It’s another one of those personal finance ‘rules’ that is great in theory, but unrealistic in practice.  We’re told by many sources to save any salary increase we earn and live on what we were making.  This advice is usually accompanied by a statement like, “and in 30 years, if invested in an stock index mutual fund, it will be worth 5 zillion dollars!”

You see, the reason this is stupid advice is that if you’re like the vast majority of taxpayers in the US, your real salary has likely gone down over the past 10-15 years.  (The term ‘real salary’ refers to your inflation-adjusted salary.  If you get a 4% raise and inflation is running at 5.6%, you’re making less money every month in real terms.)

The plain fact is, if you get a raise, you’re going to have to spend it just to try to keep up with the rising cost of food, fuel, and just about everything else.

Saving your raise.  Nice idea.  But you probably can’t do it.

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Apparently, if you are a retiree who has been getting Social Security benefits you applied for when younger than 70, you can return the money, refile now that you’re older, and get the correspondingly larger payments.  Here’s the form to file a withdrawal of application (SSA-521).  It’s perfectly legal.  You file the form, include a check for the amount of benefits you received (there are, of course, horrendous tax implications), refile now that you’re older, and start receiving a larger benefit.  There’s no adjustment for inflation (you pay back with cheaper dollars) and there are no fees.

This move may not be news to anyone else, but I was amazed at the prospect of people doing this on a large scale.  If that were to happen, not only would the US’s unfunded Social Security liabilities be much larger than their already stupefyingly high number, they couldn’t even accurately be known.

Lots of PF bloggers use credit card arbitrage to make money (or at least they used to before credit tightened); I wonder if any would recommend using a similar technique here.  Someone financially prepared for retirement could conceivably take early benefits, bank the money and reap the interest, then pay back the benefits with now-cheaper dollars and begin receiving higher payments all over again.

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What’s an authorized user

In credit-speak an authorized user is someone who is authorized to use the credit account in question.  (Brilliant wordsmithing, wouldn’t you say?)  What that means is really this.  Someone authorized to use a credit card but who does not pay the bill essentially piggybacks on the credit history of the person who does pay the bill.  Parents make college kids authorized users, for example.

Psst.  Buddy.  Wanna buy a credit profile?

The small problem with that arrangement was that literally anyone could become an authorized user, even if they didn’t actually have access to the credit card.  Credit repair places exploited this by facilitating a transaction whereby someone with less-than-stellar credit would pay for access to profile of someone who did.  The credit repair people took a cut, Mr. Subprime got loan terms better than he normally would have, and FICO was none the wiser.

Until they got wiser.

Fair Isaac decided to eliminate authorized users from its calculation of FICO.  The problem with that was that it left a lot of people out in the cold who used the authorized user technique legitimately.  Married women and young people were usually the ones affected.

It’s back

Fair Isaac has now decided to put authorized users back into the mix, though they say they’ve fixed the problem of credit repair firms exploiting it.  How, exactly, they won’t say.

Now if FICO actually meant something…

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Why now?

Car companies have taken a bath recently when many cars (especially trucks and SUVs - surprise) come off lease agreements because they can’t sell them used for what they’d planned.  The finance divisions of the Big (?) Three lose money in a weak used car market.  And boy is the market for used trucks and SUVs weak.

For years, Americans have been able to drive vehicles that were much more expensive than they could afford if they bought them outright.  Lease payments can be 50% lower than if you’d bought the car.

What does it mean?

With the functional end of leases, at least for SUVs and trucks, will this mean a return to a more realistic idea of Americans’ standard of living?  Something tells me no.  I figure it’ll take several more bludgeonings to the head for people to realize Americans, as a whole, can’t continue to spend more than they make.  What a concept.

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Maybe this just shows my ignorance of home finance in general and PMI in particular, but how come banks and other mortgage lenders are suffering huge losses on this?  Isn’t that why they make you buy PMI when you put down <20% on a house?  I have to believe that in 90% of ’sub-prime’ mortgages, the buyers didn’t put down 20%, ergo, they had PMI on the house.  So if the buyer defaults, the bank gets paid, right?

Yes, I realize in a foreclosure, the lender typically realizes something like 60% of the prior value of the house.  Yes, I realize people got creative with 80-10-10 loans and builder-funded downpayment schemes.  But still, I’d think PMI would serve to at least mitigate losses on these things.

This makes me think two things -

1. Banks are using foreclosures as a cover to write down other, unrelated losses
2. PMI is going to be much, much more expensive in the future

I’m somewhat surprised we haven’t heard very much about mortgage insurers going bankrupt.  If foreclosures are as bad as we’ve been led to believe (and I’m not sure they are), I would think insurers would be drowning in red ink.  Anybody have any thoughts?

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But I would not recommend it.

Auto insurance rates are expected to rise this year, ending a streak of several years of modest decreases.  I found that a little surprising, given that miles driven by US drivers is decreasing.  In any case, if you find your bill going up, there’s a new way to bring it back down…just agree to be spied on.

Several insurers are offering drivers the option to decrease premiums by having their driving behavior tracked.  Typically what happens is you agree to have a small device added to a computer port below your dashboard.  Every so often, the insurance company downloads the information collected by the device and adjusts your premium based on how and how much you drove.  Some of the devices track miles driven, average and top speeds driven, and how hard you apply the brakes.  The idea is to pay more ‘granularly,’ based on your particular driving habits.

There are a couple of big insurers doing it:

• Progressive - their program is called MyRate
• GMAC Insurance - it coordinates with OnStar to run its program

Both companies assure you that your information is completely private.  Sure.  I would only recommend participating in these programs under one circumstance - you own an OnStar-equipped vehicle.  If you do, you’re being monitored anyway.  You might as well get a discount on your insurance for it.

The real problem I have with these programs is that right now they’re optional.  But optional, successful trials have a way of becoming mandatory real soon.  And I’m not in a hurry to have my every driving move monitored.  This from a guy who drives approximately 50 miles a month and would surely benefit from participating in the program.

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Forget the statistics on uninsured Americans.  Forget the fact that Americans, despite repeated proclamations to the contrary, do not have the ‘best medical system in the world.’  Forget the skyrocketing cost of care.

Forget all of that.

I’m a very well insured American and I want a single-payer system if for my own convenience alone.  I realize how that sounds.  But the fact is, people do not respond to logic when it comes to topics like this.  That’s why simply stating the fact that there are 47 million uninsured US citizens (many of whom are children with working parents) doesn’t move people to action.  You have to break it down to a personal level and that’s why I’m saying this.

How did it come to this?

So why am I saying this now?  The fact is, I’ve believed in the idea for some time, but recent personal events have just solidified my belief.  What happened?  We, as a family, have had to deal repeatedly with ‘the system.’  And I use that term loosely.

The back story is that my wife had minor surgery.  Now the bills have started coming.  Nothing unusual about that, you say.  The thing is, we shouldn’t be getting any bills.  Recall that we are very well insured (by which I mean we pay a modest copay and any reasonable medical expense is covered without deductible).

The parade of idiocy begins

First, when we check in for the surgery we are asked to pay a copay four times what we expected.  This despite our checking several times on the particulars of the copay, coverages, and networks.  Ok - what are we going to do, cancel the surgery?  We pay, assured we’d “get a refund if it is determined this amount was incorrect.”

Thankfully, the surgery went well and everything is fine.

The first bill to come was from the anesthesiologist.  I sort of expected this because they sometimes don’t have the insurance information to bill.  The hospital and/or surgeon doesn’t share this with them.  Ok - we call and straighten it out.

Then the surgeon sends one.  What the???  Turns out they have billed insurance, but haven’t received a response, thus the bill to us.  Is this delay (about a month) unusual?  Not at all, the doctor’s billing person tells us.  So why the bill?  They send them out (reading “Pay this amount now”) even when insurance has been billed.

Back to the anesthesiologist.  They send a bill again.  My wife calls.  “What’s up with the bill?” she asks.  Oh, the hospital hasn’t billed the insurance company yet, so they (the insurer) has no idea why an anesthesiologist is billing them.  What?  You mean people don’t just go and get put under for fun?

It’s not unusual

This sort of thing is typical in the American healthcare ’system.’  This is how it’s supposed to work!  This is ridiculous. I don’t know medical billing.  I can’t read billing codes.  I don’t know the forms and rules.  And I actually don’t entirely blame the doctors’ billing offices.  Think about it.  How are they supposed to keep track of the billing codes and regulations for dozens of medical insurance plans?

Would there be headaches in a government plan?  Absolutely.  Would it solve these problems?  Not completely.  I don’t care.  At this point, I think the positives of such a plan outweigh the negatives.  Perhaps naively, I look to the next Congress and President to do something about it.  Too bad they probably won’t. 

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When I settled my allocation, I put 50% in a US total market index ETF; 40% in a World index ETF; 10% in a bond index ETF.  At the time, a commenter wrote that he would cut out the bond portion.  I couldn’t disagree. I’d wrestled with the idea myself.  With hopefully about 25 to 30 years until retirement, I ’should’ have the great majority of my retirement assets in equities (and, at 90%, I do).  So the inclusion of the bonds was just me following the standard advice, which I thought sensible if not optimum.

So how’d that work out?

Well, I’m now even more of a believer in diversification.  While the total market ETF has returned -14.5% YTD, the international stock -14% and the bonds?  Year to date almost 2%!  Woohoo!  Let’s hear it for not losing money!

Who would have thought earning not quite 2% would elicit a cheer?  Go figure.

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I got my quarterly statement for our taxable mutual fund account and I was in no hurry to open it.  Not like these statements are like Christmas day even in an up market, but I just had no interest in looking at it.  Because I already knew it was going to be ugly. 

Naturally it was.  It’s an S&P index fund, so you can figure out the losses.

Funny.  I never minded opening the statement or looking up performance online while the market was going up.  Hmmm.

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One of the most interesting things in finances is the power of compound interest. Compound interest is interest that is not only charged on the principal (the amount you originally borrowed), but also on the unpaid interest that is accruing on the loan. Every time interest is charged, it is added to the principal, and for the next period you pay interest on the whole. Likewise, compound interest can be earned on an investment, such as a savings account. It can be a great burden, or it  an be a great boon. It all depends on the money choices you make.

Compound interest can work against you

One of the most dramatic examples of how compound interest can work against you is the credit card. Every month your interest charges are added up and then tacked on to the principal. Pretty soon — especially if you only pay the minimum — you are paying interest on your interest, and barely reducing the principal at all. In fact, it is possible to pay back quadruple (or more!) what you originally borrowed when you are only paying the minimum. This is money that goes straight into someone else’s pocket without any benefit to you in exchange.
Other loans charge compound interest as well, but the credit card is the most common. It can also be one of the most difficult to get out of, since the interest rates charged are so high, and in some cases the interest is compounded daily.

Getting compound interest to work for you

Compound interest can be a great gift to you if, instead of spending money by carrying credit balances, you invest the money. A high yield savings account can get you a 3.75% annual yield. But if you look into certificates of deposit, you can get between 5.00% and 7.50%. And if you invest in a modest account, you can get average returns of between 8.00% and 11.00%. When you put money into interest bearing accounts (and there are money market checking accounts that you can earn money on as well), you essentially get paid for letting your money sit there. Compound interest represents free money. It works just like the loan in reverse. If you have $100 and an APY of 7.00%, at the end of the year, that free $7 you earn in interest is added to the principal. The next year you are earning 7.00% on $107, and that means you will get more in interest at the end of the second year, and so on.

Tips for helping compound interest work for you:

• Start immediately to invest your money (and a savings account or retirement account is an investment). The earlier you start, the more you will earn as compound interest works on your behalf. How much you start with isn’t as important as getting started.
• Let the money sit. This is easiest in a retirement account. Simply leave the money alone. It will gradually build up on itself as the interest you earn is added to the principal amount you invested — and then interest is earned on the new total.
• Add to your account regularly. While compound interest will work if you let it sit without adding anything, you can multiply the power of compoundinterest by making regular additions to your interest bearing accounts.

Consider your financial choices carefully. You want to be making compound interest work for you, rather than working against you.

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