Is the use of credit cards socially responsible? January 31, 2010

There are times at work when I spend hours in the lab.  These are perfect times to listen to my iPod.  And so I’ve been catching up on some old podcasts.  And like the nerd that I am, I listen to quite a few finance podcasts.  I’ve been going back and listening to my backlog of Marketplace Money, a personal finance podcast from American Public Media.  Anyway, they talk about credit cards quite a bit, and how different people use them.  Many people have chosen to go the Dave Ramsey route and go debt free, including not using credit cards.  Some use credit cards, but pay them off every statement.  Others carry a balance, and, in the most severe cases, have had to go to Debtors Anonymous or through credit counseling to dig themselves out of massive amounts of debt.

At any rate, they got me thinking about the use of credit cards.  In this discussion, they laud the benefits of using a debit card, since it is much more difficult to go into debt, as you can’t spend more than you have (ignoring overdraft fees/protection).  But they also point out that there are some benefits to using credit cards, or even selecting the credit option when performing a debit card transaction, as credit cards provide more financial protection against theft/loss.  And they do also sometimes offer other benefits, like an extended warranty on the purchased items.  They also discussed the differences between the two in a much earlier show.

During this discussion about the differences between using credit cards/selecting credit when you swipe your debit card, vs. selecting PIN/debit, I recalled hearing that different transaction fees are levied on the seller depending on what option you select.  And here’s the thing:  These fees really add up.  Another marketplace story discussed how many merchants are loath to accept credit cards for purchases.  The fees they must pay eat into their very thin profit margins in many cases.  I’ll agree (and the article also mentions) that sometimes companies would lose business if they didn’t accept credit cards/debit cards, since some people might not have enough cash on hand for their purchase.  But I think I’m like many people in the personal finance world (and the teacher interviewed here) that will basically use credit for every purchase possible.  It’s all about the points.  (Which always makes me think of this clip from Home Movies).  We figure if we’re spending money, we might as well get something from it.  Whether it’s for cash back, airline miles, or donations to a charity, it seems that our money is better spent if we’re getting something extra out of the deal.  For smaller purchases, I still use my credit card for that very reason, even if I have cash on me.

So, while people often chose to use credit even when they have other options, it’s costing the vendor money.  This extra cost will either hurt the vendor directly by eating up their profits, or hurt the consumers (i.e. us!) if the extra expenses are passed on to the customer.  And it seems that this problem affects some more than others.  The employees/owners are hurt by a decreased income, and/or the higher prices will make it harder for the least fortunate to afford the goods they need.

So, here’s the thing.  If transaction fees were eliminated, I’d be super keen on using credit for even the small purchases.  And if none of my credit cards came with rewards, I’d be more likely to use cash.  But I honestly don’t know if I’d be willing to give up using my credit card for everyday small purchases.  Does that make me a bad person?  I want to earn those points, and be able to easily track purchases online.

How do you feel about this?  I mean, I think most of us would agree that credit card companies make quite a bit of money even without imposing hefty fees on each purchase.  But I don’t know if anything will change.

Notes from Suze Orman January 12, 2010

As I mentioned in my recap of the Massachusetts Conference for Women, I was going to go into further detail about what Suze Orman said in her keynote speech.  I figured that, what with it being pretty good advice, as well as this being a personal finance blog, it would only be right to include it here for others to check out.

Suze Orman has written plenty of books.  In fact, she’s the author of one of the  books I read early on in my quest to learn about personal finance.  I remember reading Young, Fabulous & Broke, which was a good start into the personal financed world.  I also read The Wealthy Barber, which conveys the importance of paying yourself first and starting early (and other advice) through a story.  And most recently, I’ve finished reading Ramit Sethi’s book, I Will Teach You To Be Rich.  All pretty good books for getting yourself started on your way towards financial freedom!

I’ve heard most of what she said before, but it was good to be reminded to continue doing what needs to be done.  I’ve sorted out her advice into the separate topics she covered.

Opening Remarks:

• To be powerful, you need a solid platform, which includes an 8 month emergency fund and no credit card debt (Debt=bondage)
• If you have credit card debt, get a balance transfer to a credit union credit card.  She encouraged us to get away from “Big Banks”.  She recommends checking out credit unions here.  I’ve heard discussion recently on the topic.  The last thing I saw about it was at the Move Your Money project.

Retirement:

• If there is a matched 401(k) or 403(b) available to you, you can’t afford not taking advantage of it, as getting matched contributions means you’re immediately getting returns of 50-100% (depending on the match you are receiving).  If your employee-sponsored retirement fund is matched, contribute up to the match.
• 401(k)s are protected during bankruptcy, so if you are going to declare bankruptcy, don’t take money out of there to pay debts, it will be money you can use later.
• If your 401(k)/403(b) is unmatched, or if you contribute to the maximum match, your next step is to open up a Roth or Non-deductible/traditional IRA.
• Her view is that we’ll likely be in a higher tax bracket in the future; we’re currently at a low rate right now at ~35%.  She mentioned this because she wagers that the government is likely to raise tax rates to pay for a lot of what’s going on right now (I guess she threw a little politics into the mix).  Also, if the rates are this low, there’s a good chance they’ll go higher.  But I think the other reasoning is that you’ll be making more money later in life, and presumably have such a large retirement portfolio by the time you retire that you’d also be in a higher tax bracket.  Regardless, she mentioned this because she encourages everyone that is eligible to open a Roth IRA.
• If your income level is too high for a Roth IRA, she encourages you to open a traditional IRA and then convert it to a Roth.
• Regarding Roth IRAs:  Give up the tax write-off, so you can grow your money tax-free.  The benefits of Roths include:  You can take out your principle if you need to, you don’t have to start taking distributions when you reach retirement age, and you can leave your Roth to your children, and it remains tax-free for them.
• NEVER TAKE A LOAN FROM YOUR 401(k)!!! You essentially get taxed twice, you will pay a penalty, you’ll owe income tax, and, you still have to pay it back.  And as mentioned above, your 401(k) is protected during bankruptcy.

Wills and Living Revocable Trusts

• A will describes where your assets will go upon your death.
• A living revocable trust will include an incapacity clause.
• Both are important to have.
• You can use her Will & Trust Kit to prepare your will/trust.

Life Insurance

• The only type you should look to get is Term (she was very adamant about this).

The Stock Market

• “Anything can happen at any time”,  so only invest in the stock market if you don’t need that money for at least 10 years.
• If you’re young, now is the perfect time to invest.  Take advantage of Dollar Cost Averaging (buy more when the stocks are “on sale”, buy fewer when the stocks are pricier)
• Other things to invest in:  High yield dividend funds (3-5% returns) and Exchange Traded Funds (ETFs)
• Your investment portfolio should be 80% United States, 20% international
• If you’re older, stay away from bond funds.  Instead, invest in bonds with a specified (and desired) maturity date.

Buying a House:

• If you have your emergency fund, and are able to afford a 20% down payment, you can buy a house.  Those are the minimum requirements she gives.
• If the administration gives incentives, and then extend them, they are afraid that ending the incentives will send the markets back down
• If you are looking to own, but are waiting it out, be careful; it’s very difficult to time the market

Children (specifically, sending them to college):

• Don’t put yourself on the back burner:  if you love your children, teach them it’s okay to put mom first.  Don’t feel guilty putting yourself first.
• Your children can always get scholarships/loans/grants for their education; you can’t get those for your retirement.

Gift giving/the holidays:

• Give the gift of time or money for the less fortunate.

Long Term Care insurance:

• Speaking from experience with her mother, long term care can be very expensive, so it’s a good idea to look for long term care insurance, either for yourself, or for your aging parents (depending on the age)
• She recommends getting long term care insurance through Prudential.

So, that’s what she said, in a relatively large nutshell.  I know there are other opinions on these matters (life insurance, investment choices, etc.), but I think this information, along with the info you can get in the books I mentioned and the blogs I link to will get you on the path toward financial independence!

Anything I missed from her speech?  Do you agree or disagree with her advice?

Tracking no-spend days with Twitter January 4, 2010

Well, it’s 2010!  And we’re all coming out with our resolutions, our big plans for the new year.  I’m still working out what my short-term and long-term goals are going to be, but in the meantime, I decided to start small by working on no-spend days.  I like the fact that my desire to finish a day without spending money can prevent me from spending money unnecessarily.  And I’ve heard that it’s easier to stick to your goals if you must be accountable to others.  And so I’ll be tweeting about my daily expenses.

My rules of the game are:

-Anything I pay for in cash, credit card, or even check will be included

-Excluded are expenses via transfer:  Rent, utilities, contributions to retirement/savings accounts.  This is because they’re automatic and are mostly unchanging

I already avoided spending money the other day, even though there were a few things I wanted to buy.  That seems like a good help.  So, I’ll be tweeting about my expenses, either at the end of the day saying that I made it through the day, or during the day if I fail at my goal.  Follow me if you’d like, @stephtheblogger.

What do you think?  A good idea?  Or oversharing?