One of my favourite cartoons, by the wonderfully weird Gary Larson, is of a crisis clinic on fire, floating down a river, about to plunge over a waterfall. That’s what my life was like in 2008, the year I decided to divorce, start paying child support for two young children, move into a new house and take a new job. Then the financial crisis hit. My new job vanished, and opportunities for consulting work dried up. When all was said and done (I won’t belabour the details), I wound up nearly $100,000 in debt. Most of it was put on credit cards, charging me 15-25 percent interest per year. It wasn’t until 2015 that I realised my life’s work provided the answer.
Since the 1990s, I’ve been writing books about local economies and the virtues of purchasing from local businesses. The financial crisis of 2008 motivated me to focus on local investing. I wrote an article for a journal of the Federal Reserve, the US monetary authority, arguing that all the legal restrictions impeding local investment should be suspended for transactions of $100 or less. An investment of $100, I argued, was no riskier for the “non-accredited” (non-wealthy) than dinner for two at a new restaurant, and we never require new eateries to do $100,000 of legal work before they open their doors.
People liked the idea. A friend proposed this formally to the Securities and Exchanges Commission as a new rule. Hundreds of supportive letters poured in. The action then moved to Congress, which passed a law legalising crowdfunding in the United States. The bill had supermajorities of support from both Tea Party Republicans and Bernie Sanders Democrats.
The limit for investors was set, not at $100, but at $10,000, though the bill did not enact the lawyer-free zone I had originally envisioned (companies still have to do some legal paperwork). Nevertheless, it was progress. Investment crowdfunding commenced in 2016, and since then nearly $400 million has been put into small businesses by grassroots investors (Australia began allowing investment crowdfunding last year).
Suddenly a light bulb went off in my head: This was the solution to my own debt crisis!
From a community economy perspective, credit cards are public enemy number one. Not only do they addict many of us to purchasing what we cannot afford, but they also cause major leaks to one’s local economy. A two to three percent fee that goes to the home office of Visa, Mastercard, Discover or American Express drains away from local businesses, who are forced to cover those costs by raising their prices. Even worse is the usurious interest rates. As of last year, Americans owed nearly a trillion dollars in credit card debt, and card holders average a balance over $6,300. This number, during COVID, is skyrocketing.
I was able to convince half a dozen dear friends to lend me money so I could pay all the cards off—and then cut them up. I then paid my friends over five years at five percent instead of the standard rate of 20 percent, which over just those five years saved me about $75,000 in interest payments. I also provided them with a return much better than they could get at a bank and roughly equal to what they could realistically expect from the stock market.
The first person I approached with this idea was Cathy Berry of Vermont, who had been a supporter of various local economy initiatives. Before the ask, I was terrified. I feared that sharing my financial challenges might poison my relationship with her.
We spoke for almost two hours. I was stunned to discover that she actually had been thinking about investment opportunities like this herself. She thanked me for stepping forward, sharing my story, making myself vulnerable, and allowing us together—not just her—to prove how this type of investment could succeed. Five years later, my payback almost complete, she wrote to me, reflecting on our relationship: “We need to inspire others to help someone because they are doing the right thing. If we support the common good, we improve everyone’s life.”
Local investing is not just investing in businesses. It’s also investing in the people around you.
If your daughter has a student loan carrying an annual interest rate of five percent or more, pay it off and have her repay you at five percent. An estimated 44 million young Americans, including two-thirds of all recent college graduates, have $1.5 trillion of student debt.
If you use five percent as the benchmark for the rate of return from the mainstream markets, you can make a pretty convincing case for lending money to move friends, family and neighbours from being renters to home owners, to pay down their mortgage faster, or to invest in energy efficiency in their homes. The American Council O for an Energy Efficient Economy argues that “light” improvements in a home’s energy efficiency can deliver a “whopping 18.5 percent return annually.”
These investments, like all investments, involve risk. But one of the best ways to mitigate risk is to have a personal relationship with the person or business you’re investing in. We know from studies that relational bank loans lead to fewer defaults than loans that depend on computer-generated credit scores. Local investing is all about reconstructing our economic world through local relationships and trust.
When Port Townsend, Washington, a community of 10,000 people north of Seattle, lost its general store and no longer had a place to buy socks and underwear, they decided to build their own. They established the Quimper Mercantile in a refurbished 16,000 squarefoot space and sold $700,000 of shares to residents of the community. It has been profitable every year since it opened in 2012. Its 830 local shareholders are some of its best customers. Every purchase there pumps up the local economy and is also a vote for the power of collective action by the community.
Around the world, COVID-19 has sunk stock markets and ravaged communities. Rather than put your life savings back into undependable global markets, invest in the people, projects and businesses you love that are all around you. That’s the message of my most recent book, Put Your Money Where Your Life Is. The book is for an American audience and shows how simple tax tools can be used for moving tax deferred pension savings into local investments. The mechanics for moving your superannuation funds into these kinds of investments is a little different in Australia, but it’s still possible for some. And with some smart legal reforms, which would cost nothing, millions more Australians could begin doing this. Compared to the cost of the COVID-19 bailouts worldwide, reforming national investment laws is a bargain.
Now that local investing has helped me get back on my financial feet, I’m looking forward to investing in others in my community who now need help as well.
