Money Philosophies

In order to achieve success in any endeavor, whether it is mastering an instrument or managing money, certain philosophies or beliefs must be developed and turned into actions. Over the next two weeks, I will be sharing some of the philosophies that I have adopted, and that have served me well. The first two are noted below:

Do Not Loan Money
At first glance, that statement might strike you as miserly. Nothing could be further from the truth. I am not suggesting that you should never help friends and family in the form of Make it a Giftmonetary assistance. I am simply saying that you should consider it a gift vice a loan. A loan implies that the money should be repaid at some point in the future. There are two reasons why I believe this is a practice better avoided.

First, money has a tendency to put a strain on relationships, particularly if the recipient has a difficult time repaying the loan or is late with repayment. They are stressed because of their desire to repay the loan, and the lender is stressed because they had expectations of repayment, and likely, a plan for using the loaned funds for some other purpose.

Second, the practice can be disruptive to your retirement planning. Once you establish your retirement plan and have identified the amount you need to invest on a monthly basis to meet your goals, your first priority should be to pay yourself first.

If a situation arises and you have determined that a family or friend has a sincere need for financial assistance, and providing that assistance will not impact your plan, you should assist with a gift vice a loan. I assure you that if you loan a family member $300 of the $500 you were going to commit to your Roth IRA one particular month and they are not able to repay you, they are going to feel bad, you are going to feel resentment, and you will be $300 – not even counting the compound interest you will not have earned – further from your objective.

Conversely, if you find that you have an additional $150 at your disposal after meeting your monthly financial goals, and you can assist a family member with a gift of half the $300 they may need, they will be very appreciative, you will be glad you could assist, and there is no chance for resentment and strain on the relationship. Once you write that check for $150 it is forgotten forever and you move on and prepare to meet your next month’s goal.

Do Not Raid Retirement Accounts
Once the balances in your retirement accounts start to grow and you get well positioned on your rendezvous with retirement, there will probably be an occasion (e.g. helping a child with college tuition) when you will be tempted to borrow against your nest-egg. Generally speaking, you should not. Like the previous philosophy, I know this sounds a little miserly, particularly if we are talking about assisting a child with college costs. However, there are numerous reasons why you should not tap into your retirement accounts.

Raiding the PiggyConsider the money in your 401(k). First, any money that you withdraw is no longer in its tax-protected status, doing what it does best, leveraging the power of compound interest. Second, over the long-term, you are significantly less likely to make more money by lending funds to yourself, or your child (e.g. for college), than you would have made had you left the money invested in your 401(k) account.

A third consideration, what happens if you borrow money from your 401(k) and then lose or quit your job? Answer, it is likely that you will be required to pay back the entire loan within a short time period. If you cannot pay back the loan within the given time period, you will be subjected to a 10% penalty on the balance of the funds if you are under 59½ years of age. Additionally, you will have to pay income taxes on the money because even though you might consider it a loan, the IRS will consider it an early withdrawal. If you, or a child, require a loan, you are better off seeking a more traditional loan vice dipping into your 401(k).

There you have it SavvyReaders, some of the philosophies that I have adopted over the years that have served me well. And yours? What belief or philosophy has served you well?

Blogger-in-Chief here at RetirementSavvy and author of Sin City Greed, Cream City Hustle and RENDEZVOUS WITH RETIREMENT: A Guide to Getting Fiscally Fit.


  1. Our daughter is a college freshman and we began funding her UGMA and later her 529 account when she was 3. At the start of her first semester, we ensured that she had enough money to see her through her entire first calendar year and at her request, that she would manage her money/spending. Well lo and behold, she’s done pretty well but has come up a little short. My wife and I could come to the rescue but in the long run, this lesson will pay dividends down the road for her. She started her part time job this past weekend!

    • I absolutely believe there is value in struggling a little bit. Parents have to be careful not to give children too much, too easily. It sounds like you have taken a sound approach. Create an environment in which they can succeed, but require them to exert effort to maximize the opportunity.

      Always good to hear from you, Gage.

  2. A Google+ reader offers…

    “Can’t play with the retirement account, I touch nothing and go low risk, slow and steady capital gains every year, now my stock trading account is where I have plenty of risk to go around.”

  3. A Google+ reader chimes in with…

    “When I have loaned money to friends or family, I always do it with the mind set that I will not get it back.”

  4. Couldn’t agree with you more about raiding retirement accounts. People are mortgaging their future for the present, and it usually never works out. I couldn’t imagine being in a position to need or want to do that. All it takes to avoid it is a little planning.

    • Yep. Among the worst things that someone can do, with respect to their retirement plans, is remove money from an account and reduce the power of compound interest.

  5. I 100% agree with considering family loans a gift. On the flip side, as the occasional recipient of a family loan, I consider them even more important to repay than a bank loan – emotional interest is way more damaging that monetary interest. At least, I think so.

    • Great point with respect to being more conscientious about paying back the loan when it is a family member. I have given and received loans with family members and I was keenly focused on repayment because of the emotion factor.

      And as the bard would say, “therein lies the rub.” When it is a family member or close friend, there is the emotional attachment, and if – for whatever reason – the loan cannot be paid on time or repaid at all – emotions can run high and relationships negatively impacted…perhaps forever. At the end of the day, my experience has been things work out a lot better for relationships – after all, the relationship is ultimately more important than the money – when a “loan” is not part of the equation.

      Thanks for stopping by and adding to the conversation, Mel.

  6. A Google+ reader shares the following…

    “A minute spent planning comes back dressed up like an hour of free time later. If you think planning is stressful, try being in a financial bind for a while.”

  7. You don’t do your children any favors by helping them through college at the expense of your retirement. They are far better off with a few student loans than financially dependent parents.

    • Absolutely agreed, Paul. While the inclination – natural I suppose – is to help children as much as possible, even if it means dipping into retirement savings, it is generally a terrible decision. With respect to saving for retirement, time and compound interest are a saver’s best friends. Taking money away from retirement plans later in life means less time to let compound interest work in your favor. As you note, the reality is that families are better off having the children take out loans and leave the money in retirement accounts alone…and continue to let compound interest do its thing!

  8. A Google+ reader kicks off the conversation with…

    “Great advice! I think the money gift thing can work well with family and friends, you help them financially when they need it and don’t expect them to pay it back. But of course, you only give what you can afford.”

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