Yip yip yip yip yip yip yip yip/Mum mum mum mum mum mum/Get a job

The Silhouettes broke up in 1968. Color photography was still many years away

Meet us back here on Election Day 2012, and tell us that “the college crisis” didn’t become an issue in the 33 months since this post appeared.

We’ve already heard how the domestic automotive industry is the unseverable spinal cord of the American economy, and that it’s our duty to our fellow man (if he’s a UAW member) to spend $50 billion propping up this radiant pulsar of American commerce.

In 2008, you had to go all the way down to the presidential candidate with the 5th-most votes (the Constitution Party’s Chuck Baldwin) before finding one who didn’t spout off some variation on how crucial it was to “keep Americans in their homes”, even if those Americans borrowed too much money and assumed that a steady increase in their homes’ values was a cosmological constant.

And as we heard from a prior presidential administration, doling out 700 billion taxpayer dollars (that’s $233 for each of us) was necessary to keep some of the nation’s largest investment banks in the business of lending money, otherwise “the whole system would collapse”, which presumably means we’d be reduced to collecting animal pelts in exchange for our mp3s and bedroom linens. “I’ve abandoned free-market principles to save the free market” was the quote. To paraphrase a ‘60s-era t-shirt and bumper sticker, that’s like (having sex) for virginity.

Meet the next bubble – post-secondary education.

The problem is this: despite the recession, our society has gotten so absurdly rich that today, young adults loaded with potential can postpone any worthwhile work and ring up debts in the process, all in the name of getting an education. How “education” became more important than “productivity” or “fulfillment” or “not being a drain on society” is unclear.

Yes, we’ve all seen the studies say that college graduates make more money than high school graduates – somewhere around $15,000 annually. This is a mantra people take to heart without examining in any detail. It sounds logical, as many jobs require applicants to have college degrees. But like many bromides that attempt to persuade you of a fact in as pithy a fashion as possible, the $15,000 allegation tells only a minute part of the story.

The median salary for petroleum engineers is around $108,000. For a physician who’s been out of school for a couple of years, it’s reasonable to assume he’ll make anywhere from $170,000 or so for a pediatrician to more than $500,000 for a neurosurgeon.

What about philosophy graduates? English majors? People who think a sociology degree is worth anything? We don’t have figures for them, because the Bureau of Labor Statistics doesn’t list “barista” and “street musician” as employment categories. Sure, the average college graduate makes a better salary than the average high school graduate. But the average college graduate is part doctor and part engineer. The students who major in the hard sciences are dragging the political science and journalism majors up with them.

This statistic puts the cart before the horse, and puts passivity ahead of activity. For many college graduates who inherently know, just know, that the last 4 or 5 years were worth it, they assume that that diploma is the negotiable equivalent of a $15,000 annuity. God forbid they actually go to the trouble of applying it.

The University of Hawai’i’s spring semester enrollment is up 9.4% over last year. Instead of working harder than ever to find jobs in a weak economy, people are willfully deferring life – and paying money they don’t have for the privilege. And it’s not like UH is creating more engineers and scientists. A college vice president says “They tend to be all over the place. We have graduate students seeking their master’s, students in areas where there’s a shortage, such as teaching, nursing and social work, and business is popular, but so is psychology.”

And parents, don’t leave the room. We’re not done with you, either. The following is your financial obligation to your kids: food, clothing and shelter until they reach the age of majority. That’s it. No one owes anybody a college education, just like no one owes anyone a house or regular doctor visits. Your kid is far better off becoming a welding technician straight out of high school than wasting four years earning a degree in gender & women’s studies and beginning the income-earning years tens of thousands of dollars in debt. Economically speaking it’s better yet that he become a neurosurgeon, of course, but the world still needs welding technicians.

On the macro level, everyone from your neighbor to the president is talking up post-secondary education. The neighbor does it because he doesn’t know any better, the president for the same reason any elected official advocates anything.* The talking points are familiar: the next generation of Americans needs to be prepared in an ever more competitive world, education is a fundamental right, do you really want America to be a nation of blathering idiots, etc., etc.
This obscures the truth by shrouding it in catchphrases. This may be indelicate, but that doesn’t make it false: things cost money.

An investment, even in one’s own education, is a deferment of resources for an expected return. The majority of college kids don’t know a damn thing about what they’ll do when they get out of college. Therefore for them college isn’t an investment, it’s an expense.

That’s not to say that finishing high school is all you need to do to enter the workforce with a minimum of debt. There’s still a thing called motivation. Completing school, at whatever level, shows that you had the diligence to sit quietly and take some tests. There are a million ways to earn a respectable living out of high school – carpentry apprentice, garbageman, junior lab technician – but taking a random selection of undemanding college courses is not one of them.

Yet the government, true to its misguided principles, subsidizes education. President Obama proposes, in public and behind a live microphone, that no college graduate should have to fork over more than 10% of his income in student loan payments. This is what commerce has come to in 2010 – the terms of an agreement are dictated by future occurrences. Of course no one wants to pay 10% of his income on debt obligations, or on anything else for that matter. Not that 10% is an insurmountable number, but if the government mandates that it’s too high, pretty soon people will agree that it is too high, and that no $40,000-a-year junior account executive should suffer the inconvenience of paying more than $333 a month toward her student loans.

It gets better. (Or worse, if this kind of thing bothers you, which it should.) The president adds that student loans should be forgiven after 20 years – 10 if the borrower “enters into a life of public service.”

His definition of public service goes beyond Green Berets and SEALs. Say you want to take your forestry degree and be a National Park Service ranger, which offers room and board and pays $35,000 annually. Thanks to the time value of money, you’d be getting close to a complimentary education while doing nothing that makes a measurable impact on America’s gross national product.

But after the 10 (or 20) years, the unpaid part of your education doesn’t suddenly become “free”. Services were still rendered, the college still paid its professors and maintained its classrooms and grounds. Who makes up the difference? (Hint: the same generous soul who already bailed out Chrysler, GM, AIG, Lehman, your deadbeat neighbor who didn’t know how to sign a loan document, etc.)

People respond to incentives. If the government declares that the price you pay for your education will be arbitrarily lowered, more people will go to college. And earn useless degrees. And take their sweet time paying them back, if at all. But at least our elected officials can brag that a higher percentage of Americans go to college than do the Irish or the Icelandic.

*To get elected. (And in this particular case, to distract attention from more pressing matters, such as the ever-closer destruction of Social Security.)

**This article is an Editor’s Pick at The Best of the Best in Money and Personal Finance #12**


Someone should do something about how much money I spend

 

A vehicle to encourage responsible spending.

This is the fusion of two of our bugbears, each indirectly related to personal finance: media idiocy and public panic. The photo is of an application for a credit card issued by First Premier Bank of South Dakota. The interest rate on purchases and cash advances is:

79.9%

A reporter from San Diego’s NBC affiliate* with some air minutes to kill manufactured a story out of the application. Here’s his impassioned defense of an innocent viewer who was just blindly applying for credit cards one day when he ended up getting impoverished. Actually he didn’t, all he did was open an envelope, but news wouldn’t be news without a little embellishment:

Hageman acknowleged that his credit isn’t perfect, but he said it’s about average. He said the pre-approved offer didn’t mention the actual interest rate on the card — for that, he had to read the enclosed fine-print disclosure. (Editor’s note: the disclosure is the pre-approved offer. The offer is the disclosure. This is a distinction without a difference. “Your honor, I didn’t hit her, my fist did.”)

“I think you’re beginning to border on deception there,” San Diego State marketing professor Michael Belch said.

No, Professor Belch. Deception would be charging 109.9% or 139.9% while listing a rate of 79.9%. What you’re commenting on is candor, the opposite of deception. Which is apparently beyond the grasp of the overeducated.

So, serious question: is a credit card with a 79.9% interest rate an atrocious deal? There are two possible answers:

  1. Not really.
  2. No.

Let’s examine them in numerical order. [For you people who would pay interest on a 79.9% credit card, that means we’ll do 1) (ONE), and then we’ll do 2) (TWO).]

1) NOT REALLY

The next credit card issuer to force someone to use its cards will be the first. Card issuers don’t tell you to buy things you can’t afford, live beyond your means, and then owe them money for the privilege of letting you buy what you couldn’t afford in the first place.

If anything, card users should be happy that banks like First Premier provide a means by which such people can spend recklessly in the first place. If credit cards didn’t exist, or if this were the 1960s and cards were only available to rich people, then anyone who would today use a 79.9% card would have to save money before spending that money. The horror.

Hageman claims his credit is “about average”, but doesn’t quantify it with, say, a credit score.** Hageman’s (and the journalist’s) complaint is essentially the following:
“You can’t trust me not to spend what I haven’t yet earned. First Premier is offering nickel beers, and here’s me, fresh out of my AA meeting.”

You don’t have to apply for the card. If you do, you don’t have to accept it. Nothing is usurious, deceitful or dishonest about First Premier’s offer. In fact, they’re being pretty clear: if you use their card, you have a month to pay off your purchase. That they give you 30 days makes First Premier far more accommodating than merchants you pay with cash, who often expect their money within 30 seconds. First Premier will cover you for the first month.

If you don’t pay off your purchase within a month – which is an eminently reasonable task you ought to be able to complete, assuming you know how to read price tags – then in exchange for their generosity, First Premier will charge you 79.9% interest.

That is perfectly fair. You signed an agreement, with mutual rights and responsibilities. First Premier honored the responsibility part of its side of the agreement, and now they’re entitled to their right: 79.9% interest on your money.

This story came to the attention of Control Your Cash after appearing on Consumerist. That site’s commenters show what happens when personal responsibility goes from being a fundamental precept of life to a vestige from our grandparents’ era. Here’s an example:

The guy who owns First Premier has donated billions to one of the local hospitals for a children’s hospitals (sic) and a research facility. It is going to take much more than that to undo the bad karma he has going on.

Engaging people in bilateral, voluntary commerce now fosters “bad karma”, as defined by the kind of person who a) believes in karma, b) thinks it has a place in an economic discussion, and c) thinks spending “billions” of dollars on “a children’s hospitals” is barely a step in the right direction.

Not that people who comment on web stories are necessarily examples of intellectual titanhood (think about that before you comment on the post you’re reading right now), but here’s another:

Which is why we need a NATIONAL usury law. Problem is these crooks have great lobbies in state governments.

Words mean what they mean, and “crook” has a fairly unambiguous definition. Crooks steal. They take what isn’t theirs. What they don’t do is enter into a voluntary contract, then honor it. Calling an honest business entity a “crook” is like saying “literally” when you mean “figuratively”. Or “black” in lieu of “white”.

Here’s one last commenter, blessed with a gift for both pithiness and renewing our faith in humanity:

Don’t like the terms? DON’T USE THE CARD!!! It’s pretty damn simple people. Where did this entitlement mentality for cheap credit card interest rates with free stuff back come from?

2) NO.

Let’s answer a question (if you forgot, it’s “Is a credit card with a 79.9% interest rate an atrocious deal?”) with a question. What’s the difference between a card with a 7.99% interest rate and a card with a 79.9% interest rate?

If you Control Your Cash, nothing. If you ring up $500 worth of charges, then transfer $500 from your bank account to First Premier within 30 days, it doesn’t matter what they charge. There is no difference between a card that charges 1% interest and one that charges 500,000% interest.

 

So should you accept First Premier’s offer, and happily charge purchases to your 79.9% card? After all that, no. But for completely different reasons.

The least important criterion for what credit card you should get is the interest rate. The most important is the benefits it’ll provide, for the price.

More than most cards, an American Express card can make it easy for you to reverse purchases that go awry (e.g. a brake relining that doesn’t work.) But depending on which particular American Express card you get, you might have to pay an annual fee. The standard Discover card doesn’t have an annual fee, and gives you 1% cash back on everything you buy. But it’s also useless outside the United States.

Most credit cards are free to use. If you can’t find a free one, you probably shouldn’t be using credit. And that’s what makes the First Premier card a bad deal:

The $75 annual fee.

You saw that, right? Of course you did. You read the agreement.

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*Our primary passion at Control Your Cash is the responsible use of money. A close second is our hatred of journalists. In particular, television journalists. In particular, local television journalists who have neither the chops nor the ambition to progress beyond their home market(s). That’s why we don’t mention journalists by name. You can still verify the story by clicking the link, but we won’t do the journalist the courtesy of a mention.

**Why should he? Math is hard! Numbers are intimidating! Words are better than numbers, especially because you can’t prove something with the former as convincingly as you can with the latter.

**This post is featured at the 28th Carnival of Money Stories.**

Paper or plastic?

Would you be interested in an investment that pays 14.29%? You can get in for as little as a dollar, but the average investor puts in $6775.

You’ve had a fraction of a second to decide, but you can’t possibly still be thinking about it. 14.29%. This investment pays 7.8 times the highest available rate on money market accounts (from Flagstar Direct in Troy, Michigan), 8.4 times the highest rate on 1-year CDs (Ally Bank in Midvale, Utah) and 19 times the highest rate on checking accounts in a city chosen at random (Charles Schwab in Ocean View, Delaware.)

This investment came close to beating the Dow as a whole over the last year (which has gained 14.98%.) Unlike the Dow, this investment isn’t a gamble. It comes with a guaranteed return.

The investment is credit card debt. The numbers in the first paragraph are the average rate and balance among American cardholders.

Yeah, but he had a GREAT introductory rate.

Very funny, you soulless jerk. You’re poking fun at me while Visa and MasterCard are busy giving it to me repeatedly and hard.

Then here’s the same advice recommended to any woman who whines about being in an abusive relationship: stop being a victim.

If you have a spare dollar, there’s no excuse for having credit card debt. This post is mostly for the benefit of the people who haven’t incurred credit card debt, but if you’ve already let it get away from you, you need to wage the equivalent of total war on your debt.

Wear a sweater instead of turning the heat on. Learn to cook, and never eat out. Sell that car. You own it outright? We don’t believe you, but if you do that’s even better and will take a significant chunk out of any credit card debt you owe. Buy a bike or take the bus. Live the life of a Kosovar refugee until you eliminate that balance. A few months or even years as an ascetic beats the hell out of a lifetime as a credit card company’s sharecropper.

If you haven’t yet incurred credit card debt, the austere lifestyle above is what awaits you if you do. The only question is whether you want to compress it into as little time as possible, or spread the pain out over a lifetime.

The mantra will never get old nor obsolete: Buy assets, sell liabilities. The two aren’t purely symmetrical, however. Assets, those wonderful constructs that enrich you, are somewhat optional. Liabilities, in all their impoverishing glory, are not. You have to pay them, one way or another.

The fewer liabilities you have – e.g. a credit card balance that’s enriching the issuer while rendering you worse than broke – the less capacity you have for buying assets that will ultimately keep you out of poverty.

There appears to be no consensus on which culture the following proverb supposedly originates from – Chinese, Songhai, perhaps Aztec – but it applies here in spades:

“The best time to plant a tree is 20 years ago. The second-best time is now.”

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Lung cancer is an effective means for killing 1.3 million people every year. Fun symptoms include shortness of breath, abdominal pain, and fatigue. Many lucky patients also enjoy profound weight loss, and even deformed fingernails. Pain in the bones, metastasis to the kidneys and lymph nodes, skin that turns grey…lung cancer is something you’re probably going to want to shun, unless you’re a masochist of historic order.

Control Your Cash isn’t above dispensing occasional unsolicited amateur medical advice. You want to know the best way to avoid lung cancer? A way that’ll reduce your chances by at least 90%, assuming you want to avoid spending your declining years bedridden and praying for the sweet release of death?

Never start smoking.

Hopefully you’re not looking for a more intricate answer, because that’s as complex as this one gets.

You can figure out where we’re going with this. If you want to avoid being indebted to credit card companies for the rest of your life, don’t take that first drag. Don’t buy that first pack. (Or if you do, at least pay for it with cash.)

Here’s a radical concept: buy what you can afford. Credit card companies aren’t responsible for your dismal financial situation, any more than the guy behind the 7-Eleven counter will be responsible for you coughing up blood 20 years from now.

How many possible excuses can there be for incurring credit card debt? “I didn’t know how much the stuff cost”? “It just kind of crept up on me”? “It’s the retailers’ fault for making me want it so much”? Read the freaking price tag. You can’t be so easily swayed as to look at the minimum payment listed on your monthly statement and find it palatable, if you’re carrying a $6775 balance. Or even if you’re carrying a $200 balance.

We’d reprint the relevant passages of a typical credit card agreement here, but if you didn’t read your agreement when you received your card and started incurring debt, you’re not going to read it now. Just understand that the moment you fail to pay your balance in full, you’re on the road to cheating yourself, your posterity, and your planet. Incurring debt that you can’t pay is the act of a child, not an adult; a parasite, not a worker.

Credit is a privilege, a word that’s been largely equated with “right” in recent years. Not only does nobody owe you anything, nobody even owes you the means for owing other people. (Which is a good thing. One of the best ways to avoid credit troubles is to be ineligible for them in the first place.)

When credit cards were invented in the 1960s, they were status symbols. We’re not referring to the American Express black card. We mean the now-lowly green one. And for years, the issuers enjoyed a modest business charging interest to the kind of profligate people who found it gauche to pay for restaurant meals with cash. The credit card companies didn’t bother selling to middle- and low-class people, the argument being that those people didn’t have enough money to be customers.

It took a while, but the credit card companies eventually figured out that you don’t need to be rich for them to profit off you. All you needed was the capacity for earning something, somewhere down the road, and the law of large numbers would take care of the rest. Which it has, and beautifully.

In recent months, Americans who bought too much on credit engaged en masse in our national pastime – whining about their situation. Which resulted in a compliant political establishment requiring credit card companies to lower their rates. This was a classic example of Washington bipartisanship, a noun which when applied to domestic policy means “responsible people are about to get punished.”

Like almost all laws, the one capping credit card interest rates led to unintended consequences worse than the trouble that prompted the law. With their potential profit reduced, credit card companies simply stopped offering cards to high-risk customers. Many of those high-risk customers will still find their credit, even if it’s being offered by people who understand physical violence better than they do legal procedure.

But regardless, the credit card companies still have to make up the shortfall somehow. Which can mean universal user fees, penalties for prompt payment, even cancellation for people who committed the sin of paying their accounts in full every month. To the responsible credit card carrier, this means a reduced opportunity to ride free on the backs of people who refuse to Control Their Cash. But it’s also a chance to strip away preconceptions. Imagine if credit cards didn’t exist. You’d save up to pay for stuff with cash, or at least with collateral.

And how is that worse than paying a creditor every month?