Monday, March 23, 2009

The Report on My Credit Card Loan

I promised I’d report on the outcome of that credit card loan I took out last June to pay for paving our driveway. Here it is. Today I used our tax refund to finally pay off the loan completely. A couple of months early. The original terms were that I had a year to pay it off, and I paid 3% on the loan amount up front as a loan fee, and nothing more. It seemed like a good deal at the time, far easier than applying for a home equity loan. And technically, it has proven to be one. But after almost losing the terms in August because the post office supposedly took ten days to deliver my payment, thus putting me in default, I got scared. Sure, I cleared it all up with the credit card company. And I switched to online payments to better control the official payment arrival date. I can't see paying for Express Mail or some other extra delivery confirmation service when I don't believe the post office delivered my payment late in the first place. But that experience brought home yet again what a slippery slope credit card indebtedness is.

The problem is that the credit card company has the legal right to change the terms on me unilaterally and at any moment. At best, that’s like having an intimate relationship with a schizophrenic, in the old sense of the term, a split personality. You just never know who will show up this month, Dr. Jekyll or Mr. Hyde. I have seen with my own eyes credit card bills with finance charges of 67%. (Not mine, but still absolutely frightening.) What’s to stop any of my credit card companies from deciding that’s my rate? Nothing, absolutely nothing. Oh, sure, Congress passed a law that’s supposed to improve this situation. But it goes into effect next year. We all have to live through this year first.

Maybe competition is what keeps credit card companies somewhat in line. If I am deemed a credit-worthy person by another card company, one that is willing to give me a better deal, then my current company has to decide whether to push me away by being as nasty as possible, or to retain me as a customer by being nice to me. But I haven’t seen a whole lot of nice lately, have you?

No, I must be fair. This same credit card company is now showering me with offers of balance transfers at 0% interest. That’s right, free. A great offer, but I don’t owe any more money. Why do these offers always come in when I don’t need them? Are they supposed to tempt me into going back into debt? But how could my credit card company know that I would pay off my loan so early? Perhaps the company wanted me to add to my indebtedness, and possibly lose my current, low interest rate in the process? If so, that’s evil.

In the past, I have called various of my credit card companies to try to negotiate better terms. Sometimes they have cooperated. But some companies, even when I explained that if they couldn’t give me a better rate, I would balance transfer my indebtedness to them to some other company…well, some companies just did not care if they lost my business. That’s why, when the companies are kissing up to me, I take it with a large grain of salt. Sure they care. I’m just another 16-digit number to them.

Of course in this period of economic crisis, if you don’t use your credit card, the bank might close it down or reduce your available credit to less than plane fare to the coast. And if you do use your card and carry a balance, the bank might reduce your credit limit to $5 over what you currently owe. So you can’t fly anywhere. And on and on; we’ve all heard of versions of banks getting goofy over credit card accounts lately. That’s why a perfect payment record is so important to protect. It’s your only way to fight back when the cards are stacked against you.

That, and paying cash. But we don’t live in a cash economy anymore and I doubt if we will go back to one. Sure, I could write checks at some stores. But the gas station wants a credit card or cash. The line to pay cash is often long, since I’d have to wait behind people buying lottery tickets, fast food, and cigarettes, and who wants to stand in line? I might end up with a lottery ticket I don’t need. So at best I could play mix and match, paying cash, writing checks, and charging on my credit card. That becomes a lot to keep track of, though. Maybe I wouldn’t let anything slip through the cracks, but it would be work. Just using a credit card is so much simpler. It’s the payment process that seems to have become so fraught with danger.

Does my adventure in 21st century credit card indebtedness have a moral to the story? Not really. Am I glad it’s over? Very. Am I thinking ahead to the next time I might be tempted to charge a major expense to a credit card? Yes. I don’t plan to cave in to the temptation. Sure, it’s easy money. But it’s hard debt.

Thursday, March 19, 2009

Why You Should Keep Contributing to Your 401(k)

In the current Wall Street bear market, you could buy hundreds of shares of stock for a fraction of what they cost a year ago. Many companies are trading at or below $10 per share. It’s a wonderful opportunity to get a lot of stock for not very much money. And if you were buying stock through your 401(k) through the bull market, that means dollar cost averaging will pull down the final cost of, say, 100 shares bought over the last two years. For example, if you bought 50 Citicorp shares at $67 last year, you paid $3,350. A few days ago, those same 50 shares would have cost you $116.50. (Of course buying them at all now is a risk, but the US government is not going to allow Citicorp to fail. Not now that we have given Citicorp so much money.) Your dollar cost average for those 100 shares would be $34.67.

But why throw good money after bad into the stock market? There are a couple of excellent reasons. One is that many, many solid companies are currently very underpriced. Thus the value of your purchase today is bound to go up as the economy improves. These companies have nothing to do with overleveraging or insurance credit swaps or derivatives, or the subprime mortgage market, for that matter. People still buy soup and soap, and many other items represented in the market. (Am I recommending that you buy Citicorp? It’s only a fun example, not a serious investment for us small-time investors.)

The second reason is that money you put in your 401(k) is shielded from taxes until you take it out. Yes, you could lose that money by investing it, but you could win big with your investments over time. If you don’t invest that portion of your wages into a tax-deferred account such as a 401(k) or IRA, you must pay income taxes on it right now. And you will have lost a portion of that money forever. Maybe as much as a third to a half. Investing is a gamble. Income taxes are not.

Strange, that the amount you could lose to taxes is the same as what most people have lost from their 401(k) in this down market: a third to a half. If you put that money into the stock market, you could lose it, but you might double it. If you let that money go to taxes, it is gone. I suspect that most people who don’t contribute to 401(k)s don’t realize that they’re taking a hit equivalent to the Worst Bear Market Ever—every paycheck.

Reason number three is that some relatively high earners will fall victim to the Alternative Minimum Tax if they don’t contribute to a 401(k), which is an even higher tax bracket and thus a bigger bite out of hard-earned income. Why let that happen?

Am I bullish on the stock market? I never have been. It’s a gossip mart, fueled by unrealistic expectations and skittish behavior. We’re seeing that in action very vividly these days. But I do have confidence that America’s actively traded companies, most of them, are in good shape despite their current stock prices. The soup and soap theme, if you will.

So think seriously about continuing your 401(k) contributions. Direct them to conservative investments if you prefer and your plan allows. But don’t waste the opportunity to keep and grow your money.

Monday, March 16, 2009

Wasteful Habits are Out of Fashion

I read an interesting article online last night about how the tips appearing in the media about how to save money are meant for people who don’t need to save money. For people who have plenty of money and should be encouraged to spend it so our economy doesn’t totally tank. But instead, it has become fashionable in the affluent set to pare back and ape the habits of the more modest-earning middle class. The author was not terribly amused. (I would give her credit, but at the moment I’m using a computer that I have not registered with a couple of newspapers, so I can’t find the article again. And isn’t it a drag to register and accept cookies and all that nonsense? Yup.) Anyway, the writer has a good point. So many people do what is fashionable, not what makes sense for them. She herself had been intimidated years ago into not brown bagging her lunch. A boss had contempt for people who did, so she stopped. She now regrets that.

I come from a modest enough background that our mother would announce to us kids before every outing that she had brought food for a picnic and would not be buying anything from the concession stands. So don’t ask her for anything. She stuck to her guns, too. Making a comfortable home for a husband and three children on her husband’s salary meant some compromises. There were many economies. Still, we always had piano lessons and trips to the theater. There just wasn’t a ton of cotton candy. We never missed it, either.

Of course as an adult I have indulged in some wasteful habits. It was a pleasure to do so when I got my first real adult job. I even was thrilled just to receive bills in the mail like a grown-up. Fast forward some years and the bills no longer thrill me, although being able to pay them still does. I have reverted to my upbringing. I pay for cultural events that enrich my life, but otherwise hold the line. Clothes shopping? Ha. When the sneakers wear out, I buy new sneakers. This is the privilege of the freelancer, the un-hired, the non-employee. For individuals who have to show up at an office or store or factory every day, clothing becomes a necessary uniform. But then again, I once worked with a woman who always wore black. She told me she did that so people would not notice how few clothing choices she had. She was a divorcee with several children and not enough child support. She wasn’t wasting any of her money on her wardrobe. There always are choices within choices, and she drew the line on clothing.

We do all waste. Every single person makes decisions about money that others would call foolish. From time to time, regardless of the world economy, we should review what we spend our money on, and what we have to show for it. There is nothing in our lives that cannot be altered to improve our financial situation. We simply have to put it all on the table. “But I have to” is just an excuse not to examine all areas of our lives for their shortcomings. Last night I heard Suze Orman advise a woman to change the thing in her life that was causing her financial pain. I so totally agree. Whatever it is, identify it. And then be brave enough to stop that wasteful behavior that is the cause of your pain.

If you are lucky enough not to absolutely need to stop wasteful habits right now, consider examining your life for them anyway. Some extra savings could empower you for the future, or enable you to give to others who are in need. You also can chose to spend your money more purposefully, to support institutions or businesses you appreciate. Many of them are in serious trouble and need your help. For instance, if you have extra cash, think seriously about increasing your charitable giving. Or if your habit is to eat out and you don’t have an economic reason to stop, go to the restaurants most worthy of your patronage, and help keep them in business. Don’t just go to the drive thru of a fast food franchise; fast food is doing fine. If you can afford to buy books, donate them to the public library, which is under double pressure now from smaller budgets and more patrons. Mindfulness is the key to not being wasteful even if you are affluent.

As for the rest of us, we’ll be tightening our belts even more than usual. Substituting our labor for buying labor-saving devices and services. Trying to skewer our wasteful habits and root out what we can. As long as the trend lasts, we’re in fashion, too.

Tuesday, March 3, 2009

Sighing Over My 40l(k)

Regardless of whatever advice I hand out, I’m only human. I was cleaning out a file drawer and decided to find out if the financial institution in charge of my 401(k) had perhaps cut me a break by waiving a fee on the account. The recent stock catastrophe undoubtedly dropped my total below the cutoff amount for it being a no-fee situation. Sadly, the fee was not waived. And even more sadly, my inquiry resulted in learning the current dollar value of my account.

Pause a moment for a sigh.

Of course I knew it would be bad. And that it doesn’t matter much, since I don’t ever intend to retire. Writers don’t. I certainly couldn’t retire on the pitiful amount of money in my 40l(k) before this. So it’s not as if I have lost anything really big. Actually, that’s not what I’m sighing over. People in my family live a long time. I have an excellent chance of being around to see my 401(k) regain and surpass its former value. I am not particularly upset over the drop per se. Well, no more than anyone is in this worldwide economic mess.

What makes me a little sad is that there were years in my life when I earned less than the dollar amount that just vanished from my 401(k). Those of you with big fat 401(k)s have already experienced this reaction, perhaps. But I hadn’t looked at it this way before. During some of those years, I didn’t have the option of easy saving for retirement in a tax-sheltered account; they did not exist for ordinary individuals and I would have been far too intimidated to approach a broker to purchase tax-free municipals or the like. Which was what old people did, anyway. And I was young and stupid. Back then the most I did was save the excess from my paycheck, and invest it in CDs. And then cash them in a couple of years later to live high on the hog. For which I am not even sorry; I quite enjoyed spending the money I had earned.

But the paper loss I learned about today seems like an awful lot of money to have (temporarily, I hope) disappeared. I think of all the mornings I didn’t get to stay in bed, the nights when I had to end the evening earlier than I wanted to because there was work the next day, and all the extremely painful shoes I had to wear as part of the uniform of a working woman. And I sigh.

Okay. Done. It’s the past. Tomorrow could be a better day.