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Loans to Family & Friends – Don’t Do It

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Have you ever borrowed or lent more than $500 to a friend or family member? If so, you’re not alone, as more than two-thirds of Canadians have done so, according to a recent survey by Investors Group.

But did we always want to do it? About a third of us felt pressured to make the loan and ironically, half of us who felt pressured never got paid back! With the current state of the economy and tighter credit requirements, loans from family and friends are likely to become more prevalent in the coming year. Is that a good idea, or a financial trap for someone lending the money?

In the It’s Your Money book there is a section on family loans. Simply put: Don’t do it. Yes, there’s pressure and some sense of obligation to help, but it is seldom a good idea. If someone is asking to borrow the money from you, it is reasonable to assume they cannot get the money from a financial institution. If that’s true, that makes them a large credit risk. So should you be the one to take that risk? Is it even fair for the family member or friend to ask you in the first place?

Yes, it puts you in an awkward position, and it may be hard to say no, but do it anyway. I can assure you that there is a very good chance you will not get paid back, or will not get paid back as promised, when promised. Family dinners will never be the same when someone owes you money and has not repaid you. It will cause more problems than the loan attempts to solve, and the person will likely avoid you, and you will get probably get resentful at some point in time.

If you have a hard time saying no, use me: Tell the person your financial counselor won’t let you make personal loans. But you do know they can get a low-interest 11% credit card that would work or an overdraft on their chequing account from their bank. Or alternative four is to give them the name of your loans officer to see.

I guarantee you that whatever the reason for the loan, you are probably enabling someone way more than helping them. But I do know many people will make the loan anyway. It’s not that I’m now going to argue in favour of it, but if you do:
Make sure you have it in writing. According to the Investors Survey, 83% of people don’t and you should. There is a short promissory note you can use in the back of the It’s Your Money book.

If it is a small amount, get a post dated cheque for the date you will be paid back. It will put the pressure on the other person to make good on the cheque. The alternative is that you will keep waiting for the payment and the other person may never get around to you. When you have a cheque, you can always hold it for an extra week or so, but you have something in your hand.

Take the attitude, either out loud, or in your head, that this is a gift. That makes the amount only what you can afford and you will never ever be disappointed. If you cannot afford to give the money away – don’t do it.

On the other hand, a family gift-loan is still a better alternative than the financial straight jacket you would put yourself in should you cosign a loan, instead.

Financially, Can You Afford To Be A Stay At Home Parent?

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Last week, Alberta Finance Minister Iris Evans raised the issue of making staying at home with younger kids more of a priority than money. Whether she was right or wrong, she is the Finance Minister and many families may agree with the Minister, if only they could make it happen.

In families were both partners work, the thought of one parent staying home to raise the kids is often a goal and a dream. It might not be for everyone, but those who want to do it, often feel they can’t afford it, financially, and the dream dies right there.

Yes, almost all couples who have decided to have one partner stay at home, and to make raising their kids a priority, will share that it was hard. But note that it WAS hard – in the past tense.

For sure, the most challenging steps are mainly in the initial adjustment pains. Can it be done? Yes. Is it worth it? You decide. But just make sure the decision is more about your values, priorities, family, and kids, than it is about finances. After all, your credit card companies and lenders shouldn’t be setting your priorities. But in reality, our debts and monthly payments do dictate our lives.

But money is almost always where it starts. The most common feedback is: “We’d love to be able to, but our family can’t possibly make it work without my partner’s income.” Often, however this “what’s the use” mindset is not true, because gross income doesn’t count. If your partner makes $2,000 a month, you need to deduct the taxes, EI, CPP, staff fund, and all those other deductions which come off the top, and chances are the real take-home is more likely to be around $1,400 tops.

Now subtract the bills which are mostly as a result of earning this second income. For the most families, that starts with a second vehicle, just to be able to get to work. Are there $200 or $300 car payments? That alone adds another $200 or so for insurance, gas and maintenance. What else? Perhaps there are current (or future) daycare expenses of another $400 or more, and probably at least another $100 for lunch, clothes, etc.

Without these “work bills,” the real net income in this example is $400 a month at best, not even considering the working partner may now also move into a lower tax bracket. That’s less than twenty bucks a day! Sure, each situation is different, but ten minutes of looking at your finances from a different perspective can have a big impact. It’s the old saying: You have to spend money to make money. But in this decision, it totally works against you, and makes things worse and not better.

Oh, and one more question: What’s the value of your car? OK, how does that compare to the value of your kids’ education savings plan? Or what’s the monthly payment on your vehicle? Is that the same amount you’re contributing each month towards your kids’ education? Aren’t those fair questions about your choices and priorities? But how often do our actions speak louder than our words?

If your desire is to have one partner stay at home, can you really afford not to do it? Yes, it’s a one-time adjustment, but it can also create opportunities, bonds, and memories that money just can’t buy. So here are a few questions to get you started thinking about the “how to,” instead of the “can’t be done:”

• What’s the real net pay you’re dealing with?
• How much money are you paying out of pocket each month directly related to the job?
• What monthly bills or payments (such as car payments, etc.) would you be able to drop?
• How much (if any) would your partner’s tax drop by with only one of you working?
• What bills can you consolidate into a lower payment (or pay off with current savings) to increase your cash-flow?
• Can you get rid of your current car payments by paying off the vehicle, terminating the lease, or trading down to a less expensive vehicle you’re able to pay cash for?

Reward & Frequent Flyer Points: Think of Them as Bananas

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The deal with any reward program was always that you spend literally tens of thousands of dollars on airline tickets, or charges on your credit card. In return, you would get some free flights, or other kind of rewards, way down the road when you finally accumulated enough points.

You kept your part of the deal. You charged away, and kept flying and staying loyal to a specific airline. But right now, you’re being played, as the airlines and many other reward programs are not keeping their part of the bargain. According to the Wall Street Journal, overall reward perks dropped by 29% last year and an IBM Global survey reports that less than 48% of us are satisfied with our airline reward program.

Should you go in arrears on your credit card, cancel it or the company goes under, your reward points will be gone. To assure you receive at least some of the benefits of what you signed up for, forget collecting points for the super expensive and cool reward. Take your points and redeem them. At least you will get something, which is a whole lot more than nothing. Read the fine print for changes, redemption fees, and watch for increased points thresholds with fewer rewards.

In the airline industry, the shrinkage of points and the growth of restrictions are even more noticeable. Start to take the convenient schedule, the direct flight and cheapest ticket. Never mind any loyalty to a particular airline that will most assuredly change the goalposts on you, way before you ever get close to a free flight.

The sharp drop in frequent flyer point values has also started to erode loyalty from customers – and rightly so. The percentage of people who are loyal to an airline is down to 25%, according to Forrester Research. And airlines have done it to themselves. The programs used to be about 2 cents per mile in these programs. Now it’s down to barely 1 cent, that’s a 50% drop in what you’re getting, and in what you’re holding in points values!

At the same time, there can now be fees to redeem, to call them, to book a flight, to check a suitcase, massive last minute surcharges in points, and the likes, which drastically erode the value of these so-called “free” points even more.

The other big killer is that airlines make a pile of money selling their points to car rental companies, flower and hardware stores and, well – anyone that wants to pay cash up front. Last year, United Airlines made over $800 million just by selling points. At American Airlines, it was more than a billion dollars! Those are cash for an airline but it’s a staggering amounts of points dumped into the world, and now there are literally billions of points chasing the same few seats. It’s supply and demand.

Right now, it’s heads they win, tails you lose. Do not let your points get eaten up, wiped out, or shrink away. Make it a point to redeem what you can and think of them more like bananas instead of an asset! Something sort of free today is better than nothing down the road.

Lifestyles of the Formerly Rich and Famous

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Getting ahead financially really isn’t complex, or hard to do. We just need to do one thing: Spend less than we make. Yes, it really is that simple to say, but often that hard to do. We just get addicted to our “stuff,” and our lifestyle. Yet, any drop in income has us in denial and clinging to our former spending habits, instead of making some basic adjustments. But with less income, that lifestyle now has to be financed with debt. And like blowing up a balloon, there will always be an end to that shell game.

The rich and famous are even more likely to go through this denial phase. But denial only goes for a short period of time. And that time-frame is often shorter for the rich, since they choose (yes, it’s a choice) to have monthly expense which are a whole lot more than for the rest of us.

In the entertainment field, Zsa Za Gabor, Marvin Gaye, Mick Fleetwood and Don Johnson of Miami Vice fame have all been through a bankruptcy. As has Sopranos actress Lorraine Bracco, M.A.S.H. star Gary Burghoff, filmmaker Francis Ford Coppola, and singers Natalie Cole, Elton John, and Toni Braxton. The most famous bankruptcy likely still to come will be Michael Jackson. Somehow an estimated $500 to $800 million net worth in the 1980s is all spent, and then some. Jackson is holding on by his fingernails, with hedge fund financing and multiple mortgages on his Neverland ranch and his Beatles music catalogue.

But this common, often self-imposed problem, does not just apply to the rich. With bankruptcies up 16% year over last year, and the current recession, more and more people are reaching the danger level.

The National Post last week had a story of a drywaller whose income shrunk drastically last summer. Yet, for more than six months, he stayed in denial by using credit cards to maintain his lifestyle, and to make payment on his “baby,” as he called his Honda Acura. That may work for a while, but by January he had filed for bankruptcy.

Optimism is a great mindset, but when it comes to our debt and finances, staying realistic is always a much better frame of mind. And don’t kid yourself. Filing for bankruptcy is neither easy nor fun. Along with a death in the family or perhaps a divorce, bankruptcy will always rate amongst the top five traumatic experiences of a lifetime.

I got Fired and Ripped-Off Twice

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…other than that, it’s a great week.

Getting fired by CIBC Wood Gundy was both humiliating and a little unnerving a couple of months ago. It’s never happened to me before, and I needed the few months to calm down before I could use the words CIBC Wood Gundy in a sentence without bad language.

You see, I received a call from their national no-service discount brokerage department: Your RRSP account has been transferred here, please call us. I was simply dumped by the actual full-service broker because they weren’t making enough money off me, and I wasn’t close to the $100,000 accounts they want to keep. They handled it very badly, and everyone from my advisor, to their PR department, couldn’t even be bothered to return my calls.

It turns out that it can happen to you, too. According to a story in Money Sense magazine, about 20% of clients are simply dumped each year. It is those of us who don’t buy and sell lots and who don’t have $100,000 – or even close. It also happened to a family member with the Royal Bank where he, too, was bounced out of the branch and into the no-service national discount brokerage.

But you’ll get a letter that says it’s actually great news and you’ll be “better serviced.” You’ll never get told it’s because you’re a lousy little client, because that breaches industry codes of ethics and could lose someone their professional designation. Yes, I’ll be pursuing a complaint with the ethics boards against CIBC and the broker. In the U.S. it’s worse as reports are coming out that some firms will kick you out if your portfolio is under $250,000.

Now to the rip-offs: The big no-service banks have all expressed their thanks and gratitude for the bailouts and cash-infusion us taxpayers gave them by increasing almost all their service charges and dragging their heals on the prime rate decrease the middle of October, passing on half of it for a while.

But their charges are getting insane. I had to re-order some cheques for an account I need to keep for another year or so. They charged me $27 for one pad of cheques! I was so shocked I didn’t know what to say. Reason 426 to deal at a credit union where you never pay for cheque orders.

The second one was an attempted rip-off. I paid a credit card payment on-line and entered my transit number wrong. Well, two days later I got an e-mail that my payment had bounced and there was a $30 NSF charge. The odds of me bouncing a cheque, or paying a $30 service charge, are the same: They’re zero! It was a keypunch error and took two calls and 15 minutes to reverse. They just love to call everything NSF to be able add on that $30 when it costs the banks around 17 cents to process a reversal.

When these things happen to you, do not take it lying down. Make a couple of calls, challenge them and ask for what you want. YOU are the customer and getting service-charged to death is not something you have to accept. Or in the words of the captain on Hill Street Blues: Be careful out there.

This Is Not About Politics – Sort Of…

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Unfortunately, a fair bit of media coverage on the economy, as well as opinions or commentary, revolves around politics. Now, don’t read my politics into these comments, because it’s not there. But here are a couple of observations from the last month:

Before the last Federal Budget, two opposition parties announced they would be voting against it. Fair enough. But they did so a week BEFORE the budget! How is that any different from going to see your boss and he or she tells you: The answer is no, now what’s the question? How long would you enjoy that type of relationship?

If you’re not part of the solution, you’re part of the problem: Many politicians had a lot of criticism about the Federal Budget, but no alternatives or better solutions. That’s just sad. If your boss sits in on a client meeting and afterwards tells you the dozens of things you did wrong, how helpful is that? Where was he or she when you needed help? Where is the value in telling you after the meeting that it had no chance of success? Where was their feedback or suggestions when you needed them? Are there some politicians just wanting the government to fail, or the recession to get worse for political value? How sad, if that were true…

We should do more – way more in bailouts and stimulus money. OK, maybe that’s true. But would you spend $30,000 fixing your roof when you can get it done for $5,000? If it were “free” money, we would all love to get some of it. But can we please remember that the only spending the government does is with our money? There isn’t free money around, sorry. When we remember that, we appreciate it a lot more when politicians are careful with it. Plus, there is not enough money in the world, or enough printing presses, to print more to make up for an entire economic slowdown. It might seem like it, listening to some people, but it just isn’t true.

When Prime Minister Harper (who is actually an economist!) talked about value in the market, he was hammered by large parts of the media. Yet, two weeks ago, when U.S. President Obama talked about virtually the same thing, the general feedback was that his optimism was great. Excuse me? Same types of comments interpreted so differently? Only a political bias can reconcile those extremes.

Federal deficits are bad or good: Again, that depends on who you ask, and their political view. But do remember that we really don’t allow our governments to have much of a surplus before we generally demand the money be spent on this or that project, or that our taxes be lowered. While we all need to have an emergency savings account, we likely don’t allow our government to have that for bad economic times! So what choice do they have but to go into a temporary deficit?

Your E-mail Segment

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Here are a couple of e-mails from listeners. Chance are if one person e mails, there are lots of others who have the same questions:

Hi George: We are going on vacation to Mexico. The question is what do you suggest as far as taking money? I have asked lots of people and everyone has a different opinion. Some people say use your debit card (that sort of scares me aside from charges), some say Visa/MC, others say strictly US cash or take Canadian and exchange it down. I am confused…

This isn’t worth your brain power. I only answer questions as to what I would do, and in this case, you’re dealing with a pretty amount of money. You’re not buying a house down there, so we’re talking about the exchange on about $400 or $500. Whatever it is, it’s a $5 to $7 decision. I don’t pull out my debit card – that’s way too risky, unless it’s at a bank ATM. Not many places want our crappy Canadian dollar, and it’s a giant pain to find a bank to exchange it at. In the US, by the way, most banks now won’t even do an exchange unless you are a customer. They can’t recognize counterfeit foreign money and don’t give a hoot about non-bank clients anyway.

Take what you think in US cash. If you’ve got a credit union MasterCard, use it, because it has the least foreign exchange rip off, most others are 2.5% or more, there’s a chart in the back of the It’s Your Money book on everything credit card related, or you can call the 800 number on the back of your credit card and ask.

Hello George: In the It’s Your Money book, you talk about getting debt free by paying off the smallest debt to the largest debt. Wouldn’t it be more logical to pay the highest interest rates first?

Yes and no. You’re presuming that getting into debt and paying it off are logical decisions and three-quarters of it isn’t logical – it’s emotional. Is it logical to charge something on a 20% credit card? Is it logical to take a car loan over 7 years when you’ll always owe more than it’s worth? Is it logical to take a 6-months don’t pay that reverts to 29% right back to the get-go? No way.

Just like getting a car unstuck in the snow you need to get traction. Traction and extra cash comes from paying off the smallest bill. It’ll take a month or two, tops and frees up the payment that was going on that bill, as well as creating a huge self-confidence feeling that one is gone forever.

Rolling that money into the next smallest bill makes it go twice as fast, and so on. In the book is an example of $25,000 debt and how quickly it’ll get paid off with some huge interest savings. Remember that interest isn’t a rate thing – it’s interest dollars which we can control.

Besides, when it’s a single-minded focus to get rid of your debt it’ll happen really quickly. So the rate doesn’t matter that much when it’s only being paid for a year or so.

Some New Insights You Should Know From the Past Week

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You know I’m not a fan of the credit card business, but big credit goes to Capital One who recently had an insert with statements. No, not the usual mice print, but a colour flyer discussing over limit charges and how to avoid them. It also had an intelligent section on how to set up pre-authorized debit with your bank to make sure at least the minimum payments are made every month.

Payday lenders took a big hit last week. There are a bunch of class action lawsuits filed in a number of provinces about their interest rates. The industry went to the Supreme Court who just rejected their arguments to get these lawsuits dismissed.

Scotiabank just launched a rather interesting mortgage promotion. Now I have to confess I used to be a fan of Scotia. In fact, I’ve probably sent them millions of dollars of business over the years. But that was before I had a number of personal nightmares with them. But this one might be worth checking out: It’s a 1 year fixed rate mortgage offer at 3.25% and then the customer will have the option of a five year fixed rate at posted retail rates less 1.25%. Even if you don’t consider the Scotiabank it shows again that it’s pretty easy to haggle on rates and you should get 1 to 1.25% off the posted rates elsewhere, too!

The size of Canadian Banks: Sometimes you don’t have to grow to get bigger. As of right now, TD/Canada Trust is actually the 5th largest bank in the world and the Royal has also made the top 10. They didn’t really grow much but all those mega U.S. banks have shrunk a lot. Citibank used to be worth $270 billion two years ago, now it’s 2%, or $5 billion.
Last one: It was a great and VERY lengthy report from Wall Street Watch. If you ever want the insights of how we got to the current financial and housing mess we’re in it is well worth the read. Here’s the highlights:

$5 billion in political contributions bought Wall Street their total freedom from regulations and restraints in the last decade.
The report goes through a dozen deregulation steps that got us here.

The financial industry has almost 3,000 lobbyists in Washington. How many does Joe Average have? Right – none. So guess who has the influence on congress and the laws that are written – or not written?

It’s time to start our “No Spend Week”

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This started with a story in the Washington Post a couple of months ago about a lady name Kate Wheelock and her family who made it a 14 day plan (and did survive).

Now, we’re always ahead of the curve so don’t be surprised if you catch Oprah now doing the same thing. But remember – we were there first!

Our plan is to go through a full week without spending any money. No credit or debit cards and no need for cash – you won’t need any of it. Pay your regular bills such as your utilities and other monthly obligations but that’s it.
So today you’ll need to fill up your gas tank and get to the grocery store. Yes, that’s it. Then you can leave your cash, credit and debit cards at home for the week.

Now as I’m more experienced by two days, here’s a couple of things:

You have to make the tank of gas last. Plan your errands, don’t do them, or walk wherever you can.

If you have kids – get them involved. If possible, take them shopping with you so they can buy into the idea that what you buy is what you get – period. If not, you’re just being weird again. You can also have them play along. Yes, make it a game and not a pain and you’d be amazed how your attitude changes. Give them an envelope and every time you and your son or daughter agree that today you would have bought this or that for them, the cash goes into the envelope, instead.

Kids learn quickly and real cash in an envelope vs. the chocolate bar that’s long gone makes a big difference. They’re visual – the chocolate bar is barely remembered but the cash is still there – as is the lesson of foregone treats or spending results in REAL money. Maybe all of us could use that lesson a little more often…

You won’t be seeing the inside of a restaurant. That’s not a bad thing anyway as they are usually 20% food cost and 80% ambiance that you’re paying for.

That’s the hard one for me so I’m expecting Subway and Domino to be really hurting for a while. The food you have in the fridge or freezer does turn into meals! But now you have to think vs. just going back to the store!

Whether you do it to just see if you can, or to find out if you can make it for a week without all that extra (and 99% unnecessary) spending, let us know. There’s strength in numbers and perhaps you can share some of your insights.
If you’re a Christian like I am, consider doing it for Lent this year as we approach the Easter season. Lent is from the Anglo-Saxen word to lengthen.

In the 1st century the Lenten season was originally six days, now it is the 40 days before Easter. I was actually inspired to make it two weeks after my Pastor’s sermon this past Sunday sharing his three items.

In the words of President Obama: Yes you can!

Join us and let’s stay in touch. Do remember that when you tell people why you brought lunch to work or the likes they’ll want to make fun of you. It’s always amazing how many and how often broke people want to give you financial advice!
Oh, and if you’re not participating: Why?

I don’t want to put you on the spot but is it that you’re afraid of what you’ll learn? Afraid to let go of those fancy coffees or impulse spending? Or afraid to fail? Come on – there’s no failure even if you make it one day! It’s between you and your wallet. It’s your money!

But would you at least give yourself a credit limit for a week? Make it $10 bucks and that’s all you can spend for the day. Gas, food, Tim Horton and everything…would that be something you’d consider?

Happy RRSP Deadline

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So here we are just a few days from this years’ RRSP deadline. It’s the one time in the year when the no-service banks stay open forever in order to get our business. But most of us are still scrambling.

On average, our RRSP contribution is about $2,600. If we think about that, it’s a pretty puny amount to invest in ourselves and for our retirement, isn’t it. Sure, there are maybe 20 percent or so who max out. But for the rest of us it really doesn’t matter what the max is – we tend to think of what the minimum is, instead.

But why? It can’t be because we’re just really happy to pay a whole bunch of extra income tax! No, it’s because we don’t have the money! Yet the fundamental way rich people become rich is by paying themselves first. It really is that simple – yet also very hard.

Will bills and all those monthly payments, we are constantly paying for yesterday instead of investing in tomorrow. No that sounds simple, but it really isn’t. When all of our money goes to pay for yesterday’s stuff, there’s just nothing left over. It’s not like we can skip the car payments, not pay our credit cards or the mortgage for a while.

The trick, OK, it’s not really a trick, is to turn this ship around. When we don’t have all those payments, we have the money left over to invest proactively.

If you’re buried in debt and payments, I would never recommend figuring out how to save for an RRSP at the same time. You are way better off taking that money for a year or so and focusing every ounce of energy and every dollar you have to becoming debt free. I’m not saying never put money into your retirement savings but for a year or so you’ll have a way bigger return when you pay off your debts.

If you have a $400 car payment and are putting $200 into an RRSP, you’re trying to do too many things at once. If the car is paid off, you’ll then have the whole $600 for your retirement savings and you’ll catch up way quicker and will have done it much smarter.

For someone who will do an RRSP, just make sure you take the tax return and either use it to pay off some debt or stick it right back into a 2009 RRSP. THAT is how you get ahead.

For someone who is going to get an RRSP loan, consider making it a little smaller this year and also instructing your investment advisor to automatically take some money out of your chequing account for this coming year. In that way, at the end of 2009 you’ll be ahead because you’ll already have the money saved!