Reader Mailbag: Friends

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What’s inside? Here are the questions answered in today’s reader mailbag, boiled down to five word summaries. Click on the number to jump straight down to the question.
1. GTD for stay-at-home moms
2. Loaning money to parents
3. Prepaying property taxes
4. Emergency fund or debt repayment
5. Starting a Roth IRA
6. Small business encouragement
7. Thinking ahead for college
8. Out of college, no job
9. Apprehensive about mortgage prepayment
10. CFPA thoughts

As I’ve mentioned before, my wife and I have strongly considered moving to be closer to various family members. What keeps us from doing it? Friends. We have a very wonderful circle of people here and, frankly, neither one of us wants to leave them behind. It really is all about the people for us – we want to move to be near certain people, and we don’t want to move because we’d be far from other people.

I enjoyed your GTD review and am trying to implement it in my life. My problem as a stay-at-home mom is how to organize all the repetitive duties that end up taking up so much time that I can’t even get to look at my next steps action items.
Do you know of other stay-at-home people following GTD and how it works for them?
i.e. Do I have “clean house” as a project and then add “wash dishes” as a next step after every meal? I’m thinking it only makes sense to add special projects like cleaning out closets on project lists…but then I still don’t know how to organize my day to get things done. It seems that the GTD book is more geared toward office life and not home life.
Any ideas?

- Megan

GTD really works when your life is (a) filled with lots of little things that you need to keep track of, (b) appointments, and (c) longer-term projects that can’t be finished in one sit-down session.

I can’t speak for a stay-at-home mom, but my life is loaded with these things, and GTD really helps with them. The “lots of little things to keep track of” is dealt with by writing everything down that comes to mind, putting them all (and any other items I get, like mail) in an inbox, and processing all of it once a day or so. The “appointments” are handled with a calendar. The “projects” are handled by devoting a folder to each one, defining the steps I need to accomplish, and reviewing them regularly so that I’m always taking the next step on them.

I don’t use it for daily routines, though checklists can be helpful for that. The exception is if I’m trying to establish a new one, like practicing the piano or something like that.

It’s up to you, really, whether those things will help you – or help you enough to be worth the time.

Is it unethical to charge my parents interest on a loan? I’m 22 and have *very* robust finances, while my parents have been both unlucky and made some poor choices (though they’ve gotten better in the last few years). My dad recently suggested to me that instead of paying his credit card company interest (~20%, he thinks) on his balance (~$4000), I could lend them the money to pay it off in exchange for something like 10%. If it worked out we’d both be better off. This is money I can afford to lose, and would otherwise be sitting in a money market or bond index fund.

So my question, is it unethical to charge my parents interest, at least more than I’d earn otherwise? While 10% is much lower than their current payment, it’s much higher than I’d earn otherwise. If I’m willing to lend them the money at a lower rate, am I ethically obliged to? I’d value your thoughts.
- Mickey

It’s not unethical to do it. It’s just got a strong likelihood of damaging your relationship with your parents.

Think of it this way. You’re now going to have to enforce the regular repayments (likely to make them bristle). If they decide that they don’t need to repay you regularly, you’re going to bristle up. Neither one is going to be good for your relationship, particularly if the condition continues.

Now, imagine if they default. That’s going to strain the relationship for a very long time in both directions.

For me, it’s never worth it to loan money to people I care about. If I decide someone needs help, I’ll gift them something.

I’ve followed your blog closely but have not seen any info about getting a discount if we prepay property taxes. I read there is a 10% discount if we do this. Have you heard about this?
- Meena

I have never seen or heard of a discount for prepaying one’s property taxes. That’s not to say that there isn’t a municipality or state that offers such a discount.

Regardless, prepaying your property taxes is usually a good idea if you’re not saving ahead for them. That way, you’re not stuck with a huge surprise at the end of the year.

In our area, various payment plans are available without fees being charged on the monthly or quarterly plans. We use the monthly one and have it automatically deducted from our account.

I currently have a debt of $32k an overdraft charging around about 0.88% on my total balance. I have savings which are hard to get to – about $27k which i automatically pay $500/mth without fail.

I want to start saving for an emergency fund since between my hubby and myself I am the bread winner. However, I want to get rid of the debt as quickly as possible. Should I close and settle the overdraft using a loan which will charge me 5.5% per year or shud i just settle the debt using my savings?
- Aldie

I would settle most of the debt using your savings, retaining some of it for emergency fund use. I would probably retain two or three months’ worth of living expenses and put the rest towards reducing the debt.

Of course, once you’ve done that, you should channel that $500/month temporarily towards the debt until it’s gone. Make that in addition to your normal payment, so if you have a payment of $100, pay $600.

Debt freedom is truly great for one big reason: it vastly increases your monthly cash flow, making it possible for you to make a lot of choices you would have never made otherwise.

I recently changed jobs to one with significantly higher pay. I had a small amount of money (around $1100) in a Roth 401(k) at my old job, with the bulk of my retirement savings in a standard 401(k). I’m in the process of rolling that over, but my new company does not offer a Roth 401(k) option. At the moment, I’m having the Roth portion sent directly to me, and I’ll decide what to do with it when I get it.

I believe that this year will be the last year that I’m eligible, due to income limits, to participate in a Roth IRA. I don’t have any IRAs open currently. Do you think it would be worth opening one to deposit my Roth money, and then orphan it because I can’t contribute at all after this year? I’ve also considered maxing it out for this year, which I could do without affecting my emergency fund.
- Luke

I would absolutely take advantage of this one year of Roth IRA eligibility. If you’re going to be earning that much in future years, having as much of your retirement as possible in a tax-free retirement vehicle will be nice come retirement time, because that money will reduce your tax bill later on.

If you can max it out this year without affecting your emergency fund, I’d absolutely do that.

You’ll never wind up regretting having money socked away for retirement. You might, however, end up regretting not having enough socked away.

I wanted to solicit some advice from you directly. I’ve been working in the real estate industry for a few years now (in the apartment leasing sector), and I really think I’m ready to start my own independent agency. I’ve done extensive planning, market analysis, and budgeting for the whole endeavor, keeping my costs as low as I can while planning for real explosions in costs in the event of an early-onset catastrophe. After accounting for my own savings to contribute to the start-up costs (and leaving enough padding in my emergency fund), I still need to borrow about $10,000 to really launch. I have a family member from whom I can reliably borrow the money. My question is this: do you think it’s a smart idea to be borrowing money for a start-up company in this economic climate? Fortunately everyone needs an apartment (even moreso when the house market is bad), and between my experience and my plan, I’m pretty confident than this will be a success, but I don’t want to be missing some obvious consideration that I had overlooked. I know the Simple Dollar philosophy is debt-averse, but the alternative is to wait on this for another year or more to accumulate savings, and doing that could mean missing a current window of opportunity (Illinois real estate agency regulations will be cranked up early next year). So what is your take on starting up a small business? Is it OK to do in a recession?
- Chris

I don’t see any problem with launching right now. Many, many successful businesses are launched during economic downturns and take advantage of the full elevator ride of a rebounding economy.

I’d be less sure about borrowing that $10,000 from a family member. Borrowing money means you eventually have to repay it, and if you have difficulty meeting their expectations on repayment, it can create a family problem that you just don’t want to have floating around.

Could you sell this person a small portion of the business instead with some sort of buyout arrangement at a future date? Or could you borrow the money from another source?

I am a high school student with no debt. In the preceding years when I go to college, I need a way to pay for my education other than my job, not that I am lazy, but that I cannot pay 4 years of school even with tons of financial aid. Scholarships, even though they are an option, will not pay for enough, seeing as I am not from a minority background, nor any other real attributes that set me apart from the general student population, and where I live, the only jobs available to me are minimum wage. In the long run of my high school career, I may only be able to make a couple thousand dollars to put in a college savings account. I My mother and I live on a very set income, barely enough to pay for bills and food, much less college. I don’t want to put her into more debt than she already has. I was considering investing in small stocks in brands such as Coca-Cola or Starbucks, letting it all grow in the next few years, living very cheaply, and then using my stocks to graduate on the plus side of debt. I know that the stock market is ever fluctuating, however, the economy is coming out the recession, and I hope that by the time I graduate, I might be sitting on enough that I won’t have to be in debt. I would like to know what your thoughts are.
- Danielle

I would absolutely not bet on the stock market over the short term, and the six or so years you’re describing is short term in terms of the stock market.

It’s simply too volatile over that timeframe. You’re going to probably have one upswing and one downswing in that timeframe, and it’s hard to tell how good the upswing will be and how bad the downswing will be. A small downswing and a big upswing means you’d be in good shape. A small upswing and a big downswing means you’ll be in the hurt locker. Plus, the brokerage fees for small amounts will eat a lot of your earnings before you even have the chance.

Your best bet would be to sit on cash, honestly, or to open up a 529 college savings plan. Don’t invest in individual stocks over the short term with small amounts of money.

I’m a recent college graduate and not even retail jobs will hire me or even give me an interview. It’s not like I’ve never had a job before but it’s impossible to find work anywhere in this economy. If it weren’t for my tiny savings I’d be out on the street (I’ll likely be there in 2 months if I don’t find work soon). I’ve been applying to any and all jobs I can find–retail, food service, lab assistant jobs related to my major, human resources, etc. but no one will even look at my painstakingly assembled resumes. Furthermore, my parents have expressed that once my college bills are paid, they’re not willing to help me. What do I do?
- Michelle

Keep searching. Build skills. Try hard to network with people in your field.

For one, you’re probably looking grossly overqualified for many retail positions. They look at your painstakingly assembled resume, see someone who views the job as a temporary thing while they find something better or, alternately, a person who will have too many “ideas” that aren’t worth dealing with, and pass you over. If you’re applying for minimum wage service and retail, you’re better off not handing in the four page detailed resume. Keep it one page and very simple.

You may also want to look in a different area of the country. Here in Iowa, there are definitely people hiring at the retail level – I’ve seen plenty of “now hiring” signs here and there in the greater Des Moines area.

I have a question regarding mortgage prepayment. Hopefully, you and the readers could offer some advice. Little background: I stumbled upon your blog when mired in debt and utterly careless with money/ future despite having decent jobs. Your blog and book has been immense help for us. Since then, we have paid off all our debt except for the mortgage. All the retirement vehicles are fully funded. We also have a decent emergency fund. We live frugally and save as much as we can. We still have around $1000 left every month. Currently, I’m sending it to ING. Afraid of investing in stocks and bonds beyond the retirement accounts. Now, I understand both the sides of the mortgage prepayment argument- guaranteed return, peace of mind and better cash flow Vs losing opportunity to grow money further by investing in even simplest of mutual fund. My question is what are your thoughts on prepaying during this period of falling home prices especially when your time frame to move/ sell could be anywhere between 1-5 years. By the way, we owe 260K on our home and have a 30-yr FRM @ 4.8%
- Sam

If you’re planning to sell that soon, it really doesn’t have an impact on prepaying because if you sell, you’ll either be making up the shortfall then or making it up in pieces now – or, if the market is going up, you’ll either have a big gain then or a little gain then.

The big advantage of prepaying is that it reduces the total amount of interest you pay and it reduces the time until you’re fully paid off, which will increase your monthly cash flow significantly. Since you’re going to be selling soon and your interest rate is low, it’s reasonable to look at other investments. The trick, though, is that over the short term you have, the stock market isn’t a reliable investment.

Given everything involved, I would probably just sit on cash because of how liquid it is. Put it in the highest interest savings account you can find and see what happens in the next few years. That way, you can easily deal with whatever may happen in that period (and probably make your next purchase easier).

I was wondering who you think should head the new Consumer Financial Protection Agency, and if you’d be willing to mention it in a reader mailbag? I know you don’t normally blog about politics, but this is something that will directly affect personal finance for all of your readers, and I’m sure you’ve got an interesting viewpoint on it that we’d all like to hear.

I tend to favor Elizabeth Warren (whose name is the only one I’ve heard for the job so far) because she seems to genuinely care about protecting consumers, and she’s from Oklahoma
- Joe

First, a background: the Bureau of Consumer Financial Protection is a new government agency signed into law in July as part of the Dodd–Frank Wall Street Reform and Consumer Protection Act, which has a lot of things going on in it.

Wikipedia’s summary:

Established within the Fed, the Bureau is tasked with regulating consumer financial products and services in compliance with federal law.[29] The Bureau is headed by a director who is appointed by the President, with the advice and consent of the Senate, for a term of five years.[29] The Bureau is subject to financial audit by the GAO, and must report to the Senate Banking Committee and the House Financial Services Committee bi-annually. The Financial Stability Oversight Council may issue a “stay” to the Bureau with an appealable 2/3 vote. Even though the Bureau is placed within the Fed, it operates independently.[146] The Fed is prohibited from interfering with matters before the Director, directing any employee of the Bureau, modifying the functions and responsibilities of the Bureau or impeding an order of the Bureau.[29]

The Bureau is separated into five units:[29]

* Research
* Community Affairs
* Complaint Tracking and Collection
* Office of Fair Lending and Equal Opportunity – ensuring equitable access to credit
* Office of Financial Literacy – promoting financial literacy among consumers

Within the Bureau, a new Consumer Advisory Board assists the Bureau and informs it of emerging market trends.[29] This Board is appointed by the Director of the Bureau, with at least six members recommended by regional Fed Presidents.[29]

To me, this sounds like something that’s going to be heavily defined by the first group of people running it. Elizabeth Warren (see her Wikipedia entry) seems like a perfectly good choice. She at least has a solid idea of the realities of personal finance and consumer issues, which puts her ahead of many other people who might be competing for such a position.

Got any questions? Email them to me or leave them in the comments and I’ll attempt to answer them in a future mailbag. However, I do receive hundreds of questions per week, so I may not necessarily be able to answer yours.

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70 thoughts on “Reader Mailbag: Friends

  1. @Luke,

    Do NOT have the Roth 401K rollover sent directly to you. Unless I’m mistaken, that would be considered a distribution, and you will be taxed on the earnings, and the entire amount will lose its status as tax advantaged!!!

  2. Mickey….nothing wrong with charging your parents interest. I did something similar once. I did just charge the amount I’d get at ING though (or a bond if that’s what you’d be taking it from), not a whopping 10% :)

  3. Megan – check out FlyLady’s website (or her book, but the website is amazing, with free access to all her info) – her methods for managing household chores mesh nicely with the GTD philosophy.

  4. IMO, charging my parents interest would be tacky. They are my parents! If they need money and I am able to help them out, of course I’m gonna help! If they wanted to repay me back with a ltitle ‘interest’ then that’s fine and completely up to them, but I would never put on paper as an official agreement/contract . . . ~sigh~ . . .

    If I was able (which it sounds like Mickey is), I would give it to them freely and with no strings attached.

  5. Gift your parents the money if you want to help them and can afford to lose the money. If they pay you back, all the better. Loans and family members don’t mix, the relationship is not worth damaging. Much better to just give and not expect repayment.

  6. I live in Florida, and the county I’m in does do the property tax discount if you pay it immediately. In fact, they’re generous to the point that they actually scale the discount down over the next couple of months – so x% if you pay the month it’s assessed, x/2% if you pay the next month, etc, finally going to no discount when the tax is officially due.

    I’m not sure wether the financial situation in states these days makes them more likely to continue this or stop it though.

  7. Meena – in CA we don’t get a discount for paying property taxes by the due date. The statements give the amount due if paid by x date, and a much higher amount due if paid after that date, but it’s a penalty for paying late rather than a discount for paying early, if you run the #s.

    Mickey – I’m with Trent. Gift them the money if you wish, with no expectation of reimbursement. [Although it would probably be a better learning experience for them to pay it off themselves & suffer a little bit with that additional 10% they have to pay the CC company.]

    Then if they pay you back, great; with interest, even better; if they don’t, maybe not so great but the relationship is still intact. Several of the major financial advisors out there these day strongly advise against loaning to families (or cosigning loans).

  8. Trent, your “one size fits all” answers – like “never lend money to family” – don’t always fit. You’re saying never to lend money to family because of the power imbalance issues involved, but there can also be a significant power imbalance in a gifter-giftee relationship. In fact, that’s clear from the words you use: “If I decide someone needs help, I’ll gift them something.” If *you* decide – meaning that *you’re* the one with the power. Don’t you think that *that* might cause Mickey’s parents to bristle too?

    Mickey’s situation looks to me like a picture-perfect example of when it *is* appropriate to lend money within a family. Mickey’s parents have gotten better with their money lately (but still have debt from prior mistakes), and Mickey can afford to lose the money. The one question Mickey should ask himself is, “If my parents defaulted or fell behind on their payments, would I honestly be OK with that?”

    If so, then go right ahead with the loan. Draw up a written contract, agree on a payment plan, and talk about what you’ll do if something comes up and they can’t make the payments.

    And to answer the question that was asked: No, there’s nothing wrong with charging interest. There’s not even anything wrong with charging more interest than you’d otherwise earn on the money, since you’re taking more risk by lending it to your parents than you would by keeping it in a bond fund. If your dad offered to pay you 10%, it might be nice to offer him something a bit less than that (say 7% or 8%), but there’s also nothing wrong with taking him up on his offer of 10%.

  9. Mickey: My sister who is also 22 loaned money to my parents when they had to change their car. Their deal was that they would pay the interest annually,and would pay her back in a lump sum when they have the money. They borrowed it from her at 4.5%, which is more than she could get anywhere else, but still lower than anything they could get.
    My only thing would be to make sure that this is temporary and not permanent. If you *know* that they will pay you back and that this is just a problem, fine. However, if you parents have never been responsible with money, then be careful.

  10. Danielle – my daughter is not a member of a minority & we had no affiliations we could rely on for scholarships. In the end, both private colleges she attended awarded her various grants & scholarships that reduced her tuition & expenses to the same level as a state university.

    It is possible to find multiple scholarships that might add up to the level of support you need. Spend some time on the internet searching & apply for every single one you might possibly qualify for. In your financial situation, your FAFSA application will make you eligible for a lot of assistance from the colleges you apply to (grants, scholarships & work study programs).

    That said, I would encourage you to make full use of your high school years to participate in extracurricular or volunteer activities that develop & demonstrate life skills that colleges look for in applicants.

    Also, I hope you have considered local community college classes to get the basics out of the way, at a great savings on the overall cost toward a 4-year degree.

  11. “Regardless, prepaying your property taxes is usually a good idea if you’re not saving ahead for them. That way, you’re not stuck with a huge surprise at the end of the year.”

    I think maybe you misunderstood, Trent. I think the writer was asking about prepaying their property taxes as one big lump sum, not as a regular payment plan. So in that case, they’re still “saving ahead” for them, they’re just doing it a year earlier than they have to.

    That is, if your 2010 property taxes are due in April of 2010, you can either a) pay them as a lump sum in April of 2010 (assuming you saved up for it), b) have them regularly deducted from your bank account, such that the final payment lands in April of 2010, or c) pay them as a lump sum in January of 2009 (not a typo) – 16 months before they’re due.

    In such a case, the municipality has the full sum of money much earlier than they need it (but still within the fiscal window they’d start collecting them anyway), and thus they may offer you a bit of a discount. This is like them paying interest on the money for having it early – which makes sense because money has time value. You could potentially be earning 1-3% by sticking that money in a bank account and waiting until the last possible day to pay it (April 2010), so in order to motivate you to part with it 16 months earlier (January 2009), they’d have to offer you a discount roughly equivalent to the return you could have otherwise earned.

    Some municipalities do this, as having the money early allows them to make bigger deposits on capital projects financed with credit, which in turn saves the municipality interest.

  12. My county (in Pennsylvania) offers 2% discount for paying the month before taxes are due. I always prepay.

  13. Meena — all the tax bills I’ve ever gotten (several counties, a couple different states) indicate they’ll charge you a 10% penalty if your payment is late. So I suppose you could view this as a discount if you pay on time! 8-)

    There’s one particular circumstance under which pre-paying your property taxes can help you financially: If your itemized deductions are on the threshold of being smaller than the standard deduction, you can pay two year’s worth of taxes in the same year. So, say, in 2011 you’d pay your taxes in January and in December, then in 2012 you would not make a payment, then in 2013 you’d make two payments.

    Under this scenario, you’d take the standard deduction on your 2012 tax return, but you’d be able to take the itemized deduction in 2011 and 2013.

  14. It really seems to me like most of the times when loans strain relationships within families, it’s not because loans and family are inherently incompatible, but because people don’t communicate clearly about what their expectations are.

    Saying “Oh, pay me back whenever you can” is a recipe for disaster, because the borrower doesn’t know whether the lender expects payment in one lump sum or in installments, and doesn’t know how to prioritize this loan with respect to his or her other debts. Most of the strained-relationship stories I’ve heard involve exactly this kind of confusion.

    And it seems to me that saying (as some people here seem to be advocating) “This is a gift, but if you want to pay me back, that’s fine, and if you want to pay interest, that’s fine too” would be even worse. How much vaguer can you get than that? I think you need to pick one: Either “This is a gift, and I don’t expect and won’t accept repayment” or “This is a loan, and these are the terms.” Then, if you want to explicitly turn the loan into a gift later, you can.

  15. I think loaning money to parents, especially at usurious rates of interest like 10% is ridiculous. What about you paying them back for all the expenditures they have undertaken for you?!!

  16. Shannon: 10% is not “usurious.” 60% is “usurious.” 10% is a reasonable return based on the perceived risk being undertaken.

    And children do not owe it to their parents to “pay them back” for whatever they’ve cost them. Parents CHOOSE to have kids, and numerous expenses are part of the responsibility that comes with that choice. Children do not CHOOSE to have parents, so it’s not fair to burden them with a repayment expectation when they had no say in the decision whether or not to exist.

    Parents pay for kids because that’s their JOB. Kids do not owe any money to their parents just for doing what they were supposed to do in the first place.

  17. Both the county and my local township offer a 2% discount for paying property taxes early. I live in Pennsylvania

  18. @Michelle: If you’re not exaggerating when you say you’ll be out on the street if you don’t find a job in two months, you need to be planning ahead for that possibility now. Don’t assume that you’re going to find work in that time.

    You say your parents won’t help you, but is there anyone else – a friend or another family member – who can at least give you a place to stay? If not (or even if so), start looking into charities and government programs that can help you. Don’t feel bad about accepting help from these sources. That’s what they’re there for.

    Have you considered going to grad school? You say you’re looking at lab assistant jobs, so I assume you majored in some form of science or engineering. There are lots of PhD and Masters programs in the sciences that will pay your tuition and give you a small living stipend. It’s almost certainly too late to start a program this fall, but you might be able to start in January. That’s what my brother did, when he graduated from college in 2002 and couldn’t find a job.

  19. I’d like to add to the family loan thing.

    My immediate family gives freely to each other and it’s mutual. I think blended family finances are more common in immigrant households. I help my mom now and she helped me earlier in life when she could. We are both happy to have helped each other.

    I have extended family where the relationship is more one way. “What’s yours is mine and what’s mine is mine.” I think anyone who feels a sense of entitlement to someone else’s money should get nothing…too big of a red flag.

    In summary, I agree with Johanna. There is not one formula that fits all families..or even all members of a single family. It really depends on the person’s one on one relationship with that individual. I also don’t think it’s wrong to charge interest. It’s just your dad’s way of trying to give something back. Let him.

  20. Meena, Klamath County in Oregon does offer a 3% discount on property taxes paid in full by the due date.

  21. @Mickey – I don’t think it is wrong to charge your parents interest. In fact, I think it would be a bad idea not to. If you gift them the money or loan interest-free, it might make them feel like a charity case. I gifted $1,500 to my mother to go to rehab. She really needed it and I had the money. But she feels bad about it to this day, and insists on paying me back. My parents feel that they should be the ones taking care of their children, not the other way around, and it makes them “bristle” to think that the tables are stacked on the other direction. Allowing your parents to pay interest on their debt will make them feel less like a charity case and more like a win-win situation for everyone involved.

    @Meena – In Lane county OR we get a 3% discount for paying early.

    @Michelle – See if your library has a copy of “60 Seconds and You’re Hired”. If they don’t, it may be worth purchasing. It will help you customize your job search for each job you apply for. As someone said above, you are overqualified for many jobs and your resumes may be *too* painstakingly put together.

  22. @Michelle: If you’re in sciences looking for your first lab job, I’d suggest talking directly to professors who might be able to take you on for a few hours a week in their labs. You really need experience and referrals. My friend did that and after showing that he could work hard, now has a stable job.

    I’ve worked in research for a few years now and I know a lot of my friends didn’t get jobs. :( It’s very competitive!

    (If you’re in Canada, and majored in life sciences, shoot me a note)

  23. My Florida county has property taxes due in March every year. You get a 4% discount for paying in November, 3% for paying in December, 2% for paying in January, and 1% for paying in February. You can also get other discounts for paying on a quarterly plan.

  24. Charging interest is a way great way to make things official. Money involves every aspect of our lives. Having the ability to loan money to help family and friends is a great responsibility, with any responsibility it should be taken very seriously. Paper work should be written and established with signatures. Interest is also a good idea because it shows that it is important that the money is returned. If it is not important that the money be returned give it as a gift. If you want it back charge interest (not a loan shark rate) but something equivalent to what you are getting in the bank. It shows you respect your money and that the person you are loaning respects it also. It also helps to avoid conflict later on.

  25. @ Johanna (in response to Mickey) – I agree that there is no “one size fits all” equation about loaning money to family members. In my case, the situation was reversed. We borrowed money from my mom, in a sort of unique “win-win” situation (at least we all think so). My mom had a fairly large sum of money (high 5 figures) left over from my dad’s life insurance policy after she paid off her own mortgage. My mom is also fairly risk-adverse. What she ended up doing was to “invest” a portion of it in our mortgage, at 4% – a higher rate of return than she can get in pretty much any cash investment, but a discount to us compared to our mortgage rate. We were able to cancel PMI on our mortgage based on that arrangement, which lowered our total monthly payment and allows us to build equity faster. We drew up the documents stating the terms (rate, payment schedule, etc) and she sent a check directly to our mortgage company and we have an automatic payment set up to go to her each month.

  26. Interesting snippet:

    Deuteronomy 23:19-20 reads:
    “Thou shalt not lend upon usury to thy brother; usury of money, usury of victuals, usury of any thing that is lent upon usury: Unto a stranger thou mayest lend upon usury; but unto thy brother thou shalt not lend upon usury: that the LORD thy God may bless thee in all that thou settest thine hand to in the land whither thou goest to possess it” (King James Version).

    There are several other old testament passage either forbidding charging interest to family, or interest to the poor, but gives the OK for foreigners or strangers.

    The muslim faith outright prohibits charging loan interest.

    The New Testament frowns upon money-changing, as evidence by Christ overturning the tables.

    I am not of those faiths, but I ask you to, if you can, imagine a world where money was loaned without interest. Those who behaved irresponsibly would be very unlikely to get one, or have to show reform. Those who behaved responsibly would, and all would be better for it. There would be no such thing as credit cards, or credit crisis. It would be a lot more Amish, in all the right ways, I think!

    I think you would have to resent your parents a lot, to charge the people who GAVE you food, shelter, clothing, schooling, medical care, car rides, supplies and toys, interest for 18 years. They need help, and have shown they are trying to be more responsible.

    If you can afford to lose the money, then consider it pennies on the dollar for what you got growing up, and give it to them no strings attached. It must have been very hard for them to ask you. But you are perfectly fine to say you will only do this once, ever, and stick to it.

  27. @Michelle – can you do something on your own till you get a “real” job? Any talent or skill you have where you could hang up a flyer and offer a service to people – say you’re good with computers, you could fix people’s computers, that kind of thing?

    Clean houses, deliver pizzas, tutoring, music lessons, mow lawns? I know some of these may feel beneath your dignity considering you just got a college degree but keep in mind it’s only temporary.

  28. Incorrect/incomplete answer to the 401k and Roth questions.

    First – if they’re sending you a check make sure they didn’t deduct a penalty and quickly get it into a Roth IRA (or else you will be penalized)!

    Second – They have changed the rules about Roth IRAs. Now there is no income limit for Roth conversion. That means you can open a “no deduction” IRA (can’t remember exactly what it’s called) and put money into it. Then you can convert it to a Roth. So more steps but essentially a Roth for anyone.

  29. I wouldn’t consider property tax bills to ever be a “surprise” – our assessor sends us an estimate at mid-year & then the bill at least 2 months before it comes due. Even without the bill, you already know it’ll be coming at some point.

    My DH would say it’s better to save up the tax payment over the year but wait to pay when it’s due, since we can earn even a little bit of interest before we have to pay out.

  30. I am not of those faiths, but I ask you to, if you can, imagine a world where money was loaned without interest. Those who behaved irresponsibly would be very unlikely to get one, or have to show reform. Those who behaved responsibly would, and all would be better for it. There would be no such thing as credit cards, or credit crisis. It would be a lot more Amish, in all the right ways, I think!

    Kristine, you might read this blogpost for why that’s a somewhat limited view regarding interest.

  31. I actually posted this question two months ago when I was still having problems stemming mostly from applying to jobs online–you only get a call if they decide your resumes match up enough to fill the position. I since attempted to find jobs for which I had to deliver resumes (which *were* actually one page) face to face and talk to a real person, and I found a restaurant job. I’m also currently working on a better one. If anyone else is still in this position and having a hard time finding a job, I’d say stay away from internet modules for applications. Try to speak to a real person!

  32. (I’m the other Courtney, not the one who posted above) I’m with Trent when it comes to advising Mickey not to loan money to his/her parents. Unless it was a dire emergency, I cannot imagine asking my kids for money. I think it was pretty crummy of the dad to even ask and put Mickey in this position because there are very likely going to be hard feelings as a result. If Mickey says no, the parents will be resentful. If Mickey says yes and then the parents don’t pay the money back in a timely fashion (which is likely, given their history of irresponsibility), then Mickey will be resentful. It’s a no-win situation for Mickey.

  33. Hi Katie,

    I appreciate the link- I read it. I was raised fundamentalist, but think that the interpretive view is best- I would not like to have slaves, or sell my daughters, stone adulterers, or see that man who paralyzed someone in Saudi Arabia have his own spinal chord cut (eye for an eye).

    The trouble is that corporations, once made legal “entities” in this country, (to protect board members from accountability) have as their primary legal obligation to make money for the shareholders. That is in direct conflict with conscientious lending. The idea that more than a small minority of financial institutions will not avail them selves of rates that have the potential to create an entire class of indentured servants is arguably naive. The new bankruptcy laws have all but ensured this.

    Pre-deregulation, Vinny the Shark was the only lender who would charge 30% interest, or he would break your legs. A no-interest society was possible once, it no longer is- we are entrenched. Good regulation is the only band-aid we have, and when it got ripped off the mortgage industry- look what happened.

    I prefer the advice- neither a borrow, or a lender be. I have been able to avoid all but a tiny student loan debt, and it is gone. I was given a loan by friends when I was a struggling single mom, and I paid it back- no mention, ever, of interest. Just love and support. I have since helped others- with no strings attached. We are saving up to buy a tiny pre-fab house outright. I only buy cars with cash.

    I am a huge fan of freecycle, and networks of people helping people. I will not co-sign student loans for my kids, and they have known this for many years, and have worked harder accordingly.

    I like the biblical guidance that lending money to someone you know is interest-free, to strangers it is not, and usury is a sin. I would prefer usury also be illegal, and I would let actuaries define it case-by-case on the ability to pay the loan back in a reasonable amount of time, without hardship. It will legally relieve the corporations from jumping on the usurious bandwagon to maximize shareholder profits. It might even prevent house-bloat!

    I recommend the documentary “The Corporation”.

  34. Mickey — your question is whether it is unethical to charge your parents interest. In my opinion, it is not as long as you are upfront about it right from the beginning. I think it would be unethical to lend them the $4000 and then after they had paid you back $4000, to then say, hey, you owe me another $400 in interest.

    In my immediate family, loans work fine (though they always go from mom to one of us). We sign a promissory note with amouht, interest rate, and payment schedule specified, always with the clause that the loan can be paid off in full at any time; she charges the same rate of interest that she would be getting if she put her funds in the bank (we all have histories of paying her back as agreed on loans so she doesn’t feel her money is at risk); and we give her one year’s worth of post dated cheques at a time. There has never been a problem and as far as I know, there are no hard feelings about so and so getting money and not so and so. One time after she made a loan to me at one interest rate, she ended up making a loan to my brother at a lower interest rate, so she lowered my interest rate as well, even though I had signed the agreement and that was the going rate at the time she loaned the money. My point being that she keeps it as business like and as fair between her children as possible.

    So from my perspective, there is no problem with a family loan as long as you are pretty certain about the family member. I think 10% is rather high for an interest rate right now, and if it were me, I would suggest something lower — either what you would be getting otherwise or else a percentage or two higher if that matters to you. If it will take more than a year or two to pay off the loan, you might consider setting the interest rate as something like “the prime rate of ING bank as of September 1 every year” if you think you would want the interest rate to rise as rates increase.

    Once you have the agreement in place and a signed note and the postdated cheques, then if at some point you decide you want to forgive the loan or the interest, you can do so. You might decide for yourself that if they ever did default, you would not pursue them legally. However, what if they died or went bankrupt or something? If you have the paperwork in place, then you are in line as a creditor. If not, then all the other creditors are going to say that it was a gift and they get your cut of the available funds. My husband loaned some money to his brother and did not get any kind of document signed. It was never paid back, and after some years, the brother died. He did not have much of an estate, but he did have significant funds coming in from an annuity he got after an accident that went to someone else in the family without becoming part of the estate. Although not legally obliged to pay that debt, I bet the other family member would have paid it off if there had been any documentation. Even if the funds had gone to the estate, I don’t think the executor would have been allowed to pay off the debt without any proof. Oh well, hopefully lesson learned for my husband.

    Another reason to be very explicit about the interest rate and terms is that if you leave it vague at “pay me back when you can,” you may very well find that you resent it when you find out that they spent $50 here or $300 there on non-essentials rather than sending the money to you. As long as they are paying as agreed, it’s none of your business how else they spend their money.

    Do you have any siblings? Even if you could give money to your parents without resentment, maybe you would resent your siblings for not pitching in.

    Also, I think it is VERY important to not become known as the person who will lend anyone money and then not make them pay it back. It’s awfully handy to have a reputation for being the person who gets the legal document signed and is very business like and is prepared, if necessary, to sue to recover funds. It tends to weed out some of the beggars in the family. I don’t think my mom would go after me if I missed a couple of payments due to financial difficulties, but I absolutely believe she would sue if I just stopped paying altogether. And the way she raised me, I would think she was right to do it.

  35. @Danielle, the college student:

    First, if you and your mother are living in a fixed-income situation, you should definitely qualify for need-based scholarships. And FYI, since you are a girl, that is sort of considered a minority – there are loads of scholarships for women only. Make sure you fill out the FAFSA as early as you can (it’s first-come first-served for some federal money, so the sooner the better). Also go to fastweb.com and set up a profile for yourself. There are scholarships there for people who are left-handed, bowl, live in particular states, or have parents who are farmers, firefighters or have been in abusive marriages, among others. There are scholarships for darn near everything.

    Also, if you already have a particular school (or schools) in mind, look around on the school’s website as well. Many schools give out their own scholarships for students from particular areas, backgrounds, or who are studying certain majors. The opportunities out there are nearly endless. Good luck!

  36. Meena, my township gives us a 5% discount if we pay early, but also charges a 5 or 10% late fee if you pay late.

    We do not escrow our taxes, but set them aside into a savings account every month. Then, we pay early for the 5% discount.

  37. I am the Courtney at #20 and shall henceforth refer to myself as Courtney20 on this blog so as not to be confused with the other Courtney (#26) :-)

  38. To the college graduate who is looking for work. I would visit your career office at your school and I would also sign up for the site “Linkedin”, where you connect to other alumni.

  39. Danielle – I don’t know where you are located but with your family’s low income you might qualify for CNA (Certified Nursing Assistant) training for FREE. My daughter did this in 11th grade and got the training after school in a 2-week session. This is a fantastic way for a teen to earn way more than minimum wage. My daughter started in the $9.00 and hour range and now makes around $10.80 and time and one-half for holidays. My daughter is now in college and continues this work on weekends to pay her college expenses.

  40. Danielle, Why do you think you won’t be able to afford college even with financial aid?? If you and your mother are living on such a low income you can barely afford bills and food then you should qualify for plenty of financial aid. Average grants for people with low incomes are the most generous. Between grants, some loans and working part time it shouldn’t be that hard to afford college. If you want scholarships then you need to do something to earn them. You should be studying hard to get good grades, studying for and taking the pre-SAT, studying for the SAT / ACT, participating in school activities, volunteering, etc. All that will make you a more attractive candidate for colleges and improve your shot at merit & need based scholarships or grants. You don’t have to be a perfect straight A student but the more you do the better. You can take AP classes now and/or check to see if your high school has any programs at the local community colleges to get transferable credits. Public schools are generally more affordable but I wouldn’t rule out private schools. You might get giant need based aid grants from some private schools and they could be cheaper overall due to your low income. Generally I’d look towards more affordable public schools though.

  41. I second the recommendation of FlyLady. I have not read the GTD book, but I’ve been using my own version of FlyLady’s system to bring order to our home.

  42. Hey, thanks for answering my question. I am planning on taking AP classes and community college classes, as well as applying for financial aid scholarships, being socially active and maintaining my current 4.0 GPA. It’s just that my family has been in this financial situation since before I was born. The reason I was concerned for paying for college is that I don’t want to be in the same rut when I am an adult. I think about this quite often. I just let God take care of all my stresses, and I know that they will be taken care of.

    Money is very uncommon, seeing as my mom collectively earns about $40 too much for food stamps a month. It’s been like this since before she was born in 1959, in the case of my extended family. There is absolutely no money that can go into savings, and I am 4 months too young in my state to legally have a job, at this current time. Thank you everyone who commented, I will be looking into the grants and scholarships like crazy these next few years.

    And, Thank You Trent for answering my question.

    Now I have to go finish some homework…

  43. And, @jim, I am currently in all AP classes, band, the top 3% of my class, I will be joining band, plus I work on computers. Paying for college is one of those extra things that the government will pay for most of, it’s just that I want to come out of wherever I go to college without any issues or surprises. So, I will continue to be a star student, I was just mentally-dabbling in ways to play it safe with money.

  44. #1 Aaron, I believe that with any early distribution, you have a certain amount of time to rollover, but you need to make sure the penalty wasn’t taken out ahead of time. Also, while I don’t know about Roth 401(k) programs, you can take out your Roth IRA contributions at any time without penalty, but not the interest. I would guess the same would be true of a Roth 401(k).

    I agree with #23 who mentioned that anyone, no matter the income level, can have a Roth now with a little extra work. This very topic was mentioned on the latest Suze Orman show.

  45. Michelle -

    I know what you are going through from first-hand experience and I know how absolutely demoralizing it is to send out resume after resume and not even get so much as an interview. The main thing is not to get down on yourself and not give up.

    Here are some tips:

    - Pray if you don’t know G-d find Him, you need His help.

    - Volunteer, find a non-profit that fits your ideals/career goals (they always need volunteers) if a position opens up you will know about it and have a foot in the door.

    - Maximize your linked-in profile, join groups, ask for job hunting advice, network, build contacts.

    - Use your college’s alumni office, many colleges has alumni directories and job search help. Use these to job search, network and to set-up informational interviews.

    - If you are able to relocate, look into moving to another city perhaps you can even find a job that will pay for your relocation!

    - Speak to as many people as you can, ask for tips and ask if they know anybody else you can speak to that could help you. Don’t be shy.

    - Make sure you have all the job search engines relevant to your field, as well as all the good ones that are out there.

    - Check actual company websites for jobs, not just search engines.

    - Send out resumes to companies even if no jobs are listed. Use your cover letter to explain what type of opportunity you are looking for.

    - When you do get an interview always, always prepare ahead – practice interview questions (google them), learn all the about the company (read their website/recent press releases), dress professionally, be on time, follow-up and send thank you notes/emails.

    - Get a job coach. I realize this costs money but perhaps someone would be willing to help you in trade, for future payment, or totally free in order to practice thei skills.

    Best of luck! I hope this helpful.

  46. Luke, for 2010 only, there is no income limit for being allowed to convert a regular IRA to a Roth. So you can convert all (or part) of your big 401k to a Roth. It has to be this year, and you’ll pay taxes on it, (some of which can be deferred a year) but you can end up with a pretty big Roth. Google ‘roth rollover 2010′ and you can find more info.

  47. What’s with the random mailbag names and non-sequitur opening comments? Doesn’t match the theme of the post or anything… so what’s the point?

  48. @15 Kevin
    “Shannon: 10% is not “usurious.””

    Oregon, the state I live in defines Usury at 9%.

  49. To the recent college graduate. I feel your pain and was in your situation at one time. Have you thought of looking into teaching English overseas? Countries like Korea, Taiwan, Japan, and China often require no experience but the wages are decent and often include accommodation and round trip air tickets.

  50. Back in 1979, I was in a car accident with a drunk driver. I received a settlement for my injuries. My father had started a computer business and my mother had some money in a CD that she did not want to loan to the business because she feared that my father would not make it a priority to put money back into savings. My dad asked if he could borrow my settlement money and offered to pay me a rate of interest that was higher than a CD rate but lower than what he would have to pay a bank. I agreed and he paid me promptly every month.My mother had the security of the savings. We drew up a set agreement on the terms. When I got married in 1980 I paid for all of my wedding expenses and did not expect a contribution from my parents (I was still in college at the time). It worked out for both of us because my dad got the loan at a lower rate but his borrowing the money prevented me from squandering the money and the settlement money eventually was used to buy a house.

  51. @12 dorothy

    You may be incorrect regarding deducting over 12 mos prop tax in one tax year. As has been mentioned before, it’s not a good idea to share or accept legal or tax advice on a public forum.

    Talk to a CPA about this idea!

  52. @20 courtney

    I see several ways money could have been transferred and not reported correctly to the IRS. You might want to talk to a CPA about below-market interest loans, related party transactions and gift tax!

  53. @Luke

    You can do a traditional non-deductible IRA and gradually convert to a Roth IRA.

    Aaron (Comment #1) is absolutely correct. You can correct this if you, send the check to the company that you open the Roth IRA with and adding the subtracted amount to the check from your own funds. The IRS will refund the penalties when you file your tax return. Call the company asap and see if you can stop the check!

  54. Luke, see the two excellent comments above, transfer of ROTH into a ROTH has to be institution to institution, you can’t get the check, cash it, and send your own check later. That said, if you can dump any more into a ROTH this year, do it. And for a young person, converting a regular IRA into a ROTH sounds like a winning idea.

  55. The conversation on whether or not to charge parents interest money on a loan is a moot point. First, I am not an accountant, so anything I say should be verified. Probably twice. However, if you loan someone money over a non-trivial amount, you are required by the IRS to charge over a set amount of interest.
    The conversation should be whether to loan or gift the money – and if it’s money that you don’t need, I throw my vote with the people saying to just gift the money.

  56. @ Amanda (#39) – I’m the Courtney at #20 and had tried to post yesterday that I would refer to myself as Courtney20 to distinguish my comments from the other Courtney who posts here, but my post went to ‘the land of wind and ghosts’ (AKA moderation).

    I was just trying to point out that there are plenty of situations that work out better than Trent’s constant admonishment of never lending money to family members, but since you asked – it’s not a gift because a) it’s life insurance proceeds, b) we didn’t receive the money directly, and c) we have a documented interest charge. The interest rate isn’t below market; a 5-1 ARM is currently averaging 3.75%. We are just saved the hassle of trying to do a refinance ourselves. We can’t deduct the interest on our taxes because the loan is not secured, but she must claim the interest paid as income. So the IRS is still getting theirs. I don’t know anything about a ‘related party transaction’ other than what I just googled but it looks like it’s talking about disclosing transactions in a public company.

  57. Danielle- You seem very misinformed about scholarships, I did not qualify for federal aid due to my parents being upper middle class, and being basically a WASP, certainly do not fit into any minority groups. I still managed to get enough scholarship money to cover 2 of my 5 years. There is plenty of money out there, especially merit based. Some schools will even offer you money to go into specific programs, If I recall correctly I got a merit based offer from Michigan which was a full ride plus stipend to study nuclear physics and power generation, which is too bad I had no interest in that field… Get awesome SAT/ACT scores, work on any clep and AP programs your school/district offers, and clean up in class standing, and scholarships wont be a problem.

  58. @Bill

    Maybe nitpicking, but 9% is actually the “legal rate” in Oregon. The usury rate is 12% for balances under $50k.

  59. Michelle -

    I know what you are going through from first-hand experience and I know how absolutely demoralizing it is to send out resume after resume and not even get so much as an interview. The main thing is not to get down on yourself and not give up.

    Here are some tips:

    - Pray if you don’t know G-d find Him, you need His help.

    - Volunteer, find a non-profit that fits your ideals/career goals (they always need volunteers) if a position opens up you will know about it and have a foot in the door.

    - Maximize your linked-in profile, join groups, ask for job hunting advice, network, build contacts.

    - Use your college’s alumni office, many colleges has alumni directories and job search help. Use these to job search, network and to set-up informational interviews.

    - If you are able to relocate, look into moving to another city perhaps you can even find a job that will pay for your relocation!

    - Speak to as many people as you can, ask for tips and ask if they know anybody else you can speak to that could help you. Don’t be shy.

    - Make sure you have all the job search engines relevant to your field, as well as all the good ones that are out there.

    - Check actual company websites for jobs, not just search engines.

    - Send out resumes to companies even if no jobs are listed. Use your cover letter to explain what type of opportunity you are looking for.

    - When you do get an interview always, always prepare ahead – practice interview questions (google them), learn all the about the company (read their website/recent press releases), dress professionally, be on time, follow-up and send thank you notes/emails.

    - Get a job coach. I realize this costs money but perhaps someone would be willing to help you in trade, for future payment, or totally free in order to practice thei skills.

    Best of luck! I hope this helpful.

  60. Megan-

    I want to second a few other posters and recommend you check out flylady.com. She uses the ideas of creating routines to get those daily chores done and breaks jobs into smaller parts. Great site!

  61. As far as prepaying property taxes, some states do offer a discount for paying 1 month early. You will not have this option if you escrow but if you get the tax bill yourself, it will have different amounts due if you pay by certain date.

  62. GOOFBALL MAILBAG QUESTION.

    Trent, if you turned your website into “How-To’s” on how to say, defraud banks, rob houses, cheat Medicare, run illegal drug rings, etc. could your blog actually be shut down? I understand advertisers may pull out and I know the government can shut down websites in the national interest, but legally, would you be allowed to blog a “How To Get Away with Stealing from Wal-Mart” post?

  63. @Danielle – I think you have some misconceptions about college costs, financial aid, and scholarships. I would suggest doing some more research. Hopefully your high school guidance counselor and/or the reference librarian at your local library can help you get started. You have lots of options. I can say though that investing in individual stocks as you mention is not a good idea – as Trent says, it’s much too risky and you could easily end up with nothing if the market is down when you need the money. It’s almost as bad as buying lottery tickets and hoping to win as your plan to fund college!

    Make sure to look into community colleges – you could take classes very inexpensively there for your first 2 years and then transfer to a 4-year college.

    Trent – I’m not sure why you told her to stay out of the stock market and then at the end mentioned investing in a 529 plan as an option. A 529 plan *is* the stock market. It’s like a 401k where you are investing in mutual funds and similar investments. If Danielle is already in high school I would guess the timeline till when she needs the money is too short for a 529 investment to make sense.

  64. @Danielle – I agree with all the advice in the comments above. Even if your situation doesn’t look dire on paper, many financial aid departments will work with you individually to get you the money you need.

    You also have 4 years during college to come up with funds as well. At my college, I got paid as much as 3x minimum wage over the summer and during the year, and that helped pay whatever bills were leftover after financial aid.

    As a high school student, the amount of money you might make will barely make a dent. In some cases, money in your name counts as assets that work against you when applying for financial aid (money in your mom’s name is counted less heavily for your education than money in your own name does). While a job is probably good, you’ll probably be better off investing your high school time in making yourself the best possible college applicant you can be. Study hard, find activities you like to do and devote yourself to them. Being passionate about something makes you more attractive to college admissions teams, as well as scholarships.

  65. Danielle, if you are still checking back here, I’d like to reinforce what others have said.

    Find a good guidence advisor, as you do seem to be poorly informed about finacial aid and the products out there. Second, consider a community college for the first two years, where you will get more on-on-one support as well as face significantly less in tuition and fees.

    And finally, contact the local community college now to see if you you are eligible for any remedial or enrichment classes. I am an educator at the community college level, and not to be unkind, but your composition and syntax need some improvement. It is all about practice and having a coach assist you with the finer points. GOOD LUCK!

  66. Okay Trent, I know you don’t “meddle” in the comments much, but I got a new computer last Friday and my comments on this post still haven’t been un-moderated. Are you ever going to get around to this or should I just give up?

  67. Mickey — Regardless of whether loaning money to a parent is ethical, you might consider the IRS rules on personal loans and charging the “imputed interest rate.” The IRS WANTS you to charge interest and have you pay tax on the interest income. The IRS publishes a table of current imputed interest.

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