Our Anti-Couple Of The Year

December 6, 2010
Control Your Cash: Anti-couple of 2010

75 is the new 125

In 5 weeks we’ll give out our Man Of The Year award. There’s no formal set of criteria for it, but it’s fair to say that we give it to someone who does a lot with less than a lot.

Nor are there formal criteria for nomination, but we recently discovered the least qualified candidates in existence (non-government category.)

If you read Control Your Cash with any regularity, you’ll know that our opinions on gambling are unambiguous. Don’t.

Meet Violet and Allan Large of Truro, Nova Scotia, who spent $11 million of their gambling winnings in 3½ months. And people are commending them for it. If you needed any further proof that Canadians are monotonal, obsequious milquetoasts who enjoy being acted upon, this is it.

The Larges played Canada’s iconic Lotto 6/49, in which you pick 6 of the first 49 positive integers. Odds of winning are thus 13,983,816 to 1. The Larges nailed it and took home $11.2 million. Canadian lottery jackpots aren’t subject to tax, the eminently reasonable argument being that you paid the tax when you bought the ticket.

Ma & Pa Large “took care of family first”, according to an amateurishly written story that doesn’t specify how many family members that entails. The story also claims the Larges “don’t gamble”, leaving open the question of what activity buying a lottery ticket should be classified as. Then, the Larges cut checks (excuse us, “cheques”) to firemen, churches, hospitals, cemeteries (cemeteries need money?), the Red Cross, the Salvation Army, etc.
If a pro athlete did this with jewelers instead of cemeteries, hack sportswriters across North America would proselytize against it. Bob Ley would devote an ESPN Outside the Lines special to it. But if some astonishingly dull couple does it, people want to beatify them.

The Larges kept $200,000, or $100,000 apiece. Let’s assume Violet dies in the next couple of years: she doesn’t have the hairstyle of a woman with a lot of time left. Is the remainder really going to be enough to keep everyone comfortable? Self-made multimillionaire Paul Stanley put it best:

“ALRIGHT! I KNOW EVERYBODY’S HOT! EVERYBODY’S GOT…ROCK AND ROLL PNEUMONIA! SO LET’S CALL OUT – DR. LOVE!”

Sorry. He did say that, but more to the point, he said:

“The best part about having money is not having to worry about having money.”

Contrast that with Violet Large:

“What you’ve never had, you never miss.”

The self-contradictory old kook borrows her philosophy from ancient bromides and fortune cookies, adding that “Money can’t buy you…happiness.” If the recipients of her largesse share that belief, they aren’t acting as if they do.

Were Control Your Cash an ordinary personal finance site, this is the part of the post where the author would write, “Would you give away $11 million? What would you do if you won the lottery?”

We don’t care. Here’s what you should do.*

Sell liabilities. Buy assets. No matter how much money you have, that never changes.

At least the Larges don’t appear extravagant. (No, really, they don’t. In case you didn’t notice.) We can only hope, maybe assume, that they own their house free and clear. And it’s true that staring at each other across the kitchen table costs little.

If you’ve got any kind of overarching debt that incurs large interest, and you come into a windfall, pay that debt off in its entirety. If you need the cash to capitalize on an investment with a larger return than the return you’re giving the lender on whatever it is you’re borrowing, then maintain the status quo if it involves a spread you feel comfortable with. In other words, if you finance a $50,000 car at 11%, but you’ve got $50,000 in an investment with a guaranteed 12% return, enjoy your annual $500 profit. But such examples are rare in the real world. When you’ve got the cash, it’s almost always better to pay the debt off, start again at 0 instead of at -11%, and start looking for an investment that pays you more than a net 1%. Which shouldn’t be hard to do.

And if you’re so devoid of ambition that you can’t think of a single exotic place to visit or an experience to enjoy that requires you to spend a few bucks, join the Larges in Nova Scotia and together you can watch the ground freeze.

P.S.: They’re still buying lottery tickets.

*Someone, possibly that disagreeable Nancy woman from that one blog, is reading this and saying “How dare those arrogant people tell us what we should do with our hypothetical money.” Fine, we’ll refund your blog-reading fee.

Filed Under: Bad Examples, Economics, Estate Planning, Making Smart Choices Tagged With: , , ,

What’s the difference between a 12.9% interest rate and a 239,238.9% interest rate? Nothing.

December 2, 2010

This post originally appeared in a different form on Credit Card Chaser in June. Well, it originally appeared in an even more different form in our book. Either way, the post is especially valid today. Happy Thanksgiving, and happy shopping.

Read the fine print

If you can't read English, nor put a baseball cap on straight, maybe a credit card is not for you.

The average American household receives a credit card offer every 10 days. (If you’re on Capital One’s mailing list, more like every 10 hours.) That average American household accepts a lot of those offers, and carries a balance of about $10,000 on an average of 12 cards, which is at least 10 too many. The average interest rate on credit cards is around 18%. Twenty percent of those cards are maxed out, and 35% of their holders pay a monthly late charge.

A helpful rule in your economic life is to think about every transaction from the other party’s perspective. In this case, look at the handsome annuity that your credit card balance becomes in the eyes of the card issuer. If you can find an investment that pays a consistent 18%, let us know. Not only will we refund you the price of my book, we’ll retire from creating personal finance books and put all our money in that investment instead.

If you couldn’t pay your bills in 18th century England, you didn’t get to “call and work something out,” nor could you sue in civil court because your bank made its credit card application so pretty and the envelope so easy to open that you couldn’t say no. Instead, you went to debtor’s prison. Sometimes it seems as though the threat of incarceration might be the only way to get modern Americans to spend with discretion. You’re carrying more debt now than when you were 15 and working at Hot Dog On A Stick. Ever wonder why?

Money is a commodity, but it’s also a tool. A tool that can help you build a house, a career, a life. Lose control of your money, and it’s the credit card issuer that’ll determine how hard your nails will be hammered and how frequently. So when you get a mailer that reads:

“Instead of 18.9%, apply now and we’ll give you a fabulously low rate of 14.9%!”

understand that means

“We’d like an investment that pays 18.9%, but then we’d also like it to rain beer. An investment that pays 14.9% is still fantastic, though. Almost no investment in the world can guarantee that, besides the atrocious saving habits of the American public.”

Never carry a credit card balance. Sacrifice a month’s groceries and beg for orange peels if you have to. Regard paying your bill in full every month as an imperative no less important than locking your door every time you leave home. Depending on what neighborhood you live in, doing the former could save you more money than doing the latter.

If you carry no balance, it costs the issuer to keep you around. You’re a low-revenue customer. (Or better yet, a non-revenue customer.) Let the irresponsible borrowers with the $25,000 balances pay the salary of the MasterCard CEO and put the fuel in VISA’s corporate jets.

With a zero balance, you can look at the issuer/borrower relationship in a new light. You’ll notice that credit card companies plug their low interest rates and balance transfer rates like they’re being eleemosynary bighearts. “Act now, and pay just 9.9% on balance transfers!”

In other words, if you’re irresponsible enough to have rung up debt on a competitor’s card, come to us. You’ve proven yourself to be a juicy fish. You’re actually far better than that, because a 50-pound chinook salmon can only be eaten once. We can feed off your bloated carcass again and again. The issuer is saying, “Hooked on cocaine? That’s for losers. Instead, give our pure crystal meth a taste and you’ll never go back.”

If you pay in full, annual percentage rates and interest-free introductory periods become meaningless. The credit card company has to profit off someone. Let it be the ill-prepared next person, not you.

The longer your record of paying your balance in full, the bigger the limits your issuer should allow. Most introductory credit cards will only let you charge up to, say, $3,000. After you’ve paid in full for a few months, they’ll increase your limits. This isn’t to reward you for being a profitable customer, as you’re anything but. It’s in the hope you’ll slip up, charge more than you can afford, and that’s when they’ve got you. Another debtor on the hook.

This is not a condemnation of credit cards, says a man who would use his Hilton Honors AmEx at the neighbor girl’s lemonade stand if she’d only accept it (62,760 points and counting!) Credit cards are wonderful. They’re convenient, discreet, trackable, replaceable and inconspicuous in ways cash can never be. But if you use them without regard to their possible consequences, you’re the equivalent of a parent who thinks her baby’s nursery has just the right mix of temperature and humidity for storing loaded firearms.

**This post is featured in the Carnival of Personal Finance #286-Check Your Math Edition**

Filed Under: Bad Examples, Credit Cards, Economics, Education Tagged With: , , ,

Even playing with the house’s money isn’t enough

November 29, 2010
Bum on a bench

The only thing more pathetic than a horse player? A dog player.

If you don’t know anything about sports, read this instead. Or try and slog through today’s post. If you want the conclusion first, today’s moral is that gambling remains a moron’s pursuit.

——————-

Not only can you not consistently win gambling, you can barely win if the house pays for your bets.

A Control Your Cash acquaintance (we’d use the generic pseudonym “Bob”, except that’s his real name, so let’s call him “Stu”) recently found himself in possession of the kind of thing most gamblers only dream about – a free, hot ticket. Here’s the story.

Bob Stu likes to gamble on sports occasionally. (Whatever, we don’t hold it against him.) You might not know this, but the IRS lets you deduct gambling losses up to a certain amount. We don’t mention that in the book, because you shouldn’t be gambling anyway. When most gamblers lose a bet in the race & sports books in Las Vegas, they discard their tickets, not realizing that they count as effective receipts and proof of loss. It’s fairly common for enterprising gamblers to scour the aisles looking for discarded tickets written for large enough amounts. Stu isn’t above this.

One weekday afternoon during the NFL preseason, Stu thought he’d hit the jackpot, so to speak. He found a perfectly preserved $100 ticket that would make a great addition to his tax return.

On closer inspection, it turned out to be three neatly folded $100 tickets, each for the same wager.

On still closer inspection, the wager turned out to be live. Each ticket was a 10-1 bet on the Baltimore Ravens to win the Super Bowl, written hours earlier. Some schlimazel up and lost his tickets.

Stu, being the honest guy he is, returned to the book the next day and spoke with the manager. He explained the situation, slightly tempering it. (“I found a $100 ticket…”) As Stu acknowledges, “I wasn’t going to admit to having all 3. I’m not that honest.” The manager, shocked that a customer was asking him for anything other than a light, said that unless the buyer had taken the extremely unlikely precaution of writing down the ticket’s 15-digit serial number, there was nothing he, the manager, could do. The ticket and its siblings were Stu’s.

So there it was – a potential $3000, just for being in the right place at the right time.

But also a potential $0. After all, the Ravens, like any other given team, probably won’t win the Super Bowl. So how to maximize Stu’s return?

Hedging. If you’re only vaguely familiar with the term, it means forgoing the possibility of a particular payout for the greater possibility (or better yet, the certainty) of a smaller one.

Say Stu had found the tickets the week before the Super Bowl, and the Ravens happened to be playing in it. To hedge optimally, Stu would wager enough money on the other team to guarantee him the same payout regardless of who wins. Formula coming henceforth. Formula contains one addition and one division, two operations you hopefully mastered by the 4th grade.

But Stu found the tickets during the preseason. Although the oddsmakers expected the Ravens to have a good year, giving them 10-1 odds to win a 32-team league, there’s no guarantee the Ravens would even make the playoffs. Baltimore is leading the AFC North at 8-3 and looking as good as anyone expected in a tight division, in a tight conference, in a tight league.

But had T.J. Houshmandzadeh dropped on 18-yard touchdown pass with 32 seconds remaining against Pittsburgh on October 3, and Ray Lewis not recovered a fumble 3 weeks later in overtime against Buffalo, Baltimore would likely be on the outside looking in at the playoff picture.

Say Stu had advance knowledge that the Ravens would miss the playoffs. Could he have hedged enough money to guarantee himself a payout?

No. It’s unlikely any offshore wagering site offered a proposition on something as esoteric as the Ravens missing the playoffs, but if one did, it would likely set the odds around 2-5 (given that Baltimore was 10-1 to win the whole thing). That’d be a 40% return on Stu’s money, but then what if the Ravens do make the playoffs, which the oddsmakers say they probably will? Now Stu’s out the price of his hedge bet, and still needs to have multiple playoff games break the right way. After all, Stu’s ticket wasn’t for the Ravens to simply get invited to the pageant, but to win the talent and swimsuit competitions too. Stu would have to hedge every playoff game the Ravens are alive for, approximately doubling his bet and thus halving his potential return every time.

What if the midsummer genie said “the Ravens will make it to the Super Bowl” without specifying who’d win? Which is a pretty bold proclamation for a genie to make. Yet now, at least, we can get this down to exactly one hedge bet. But for how much?

Say Atlanta represents the NFC. The smart thing would be to place a bet on Atlanta costing
$3300/(m+1)

where m is the odds on Atlanta. Stu’s payout would be
$3300m/(m+1).

We use $3300 because that’s what Stu would pocket if his original tickets all came in: $1000 on each of three $100 10-1 tickets, plus the original $100 that the anonymous poor sucker spent on each.

Let’s say after Atlanta wins the conference, the odds on them to win the Super Bowl are 5-11. Stu would bet $2143.75 on them, guaranteeing himself $1156.25. If Atlanta paid even money, he’d wager $1650 to guarantee himself $1650. If Atlanta was an 11-5 underdog, Stu would wager $1031.25 to guarantee himself $2268.75. The better Baltimore does this year – the bigger a favorite they are – the better it is for Stu.

But this is the Super Bowl, and neither team is likely to be as big a favorite as 5-11 nor as long an underdog as 11-5. The game is supposed to be between somewhat evenly matched teams.

What if the genie said “the Ravens will make it to the conference championship”? That’s still a valuable thing for a gambler to know going into the season, or so you’d think.

By the time we get to the NFL’s round of 4, Stu could truly hedge his Super Bowl bet only by wagering on the 3 remaining teams. Which, on average, would probably each pay around 3-to-1. Or could pay a lot worse. So if he took them all, covering every outcome, Stu would be winning close to even money.  But again, he’d still have to risk a ton to keep his original, “free” bets live.

Working backward yet another step, even when there are still 8 teams alive, Stu couldn’t hedge himself more than a few bucks. Every time the number of participants increases, the number of possible outcomes does too. Double them, and you again halve (or close to it, depending on odds) Stu’s potential payout. Were the genie to guarantee Stu that the Ravens would make the playoffs, he still couldn’t make any money.

And that’s with the benefit of a nonexistent genie. Even a free 10-1 wager can’t be manipulated into a bet that guarantees anything more than a tiny sum.

If free gambling isn’t worth the effort, think about how useless it is to pay for the privilege.

**This post is featured in the Carnival of Wealth #15**

Filed Under: Bad Examples, Making Smart Choices, Math, Personal Finance, Shopping Tagged With: , , , , , ,
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