“Bad” financial advice
Wow. I thought I’d left all the nasty name-calling when I stopped posting political opinions. But I’ve discovered a new sacred cow in America: credit. My post yesterday, Credit Card Zombies, drew some nasty responses. Positive responses, too, but the few ugly ones caught me by surprise. None of these replied to me directly, I found them over at a board called NotMSNMoney, on this thread.
I’m sorry…but jackass?
My friends, if I’m a jackass for wanting to keep my kids from giving away their money to banks and immersing themselves into our culture of debt, then guilty as charged. I am truly amazed that anyone would defend a lifestyle of debt. Someone must explain to me how it makes better economic sense to lose money in interest fees than to earn it in investment returns.
Let’s go back in history a bit, once again. Why is it that debt was never considered vital to our economic health until the last half of the 20th century? And well into the last half, mind you. If it was always such a good idea, why didn’t our grandparents think so?
The bank is your BFF…trust them!
Who is it that is offering our kids “good economic advice” by telling them to start buying things on credit? I’ll kindly ask that person to stay away from my kids. He ranks right up there with the marriage expert who advises watching porn to add a little spark to the romance.
Seriously, naysayers. Let’s forget the credit rating for a moment. That is a recent invention designed to keep us in debt. To what purpose does debt serve us? If I have insurance and an emergency fund, what is this disaster to befall me that will force me to rack up a huge debt?
The truth of the matter is that we don’t want to plan. We don’t want to prepare. We want to live for the day, buy what we want, and buy it now. I find when I discuss credit card debt, I never meet anyone who doesn’t pay off their balance every month. Amazing. Yet somehow the banks are making billions off of credit cards. These are the same folks who always break even at Vegas. I’ve yet to meet anyone who loses money at the Blackjack tables.
The truth will make you enemies
My friends, I am willing to take the hits. No, I’m not an economist. But I have learned valuable lessons and have enough common sense to know that buying a car with a sticker of $25,000 and paying $32,000 is probably not a wise investment, especially when said vehicle loses it’s value to the tune of $100 per week. Likewise, buying the TV, clothes, lunches, and everything else we desire on credit is just dumb.
The fact is that few of us use our credit cards for emergencies. We use them so we don’t have to wait. If you’re the rare individual who has never held a balance, God bless you. You may drop a “jackass” in the comments and move on.
Based on the numbers that the banks themselves reveal in their annual reports, though, I’d say you are a rare bird indeed.
So, kids, here’s more “bad financial advice:” Pay cash or don’t buy it. If you want it, save up for it. If you think you may have an emergency in the next 60 years, save up a fund for that as well. I’ll get to work on some posts explaining exactly how to do that. You just keep an eye out for the predators who are after your money.
God bless you and, please, always question “normal” behavior.
Yours truly,
The Jackass
Dear Jackass, I am proud to call you friend. Signed, former Dumb Ass.
Thanks Jeanette. Maybe I should change the name of my blog to “Jackass Revolution.”
Hi there Mr. Estrada. I’m a poster over at NYMSN aka “MSN Refugees”- I’m the resident obnoxious conservative evangelical Christian over there. One of them, anyway. I am also one of the posters that took issue with your advice to eschew all credit cards. Wise use of credit has benefits for even the most conservative Christians out there.
By the way- I’ve made my share of mistakes with credit. However, like a lot of things- one extreme is rarely the solution to the other. Rather than allow (in my day it was Larry Burkett– who by the way predicted that the entire financial system would collapse in 1994 (guess he doesn’t know what they used to do to false prophets back in the old days) well-meaning people to misguide me on the subject, I dove into personal finance head first and I learned the ins and outs. I learned to make credit my friend.
Like any tool, it can be dangerous if misused- but let me pose one simple scenario and you tell me what the right answer is. Nevermind my personal financial situation, because it’s actually quite good so I don’t want to use myself– but I’ll use a recent example from my life in part:
1. I had an old car- I make a good living, but I could give a hoot what I drive. So, I ran my 1997 Honda Civic into the ground. I put about $1,200 into it early in the year last year, but last summer I ran into a situation where my A pipe failed and it was going to cost $600 to replace it. I was also starring down the barrel at CV joints (205K mile car- stuff starts to happen– even to a Honda), and who knows what else?
2. I made a decision to trade the car- they gave me $1,000 bucks for it.
3. I was all set to write the check for the used one (I bought another Civic) which was going to come to $19K w/ for a 2011 model with 13K miles on it when I got offered .9% financing on a brand new 2012 model with 6 miles on it for $23K and change.
4. I went with the new car and the .9% financing. Monthly payments are $335 give or take a nickel and mind you- I have the money.
The question is, why not just pay cash for the used car– I’d “save” $4,000 over the new car, it’s a Honda so the miles aren’t really an issue– a 13K mile Honda may as well be new? And even if I went with the new car, why would I incur debt? Why not write a check for it?
Well, the answer is rather simple- If I didn’t do ANYTHING with my money, I’d make money on the financing. You are probably one of those ‘crazies’ like me that knows the endless printing of fiat currency, and massive national debt is all going to come to a head at some point.
I’ll save you the trouble on the math (I put $5K down) and my TOTAL finance charges over 60 months is $460 bucks. That is the TOTAL cost of the money.
Now, let me ask you this question: $1.00 in June of 2012 will be worth:
a) About the same in June of 2017
b) More in June of 2017
c) A whole lot less in June of 2017
d) There’ll still be Dollar in June of 2017?
The fact is we don’t know for sure, but at current inflation rates (the real rate- not the phony baloney government number), that money is losing about 1% to 2% per month in purchasing power. My expectation is that inflation is going to accelerate as the economy eventually begins to expand and the Fed cannot soak up the excess liquidity, and someone just handed me money at .9%.
But I didn’t do “nothing” with my money– I invested it. I bought some gold- about 5% of it, and I bought a property in Riviera Beach, Florida (Yes, I buy houses this cheap- do it all the time) with the rest ($16,900) and I even had a few bucks left over which I spent frivolously. Now, my house is done and rented (as of the end of September 2012) and the NOI on that property is $290 and change. The recently appraised value of that property: $40K. That value, btw- will likely track with inflation meaning it will be worth (conservatively- if there’s no change in the inflation rate) around $65,000 to $70,000. And of course, this also conservatively assumes that we aren’t on the verge of a massive housing shortage- which we are.
So, you can keep your zero debt and your peace of mind. And btw- I’m not criticizing you if you do. I do, however, feel it would be worthwhile to keep an open mind on matters that are not moral absolutes- and the idea that debt is “evil” or “bad” is 100% man-made. The Bible provides caution, and wisdom in handling money- in fact, it covers the topic of money more than the topics of Heaven and Hell combined- but in no place in the Bible does it say not to ever, under any circumstances borrow money or else we’d have 11 instead of 10 commandments.
Good points, Paul. Yes, I’ve considered the inflation factor when it comes to credit and investing as well. I have no doubt that the reckless spending and money creation coming out of Washington will devour a great portion of our savings and investments. And I have also done the low or zero interest borrowing. The latest was a Cub Cadet ZTR lawn mower (Highly recommended!).
But keep in context the focus of this blog. I’m after the twenty something just starting out. A scant few of them will do the kind of homework you and I will when making a decision on a major purchase. Young people are getting sucked in by the allure of having what used to be luxuries the moment they get they first apartment. Remember when cable TV was a luxury? Now one simply can’t live without it. Or the flatscreen TV.
Just about anyone who hangs out on your forum over there is, naturally, more careful with their money and credit than the average Joe. I can take a look at my own extended family, who probably represent a pretty good cross-section of Americans, and tell you that is not the case for most.
So, like my advice on drinking, I’ll advise the young man or woman to “opt out” until discipline is learned.
I do hope you’ll continue to watch my blog and comment. I’ve dabbled in politics, so disagreements don’t bother me. One develops a thick skin when discussing organized labor in Michigan.
Thanks for the feedback. Stick around and let me know what you would tell your twenty-something. What would you have done different, be it financially, spiritually, name it. God bless and see you around.
** Clarification- that $290 NOI is *monthly*
The banks are making money off Credit Cards via the interchange/transaction fees that merchants pay every time you use a credit card. I’m a credit card ‘dead beat’ – I dont incur fees or interest on my card(s). Yet, I use my card(s) every month I have several services paid via a credit card. I charge gas. I also charge some big ticket things on a yearly basis (event tickets!) as well as other stuff over the course of the month. Surely the Credit Card company would have dumped me as a ‘customer’ years ago- I’ve not paid them a penny for the monthly ‘loan’ they give me? How does it make sense for them to keep me as a customer? Are they hoping someday eventually I’ll slip up and incurr a fee or have to pay interest? No, they make money every time I swipe my card – they want me to use my card and make it easy for me to do so.
I don’t think you are giving ‘bad advice’ – there are people who can’t control their spending or who find not having a credit card comforting. But to assume that anyone with a credit card will automatically carry a monthly balance is like wearing blinders.
Maybe finding a way to communicate how much interest is being paid on 3K or 5K balance with various monthly payments might be more helpful. I suspect that most people who are paying interest don’t have a good feel for how much over the course of a year that debt is costing them. I know once math and numbers get involved most people start hearing Waaaah Wah Wah Waaaah Wah. So finding a way to get people to realize the COST of having the debt might be a better deterrant then demonizing the peice of plastic.