Monthly Archives: March 2019

When Should Your Parents Stop Being Involved in Your Financial Affairs?

Our parents raised us and shaped who we are today, and there is probably nothing that we can do in comparison to what our parents did for us, except for perhaps raise our own children well. But, when should our parents stop taking charge of our finances, career and/or business?

It is a good for us to always seek counsel from our parents, especially on matters that they may have more experience with or needed expertise. Even when we are in our fifties it is wise to communicate financial issues with a knowledgeable parent. However, make sure to separate having trust in someone versus their ability to competently advise you.

Once you are in the workforce and are an adult, then you need to deal with your employer directly. Several examples have been shared with me regarding parents contacting their adult child’s previous employer over payroll issues. Even worse is that in those situations the adult child was a professional that advises others! Again, feel free to seek the advice of your parents, but do not have them act as your “proxy.” I can just picture this now, “This is Mr. Smith, and I am calling to let you know that Timmy will not be at work today because he is under the weather. Please cancel his meetings with the executive vice-presidents of Fortune 500 Co.”

Sometimes you may own and operate a business and employ one of your parents, which does happen occasionally. Your parent may be able to give you insight that you are not seeing regarding employees, customers, or finances. However, unless you hired your parent as a strategic advisor because they have developed successful companies in the past, or the CEO, which small business owners actually are, then your parent should not be actively deciding the direction of the company or connections with key people.

Anecdotally, it seems that adults who enforce boundaries with their parents make better financial decisions, are more successful, and have more confidence.  I’ll let the psychologists further elaborate on this topic.

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A Silly Trap When Trying to Pay Off Debt

I have had numerous clients tell me that they are paying off their debts early, whether it is a student loan, car loan or mortgage, which is very admirable. However, they really aren’t paying off their loans early. How can this be and why?

The reason is simple. They are not actually paying off their debts, but prepaying their regular monthly payments. The assumption is that if you make extra payments then those extra payments will go directly towards principal, which in essence will reduce your loan balance. It sounds logical, but usually the loan company will apply these payments towards future bills, so in reality no extra principal is being paid. They are just considered prepayments.

One way of determining if your extra payments are being applied properly is to look at your current monthly statement to see if your payment amount is either -0- or shows a lower amount than normal. If this is the case, then your extra payments are not being applied towards principal.

The proper way and easiest way to ensure that your extra principal payments are being applied correctly is to specify that your extra payment should be applied towards principal. It is best to do this online and then check your activity once the payment settles to confirm this.

It’s not right, but when it comes to finances you must be extra careful and do not make any assumptions!

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Is Debt Good or Bad?

What are we to believe? Is debt good or bad? On one extreme are some financial pundits that say to go into debt and use other people’s money to make money, and on the other extreme are experts that believe that any form of debt is bad. Who should we listen to?

Ignoring the rare exceptions, most successful people have incurred some form of debt either personally or through their business, and if they did not incur this debt then they would most likely not be in the position that they are in currently, even if they have now paid off all of their debts. Let’s look at some pros and cons.

Pros of debts: Without incurring debts, virtually no one in this expensive area would be able to purchase a house. If you were debt averse and had to save up for your house to pay cash, then you may never get there. If a $500,000 house appreciates by 3% per year on average (let’s ignore significant ups and downs to keep the point simple), then just one year later you would need to save an additional $15,000 to purchase your home. You may never get there.

If you want to expand your business or start a new one and need capital to build out your office or purchase equipment, then a loan is most likely needed. Even the best savers have a hard time saving up the significant sum that is needed to do so. The same applies to investment properties.

Unfortunately, you most likely need to incur some debt to finance college or purchase a vehicle.

Cons of debt: Debt is not without risk and I am a big proponent of proceeding cautiously and wisely when incurring debt. Here are several pitfalls of debt:

Over leveraged: If you incur too much debt than you may not able to meet your payment obligations. This is especially true if and when there is a slow down in the economy and/or your business. Think of debt payments as taking from your future income, but you really never know what your future income will be. If you find yourself with tons of debt then you need to closely examine your spending and look for ways to increase your income.

Increases risk: Debt amplifies the risk of any financial endeavor due to a decrease in cash flow from making debt payments and the financial obligation of the debt. Most debt is personally guaranteed, even if it is for business. Trust me when I say that a bank owns you when you take out an SBA loan. They may even put a lien on your children, but that may just be a rumor.

Makes you spend more (much more): Surprisingly, this isn’t mentioned too often as most people only consider the monthly payments, interest rate, and length of a loan. However, debt makes you less cautious when spending and investing money, even if it is for something productive, such as  purchasing equipment for your business or buying rental properties. The end result is that you wind up spending more than you anticipated. Why do you think so many companies offer enticing payment plans for just about everything? If you have the resources to pay cash, then it probably makes sense to do so.

Increases costs: Even loans with low interest rates increase your costs due to both interest and fees, which can be very significant.

As you progress on your financial journey, then a noble goal is to become debt free. Ideally, you should try to avoid debt when possible, but it may provide you with a much needed boost to get you started. Just do not over do it.

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