Q: My husband says that if we have to borrow money in order to buy something, then we can’t afford it. Is that really true? – Trish (via Facebook)
A: Trish, I’ve heard people offer that same philosophy and I think it’s important to understand what it really means. It’s probably not that he’s averse to getting a bank loan or using a credit card (which, lest we forget, is indeed a loan). The issue is that he doesn’t want to incur debts that you don’t have the assets to cover. For instance, I might use my credit card when I go buy a month of feed corn for my livestock, but I know that I have the assets in my bank account to pay that bill when it comes due. After all, I don’t want to pay the interest and fees associated with carrying a balance for months or years on end.
So my hunch is that the issue isn’t so much borrowing money. It’s borrowing money that you can’t afford to pay back. And I do have to support the spirit of that argument, even though many of us are offenders. After all, few people pay cash for their primary residence, and yet for nearly all of us - regardless of income level or net worth - our home is our single largest asset.
It sounds to me like the two of you need to sit down and make a list of financial priorities (in other words, a budget) to decide what it is that you want to start saving money for rather than buy things on credit and live in fear of the day that the bill arrives. That budget is going to give you a great idea of how often you can afford to eat out at restaurants, or how much money you need to save each month to do the bathroom remodel.
Q: My parents will likely be passing down a fairly substantial portfolio of liquid assets and farm ground split evenly between my brother and I. He probably needs the cash more than I do, and I REALLY want the land. Does it make financial sense to buy his half of the land from him even if it means giving him my entire half of the cash? – Alisha (via email)
A: Alisha, if you’re looking for a purely financial answer, there are too many variables here for me to render a good opinion. For instance, where is the land? How many acres are involved? What are the terms of any cash-rent agreements in place? What are the crop prices? What are your costs of ownership on the land? What is your time horizon for recouping the cash you gave up to get ownership? Do you plan to sell it anytime soon? For some of these questions, you may want to talk to your parents now and find out what the financial implications have been for them over the years they have owned it.
Kansas farm ground sells for about $2,000/acre these days with cash rents of $40/acre state-wide. So you’re talking about giving your brother $2,000 up-front, and getting $40 in exchange. Doesn’t sound all that great on the face of it. But you’re getting that $40 multiplied by the number of acres in the deal, multiplied by the number of years you own it. And you still have the inherent value of the land to fall back on, which – it sounds to me – is really what you’re going for anyway.
Ask yourself this. Would you buy a house for $200,000 if you could only rent it out for $335/month? If you would, buy the land from him. If you wouldn’t, then you need to decide if your sentimental attachment to the ground is worth it.
Lastly, if you decide to do the deal, I would make sure that my financial affairs were in-order without any regard for whatever you might get from your parents. In fact, you might consider forming a separate legal entity such as a Limited Liability Company (LLC), to deal with the land. This allows you to keep your regular income and household bills in one box. And the inherent revenue, tax, and legal complications of farming can be kept in another.
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— Eric Litwiller has spent the last eight years of his professional career helping people achieve their financial goals through the use of budgets, retirement vehicles, and estate planning options. He is a firm believer in the importance of using Earthly riches to fulfill a mission of Christian stewardship. Eric is not a licensed financial planner.