Sunday, May 31, 2009

Don't Become A Network Marketer. Please.

Last night I saw a TV commercial pushing women to become Avon ladies, claiming that in this economy it would be a really good deal and you’d be your own boss. That is, you would make money and no one could fire you. An Avon lady is a network marketer. Network marketers are usually women who mine their friendship and acquaintance connections with other women to sell them things. Things that most of them don’t need and some of them can’t afford. Things like Mary Kay cosmetics, Tupperware, Pampered Chef kitchenware, and many other categories including candles, statuary, lingerie, and more.

How does network marketing work? Friends are invited and encouraged to bring their friends to a party in the marketer’s home. Most people who attend feel obligated to buy something, even though they are always told that there is no obligation to buy anything. It doesn’t feel nice not to buy, so they buy. The marketer makes a commission on these obligation sales. A few people actively want to buy the products, and the marketer may then convince these women to become salespeople themselves, so they can buy the many items they want at extra discounts. The marketer gets a rakeoff on the sales of every customer converted to a saleswoman.

As a volunteer tax preparer, I shuddered at that ad. I’m looking ahead to next year, when a lot of hapless and confused women will come in to have their taxes done, and only then discover that they have been running a home business at a loss instead of at a profit. This is what easily can happen when you are a network marketer. Why? Because you buy inventory from the parent company, and then you have to sell it. If you don’t sell it, you’re stuck with the stock. Sometimes, by the time you have bought the inventory and tried to sell it, the parent company had decided to no longer support that inventory with brochures or other sales devices. So you end up stuck with last year’s catalogue of unsellable inventory.

None of this is illegal. I wouldn’t even call it unethical except that I end up seeing too many confused people who clearly never have understood the network marketing business in which they have engaged. A basic rule of inventory is what’s called turn. In retail stores, inventory is carefully followed to ensure that it sells out, thus turns, in a given period of time. If it doesn’t, the retailer gets rid of it in favor of some other item that will turn faster. So one principle that network marketers often don’t understand is that they must sell out all their inventory, turn it, quickly. A second reason for quick turn in the case of cosmetics is that the products themselves age and become unsellable or unsafe. You don’t want to put eyeliner on that’s over a year old, do you? Not a good idea. The chemicals deteriorate.

So here the poor woman is, having bought sometimes thousands of dollars worth of stuff that she didn’t sell. Why? Maybe she got caught up in the excitement of it all, and ordered too much inventory. A mistake. Retailers keep their shelves full but their back rooms empty, and they get customers all day long, every day of the week. Network marketers, who are usually part-timers, should keep as little stock as possible, and put everything on order. Let the customer wait for the order to come in. The delayed delivery gives the marketer a second opportunity to sell to the customer, anyway.

Another reason the marketer might have too much inventory is that the parent company is insisting on volume buying, or encouraging it with discounts. Discounts are a funny thing. One has to look no farther than the hilarious explanation of how the mother saved money on a hat in the movie “Life with Father,” or one of Gracie Allen’s killer routines, to realize that many women still believe that spending $20 instead of $40 is saving money, when the truth is that spending $0 is the only way to save money. It’s a neat trick, and these network marketer babes-in-the-woods get caught by it again and again.

A third reason a network marketer might get stuck with too much unsellable inventory is that she is not a good saleswoman after all. She might like the social aspect of the business, but she might not be good at pushing the products. This is especially true because it’s typically a part-time business capitalized by other income and thus not truly at risk. What do I mean by that? Most women who become network marketers don’t go to a bank to get a business loan to buy inventory, so they don’t have loan payments looming to push them to succeed at selling. Instead, to capitalize the business, they simply open their personal check books or flash their credit cards, and divert family money. This may or may not be true discretionary income, but the marketer acts as if it is. She does not hold herself strictly accountable to repay the family for every dollar she spends on the network marketing business. And without the incentive of a business loan to repay, it’s easy for the network marketer to lose track of the profit concept. She’s having a good time, or she’s not having one after all, and well...

I’ve bought goods from network marketers, and there was nothing wrong with the products or the prices, or the service for that matter. I even enjoyed the network marketing parties I attended. But I am ethically opposed to network marketing because it preys on the bonds of friendship, it cynically uses the ancient rites of hospitality, and it too-often leaves the network marketer herself under water financially. Anybody considering doing it ought to think very carefully about sales as a career, because the most successful salespeople are always the people who enjoy selling. Anything less, and you could wind up being another unhappy victim of network marketing fever, with a garage full of useless stuff, and a hole in your bank account.

Sunday, May 24, 2009

Savings Accounts. Use Them.

I did something wild this week. I took money that I had in my checking account and put it in my savings account. This is earmarked money. Half of it is money I have already spent. I ordered some flower bulbs, but the company isn’t going to bill me until they send the bulbs in the late fall. So I need to make sure that when I get the bill I’ll have the cash to pay my credit card company. The other half of the money was for a writers conference I attend every year. The entrance fee is something over $200. So I put away $200 so I can pay the fee the moment registration opens. These two expenses are definite later this year. It made sense to sock the money away in a savings account, because freelancers don’t have a steady stream of income and it’s important to earmark the cash that comes in.

I am experiencing a strange byproduct of having done it. Without that money sitting in my checking account, I’m feeling a bit broke. Not willing to spend like a drunken sailor. More careful about my immediate expenses. This is as it should be, considering that these two purchases are definite. But it brings home a lesson that many personal finance books have tried (and failed) to teach me before: You can’t just let money sit in your regular account, because having it there will give you the sense that you are wealthy, even though that might be far from the truth. And when you think you’re fine financially, that’s when you will spend more money. If you make plans for your money and segregate it in different accounts, you’ll have the money you need for the things you really want. In my case, for flower bulbs and a writers conference, but in your case it could be for an HD TV, or a discounted Coach handbag, or whatever.

This isn’t pure savings. I’m not just siphoning off extra cash I just had lying around to indeterminate savings. This is planning ahead. Maybe when the time comes to pay the two bills I’ll have cash available that isn’t earmarked for anything else, and I won’t have to use the money in my savings account. Then, that money becomes pure savings. Until I designate it for some other future purpose.

It always amazes me that I can understand the benefit of an action intellectually, but I don’t understand it emotionally until I experience it myself. I am so glad I took this action. I recommend it.

Sunday, May 17, 2009

Is Lowering My Credit Card Limit Bad?

It finally happened. Friends have reported this happening to them, but now it has happened to me. One of my credit card companies, Fidelity, has cut my card limit almost in half.

I am not sure what to think about this. Did I need a card limit of $23,000? Will my new limit of $12,000 be enough? Enough for what? Another driveway pave? Unnecessary. A home improvement? I’d rather get a conventional loan or do without the improvement. No more loans whose terms can be changed unilaterally by the credit card companies, thank you very much. Been there. Done that. Would $12,000 be enough to pay for a trip to Australia? No worries. But that’s not how my next trip to Australia will be financed.

By my calculations, which admittedly are extremely simple, I have never, ever made so many purchases on this credit card to warrant even a $12,000 limit. And if an emergency situation arose where I’d be looking for $23,000 in cash, I wouldn’t go to a credit card company for it. I’d go to rainy day savings. Or my IRAs.

Is this going to affect my FICO score? I suppose. But what do I care? I’m not getting a mortgage or buying a car. Or a yacht. How many points on the scale do I slip when I owe nothing anyway?

A friend’s story is different. This person is mired in credit card debt, so cutting the limit put a damper on the possibility of making new purchases. But isn’t that a good thing, if you can’t pay off the purchases you’ve already made? Ah, but we’re all stuck on the treadmill. This is our lifestyle, and nothing in it shall change, even if we have to finance the lifestyle through unsecured loans from credit card companies.

Face it, few of us have assets that anyone, even a loan shark, would accept to secure a loan. It’s not as if we have large diamonds to hock. Our houses? Forget it. Cars? Doubtful, but maybe the used car market is in better shape than the new car business. Objets d’art? We don’t own them. Try to sell a plasma TV for anything like what you paid for it. Yeah, I thought so. Not happening. Maybe on Craigslist you could find someone, but all I see are unrealistic prices and no buyers. Most buyers would rather have the factory warranty, anyway. So, yes, most of us use unsecured loans to raise cash if we don't have other resources.

What happens if six months from now this same credit card company again cuts my limit in half, and I’m down to a $6,000 limit? Still enough to finance a trip to Australia. But taking trips is not what I use this credit card for. I buy gas, I buy groceries, and I go to various stores for random household and hardware items. Do I need even a $6,000 limit for those shopping habits? No. What about my online purchases? Opera tickets? Books? Flower bulbs? Those can add up, but still, about $1,000 would be fine. Make it $2,000 in case I decide on the spur of the moment to fly to California for a weekend.

I don’t need a lot of credit, and that’s the truth. I remember several years ago, arguing with a credit card company that insisted on raising my limit. I had called for some other reason but they were pushing giving me more credit. That was raising the limit to $5,000 or so. They won that round. Now, the credit card companies may think they have won another round, but I disagree. I think I have won. If someone steals my identity now, they can’t get away with $23,000 worth of stuff. Only $12,000.

Thanks, Fidelity. I await the next credit limit reduction with eagerness.

Monday, May 11, 2009

Banks Are Stupider Than We Are

An article in the New York Times today says that banks are bracing for taking losses on their credit card customers. The banks might have to write off some debts they realize they will never be able to collect. Nowhere in the article are the dollar amounts of actual purchases separated from the dollar amounts of expected profit from late fees, finance charges, and finance charge hikes, and the many other punitive measures banks use to raise their expected profits from credit card holders. Nowhere does the article mention the transaction fees the banks have already collected from merchants for each purchase.

I wonder what Americans really owe? Is it $8,400, as Moody’s is quoted in this article? Or $9,000, the figure that various financial writers fling about? And how much of that $8,000 or $9,000 is actual purchases, and how much is the additional punitive fees banks add on?

This is meaningful because at some point, someone has to recalibrate bank expectations of profit from credit cards. We all know that finance charges and late fees have been minting money for card issuers for decades. If they are used to making, say, 70% profit on these cards, perhaps in the future, they should expect to make only 35%. I don’t know what percentage of profit banks routinely make on credit cards because most of the articles I pull up on the net are about the losses they expect to take this year. But a little probing reveals that some quote percentages such as 71% profit and a 24% loss. Compare that to the 1% or 2% profit that the grocery store industry typically nets. Or the 6% profit that publishing used to make. That’s right. Those figures are correct. Many large businesses make huge dollar amounts but only tiny percentages in profit. The banks have been making huge percentages ever since they got deregulation of finance charges.

But, and this is interesting, in searching for the figure on bank credit card profits, I have realized something else about them. If we think that individual consumers are stupid about credit, we now have proof that banks are even more stupid. Why? Because the banks are taking a bath on credit cards right now and in the foreseeable future. It’s all over the net. And nobody seems to realize that if the banks did not charge such fantastic and unfair fees, consumers, even consumers who have lost their jobs, might be able to pay them back. Well, duh.

Which brings me back to that $9,000 average credit card debt. What if it’s only for $2,000 in purchases? It looks a lot easier to pay back, doesn’t it?

Here’s the thing. We all know how credit cards work today. And we all know that credit cards were originally only issued to people who were wealthy or whose purchases were on an expense account and would be paid for by an employer. At that time, the banks collected their profit as fees from merchants. But then the banks changed their paradigm. They decided to make credit available to more iffy customers, including college students, which enlarged their customer base enormously. This drastically increased their percentage of failures, i.e., customer defaults. And it increased the banks’ internal costs of operation, since they now had to monitor and deal with many more customers. In other words, the banks took a solid business based on people who could pay and turned it into a precarious business based on people who might pay but often could not. And now that the economy is in a significant downturn, the folly of basing a business model on such a precarious concept (overloading individuals with debt and then milking them for finance charges) is self-evident.

So, yes, another instance of the banks being even stupider than we are.

Monday, May 4, 2009

Something’s Wrong Here

Guess what my car insurance company just gave me as a free service upgrade.

Accident forgiveness? Nope.

Reduced rates with more coverage? Nope.

Pet insurance?

That’s right. In this time of worldwide financial crisis, with many people out of work and others trying to subsist on terribly reduced savings, my car insurance company has seen fit to bless me with accident insurance for my pet if the pet is injured while in the car.

And there’s no deductible.

Last time I heard, there was a deductible if I got hurt in the car, but then again, it’s likely that I don’t understand my automobile insurance policy. Maybe there’s no deductible for me, either. But I do understand this new part of my policy, because the insurer sent me a special full-color page describing it. Too bad they’ve never sent me a similar page elucidating the ins and outs of my human coverage.

Do I begrudge pets this coverage? Yes, I do, because I don’t have an option not to carry it and that means I am paying for it buried in my rates. My insurance company charges every single customer for this supposedly free coverage by raising rates it could have held steady, by not reducing rates it could have discounted, and by not expanding coverage for humans. The very humans who are the company’s paying customers, unlike Muffy and Rex.

Look, I like animals, and I would never be deliberately unkind to any that aren’t invading the sanctity of my home. (Those that try, die. Come to think of it, I pretty much hold the same view when it comes to humans.) Still, I do not believe in wasting any precious human-grade resource on animals, be it food, shelter, or medical care. I don’t think animals should be made to undergo surgeries that prolong their lives yet subject them to continued pain and confusion. I don’t think dogs should live in tiny kennels, or on chains, and I hate seeing wild animals in cages in zoos. Pets are okay, and working animals are more than okay. Guard dogs? Good. Rodent-hunting cats? I’m for them. But unless they are sources of revenue, pets should not merit better treatment than we give other humans.

People ought to look around them at all the humans who need food, shelter, and medical care, and who are going without these resources. If you’ve got extra, before you pamper your pet with super-special food or other luxuries, ask yourself if you have at least donated the equivalent to some charity or other organization that helps people. If you haven’t, then what are you doing feeding sirloin steak to a dog? Or fresh salmon to a cat?

And where’s my no-deductible insurance for when a deer runs in front of my vehicle and I can’t stop? Or simply runs into the side of the car before I even see it? (I saw that happen one afternoon. A deer ran across a suburban yard into the road and banged into the side of a car, and bounced off. They do that.) But no, such no-deductible insurance apparently doesn’t exist. If I threw the half-dead deer into the back seat and called it a pet, would my auto insurance company pay for its life-saving care? Yes. From dime one. But if the deer caused me to lose control of the car and slam into a tree, I’d still be liable for a deductible while I’m being sent to the trauma center.

Something’s wrong here.