Real Financial Advice. No Bullcrap.

January 15, 2014

In this site’s capacity as a feeder or proving ground of sorts for Investopedia, our work occasionally ends up on Yahoo. (Note: We’re done with accommodating entities that want to punctuate themselves in a wacky fashion. Yahoo, your exclamation point is confusing, gratuitous and unwelcome here.)

A fellow Yahoo contributor is Gary Foreman at CreditCards.com, who answered a “reader’s” question about saving and debt. That’s in quotation marks because it leaves open the possibility that there exist people who believe that a question publicly answered by someone promising advice could ever be anything but pure fiction.

Anyhow, reader “Waqas” posed the question. Here’s Gary’s response, and ours, even though no one asked for the latter. No one asked for the former either, but whatever:

Dear New Frugal You:

Right now I owe $3,100 on my credit card. I have $6,000 in my savings but am trying to hit a benchmark of $10,000 in my savings. The way I’ve been saving I should hit the $10,000 mark in three months. However, the balance on my credit is glaring. My total credit limit is $4,500. Should I pay this debt immediately, slowly, or should I continue to pay a small amount just over minimum to hit my benchmark of $10,000, then anything I make after will be strictly towards my debt? Please and thank you. — Waqas

Got all that? Good.

Dear Waqas:

Your priorities could not be more out of order. You’re “trying to hit a benchmark of $10,000 in [your] savings”? First, the expression “hit a benchmark” is unnecessary. You’re trying to save $10,000. So say that instead.

Second, stop being ingenuous. Not sure if you noticed this, but credit cards charge interest.

This is 77 Harrison Avenue, Sausalito, California. It’s the home of Robert W. Matschullat, chairman of VISA.

VISA house

 

Three stories, 10,581 square feet. 5 bedrooms, 7 bathrooms. He paid $6,834,000 for it, and when you’re that rich you can ignore our advice to buy the smallest house in the best neighborhood. Also, Chez Matschullat is this close to San Francisco Bay:

 

VISA house II

 

Waqas, if credit cards didn’t charge interest, Mr. Matschullat would be living in the same basement suite you do. You’d be roommates. CBS might borrow details of your story for a family-friendly sitcom about your crazy adventures. Can a young humanities graduate with a crushing debt load and a failed financial services executive share a cheap apartment without driving each other crazy? Find out on this week’s episode of Waqas & Bobby, Thursday at 8 (7 Central)!

In other words, your $3,100 balance is going to be a $3,101.61 balance tomorrow and a $3,103.24 balance the day after that. Unless you’re in an introductory no-interest period, but we figure you would have mentioned that. Oh, what the hell: you’re a figment of Gary Foreman’s imagination anyway, and for all we know he’s a character created by the Taiwanese entrepreneur behind CreditCards.com, but we’ll assume that you’re all flesh-and-blood for the purposes of this post.

Let’s parse the 1st line of Waqas’s lament:

Right now I owe $3,100 on my credit card.

followed by

I have $6,000 in my savings

Boom! Done! What else is there? A couple of keystrokes, and you now owe 0 on your credit card and have $2,900 in savings. Come on, give us a hard one.

Why does your question continue? That should be the end of it, and yet it isn’t.

Trying to save $10,000? Congratulations, you’re 29% of the way there. But no, the financial idiot’s capacity for complicating things is limitless. We already quoted this, but it bears repeating:

Should I pay this debt immediately, slowly, or should I continue to pay a small amount just over minimum to hit my benchmark of $10,000, then anything I make after will be strictly towards my debt?

The only acceptable answer is “Unless your bank/credit union/neighborhood Shylock is offering you a higher interest rate than the credit card is charging, pay it immediately. And how did you manage to form sentences despite being so amazingly dumb?”

Maybe it isn’t stupidity, but rather naïvete. Are there people who really think that there exist savings accounts that pay more than even the lowest-interest credit card charges? No, there can’t be.

Which brings us to a CYC standby, Always look at the transaction from the other party’s perspective. The 19% or whatever that VISA or MasterCard charges you in interest is a 19% return for them. You like high returns, right? Would you be interested in an investment that pays 19% annually? Because Robert Matschullat sure as hell is. And his landscaping crew, tennis pro, pool boy, and string of jewelry-hungry mistresses (if any) certainly appreciate it.

So yeah, if you want as concise an answer as possible, send a $3100 check to your credit card issuer yesterday. Why you didn’t do this while you were amassing the $6000 is beyond us.

Here’s Gary Foreman’s more nuanced if less helpful response. We’ll admit, it’s definitely different. We were going to present it as a block and then give comments at the end, but it’s more fun (and probably easier on you, the readers) if we assail it point-by-point:

Congratulations on your savings success.

 

(Yes, let’s start by patting the idiots on the back. When did we start treating the population at large like Special Olympians?) I’m sure that it feels good to be so near to your goal. Your question is a good one (No, it’s an awful one. See above) and one that many people ask: Does it make sense to put money in a savings account while you still are repaying debt? (Many people ask if smoking clove cigarettes is somehow better than smoking conventional cigarettes, or if smoking either will help maintain weight loss. That doesn’t make them legitimate questions.)

Let’s look at the question a couple of different ways. (Why? We already answered it! Unambiguously! This is like trying to find a second answer to “What’s the capital of Chile?” There isn’t one.) First, we’ll discuss why we want/need a savings account and why we borrow money. Second, we’ll look at the purely mathematical aspects of your question. (Nice going, Gary. You put the 1st part 2nd, and the useless part 1st.) Then, finally, we’ll consider some of the emotional/psychological issues your question brings up.

(Alright, new paragraph required. Boldface, too. There is no place for emotional/psychological issues in personal finance. None. Leave that nonsense in the pages of Cosmo. We’re not being funny or intentionally shocking here, either. You should know this by now. Because finance don’t care. Emotion and psychology have their place, but it’s not here. If you want to talk about, share, or otherwise validate your feelings, there are other more fitting avenues for doing so. Your personal relationships, for instance. But not your relationship with money. Good God, why hasn’t the world as a whole figured this out yet?)

I’m guessing, but I suspect that you started saving because you became tired of having unexpected expenses that could be paid only by using your credit card. And, to tell the truth, those bills aren’t really unexpected. (Gary, do you give your straw men names? If not, how do you tell them apart?) We know that a car or the fridge will break down or we’ll need to visit the doctor. What we don’t know is when it will happen. (Great insight. Why hasn’t The Simple Dollar hired you as a staff writer yet?)

As to why we use credit cards the story is usually the same. In the beginning, it’s just convenience. They’re easier to use than cash. (The guy didn’t ask this. He wanted your advice. How about giving it, instead of answering questions he never posed?) Plus they’re handy for the unexpected bill that we can’t handle out of savings. (Actually, credit cards are for a] freeing us from the obligation of carrying cash, 2] allowing us to track our expenses more easily, and iii] letting us amass rewards that we wouldn’t be eligible for if we paid cash for everything. Look it up.) Typically we want to spread the bill over the next few months and pay down the credit card account. (Why? What fool willingly wants to do this? “Yes, I’d much rather incur interest over the next few months than pay this instantly. Because I hate money.”)

Sometimes we find that difficult to do. And today’s unexpected expense gets added to the one from six months ago that we still are working on repaying. So our balance doesn’t disappear, but rather seems to be growing. That sounds like what you’re experiencing, Waqas.

Next, let’s examine the math of the question. (Why didn’t we do this 200 words ago? Oh right, you’re making it up as you go along and needed to fill some space. You should submit to the Carnival of Wealth sometime.) If you’re asking what’s the quickest way to both save $10,000 and repay your debt, your answer will lie in the interest rates. (No! False premise. Those are conflicting goals and need to be prioritized. And anyone who thinks that saving $10,000 should come first shouldn’t be permitted access to the internet.) Compare the interest rate being earned on your savings to the interest rate being charged on the credit card. (We really try not to use profanity on here, but no sh*t.) You should put any extra money you have on whichever is higher. (That’s great. “Whichever is higher”, as if there could be a question. Pitch to Mike Trout or Erick Aybar, whoever’s the weaker hitter.)

It’s almost certain the credit card bill should be paid off first. (Other things that are almost certain? Ice is colder than water. Bees make honey. Puppies are cute. We’re closing in on maximum enlightenment here.) Your interest rate on the unpaid balance is probably in the teens. Your saving account is probably in the low single-digit range. Once you’ve paid off the credit card you can resume adding to the savings account.

If your only concern is how quickly you can accomplish both you’d actually be wise to pull $3,100 from savings to totally pay off the credit card balance. But some would argue against that. (Ooh! Ooh! Call on us, teacher, because we can’t raise our hands any higher. We’re practically touching the ceiling here.) Which leads us to the final way to look at your question.

Are there any emotional issues that would suggest that you should save the money before repaying the debt? (Wait, is it “Gary” or “Gabriella”?)

There are some people who, for various reasons, must have some savings available to them. (Yeah, they’re called “humans.” Needing savings and artificially creating a higher level of same are 2 different things. Think about it. Waqas is BORROWING MONEY to keep his “savings” high. Why not encourage him to take out an additional $20,000 loan? Then he’ll have $26,000 in savings! What a cushion!) Without it they feel vulnerable. For them it would be best to build the savings up to an acceptable level and then use extra money to repay debts. It won’t be the quickest way, but it will help prevent sleepless nights! (Okay, now we’re at the point where we’re adding blatant lies to the mix. How does increasing the number of nights in debt reduce the sleeplessness? How about we put that question in your next mailbag?)

What should you do? Only you can decide how comfortable you’d be if your savings was suddenly cut in half. (Ah, the good old vacillating non-answer. “Whatever you think is right.” If you were going to say that, why even pretend to bother answering the question?) But you might feel relieved knowing that the credit card debt was wiped out. In either case, at the rate you’re going, you should reach both goals in about six months. So you won’t have too long to wait. Congrats!

And one more back-patting gesture for good measure. Enough.

If you have questions of your own, send them to info at ControlYourCash.com. And don’t ask “Why are you so mean?”, we’ve already answered that one several times.

Filed Under: Bad Examples Tagged With: , ,

Trent Hamm, Genius. Trent Hamm, Lunatic

December 18, 2013
Who's the most handsomest boy at the board game convention?

Who’s the most handsomest boy at the board game convention?

 

See? He’s not the only one who can change his mind by 180º in a single motion. And honestly, he is something of a genius in that someone this, what’s a good euphemism – single-minded can attract tens of thousands of devotees despite having only one personal finance tactic at his disposal (“spend less.”)

If you’re unfamiliar, Mr. Hamm is the “creative” force behind The Simple Dollar, an amateurishly written website in which he repeats himself 14 times weekly. He’s been a favorite of ours for a very long time. His advice is insipid, his syntax more stilted than Roy Maloy. From Mr. Hamm’s latest post, here’s an example of the excruciating detail he entices his readers with:

The first morning we were [at a relative’s house for Thanksgiving], I grabbed some clothes and headed for the bathroom to take a shower. Just like I do at home, I turned the hot water to full and turned on the cold water just a little bit, waited about fifteen seconds, and stepped in.

No mention on which body part he used to turn the water on with, whether he closed the shower curtain behind him, or if soap was involved, and if you think we’re being funny you haven’t seen the depraved depths of specificity to which he’ll go. The shower turned out to be too hot for his soft white underbelly, so…you won’t believe what he did to address the problem. Any guesses? Come on, you can do this.

I turned down the hot water and turned the cold water up quite a bit until I found a good balance

This is how you become a great blogger, kids. Write things your audience can identify with. Who among us hasn’t gotten in an unfamiliar shower and found it too hot? More importantly, who among us has found it noteworthy to mention such an occurrence?

Afterwards, I was talking to the person who was hosting us

Trent goes to disturbing lengths to camouflage the identities of the bit players in his inexorable stories. Earlier, he refers to this home as that of “some of our extended family members.” Because “my wife’s uncle” or whatever just conveys way too much information.

Anyhow, the person who was hosting the Hamm clan (or, if you prefer concision, the “host”)

told me that he, too, turns on a mix of hot and cold water for his shower, as does his wife.

This isn’t an atypical post for Trent Hamm. Every one of them is this dull, pointless, and dizzyingly simple in its progression. If you were visiting kin and discovered that they drank beer with breakfast, dried their clothes in the oven, or tossed their trash in the neighbor’s yard, that would be worth mentioning. But that they “tur[n] on a mix of hot and cold water for [their] shower[s]”? You know, like everyone else in the civilized world does? To you, our readers, this is as pleonastic as information gets. To us, it’s something to make fun of. But to Trent, it’s critical to the plot.

[Finding out that these people shower with a mix of hot and cold water] threw me for a loop.

I was…shocked.

We only wish that Trent’s shocked-by-the-shower story had involved someone throwing a toaster in standing water while Trent was scrubbing down his orcine body, but no such luck.

We’re not going to parse every line in Trent’s Typhoon Haiyan of a post, because if we did we’d be here for months. Fast-forwarding, the unidentified male family member explained that they keep their water heater temperature high to prevent disease.

Where do these people live, Calcutta?

The good part, at least for Trent, is that this conversation gave him another triviality to obsess over.

At about 50 degrees Celsius, which is what we keep our hot water heater set to, you have a drastically higher chance of Legionella living in your hot water tank. Instead, [The Canadian Journal of Infectious Diseases] recommends keeping it set at 60 degrees

God forbid he’d multiply the Celsius values by 1.8 and add 32 to accommodate his American audience, but Trent has a knack for paying attention to meaningless details only. Although he’d probably never given Legionella a 2nd thought in his life, he was now confronted with a whole new series of economic tradeoffs to calculate cost-benefit analyses for:

The problem with that temperature is that you run into some danger of scalding. The solution there is to have anti-scald devices at the faucets and showers

[…]I raised our own tank temperature up to about 140 F. We already had these anti-scald devices installed

So, does Trent’s post have a point? Of course not, this is Trent Hamm we’re talking about. By the way, the cheapest anti-scald device we could find sells for $42. Trent Hamm, who regularly tells his readers to save money by making their own toothpaste instead of dropping $1 for a tube of AquaFresh, and who literally counts the number of times he shakes salt or pepper onto his food, threw away $42 on an additional shower valve instead of just playing with the hot and cold faucets like a normal person would. The net result of Trent raising his water tank’s temperature to unfamiliar heights? Again, by now you should be able to guess this easily.

The water in the shower…does come out warmer than I like, meaning I mix in some cold water with my showers.

Every 12 hours, this psychopath manages to hunker down and squeeze out another post. Which sounds like it’d be hard to do, at least in terms of time expended, until you remember that he can burn multiple paragraphs on the subject of his preferred method for finding a comfortable temperature each time he steps into the shower (which, judging by his appearance on those YouTube videos, isn’t all that frequently.)

There is a plot twist. About once every couple of hundred posts, Trent goes iconoclast and stops praying at the altar of the great goddess Parsimonia (boldfacing his):

Frugality isn’t worth the risk of a significant increase in the likelihood of Legionnaire’s disease or other bacteria-borne illnesses in our home.

Again, what 3rd-world backwater is he living in? Last we checked, Huxley, Iowa was nowhere near the Gaza Strip. Granted, he lives with kids and kids are filthy, but so filthy that even 120º isn’t enough to stop the microorganisms from claiming another victim? The only people Legionnaire’s disease has killed in this country in the last 30 years all lived in nursing homes. Trent isn’t yet so immobile that he needs a health-care worker to wash him down with a rag on a stick, but you can’t be too careful.

This advice wouldn’t be so bad (though it’d still be plenty bad) if it weren’t coming from the same tool who bars the door against Legionella but goes out of his way to recommend other fun ways for incurring disease:

If your recipe says “Preheat the oven to 400º” and then later says “Bake for 30 minutes,” don’t preheat the oven at all. Instead, put your food in the oven, then set the temperature to 400º. Then, add about half of the preheat time to the cooking time. Why? When you open a preheated oven to put in your dish, it’s no different than opening the oven to check the food near the end of the cooking time. You lose that 2¢. (Ed. note: 2¢ being the amount Trent figured out that it costs to open your oven to check on food. That’s not a joke. Nor is it a joke that he apparently had no clue than turning on an oven light could have saved him 1.994¢ or so of those precious pennies.) 

Keep your shower’s hot water relatively cool to save money. No wait, raise its temperature so you don’t get an extremely rare disease. But it’s okay to risk a more common (if less fatal) disease if it means saving 2¢, or .05% of the price of an unnecessary anti-scald device.

Trent Hamm is an abomination. If you read him for anything other than the (admittedly small) amusement value, you’re throwing your life away. If you’re contemplating buying his book, please buy ours instead before killing yourself.

Filed Under: Bad Examples Tagged With: , , ,

November’s (F)RotM, Now With Local Flavor

November 29, 2013
Not Amie Pellegrini. Close enough, though

Not Amie Pellegrini. Close enough, though

 

We’ve maintained on this site, again and again, that for most of us entrepreneurship is the surest path to wealth-building. It’s also the surest path to illiquidity and receivership, if you don’t know what you’re doing. And you probably don’t. Especially if you start a business for no better reason than you want to sell products that are, in your estimation, “cute.” Speaking of which, if you think “cute” is the overused adjective of choice among dippier females, wait ’til you get a load of this month’s (F)RotM and her overuse of it.

Meet Amie Pellegrini, a would-be transportation tycoon and founder of The Town Bike, somehow still in operation as of this writing. The only thing standing in the way of the realization of Ms. Pellegrini’s dream is a gaping hole where her business sense ought to be. We’ll start with the foreboding opening sentence in a Las Vegas Review-Journal story of 2 months ago:

Imagine Paris Hilton opening a downtown Las Vegas bicycle store.

Yes, except Paris Hilton has unlimited funds to indulge her fantasies. Ms. Pellegrini is operating a little more modestly:

Pellegrini debuted the shop this month, pouring $40,000 into [it]…

Laid off from her operating room medical device sales rep job, Pellegrini sold her Lexus for $10,000

Ms. Pellegrini can now go without the car because she works in downtown Las Vegas, where parking is relatively scarce. We’d say she can take one of her bikes to work, but her commute is too short even for that:

She lives above her store.

Owning a bike shop is the culmination of a lifelong fascination with and love for cycling, right? Not exactly:

“I don’t even know what bike shops are supposed to be like,” Pellegrini said. “There was a shop in New York I loved. I loved the way the bikes were put on display. It almost was like a runway for models. It was a cute store.”

Last Saturday morning, Pellegrini greeted a visitor while she was wearing a long pink dress and smoking a cigarette — not the conventional bike shop garb

Read the original article and you can hear its author, a competitive cyclist himself, holding back the laughter between keystrokes.

We saved the entrepreneurship chapter for last in The Greatest Personal Finance Book Ever Written. We explained how to set up a limited liability company, how to minimize taxes, etc. We didn’t explain what reasons you should have for starting your own business, mostly because they seemed too evident to mention. Fill a need. Look for an underserved market and serve it. As a business owner, you trade having one boss for having multiple mini-bosses, better known as customers. Make their lives easier, and you’ll succeed. Or to quote the Kinks, Give The People What They Want.

Ms. Pellegrini reverses the traditional wisdom here. You’re not going to believe this, but the hot blonde single chick thinks that her business should exist for the benefit of said hot blonde single chick:

“I wanted to do something just for me“

“Mr. Zuckerberg, why did you create Facebook?” “I wanted to do something just for me.” Carry on, then. It does not strain the limits of credulity to think that people have been doing things just for Ms. Pellegrini for most of her life, including the poor unnamed loser in this paragraph:

[Pellegrini] admits she doesn’t know much technically about bicycles. She bought three old bicycles, including a Schwinn Le Tour road bike and a beach cruiser.

“I took apart the bikes, but couldn’t put them together,” Pellegrini said. “I wanted to find out how they worked. I called a friend who helped me put the bikes back together.”

No mention on whether the friend is male or female, but we can take an educated guess. And if you think that’s unnecessarily sexist, might we remind you that

[T]here are bicycles on the floor, but they were picked because they look pretty. And besides the two-wheelers, frilly sundresses hang from a rack greeting patrons, and cute dog toys and bow ties sit in one corner.

We now introduce the story’s villain. He’s the regional sales representative for Linus Bikes, a California outfit that sells 3-speed touring cycles. He also knows a sucker when he sees one:

The fact that Pellegrini is an outsider to the bicycle industry is just fine with the Linus sales representative who sold her the bicycles[…]

“She’s been refreshing. She brings a new perspective. She’s not coming from a techie bike background, so she relates to our customers[.]”

“Ma’am, your showroom looks a little bare. But you know what would fill it up just right? 20 of our Roadster Sport bikes. 5 almond, 5 black, 5 olive and 5 marine. They’d really accentuate the sun dresses and dog toys. I can get them for you wholesale. And the retail markups on them are among our highest.”

“But I haven’t had 20 customers come in all month.”

“Just you wait. Once you’ve got these babies in stock, you’ll have to turn people back at the door.”

We’ve never changed the (F)RotM in mid-post, but this time we might have to take the honor away from Ms. Pellegrini and give it to her neighbor, Don:

My neighbor Don who lives on Third Street, for a year I walked by his house and would talk with him about opening a bike store […] He came over and helped me put together a whole shipment of bikes once. He helped me move everything into the store. He helped paint the store. He spent three months building the store with me and never asked for a dime. He just wanted to help me[.]

Okay, now try beseeching Don’s help again, only this time be fat and/or ugly and see what happens. We only wonder at what point Don asked her out on a date. He must have run out of pretexts at that point, seeing as he already had her contact information and knew where she lived. We don’t know what his line was, but we can guess her response. “Oh, that’s so sweet! I really like you, but not in that way. Now [bats eyelashes] can you help me carry these Thule® racks upstairs? They’re really heavy.”

Just kidding, that would never happen. Bike racks are bike accessories, and Ms. Pellegrini doesn’t have the floor space to devote to such trivialities when there are sundresses and dog toys to display. She doesn’t sell tubes, doesn’t sell tires, and doesn’t have a repair facility on the premises. If you buy a fixed-gear douche ride from her, you’ll have to take it to another store for professional repairs. That other store will have packs, bottles, shoes and helmets available, and will preclude you ever needing to set foot in Ms. Pellegrini’s store again.

We saw this story back in September and figured she’d be out of business in 4 months. A smart gambler would have taken the under, as she was poised to last barely half that long:

On Tuesday, Amie Pellegrini posted on Facebook that she would have to close her unique downtown Las Vegas bicycle shop, Town Bike.

But it seems that some gullible guys on Facebook took pity on her, the kindness of strangers postponing the inevitable until the end of the year. Oh, and one more handy tip for prospective entrepreneurs whose businesses are crumbling before their overly mascaraed eyes: try not to get arrested for domestic violence the very week that your failing business is featured in the local paper.

Filed Under: Bad Examples, Financial Retard of the Month, Uncategorized Tagged With: , , , ,
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