About Midlife, Crises and Personal Finance

I might as well have written I would streak naked down the streets of Gallup, New Mexico.  This is just as incendiary a post title as that.  I don’t mean it to be so.  I was sitting here reading Ellen Ruppel Shell’s, Cheap: The High Cost of Discount Culture when this post title came to me.  I have been taking in the details of the lives of many of my friends as they lend to family, some of it repayed, most of it not.  Loan cosigners usually cosign for family and end up paying for, then owning, the thing they cosigned for.

Just as I don’t believe you should pay for a child’s education, I actually don’t believe you should lend to family.  I do believe under certain circumstances you can, and should, gift to family then walk away from whatever sum of money it was.  When money is considered a gift, not a loan, the amount of money given will generally be smaller than the amount of money loaned.  You will give only what you can contemplate doing without;  you will loan much more than that.

Families are a funny business, some family members feel entitled to the fruit produced by other family members forgetting that all, having been raised in similar circumstances, had the same opportunity for advancement.  Other family members feel complete discomfort around having achieved more than their siblings and parents and stand at the ready to meet every family need often doing so at great personal cost.

Some time ago I was on a conference call with a financial strategist whose name I cannot even remember,  he discussed this very problem within families, lending money, and proposed something more formal.  A family bank.  The truth is that most adults, given time, can solve their own problems.  It is human nature, though, to take the path of least resistance and ask for money from a relative.  Asking for and receiving money from a relative may forestall austerity measures that the person requesting the money probably needs to take but would prefer to avoid.  The person who needs $800 dollars to stay in their apartment probably needs to bite the bullet and rent a cheaper apartment.  The person who needs $4000 to make a mortgage payment probably needs to loose the home and rent a cheaper place.  Personal loans are often asked for in confidence and one sibling may not know that his sister Sallie also received loans from Mom, Dad and brothers Dave and Sam.  When deciding whether or not to loan or give money it would be wise to ask yourself whether or not this loan or gift will address a temporary or on-going situation.  Unfortunately, when family is involved, we don’t ask those questions.

A family bank is what it sounds like.  It is a bank that all family members contribute to.  The bank’s capital will be accessed under certain circumstances and the loans repaid under terms agreed to by all.  If someone defaults on a loan from the family bank, they can never access the bank’s capital again.  When I first heard this idea, I grew very excited and told as many people as I could about it.  Most were very uncomfortable with the idea.  One person told me that in her family one person would access the bank all the time.  Having to do so formally would isolate her from the rest of the family.  Another person told me that only “rich white folks” would do that and she didn’t want to hear any more about it.  Actually family banks are now used by the wealthy to distribute an inheritance with strings attached to an heir who might otherwise squander it.

Whether or not to loan money within families is a complicated issue.  In general, I believe people are uncomfortable discussing issues of money.  Treating a loan within a family like the business transaction it really is would make most people squirm, but that does not make it a bad idea to do it.  What I have found is that not doing so is much worse.  The person who is constantly in need, generates anger and resentment within a family and those feelings only grow with time.  Family gatherings become uncomfortable and that person ends up isolated anyway.  I was just speaking with a friend of mine who is constantly helping out family members.  He has come to the conclusion that in the long run, the financial assistance he provides really does not help.  The recipients just create a new problem and a new need.

Do you loan to family?  What is the result?  Please comment.

{ 0 comments }

“That wasn’t your Patronus!” said a Death Eater. “That was a stag, it was Potter’s!”

“Stag!” roared the barman, and he pulled out a wand.  “Stag! You idiot —expecto patronum!”

Something huge and horned erupted from the wand:  head down it charged towards the High Street and out of sight.

“That’s not what I saw–” said the Death Eater , though with less certainty.

“I still say I saw a stag Patronus!” shouted the first Death Eater.

“Stag?” roared the barman. “It’s a goat, idiot!”

Harry Potter and the Deathly Hallows, JK Rowling

And so begins deception.  You know something because you have seen it, yet somewhere along the way you begin to doubt what you have seen.  And you doubt what you have seen because another, presenting a reasonable facsimile, tells you that you are mistaken. The stock market is the way to a sure retirement, yet there have been two bear markets in a matter of a decade wiping out trillions in retiree wealth and pushing back planned retirement dates.  Home prices would always rise yet we are in the midst of one of the worse housing markets in 2 decades.  The popping of this most recent bubble has wiped out 1 trillion in home owner wealth.  Anyone who bought home in the late 1980’s and early 1990’s and saw the aftermath of the Savings and Loan debacle knew that home prices could not possibly continue to rise unchecked, yet financial pundits and mainstream media armed with charts and graphs insisted that they could. And so many ignored the lessons of history and bought.  Deutsche Bank now predicts that through 2011 some 25 million homeowners will be upside down on their mortgage.

Too many tell us that what we see as and know to be a stag is really a goat.  What I have found as I plan for retirement is that without the pension plan that I thought I would not need, retirement would not be possible until well into my 60s despite saving regularly into my 401K and having a generous company match.  I don’t have to search very far to read the same pablum that I have read for 15 years: maximize your 401K, maximize your match, diversify your portfolio.  Why didn’t I think I would need my pension?  Because the 401K is king.  Now I am glad to have my pension because the King is really a Joker.

Financial planners have taught millions to do net worth calculations when they should have been focusing on cashflow.  The real question should be how much of my net worth can be converted to cashflow for me to live on in retirement?  For far too many, a high net worth translates into too little cashflow. Sure your home may be paid for in retirement, but what is your cashflow?  Does it make sense  to have $200K tied up in a home in retirement or does it make sense to liberate half of that money, avoid income tax and carry half in a small mortgage over 30 years?

Many of us see stags running around the streets of our financial lives, yet we are too willing to believe that what we see is a goat because an entire industry is predicated upon our doing just that.  What would happen to the stock market if people stuffed their 401ks with bonds rather than stock mutual funds?

What would happen if people began to focus on cashflow and therefore chose to create the extra time to start a small business? We are told that starting a business is too hard and too time consuming, yet I can think of nothing more wasteful  and nothing more risky to one’s overall financial well being than spending 30 years thinking  a stag is a goat only to find in the end it was a stag after all.

Please comment

{ 0 comments }