The retirement nightmare is looming large.
Childhood and Money I read an article today by someone in the sports world. He talked about all the young athletes he knows who became successful and started earning big bucks – and then found themselves foreclosed out of all of their oversized homes, milked dry by all the ex-wives and friends they took pride in supporting because it pushed their “look at me, look what I can afford” buttons. (Until the bucks were gone.) The author compared that with Michael Jordan, who made the same big bucks—or more—and who spent plenty to “celebrate” his success, but who also started investing in businesses that would carry his income-earning years far beyond the short span of his athletic stardom. Then my friend Dora called to ask if I thought she should buy a new car. Hers has been in and out of the shop now that the 5-year warranty has expired. I asked if she could afford to pay for a new one. “Sure, I’ve put money aside each month since I bought this one, knowing that someday I’d have to replace it. Besides, this model holds its value pretty well, so I’ll get a good trade-in amount. But I can’t seem to make myself go pick one out.” I said, “So tell me about how your family handled big purchases. Do you remember?” “Well, I remember the fights my parents would have when I was a kid. My dad always wanted to trade his car in for the latest model, and my mother kept screaming that you had to keep a car for at least 8 or 10 years so you got full use out of it. Anything less was being wasteful.” “So what happened? Did you father get new cars?” “No, not for many years. At least not until he used his year-end bonus to buy himself one. That’s when the fighting got really nasty and they ended up in divorce court. I was 15.” Childhood and Money Messages As different as these two instances seem, they both deal with messaging the people got from peers, family and other authority figures as children. We receive these messages either from what we witness or from what we’re told. The messages get embedded in our little brains as truth. And that truth sits there until someone shows us how to challenge it if it no longer serves us well. In the case of Michael Jordan, if he didn’t have a different childhood (and hence different messaging) than Chris Gatling, Latrell Sprewell and others who fell on hard times after poor money management, who made the difference? Who was it who came into his life as he started making money and helped him reverse that messaging? It wasn’t just that he had a good financial team. Someone reached him at the right time and reversed a lot of the destructive childhood beliefs. In Dora’s case, the messaging she had around big purchases had everything to do with the reality of her parents’ life and nothing to do with her own. Yet the emotion from the screaming and separation through divorce – especially related to car buying – is still embedded and having an impact on how she spends her money. Childhood messaging – held far too long and too tightly. Childhood and money. Beliefs that should have been revisited and let go of once we reached adulthood. The Power of Early Messaging I discovered the power of childhood messaging when I hit the wall financially at 53, lost everything and was forced to reinvent myself. As I did so, I revisited all my beliefs, trying to understand the ones that had tripped me up. I eventually realized that my downfall had come from holding on to beliefs that may have served my parents well, but that did not work for me. I started reversing them one by one. I later went one step further, looking at how I could be proactive with this information. I’ve come to realize that if I ever start to feel uncomfortable in a situation, I should look at where the discomfort is coming from. To this day I still catch myself reacting to something my mother said, or my father did, or some older kids teased me about. Once I identify the troublesome belief, my next thought is, “Do I still believe that? Or have I just never questioned if that was true?” Next time you’re hesitating to do something or are feeling uncomfortable in a particular situation, ask yourself where the behavior is coming from. Don’t be surprised if it’s not something you’ve been reacting to the same way for years, unknowingly. If it is, look deeper and see if it came from childhood beliefs. If so and if it doesn’t make sense any more, let it go. You have that power.
Lending money scenarios … “Sarah, do you have ten bucks?” Mindy was at the Starbucks checkout, drink in hand, and again needed money to pay the bill. Let’s see, this was the umpteenth coffee, and last week it was the lunch bill, after she had finished eating. This habit was getting expensive … “Mom, I have this great idea for a little business. I’ve put together a plan of what I need and it’s not that much. Since I can’t find a job, would you be willing to make me a business start-up loan?” Vanessa had been job hunting diligently since she got her marketing degree from Ohio State last year. Meanwhile, she took any minimum wage and part-time job to bring in money. Back home, living in her room, she contributed time and energy, especially when she couldn’t contribute money. “They’re going to foreclose on my house, Cindy. Then I don’t know what I’ll do. Steve’s gone, the kids are all upset, my job doesn’t pay enough to carry the house, but I just need some time to sell it so I can get us into something more affordable. You know I’m good for the money, I always have been.” Cindy’s sister Sam was sitting across the breakfast table, picking at the food in front of her with her fork, not even raising her eyes off the plate of cold eggs. So what do you do when a friend or family member asks you for a loan? Why is it such a touchy topic and why does it stress the relationship so much? The culprit is the fact that so many of us see “talking about money” as such a taboo. Because money carries so much emotion, saying “no” to a friend or family member is nearly impossible. Yet, if we were able to have a calm discussion about the request, we might be able to come up with an arrangement that works for everyone. But for it to work, the lender has to be seen as a friendly banker. No more, no less. Free of emotion, everyone can take a deep breath and act like adults. Instead, there is usually a lot of mumbling, money changes hands and no clear discussion takes place of responsibility, terms, expectations … or much anything else. The result is that we avoid the topic, the situation gets toxic, tensions rise and relationships are skewed. The Three Key Questions Regardless of the circumstances of the request, lending money has to start with three key questions: • What is the magnitude of the loan: minor or major? • Deep down, do you see it as a loan or as a gift? • Either way (since the loan may not be repaid), can you afford to lose the money? Some other considerations: • Hopefully it’s not just enabling some existing bad behavior. • Your spouse or partner needs to be part of the decision-making process. • And you shouldn’t be dipping into your retirement account, no matter how strong the desire to help someone else out. Coffee Money If we’re talking about coffees, meals and incidentals, we need to decide how important the relationship is to us. If it’s a good friend and “that’s just how she is,” decide if the “loans” are the price of the friendship, since they probably won’t be repaid. You need to decide and be at peace with your decision. If the price is too high, however you measure it, take all emotion out of your voice and simply state that you are no longer able to be her bank. If that destroys the friendship, you’re very sorry. But, for the friendship to be valuable to you, you have to be straight and honest. And then let the chips fall where they may. Fund My Business If a family member or very close friend is looking for money for a business, for example, it’s actually easier: business is business. You should have access to their business plan (otherwise, forget it). You could have them sign a promissory note (Internet Legal Research Group offers forms for each state.) Or you could require a share in the business, with a certain amount of control over how the money is spent, but be aware of any liability you take on. (If you’re funding a car purchase, you could agree that you’ll place a lien on it.) Whatever you do, do not co-sign for anything that makes you responsible for more than you lent. Emergencies Regardless of the amount, if it’s emergency money for something like food, housing or medical expenses, consider that it is very unlikely that the loan will be repaid. You’d only do it if you had feelings for the borrower and you wanted to help. If it is repaid, consider it a bonus. The Tax Man No one thinks of tax implications when they’re lending money, especially to friends and family. But the IRS does expect you to charge a minimum interest rate defined monthly by the Treasury Department. In their eyes, if it’s not an interest-bearing loan, it’s a gift and here you have some leeway: up to $14,000 per person per year as a gift. Beyond that, there’s a 35% gift tax. Lending Money or Making a Gift? For any loan of consequence, once you have agreed on the amount of the loan, you should calmly discuss the interest rate, term, payment due date, late fees and consequences of non-payment. You could use a loan calculator to figure out monthly payments, including interest, at sites such as Bank Rate. Besides formalizing the loan, having all that in writing allows you to write off the loan if the lender ever declares bankruptcy. On the other hand, if you’re unwilling or unable to get it in writing, consider that you’ve probably just made a gift instead of a loan. Let us know in the comments section below if you’ve had good or bad experiences lending money to friends or family.