Advanced Personal Finance

Whether you love or hate Suze Orman, if you’ve spent any time at all listening to her or reading her work you’d have to agree she’s all about FICO. FICO stands for Fair Isaac Corporation and it’s typically a stand-in for a ‘credit score’ calculated by Fair Isaac, a public company that makes money selling information. Information about you. Whether you want them to or not.

Orman talks almost constantly about the need to know, monitor, and improve your FICO score. She says this is because it determines whether businesses extend you credit and at what rate. It is also coming to be used by employers to help determine who they should hire.

What she doesn’t tell you is that there is no one FICO score. There are dozens of them, more even. Fair Isaac labels you based on what industry is asking. So you have a FICO for banks, one for insurers, another for telecoms, etc. And how do your actions (e.g. opening or closing a credit card or paying a month late) affect your FICO? Orman can’t tell you. Neither can I. Only Fair Isaac, which designs the algorithms that calculate your score, could tell you. And they’re not talking.

The other little item Orman neglects to mention is that your FICO score has nothing to do with the one variable that determines your ability to pay your bills - your income. FICO is a ‘measurement’ of your history of payment. It says nothing about your ability to repay debts.

So the next time you hear or read about FICO, keep those two things in mind.

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I read a short article about giving the gift of a personal finance book. In the article, the author Eileen Ambrose writes about which books several financial professionals recommend. They’re the usual suspects - The Richest Man in Babylon, A Random Walk Down Wall Street, The Millionaire Next Door - nothing out of the mainstream.

I wonder if it’s a good idea and/or acceptable to give a personal finance book to someone? If so, under what circumstances? I can think of a couple of possibilities - wedding, college graduation. I’m not sure I’d be completely comfortable giving someone that as a ‘gift’ for such an occasion. It’s a really practical idea. I mean, typically people in those circumstances need to learn the basics. It’s just that I can imagine most people’s reaction to opening something like that the day after their wedding.

I think maybe a better choice might be buying an hour of time with a fee-only financial planner. My brother’s getting married next year. Maybe I’ll look into doing that.

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About six months ago, my wife’s car was rear-ended by a delivery truck while she was on her way to work. Fortunately, she was not seriously injured but the car was a total loss. If you’ve ever been through this process, you know how much of a pain it is. The path to getting the word from the insurer that your car is totaled is not a straightforward or quick one. Then once you get the word, the real fun begins. You get to haggle with the insurer to get the most money possible from them. That’s a whole other story.

This story is about how not to buy a car. After we were notified of the amount we were getting reimbursed for the totaled car, we looked at our budget and savings and came up with a number we felt comfortable spending on a replacement vehicle. I think it was $9,000. If you’ve tried to replace a perfectly good family car with $9,000 recently, you know what we were up against. It’s next to impossible.

Obviously, we were looking for used. So I begin the online research and narrow our search to the usual suspects - Honda Accord or Civic, Toyota Camry, and Nissan Altima. There were others on the initial list but they were scratched for one reason or another. We set a babysitter up for Saturday and start visiting listings. Some of the highlights:

• Honda Accord in our price range. After searching the lot with a salesman for a few minutes, I find the car. And its wheels are missing. All of them. And the car is laying on its belly. We leave.
• Nissan Altima in our price range. Searching the Carfax report we find three owners in the last six months. We leave.
• Toyota Camry in our price range. We drive it. It’s nice. We ask how much. Salesman: “Oh, I can’t let you buy this one.” Me: “Why not?” Salesman: “It’s not ready yet.” Me: “Wow” We leave.

We end up looking at a Volvo dealership that has Toyotas on the lot. It’s now 8 hours into the day and we’re tired and starting to get grumpy. My wife’s eye turns to Volvo station wagons (her dream car). I have done know research on these. I have no clue what a good price is. Before I know it, we’re driving one. Twenty minutes later, she’s on the phone with her mom who’s checking prices and ratings on Consumer Reports. Now I know Volvo hasn’t had good reliability in recent years and I’m skeptical, but this is her car.

After the obligatory back and forth over price (we end up offering more than our ‘target amount’), we come to agreement. While we do paperwork, the car is getting ‘prepped.’ Did I mention the ‘Check Engine’ light was on during the test drive? So in our case ‘prepped’ meant ‘resetting light so suckers think there’s no problem.’ Thus accomplished, my begins driving home. Can you guess what happens next? Wait for it… The ‘Check Engine’ light comes on again.

So the next day I take the car to our local mechanic to have it generally inspected and so they can tell me about the light. My wife calls them later and then calls me. Wife: “What’s the most expensive thing you can have to replace on a car besides the engine?” Me: “The transmission.” Wife: “Try again. Give up? The car’s catalytic converter is shot and needs to be replaced. About $2,000.” Me: “Holy crap.”

The next day, the calls to the dealership begin. To their great credit, they were sympathetic and after some back and forth, agreed to let us find another car on their lot. My wife takes the next day off and, with my admonishment to buy a Camry or Accord, goes back to the dealer. Can you guess what happens next? My phone rings. Wife: “I found a great car.” Me: “Oh yeah? What is it, the Camry I spotted?” Wife (voice full of excitement): “No. It’s a different Volvo station wagon only newer!” Me: “Oh, no.” Wife: “And it’s not that much more.” Me: “How much is ‘not that much more?’” Wife: (unintelligible)

So that was six months ago and we paid way more than we wanted to for a car we didn’t start out to buy. On the plus side, it’s been a good car so far and I learned how not to buy a car.

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The Carnival of Personal Finance #97 is at Endless Gibberish. Check it out this week.

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1. Cashing out when changing jobs

Probably the worst thing you can do with a 401(k) is to take a distribution from it when you change jobs. There are negative tax consequences, you undo lots of good (and easy) work saving for retirement, and you probably don’t need the money anyway.

The major negative with taking a distribution from your 401(k) when you change jobs is the tax consequences. When you take a distribution before retirement (with some exceptions which are rigid in their requirements), you are immediately hit with a 10% penalty by the IRS. In addition, the distribution now becomes ordinary income, meaning you’re then taxed on the distribution.

The second reason not to take an early 401(k) distribution is because you’re undoing a lot of good work you’ve done for your retirement. When you had money taken out of your paycheck and put into a 401(k), you’ve already done the hard part. Any pain you may have felt in having a smaller paycheck has already passed. If you take a distribution, you’ve just undid all your work.

Finally, you probably don’t need the money anyway. Unless you’ve been involuntarily separated from your company, you either have another job lined up or plan on something else like going back to school. In either case, you most likely don’t need a lump sum of money right now. Can we all make use of a big deposit into our checking account? Of course, but you weren’t planning on it, so its absence won’t hurt.
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