Advanced Personal Finance

I find it amazing what banks and credit card companies will put in advertisements.

The other day I saw a commercial for a credit card offered by a well-known bank. I forget which one or I’d say. Anyway, the gist of the ad was that, due to there undying benevolence, this bank wouldn’t charge a fee for going over your credit limit.

Excuse me, but what’s a credit limit for, anyway? It’s been a while since I had to concern myself with my credit limit (though don’t think I never have had to - I did) but what are these for if you can charge stuff in excess of the limit? I guess the honest answer is “they’re a method banks use to extract more cash from consumers.”

I just don’t get it.

I also have another observation. Have you ever noticed that credit cards are an extremely competitive business in that they’ll offer all kinds of incentives to get you to sign up for one, but no one competes on price (APR)? Aside from one of those incentives in the form of a short-term 0% balance transfer or 0% on purchases for a year, that is. Why, if competition is so fierce, do banks not compete this way?

The answer lies, once again, in economic behavior. See, when people consider whether or not to sign up for a credit card, they never see themselves carrying a balance. They believe they’ll pay off their statement every month. Except, for a sadly large percentage of people, they do carry a balance, at least occasionally.

Instead of considering the actual cost of that credit, people sign up for the free t-shirt or teddy bear. It’s proximity. The t-shirt is here, now. Finance charges are only a possible outcome; and anyway, that’s months from now.

Since people don’t shop for credit cards based on actual cost, banks don’t compete on it.

Those crafty credit card companies.

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This is off topic, but I feel like getting this off my chest.

Attention people traveling by plane over Thanksgiving holiday: By choosing to fly over the Thanksgiving holiday, you have forfeit all right to complain.  If you chose to travel by air this time of year, you deserve everything you get.  This includes, but is not limited to, flight delays, lost bags, long lines, and poor service.

Attention people shopping the day after Thanksgiving: By choosing to shop on the stupidest day of the year for shopping in person, you have forfeit all right to complain.  If you chose to get up at 4 AM to line up outside Best Buy to get a DVD player for a nickel, you deserve everything you get.  This includes, but is not limited to, crappy weather, long waits, long lines, out-of-stock items, and surly service.

And let me talk for a minute about customer service.  Don’t bitch about poor customer service unless you’re in the habit of frequenting Ritz-Carlton hotels.  Americans long ago chose low prices over good service, hence the success of Wal-Mart.

That’s another thing.  If you shop at Wal-Mart, you have forfeit your right to say Wal-Mart should treat their employees better by offering them a living wage or good health benefits.  You don’t shop at Wal-Mart because their stores are clean and the employees friendly.  You shop there because their prices are the lowest in town short of the dumpster.

It all flows really nicely.  Consumers shop places with the lowest prices in droves.  Those places pay terrible wages to employees who are supposed to provide service to the customer.  Employees don’t give a crap about providing that service.  Consumers get poor service but low prices.  Consumers continue to shop there.  It all works.

So this holiday season, before you open your mouth to complain about the lousy service, stop and think what you’re paying for it.  Because the correct answer is, “Next to nothing.”

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Yesterday, I heard a commentary on American Public Media’s great program, Marketplace.  The piece, by Moira Manion, was about how Ms. Manion is looking forward to a recession.  It seems Manion is debt-free and she feels fully confident she can always bring in enough for monthly expenses (she proudly proclaims she nets $1,200 per month working a retail job at an airport).

Not only was the piece distasteful, it reflected a stunning hubris.  Manion seems to believe that anyone with debt (any debt) is an irresponsible consumerist, buying big screen TVs and expensive shoes.

“No, the people who need to worry are the people I see every day: Customers with 10 credit cards that are all maxed out. People with two cars, two kids, a mortgage and no savings. The fresh-out-of-college guy who bought a $190,000 condo, while owing $40,000 in student loans, and who still hasn’t found his ‘dream job.’”

Better than you

One of the complaints I read about personal finance writers (including bloggers) is that they exude a holier-than-thou attitude.  I truly hope I don’t ever sound like Ms. Manion on this blog.  If I do, please feel free to cyber-slap me.  I’m not writing to proclaim how awesome I am.  The fact is, my family often busts our budget, we owe money on a mortgage, and I don’t have all the answers.

On the contrary, I feel an almost constant underlying dis-ease.  I suffer from the feeling that financial disaster is only one step away.  And I feel this way regardless of our current financial situation.

I’m sure it’s a combination of biology and experience causing this.  Economic behavior is funny that way, I guess.  I read that the same percentage of people polled agree with the statement “I always/often worry about my finances” regardless of whether they were middle class or extremely wealthy.

So as for me, I hope there isn’t a recession.  Because I know people with debt aren’t bad people, and they certainly don’t deserve the pain a recession would bring.  Regardless of how many credit cards they’ve maxed out.

I understand the phrase, “There but for the grace of God go I.”

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News flash - Having more money will not solve your money problems.

I can’t tell you how it drives me nuts when I hear, “If I just made $10,000 a year, man, I’d be set.”

No you wouldn’t.  You’d just buy $10,000 worth of crap and be back in the exact same place you are now.  You’d still have crappy spending habits and no self control.

Let’s get this straight.  If you have it together now, you’ll have it together with a higher (or lower) salary.  If you can’t live below your means and save a little something for the future now, you won’t be able to with more money.

I’m not trying to sound preachy.  I’m just a regular guy.  Thirty-something with two kids and a mortgage.  My wife and I paid for our college degrees the old fashioned way - with student loans.  We bought our house the old fashioned way, too - by living in a crappy apartment and saving like crazy for a down payment.

Your money decisions are yours alone.  Hell, your life decisions are yours alone.  Regular guys and girls can do it.  You absolutely can live a balanced life, pay your bills, and save some money.

You just have to want to.

Making an extra $10,000 per year - that’s the easy part.  Changing dumb money habits into smart ones - that’s the hard part.

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You wouldn’t spend money differently depending on how you acquired it.

Or would you?

Take this quick quiz:

1. You’ve just cashed in stock options worth $5,000. You…

a. Invest the money
b. Save the money
c. Spend the money on necessities
d. Treat yourself and spend it on a ‘luxury’

2. You’ve just received a gift of $5,000 from your parents. You…

a. Invest the money
b. Save the money
c. Spend the money on necessities
d. Treat yourself and spend it on a ‘luxury’

I’ll bet I can predict what you answered. Most people would choose c or d for question 1 and either a or b for question 2. But why would how you got the money possibly determine how you spent it?

I am facing question number 1 in real life (though the amount is much smaller). I’ve already observed in myself, though, this very behavior. I’m much more inclined to spend (at least a portion of) the proceeds on something frivolous. You better believe, though, that if I got a gift from a relative I wouldn’t be thinking, “What treat should we buy for ourselves?”

A question of amount

I think there’s another factor at play here besides how I got the money. The amounts I’m talking about are relatively modest. Having experienced this sort of thing before, I know exactly how I’ll react to spending the money on something ‘frivolous.’ After the money’s gone, I’ll probably be pretty happy about how I spent it.

When I was a teenager, I was walking home after work one day and found a $10 bill in the grass. I’m thinking, “Sweet! Ten bucks,” as I pick up the bill. Only it’s not a $10 bill…it’s a $100 bill! And there are three more of them within a couple of yards, just fluttering in the breeze. Holy crank! I pick up the money, look around for anyone coming back for the money, and wait a few minutes. Nobody comes to claim the dough.

I got home and told my parents about my good fortune. Without missing a beat, they told me I had to turn the money in. They correctly pointed out that it could be somebody’s rent money - somebody who needs $400 way more than a teenager does. To cut the story short, I did turn it in and later got it back after it remained unclaimed for a few months.

So what did I spend that $400 on? I blew it all on a brand new 4-head VCR (I’m really dating myself here) and a Metallica videotape to play on it. Hey, it was free money! I spent it and felt great afterward. I don’t think I ever regretted spending it how I did. (Well, except maybe years later when a VCR cost about the same as a carton of cigarettes.)

I’m quite certain, though, if I’d found $40,000 and blew it all on assorted crap, I’d be kicking myself afterward. The regret from having blown such a large amount of money, potentially a life-changing amount, would be tremendous. I would not feel great afterward. On the contrary, I’d feel like a complete jerk. (Could this be why you hear about big lottery winners ending up wishing they’d never won?)

It’s pretty amazing when you think about it. How you acquire money and how much you acquire largely determine how you spend it and how you feel afterward.

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