Who are you trying to impress?

April 25, 2010

These two hate each other, but at least they didn't spend $30,000 for the privilege.

Skirts and malleable men, this one’s directed at you. Spending money on a wedding is one of the surest, most effective ways of getting your financial life off to a treacherous footing. The average American wedding costs $30,000 from ring to honeymoon. And despite their effervescent exteriors, wedding planners are among the most opportunistic agents in all of commerce. They know that you’re the best kind of customers there are – people who are too terrified to concern themselves with budget, for fear of looking cheap. Especially in the eyes of their betrothed.

If you’re young, and getting married at the traditional age, then you don’t have any net worth to speak of yet. Or at least, you don’t have so great a net worth that you can afford to “invest” some of your valuable assets in a ceremony that doesn’t pay any returns. And if this isn’t your first wedding, act your age. You already had your shot at glamor and pageantry. Treat this wedding like the requisite business transaction it is.

A wedding is not only a perpetual spring tradition, it’s an obscene commitment of time and money, in exchange for breadmakers and fondue sets you will never, ever use. You’ll also get photographs that there’s a 34% chance you’ll end up ceremoniously ripping in half within a few years. If we told you that your $30,000 car had a 3-in-1 chance of getting clobbered by an asteroid (Note: insurance policy does not cover acts of asteroid), would you buy it?

There’s another argument we haven’t demolished yet, the microtine one. Your best friend from college invited you to her wedding, and she had jugglers and dancing bears. Elton John sang and played the piano, and the entrée was fricasseed Yangtze River dolphin, swimming in a reduction of alba truffles and Château Mouton Rothschild sauce. Every guest got a gift bag with a Krugerrand inside.

If you take your friend’s lavish wedding as the benchmark that your wedding needs to meet or exceed, then welcome. You clearly made it to ControlYourCash.com by mistake. Stick around for a while, maybe you’ll learn something. Although it’s going to require more than a little deprogramming.

Here are two appropriate ways to get married – the first if you’re religious, the second, if you’re secular.

Go to your parish priest, minister, rabbi, or local fat woman who could never meet men and calls herself a witch. Then rent out the church on a Saturday/synagogue on a Tuesday/coven during the daytime. Ask the celebrant what the going rate is, then give an extra 10% in recognition of all the money you’re saving by not getting married in the conventional and dimwitted way. (Of course, you’ll be paying with cash or a check.) Invite as few friends and family as you can get away with to the ceremony. Here’s an unquestionable truth – with the exception of your mother, no one wants to be sitting there anyway, in uncomfortable clothes on a perfectly good day when they could be out enjoying life. It’s a social obligation all around, so don’t you owe it to everyone to at least make the event as painless as possible?

If you absolutely need to celebrate with friends, meet at a local bar and convive. Rent out a nearby yacht club if you still can’t convince yourself that you need to spend some amount of unnecessary money in order to properly embark upon married life, which is going to be enough of a struggle as it is. Yes, your adorable niece can still be a flower girl. Let her parents buy her dress, though.

For females, if you feel that having a modest wedding is denying yourself some ritual of womanhood, shake yourself. Most rituals of womanhood are overrated anyway. Care to relive the first time you wore heels? How about menarche?

You know what? Go ahead and splurge on the honeymoon if you want. Seriously. You’re going to bitch about how Spartan the wedding was anyway, so at least this way you can justify your innate need for self-indulgence.

If you’re not religious, find a justice of the peace or a nondenominational minister who does house calls. Hold the ceremony at someone’s parents’ house. If you want, put the bride’s most pathetic friend in charge of ordering flowers (2 dozen, no more) and calling a caterer (two entrees, max, and not salmon.) Said friend probably has lots of free time on her hands anyway, so you might as well put it to use.

Princess Beatrice and Joey Buss can be as ostentatious as they want and charge it to their parents’ credit cards. For the rest of us, a wedding isn’t meant to be a display of our family’s legacy. It’s a financial liability, however obligatory, to minimize the impact of. Freeing up important resources for you to buy assets with.

Filed Under: Consumer Debt Tagged With: , , , , ,

Ignorance is no excuse

March 14, 2010

This is strip, not prime, but close enough

What does prime rate mean?

In between poking fun at people, occasionally we deconstruct complexity and explain what’s what. Prime rate is a term you hear frequently but might not know the meaning of – like “Dow”, “consumer confidence”, and other commonplace but commonly misunderstood terms.

(If you can’t get enough of Control Your Cash, read our guest posts on LenPenzo.com. Len Penzo is an engineer based out of Los Angeles – a financial amateur. But his common-sense approach and avoidance of stupidity make his blog one of the most insightful you’ll find.)

Prime rate is the interest rate banks charge their most creditworthy customers. Last January the U.S. prime rate fell from 3.61% to a 55-year nadir of 3¼%, where it’s been ever since. In 2007 the rate was 8¼%, and it reached its all-time zenith of 20½% in 1981.

Does that mean that if you’ve always paid all your bills on time and in full, Chase will loan you money at 3¼% to buy a house? No. But if you were Costco (America’s 24th largest corporation), and wanted to build a new location at a cost of $4 million, you’d pay $130,000 in annual interest charges. For individual investors, who don’t have millions in cash on hand, your bank sets its rates higher. Which is why mortgage rates average 5.09%* today.

Prime rate generally derives from the federal funds rate, which banks lend to each other in the short-term (i.e. overnight) at and which we touched on here. Under normal circumstances – 1981 was about as abnormal as it got – add about 3 percentage points to the federal funds rate, and that’s your prime rate.

Where does our 3¼% rate stack up internationally? Here:

So, two questions:

a) Why is the prime rate so historically low right now?
b) (As always,) how can I use this to my advantage?

It’s low because the Federal Reserve, the quasi-governmental leviathan that has an unduly large hand in our economy and answers to no one, wants to make it as easy as possible for people to borrow money. The federal funds rate (which is really a range of rates, rather than one rate) sits at close to 0. Banks obviously have to make money on loans or they wouldn’t stay in business, which explains the spread of 3% – which has been fairly uniform throughout American history.

But wasn’t it those low rates that got us in trouble in the first place?

Yes. People bought houses larger than they needed, cars fancier than they could normally afford, ATVs they were going to ride maybe once a year. And financed them all. It seems almost too obvious to mention, but borrowing money makes sense if you can pay it back. More to the point, it makes sense if you can buy assets with it. A piece of vacant industrial land that appreciates by 2% annually, ceteris paribus, isn’t a worthwhile investment if you’re paying 5.09% for the privilege of borrowing the money to pay for it.

So why is the Fed encouraging people to engage in more of the same destructive behavior?

The Fed would argue that this is the least bad option. Getting money circulating in the economy means borrowers are hiring people to complete their projects, and those newly hired employees will spend money on goods and services. If the prime rate were at 1981 levels, or even at 2007 levels, people would be more cautious to invest. They’d sit on their money, and the economy would stagnate.

So how can I use this to my advantage?

Don’t defer for a tomorrow that might never come. Understand that no economy is an island, and that time is not static. Interest rates can’t get much lower than they are now. The federal funds rate isn’t going to go negative. Banks aren’t going to accept a spread much lower than 3%. The eventual pressure on interest rates should be to rise. It’s no guarantee, but 6 or 12 months from now it ought to cost more to borrow money to finance an investment than it does today.

So if you’re thinking of making your way into the investment class, and joining the ranks of people who derive their income through passive means rather than earning a salary, now would be as good a time as any to take the leap. Don’t wait for a perfect set of circumstances, because a) such a thing never arises and b) it’d be tough to identify if it did.

———————-

*There are several kinds of mortgage rates, the vast majority of which you don’t need to concern yourself with. If you see the unadorned phrase “mortgage rate”, whether at Control Your Cash or elsewhere, assume that it refers to the most generic mortgage of all – the 30-year, fixed-rate kind. And if you’re thinking of buying an adjustable-rate mortgage, think again. Or did you not hear about the foreclosure crisis?

Filed Under: Economy Tagged With: , , , , ,

Invest in Sylver or Platynum before Zync.

February 22, 2010

Ysn't thys clever? Yt's a good thyng our comedyc ynstynct ys so childysh.

We’re still having this discussion?

Listen, the credit card companies don’t owe you a thing. You owe them. That’s how you got stuck in this mess, remember?

You applied for a card. You signed an agreement. No one “preyed” on you. Coyotes prey on ground squirrels. But the ground squirrels never initiated proceedings with the coyotes.

If a credit card company promised you a 7% interest rate, then started charging interest on your balance at 15%, then you can consider yourself preyed upon. Even though you’re idiotic for carrying a balance in the first place. One problem: no issuer has ever arbitrarily raised rates without notice. They’re not going to blatantly lie and run the risk of losing customers.

But they lost me, you say. I refuse to pay their confiscatory interest rates. I’ll never get out of this mountain of debt. Even the White House and Congress want to keep them in check, so clearly the issuers are doing something nefarious.

Then where’s the court willing to hear the inevitable class action suit filed on behalf of millions of defrauded cardholders? Fine, if you’ve got conclusive proof that a credit card issuer dishonored the terms of its agreement with you, let us know about it at info at control your cash dot com. Include a copy of the agreement.

Neither American Express nor Visa nor MasterCard nor Discover has ever held a cardholder at knifepoint and said, “Buy stuff, preferably more than you can afford.” Diners Club and Carte Blanche, we can’t vouch for. Ask your great-grandfather.

Governments routinely change the rules in the middle of the game, but do you seek redress for that? Your elected representatives and executive branch raise tax rates, and your only recourse is to emigrate. Which is somewhat less practical than cancelling a credit card.

In Control Your Cash: Making Money Make Sense, we endorse Discover and American Express Blue Cash as the only credit cards you should look at (and even then, pick only one of them.) Sure enough, the moment we sent the manuscript to the publisher, American Express unveiled a new card: Zync.

It’s got a contemporarily misspelled word and it starts with a Z…the young folks will love it! Zync is intended for people in their 20s and 30s, as evidenced by the patronizing marketing campaign. (Hey, that’s Control Your Cash’s demographic! Only we try to talk to you like adults.)

Anyhow, here’s how Zync works. You pay $25 annually, which immediately sounds like a bad idea, but keep reading. You have to pay the card balance every month. (Until the ‘90s, this was how every American Express card worked. The company made a lot of money on annual fees, and even more on services available only to cardmembers. Convince people that they’re special and you can rifle through their pockets indefinitely.)

On top of the $25, you can pay an extra $20 for what American Express calls a “pack”. “Packs”, just like the way they expand the video games.

Anyhow, packs: (This feels like explaining Twitter to my grandmother.) The Go Pack, the Social Pack, the Connect Pack, the Eco Pack. That pretentious-sounding last one waives the $20 fee, because encouraging something as noble as global-mindedness should never come with a price tag.

The Go Pack earns you double rewards on airfare, an annual $50 credit if you book a vacation via American Express (don’t, Orbitz is free), 20% off Hertz car rentals, and 25% off Avis and Budget. (We’d love to know which Hertz employee stood firm on that 20%. Don’t kid yourself: they really are #1.)

Then there’s the Social Pack (social, like networking! This isn’t your grandfather’s credit card.) Double rewards at restaurants and shows, and first crack at seats for the latter.

Followed by the Connect Pack. Double points on your cell phone, cable and internet service; and you get 1/3 more points on cell phones at MembershipRewards.com.

For the insufferable among you, and those who just happen to prefer the illusory to the tangible, get the Eco Pack and American Express will buy $1 of carbon offsets. Amass enough of them, and you too can get a Sri Lankan farmer to metaphorically dig himself an early grave by continuing to plow his yam fields with oxen and a hand tiller instead of saving up for a tractor. As if that’s not enough, you’ll earn double reward points on any item deemed sufficiently holy by American Express’ green-rating service. This includes Chevy Volts, Olive Green loofah dog toys, Aleutia solar-powered desktop computers (we’d never heard of them either), and other stuff we wouldn’t be caught dead buying.

You know what were the first companies to offer reward points for buying more of their product than was good for you? Cigarette manufacturers, and not by coincidence.

American Express gives you “one point for virtually every dollar you spend.” So charge $432,000 to your Zync card, and you can earn a 17” MacBook Pro with a 2.8GHz Intel Core Duo processor, which is a wonderful computer that retails for about $2000. Of course, this assumes you haven’t redeemed any of your reward points for anything else in the time it takes you to spend that much.

Don’t be confused by the hijacking of a word. A “reward” is what you get for lassoing the horse thief to the cactus and holding him there for the sheriff. Credit card “rewards” are really incentives. They’re encouraging you to buy a particular product or service that you wouldn’t have otherwise.

You don’t want that. You want cash. (You really want gold or real estate, but credit card companies don’t offer those.)

So does Zync make sense? Only if you’re in that small group of people who know you’re going to rent $225 worth of car from Hertz this year (or $180 from Avis or Budget.) American Express’ own Blue Cash is a better deal. Blue Cash is not only free, it refunds you $1 for every $200 you purchase. Once you buy $6500 worth of stuff with it every year, they’ll refund $1 for every $80 you spend. You’d have to spend “only” $163,900 to earn that MacBook Pro. Which you should buy on eBay anyway. To paraphrase AC/DC, sink the Zync.

Fortunately, we don’t have to change one word of credit card advice in Control Your Cash: Making Money Make Sense. (And while you’re here, scroll up and to the right and buy a copy or two of our still up-to-the-minute book.)

Filed Under: Credit Cards Tagged With: , , , , , ,
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