THOSE WHO ABUSE THEIR
WEALTH DON’T TEND TO STAY
WEALTHY FOR LONG
I personally think the best use of wealth is to teach children how to earn it, invest it, save it and spend it wisely. As we all get more and more affluent, there is a real need to introduce some element of monetary discussion into the curriculum. Children need to learn about tax, insurance and spending and all the stuff we never got taught and have had to learn the hard way as we went along. Mind you, I would also make sure every child could read and write before they left school and could drive a car.
RULE 97
Never lend money to friends or family unless you are prepared to write it off
Can you share your wealth with family and friends? Yes, but if you want to retain your sanity I would strongly suggest you don’t lend anyone any money unless, mentally, you are prepared to write it off. That way when they don’t repay you – and I bet they won’t – you’ll feel just fine about it. If you expect them to repay you and they don’t, imagine how hurt and let down you are going to feel.
I know. I have sons. But my money is for them as much as it is for me, so we play this game of them asking for a loan and me giving it to them. Sometimes they pay it back and I am pleasantly surprised but sometimes they don’t and I write it off and that’s fine too. (I really hope they don’t read this or I’ll be cornered like a rat in my own home.)
I value them and their relationship with me and I wouldn’t want to fall out with them over something as squalid as money when there are so many better things to fall out with them over anyway.
If you do lend money to friends and don’t get it back, you lose more than just the money – you lose the friendship as well. They feel embarrassed because they aren’t repaying you and thus don’t come round to see you. You feel grieved and don’t invite them because of it. Result: end of friendship.
Write it off though and you’ll still be happy to see them and they’ll quickly forget the embarrassment and regard you as one of a kind.
Of course you don’t have to do either. You can just say no (see Rule 100). Or you could just give them money (see Rule 101).
I’ve been reading an advice blog on the web about a young man who lent his room-mate at college $350 – not a huge amount – but the repayment never materialized. He had asked various friends first if they had ever lent his room-mate money and they said he had paid them back. Now he has of course fallen out big time with his room-mate – despite offering him the option of repayment terms at $50 a month. Worse still, he has fallen out with all his other friends because they ‘approved’ the loan in his eyes.
The advice was to take the friend to court but I figure he won’t see the money anyway and will cop a lot of legal expense into the bargain. Better to chalk it up to experience and walk away whistling. I know, for him, it is a lot of money but any decent education doesn’t come cheap. The discussion did go on into his rights to ‘seize’ his room-mate’s possessions etc. I still say walk away whistling and don’t ever do it again.
CHALK IT UP TO EXPERIENCE
AND WALK AWAY WHISTLING
RULE 98
Don’t lend, take equities
If you are asked for a loan by somebody for a specific project such as starting a company or expanding one, there are a variety of answers including:
no
yes
yes but
yes on the condition that
yes with equity
yes with a convertible loan.
Obviously ‘no’ can cause offence (see Rule 100). ‘Yes’ is a no-no, if you see what I mean. Lending money to friends and family isn’t on unless you are prepared to write it off (see Rule 97) and generally people who want big loans aren’t that close or they’d know you better.
This leaves us with the last three – conditions, equity or convertible. There may be others of course.
Conditions. A mug’s game if you ask me. On the condition you repay me when you’ve made your fortune. Hmm. On the condition you don’t do anything silly with this. Hmm. On the condition you only use this for the good of mankind. Hmm. Conditions is such a tricky one but there are many who’ll ask for conditions – ‘If you would just be so good as to lend me this I promise to... blah blah’. Yeah, right.
Equity. Better. You don’t lend, you offer to buy a share in whatever project it is. If it is successful you recoup with interest. If it fails, you shouldn’t have been lending – or buying into it – in the first place. More fool you. The trouble with equity is that it’s often black and white, hit or miss. You get your money back if the project is successful – and perhaps that should be when the project is successful.
Convertible. Much better. You lend as a proper loan with repayment details all worked out legally so it is a binding loan. But if the project is successful – it should be or you shouldn’t be lending in the first place – you convert the loan into equity. This way you get your money back plus a big share of the profits. It sort of makes lending seem worthwhile.
If approached for a loan, asking for a convertible loan will sort the wheat from the chaff, the serious from the not so serious. It makes the serious stand up and be counted. If the project then fails you get your money back – in theory at least. Obviously if the project fails there may not be any money but you will have secured it against their property of course (I know I said never to do that, but that was advice for you as a borrower; as a lender always make sure you do). I even do this with my children if tempted to lend them any money for big items like cars and houses. Yes, you can have the money but I want to own a share, so you can’t sell it if you get bored or restless or whatever without my permission. Amazing how often they back off when they know I’ll be their partner. And I also then know that they did buy the item rather than something they’d rather not tell me about.
ASKING FOR A CONVERTIBLE
LOAN WILL SORT THE WHEAT
FROM THE CHAFF
RULE 99
You really, really can’t take it with you
I know there’s a saying – whoever has the most toys at the end wins. But you really can’t take it with you and you can’t buy anything with it when you go – no tickets into heaven, no indulgences, no get-out-of-hell-free cards. When you go, you go alone and with nothing, just as you came in. So all that effort, in a way, is wasted. Unless of course you did something useful with it when you had it and had the ability to do it. Left drooling in some old folks’ home isn’t the time or place to start being philanthropic, is it?
Not getting rid of it is known as wealth bondage – being tied so tightly to your money that you really do try to take it with you – and that really is kinky. Sure you can leave it to your kids but you should have given most of it away long before you pop your clogs or you’ll be leaving a massive tax liability for someone down the line.
NOT GETTING RID OF
IT IS KNOWN AS
WEALTH BONDAGE
Whatever you decide to do, do take the proper advice – nothing grates so much as a poorly thought-out will and lots of tax after you’ve gone.
You can of course insure against tax liabilities after you’ve gone. You have to calculate what you think your tax liability is likely to be and then set up a whole-of-life insurance policy to cover it. But the policy has to be written into a trust to ensure the proceeds from the policy aren’t included with your estate – but for heaven’s sake be careful of placing anything in trust because if you use the wrong one you can make things even worse.
Gosh, I’m not a financial adviser (except on a behavioural level – you need somebody else for the nitty-gritty-which-investment-is-best-for-me detail) but it seems to make sense to have all this tied up before you go. And of course you can leave the lot to your spouse and then they don’t have to pay death duties* but by golly their tax bill is going to be high when they go, so you are only delaying rather than off-setting – although the effect of this is reduced in the UK by the ability to claim a de
ceased spouse’s unused nil rate bond. Alternatively, you can establish a trust to ensure that both husband and wife’s nil rate bands are fully utilized – but again be very careful using a trust.
I was reading about the Dalai Lama’s wealth the other day. He gets paid the equivalent of around 38p a day expenses, owns two robes – one on and one in the wash – and his only indulgence is a new watchstrap every now and again (I did wonder if he bought leather ones). And yet he is the head of an entire country – albeit one in exile. Now that is cool in my book.
* Spouse’s exemption – it must be your spouse or civil partner and if they are domiciled outside the UK the exemption is restricted to £325,000.
RULE 100
Know when/how to say no – and yes
Now you’ve made some money there will be those who see you as:
a target – easy pickings
owing them something – after all, they have known you for years...
worth taking a chance on – you never know
a genuine source of low-interest loan or free gifts – and so much easier than preparing a proper business plan and going to the bank.
I’m not saying you will always get the outstretched hand. In fact some requests will be cloaked in the most attractive brochures of potential investments. So how do you know when to say yes and when to say no? And how to say either?
Saying no to friends and family is easy, in a sense. Right from day one you make it a policy – and a very easily identifiable one – not to lend to friends and family (see Rule 97). You never do, so they learn not to ask.
Saying no to business acquaintances is also easy. Just ask them to refer everything to your accountant or business adviser. Say you never make a decision without their input and you can’t proceed until they have studied everything in close detail. That puts off the ones who are just arm-round-the-shoulder trying it on. The others might be worth considering if they have genuine plans. In which case it might be worth having a look.
Now, when to say yes or no. Say no if:
your gut instinct says to say no
they haven’t done any work on their presentation – if they are lazy at ground zero it strikes me they’ll be lazy right through
you have no connection with them – always say no to strangers basically.
To say yes is fine. To say no is fine. It’s your money and you can do with it what you want. You have to:
Let go of any guilt – this is business.
Make sure you understand exactly what is being asked for – that’s why calling in advisers is always a good idea.
Keep a closed-door policy to stop yourself being overwhelmed by requests – make it hard for them to get to you.
Avoid saying yes because you think it will make people happy – they are emotionally blackmailing you and thus get themselves crossed off the list automatically and without guilt.
Always be very clear when you are saying no. No ‘maybes’ or ‘we’ll see’ or ‘I’ll have to sleep on that one’. Say no and put everyone out of their misery – including you.
Don’t allow yourself to be badgered. Be assertive.
Stop them in their tracks – a simple ‘I’d rather you didn’t ask me’ before they’ve even got started.
IT’S YOUR MONEY AND
YOU CAN DO WITH IT
WHAT YOU WANT
RULE 101
Find ways to give people money without them feeling they are in your debt
I love this one. It is such a challenge to give money to people who:
haven’t asked for it
need it
deserve it
will use it wisely/well.
And the challenge is to get them to accept it without feeling indebted to you, beholden, grudging, guilty, whatever. This is one of those rules we all ought to practise no matter how much money we have. I reckon you get to start as soon as you become a parent and give your kids big money for cars and things. They are always saying ‘I’ll pay you back’, and you know they won’t. But if you can give them money without all that stuff being attached to it, you are doing well.
There are a variety of approaches to help you give your money away without them feeling guilty or you embarrassed:
You might win the lottery one day. This is a good one as it implies that there, but for a bit of luck, you go. All they’ve got to do is be as lucky as you and they’ll pay you back.
Fortunes change and they go down as well as up. Basically what you are saying is that you are flush at the moment but that might not always be the case and when your fortunes go down, they can help you out.
I like my friends to be happy. How can I be happy when I see my friends in misery/trouble/debt/whatever? If you aren’t happy then I can’t be, so I’ll help myself to become happy by helping you to become happy. How can anyone refuse?
Why shouldn’t I help my friends? This is a subset of the one above but still valuable and useful. Look, it’s what friends are for. You’ve helped me out in the past/are helping me by.../have always offered help anyway so why can’t I do the same for you?
Help me out here, I’ve got a tax problem. Look, if I can offload some of this cash I can alleviate my tax burden, so can you help me by taking some? I would be ever so grateful.
The taxman will only get it after I’m dead. So can I give it to you now and see the pleasure it’ll bring you rather than you be grieving and moping after I’ve gone?
Let me help with a housing upgrade by taking equity in the new house. They pay nothing until they snuff it, at which point your investment will probably show better appreciation than the interest rate it would have earned on deposit. And if it doesn’t, so what? Profit was never the point anyway, but they can feel happy about it.
I’m sure if you put your mind to it there will be many more you can come up with. Hey, this one is fun. You get to help others, give loads away, share your wealth and be creative all at the same time.
IF YOU CAN GIVE THEM
MONEY WITHOUT ALL THAT
STUFF BEING ATTACHED TO
IT, YOU ARE DOING WELL
RULE 102
Don’t over-protect your children from the valuable experience of poverty
Look, if you’re about to ask your parents for a really big loan (gift?) then you’d better buy up every copy of this book you can and burn the lot of them because you’re not going to like what I have to say next.
Parents, if you are reading this then don’t give them that loan (gift). It is OK not to mollycoddle them, to make them learn the value of money, to make them treat money with respect right from the word go. And just because you have lots doesn’t mean they are entitled to stand there with their hand out right from the day they get out of nappies.
I’m the world’s worst at this one but I am learning. There are various ways you can go from being utterly mean and not giving them a bean to being overly generous and giving them everything. Now, I was going to talk about setting budgets for children and setting up trust funds for them.
A monthly allowance is always a good idea as they then have to live within their means. It teaches them to budget and to scrimp and save at the end of the month – or halfway through it in most cases. When they first go off to uni is probably the best time to do this as they are also learning a whole new batch of things about being grown up – sex, drugs, staying out late, wrong sort of friends, binge drinking. Learning to balance their own books at the same time is good for them.
You can set aside lump sums for them as well so they can buy a house, business, decent car. If you administer it, then they can’t blow it on a plasma TV or a £600 designer handbag but only a sensible thing that they have to explain to you in some detail. And of course a trust fund for when you have shuffled off. Or of course let them have such a fund when they are of an age sensible enough to enjoy it without it diverting them from their education. Personally, I would give it to them after it would make any real difference to them; in effect after they have started to
earn their own money in worthwhile amounts.
And for goodness’ sake don’t ever tell them they are getting a lump sum aged 25 or whatever you decide. Nothing demotivates a child more than thinking they’re coming into money. They’ll think they don’t have to make any effort. Let them think they’ll always be poor and watch them go.
And how do you set a good allowance figure? Only you can work it out for your child and it obviously varies depending on age but once they reach their teens it’s as well to thrash it out with them – a process sometimes of painful discussion (who said rows?). But make them argue every penny and justify it. It’ll make them value it when they get to spend it.
A MONTHLY ALLOWANCE
IS ALWAYS A GOOD IDEA
RULE 103
Know how to choose charities/good causes
Once you have some money you get inundated with requests to give to charities. I’m not talking about the emotional blackmail ones we all get through the letterbox – these three pennies could pay for food for an entire family forever and a rainforest and sight for all the blind people in the world and all you have to do is send them back with whatever you can afford. Oh the guilt when you spend those three pennies – not!
I’m talking about big charitable donations, supporting a particular cause, sponsoring a particular person. I’ve always had my doubts – and this is entirely subjective, entirely personal – about supporting a penguin or endangered fish or threatened albatross. How do you know which is yours? In the zoo you can at least go and have a look at your own saved pet but in the wild it is so much more difficult.
The Rules of Wealth Page 15