoid catastrophic losses (e.g. health insurance). It would also encompass avoiding decisions with a reasonable probability of going wrong that would have a materially negative impact on your financial future.

Tell me what you think!

Are there other cases where you think you would be justified in actively choosing not to increase your net worth?

Should you get involved in financial decisions your family and friends make that are not wise? Is it ever worth it to stick your nose in?

He who loses money, loses much; He who loses a friend, loses much more; He who loses faith, loses all.

Eleanor Roosevelt