Tuesday, October 28, 2008

Who Is Going to Bail You and Me Out?

What are we expecting, and what will actually happen?

1) The banks will get lots of money.
2) The banks will lend it to us, keeping our houses from being foreclosed.
3) The banks will lower credit card finance charges and make it easier to pay off balances without incurring penalties and harsh rate hikes.

Number 1 will come true. Even now, the banks are being given money by the Federal government, in fact, being forced to accept it.

Number 2 will come true for some people, but a lot will somehow not qualify or get caught at the wrong moment. A few people will even fall for yet another housing scam, and find themselves even worse off than before.

Number 3 will only happen if we the public put pressure on legislators to insist that banks who take a bailout also knuckle under and revamp their usurious credit card rates and practices. Banks are living on credit card finance charges and penalties. We are their huge profit center. They won’t give us up easily, and they will lobby not to let us get away with any write-down of our personal debts. Meanwhile, banks will get millions of dollars in write-downs of their own debts.

In this unfair situation, what are we to do? We should press our legislators to reenact usury laws to cap the rates we can be charged. But meanwhile, until Congress finally acts to protect consumers—thus warding off the third, currently unacknowledged but looming credit crisis of our economy—we need to protect ourselves from getting caught in the squeeze. I know someone who missed a payment and then was assessed 67% in finance charges. It could happen to you.

Here are some tips on how to maximize the value of your credit card payments:

1) Currently, credit card bills get mailed very late in the billing cycle, so we have only a few days to put together the money to pay the total on time. It’s getting harder and harder to trust that the credit card companies will admit that a mailed payment arrived on time. The US Mail is not as slow as the credit card companies claim. Fight back by establishing a free online method of moving money directly from your bank to the credit card company. And then check on your running total weekly, so you can begin to gather up the needed funds in advance. As the new total edges higher, seeing it will remind you to slow down your spending, too.

2) If you usually pay in full, pay in pieces during the month. Then you’re always sure of having paid the minimum on time, thus avoiding any late fees or penalties.

3) If you run a balance on the account, use this early-pay method to lower your finance charge total. The charge is calculated based on your average daily balance, which will then be lower as the month progresses, not higher.

4) If the minimum payment is all you can afford, make it work harder for you. As soon as the payment cycle from the previous month closes (your bill due date), make your next minimum payment. It’ll reduce your daily balance every day of the billing cycle. If you don’t have the full minimum that early in the month, pay what you can as you receive it. It’ll still help lower the bite.

The psychological advantage to paying your credit card bill online in pieces is that you will be continuously aware of the coming total long before you receive a mailed bill, and you will be handling it according to your schedule, not the credit card company’s. That puts more power in your hands. The bill is never a surprise, and you have a strategy to ensure that you never make a late or insufficient payment.

Saturday, October 18, 2008

Have You Checked Your 401 (k) Lately?

Well, don’t. At least, don’t check the total. You won’t be happy. Instead, look at your asset allocation. That’s the page that shows whether all of your 401 (k) is in aggressive growth stocks or in conservative funds or even in bonds. Typically, it will show a mixture. Your job now is to be your 401 (k)’s arbiter of how much should be in which kind of investment.

No one else can tell you what mixture of risk and assurance will allow you to sleep at night. But before you rashly sell and buy, consider your own personal track record when it comes to risk. Have you tended in the past to go whole hog for iffy stocks? And has that worked for you? Or is your style to lock all your money into extremely safe, low-growth stocks or no-growth bonds? Has your capital merely crept along, barely keeping pace with inflation? Is that good enough for you? You are the only one who can decide if you are happy with the trend of your investments. But you do need to know who you are as an investor. And this is something you should know regardless of the current state of the stock market or the economy.

Has your understanding of the market, especially of ups and downs, been proved faulty? Years ago, mine was, and I took that lesson to heart. I had been given some stock in a big corporation. It made a large investment in a product line that tanked in a very visible fashion (think Classic Coke or the Edsel), and its stock took a beating. So I sold it. Big mistake. A company that large commands so much talent and market presence that it soon had another wildly successful product. The stock split, and then split again. And it has been on an upward trend ever since, although I am sure it has had periods of being down a bit, too. I haven’t been looking carefully, because it reminds me of how I lost a huge amount of profit. All because I thought a momentary down was permanent. In these extremely volatile times, you need to consider that lesson. Some businesses are going to do well in the future regardless of current craziness. Others are headed for oblivion. If you don’t have enough knowledge to forecast which is which, then your choice is to educate yourself or let a fund manager do the worrying.

I could have bought stock in that company again, and participated in the rest of its good times. But being stubborn and stupid about a mistake is a common human failing. It even has a behavioral economics name, the disposition effect. That’s when we tend to throw good money after bad, even though we know we should cut our losses. I’ve talked about it on this blog in the past, although not by name, when it comes to being stubborn about staying in a house you can’t afford. Turns out we’re all doing this all the time in all areas of our lives. That’s probably why your friend took so long to dump that loser she dated.

I tried again with the stock market, years later. I bought an index fund. But I hadn’t been paying attention to the trend of the market, which was down. It immediately lost one third of its value. So did everything else in the stock market, of course, but I felt like an idiot. Because I was. The safest thing to do if you aren’t an expert on the stock market is to hire an expert to work for you. Individual brokers haven’t usually been the answer for the modest investor; mutual funds have. With a mutual fund, you spread your risk because you buy a defined mixture of assets, and then depend on the fund manager to keep buying and selling the right assets at the right moment. Still, in a precipitously down trending market, you’ll initially lose money.

I’ve previously advocated putting money into bank savings accounts or CDs, and I still do. It still makes sense to protect your principal. The problem with utterly safe bank investments and bonds is that they don’t grow your principal. So you have to decide what you are saving for. And this is where it gets sticky. If you are saving to pay your mortgage, car payment, tuition payment , and other set obligations for the six months to a year it might take you to find a new job if you lose your current one, a bank is the best place for the money. Why? Because as I have said before, even the deflated value of money in the bank still pays the original percentage of a fixed obligation. If the mortgage is $2,000 a month, it’s still that a year later. So if you have $24,000 in the bank to pay your mortgage for a year, you’re fine. But you don’t necessarily want to have two or three years of payments sitting in the bank not keeping pace with inflation and not growing. And that’s why people turn to the stock market.

What you want to think about is how long you have to grow the bulk of your savings as investment, versus when you want to draw on that money. And that’s unfortunately where the current stock market mess is giving people anxiety attacks. Because some of us need to retire very soon, or we need to draw on education accounts to pay for college very soon. As Jim Cramer of the TV show “Mad Money” said recently, if you need the money in the next five years, pull it out. He has been credited and vilified for saying this, because the stock market went even lower after he said it. Is the advice of one man that influential? Possibly, in a time of general panic. But then why did Warren Buffett’s three billion dollar investment in GE stock not send every investor in the world to buy GE? Incidentally, Cramer put his money where his mouth was. He sold stock from his elder daughter’s college fund because she’s in college now. He’s holding the stock in his younger daughter’s college fund because she has several years to go before college. My own personal decision has been to leave all my investments in the stock market as is. But then my own 401 (k) and SEP IRAs are so small that they’re not particularly significant to my future. I still have hopes that I can grow them so they could become substantial, which is why I am leaving them in.

Most of us are familiar with the concept of dollar cost averaging. This is a great time to buy stocks cheaply. So keep shoveling all you can into your 401 (k), acquiring more assets in the proportions that make you feel comfortable. Buy more bonds, for instance. Your research should not be on individual stocks unless you have an area of expertise that allows you to understand how a certain field trends. I have a relative who specializes in railroad stocks. As a lifelong railroad fan, he has accumulated a vast amount of knowledge about the assets of individual railroads and he knows when a certain stock is undervalued. But he also knows when to take his profit and sell, thus avoiding the disposition effect. If you don’t know that—and I certainly have proof I that don’t—then individual stocks are not the investment for you.

Instead, research funds and fund managers. You want a fund, or a mixture of funds, that gives you a fighting chance to cash in on every stock that is underpriced in today’s market (and there are plenty). But you don’t want or need the heartache of knowing their individual ups and downs. That way lies madness. Your fund should include rebalancing on a regular basis, whether the stock market is in crisis or not. What is a comfortable risk profile when you are 30 is not the same as when you are 60.

And stop checking your 401(k).

Tuesday, October 14, 2008

Math Madness

An article in the NY Times complains that math skills aren’t prized in our society and as a result, we’re missing out on a lot of talent. Girls in particular, but boys also are discouraged from doing anything that labels them as smart, and thus nerdy.

No surprise. I was good in math, but my problem with math is how it is taught divorced from real life situations. As an adult, I look around me and realize that complex math is what professionals are using to design houses and build bridges and manufacture just about everything. And these skills are only taught in specialized, advanced math classes that are labeled as something different. Astronomy, for instance, or Engineering, or Architecture, or Production.

What I find infuriating is that math is not taught at the introductory level as it ought to be taught, not stripped of all relevance to the complex work of the world, but specifically tied to it. I spent an entire year learning trigonometry, and I did well in the class, but even then, I had only a vague notion of what use trigonometry had in the real world. Yes, I knew that harmonic curves are related to sine curves. But I had no school work that tied the two together. Thus there was no need to learn trigonometry beyond what I had to in order to pass the course. And no need or opportunity to retain the knowledge and use it again in a trig course that connected the dots. Imagine how much more interesting and useful it would have been to have been taught about sine curves in conjunction with music theory. Or with any other area of relevance to trig.

Similarly, my friend who sent me the article (yes, you, James) mentioned logorithms. I remember doing quite well with them. (As I said, I was good in math.) But even then, I didn’t know what real-world purpose logorithms served. There were tables of them, but why? I’m sure they told us, but the information did not stay in my head because it never got used outside of math class. And we talk about algorithms all the time, but how are they related to logorithms?

Calculus, which I took in college and which was taught so poorly that basically my entire section failed, was another mystery. What it was for, I could not grasp, and thus it was hard to remember any calculus function long enough to pass an exam. And yet it turned out that calculus was a prerequisite for astronomy, a subject about which I and many other people are interested. But the general public knows very little about the complex math of astronomy. It’s as if the scientists speak a secret language to each other, and we’re just left to admire the bright side of the moon.

Why must we all learn math stripped of its color and life? I grant that some people have a sheer love of numbers, and that those people may be determining math curriculums. But it’s crazy to deliberately make a field of study theoretical only, when you can sell it to people so much more readily if you make it real world. Although choosing which real world application to teach might be an issue of economy, and that’s why it gets taught at the theoretical level instead.

(At this point, I must mention that I trotted out this theory at a party recently and the calculus teacher there refused to comment on it, claiming he did not want to offend. Actually, he refused to say anything more on any topic, period. So even though he may have had insightful, valid objections to my theory, since he obviously considered himself above his company and couldn’t be bothered to voice them, I haven’t a clue what they might be. Other than that math classes actually are taught today with direct links to the real world uses, and I’m just a blowhard with amnesia. )

Even simple math functions need more humanizing. Students may leave school knowing how to add, subtract, multiply and divide, but if they don’t know when to do it, they know nothing. People make wild guesses during essential mathematical transactions, and merchants and marketers constantly take advantage of this. We need to know whether a bottle with 200 ibuprofen at $4 is cheaper per pill than a bottle of 500 at $7.22. (I can’t do the math in my head, and the prices are deliberately uneven in order to make it hard for me.) Shelf talkers often don’t compare by the same terms. We need to know just how many variables we must take into consideration—mathematically—when we decide on many other essential purchases and conditions of our lives. But mostly, we guess.

Why is adding and subtracting not taught using ATM withdrawals and fees? Is Drive Thru banking taught including the cost of idling the car versus parking and walking inside and then re-starting the car? What about the value of a bulk buy at a grocery store versus the rate at which we consume the item? Whether to take the cash back or the interest break on a car deal?

Maybe some teachers do use these real world calculations. Then I guess the question becomes why didn’t they stick? Why are we constantly making very wild guesses at the true cost of things we buy? We could all be carrying graphing calculators hanging from our belts or handbags, and making complex calculations based on many variables. Or computers that talk to our home computers. Which would mean that no one would ever buy a chair again that doesn’t fit through the door to their home. But we don’t. We go along, deliberately vague, letting our wild guesses arbite our buying decisions. It’s crazy. Which costs less, a used or a new car? Used, flat out. Which costs more, a new car or a leased car? A leased car. Which costs more, a loan from a bank or from the finance company the car dealership uses? The dealership loan. Which saves you more money, a lower interest rate or cash back at purchase? I don’t remember, and I don’t know the calculation that would give me the true savings in interest. (Ah, there are more variables in this: How many years you expect to own the car, how you expect to use it, etc.)

These are all decisions ordinary people have to make. Why isn’t the math we learn infused with these situations? I don’t care how long it takes Johnny to get to a mythical city at 30 miles per hour versus at 60 miles per hour. I want to know what advanced mathematical calculation explains why it takes him two hours to drive 25 miles at 7:30 AM, and only one hour at 10 AM, and what that extra commuting time is going to do to his personal time, his family life, his sleep habits, and his chances of getting a promotion because he’s always exhausted at work. Real life. Real math. Real money.

Wednesday, October 8, 2008

Who Needs Granite Countertops?

I was posting on LiveJournal about our economic mess and the poor homeowners stuck with impossible mortgages, and then I had a thought: Who needs granite countertops if you don’t cook?

I watch a lot of home improvement shows. I’m not sure why. I never used to and in the past I would scoff loudly that they were a waste of time specifically designed to move useless product. I happen to believe that the entire decorating industry exists to decoy women’s energy into useless endeavor. Spend months or years decorating your house instead of earning a college degree or a promotion, or starting a new business, honey. No.

But I keep seeing house hunters traipsing through homes that are perfectly adequate, complaining that there are no granite countertops. And sometimes I look at those people and I just know that all they do is order takeout. They don’t cook. They don’t need a professional stove, a stainless steel refrigerator, or a two-drawer dishwasher. Because all their dishes are plastic takeout containers. And they toss their cutlery in the trash.

What people keep looking for in homes is status. Flash, if you will. And I admit that when I went house hunting four years ago, I was doing my version of the same. I had lived in a modest, completely unpretentious house for 15 years. Now I wanted something that had grace and charm. That was expansive. A house whose hallways weren’t cramped. With bedrooms big enough so that if you fell out of the bed, you wouldn’t hit the dresser. Or the wall. Now I have it, but I also have 26 more years to go on a big mortgage. If I’d stayed in my old house, I would have been done with the mortgage in another 11 years. About when I’d probably want to sign up for Social Security payments. Did I make a mistake? Only time will tell, but I surely have taken a risk I did not need to take. Nobody was forcing me to leave my old house. Only my sense that my time there was over was pushing me out. And I am glad I sold up. I feel as if I was reborn when I moved into my current home. A new me has emerged, and the gracious, spacious, sunny and private new house has a lot to do with it. However, all it will take is a job loss and several years of unemployment or underemployment, and I will lose this house. And then have to move on to another, lesser version of a new me. I’ll cross that bridge when I come to it, but I am not ignoring the threat. But I’m typical of many Americans. I take risks.

The conventional rule has always been to buy as much house as you can afford. But somehow, the definition of what we can afford has splintered, because tons of us have managed to buy houses that we quite obviously cannot afford. People have bought houses they couldn’t even make the first payment on. I couldn’t afford our previous house as soon as a layoff occurred. It took years to re-climb the pay scale enough to afford the house again, years in which credit card debt fueled our extremely modest lifestyle. I’ve often thought that we should have just given up the dream of home ownership, sold the house, and gone to live in a relative’s basement. But, like so many other Americans, we didn’t. We wanted to be homeowners so badly that we were willing to sacrifice many other aspects of quality of life. And looking back at it, that’s a crazy risk.

Another crazy risk was paving our driveway recently, and thus putting a lot of debt on a credit card. It gives me a fellow feeling with other Americans who are crushed by debt. It makes me very careful with our money. And, irrationally, I believe that being careful is the answer, even though logically the solution to lack of money is always to obtain more of it. Get another job. Get a better job. Prod a family member to get a job. Sell something, etc. But this is a terrible economy in which to be looking for a job. The only bright spot is the thought of all those arrogant Wall Street guys also looking. Maybe they’ll have to sell their posh homes with all the granite countertops.

But I still don’t want one. Granite’s a bitch to take care of. It’s pretty, but we have the darkest kitchens ever now, full of dark granite, dark hardwoods, and basically non-code, hot, dark task lighting. A working kitchen should be bright and filled with light, so you don’t chop off a finger. But in a time of excess, it’s a status symbol to have a dysfunctional kitchen with appliances fit for a professional chef and all the rest looking like a boudoir. A beautiful showplace with a huge countertop for all the takeout containers. Count me out.

Saturday, October 4, 2008

Savings Accounts, Part Trois: Staying Safe in an Unsafe Financial World

We all know that the finance side of the American economy is in meltdown right now, so let’s not talk about that any more until it reaches some stability. Let’s talk about our personal savings, which we don’t want to see vanish through either a stock market that stays down forever or inflation that wipes out the value of those savings.

An entire generation of Americans has been persuaded to put its personal retirement savings, usually as 401 (k)s or IRAs, into the stock market. Which did not feel very good in 2001 when the stock market took a serious tumble after the tech meltdown. And it doesn’t feel very good today, either, with major investment companies failing and banks going under, too. But down markets don’t usually last. Given time, our stocks will recover. Or at least, they should. The one aspect that bothers me is that for the first time ever, foreign investors, the very people whose fickle confidence has been responsible for major financial collapses in many developing nations, are not confident in America. These foreign investors are waiting for the fire sale; they aren’t treating this dramatic mess as just a minor blip. I believe this is a genuine and scary sign that the US is on its way out as a major economic power. The power issue doesn’t bother me as much as the fact that we could become helpless pawns in the same games of economic opportunism that messed up many another country’s economy and plunged it into runaway inflation. And inflation will destroy the value of our savings and of our 401(k) and IRA accounts.

Maybe. As I’ve said before, if the mortgage stays the same and the dollar amount we have in savings stays the same, then we haven’t lost anything as long as we pay the mortgage with those dollars. The same thing with paying any other fixed obligation incurred before inflation. The principal doesn’t rise, so dollars that are worth less will still pay off the same dollars of debt. The problem is going to be when we try to live on assets from a 401(k) or a pension (we should be so lucky to have one) that add up to a fixed dollar amount when the price of everything has gone up via inflation. Then, we’ve got trouble. Some retirement payouts are indexed to inflation; others are not. And therein lies the potential to be faced with eating cat food in our old age or not buying needed medicines, because our income dollar amounts have not increased to match inflation.

Which leads us back to the stock market and all the risks it entails, because it is about the only game in town that can offer profits that hedge against inflation. Yes, there are TIPS, the US Treasury Inflation-Protected Securities. But buying TIPS is complicated and yearly recordkeeping regarding their earnings is required. Unless you are a financial expert, you’re pretty much stuck using a broker to buy TIPS, and that means more fees as well as exposing yourself to the persuasion of a broker to do something not in your long-term financial best interests. And as far as I know, TIPS cannot be part of a retirement account. (If you know something different, please comment.) Thus anyone contributing to income tax deferred 401(k) or IRAs is not able to sock that money into TIPS. Another reason why our contributions to retirement are mostly at risk.

There’s also the bond market, and most of our 401(k) portfolios do include some bonds. But unless we buy bonds at a discount on the face value, they don’t pay much. And their value never goes up. They do not protect us against inflation. Although bonds are the first call on a bankrupt company, ahead of preferred stock, they’re still a risk. In the current meltdown, even bondholders could take some unpleasant payoffs if the money just isn’t there anymore. And that’s one reason why our government is bailing out some of these big financial institutions. Everything is intricately connected to everything else.

I recommend that we save more in conventional savings accounts and CDs. Why? The common reasoning goes that savings banks only pay a puny rate of interest and thus will not grow our money. Putting our money in savings banks will ensure that our savings do not keep up with inflation. And so on, and so forth. But all along, I have had my doubts about this line of thought. The thing is, a savings account at an FDIC insured bank is safe. How long would my savings have to sit in a bank to be seriously affected by inflation? Is it the length of time I save or just being exposed to inflation at a certain moment? In other words, if I keep money in ultraconservative, fully federally insured savings accounts until a time when inflation starts happening in a big way, and then switch my money instantly to stocks, wouldn’t I get the best of both worlds? Long-term safety, and short-term gain? And isn’t that what owning a house for decades and then selling it in an up market achieves?

Not so long ago, our current president was touting privatizing Social Security and wanting to put all that money in the stock market, too. That would have been a disaster, especially considering what has been happening with the investment business lately. Each of us could then go broke in two different ways. And I doubt that there would be a federal bailout for the poor suckers whose Social Security benefits were wiped out by investing in BearStearns or Lehman, for instance. This is an idea that is quite dead at the moment. If someone revives it, point to 2008 as a good reason not to go for it.

So what’s the bottom line here? The usual, of course: Live within your income and make a point of saving. If you can. Save even if it means denying yourself something that you want today. Then maybe you will have money for things you actually need tomorrow. Put some of those savings into utterly secure accounts such as FDIC insured CDs with short terms or conventional savings accounts, not retirement accounts. The bottom can’t drop out of those, nor will you have to pay an IRS 10% penalty tax to get at your money before age 59 ½. Make sure that some of your money is available with no penalties at any time. As always, visit a half-dozen savings banks (including online banks) to get competitive quotes on terms and rates.