Wednesday, June 16, 2004
Financial Tip: Beware of What You Read
Wall Street Journal personal finance columnist Jonathan Clements has a column today on providing financial assistance to adult children without killing their ambition or work habits.
Most of what he suggests is great.
1.) If your young adult is having trouble with filling her 401(k), don't reimburse her for the whole thing. Instead, provide an incentive to good behavior by offering to match her dollar for dollar.
Good. I'm down with that.
Also a good idea. Particularly if the low income retirement credit applies (see this post here for more on this underutilized tax credit)
A super idea.
But then he suggests a tactic I strongly disagree with:
In essence, you will have owner-financed your house to your daughter.
Are you f*@&ing kidding me?
Suppose she misses payments. (Daughters have been making mistakes since the dawn of time. Sons, too.)
Suppose she has health problems or an unexpected disability (most young people are grossly underinsured for disability.)
Would you be willing to reposess the house?
Would you be willing to evict your own daughter if you had to?
At the very moment she could afford it least?
C'mon, people.
I don't have a daughter. But if I did, my relationship with her would be too important to risk destruction for a measly mortgage spread when I could just as easily owner finance a house to somebody else.
Owner financing is a great tool--a win-win for both the cash-strapped buyer and the income-oriented seller.
But owner-financing your own children is potentially poisonous.
It makes perfect sense on paper, but we don't live our lives on paper. The plan ignores a major emotional-relationship aspect of money. And while you hedge your credit risk with the title on the house, there is no hedge against the collapse of your relationship.
Splash, out
Jason
(Link requires subscription. But c'mon! Don't be cheapskates. It's the Wall Street Journal! And it's less than 7 bucks a month. It's worth it! Stay home and read it with a cuppa Joe instead of going to Starbucks and you pay for it every three days!
Plus, I'm getting more news from the Journal now, so I'll be linking to it, sometimes, too.)
Most of what he suggests is great.
1.) If your young adult is having trouble with filling her 401(k), don't reimburse her for the whole thing. Instead, provide an incentive to good behavior by offering to match her dollar for dollar.
Good. I'm down with that.
2.) Like the idea of matching contributions? You might also offer to invest $1,500 in her individual retirement account if your daughter comes up with the other $1,500. Similarly, if your daughter has kids, you might promise to invest $1 in a 529 college-savings plan for every $1 she kicks in.
Also a good idea. Particularly if the low income retirement credit applies (see this post here for more on this underutilized tax credit)
You can also leverage your dollars by helping your daughter with the down payment on a car or a house.
In any given year, you and your spouse could each give your daughter as much as $11,000 without worrying about the gift tax. So where's the leverage? While you may help with the down payment, thereafter your daughter would have to make the regular monthly loan payments, thus forcing her to be a little more financially responsible.
A super idea.
But then he suggests a tactic I strongly disagree with:
You could even take this one step further -- and thereby get a payback for yourself. Suppose you are a conservative investor looking for more income. Instead of stashing your cash in a money-market fund that pays less than 1% or a short-term bond fund yielding 3%, you might lend your daughter the entire sum she needs for a home purchase at a 6% interest rate.
In essence, you will have owner-financed your house to your daughter.
Are you f*@&ing kidding me?
Suppose she misses payments. (Daughters have been making mistakes since the dawn of time. Sons, too.)
Suppose she has health problems or an unexpected disability (most young people are grossly underinsured for disability.)
Would you be willing to reposess the house?
Would you be willing to evict your own daughter if you had to?
At the very moment she could afford it least?
C'mon, people.
I don't have a daughter. But if I did, my relationship with her would be too important to risk destruction for a measly mortgage spread when I could just as easily owner finance a house to somebody else.
Owner financing is a great tool--a win-win for both the cash-strapped buyer and the income-oriented seller.
But owner-financing your own children is potentially poisonous.
It makes perfect sense on paper, but we don't live our lives on paper. The plan ignores a major emotional-relationship aspect of money. And while you hedge your credit risk with the title on the house, there is no hedge against the collapse of your relationship.
Splash, out
Jason
(Link requires subscription. But c'mon! Don't be cheapskates. It's the Wall Street Journal! And it's less than 7 bucks a month. It's worth it! Stay home and read it with a cuppa Joe instead of going to Starbucks and you pay for it every three days!
Plus, I'm getting more news from the Journal now, so I'll be linking to it, sometimes, too.)
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