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How should money work among friends?

Maybe you resist letting anyone else pick up the check. Or maybe you and pals parse every expense down to the penny.

The first habit leaves you open to exploitation. The second is just annoying if a nice evening out culminates in "Your appetizer cost 50 cents more than mine . . ."

Treats and short-term loans can be generous expressions of friendship. It's fine if you can afford it and if you're pretty sure your pals will reciprocate or pay you back. But suppose you find yourself:

  • Holding the business end of the tab much too often.
  • Lending cash to a needy friend whose "need" turns out to be a night on the town.
  • Agreeing to split the check evenly when it means you pay $50 for your pasta and iced tea.
  • Covering your roomie's share of the utilities, then waiting weeks for repayment.

Fortunately, the solution is close at hand. Right behind you, in fact, running from your neck all the way down to your coccyx. It's called a spine.

Image: Donna Freedman

Donna Freedman

A little higher up is your brain, the organ that lets you decide what you will and won't do -- and that lets you discuss such issues before there's a problem.

Let's talk money

Actually, let's not. It's generally a taboo subject in the United States. The only thing you need to know about money is that you should have lots of it -- or that you should at least look as though you have it.

"The shame of indicating that you might not have enough money is hard to tolerate. So we make choices that we regret later," says psychotherapist Kate Levinson, the author of "Emotional Currency: A Woman's Guide to Building a Healthy Relationship With Money."

A woman she knows served on the board of a nonprofit. After meetings, board members often went out to eat. Too embarrassed to say she was broke, Debra went along -- and because this was a crowd that routinely split the check, these evenings weren't cheap.

Ever been in this situation? You smile, you put in your share and later, at home, you kick yourself for having overspent, again.

Sticking to your budget

Try asking for a separate check upfront. Or say, "I'm not in a position to split the cost evenly, so I'll pay for my share plus tax and tip." That's not a crime, and besides, "you're probably not the only one at the table who feels that way," Levinson says.

You might be twitted about being a tightwad. Do not cave. State matter-of-factly that you need to stick to your budget.

That's not to say that cheapskates aren't out there. Ted Hunter used to go to lunch with co-workers a couple of times a week. They quit inviting one guy because he'd toss in just enough to cover what he ate but nothing for the tax or tip.

Don't do that, and don't let your friends do it to you either.

"Mooching is a character flaw. They are giving you the message that they don't care about your feelings and that their needs are more important than yours," says Hunter, the author of "Money Smart: How to Spend, Save, Eliminate Debt, and Achieve Financial Freedom."

Giving versus receiving

Plenty of us find treats really tricky. We don't want to burden our friends. But it might be a slap in the face to the would-be giver to say something like "I refuse to accept your kindness."

My best pal has hosted me on numerous occasions, sometimes for as long as two months at a clip. She hasn't taken a dime for increased utility costs, and she has encouraged me to raid her cupboards. (I don't, by the way.) When we go out for lunch, there's a "death match" over the bill. She actually tried to pay me for house-sitting when she had to be away for a week.

I understand how she feels, since I want my own guests to feel welcome. But I can't shake the feeling that I'm a great big mooch. So I do household chores when she's not looking and mow the lawn or shovel snow. I also use my extreme-couponing skills to purchase her favorite treats. (Hunter calls these "gotcha" gifts: "What are they gonna do, throw it out?")

Yet I still feel beholden. That's normal, Levinson says: "For some of us, there's discomfort in receiving."

The trick is to find balance. Friends care for each other out of love, so learning to accept gifts graciously is one way to acknowledge and return that love.

Payback is eventual

Mario Golden's friends know he cares: He routinely covers their entertainment expenses if they run short and makes cash loans for everything from tuition to pizza. They have a name for his largesse: "Mario credit."

"The longest that they've taken to pay me back was about a year," says Golden, who works in the software industry.

Only occasionally do people abuse the system. Recently, a friend who owed $100 planned to buy a fancy item of clothing. Golden was irritated: "It's like he put (his) debt at the very end of the list."

Sometimes Golden asks for the cash but feels "bad" doing it. That may be what some borrowers are counting on, says roommate Monique Muro: "A friend isn't going to put a collections agency on you."

Golden makes the same mistake that a lot of us do: telling people to pay us back whenever they can. That phrase that could be interpreted as "sometime between today and never." Is it any wonder that friends go shopping instead of making payments?

Sign here, please

"It's all about communication and setting expectations," says Deborah Hutchison, a co-author of "Put It in Writing! Creating Agreements Between Family and Friends."

It might feel weird to ask your best bud to sign for the money. But that paperwork just might save your friendship. Whether it's a formal document or a promissory note scribbled on a cocktail napkin, a loan agreement prevents misunderstandings. Your friend knows when payments should begin, and you won't be in the position of reminding him or her.

In theory, anyway. A written promise can be ignored as easily as a handshake deal. But at least you have something to refer to.

Closing the bank?

I've lent a fair amount of money in my day. Currently, I'm owed $2,900 in unsecured loans. A few months ago, I realized I had to close the bank because:

  • Saving for my retirement is a priority.
  • My health insurance is pricey.
  • I'm single; there's no partner to shore up my finances.
  • I help out several strapped relatives.
  • I like to go places, but even frugal travel costs money.

Thus, I can't afford to lay out any more cash, especially since I may never see that $2,900 again. Of course, I knew that going in. So should you -- before you write the check.

"There's so many situations where you're not going to get the money back," says Carmen Wong Ulrich, the author of "The Real Cost of Living: Making the Best Choices for You, Your Life and Your Money."

Never lend more than you can afford to lose. In fact, think long and hard before lending at all.

"I'm not a fan of mixing friendship with money," Ulrich says. "I've seen relationships be destroyed over this. It tends to be toxic."

There's an app for that

Technology can help keep the bank of best friends running smoothly. PayPal has a mobile app that allows one person to put expenses on a credit card and friends to pay him back electronically by bumping their cellphones against his.

Social-bill-pay companies like BillMonk and PayDivvy simplify everything from meals out to splits of rent and utilities.

California resident Nikolaos Pavlou, who lives with five other people, says PayDivvy makes for truly fair shares. In the past, a roommate would sometimes forget to kick in for the cable or electricity, which meant someone else "would have to eat the cost."

"It's scary to think what would have happened to all that money before," Pavlou says.

His favorite part of the system? The electronic reminder. If you've lent money to a friend, you can "ping" him instead of calling, which is "never a nice conversation," Pavlou says.

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Here are a few more tactics:

  • Keep track. Write down any loans you make or expenses you initially cover. "With so much going on in our lives, it's easy to forget," says Golden.
  • Compromise. Can't afford to split the tab at a pricey bistro? Suggest cheaper alternatives: a happy-hour pub crawl or a daily deal voucher.
  • Eliminate transactions altogether. Invite a friend over for wine and snacks. Visit a free museum. Walk in the park.
  • Say something. Some friends are supercasual about money. Others are just leeches. Once you've identified a pattern, call them on it: "I paid for you twice in the past month. I can't afford to keep doing that. Sorry."

Note: The above techniques may get you called cheapskate. Would you rather be known as "that numbskull who keeps buying us beer"? Let them grumble, and keep your money in your wallet.

Unless, of course, you like being taken advantage of. You numbskull.

Donna Freedman is a freelance writer in Seattle. You can find more of her writing on MSN Money's Frugal Cool blog and at Surviving and Thriving (motto: "Life is short. But it's also wide.").