Financial Freak Show

Man I’m glad I don’t have to deal with credit card companies any more. Sunday evening I was catching up on my laziness and decided to watch an old episode of Frontline titled the Secret History of the Credit Card. No, I don’t normally make a habit of relaxing to episodes of highly biased news programs from 2004 but I figured you FinancialFreaks might benefit from my pain – so I took one for the team!

The program itself started out by revealing the history of how credit card companies positioned themselves to take advantage of a lack of regulation in some states. They then went on to discuss how the companies then came to exploit the lack of regulation to take care advantage of the consumer/borrower (told you they were biased…but then again so am I).  I’m not going to suck the life out of you with the intricacies if the credit card business here today but I will say the more I pay attention to the business the more I wonder, aside from the stock holders, who is really benefiting from their practices. The one thing I found surprising was how many ex-credit card industry professionals came out to speak against industry practices.  

Now I’m not here to completely bad mouth these guys but it does reinforce to me why I choose to find other options than credit cards. Remember these consumers, including myself, signed up for this ride and if you don’t understand the contract maybe you shouldn’t be so quick to sign on the line. I am personally a share holder in several banks through my mutual funds so I love it that people several million people can’t control themselves almost to the point of bankruptcy then manage to fight their way back through 30% interest rates and late fees then immediately jump back on board for another trip. To that I say….YEEHAW boys! Let’s ride these hogs all the way to retirement on the backs of out of control consumers trying like hell to save the embarrassment of a low credit score! Keep it up suckers, daddy needs a new Maserati!   

So if you have 40-ish minutes of your life you won’t regret spending on the couch and you have an odd fascination with money, business & credit click here: FRONTLINE: Secret History of the Credit Card or even better read my Credit Card Debate page to learn how you don’t have to ever deal with them if you don’t want to.

I’m not big fan of owing money to anybody. I really began to realize this when I began paying my debts off. I noticed that after I paid off a debt I felt all nice and fuzzy inside but when I acquired a debt I didn’t feel all nice and fuzzy inside. After hearing the proverb “The borrower is the slave to the lender” then realizing I had just spent the last two weeks working only to send it away to pay back some of what I owed – I was working for someone else and I don’t think they were paying me! I quickly came to the realization that, as I said above, I’m not a big fan of owing money to anybody.   

I think for many reasons debt can often do more harm than good, especially over the long term. Not just financial damage but emotional, relational, and sometime physical damage. Debt is not always a bad thing to have and in some cases it can work out. Though in my opinion for a lot of people and a lot of  situations it’s very often either dumb or unnecessary. In Ron Blue’s book The Debt Squeeze he addresses when he feels it is okay to borrow money and carry the debt. He lays this out in four simple rules that I’ll summarize for you:

Rule 1: Common Sense; this rule is pretty straight forward. You need to seriously consider what this debt will do to/for your life. Will the payments stress you family, your business, yourself? Are you making a mistake at some level by bringing this into your life? Will this be a blessing now and in the future of are you signing up for another future financial disaster and just justifying it somehow? Does this purchase fit well into your financial plan and future goals?

Rule 2: A Guaranteed way to repay; this is the rule that caught my attention (it’s a good one so stay with me!)  Can you guarantee repayment for this debt? I’m not talking about promising all of next year’s paychecks, I’m talking about a guaranteed way to repay. What this means to me is not borrowing money towards things that cannot stand good for themselves. Real estate is a great example. A mortgage is secured against the value of the property itself – assuming you had a proper down payment or solid equity when purchased. If you can’t make the payments in theory the value of the asset would stand good for the debt liability. Purchasing a business may also fall into this category assuming you are buying true assets and not just a process or name.  

A car (especially new) almost never falls into the guaranteed repayment category. This is due to the value of vehicles dropping too fast. Cars almost never increase in value (well not the kind you drive anyway). So unless you are borrowing $1,000 on a $12,000 car I doubt a financed vehicle can truly stand good for the purchase on its own. I know this sucks but how many people do you know with a financed car can sell the vehicle and clear the debt with the proceeds from the day they drive it home and through the life of the loan? That’s not a guaranteed way to repay.

Sometimes you can pledge the value of one asset as collateral for another financed asset. If you have the ability to take that route then you may have fulfilled Rule #2 and if you’re okay with that then I’m okay with that!

Obviously there are many variables to consider for Rule #2 but this part of the debt decision deserves some serious consideration and some honest answers to some tricky “what if” questions. Can you remove this debt burden from your life if necessary without being kicked in your financial groin? If you can’t answer yes to that question stop right here and reconsider.

Rule 3: Peace of heart and mind; Rule 3 is a bit more spiritual than the others in my opinion. How is this debt going to make you feel? Are you going to beat yourself up over the next five years for making a quick decision? Are you going to unintentionally going to forgo some big goal in the future for a pick-me-up right now? Will you lock yourself in to a job you don’t really want because you strapped yourself with a house payment you can barely cover? Will you put off your saving for the kiddo’s college to drive a new truck? Will you be able to sleep at night after you sign on the line?

Rule 4: Unity; This rule is easy to explain. This rule relates to married folks or people partnering with someone else in one way or another. Basically what is being said here is if you’re going to be in debt you need to be on the same page with your spouse or partners on what is happening and what is going to happen in the future. That’s really it. The two of you need to have a solid agreement and commitment to carry the burden together as one.

So assuming you can come to terms on all of these four rules a particular debt may not be such a bad thing in your life. That said, if for any reason you question don’t have a solid honest answer for any of these rules you may be buying a ticket for a ride you didn’t really plan on taking. Financial decisions should be very deliberate and well thought out no matter what dollar amount is involved. Slow down, take a little time and consider all your options then move forward deliberately and cautiously – every time

Emergency money was a key in my strategy to remove the debts from my life. In my posts To Whom the Accidents Happen and So the Accidents Don’t Happen to You, I talked about the importance of saving some money to help cushion you from some of the lumps you take just by living your life.  After reading up on the subject a bit (actually quite a bit – I knew nothing about having money in the bank) My conclusion was if I was going to lower my debt I first needed to put some money in place to prevent me from using debt to live my life every day. Now my only financial safety net is my bank account where before I used credit lines – I sleep much better now.

How long could you cover your household living expenses with your current liquid savings? This survey of 2,318 adults 18 & older asked how long people could survive on the liquid money they had available. It proves how unprepared many Americans are with less emergency money available than the professional financial nerds out there recommend.

• Less than one week 17%
• One week - one month 14%
• One month - 90 days 24%
• Three - six months 10%
• Six months or more 19%
• Declined to answer 17%

The scary numbers are the first two. 31% don’t think they could make it a month. That’s a scary state of affairs for a lot of people out there. Most advisers recommend 3-6 months in liquid money. According to this survey only a third of Americans measure up to those recommendations though it sounds like from recent reports the current economy may have scared some more money into savings accounts over the last year or so. From my experience lately though people have been spending more time whining about being broke than actually doing something about it…I guess we’ll see the next time “it rains!”

So how does  your family measure up? Post a comment and lets us know (don’t worry you can even use a fakie name if that makes you feel better about yourself)

*Survey source: LexisNexis Martindale-Hubbell’s Lawyers.com survey of 2,318 adults 18 and older.

 

When the blind lead the blind…get the hell out of the way!

Have you ever heard that saying? Well as stupid as the saying is it actually has some solid logic to behind it. When I was first working to take out my debts I got some great advice from someone that makes quite a heck of a lot more money than I do (I know that’s hard to believe). Anyway…he told me “never hire an accountant whose client list includes people that make less money than you do.” In other words always look for people that can help you grow into more than you are now instead of the opposite.  

This advice stands true with most of the advice we receive around money (and most anything else for that matter).  If somebody isn’t successful with the particular advice they’re giving why should you not be a bit skeptical?  This is exactly what many do with our money decision each day. Often we take counsel from people who make poor money decisions. Sometime it’s formal counsel like an advisor and sometimes it’s just a couple guys hanging out having a beer bs’n about a new ski boat. In either case always step back for a second and ask “where’s this information really coming from? 

In a business sales seminar I was once taught to “mentally step back” from a negotiation and pretend you are looking in on the conversation like an outsider. The idea being as an observer of both parties you get a better idea of where each party is coming from and where they’re trying to go. Whenever I receive money advice I do this as well, not in lame close my eyes and go to my “happy place” kind of way, but I try to step back and take an intentionally subjective look at what’s being said. Who’s saying it, What they’re saying, Where has their experience and/or expertise come from, Why are they really telling this to me, etc. Also you must always understand that some things rub off on us with or without an actual conversation, especially from friends and family. Always be alert to what people around you are saying and doing. If everybody around you is driving around in financed cars or living in homes with absurd mortgages you may find yourself taking their cues.  

With your money you need to be cautious of where you get your guidance. You must always be objective with new information. You must always consider who it’s coming from, where they are coming from, why they are passing these nuggets on to you, and what it has to do with you. Why would you allow people who continually make poor money decisions to advise you on your finances? Sad thing is we all do this stupid move everyday and often don’t even realize its happening.

So what steps can you take to avoid unintentionally honoring advice from broke people?

• Have a solid financial plan – you don’t have to be rich or have your plan completed but clearly knowing where you are going and how you intend to get there will help you do what you feel is correct not what others tell you is correct.
• Continue learning – the more you know the better information you will have to make more sound decisions. You don’t have to be a genius with your money but if you know more you will have more option available to you
• This is a big one….Don’t hang around with broke people! Okay, that’s a bit harsh but seriously if the people around you are not helping you reach your goals maybe you should consider how you interact with them. I’m not saying stop talking to your broke family, coworkers or friends (unless you want to, you can blame it on me I don’t mind) but if they’re dragging you out to dinner or continually convince you to do things that you really can’t afford this might be a good time to reevaluate when & where & how you spend time with certain people. They may unintentionally be creating obstacles to you reaching your goals.     

Step back and look at the advice, influence, or sales pressure and only then can you make a clear decision on your next move. Figure out what works best for you to keep yourself on track and always remember who you’re listening to because sometimes you don’t even realize you’re listening to them (and there’s a fairly reasonable chance they’re an idiot)

Last night I received phone call from Military Wife about her Citibank credit card interest rate being raised from 13% to 29% interest. Actually if I remember correctly her exact words were…

the %!<&\# at Citi just jacked my interest rate right after I made the stupid payment

Her call sent Vinny Financio into action and prompted me to snoop around the inter-web a bit. Little did I know I would find out that Citigroup has also started charging annual fees to card holders who don’t put more than a specific amount on their cards, typically $2,400 per year. So let me get this straight…If I use a card you charge me, (I get that) If I don’t use my card you charge me (thats the part I don’t get!).

Okay that’s not really true, I do get it they are charging customers more fees. That’s what they do, that’s what their consumer business model is based on. The part I don’t get is why do they still have customers? You know the saying though…

you can lead an idiot to water but you can’t make him drown himself

It amazes me what people are willing to put up with. Luckily though Military Wife, due to her recent financial progress, was able to close the account and I doubt she was able to contain her ex-Marine Corp potty mouth when she told them what she thought about their new programs. I guess at this point for those that are willing to accept this treatment more power to them. Somebody has to get bent over the bar to keep those bank stocks in my mutual funds afloat for another 30 years. Personally I’ll take my own road on this one.

This post was inspired by a chat about a friend mentioning cutting out the purchase of a (get this) a CD per month to help ease their financial burden. When I say “CD” I mean the music type not the investment vehicle. Apparently she has a habit of purchasing 1 new CD each month with her first paycheck she receives each month. Her thought was that with this sacrifice and her other sacrifice of cutting morning espressos to a couple times a week will lead to the financial freedom her family is seeking.

I will say this, I am proud of her for making some more “grown up” decisions regarding her finances but I honestly think this is a waste of her time…and I let her know that (I know I seriously need a better opinion filter, but whatever). I told her that I doubt a $15 CD is really hurting her finances at all. I then told her that her newer car, her new couch and her new $2600 bull dog she bought with a cash advance with her credit card were her problem. Cutting CD’s out of the budget is cute but you’d have better luck trying to pick up a turd from the clean end! Seriously though if you think squeezing $50 a month out of your budget you haven’t address the actual problem…..YOU! 

The CD’s aren’t your problem girl. Your lack of planning & your lack of discipline are your problem. If you actually want to change the way you spend money then change the way you spend your money…ALL OF IT. Don’t just change the parts that are easy. Change all the parts that are broken, change the parts that hurt, change the parts that are will truly make a difference. Don’t try to nickel and dime your way out of 20k, 50k, 100k in debt cause we all know you sure as hell didn’t get in 20k, 50k or 100 worth of debt buying CD’s so why do you think this will ever get you out (if you did get in debt buying CD’s get your butt on Craigslist tonight and start selling!) Get out there and get mad, break something…break the habits that got you to this place. If you don’t at least try you will have no one to blame but yourself. True, it may not be only your fault you ended up here but will be your fault if you stay here (especially if you don’t want to be here).

So take a lesson from my friend and stop buying those CD’s if that’s what you need to do. Then take a lesson from Vinny Financio’s real financial world and cut deep into your lifestyle to the point it hurts, stop buying all the other garbage too until you have your stupid messes cleaned up. And then we’ll go drop some cash baby!

Debt is not always a bad thing to have. Though for most people and most situations it is either dumb or unnecessary. In Ron Blue’s book The Debt Squeeze he addresses when he feels it is okay to borrow money and carry the debt. He lays this out in four simple rules that I’ll summarize for you:

Rule 1: Common Sense; this rule is pretty straight forward. You need to seriously consider what this debt will do to/for your life. Will the payments stress you family, your business, yourself? Are you making a mistake at some level by bringing this into your life? Will this be a blessing now and in the future of are you signing up for another future financial disaster and just justifying it somehow? Does this purchase fit well into your financial plan and future goals?

Rule 2: A Guaranteed way to repay; this is the rule that caught my attention (it’s a good one so stay with me!)  Can you guarantee repayment for this debt? I’m not talking about promising all of next year’s paychecks, I’m talking about a guaranteed way to repay. What this means to me is not borrowing money towards things that cannot stand good for themselves. Real estate is a great example. A mortgage is secured against the value of the property itself – assuming you had a proper down payment or solid equity when purchased. If you can’t make the payments in theory the value of the asset would stand good for the debt liability. Purchasing a business may also fall into this category assuming you are buying true assets and not just a process or name.  

A car (especially new) almost never falls into the guaranteed repayment category. This is due to the value of vehicles dropping too fast. Cars almost never increase in value (well not the kind you drive anyway). So unless you are borrowing $1,000 on a $12,000 car I doubt a financed vehicle can truly stand good for the purchase on its own. I know this sucks but how many people do you know with a financed car can sell the vehicle and clear the debt with the proceeds from the day they drive it home and through the life of the loan? That’s not a guaranteed way to repay.

Sometimes you can pledge the value of one asset as collateral for another financed asset. If you have the ability to take that route then you may have fulfilled Rule #2 and if you’re okay with that then I’m okay with that!

Obviously there are many variables to consider for Rule #2 but this part of the debt decision deserves some serious consideration and some honest answers to some tricky “what if” questions. Can you remove this debt burden from your life if necessary without being kicked in your financial groin? If you can’t answer yes to that question stop right here and reconsider.

Rule 3: Peace of heart and mind; Rule 3 is a bit more spiritual than the others in my opinion. How is this debt going to make you feel? Are you going to beat yourself up over the next five years for making a quick decision? Are you going to unintentionally going to forgo some big goal in the future for a pick-me-up right now? Will you lock yourself in to a job you don’t really want because you strapped yourself with a house payment you can barely cover? Will you put off your saving for the kiddo’s college to drive a new truck? Will you be able to sleep at night after you sign on the line?

Rule 4: Unity; This rule is easy to explain. This rule relates to married folks or people partnering with someone else in one way or another. Basically what is being said here is if you’re going to be in debt you need to be on the same page with your spouse or partners on what is happening and what is going to happen in the future. That’s really it. The two of you need to have a solid agreement and commitment to carry the burden together as one.

So assuming you can come to terms on these four rules this debt may not be such a bad thing in your life. That said, if for any reason you question don’t have a solid honest answer for any of these rules you may be buying a ticket for a ride you didn’t really plan on taking. Financial decisions should be very deliberate and well thought out no matter what dollar amount is involved. Slow down, take a little time and consider all your options then move forward deliberately and cautiously – every time   

Do you agree with these 4 rules? Have you taken on debt without considering one of these principles? How’d that work out for you? Please share.