Painless Change, More Money (Yet Another One)

May 23, 2012

 

Abandon all hope, ye who enter here

Control Your Cash Trivia Time!

Which will lubelessly rape your wallet the fastest while leaving the deepest scars?

  1. Incurring credit card debt
  2. Having children
  3. Going to a car dealer for repairs and parts

The answer is 2, of course, but that doesn’t make for as interesting a blog post as if we assume the answer is 3.

What turns most people off about personal finance is that so much of it is about economization. Go without, deny yourself one of life’s immediate pleasures, and maybe in the future you can enjoy a slightly greater pleasure. No wonder so many people just give up and decide to indulge themselves immediately.

But this is different. Here at Control Your Cash we consistently urge you to make painless choices that you won’t even notice after you’ve spent the initial few seconds making them.

Like the idiots we see waiting in the drive-through lane at Starbucks every morning. Yes, the “latte factor” has been analyzed to death already, but it’s still valid. These people not only pay 2000% markup for the privilege of patronizing Starbucks, they wait in line longer than it would take for them to brew their own coffee. So they’re not even purchasing convenience, however much that’s worth. They’re wasting money simply out of habit.

Log into your car insurance account, and your health insurance account while you’re at it, and check your limits. You’re probably overcovered, and throwing money away each month unnecessarily. Once you reduce your limits, you won’t be suffering through the privation of having reduced coverage. You’ll be saving more money, again with minimal effort, and all for a few minutes’ work. We’re not talking about forgoing that Fijian vacation you’ve been working towards and desperately wanting for so long. We’re talking about doing practically nothing and getting more money out of it. All because you were a tiny bit more cognizant and aware of your surroundings than you were before.

Which brings us to our multiple-choice quiz answer. Why do car owners go to the dealer for service? Because they don’t know any better, and because it’s convenient. Also, if you bought your car new, the dealership almost certainly offered you a free oil change and tire rotation or two when you closed the deal. Sometimes, depending on how naïve you look, they’ll go so far as to insult you by offering services that even Baker from Man vs. Debt could perform on his own. Like replacing windshield wipers, for instance, as if that’s something that anyone with opposable thumbs couldn’t do.

Merchants have been offering “free” goods and services for millennia, and still people get suckered in. It’s not that the merchants are necessarily cheating you, but rather that you need to take into account what they’re selling you beyond the free stuff. Free socks with that new pair of sneakers? Maybe, just maybe, and you’re not going to believe this, Foot Locker factors in the (minimal, to them) price of the socks and still makes a tidy profit off you when you buy that pair of Reebok RealFlex CrossFit Nanos.

Even without the free oil changes, the dealer relies on your presumed comfort level to make you a lifetime customer. The friendly man who sold you the car? There are even friendlier men working at the dealership as service advisors!

Of course they’re friendly, you’re responsible for financing their fishing boats and summer cabins.

We’ve discussed it on this site before, and elsewhere, ad nauseam. Like the time we priced a job that included replacing both sets of front brake pads and the calipers, cleaning the rotors and bleeding the lines. The dealer quoted $871.45. Oops, left my credit card at home. It’s the darnedest thing. How about I bring my car back this afternoon?

The shop down the street offered to do the same job for $398.34.

Only with rare exceptions should you take your car to the dealer. For warranty work, obviously, but beyond that the reasons you should let the dealer touch your car are selected and rare. Resetting the factory satellite radio unit, for instance.

Even the most meaninglessly inconsequential items are cheaper just about anywhere other than your dealer’s service department. Case in point, Motorcraft Part 15K601:

Price on FordOwner.com, $55.71

Price on Amazon: $7.50.


Damn, those internet retailers really are killing Main Street. We didn’t even think about visiting the neighborhood mom-and-pop key fob store.

Once more, repeat after us:

Poor people are poor largely because they choose to be.

It was only a few years ago that “comparison shopping” meant driving across town and burning a day or two to find the best deal. Today, that’s not an issue. While reading this post, there’s nothing to stop you from opening a couple more tabs and finding meaningful savings on your next purchase of whatever. The money you save, you can buy assets with. This is how you get rich. There really isn’t much more to it.

This article is featured in:

**The Carnival of Personal Finance 364: The Art of PF Blogging Edition**

Filed Under: Healthy Living, Making Smart Choices, Personal Finance Tagged With: , , , , ,

A Guest Post From A Dog

May 16, 2012

 

Occasionally we run guest posts. If you’d like to submit one, see our requirements here. Today’s is written by one of the very few submitters capable enough to meet all our criteria, Froofy the Dog.

 

He already writes better than most Carnival of Wealth submitters

Hi, this is Froofy! My brain can do the following, and not much else:

  • remember which people I can trust
  • know where my food and water are
  • allow me to whimper so the people mentioned above will open the door and let me out when required.

Yet even I know that you’ve got to be some kind of lower vertebrate to take to heart half the tripe I read that’s passed off as personal finance advice. (Yes, I occasionally read. That contradicts what I wrote earlier, but I want you to suspend your disbelief, at least until the end of the post.) These self-styled experts and bloggers repeat the same incessantly dumb stuff and think that a) it’ll make a difference if executed, and b) anyone’s going to act on their awful advice anyway. Here, I’ll list some of the most offending personal finance mantras I’ve come across. I’ll use point form, the preferred method of communication for dimwits:

  1. Create an emergency fund.

What’s an “emergency”? Yes, I know, it’s a relatively simple word, but what, specifically, could it mean in this context? Give me an example, humans.

Medical bills?
Car accident?

Wow, you folks are unimaginative. Then again, you cite the same emergencies repeatedly because there just aren’t that many occurrences that can legitimately qualify as “emergencies”. That’s if you define an emergency as something that requires you to draw down funds that you’ve set aside for such an unfortunate occasion.

Let’s examine the examples above.

You can buy health insurance. Yeah, I know, it’s too expensive. Waah, waah, waah. Get off that doughy posterior of yours, eat better, and maybe your premia will decrease.

Besides, if your finances are so tight that you consider insurance to be expensive, why do you want to sock away money in an inert account anyway? Shouldn’t you be growing that money instead? Explain this to me. I’m just a dog.

Okay, #2. Car accident. You have insurance for that, too. In fact, it’s required.

I know what you’re thinking. What about an unforeseen expense that insurance doesn’t cover, something like a cylinder head assembly that needs replacing?

This is easy. You withdraw the $3000 or so that that’ll cost out of one of your investments. Dropping $3000 is something you’d obviously rather avoid doing, but when the time comes, you’re going to have to do it anyway. To quote business author Harvey Mackay, you’re supposed to dig your well before you’re thirsty. That’s not a retroactive argument for creating an emergency fund. Rather, it’s a retroactive argument for putting your money somewhere it could grow.

Confused? I usually communicate in barks, so you need to work with me here.

When someone recommends an “emergency fund”, they mean a highly liquid account – one you can take money out of easily. Most of the time, that’s going to mean a savings account that earns either no interest or minimal interest. This is stupid. If you’ve got the discipline to sock away $5000 or whatever and not touch it, good for you. But it also means you’ve got the discipline to amass $5000 and actually, you know, do something with it. Five large is a down payment on a condo. A cheap one, anyway. Or it’s a substantial piece of a real estate investment trust. Or it’s 223 shares of Hewlett-Packard, which is trading at close to a 52-week nadir. They recently switched out CEOs, can’t possibly make any more dumb acquisitions anytime soon, and probably should have been selected by the folks behind Control Your Cash in Financial Uproar’s stock-picking contest. Not sure why they didn’t.

When you create an emergency fund, you’re saying, “I want my money to stagnate.” If I get lucky, something costly will happen and it’ll all be worth it. Dang, Mark Twain wasn’t kidding. You people really do love to rationalize.

2. If you can’t handle credit, freeze your cards in a block of ice.

Come on. You’re screwing with me, right? This is like a personal-finance version of the hidden-ball trick, isn’t it?

Why do you have credit cards if you’re not going to use them? Oh, for emergencies? See above. To build credit? Don’t you have to occasionally use them, then?

I know a guy, a Dobermann. Nice fella. From Germany, which is why he uses the additional “n”. His owner tried to quit smoking once. Well, several dozen times. He’d buy cigarettes, then get his girlfriend to hide the packs in the house. Why you’d possess something and not use it, we couldn’t tell you. Flirting with lung cancer seems at least a little more straightforward than trying to fool yourself into being tobacco-free. If you’re afraid that being able to access your cards means you’re going to go on a spree and end up thousands of dollars in debt…well, have you tried being an adult? Try it and see how that works.

3. Create a budget and stick to it.

How does this one work, exactly?
Let’s say you get a call from a friend on the 30th of the month. He asks if you’d like to meet him for lunch. At a restaurant, which presumes you’ll be spending some amount of money.

What do you say? “Sorry. Went a little crazy at Chili’s last Monday – I ordered an appetizer and an entrée. Long story short, I reached my allotment for the month (Expenses: Food & Entertainment category) and can’t meet you. Unless you want to pay for me, or perhaps you’d rather I just order water while watching you eat.”

You’ll lose a friend, and you’ll deserve to.

Budgets are for business entities. They have to have them. Businesses have multiple decision-makers pulling in different directions, and not everyone can have their way. The research & development team would love to have an extra few hundred thousand to experiment with, but the CFO has owners to answer to and finite resources to manage. The factions have to reach a compromise, thus every department gets a budget.

But you’re not a company. You’re one person, with no one else to answer to. Try this: spend necessarily. Don’t squander your money. Make a conscious decision every time you take out your wallet. Don’t freak when you’re in line at the supermarket and you find that that 60¢ bag of cilantro put you over your self-prescribed limit. Life’s too short. And are you really going to spend time fixated on a spreadsheet, categorizing your expenses for the sheer fun of it? Come on. Unless you’re naturally inclined to do so, you don’t. Stop kidding yourself.

Those 3 useless pieces of advice just perpetuate bad habits among people who were never going to change anyway. You don’t need an emergency fund: you need assets. You don’t need to save yourself from yourself: you need to grow up. And you don’t need a budget. You just need to stop spending stupidly.

That wasn’t so bad, was it? (It wasn’t.) Told you we were smarter than cats.

Filed Under: Making Smart Choices Tagged With: , , ,

Expose Yourself For Fun And Rewards

May 11, 2012

She's smiling because she's AB-. That'll get you $20 a quart.

A company is struggling, and the struggle has no quick resolution. (How) can you profit off this situation?

Case in point, and a real-world example. We needed an polyurethane iPad Smart Cover, which is made by Apple and sells for $40. It’s the only accessory we could find that hit the multiple criteria of a) being made especially for the product it’s supposed to accessorize and b) coming from a trusted manufacturer (Apple itself). There are plenty of knockoffs available, but we’re not interested.

While we’re certain the Smart Cover does what it’s supposed to, we still wanted to take a look at it rather than just read the description on Apple.com. So we headed to Best Buy, America’s dominant electronics retailer since the demise of Circuit City. You can touch and play with the iPad Smart Covers there. We did.

Then we bought one on eBay for $23. With free shipping and no sales tax.

Here’s an immutable law of commerce that we’re already seeing regular examples of and will continue to for the next few years: Businesses that operate as showrooms, rather than as businesses, are at a huge disadvantage. Look at the position retailers such as Circuit City and Borders (and now Best Buy, and others to follow) have put themselves in. You can walk in off the street and examine the merchandise at your leisure. The employees range from obsequious to unobtrusive, but none of them are going to give you the hard sell. (Imagine a car dealership operating the same way. More specifically, imagine walking around the floor looking at new models and responding to every salesperson with “No thanks, I’m just looking.” The car dealership would kick you out within minutes. Maybe electronics retailers and bookstores need to place their staff on commission.)

The old business model isn’t just old, it’s counterproductive. Using a retailer/marketplace like Amazon or eBay, plus the wireless provider of your choice, you can walk into Best Buy, look at the items available, buy them from someplace else, then discreetly leave the store. If you really enjoy irony (as distinguished from coincidence), you can buy the items from Amazon or eBay with a phone that you bought at Best Buy. If you’re feeling really daring, you can do it with a floor model display computer.

There’s no obvious solution to this, either, short of Best Buy drastically lowering its prices. Either that or the company could get out of the retail electronics game, and operate exclusively as a seller and installer of large appliances and car stereos. When Best Buy hires us as consultants, that’s what we’ll suggest. Until then, our ideas are merely opinions.

As a customer, your options are plentiful. As an investor, you can make money here: you just have to be resourceful about it. Imagine a market so relatively free that it lets you sell stuff you don’t own.

BBY seems like a perfect example of something worth selling short. This is vastly different than selling a house short. You borrow the stock, hope it loses value, then buy it, then return it to the lender at the original price.

Sound like too much work? Heck, it’s an opportunity. The holder of BBY obviously thinks it’ll appreciate, so it’s only fair that there be a mechanism for profiting off daring him to be wrong.

The compact explanation is as follows. BBY is currently trading at around $20. Say you borrow $20,000 worth of shares, which you can hopefully figure out is 1000 shares. You wait 3 months, and the price has fallen to $16. You then buy $16,000 worth of shares, sell them to the entity you borrowed the original 1000 shares from, and pocket $4,000 (less borrowing charges.)

But instead of following the predicted downward trend for those 3 months, Best Buy gets a patent for a perpetual motion machine. Or finds an oil patch underneath its corporate headquarters (which would be noteworthy, seeing as it’s in a Minneapolis suburb.) The stock shoots up to $60, and the lender wants his 1000 shares back. That’s going to cost you, Ace. $60,000, to put a nice round number on it. You’ll be out $40,000 for your little exercise in semi-sophisticated trading (again, plus borrowing charges.)

What about the actual specifics of short selling? It starts by opening a margin account. E*Trade*, for instance, will let you open a margin account with a minimum balance of $2000 if you already have a regular account with them. When you use a margin account, you’re borrowing E*Trade’s money. You can’t run away from them if you come up short. They know where you live, and they have your money.

So say BBY falls in value, but not by as much as you’d like. After your arbitrary 3-month period, the borrowed money comes due with the stock sitting at $19.53. How much would you make?

This isn’t hard to figure out, and you can probably do it in your head. $470, right?

Go back and read the post again. From the top. E*Trade (or anyone else, other than a particularly dupable family member) is going to charge you interest. Your net profit for that imperceptible decline in the stock price is 0.

Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.
Never make an investment without knowing the interest rate you’ll be charged on any money you borrow. 
Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.

Should we say it once more, underlining this time, or did you get the message?

Brokerages start with something called the “base rate”. E*Trade set its at 4.14% a couple of years ago, and it’s remained untouched since. If you have half a million dollars in your margin account, you get to borrow money at the base rate. (Put a million in your account, and they’ll take 25 basis points off the base rate.) But the less your ability to repay, the higher the interest rate you’re charged. That’s why unsecured credit cards charge so much, which you shouldn’t be paying interest on anyway. With that $2000 minimum balance in your margin account, you’ll pay a 430-basis-point premium on the money you borrow. 8.44%. You’re almost better off borrowing on that credit card. Almost. Here’s the list of interest rates, segmented by size of account balance:

 

Making money’s a pain, isn’t it? For a beginning-to-intermediate investor, better to find something undervalued and buy it long than search for something overvalued. The worst thing that a stock you perceive to be undervalued can do is fall to 0. A stock that you think is overvalued, but isn’t, can rise so high that you’ll lose your margin account, your house, your 401(k) and the respect of your friends and family. Now, who’s up for some trading?

 

*Technically, the name is supposed to be in all caps. They should consider themselves fortunate that we’re deigning to indulge even one of their typographic fantasies by spelling the company name with an asterisk. The asterisked name spawned an asterisked comment, adding to the confusion, a confusion that this asterisked comment can’t hope to resolve. 

Filed Under: Investments, Making Smart Choices, Net Worth, Personal Finance
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