Much of America has is in debt. Sometimes it’s good debt and other times it’s bad debt. I wrote about good debt vs. bad debt last week. Credit cards that you don’t pay off are an example of bad debt. Many of them charge upwards of 20% interest. For that reason some people have decided to not to use credit cards at all.
It doesn’t have to be all doom and gloom with credit cards though. For those with the means and fortitude to pay them off every month, there are definitely rewards. Just be sure you can you handle the responsibility before you try. Here’s a list of the benefits that responsible users of credit cards enjoy:
- Free Money/Rewards - I get 5% back on gas with my credit card. With my local gas prices at $4.55 a gallon, that’s nearly 23 cents a gallon. (My credit card doesn’t seem to available, but the Chase PerfectCard seems to be a good alternative with 6% for the first 90 days and 3% after that.) I get the same 5% off of grocery and drug stores. I get 3% off of restaurants, home improvement stores, and office supply stores. Every few months Chase sends me couple of hundred dollars. That’s one piece of mail I don’t getting.
- Free interest - The extra time that I have to pay off the credit cards is time where I’m making a small amount of interest by keeping the money in the bank. Admittedly this is a very minor, but real benefit.
- Enhanced warranties - Many credit cards double the warranty of many consumer products.
- Consumer Protection - Have you been wronged by a merchant? Often times the credit card company will go to bat for you. I don’t use this benefit very often. I don’t want to be the one that cries wolf. However, once every 12-18 months, it proves to be a very valuable perk.
- Building Great Credit - By paying off my credit cards each month, I have been building great credit for years. It paid off when it came time to get a mortgage and I qualified for the lowest rate - the teaser rates that very few people qualify for.
- Emergency Protection - You never know when something is going to come up. I don’t want to carry that much cash on hand. Debit cards help, but I like to keep money earning the most interest possible. As such, I don’t keep a lot of money in accounts where I have debit cards.
- Spending History - I can give a service like Wesabe, or Quicken my credit card transaction file and it will analyze where and how I’m spending my money. If I see I’m spending too much on eating out, I curtail it.
This is just another example how emotional control can add up to very real, tangible gains.
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Posted by Lazy Man on July 11, 2008 in
Credit Cards
If you read personal finance blogs or magazines you’ll find a lot of advice to save money, get out of debt, and build an emergency fund. This is all solid advice and things that I fully endorse on Lazy Man and Money. It makes too much sense to stretch your dollar further and to be prepared in the case of some kind of emergency or job-loss. Plus there as of 2002 Americans had $750.9 billion of debt spread across 84 million households.
If you watch CNBC or read the Wall Street Journal, you’ll get a different view of things. They’ll discuss consumer spending as being a sign of a healthy economy. It goes a little something like this. If you decide to not go to restaurants or make your coffee at home instead of going to Starbucks, these businesses will close. It’s not just these business, but if you cut back on travel hotels lose money… entertainment movie theatres and netflix lose money… you can go on and on. If businesses lose money, jobs are be lost. When people lose jobs, it’s never a good sign for the economy. This is why the government is giving us money, to stimulate spending.
So if people spend money and live on credit, the value of a dollar falls. If they don’t spend money, people lose their jobs and the economy suffers. Doesn’t this seem like a game of lose-lose. It seems you are quite literally damned if you do and damned if you don’t.
I wish I had a solution for this problem. Maybe I should have studied macro-economics in school. I’m trying to think of how America can win this Catch-22. Maybe I’m crazy, but it seems like as long as the money shifts between business and consumers the economy isn’t going to improve overall. If consumers have more money they have safety and security, but businesses suffer. If businesses have more money, consumers are likely overspending and have too much debt. I’m probably being a little simplistic in thinking that money might be a zero-sum game.
The best idea I can come up with is to sell goods and services to other countries and bring in outside money. If money within the US is truly a zero-sum game, the solution is to add more money to the game. That outside money can pay off our consumer debt and keep businesses running. I wonder if we can export goods and services cheaply enough for foreign countries to buy them. Questions, questions, questions, I wish I had answers.
Maybe you have some questions as well? Perhaps you even have answers? Let me know in the comments below.
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Posted by Lazy Man on July 10, 2008 in
Economy
I might not have mentioned it, but I’m in Los Angeles this week, staying at a swanky hotel called The Omni. (I’ll tell you more about it after my stay, but it’s essentially free.) They dropped off a copy of USA Today yesterday and for the first in months, I read a physical newspaper. It’s a general interest newspaper, but the front page seem dominated by financial concerns. There is a “Nation’s gas gauge” in the top left showing how much the price of gas has changed in the last day and the price a year ago. (It’s 37% more expensive for the regular stuff in case you were wondering.) The cover story was, As food costs soar, it’s back to basics for meal planners. At least they didn’t have an article on adjustable rate mortgages rising and people foreclosuring on homes. Maybe the editor didn’t want to depress everyone on the same day.
That’s what America is faced with today. Food prices through the roof. Gas prices through the roof. Home prices through the roof. It’s going to cost you more money to commute to your job. The money you make there is going to less quantity or quality of food. Then you come home and worry about how you are going to pay the mortgage. At least basic clothing is relatively cheap, right?
As Ben Stein says, this isn’t so much of a problem for the highly skilled/educated lawyers, doctors, investment bankers, etc. When you bring in six figures or more, you can usually a few hundred dollars a month. However, if you are on the lower pay scale you likely have bigger problems. The rise of gas and food is huge. When you might have been scraping by before you might be in even bigger trouble now. In the aforementioned article, Ben Stein is quick to point out that “Since [1974], real wages both hourly and weekly for all non-government workers, on average, have fallen by about 5 percent, very roughly.”
I’d like to revisit that USA Today article on food costs. It is filled with anecdotal evidence of people reacting to food costs:
- Retirees Sally and Robert Jones reverted back to some of the menus that got them through graduate school, living on beans, stews, and soups.
- Nancy Sierra eats peanut butter and jelly sandwiches for lunch.
- Tiffany Nicosia whips up new recipes with whatever is left in her refrigerator.
- Rebecca Woods and her family of five saw their grocery bills double from $800 to $1,600 a month.
However, the part that I want to focus on is the Rebecca Woods quote:
“We were eating whatever we wanted — yogurt, bagels, name-brand cereals. I wasn’t looking at the price of anything. I was at the point where I bought the same thing every week. I ran into the grocery, I bought what I needed and ran out.” Later she says, “I realized we were sinking financially and couldn’t go on that way.”
Are you like Rebecca was - spending money without looking at the prices? Do you know someone who is? Do them a favor and use the little e-mail icon at the end of this story to send them this article.
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Posted by Lazy Man on July 9, 2008 in
Economy
This post is very much a rant. If you don’t like reading rants, and I don’t blame you, it may be wise to move on to the next article.
Last month, I went on vacation. My cheap luggage from 1996 died and I bought a replacement - an American Airline branded set from Luggage America (. I was extremely excited about the new luggage with four freely moving wheels. My excitement lasted five days. On that fifth day, I took my first trip with the luggage. It performed quite well until I picked it up at the baggage claim when I returned home. It had a big hole in it. Luckily all possessions were accounted for.
As I bought it from a military base 3000 miles away, my options seemed limited. I could drive to the nearest military base, which at an hour away, would cost me a bit of gas money. My other option was to explore the 20 year warranty, something that comforted me significantly when I made the purchase. I wrote Luggage America via their website and asked for them to cover the shipping or repair costs. They responded that they’d waive the $9.50 check that they normally require for return shipping. Today I went to ship the luggage to them. It cost me $22 to ship the $60 piece of luggage… within my own state. It was nice of them to not require that I’d spend the other $9.50. As it is, it will cost me $82 for something that I was willing to pay $60 for. I’m not sure I got $22 of use out the luggage on one way of trip thus far.
When I found out that it would cost me $22, I replied back to their mail and politely ask that they reimburse me for all shipping costs. I hope they can understand that I would expect a product expected to last for 20 years to work for more than 5 days before I have to pay another 33%+ for the product. I did imply that if they sent back an upgraded piece of luggage (a step bigger from the medium size that broke) I would be happy with the company. I’m curious to see how that will go.
(Final interesting side note for conspiracy theorists: The luggage I bought is no longer available on their website. My luggage was made with an 840 D. nylon (not mentioned anywhere on the luggage that I could see), while the one new version on the website is a 1200 D. polyester. It’s only because I caught them upgrading their website that I noticed that the old version of the website had the luggage I bought.)
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Posted by Lazy Man on July 8, 2008 in
Consumer Battles
I’m amazed by the number of people who seem to be against debt. Debt has become has a problem in America, but I think too many people clump the good with the bad. To the people that don’t like debt, would you take a million dollar loan at 1% interest? I would. I’d immediately put it in a few interest baring accounts that are FDIC insured (I say a few because FDIC insurance doesn’t cover a whole million). At today’s rates, which are historically pretty low, you can make a guaranteed 3% on that money. That means the debt naysayers would be missing out on 2% of a million dollars, $20,000 a year. I’m pretty Lazy, but for $20,000 I can manage to set up some bank accounts.
Good Debt
When you can make more money than you are paying, that’s an example of good debt. Some people call it leverage. Here are some other examples of good debt:
- Student Loans - The idea here is that you choose to into a little debt now, so that you can make a lot more money through the rest of your life. That extra income, in theory, should be enough to pay back all that debt and then some.
- Mortgage - This is an area of wide debate - it might even matter where you live. If you had a mortgage in the early 1990’s there’s a good chance that the debt allowed you to own a home that appreciated in value a whole lot. If you bought in some markets in the last couple of years, there’s a good chance you’ve seen no appreciation and if you sold today would have been worse off than if you rented. In many cases, a mortgage is tax deductable and that’s very nice benefit as well.
- Work Necessities - Many people don’t consider a car loan good debt. However, if you need a car to get to your work, I argue that it’s good debt. For it to quality as good debt, you’d have to treat it as purely transportation between two points, not a status symbol. When an expense is necessary to protect your income stream, it may very fit into the good debt category
Bad Debt
Bad debt is debt that doesn’t have an obvious way helping your finances. There’s a lot of debt that falls into the category of bad debt, which is often where bad debt gets its name. Do you use a credit card to buy CDs and don’t pay it off every month? That’s a prime example of bad debt. Many companies will charge you interest of 20% or more. It’s not long until you are paying twice as much for that CD as you should. This does not benefit your finances?
If you go into debt to afford a vacation, that’s bad debt as well. You might feel more refreshed and ready to earn more money, but you need to get your finances in the positives first.
Three Debt Questions to Ask Yourself
I like to ask myself the following questions before considering taking on any kind of debt:
1. Am I going to pay interest on this purchase? With my credit card purchases, I pay them back, so the answer is usually no.
2. Does this purchase preserve or grow my current earning potential? If yes, then it has potential to be good debt. I say potential because it’s not worth going a million in debt to earn a couple of extra thousand dollars a year. It’s also not worth protecting a $20,000 a year job.
3. Am I buying this because I feel “I deserve it?” This is often a danger sign.
It’s not always easy and straight-forward, but understanding the difference can be important.
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Posted by Lazy Man on July 8, 2008 in
Finance 101
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