Would You Take A Loan From The Mafia? No? Then Keep Reading!
Let’s pretend for a moment (pretending is fun…still) that you’re in desperate need of $50,000. The fan has been hit with the proverbial pile of dung and you’re down-and-out with no resources to utilize. You attempt the bank, after all, you own a good suit and know the banker. But of course, banks only loan money when you don’t actually need it and not when you do…so you’re stuck.
Now, in this pretend story you know me to be flush with capital. I have access to plenty and we go way back; however, I’m a little sketchy. Your need for money wins and you come to me for help. We sit down, you lay out this long story and finally I simply smile, reach into my coat pocket and pull out a checkbook, draft a check to you for $50,000, I write “LOAN” in the Memo Line and slide the check across to you. I haven’t said a word in response this whole time. A very large man is standing just behind me and to the side and it feels like he just showed up but in reality he’s been there the whole time. It’s obvious that he’s just waiting for my instruction.
You grab the check. Sure enough, $50,000! Problem solved. The word “LOAN”, however, is almost instantaneously eating at you. There are two things running through your mind that you want to know regarding this loan before you walk out of there. (I’m sure you can guess).
- Interest Rate
So you ask me, “Um, Kelly, first thank you. What were you thinking the interest rate and terms would be for this loan?”
I answer, “Here are the terms: there are none, for now. You’re in need and I want to help. I don’t want to burden you with a payment. So as of now, there are no terms…but that can change later.”
You think to yourself, Okay, well that’s not that bad I guess.
I continue, “Here’s how the interest will work: right now I don’t know how much to charge you because I don’t want the money yet. At a future date, whenever I determine how much I want and/or need, I will decide on an interest rate and make it retroactive to today. Don’t worry though, it’ll be years before I do that to you.”
Ask yourself, would you take that loan? Of course you wouldn’t! What I just described is the worst debt imaginable…debt with unknown terms at an unknown interest rate. Nobody would take that loan. Imagine if a mortgage lender tried to pull that type of loan off to people. They would literally be forced to close due to lawsuits; heck, even our government would sue them!
This pretend story actually describes to a “T”, perfectly, the most common investment vehicle used by the majority of Americans today? Any guesses? Come on don’t look down…guess!
What I just described, again to a “T”, is a government qualified plan which includes: 401k, 403b, IRA, SEP IRA, etc. Funny how the government would sue any company who did this to consumers yet they do it every day. Run! Absolutely RUN! Hand back that check and say “No thank you!” Then get your ass out of there! These plans are absolutely NOT the answer for you. Specifically if you’re a business owner…NEVER EVER do a SEP IRA!
Kelly O’Connor — Managing Partner of the Solid Rock Financial Movement — Founder of College Money Academy — Financial Coach — Twitter: Kelly O’Connor — Instagram: @kellydoconnor — Snapchat: @kellyo821