(This blog is part two of a 12-part series on emerging opportunities for local investment that are especially important in the post-COVID era. It’s drawn from my new book, Put Your Money Where Your Life Is.)
Last week I talked about how investing in yourself by paying off your credit cards was the single best local investment opportunity. It’s risk free, generates a 15-20% annual return, and ultimately saves you from Debtors’ Hell. This week I want to suggest that you do the same for the people you care about. Invest in your kids and friends by cutting up their credit cards as well. What’s good for the goose is good for the gander and all the other people who flock around you.
If your daughter has racked up an unsustainable credit card debt of $20,000, make her a deal: I’ll buy out your credit card, pay it off, and you can pay me the $20,000 at an interest rate of 5% per year. You get a great new income source, and your daughter gets a new lease on life. (You might promise to post the most embarrassing childhood pictures on her social media accounts if she ever opens another credit card again or falls short on a payment!)
You’ll recall that I shared last week the awful tale of my own foolish financial choices after divorcing that got me $80,000 in debt with the IRS. I had to pay my way out mostly on credit cards, but I hinted that the story had a happy ending. The way I got myself out of credit card debt was to convince a half-dozen dear friends to lend me money so I could pay the cards off. I agreed to pay them back over 5 years at 5% (though one friend refused to accept interest payments). This offered them a rate of return much better than bank CDs and commensurate with Wall Street, while enabling me to get back on my feet financially.
The first person I approached with this idea was Cathy Berry of Vermont, who had been an important supporter of various local economy initiatives. Before the ask, I was frankly terrified. I feared that sharing my financial challenges might poison my relationship with her, and that she would lecture me with some version of Ben Franklin’s admonition: “Lend money…to a friend and thou will lose him.” She agreed to my request to set up a telephone call. We spoke for almost two hours. I was stunned to discover that she actually had been thinking about investment opportunities like this herself. She thanked me for stepping forward, sharing my story, making myself vulnerable, and allowing us together—not just her—to prove how this type of investment could succeed. Reflecting on our relationships (the payback is now complete), she recently wrote: “We need to inspire others to help someone because they are doing the right thing. If we support the common good, we improve everyone’s life.”
Why stop at credit cards? If your daughter has a student loan for 5% or more, pay it off immediately and have her pay the amount back to you at 5%. An estimated 44 million young Americans, including two-thirds of all recent college graduates, have $1.5 trillion of student debt. More than 12 million have debt between $10,000 and $25,000, 2.5 million have debt over $100,000, and 610,000 have debt over $200,000. They are typically paying interest rates between 4.5% and 7%, though millions are in default and paying more. This is a huge opportunity to make money and keep thousands of your kids’ dollars out of Wall Street.
The post-COVID world is guaranteed to worsen the debt picture for tens of millions of Americans. It will also open up other opportunities. Depressed real estate values, for example, might mean it’s time to help your kids buy a house. Why invest in the Wall Street roller coaster when you can lend your son the money for a downpayment at 5%? It behooves us to engage in serious conversations with the people around us about ways we can enter mutually beneficial deals.
Four final caveats about this strategy.
First, you can’t use your Self-Directed IRA or Solo 401k to invest in your kids or their houses (more on this in a future blog). But you can take a personal loan from your account, and then enter a deal with your kids on anything. Just be mindful to pay your account back within five years.
Second, even with your kids, write up a simple agreement. There are many web sites, like ZimpleMoney, that can help you manage the agreement.
Third, whoever provides the loan will have to pay taxes on the interest income. It probably won’t be much, but it’s something.
Finally, you need to be careful with people you don’t know very well (and sometimes with people you know all too well!). The person you lend money to can default, and your legal recourses will depend on your agreement. If someone has high credit card debt, that may be a sign he’s already in financial trouble—so you’ll want to learn more about why he thinks he will have the funds in the near future to pay off the loan to you before engaging in a transaction like this. That’s what I had to do with my lenders.
Creative local investment choices invite family members, friends, and neighbors to have more honest (if difficult) conversations with one another about their financial needs. You may be surprised by how many people who you assumed were in great financial shape would welcome your help.
If you have a story of investing in people you love, please share it on www.michaelhshuman.com.