Boston Gal's Open Wallet

(I'm a CPA) As a cash-basis taxpayer, it's correct to just show it as a reduction in cash; however, if you want a more accurate portrayal for your net worth updates, you can use accrual-basis and simply make a new line item under ASSETS labeled Loan Receivable. So reduce cash by the loan amount and increase Loan Receivable by the loan amount. Then you can decrease the loan amount by the amount on the amortization table based on the terms of the agreement. It's simiilar to the way you account for your mortgage, except now you're the one who's receiving instead of paying back. Since you record your mortgage as a liability (which gets reduced for each month of principal you pay back), you should also record the loan receivable as an asset (which gets reduced for each month of principal you collect).

 

Your net worth probably didn't suffer as much as you think. As long as you think you'll get paid back, you should count the outstanding loan balance as an asset.

It seems like personal finance experts always advise against making family loans, but I don't see the big problem. Yes, if the borrower has to struggle to make the payments, or misses the payments, it could strain the relationship, but what they miss is that being willing to help each other out can bring a family closer.

 

Lending money to relatives can be tricky. I prefer not to make any loans at all--instead treating everything as a gift. That way, I have no expectation of getting anything back. This has two benefits: (a) no disappointment and ill-feelings if I don't get paid back and (b) it leads me to give a lot less than if I "convince" myself that it's really a loan (when it really isn't). It's easy to make a $10,000 loan. But call it an outright gift and it's harder to make a such a large gift.

But who knows. Maybe my approach is wrong. And it depends a lot on who's borrowing the money I guess. Still a very tricky spot when a relative comes asking for money.

 

Another tip: If someone asks you for a loan, direct them to Lending Club. You can always invest in them via your investment portfolio at Lending Club as well (which I've done in the past.) If Lending Club won't accept them -- LC is picky -- I wouldn't loan them money either.

This also lets you NOT have to deal with collections. I've made two loans that never got paid back; both to people I trusted at the time. I won't do it again.

-Erica

 

What an exhilarating feeling you must be experiencing by the thought of being debt-free.

I decided about 3 years ago to take on some "smart debt" aka buying foreclosures and then renting the properties.

Now I know there is no such thing as smart debt. I lost my job a few weeks ago. While it is really nice to have the passive income my properties provide, it is also really stressful knowing I am responsible for the mortgage payments even if my tenants don't pay their rent or vacate the properties.

One of my goals, now that I see the perils of any type of debt, is to become debt-free myself as soon as possible.

 

I'd count the outstanding loan balance as an asset. Unless you really think you won't get it back.

 

Great blog. It's nice to read about someone who has her finances in check, for a change.

I'm on the pay-down-the-mortgage bandwagon myself -- only we're just 3 months into a 30-year mortgage. It's an incredible amount of debt compared to the car loan (we were renters before finally buying a home this summer). But even small principal pre-payments make a difference over the life of the loan. As I noted in one of my blog posts, we're starting with an extra $25/monthly until we build up our emergency fund some more. Even this small amount shaves off a year from the mortgage, so I love to imagine have much shorter the loan period will be if we up that to $50 or even $100/month.

 

I've been toying with the idea of paying off my mortgage. Before the stock market started going up again, I was making more money on my money by paying extra on the mortgage. It was nice to see the monthly interest calculation going down. I'm 7 yrs into a 30 yr but with the extra payments, I've managed to cut it down by 2yr 4 mth. It sure would be nice to not have it hanging over my head when my kids go to college in 10 yrs.

 

its an interesting question. we had been 4 yrs into a 30-yr last spring. we were paying extra to translate into about a 22-yr note.

but with rates down this spring, we got a 15-yr @ 4.25%. our payment is much lower than previously. principal > interest in month no. 1 - all good.

but i still wonder about just paying it off. we have the cash to do it ($155k), and would still have abt. 6 mos. left for emergency afterwards. it would be the end of itemizing our taxes too. (would translate to ~$1100/mo savings)

we also will have our boys (7 and 8) starting college in 10 years. too soon for the mortgage to be paid, so we could be looking at equity lines anyway.

accelerating the 15 yr to 10 yr is too much work, just to tap equity anyway, i think.

i know this site has lots of informed people, so i'd love to hear people's thoughts on this decision.

thanks,
crispy

 

As for paying extra to your mortgage I've actually written a post about the comparison between two people. One trying to pay their mortgage off as quickly as possible and the other trying to save as much as possible.
http://evolutionofwealth.com/2009/10/06/bob-or-jim-the-final-chapter/

@crispy College expenses are a huge thing for you to start thinking about. You are right on. I worry you reach your goal of paying off your house just so colleges can tell you to access that money to pay for your kids in school. I think you need to start planning for this right away. This post might show you why you might not be better off paying off your mortgage as quickly as possible. http://evolutionofwealth.com/2009/09/15/your-mortgage-when-30-beats-15/

 

I hope you that since you will be charging interest on the loan you lent to a family member, that you will pay income taxes on that interest... whether you receive the interest or not.