Dear Dave: My parents are going through a divorce, and money issues are a big part of the problem. My dad bought several rental properties and poured money into them. Then he lost them to foreclosure and isn’t making a lot in his new, commission-based job. How can I, as a 25-year-old kid, tell him that his career choices aren’t working?
Dear Ryan: I’m sorry to hear about your mom and dad.
You’ve probably heard lots of old sayings about how winners never quit. Well, in many cases those are false statements. Winners and successful people quit all the time; they quit doing things that aren’t working. This doesn’t have to mean that you quit on a dream, but it could mean you change the methodology you’re using.
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Part of being a successful entrepreneur is having the ability to recognize when something isn’t working and change it. You sound like a smart, caring young man, but there’s little chance that a 20-something with very little life experience will be able to convince his father of these things. I mean, he’s probably in his fifties, right? Plus, he’s going through a divorce, and it sounds like he’s broke and emotionally worn out.
You’ve got a great heart, and I’m glad you care enough about your dad to try and help him. But in this scenario, I think he needs to talk to someone like a pastor, or even an older relative or good friend closer to his own age — a guy with a little more life experience. Maybe you could talk to someone like this and explain what your dad is going through. Ask them to talk to him, and see if he’ll open up to some new ideas.
Meantime, just be there for him and show support.
Dear Dave: Let’s say you have $1 million in the bank. Why would you take out $300,000 to buy a house, instead of just making a 20 percent down payment and keeping the rest of the money in mutual funds? If need be, I could still pay off the house.
Dear Alex: Interesting question. OK, I’m game.
The spread that you’d make between even a high-interest rate mortgage — let’s say 6 percent — and mutual funds, at 11 percent or so, is about 5 percent. And that’s assuming nothing goes wrong, and you can get your mutual fund out if needed.
What you’re talking about is theory, and what I’m talking about is actual life. In your theory you’ve left out two major issues: paying taxes on the mutual fund, which would make your yield less, and risk. You’ve compared a zero-risk investment with a risk investment, and you shouldn’t do that. You must factor in risk so you can accurately compare one investment to another.
Every time you pay off a mortgage, the bank no longer charges you interest. That’s zero risk compared to a mutual fund, which does have risk. Remember, if your house was paid for you wouldn’t borrow $300,000 against it to invest in mutual funds!