Beware of borrowing cash without written agreement
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QUESTION: I am in a desperate situation. I borrowed $14,000 from a friend and returned $50,000 in cash in the next couple of months. He had given me the money through my bank account. Now he denies having received it and demands compound interest. How can I settle this? There was no agreement between us on interest payment! Martin
ANSWER: I’ve had two editors re-read your original question in utter disbelief. They were each left satisfied (after reviewing your contact details) and terrified for your situation. Your question reads like a script from Breaking Bad: either you’re in the business of selling limited-edition Game of Thrones memorabilia, or you’re a drug dealer. How else can you borrow $14,000 from a “friend” and return $50,000 in cash a few months later? Now, whether you’re liable for further interest payments depends on the interpretation of the contract you entered into. I would argue that paying him an extra $36,000 for a loan for “a few months” is the definition of (ultra short-term) compound interest — or, more likely, extortion. But if he’s really serious about pursuing you for more money, he’ll do one of two things: seek legal action against you or break your legs. You should have bank records of withdrawing the funds to make the cash payments. (Your bank will report any cash transactions of about $10,000 to the Australian Transaction Reports and Analysis Centre. Why? So they can keep tabs on crooks who launder money … and prosecute them.) Ultimately, this really isn’t a finance question — though it is interesting, which is why I have included it for my readers. Really, it’s more of a physical safety question: if you don’t cough up more money, will you wake up with a horse’s head in your bed? Tread your own path, carefully.
OWNING YOUR HOME DEBT-FREE IS THE GOAL
Q: I want my husband, a fly-in, fly-out geologist, home at night. While FIFO worked for us previously, with a two-year-old and plans for another baby, we are now considering jobs where he no longer works in this way. We are exploring where we live and may not return to Perth. Should we rent our home, or should we sell it and put the money into Mojo and shares until we decide where to settle? We owe $150,000 on our home, with a value of about $1 million, and have no other debts. Tanya
A: With $850,000 in equity in your principal place of residence, and no other debts, and still being relatively young, you’re in a great situation. I believe every family should aim to (eventually) own their own home outright. But I wouldn’t do anything until you’ve made a firm decision on where you’re going to live for the next 10 years. If that ends up being somewhere other than Perth, you should sell your home (capital gains tax free) and buy a new home — then focus on paying it off as quickly as possible. Owning your own home debt-free is the one financial decision you’ll never regret.
MURRAY GOULBURN NOT A TOP PICK
Q: I was wondering whether you had any thoughts on the Murray Goulburn IPO. I’ve been thinking about investing, but I’d like to get your opinion. Keep up the good work! Peter
A: This is the first time investors will be able to buy into Murray Goulburn, Australia’s largest milk supplier. It’s a decent business, with the upside of low-cost production, new promising products, and the ability to sell its UHT Devondale milk into China (though right now their current biggest customers are the supermarkets, and they’re notoriously tighter than a buyer on Gumtree). For its entire 65-year history, Murray Goulburn has been a co-operative that’s been 100 per cent owned by dairy farmers. That won’t change: the units being offered (in the ‘MG Unit Trust’) are non-voting shares. And for me that’s the biggest problem: it’s an overly complicated structure designed to look after the milk suppliers (the dairy farmers) first, and investors second. The bottom line is that I won’t be buying shares at these prices.
ALL THAT GLISTERS NOT WORTH INVESTMENT
Q: My wife and I paid about $30k for gold and silver bullion when I was nervous about financial armageddon. It’s now worth about $25k (I bought a lot when prices were high) and, while it will go up eventually, I wonder if I should sell and invest elsewhere. I guess it’s a no-brainer in a way as it’s either losing money or doing nothing, but I hate to take the loss. What do you suggest? Trevor
A: It’s impossible to value the price of gold or silver, because neither generates any cash flow. So any prediction I give you about the price of either is as reliable as my son Lewis’s potty training aim (in potty-parlance, I’m referring to his ones not twos). But just like Lewis, I’m always willing to give it a go (and risk peeing it up against the wall). With Greece looking like it will “Grexit” out of the euro, we could be about to enter into another bout of economic uncertainty. When things like this happen, traders, speculators and tin-hat-wearing newsletter readers buy bullion, pushing up its price. (They also tend to dump it rather spectacularly, too, when things turn out OK). So you may see a bounce in prices in the near future, though that’s a guess. Collingwood could also win the flag this year, but I wouldn’t bet my life savings on it. Bottom line: It’s time you got up off the potty and began investing like a grown-up: Buy some good-quality dividend-paying shares. It won’t be as glittery as gold, but it’s the safest and surest way to compound your wealth. As Albert Einstein famously said, compound interest is “the eighth wonder of the world”.
Originally published as Beware of borrowing cash without written agreement
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