Jewish World Review May 12, 2000 /7 Iyar, 5760
Borrow from Mom and Dad?
DEAR BRUCE: I am 25 and very ambitious, but I don't have a great deal of money. I have the chance to purchase a prosperous business with a lot of potential. The owners feel burned out, and they are willing to carry about 75 percent of the cost, including inventory, with a balloon note at the end of 10 years.
I have approached several lenders in my area, but they say they simply cannot approve a loan for the down payment. My parents are quite well-to-do and could easily afford to loan me the money or co-sign for me. I am sure they would be willing to do so, but I am very reluctant to admit that I need help from them.
I'd like to do this myself. Can you tell me what you would do? -- R.S., Irvine, Calif.
DEAR R.S.: There was a time when I might have said you have to learn to stand on your own hind legs, but times have changed and so must our attitude toward these things.
Lenders are difficult to deal with without collateral -- and understandably so, since they have a responsibility to their stockholders and depositors.
I see no problem with using your parents' credit line or their money -- as long as you keep in mind that this is a debt of honor that must be retired. In fact, it may be less expensive for them to use their own resources if they are in a position to do so; or they may put their signature on a note guaranteeing you.
DEAR BRUCE: You have spoken on many occasions of the prudence of a young person maxing out his 401(k) or other retirement vehicle. I'm 28 years old and I have taken your advice thus far, but the 401(k) my company offers has not performed nearly as well as the market over the last couple of years.
I now have the right to put more money into the 401(k) on a nonmatching basis, but I wonder if there is something better that I might be doing -- maybe going directly into mutual funds? -- C.C., Lexington, Ky.
DEAR C.C.: It seems to me that there is another option that you haven't explored, and that is to take the dollars you might have put into the 401(k) on a nonmatching basis, pay the taxes, and then put the money into a Roth IRA, where you can pick the investment vehicles through a third party. The advantage of the Roth is clear: While you do give up some in the way of taxes today, all of the money earned inside the Roth is totally tax-free, with the additional bonus of your being able to call the shots.
DEAR BRUCE: My daughter and her fiance are currently considering buying a home. They are living together but probably will not be married for at least another year. I am happy to see my daughter thinking about home ownership and all the responsibilities that go with it. However, I have a nagging feeling that I am not doing the best thing by encouraging this. I would be grateful if you could tell me whether I'm on the right track. My husband says I should butt out. -- D.H., Los Angeles
DEAR D.H.: If your daughter and her fiance have not asked for your opinion, your husband's advice is probably on point. If they have asked, however, I would feel obliged to say that I don't see how it is wise for an unmarried couple to buy property together. An engagement can be dissolved in a heartbeat, but the financial responsibility does not go away. There are no divorce courts to set parameters on who is responsible for what in the case of a dissolved engagement. If one of the partners decides to disappear, it can take a considerable period to unravel the relationship -- during which time one partner or the other may be stuck with all the payments to protect the investment they have made.
In short, if they are old enough and mature enough to buy a house together, they are old enough to enter into a legal contract of
Send your questions to JWR contributor Bruce Williams by clicking here. (Questions of general interest will be answered in future columns. Owing to the volume of mail, personal replies cannot be provided.) Interested in buying or selling a house? Let Bruce Williams' "House Smart" be your guide. (Sales of the book help fund JWR).
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