How We Paid Off $0 In Credit Card Debt

May 31, 2013

 

 

Our target audience. This is going to end so badly for them. That being said, the one without the syphilitic sores is kind of hot.

Our target audience. This is going to end so badly for them. That being said, the one without the syphilitic sores is kind of hot.

 

By not incurring any.

Fine, 4 words probably don’t constitute a regulation blog post. But there’s got to be something we can do to distinguish ourselves from (and discourage you from following the examples of) the galaxy of personal finance bloggers who do nothing but chronicle their debt. (“One woman’s journey/one man’s journey/one couple’s journey/one family’s journey from debt to freedom.” And it’s always a “journey”, which is as close as most of these people are ever going to get to a vacation. Or at least a vacation that they didn’t finance with a credit card and spend 20 years paying off.

The old saw is that an ounce of prevention is worth a pound of cure, but our calculations show that 16:1 isn’t anywhere near the size of the ratio between the benefits that accrue from the prevention of paying your freaking bills on time and the cure of minimum monthly payments, bankruptcy, or burying one’s head in the sand.

Like most people of our vintage, your bloggers first got credit cards when we were in college. (It was our parents who grew up in an era when credit was something consumers sought out, rather than the other way around.) Come to think of it, American Express didn’t even seem all that concerned about whether we’d reached the age of majority.

(Note: It’s amazing that today you can, for instance, overhear a person offhandedly give their name or even their phone number to someone, then use your mobile device to find out where that person lives, where she works, how many kids she has and what her friends’ and pets’ names are.

But in the pre-Internet Age, what you could conceal was every bit as impressive as what you can uncover today.  You could get a speeding ticket in one jurisdiction and never have any court on the other side of the continent find out about it. You could avoid people for days on end, and blame it on having a landline only and no answering machine. And you could lie about your age and get a credit card with very few questions asked, if any.)

That original Royal Bank VISA card is long gone, but fondly remembered as the most significant totem of the entry into adulthood. Certainly more than a driver’s license. They give those to adolescents.

The first items bought with that card included…groceries. And little else beyond that. Using the card was more of a challenge than anything else: Is it possible to swipe plastic in place of cash whenever possible, and not scream in horror when the statement arrives?

You know how kids are better at picking up languages than adults are? Maybe this is a similar phenomenon, because there isn’t an 8-year-old in the world who thinks about financing purchases of candy and Pokemon stickers.* But adults will rationalize their revolving balances with whatever excuse you give them. “It’s the holidays, I’m not Scrooge.” “It’s only $15 a month, it’s not like I can’t afford it,” etc.

If you can’t pay cash for it, you can’t afford it.

Who doesn’t love a blanket statement like that? The implied second half of the proverb is that it refers only to consumer goods. Basically, anything where 14.99% annual interest is impossible to justify.

No one expects you to pay cash for a house: the opportunity cost is too great. Why spend a decade or longer saving up for the price of a house when you can borrow the money, at significantly less interest than credit cards levy, while simultaneously not having to pay rent? If you’ve got the down payment available and the credit history (see above), it makes perfect sense.

You shouldn’t have to pay out-of-pocket for a hostile takeover of a plastics manufacturer, either. Just put up $15 million or so of your own money and borrow the remaining $850 million. The company itself is an asset by our definition, in that it’ll generate income under the right conditions.

But the purchases that result in people snowing themselves under with credit card debt are usually moronic and wasteful. Yes, we understand that you want to impress your new love interest by eating at that Mobil 2-star seafood place instead of Red Lobster. And that $150 for two (including varietal house wine per the maître’d’s recommendation) is going to get you somewhat closer to sex or a more intense if equally superficial level of companionship. But there’s still the business of the monthly statement. And our research has shown that balances are a lot easier to pay when they’re smaller.

Decades later, with more income, we’ve adopted the curious habit of not living like college kids. We have real furniture, for one thing. And trucks, with thirsty gas tanks. We even have satellite radio subscriptions, tool kits and health insurance, all of which goes on the credit card. And you know what? We still pay it off in full every month. It’s the craziest thing. It’s almost like we read the cardholder agreement, saw what we’d be in for if we didn’t make our payments on time, and decided to act responsibly.

Once again: Doing smart things is important if you want to build wealth. Avoiding stupid things is at least as important.

COMING NEXT WEDNESDAY: How We Paid Off $0 in Student Loans.

 

*Is Pokemon still a thing? Or did it die out 14 years ago? How about Beanie Babies? Ah, the pleasures of being childless and not having to stay on top of juvenile consumer trends.

 

Filed Under: Consumer Debt, Credit Cards, Making Smart Choices Tagged With: , ,

Somebody Slap This Man

May 24, 2013
"1st floor; sports logo gear, Lee Brand jeans, and soon, our husky Hispanics section."

“1st floor; sports logo gear, Lee Brand jeans, and soon, our husky Hispanics section.”

So this is what it’s come to.

Kohl’s, the amazingly outdated department store chain with its radiant white perfume counter and its Semiannual Men’s Suit Events, is on the defendant end of a new lawsuit. The basis for this suit is so stupid that it’s hard to recite for you here without seething, but we’ll attempt.

Some shoppers feel they were defrauded. They don’t question the quality of the merchandise, nor do they claim that they were charged a different price than that which appeared on the label.

The plaintiffs’ argument is that Kohl’s smacked them in the face with a big old rusty anchor. The lead plaintiff is a sensitive California gentleman named Antonio S. Hinojos, who bought $150 worth of Samsonite bags at his neighborhood Kohl’s. So far so good, right?

Oh no. The problem is that Kohl’s claimed to have, or Hinojos claimed that Kohl’s claimed to have, marked the price down from $300. Hinojos asserts that the luggage was never available at $300. Let’s rephrase that as a logically equivalent statement:

A retail consumer is complaining that the store he chose to patronize sold its goods at too low a price.

He also bought some polo shirts at $36 apiece. Is that a fair price? According to the U.S. 9th Circuit Court of Appeals, it doesn’t matter. It’s how much they were discounted off their original price that’s the sole determinant of whether the shirts were worth buying or not. Kohl’s claims the shirts in question were reduced 39%, implying a regular price of $59. Hinojos claims that the regular price was lower, and that he was somehow harmed by Kohl’s never having charged the higher price.

Again, because this lawsuit is so ridiculous that it’s easy to think you must have misunderstood some point, or that we failed to explain it clearly enough: Hinojos isn’t claiming that he tried to buy a $300 item that was listed on sale for $150, and was then denied the discount. He paid $150, just like everyone else who bought Samsonite baggage that day. Neither Hinojos nor Kohl’s dispute the prices of what he bought. Hinojos’s argument is that by offering its wares at as much as 50% off, when in truth they were discounted by some smaller percentage, Kohl’s enticed him to buy things he otherwise wouldn’t have.

Here’s Judge Stephen Reinhardt of the 9th Circuit, offering educated blather no layman could hope to spew:

When a consumer purchases merchandise on the basis of false price information and when the consumer alleges that he would not have made the purchase but for the misrepresentation, he has standing to sue.

Hinojos is the philosophical descendant of every idiot housewife who came home with an overpriced and/or unnecessary handful of shopping bags.

“How much did that cost?”
“I got it on sale!”

That’s not an answer. Things cost what they cost, not the reduction by which they were discounted. That sounds so utterly obvious, so tautological, so A-is-A, that it seems insulting to have to point it out. But what do we know? Less than at least one judge on the 9th Circuit, evidently. Who carries on for 21 pages, including this passage:

[T]he bargain hunter’s expectations about the product he just purchased is precisely that it has a higher perceived value and therefore has a higher resale value

Hinojos suffered economic harm because should he choose to sell his polo shirts somewhere down the road, he wouldn’t be able to get all that much for them if the future buyer knew that they had never been sold for $59 apiece. Leaving aside the question of who buys clothes with the intention of doing anything other than tossing or donating them at the end of their useful life, how is an item’s price not its price? This is neither fraud nor misrepresentation by any rational understanding of the terms.

[C]onsumers such as (Hinojos) reasonably regard price reductions as material information when making purchasing decisions

We’ve asked a similar question before in a different context, but ceteris paribus, which woman is more desirable:

  1. the one who’s 5’4” and weighs 130 pounds
  2. the one who’s 5’4”, 130 pounds, and used to weigh 192 pounds?

If you’re chronic clothes shopper Antonio Hinojos, the only possible answer is c), the brother of the formerly fat one.

Of course America needs tort reform, but we’re interested in this story primarily because of how it illustrates a financial point. If you believe – whether sincerely, or for purposes of filing a nuisance lawsuit against a multibillion-dollar corporation – that things cost something other than what they cost, you’re a moron. Imagine Mr. Hinojos negotiating his salary:

Employer: “This neurosurgeon job pays…well, it normally pays, um, $18,000 a year. But for a qualified, dynamic, go-get-‘em candidate like you, we can go as high as $22,000 plus bene—“

Hinojos: “I’LL TAKE IT!”

If Mr. Hinojos had instead visited Rick’s Budget Valise Emporium, where that same Samsonite ensemble sells for $145 every day, he presumably wouldn’t have bought. After all, what’s the point? Where’s the savings? And if Rick’s had raised the price from $135 the previous week? Forget it. Let the seller dictate the terms of the sale, not you.

(That was sarcasm. Let the seller dictate as little as possible. Look at every transaction from the other party’s perspective. Walk away from a deal you don’t like; there’ll be others. Find the details here. And stop clogging up the court system with your vexatious foolishness.)

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

We’re Not Your G.D. Friends

April 17, 2013
"I wish I'd spent more time at strategy meetings."

“I wish I’d spent more time at strategy meetings.”

 

And we never will be.

This site isn’t “a place where you can share your thoughts freely on all things personal finance related,” or “a daily recap of our struggle with debt,” or any of that crap. If that’s what you’re looking for, God knows it’s out there and not difficult to find. Commiserate somewhere else. If you’re not here to get rich, get lost.

Because for our purposes, and hopefully for yours, building wealth is all that matters. We’ll even make the argument that building wealth is the highest possible worldly endeavor. The more you make, then the more highly the marketplace of consumers has valued the goods and services you’ve chosen to create. Though that money can buy you stuff, more importantly (to quote one sharp thinker) it can buy you the most precious commodity there is: time. All the other activities that people prioritize – reproducing, being kind to animals, taking a bus to Washington so you can stand outside the Supreme Court with a placard telling passersby your opinion on homosexual marriage – is swell once you’ve got your financial house in order. Until then, Matthew 7:3-5. Take care of your own business first.

Grandiose ideas (and even ordinary ideas) undertaken while suffering from negative net worth almost never materialize.

Sure, J.K. Rowling wrote her first book as a single welfare mother. Good for her. Thousands upon thousands of other aspiring writers wrote their first (and only) manuscripts while on welfare, and never came close to selling them. Or they gave up halfway through Chapter 2. Or they never got beyond the outline stage. But regardless of where those failures ended up, what does it prove to cite the one example who beat historically long odds? What moron makes the argument “That person succeeded as a 100-million-to-1 shot, so I can too”? Isn’t it infinitely better to undertake a path where success is likely, or at least not exceedingly unlikely?

Most personal finance sites love to share first-person stories. Here are some pictures of my new wedding dress and a sidebar about how much it cost me.

I had a ton of consumer debt at the start of the month, but now I have 1998 pounds of consumer debt. I think I’m doing an awesome job, and will punctuate that assessment with an exclamation point!

Now it’s time for 800 words on how I bought discount school supplies for my kids. Oh, and you should look at price tags before you buy things. In my opinion, the smaller the number, the better it is for you.

These people aren’t true personal finance bloggers. They’re merely diarists, interested more in the catharsis of getting their small thoughts down in a semi-permanent form than in writing anything interesting, entertaining, or beneficial. Besides, Samuel Pepys already perfected that literary form 350 years ago.

They’re all idiots, every one of them. (We listed most of the exceptions here. Late addenda: 101 Centavos and Hull Financial Planning. Oh, and Reach Financial Independence.) The grad student with $90,000 in tuition loans but a $1,000 “emergency fund.” The aspiring filmmaker who moves his family around the globe from rental home to rental home, cranking out kids he can’t afford while telling you that selling your excess stuff on eBay is the surest path to riches, and who then finally gives up and hands the blog over to someone in even worse financial shape. The pseudonymous Credit Suisse trader, since fired, who brags about living the baller lifestyle while downsizing his home and trying to convince others that there’s no such thing as a bad financial decision if your heart tells you so.

What makes us different? We know what we’re talking about. We already made the (minimal and non-catastrophic) mistakes, saving you the trouble of repeating them. Unless you want to repeat them, in which case knock yourself out. We’ve also enjoyed the successes, which we experienced largely because we knew how to capitalize on them when we saw them a-coming.

That’s also an indirect explanation of why we don’t take comments. First, 99% of commenters (not just on personal finance sites, but on the internet in toto) have nothing to say. Second, we’re not here to facilitate dialogue. It’s a monologue, and you’re the listeners. For the most part, anything posted as a response in a publicly viewable forum isn’t worth repeating. If you want to talk to us, send us an email or a tweet.

Why do we insist on forbidding comments, which runs counter to almost every other site in the universe? For an answer, take an important subject we have little proficiency in: for instance, medicine. Who are we to go to the WebMD entry on diabetes mellitus and offer our subjective opinions on insulin therapy and high-fiber diets? The licensed professionals who wrote the article aren’t interested, and the WebMD readers shouldn’t be, either. Or we could just write “Awesome post!” in a flawless impersonation of any of the awful personal finance bloggers we referenced above, who leave comments only to microscopically improve their own sites’ Google PageRank.

Look. You want to get rich but have no idea where to start? Here’s a list of criteria neither necessary nor sufficient to build wealth:

  • A college education
  • Legacy money
  • Upward corporate mobility
  • The ability to be the last one out of the office every day and the first one in the next morning.

Here’s what will come in handy. Best of all, these are available to anyone. Most of them are practically your birthright:

  • Secondary, passive sources of income
  • Patience (when it’s warranted)
  • Conviction (when patience isn’t warranted)
  • The ability to avoid doing moronic things (for an illustration of these, enter “retard” in the search box at the top right of the page)
  • Boldness. Not rashness, but rather the confidence to say “Lots of other people are rich. I can do this, even if it means discarding ingrained societal notions of getting a job I’m going to hate and working my way up a ladder I’d just as soon not be on.” In other words, the inverse mindset to obsessing over “What if I lose everything?”

And finally

  • The purchase of assets
  • The sale of liabilities.

Exercise all those and, we’ll say it again, you’ll get rich in spite of yourself.

Too vague? Here are some specific steps. Eliminate all your consumer debt as quickly as possible, without regard for any short-term pain you’ll incur. Put money aside for growth, not for contingencies. Contribute the maximum to your 401(k). Get your employer to match it. Get as little withheld from your checks as possible, so that you can write the IRS a check on April 15 instead of the other way around. (If you don’t know why you want to do that, you really need to read our book.) Get out of that rental you’re living in and get a fixed-rate mortgage. Don’t just buy low and sell high, do so when your feelings are telling you otherwise. Quit drinking. Start your own business. Organize it as a limited liability company. (Again, if you don’t know how to do this, read our book.) Keep and organize your receipts. Buy a 2nd home and rent it out to someone who’s never going to read this paragraph. Don’t waste time on piddly nonsense like selling your DVDs on Craig’s List for a functional wage of 77¢ an hour. Value your time by concentrating on its most lucrative uses – half a day researching car prices can save you thousands before you negotiate. Get a price out of the other party first. Figure out what they’re after and how much they stand to profit vs. how much you do. Walk away if you don’t like a deal. Ignore emotion at every turn.

None of those are particularly hard, except for the house-buying one. It’s simply doing this stuff, instead of wallowing in doubt and partaking in the fellowship of the damned, that scares most people off.

And thank God for that, because it makes the path a whole lot less crowded for the rest of us.

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