Thick as a Brick Award – June 2018

I first introduced this idea back when I saw someone whose work I admire, Dave Ramsey, tout some rather uninformed financial advice on “buy term insurance and invest the rest” to his huddled masses.  This time I take a look at a long list of shallow financial advice published for the sole purpose of “looking useful”, rather than being effective.  On the surface the suggestions might sound good to the casual reader, but without discussing related information and situations, can be misleading and financially riddled with hazard.  So, let’s dispel some poor financial advice.

These are my reactions to the “Financially Empowered” magazine from Arizona Federal Credit Union, article written by the employees on “insider advice…best money tips”.  First, I’m not convinced that employees are particularly well-informed on how to best leverage their financial strategies, or they wouldn’t still be employees.  This is a nice activity to get the staff involved and have them feel as if they are contributing.  Bravo to management on that score!  I would, however, suggest some deeper discussion, review by a financial expert, and some strategic planning prior to releasing the information on their clients.  Second, not every suggestion was bad.  I actually found several ideas rather intriguing, but these were the worst of the lot:

Read the article with the following thought in mind: “Wealth is not money that you spend.  Wealth is money that you put to work.  Wealthy people think about money differently, which is why they have more of it.”

The worst advice examples:

Earn rewards on everyday purchases[1]: Debit cards that give rewards are rare and less banks are offering debit card rewards.  Both Debit and Credit cards that offer rewards are usually higher in fees or interest over cards that have no such bonus programs.  In short, “you don’t get anything free from a bank”.

If you’re looking to make positive interest, find the programs and opportunities that offer positive interest.  Attempting to game the system is a good way to fool yourself all the way to being broke and in-debt.  Savings accounts, CD’s, share certificates, and bonds have rates that are currently at all-time lows and well below the real rate of inflation.  If you need good rates to grow your assets, and you do, there are much better options.

Pay off your balance religiously:  If you understand how credit scores are calculated and what credit scores actually impact these days, this is not effective advice.  A higher credit score is money in your pocket in lower rates on loans, insurance, better jobs… all of it.  The intent is right, but the practice is off.

If you use a credit card, you should use it to gain the protections and flexibility that the card provides that cash would not.  Using credit for Christmas shopping, as an example, could have much greater purchasing power, in a smaller space, and with much greater security than carrying cash around with you.  In addition, your purchases may be boosted with extended warranties or other options (yes, like rewards).

If you’re using credit, you should already have the money to pay the bill “down” when it comes, or a plan to pay it “down” over a short period of time.  Think of your available credit like a muscle, you flex and relax, flex and relax.  Putting down the weight by paying off the card to zero doesn’t demonstrate to the credit rating agencies that you understand how to “manage your available credit”.  Pay it down so that interest calculated is mere pennies, but maintain a small balance.  What you gain in a higher credit rating along with other strategies will pay back those pennies in dollars in other areas affected by your steadily increasing credit score.  You can find more ideas on how to boost your credit score in Chapter 9, How and Why to Manage Your Credit Score in my book MoneySmart Personal Finance Solutions, 2nd Edition.

Paying Off Debt: Go smallest to largest:  This might be the right answer if the smallest balance account is also the highest interest rate.  When you understand how interest works, a card with a 21% interest rate is costing you over 21-cents-on-the-dollar annually (compounding periodically) versus a card that may cost you less than half that much at 9.9%.  Whether the “smallest to largest” idea makes sense depends on how long it takes you to pay off the 9.9% card.  If it takes you months, that 21% card is earning a much higher rate per dollar for every month you leave the dollars on balance.  Learn more about this topic along with a handy worksheet to organize your debts and a strategy to retire them in chapter 8 of MoneySmart Personal Finance Solutions.

Picking up a $100 gift card for $85.  Remember, some gift cards have expiration dates and can lose value; know your terms.  More urgently, spending $85 to get $100 in purchase power is nice, but “buying at a lower price” isn’t growing wealth.  This is only effective if you were going to make the purchase anyway; as with groceries or gasoline.  Getting a discount and buying something “because it was on sale” is still spending money not building your wealth.  When you’re trying to stay in a budget or cut spending, buying things you don’t absolutely need works against your wealth accumulation goals.

Auto-pay is your friend: If you control the activation from your end of the account, an auto-draft is more manageable than if not.  Getting an automatic draft turned off at a company who is drawing on your account might be problematic and time-consuming.  Back when I was teaching high school and funds were tight, broken water heaters and parts for a motorcycle for example left me lean for the month.  Being able to turn off an auto-pay for a few days until another paycheck comes in can be handy when budgets are tight.  Bouncing a payment to NSF status costs you big in fees and on your credit rating.

Paying into your retirement or cash asset accumulation account automatically is a very different story.  Very often you can pull money out of accounts freely, without capital gains taxes, without penalties, and in large amounts; sometimes even leveraged (at interest)!  Since cash accumulates into a cash asset, you aren’t penalized, but rewarded.  This is how I help clients cut their student loan debt interest in half while they are building a cash asset!

Triple Dip when shopping:  The recommendation?  1) only shop on sale  2) use a credit card that earns bonuses, and 3) use coupon and rebate sites that offer incentives and discounts.

Again, spending money is not building wealth.  If you can do this with the new water heater you need to replace in lieu of cold showers, then you have a valid strategy.  If your favorite recreation activity is shopping, then “no, spending money won’t build your assets”.  That said, if you budget an amount each month to shop because you earned it and it makes you happy, then you have a reward and a plan to pay for it; a completely different story.  You should enjoy some of what you earn, but not at the cost of your long-term financial security.

Lifestyle: Quarter mile:  the recommendation?  “place a quarter ($0.25) into your savings for every mile that you drive.”  If you’re going to play these kinds of mental games, you have bigger issues than I can help you with.

If you put the effort in to track your mileage just so you can multiply by 0.25 and make a checking to savings transfer, why not just do the real math?  Track your expenses for your car, payment or lease, gas, insurance, tires, cleaning, repairs… and start dividing.  If your payments are for 4 years, but you plan to drive the car for 8 years, divide the cost (or at least the down payment) by (8×12) 96 months and place that into a growth account for the next time you need to upgrade the car.  Prepay your repair and maintenance based on the expenses you incurred the year before and add 10-20% for wear and tear.  Is it possible that your repairs actually divide out to 25-cents-per-mile?  Yes, it’s possible.  But why not just do the real math and be accurate?  If you’re in business, you likely add these expenses up anyway along with tracking your mileage.

Investing / Retirement:  Invest your savings:  The recommendation: “Only keep enough to cover six months to a year’s worth of expenses in your savings account.  The rest should go into an investment account.”

Yes and no… First, this article was published by a credit union, which is leagues better than a bank in my opinion, but still in the same “nearly-shut-down-in-2008” industry.  Of course they want six to twelve months of your wealth sitting on their books earning you next-to-nothing.  They loan it out at interest for car loans, home loans, and business loans at 5 to 7 times what they pay you.  What they haven’t considered (or maybe they have) is that the average person as recently as 2017 would have trouble pulling together $400 cash in an emergency.  That’s certainly not 6 to 12 months of expenses.  “They’re dreamin…”

If, however, you are flush with savings due to good cash flow, you manage your expenses at low levels so that you have good discretionary income (money not dedicated to bills or goals), and have managed not to spend it all (rare in our current culture) then having a good cash asset is certainly possible.  Now, let’s look at that advice.

pennies picture“The rest should go into an investment account.”  Which investment account?  Into what investments?  Into the market violently undulating with volatility and in need of a Dramamine (motion sickness pill)?   Someone who is looking at 6 to 12 months of expenses, maybe upwards of 20-60% of their annual income in cash, isn’t likely to be holding it in a bank at current rates of around 1.5%.  This is what earned my “thick as a brick” award.  Savers understand assets, even if intuitively, and are likely to be looking for better opportunities than bank rates, bond rates, and the inherent risks of Wall Street.  That’s why I have a business.  I represent accounts that offer great rates of return with no market risk.

What about the good suggestions?  Well, I wrote three pages already with the intent to dispel poor financial information and I believe I’ve done so.  If you’re in Phoenix and you’d like to review Arizona Federal Credit Union’s Empowered Magazine, I’m certain that they wouldn’t mind you stopping into a local branch and requesting to read the latest edition.  I’ll bet they’d be glad to see you in fact!  They’re a nice bunch, and I do have several personal accounts and a business account at my local branch!  I don’t, however, store my long-term wealth in the banking industry!  But that, is yet another story!

Wealthy people have better information, better strategies, and better help.  Who is helping you?  People who have money have planned to have money.  What is your plan?  If you’re a saver in this economy, you’re a rare bird; and that’s good; very good!  When the world goes on sale, the people who have money to invest can put themselves in a situation to own a nice slice of it… for pennies.  Let me know if I can help guide you.

 

[1] https://www.bankrate.com/banking/checking/think-twice-about-debit-card-reward-programs/

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