Five Reasons to be Skeptical About Your Finances

Posted by Ben

October 22, 2009

This is a guest post by Al Jacobs, the author of OnThe MoneyTrail.com.

A running debate continues over the use of credit cards. Much of the controversy involves matters like annual fees, interest rates on the unpaid balance, and the use of an account to establish credit. Articles abound on charge strategies to secure tax deductions for otherwise nondeductible interest payments. There are even dissertations explaining how balances due on one card can be financed for prolonged periods through borrowings on another. Much of the information is of marginal value, and some is preposterous.

Here’s the straight word: The lower the annual fees and charges, the less you pay each year. Some banks and other organizations offer a card without a fee. If so, grab it. In case you cannot find a free one, shop around for the lowest price. In this regard, let me offer the philosophy of “Cheap Charlie,” a one-time Huntington Beach, California, shopkeeper who operated on the stated principal: “You can’t beat cheap” certainly words to live by. As an aside, Charlie closed up shop during an economic downturn; perhaps his prices rose too high. Nonetheless, make certain it’s not merely the first year’s fee which is waived. Also give thought as to whether the card is sufficiently usable. MasterCard and Visa are universally accepted; American Express, Diners Club, and others are of less value because fewer businesses accept them.

Does it surprise you interest rates charged on credit card balances generate dissention, resulting in litigation and legislation? This is understandable when comparing interest paid on bank savings accounts, currently at or below 2 percent, to the interest that credit cards incur, often running to 21 percent and higher. It’s true some issuers around the country offer credit card rates more in the 10 percent range, but these are the exceptions. Worst of all is what happens to those unfortunates who get tagged at the default rate, which can be triggered by any sort of contrived infraction such as exceeding an arbitrary credit limit or a single late payment. Default rates as high as 31.99% are not uncommon.

To add a second whammy, the federal Tax Reform Act of 1986 phased out tax deductibility on personal interest payments. Consider the ramifications of credit card debt at a 30% default rate on a taxpayer in the 28% federal income tax bracket, forking out an additional 7.65% in FICA withholdings as well as state income taxes (at 9.3%, if a Californian like me). This poor devil must earn $1,817 to retain $1000 after taxes to pay on the credit card. This calculates out to an effective annual interest rate of 54.5%. Such thievery would have caused Al Capone to blush.

In passing, be aware of other wrinkles. Many credit card issuers impose charges on users who avoid paying interest. They also collect fees, often retroactively, on a variety of pretexts. They rationalize these practices as necessary costs of maintaining the account, as if a reason to charge a fee is needed. Perhaps some relief is in sight. In an April 23rd radio address, President Obama called for legislation from Congress to reign in the credit card industry. He declared: “Rate hikes and late-fee traps have to end. No more fine print, no more confusing terms and conditions. We can’t tolerate profits that depend upon misleading working families. Those days are over.” What will come from all of this is uncertain. The bank and credit card lobbyists constitute a powerful interest group.

This finally gets us to the bare bones of the matter. My belief is a credit card serves a single purposea convenience when neither check nor cash is handy. Most importantly, when the monthly statement arrives, pay the full cash balance before the date interest is charged. Follow this rule and the interest rate means nothing. If for any reason you cannot regulate your credit card use in this manner, destroy your cards, swear off cold turkey, and fashion your life accordingly.

Do you regard yourself as a skeptic? Does a clever advertisement or plausible testimonial convince you to buy a product, or do you normally suspend judgment until you can check it out? If you fall into the latter category, you’re a skeptic—and if so, it’s a good thing, particularly in managing your money. The world of finance is a hazardous place, perhaps more so today than ever before. You’ll need to be extra cautious if you want to avoid losing your shirt. Let me describe five areas in which you must exercise skepticism.

1. Dealing with Marketers. A person’s possessions speak volumes on what that individual regards as important. The advertising industry is devoted to identifying what the citizen considers significant. Even more so, the market manipulator creates those choices. There are massive sums to be spent and the competition is as fierce as it is grotesque. It’s for this reason you avoid the overpriced junk foisted off regularly on the consumer: lottery tickets, $300 per ounce bottles of perfume, timeshare projects, Las Vegas weekend getaways, $8,000 wrist watches, and any variety of items which serve no other purpose than to proclaim your affluence. The point is, sharpen your buying habits with a healthy dose of skepticism. In most of our purchases we are less familiar with a product than are its vendors. We can overcome this disadvantage by educating ourselves. The results are cumulative and your performance will improve with time. Remember always that if a vendor must buy a dozen pages of advertising to say how wonderful its product is, it can’t be.

2. Dealing with Financial Advisors. It’s the rare citizen with an ability to invest wisely. This takes a talent few possess. So, with billions of investment dollars in the hands of Americans, professional investment advisors occupy a position of prominence. Unfortunately, many practitioners who offer their advisory services are equally devoid of investment expertise. The result is predictable; huge sums are woefully misdirected. To protect yourself, you may try to prequalify your counselor. However, don’t expect credentials, such as certification, ensure proficiency. Comedian Mel Brooks provided this classic definition of certified: “You’re a nice guy . . . we like you . . . you’re certified.” Understand, as with many other products, financial planning is an exercise in pure marketing. You’ve seen the newspaper and television advertisements guaranteeing each client will prosper. A sense of skepticism suggests the persons who write the ads are unrelated to those who recommend the investments. A final warning: You cannot depend upon a hired advisor to responsibly invest your money. You must develop an understanding of what constitutes an acceptable investment so that the final decisions are yours.

3. Dealing with Mutual Funds. How do most Americans invest their money? In mutual funds, of course. Quite simply, a mutual fund controls a pool of money provided by its shareholders which it invests in a portfolio of securities selected by the fund’s managers. Because of its universality, it is an industry devoted to investment by default. Though in theory the mutual fund meets the intended needs, those of knowledgeable selection of securities and advantageous portfolio diversification, theory and reality do not always coincide. There is no particular magic involved. These vehicles merely rise and fall with the general fortunes of the market. Recognize this is an industry in which the placing of investors’ money is, at best, a secondary consideration. The primary justification for their existence is to enable the operators to regularly skim a percentage of the gross assets of the funds while performing little more than marketing activities. It’s my belief if you choose to invest in the securities market, you’ll fare better if you select individual stocks.

4. Dealing with your Banker. Over the past decade or so, banking officials made a fascinating discovery. They found their customers to be an untapped source of bounty, with depositors willing to accept minuscule interest on their savings while tolerating the payment of fees and assessments limited only by the imagination of the bank hierarchy. Now, in the third year of what appears to be a prolonged recession, interest rates paid on bank savings accounts can be seen as low as one-twentieth of one percent annually. However, those ultra-low rates are not reflected in the charges your bank may impose for any variety of “services.” Should you issue a check for one dollar over your account balance, or pay your credit card bill one day later than the deadline date, you’ll be slapped with a penalty which can calculate out to annual percentage rates of twenty percent or higher. My advice: Regularly scrutinize your bank statements to see what might be slipped in. Only your active participation will protect you.

5. Dealing with Government. The most frightening words you will ever hear are: “Hello, I’m from the government, and I’m here to help you.” Let’s wade into the center of what government is all about. It can be summed up in one word: Taxes. Regardless of location, party denomination or political structure, just as an army reputedly “travels on its stomach,” a bureaucracy travels on its citizens’ billfolds, and everyone who enters government service sooner or later comes to share this attitude. Left to the devices of the officials, there is no limit to the amount to be collected, and any attempt by the payors to minimize the tribute will be met with the usual warnings of dire consequences that never end. It’s for this reason you must be cautious in your dealings with government. Do not fail to respond to notices from them. Do not accept their offer to calculate your income taxes. Keep records of all contacts with officials. And above all, never entertain any doubts about what the government expects from you. It wants your money.

Al Jacobs has been a professional investor for nearly four decades and a nationally syndicated columnist. He is the author of Nobody’s Fool: A Skeptic’s Guide to Prosperity. Subscribe to his financial column, “On the Money Trail,” at no cost or obligation at www.skepticsguidetoprosperity.com.

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Comments

Comment by ctreit on October 23, 2009 @ 7:12 am

It sounds like everybody is out there trying to get you – not just when it comes down to money, right? Maybe a consumer watchdog would help a little but other oversight agencies don’t have much bite, either. So, I suppose that the only remedy is that you try to look out for yourself as well as you can.

Comment by Investing 101 on November 18, 2009 @ 2:09 pm

If you want to get ahead financially, you pretty much have no choice BUT the become a skeptic with your money. Otherwise you’ll just end up broke. My motto is “Everybody Loves My Money”. I think there’s a personal finance blog that goes by everybodylovesyourmoney.com anyway, lol