Even the best of friends often feel awkward talking about money. A single financial mistake can put even the strongest friendship at risk.

Believe me -- I know.

In 1993, my college buddy Alex and I decided to pool our money and invest. We put in $2,000 each. He suggested buying shares of a new business called America Online. Arrogant and fresh out of school, I decided we could do better trading stock index options. I was wrong, and after a year of small losses, we dissolved the partnership.

We mostly went our separate ways after that, but I kept my eye on AOL over the years, even after its merger with Time Warner (NYSE:TWX). By late 1999, the stock peaked around $94 per share. If Alex had bought $2,000 of AOL stock on his own, his 34 original shares would have split into more than 4,350 shares, which at their peak would have been worth more than $400,000.

No wonder we haven't stayed in touch.

What to watch out for
Of course, most money mistakes aren't this extreme. But when it comes to friends and money, the amount involved often doesn't matter. In many cases, it becomes a matter of principle.

Here are some common situations that come up, along with advice on how to deal with them.

  • Loans. Few things can sour a friendship faster than making a loan to a friend who doesn't pay you back. If you're not careful, it can be a real hassle to get your money back if your friend makes things difficult. The best way to handle loans is to expect that you won't get repaid -- that way, anything you get back is a pleasant surprise. But if you need to get that money back, at least write down how much you're loaning your friend and when you want the money back, and have your friend sign it. That may not qualify as a legally binding document, but it may give you a leg to stand on if you have to go to court to collect.
  • Asking for donations. If you do volunteer work raising funds for charity, turning to your friends for donations is an easy first step. But giving shouldn't be a one-way street. If you ask others for money, you have to be willing to write a check if your friend asks you to return the favor for a different cause.
  • Dealing with dinner. This is an everyday example that our Motley Fool Green Light newsletter addressed recently. Salad-eating designated drivers shouldn't end up paying for their friends' martinis and filet mignon, but some restaurants frown on keeping separate checks.
  • Investment advice. My friends often ask for tips on what stocks to buy. I'm pretty open about what I own -- it's all on my Fool profile, for one thing -- but that doesn't mean I recommend them to everyone. You see, I'm not uncomfortable when stocks like Starbucks (NASDAQ:SBUX), Southwest Airlines (NYSE:LUV), or Pfizer (NYSE:PFE) go through long dry spells -- I'm in it for the long haul. But I don't want my buddy scowling at me because some stock we talked about once is down 20% on the year.

The Foolish bottom line
In the end, no financial issue is worth ruining a good friendship. The key to avoiding problems is to know how you'll react if something goes wrong. If you know you won't be able to get past a problem, then you're better off not getting into the situation in the first place -- even if that means some awkward moments of turning down a request for help. On the other hand, if you do think you could forgive a friend who takes advantage of you, then mixing money with your friendship might work out OK.

To learn more on handling your personal finances, find out about:

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Fool contributor Dan Caplinger wonders how ol' Alex is doing these days. Dan never did get around to buying AOL, but he does own shares of Starbucks, Southwest Airlines, and Pfizer. Starbucks is a Stock Advisor recommendation, while Pfizer is an Inside Value pick. The Fool's disclosure policy is a buddy who won't let you down.