Mixing family and money - Good idea? Bad Idea?

My friend M. asked me this question:
"Mixing family and money - Good idea? Bad Idea? My brother has lots of student loans. Is it a good idea to help him out after we pay off our student loan debt? He is almost 37 years old."


Purely financially - No. For you it is not a good idea. You may end up with less money, if he doesn't return it. For your brother, your idea is good, because he will end up with more money. 
But such an answer is too obvious. I think it is not a financial question at all.
This question aims at the consequences: will there be a change in the relationship if you give money to him.  


There  definitely will be consequences.

When you enter a "transaction of giving and receiving help" you are entering a deal. This deal has levels.
The material level - the money changes hands.
The subconscious level - the perceived positions of strength are changing when money changes hands. 
And there will be consequences on both levels.  
 

On the material level it is easy: the money will be taken, returned, or not returned.


On the subconscious level following things will happen:


A person in possession of recourses and capable to give is positioned superior to the person who has no recourses and is not capable to give. The resourceful person is dominant.
When this resourceful person is giving recourses to someone, this person visibly demonstrates the dominance and this dominance is directed toward the receiving person. 

On the receiving site, the other person automatically moves into the position of weakness.

If the receiving person asked for help, this person acknowledges his weakness and your dominance from the start. This happens voluntary, which is important. 

If the person did not ask for help, then the giving person is pushing the other person into the position of weakness demonstrating dominance. The receiving person feels that and may resist.


From here it can go 2 ways.

1. Helping weak will make you weaker.
2. Helping strong will make you stronger.


How does it work?


1. Helping weak will make you weaker.

The receiving person easily steps into the weak position.

Which person will easily agree to take a weak position?
It is either the person who is used to be weak, or a person who frequently uses others by demonstrating weakness as a bait to receive benefits and this person is actually an aggressor masquerading as weak. 
With both of those types your chances of being used and not getting your money back are very high.

The habitually weak person is used to be weak and he/she will not resist a new weak position very much. This person may not even try to repay the debt because there is no motivation to get out of the weak position.

You will feel being used unless you will forgive the debt completely. But even then the relationship will be awkward. This is because a good friendship usually requires people to be in equal strength positions.
If the balance is disturbed, there is usually an effort to even it out. That is when friends help each other and don't leave unpaid debts of financial or emotional kind. Uneven positions are uncomfortable because this inequality is felt subconsciously at all times. 


The masquerading aggressor will also not be motivated to return the money. He/she will actually start to actively research the ways how to get more out of you. You may not see it clearly but you may get the feeling that you are being used. It would be best to cut  the losses, stop the contact and stay away from this person.   
   

2. Helping strong will make you stronger.


The receiving person needs help but really doesn't like to be in a weak position.


This is usually a strong person in a temporary need. 
The strong person in temporary need is the best variant you can get. This person will try hard to get back to at least even strength position, but more often the strong person will feel the need to compensate for the time spent in the temporary weak position. Those usually pay back with interest.

If you refuse to accept the re-payment from a strong person, with interest or not, you will get a strong enemy instead of a strong friend. By refusing the re-payment you insist on keeping your dominant position. If you accept, the relationship will most likely stay good. When the positions are evened out again the normal friendship can continue. You might even ask you friend for a small favor, just to help even out the positions.

Be careful of people who only appear strong and the only strong part of them is their ego.

With the person who is not strong but wishes to be strong and has a "strong ego", the situation is more difficult. If he/she has no capacity to re-pay, this situation feels very insulting to that person. It makes him/her feel even weaker then he/she really is.
The person hates this feeling and transfers the feeling of hate onto the helping person who produces this feeling.
With or without repayment this feeling will stay and many times it will grow, the longer the situation goes on. No one will be a winner in this scenario. The future relationship is lost.



Back to the brother.


Did he ask for help?
Which category does he fit into?
Is he a weak person who will stay weak or is he a strong person in temporary need who will get stronger? As I already described above, the only settings where the friendship can stay the same or get better is if a strong person asked for help and is motivated to get out of the temporary situation of weakness.
With the weak who will stay weak, the wanna-be strong with "big ego" and the masquerading aggressor - the relationship will get worse.



How to offer help?

If you realize what happens subconsciously when you offer help (financial or not) to someone, you might start thinking twice before doing it.  And you might think even more if that involves money or good friends. Offer help very carefully considering the types and the financial and emotional consequences.


How to refuse to help if asked?

Every "help transaction" is actually a deal. And you need to evaluate that deal just as any other deal. Just like if you are buying a car.
What type of person is asking? What are the consequences for you you enter this deal?
Is it a strong person - you might take the deal. With other types - most likely not. Closeness, niceness or family relations should not be a major factor in this deal.

Relatives are just like other people. They became your relatives by chance and it doesn't give them any rights to demand a deal that is bad for you or induce guilt feelings in you (usually used by weak and by masquerading aggressors).


If you don't like the deal, you can just say that at this time you really can't help.
You don't need to explain why, but the refusal is always accepted softer if you try to lessen you perceived dominance buy saying that you have a lot of payments yourself.

If after that the person doesn't give up and keeps trying to persuade you, you are dealing with masquerading aggressor and it is ok to lie to get rid of him. You might even turn the deal 180 degrees and ask him for help. Masquerading aggressors disappear very quickly after that.

Would I use real estate crowd funding?

Would I use real estate crowd funding?
 
No, I wouldn't, at least not at this moment.

Why?



The real estate crowd funding is a relatively new thing.
It might be a good thing, but probably not for me.
I am very suspicious of new things and I feel that it might be not safe enough for me.
 
I don't have any facts to support that feeling. I just have relatively high safety requirements and anything new feels risky to me if there is no long tern tracking of the results.

The more money I accumulate (and it accumulates slowly, slower than I would like), the more careful I become.
I am not hunting for high returns.
I don't even specifically target percentage of my own returns. For me, the main goal is that my gains and returns can cover my expenses.
If I can reach it in a very safe way, I do it. If I can't yet, I will try until I get there. And that is reflected in the choice of my investments.

I use indexing, because I don't think that a major index will go down to zero and that even if it will get down 50% it will come back up. I also use individual stocks, but I limit my exposure to them because they can go to zero unexpectedly and if they go down significantly, they may never get back up.

I generally don't trust very new things, where the specifics and regulations are still in the process of being worked out and I don't want to let others to experiment with my money.

The closer I am getting to retirement, the less risk I take and the real estate crowd funding is just too much risk for me.

But in case if you are interested, here is a link for a post with a great resource on real estate crowd funding from www.passiveincomemd.com. The author appears to have researched the world of real estate crowd funding very well and he shows some of his own results he could produce in the last few years.
 

 

Challenge "cash flow" update - May 2018





For the year 2017 the overall investment income was slightly over $49,000. I was very close to challenge status "swimming" which is $50,000. But since I didn't reach it, I am still "floating".


The counts reverted to $0 on January 1, 2018. A little more than 4 months passed since the start of 2018 and today I broke $50,000! January and April were very good months.

      My returns per month until 5/10/2018 

Below here is the S&P500 monthly return in %. Data for May is not available yet because the month is not complete.

S&P monthly returns

Should I pay off the mortgage instead of investing?

 

Should I pay off the house instead of investing?
This is a question I received from a friend recently.
I am already done with paying off my mortgage. I did pay it off but at the same time I did invest too. I only made $1,500 additional principal payments per month.


There are many arguments out there supporting investing instead of paying additional principal to the mortgage. The main argument is that the investments will generate higher returns than paying off mortgage.



Investments will provide gains.
Paying off mortgage will reduce your debt.
What will be better at the end?


Below I will make calculations on my own example.


Mortgage on a $210,000 house

Down payment 20% equals $23,898
The financed amount is $186,102
Monthly payment: $867
The interest rate: 4.37%
The total interest to be paid to lender on a 30 years term: $148,301
Total interest paid in 8 years (paid down the mortgage in 8 years instead of 30): $33,659
Mortgage interest saved: $114,542

By paying off the house early I saved $114,542.

The total extra payments to the principal totaled to $135,000 for the period of 8 years.

The extra principal payments of $135,000 were not available for investing. If I would have invested that money gradually during those 8 years, then according to the bankrate calculator it would have produced $172,157 at the end of those 8 years assuming stable growth rate of 7% per year, 2.9% inflation, 36% federal tax and 0% state tax (for TN). Investing would have produced $37,157more in those 8 years.

Now after paying off the house in 8 years and saving 22 years of paying interest (total mortgage term of 30 years) I can invest the available $1,500 for the next 22 years. That would produce $665,212 with the same 7% returns. 

$665,121-$37,157=$627,964 that is after subtracting the $37,157 I had less by choosing to pay off the mortgage instead of investing for the first 8 years.
But I still paid mortgage interest for 8 years. Subtracting that interest of $33,659 leads to $594,305.


If I would have kept the mortgage for 30 years, and would have $1,500 available to invest from the beginning and until the end of the 30 years period, that would have produced $1,116,708. 
From that I have to subtract the total interest paid for 30 years - $148,301 and that equals to $968,407. 

If my calculations are correct, in 30 years, by paying off the house early and continuing investing $1,500 for the reminder of the mortgage term, I will have only $594,305 instead of $968,407. 
The difference of $374,102 is significant.
This money would have been available in year 2039 (in 21 years).
With the inflation of 2.9% per year that sum of money will equal $205,242 in todays dollars.  

Was it bad for me to pay off the mortgage early and forgo on $374,102 in 21 years?

That is the price I paid for the piece of mind.  I didn't know that, I only found it out today after calculating everything. It surprised me a little. Well, I hope that number will not matter that much when I get to the retirement. 

Those calculations are made for 4.37% mortgage interest. If your interest is lower, it will make even less sense to pay it off early.
All values are calculated with bankrate calculator assuming 7% yearly returns, 2.9% inflation, 36% federal tax and 0% state tax (for TN).


Now I will redo all calculations with more conservative 5% yearly return on investments.
Below is the same text but with different numbers.



The extra principal payments of $135,000 were not available for investing. If I would have invested that money gradually during those 8 years, then according to the bank rate calculator it would have produced $163,553 at the end of those 8 years assuming stable growth rate of 5% per year, 2.9% inflation, 36% federal tax and 0% state tax (for TN). Investing would have produced $28,553 more in those 8 years.
 
Now after paying off the house in 8 years and saving 22 years of paying interest (total mortgage term of 30 years) I can invest the available $1,500 for the next 22 years. That would produce $570,502 with the 5% returns. 
 
$570,502-$28,553=$541,949 that is after subtracting the $28,553 I had less by choosing to pay off the mortgage instead of investing for the first 8 years.
But I still paid mortgage interest for 8 years. Subtracting that interest of $33,659 leads to $508,290.
 
 
If I would have kept the mortgage for 30 years, and would have $1,500 available to invest from the beginning and until the end of the 30 years period, that would have produced $897,551. 
From that I have to subtract the total interest paid for 30 years - $148,301 and that equals to $749,250.   
If my calculations are correct, in 30 years, by paying off the house early and continuing investing $1,500 for the reminder of the mortgage term, I will have only $508,290  instead of $749,250. 
The difference of $240,960 is significant.
This money would have been available in year 2039 (in 21 years). With the inflation of 2.9% per year that sum of money will equal $132,197 in todays dollars.


There are many variables but it appears that you have to go below 3% of yearly returns on investments to break even (the difference at 3% of returns will still be $141,912 before inflation and $77,856 after inflation).



The common arguments supporting paying off the mortgage early are:

1. If you loose the job, you don't need to worry about the mortgage.
2. If you will have to move, you don't need to worry about two mortgages.
3. If you decide to retire early or have to stop working for some other reason, mortgage doesn't need to be covered by savings.
4. It is a way to diversify your investments.

I gather it is a form of diversification of assets and a sort of  insurance for the hard times. It turns out to be quite expensive. If you are thinking about paying off the mortgage early, make your own calculations.   

What is good debt and bad debt?

M. asks: What is good debt and bad debt?

Growing up I was instructed by my grandma that all debt is bad and there is no such thing as good debt.

But maybe it is time to reevaluate this old opinion. My grandma is long dead and she will not complain.

There are several definitions/opinions on separating the good debt from the bad.

One definition is going just by the interest rate. The high interest rate makes the debt bad and the low interest rate makes the debt good.

Another definition separates the debt by ability to generate income and go up in value (good debt) versus purchase of depreciating assets which lose value with time (bad debt).

The third definition I found is a distinction by secured versus unsecured.
Secured are loans that have a collateral: a house, a car or anything tangible that can be repossessed in case of default.
Unsecured loans are credit card balances or medical bills.
This explains why the credit card interest rates are higher then a mortgage - if the loan is unsecured, the lender carries a higher risk and the higher interest compensates for that risk. 


Consolidating this three definitions, an example of a good debt would be a mortgage, and examples of a bad debt would be a car financing and credit card balance.


But is it really so?
I try not to use the terms "good" or "bad" because they don't reflect the reality very well. Nothing is just simply good or bad. I usually use the terms "useful" and "not useful" to clarify things.

Let's see if that will work with bad and good debt too.



A loan allows you to acquire an asset now, instead waiting until you save up enough money to buy it paying cash. The interest rate is the cost of services for you to have that money available now. 


If you want to buy a house, you would not like to save for many and many years. If you need 20 or 30 years to save that amount, the life will go by without a house. In this case you would get a loan and pay the interest for that service. Is this good? I don't know. Is it useful? Definitely. 


If you want to buy a car to drive to work and you have to finance the car? You will pay for the service to get money now and to have the car now. That will make you able to drive to work. Is it good? No, the car will depreciate... Is it useful? Yes.


You would like to take out a loan to pay for college education. Is it useful? I would say it will depend on the degree.
If your degree will get you a good income later - it is useful.
If your degree will not get you a good job that will not be useful. 
If you meet someone at that college who will get a great job with a great salary later, and all you get is a "Mrs. degree" when you marry that person - it world be quite useful...


You would like to buy a boat which you will rarely use and it will just generate costs and bad feelings that you should have used it more often - that is not useful at all. Instead of paying for service to get the loan for the boat you better pay for the service for renting a boat those couple of times.

You see how it works. You can apply the "useful or not useful" test to your own examples. 

Here are my own examples:
 

The car loan for my car falls into cheap and useful. Over the term of car loan (3 years) I paid $1,500 for the service of the money being available for me to buy it. I did it when I got my job and didn't have much in savings. I needed a reliable car and to pay $1,500 was ok.


The mortgage falls into expensive and useful. With the mortgage the monthly payment was the same as my apartment rent but the house provided much more space. The costs for  that service over 30 years would be $148,201 but with paying additional principal I shortened it to 8 years and the costs were only $33,659. But still it falls into the expensive category. (See my post on if you should pay off the mortgage early here).

I put the boat into cheap and not useful category. The example is for a smaller boat which you can pay off in few years (comparable to a car). Compared to mortgage costs it is cheap but I have no interest in a boat and it is not useful for me.

The credit card debt is in expensive and not useful in my example. But for some people it might move into expensive and useful in some emergency situations. To minimize this kind of expensive debt even if it is useful, an emergency fund is very helpful.

In summary, I would apply "useful" debt and "not useful" debt instead good and bad debt. And I would apply it not in general terms but to a particular situation and person.