Stocks were down again last week, as investors digested the latest inflation reports. The Producer Price Index was up slightly, mostly due to the cost of services. At the same time, core inflation, as measured by the Consumer Price Index, came in at 4.7%. This has led some to believe the Federal Reserve will hold rates at their September meeting. While the Fed has repeatedly said they will base their decision on the data at the time, their current projections, called a dot plot, still show rates increasing later this year.
And as both the cost of living and interest rates have increased, many people are turning to family and friends for loans. The process is fast and easy. You avoid credit checks, underwriting, and concerns about debt-to-income ratios. On the flip side, borrowing money from friends or family can destroy a relationship if the funds are not paid back in a timely fashion, as agreed upon. We always recommend to the person lending funds that they never lend a friend or family member money they cannot afford to lose, and to document it all in writing.
If the loan is over the annual gift tax exclusion (currently $17,000 per person or $34,000 for a married couple) it should be documented as a loan; otherwise, the lender would need to file a gift tax return. In addition, a minimum amount of interest must be charged, and the borrower should issue a 1099 to the lender to reflect those interest payments.
Other alternatives to borrowing from family or friends include cash advances on a credit card. The concern here is that interest starts accruing immediately, and payments begin as well. You can borrow up to the lesser of $50,000 or half of your 401(k) or 403(b) with your current employer if the plan allows loans. You must pay the money back over five years. If you leave the company, you may be required to fully repay the loan, or the IRS will consider it to be a withdrawal and you will be taxed on the outstanding loan balance plus, if you are under 59 ½, a 10% penalty. Your money is also out of the market and not invested during this time. Some of the personal lending sites such as SoFi, Marcus, and Best Egg are easier to navigate and may have easier underwriting standards (the guidelines bankers use when making a loan) than a traditional brick-and-mortar bank. Pawn shops and pay day loans are generally not recommended due to the exorbitant interest rates.
Depending on the amount of money you need and how quickly you need it, you may consider a side hustle, either working for a gig-economy company, freelancing in your current profession, or babysitting, mowing lawns, dog walking, etc. You can also generate income by decluttering and selling unnecessary items.
A new feature many 401(k) and 403(b) accounts may offer as soon as January 2024 is a hardship withdrawal of up to $1,000 per year. This was part of the recent Secure 2.0 legislation and waives the 10% early withdrawal penalty. In addition, you can repay the withdrawal within three years.
Finally, if you’re in a position where you need this, once the immediate problem is solved, take a step back. Can you afford your current lifestyle? What changes can you make, either on the income side, or the spending side, to prevent this from happening again? Can you build emergency savings, even at $5 a paycheck? Take a critical look at the big picture, and what you can do to change it for the future.
Ironically, your action item this week is to go shopping. Maryland tax-free week started yesterday and runs through August 19th. Clothing and footwear priced at $100 or less is tax-free.
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CovingtonAlsina is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.