5 Common Financial Brain Farts
The world seems to be spinning at such a rapid pace that the many basics of money are neglected. It is these small lapses of financial common sense that foster a trend of bad habits.
Take out the numbers and look at the fundamentals. With a hint of logical reasoning, our personal finance management skills would become that much more powerful.
1. Buying stock is buying part of a business.
The mentality of investing in the stock market has drifted to a point where people are buying stocks and praying for the share price to go up.
Too often is there a voice saying that stocks are a way to make money while the fact is that it is actually a purchase of part ownership in a company or business. Sure, the desired result for everyone is a profitable return but stocks aren’t lottery tickets. In the end, the business has to do well for the investor to do well.
So, stop asking what is a good stock. Instead, start asking what is a good business that you don’t mind owning. Personal finance experts have recently been trying to drive this point home because many rookie investors omit this reasoning in their investment decisions.
2. Credit card purchases are loans.
We are oblivious to the fact that every time we swipe our credit cards, we are actually borrowing money with the agreement to repay the amount, plus interest. If someone is unable to pay the balance in full, the purchases are bound to cost more than the prices that appear on the receipts.
Credit cards are designed so that we can escape that reality. The form of seemingly simple plastic cards that, when swiped, allows us to buy things we cannot afford reminds me of the granted wishes with the rub of a genie lamp. Unfortunately, a credit card is the magical lamp containing the devil disguised as a genie.
The convenience and accessibility of credit cards exist to keep us spending without this fact ever crossing our minds. If we had to sign a bunch of forms for every time we made a credit card purchase, we’d all be much more reluctant to incur more credit card debt.
3. Banks are out to make money.
Banks are financial institutions that operate for a profit. For them to profit, there has to be a way for them to take money from their customers.
I find it funny for a bank to claim that they have your financial goals in mind. Make a late credit card payment or overdraw your account and see how much they care about helping you reach your goals. When you stop to think about it, the bank’s ultimate goal to draw a profit conflicts with the customers’ ultimate goal of saving money.
4. Founders of get-rich-quick programs aren’t rich, yet.
If you’ve ever been home on a Saturday afternoon, you’ve probably seen one of these paid advertisements on TV touting an ambiguous program on making thousands of dollars with little to no effort in a matter of weeks.
You’d expect the people, who teach you to get rich quick, to be rich as well. Right?
Now ask yourself: “why would someone, who knew the secret to achieve instant wealthy, contemplate sharing this knowledge with someone else?” Would you share these secrets if you were in this position? I sure wouldn’t. And, if I genuinely wanted to share the wealth, I wouldn’t charge you for it.
5. Spending isn’t saving.
An avid shopper may tell you that a sale is a once-in-a-lifetime event that mustn’t be missed. If such an awesome deal was never presented to us, would we have spent the money to buy something at a discount? If we didn’t have a super savings coupon, would we have even walked into the store?
Now, if we hadn’t bought anything, what wasn’t spent was saved. But, if we bought something and spent money, did we really save anything despite getting a discounted price?
We didn’t save – we just spent less, which is technically still considered spending.
I know I missed many other obvious financial concepts that must’ve influenced the way you handle money. Share the logical reasoning behind them so that other readers can benefit from the cold, hard truth!
(Photo credit: banjo d)
Book Review: The Skinny on Credit Cards
Throw in a short storyline and some stick figure illustrations with the bare bone facts on credit cards and Randel presents us with a nice one-hour read to set readers straight.
Here are some things that Randel does nicely:
- Unmasks the disguises of a credit card. He puts it in your face. When you use a credit card, you are making loans and you are borrowing money. It’s design was purposely created to make it easy and mindless.
- Adds a story to make a point. Situational examples provide something that readers can relate to. That helps drive home the point that is trying to be made. When it comes to credit card debt, it becomes an influential way to motivate change.
- Provides updates from the Credit CARD Act. With the new financial regulations in full motion, much of the information in books and on the Internet need to be updated as some information may no longer apply.
Overview
The Skinny on Credit Cards
Randel tries hard to include strict facts and distinct points (which he does very well) but credit cards just encompass so much that the content may be overwhelming to anyone unfamiliar with the terms. As a personal finance blogger, I was already familiar with about 95% of the content but his story/stick figure format kept me flipping the pages.
The Minimalist Lifestyle: Efficient and Saves Money
Minimalism is an art that I’ve seem to have slowly adopted unconsciously. It may have contributed towards my carefree, lax attitude toward physical possessions. Some may call it being lazy or apathetic but I prefer the freedom from unnecessary worry and concern over material substance.
All too often do we place an excessive amount of sentimental value on items that are better off if they remained out of our lives. The typical outcome is clutter – the true enemy of a minimalist.
A Minimalist Lifestyle
The minimalistic life consists of days where physical belongings represent the bare minimum. A great way to think of it would be to pretend as if you were traveling around world for eternity. George Clooney’s character (Ryan Bingham) in the movie Up in the Air was always traveling and showed very little emotional attachment to physical things – maybe that’s why he excelled at his job of firing people.
A time when I, and many of you, experienced a minimalistic lifestyle is the time spent away from home in college. I lived on very little – rarely spending more than $50 a week on food and fun. Plus, there was only so much space in our tiny, overpriced dorm rooms. That’s why so many people suggest that we not dismiss the college lifestyle after graduation because we were able to live off very little then, so we can live off very little now.
Another terrifying way to look at it is to put myself in the situation where burglars breaks into my home and leave tremendously pissed off at the slim pickings this target happened to be. A minimalist would be able to withstand material loss calmly (though I’d lose my sense of security).
What Minimalism Offers
It is a zen approach to life. With it, money is secondary to meaningful experiences and peaceful lifestyles. To me the benefits are very enticing.
- Focus on what counts. Minimalism frees the mind of mental clutter and it frees my surroundings of physical clutter. That leads to more focus and concentration on the things with true relevance to my financial well-being. In the end, I am able to spend money and devote time and attention efficiently.
- Clutter prevention. It takes up space. We build a false sense of compassion for it. I sometimes look at a useless object and feel the need to keep it. Why? I don’t know. But, it will be the start to many deja vu’s next year, the year after that, and the many years to come. When I do toss it, I’ll wonder why I was silly enough to hold on to it for so long.
- For the need of less stuff, there comes a need for less spending. The obvious reason for cutting out what we consider to be “necessities” is to save money.
- Find out what real makes me happy. Buying new things does create the happy feeling but it lasts for just a moment. It requires repeated purchases to maintain happiness – a recipe for financial disaster. Instead, money is better off spent on new experiences and learning new things because they create long lasting memories of the happy times.
- Lessen the burden. Society has made many of us into rabid workhorses. The conventional wisdom to wealth accumulation is to boost income. Higher income is definitely an appealing option but minimalism goes against advice to earn more to buy more but it supports the idea that we should learn to live with less.
Small Steps
An immediate conversion into a minimalism would be overwhelming. As a matter of fact, there is no specific point where one person can say “I’m living with the bare essentials”. If I feel I’ve reached that point, then that is the life I’ll try to maintain.
Each person has their own beliefs on what is considered necessary. For me, tech gadgets have gotten me enslaved. In other areas, I can easily purge myself of “stuff”.
(Photo credit: Hoboken Condos)
Opting Out of Credit Card Upgrades May Only Be Temporary
This is a guest post by Michael from CreditCardForum.com, a message board and blog for the discussion of credit card deals, as well as a place to talk about the drawbacks that come with the use credit cards. In today’s post, he will be talking about one of those drawbacks.
Last week, Simon wrote about how Citi tried to automatically “upgrade” him to a World MasterCard – a credit card that has no pre-set spending limit. I actually have the Citi Dividend Platinum Select card myself but I am lucky that they haven’t tried to change my card, yet .
However I have faced this same problem with Bank of America forcing my current card to become a Visa Signature card (which is Visa’s version of the World Mastercard – so no pre-set spending limit as well). But before I tell you that story, let’s discuss the basics about these cards…
Why all the hate for World MasterCard/Visa Signature?
These cards are marketed as a high “premium” tier for the aforementioned card issuers. They offer added benefits like free phone concierge, extra travel insurance, purchase protection, and more. All that without an annual fee! So why all the hate?
Well unfortunately, these cards have on drawback – they do not have a set credit limit. Part of your credit score is based on credit utilization (the percentage of your available credit that is used). You don’t want this number too high. According to many talking heads in the finance world, the general recommendation is to not use more than 30% of your credit limit on an account.
On many accounts from current cardholders, the highest monthly balance on these “no pre-set spending limit cards” are reported to credit bureaus as the credit limit. As you can imagine, this may not be to your benefit because it would hurt your credit score.
You may have had a $20,000 limit on your original account but you could have a reported credit limit of $2,000 if that was your highest monthly balance.
Which would you rather have shown as your credit limit? Obviously the $20,000!
Why was there no opt-out option for my Bank of America credit card?
Back in 2004, I switched my checking account to Bank of America. During the process, they also offered me one of those credit card deals where they give you a free $100 bonus if you also open a credit card. I took the bait.
I’ve used that card periodically over the years and had built up a very nice credit limit on it. Then in May, I got a notice in the mail that my specific type of card was being discontinued in August and would be replaced with a BankAmericard Cash Rewards Visa Signature card. I called up and vehemently made clear I did NOT want my new card to be a Visa Signature, instead I wanted it the tier below (Platinum Plus). The CSR said that was not a problem and confirmed the replacement card coming in August would indeed be a Platinum Plus.
Well it’s now August and I got the card in the mail and guess what… it was a Visa Signature. Furious, I called up customer service as I was sure they must have forgotten to fulfill my request. As it turns out, the CSR in May did opt me out of the Signature version. But guess what happened? They decided to re-evaluate my account again on August 1st and made the decision to issue me a Signature without my approval.
Why the no preset limit cards are going to become more common
After talking with someone I know at the bank, it turns out that even if you opt-out of these “upgrades” they might upgrade you again a few months later, without your consent! So basically, these “opt outs” are only temporary, because when they re-evaluate your account again (possibly every few months) they might just try and do the upgrade again.
The reason these banks love these no pre-set limit cards is because it limits their liability.
If you have $20,000 of available credit that’s a $20,000 liability for the bank. But if you have a no pre-set spending limit card, your purchases are approved (or declined) on a case-by-case basis. So, they no longer have to record your account as that $20,000 liability. Instead, they can just cut off your spending whenever they want.
With the shaky economy we’re in today, you can bet that banks will be utilizing this technique more and more to limit their risk.
If you want a set credit limit, what should you do?
As mentioned, for some people the benefits offered on these cards may be a worthwhile deal (I actually have one myself, the Chase Freedom). However, I wouldn’t recommend having more than one of them due to the credit limit predicament discussed above.
If don’t want them, respond to these notices right away and opt out, but even then, there are situations where it’s not a guarantee (like what happened to me, where my card was discontinued). Also, realize that some issuers may try multiple times a year to upgrade your account – so be diligent and pay attention to all the notices they send you.
Simon’s Note: Some people have been able to transfer their credit card limits to a different card under the same issuer. Because the bank may have a goal to convert a select group of cardholders, moving your account to a different card may be a viable option to keeping your credit limit out of the line-of-fire. You may lose some of the perks of the original card though…
We Are Forever Indebted to Technology
I love tech gadgets. Don’t you love tech gadgets?
How can you hold an iPhone 4 and not say “it’s one of the best phones I’ve ever seen”? How can you stare at your 1080p HDTV playing Avatar on a Blu-ray disc and not be mesmerized at the amazing detail and clarity?
This is evidence of the innate behavior of the human race to strive towards what has never been done before – to continue inventing new things that makes a chore or task even easier. Tech companies are, and will forever be, in a perpetual competitive race to release the next gadget or software that will revolutionize our lives.
As a result, consumers like you and I are stuck in between their wars in this age of technology. Nowadays, technology is evolving at such a rapid pace that I find it threatening to our financial situations.
Technology’s Death Grip
Stopping to think about the lifestyles we now lead, we can see how much money we are spending just to keep up with the trends.
Your sizable DVD collection has become obsolete as you can now stream high definition movies straight to your television. Yes, you spent hundreds of dollars on the movies, while racking up some substantial debt, and now you have to pay for your monthly Netflix subscription. Don’t even think about rebuilding that collection with Blu-ray discs (start reading again from the top if you are asking “why?”).
Cold hard fact: Most new consumer technologies are actually old. The toys that just became recently available had to undergo a long process of production and development – the idea or concept originated months or even years ago.
Let’s use the recent 3D craze as an example. The movie Avatar ignited a new trend in the film industry to shoot their movies in 3D. Production companies already had the idea of 3D entertainment a couple years before the movies were released. Then, the top players in consumer electronics (e.g. Sony, Samsung, LG) finds that there is high consumer demand for 3D video and begin making 3DTVs. HDTVs just became a norm in my household and here comes a new trendsetting change.
It is an endless game of playing catch-up. Either we spend the money or we get left behind to miss out on a world of new experiences.
If you cut off my broadband Internet connection, I’d go berserk. If there wasn’t a single computer in the house, I’d go mad. My iPhone 3GS was water-damaged and died and I felt like I lost an arm. They’ve become drugs and the fuel to an addiction. I know that I’m one of the millions of consumers who will forever be indebted to technology.
To imagine how life would be without a computer, internet, and a smartphone is terrifying.
We Willfully Adapt
The easy solution is to stick with what we have and what we can afford. Adopting an Amish lifestyle is also an option…
Obviously, this is easier said than done. When enough people integrate these new gadgets into their lives, it becomes a standard. It dictates a progressive change that we feel would be disadvantageous if we did not follow along.
- In the workplace, following the trends keeps employees up to date. The competitive employment environment weeds out the select group that possess the skill sets to adapt new, upcoming technology because such knowledge would be beneficial to the growth of the business and the company.
- In social settings, peer pressure and the need to impress plays a major role in how likely a new technology will survive in the consumer market. In a few years time, the Apple brand went from a fluke to a fad to a cult and now it’s like a religion. There is no doubt that some of us buy things just to say “I have that”.
- From a curiosity standpoint, technology often sparks an interest. How cool is it that we have vacuum robots working while we are away? Sometimes, I feel like buying new electronics just to see them function in my own home.
- From a functionality perspective, if something that makes your life easier is worth paying for, then why not buy it. After all, advancements in technology are meant to make our lives easier.
Unfortunately, the rate of technological growth is always higher than the rate of growth of our bank accounts. The new gadgets we buy today will be old gadgets tomorrow. Our ability to refrain from constant upgrades will determine how much we spend on technology.
(Photo credit: ndrwfgg)
