You're A Sucker To… Cut Up Your Credit Cards

This is the fifth post of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about. You can read the rest of the series here.

Credit cards are the double edged sword of finance. Used correctly, they can be used to get out of financial emergencies, used to accumulate reward points or for countless other financial conveniences.

On the other hand, used incorrectly, they can be the biggest contributor towards consumer debt. The interest rates are often sky high and the convenience can be a contributor towards somebody getting into financial problems. They’re the needle to someone with a spending addiction.

For the sake of argument, let’s divide people into two groups. There are those people who have their financial lives together, (or are working towards it) and those who don’t. If you’re part of the first group, you know all about the evils of credit cards. You also know how to use them responsibly. I have no idea why everyone in that group doesn’t have one or two credit cards they use and then pay off every month just for the rewards.

Then there’s group two. This will probably be the only time you’ll see a religion reference on this blog, but it’s the best comparison I can think of. Just like religion, these people need to find Jesus before they can truly be saved. Before a person finds Jesus, if they go to church they’re only going through the motions. Once they develop that belief, they turn into a whole new person. Those of us who are so passionate about money have found the financial Jesus.

Why does your girlfriend not care about your stock market investments? Why does your neighbor continue to piss away money on a new car? Why do so many people continue to charge crap on credit cards? Because they haven’t found financial Jesus yet. And until they do, you’re absolutely wasting your time and energy convincing them otherwise.

In the meantime, they might as well enjoy the benefits of a credit card. Regular readers will know I’m planning on travelling soon. Thanks to having a credit card, booking the flight and hotel was as easy as a few clicks of the mouse. I never have to worry about forgetting to pay a bill again, as they all come off my credit card automatically. I use the bank’s money for free, and they give me a cash back reward for the privilege. It’s not that hard to figure out how bad credit card interest is. It’s just a matter of finding financial Jesus.

Credit cards don’t make people get into financial hardship. People make themselves get into financial hardship. Until people start to care about the results of their spending, they’ll keep making the same mistakes. Finding the answer to your financial woes is a Google search away. Once someone finds financial Jesus, the rest is easy.

You're A Sucker To… Buy Life Insurance

This is the fourth post of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about. You can read the first, the second and third posts of this series by clicking on the links.

The title of this post is a little misleading. I’m not against life insurance. I am against it in certain situations, however.

I have some friends who are going to have a baby. I’ve dubbed him Financialuproar Junior, but for some reason his parents aren’t in favor of that. I wonder why? If his brother and sisters are any indication, he’s gonna turn out to be a great kid.

My Grandmother recently had a trip to the hospital. Luckily, they figured out the source of her heart problems and they have her back on her feet. By the time this is published, she should be just about back to her old self again.

My buddy recently split from his wife. He purchased a term life insurance policy paying a lump sum to his kids if he dies. He also has life insurance that pays off his mortgage.

My friends in example #1 have been told to purchase a whole life insurance product for their baby. The dad’s friend, (!) who doubles as his financial advisor, is claiming that it’s not just an insurance product, it’s also a savings vehicle for the little guy’s education. I assume everyone knows that whole life insurance is terrible, right? If not, just read this.

(Whole life insurance is the product that combines insurance with an investment product. Term life insurance is just insurance, for a predetermined amount of time, say 20 years. Just wanted to clear that up if you were confused.)

That’s poor financial advice in two ways. 1) Never insure a liability and 2) Never combine investments and insurance. Even though the little guy is going to be as cute as a button and bring his parents all sorts of joy, the fact remains that he’s nothing but a financial liability. Financially, his parents are better off without him. That’s why they shouldn’t insure his life.

Even if my Grandmother from the second example was broke, buying insurance on her life would be pretty silly. Her kids are all grown, even her grandkids are mostly grown. The only expense her death would incur is a funeral. If you wanted, you could have a pretty frugal funeral. Or she could start saving for it. Or her kids could each scrape together a few thousand bucks if they wanted something extravagant. There’s no reason for her to have life insurance.

How about example 3? At first glance, my buddy seems to be doing the right thing for his kids. If he dies, they’re absolutely set financially. I’d argue that he’s actually over insured. If he dies, his now paid for house can then be sold and the proceeds given to his kids. That amount of money would be plenty to pay for their education and still give them a reasonable amount of money to give them a head start as adults.

Figuring out how much insurance someone needs is tough. First you have to figure out what you’d like your family to have if you do die, then you have to figure out what products are best at accomplishing that goal. I’m not going to tackle that issue today; I’ll leave that up to a good insurance broker. What I can tell you though is this: before you buy insurance for yourself or a loved one, take a objective view of whether anyone is actually financially affected by your/their death. If the answer is no, then save your money. Don’t listen to that fear mongering salesman.

You're A Sucker To… Buy A New Car

This is the third post of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about. Read the first here and the second here.

I know, I’m hardly being as controversial with this post as my first two, but just hear me out. Anyone who has their financial head on their shoulders knows buying a brand new car is, at least financially, a bad idea. This great old post from Four Pillars estimates depreciation on any car at 20% per year, which I think pretty much nails it. So if you buy a $30,000 car new compared to the same car that’s 3 years old, be prepared to spend close to 50% more. ($30,000 to $15,300) None of this is shocking to anyone I hope.

So why wouldn’t everyone just buy used? There’s the “shiny new car” factor. People don’t want to buy a used car; someone is probably picked their nose and wiped it on the seat. Or, maybe they farted on it. (Guilty on both accounts!) There’s this stupid misconception that repair bills are going to kill you if you buy used. Other people justify it by buying something like a Prius, thinking that they’re smarter than the used car market will be in a few years and they’ll be able to get more for their used car. Quite frankly, all of these reasons are BS, but whatever.

Even though the numbers are pretty obvious, quite a few highly regarded financial bloggers have bought brand new cars. I don’t understand how someone can be so passionate about getting out of debt that they start a blog about it, and then in a short amount of time promptly get back into debt. And of course, rationalizing it is the worst. If these bloggers just admitted that they wanted a shiny new car, everything else be damned, then I think their readers wouldn’t get so upset. It’s not a financial decision for these people, it’s an emotional one.

Take the emotion out of the decision. I’d encourage you to buy something a couple years old, with low mileage, and then drive it until it falls apart. That way you get the benefits of having a nice car at the beginning, and then getting a cheap car at the end. And even if you drive it for just a handful of years, you still end up ahead. Not everyone wants to drive an older car after all.

Oh, and never ever finance it. Even at 0%. There are no dealer rebates on 0% loans, which could push the price thousands of dollars higher. I’m reminded of the old saying “there’s no such thing as a free lunch.” Every single month you should be putting money away for that new car. That way, when the time comes, you just have to write a cheque. And if you want a shiny new car? Just don’t do it. Let some other sucker pay that extra depreciation.

You're A Sucker To… Have A Big Emergency Fund

This is the second post of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about. You can read the first of the series here.

An emergency fund, when used properly, can be one of the best financial moves you can make. Having supplemental cash on hand can be used for anything from car repairs to a broken furnace to vet bills for a beloved pet. If someone doesn’t have a sum of cash, they run the risk of getting into a problem if the you know what hits the fans. If there’s a money emergency, someone who has just gotten out of debt could fall right back into the abyss. Nobody wants that.

It’s not the idea of an emergency fund I have a problem with. My problem is with the size that people recommend. The Simple Dollar recommends a person have 6-12 months of cash sitting in an emergency fund. Frugal Dad recommends the same. For the average family, this represents having anywhere from $25k to $75k sitting in a bank account earning 1% interest. Financially, that’s a very bad move.

There’s no reason why you can’t take the money you’d normally have in an emergency fund and have it as the more conservative part of your portfolio. Buy an exchange traded fund of real return government bonds. Or maybe some high grade corporates. Mix in some preferred shares as well. If you bought a combination of the three, you’d be getting close to a 4% return. That sure beats 1% from your savings account. 3% more on $50k is $1500 per year. The prices of these three funds don’t move very much either. They basically have a 10% range. If you’re forced to sell something at a loss, it won’t be that big of a loss. Take the amount of risk you’re comfortable with.

Don’t put all of your money in something like this. I’d like you to have a month’s worth of expenses sitting in your bank account. Emergencies happen. But what kind of emergency really needs more than one month’s expenses to fix? How likely is the probability that sort of catastrophic event to happen? It’s like winning the crap lottery. Sure, it happens. It just isn’t very likely.

Having money sitting around doing nothing is a financial sin, plain and simple. I never have more than $5k in liquid savings. My money is constantly being put to work. It begs for a return greater than 1%. And yeah, emergencies happen. I have a credit card available for just that purpose. I simply charge up my credit card, then take my time figuring out how I’m going to pay for it. Why have piles of money kicking around when there’s credit cards waiting to lend you the money? I can sell all or some of a position in an ETF in 5 minutes and still have enough time to twitter everyone about what I did. It takes 3 business days for the money to be accessible in my account. That’s it.

It’s about time for people to put that emergency fund to work. Your increased net worth will thank you.


You're A Sucker To… Have A Budget

This is the first of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about.

I’m about to tackle one of the pillars of personal finance, having a budget. According to conventional thinking, for a person to get ahead they first have to control their spending. After all, one can’t save if they’re spending more than they make, right? And what better way to control spending than with a budget? By figuring out how much to spend on food, shelter, entertainment or utilities, one can have a great road map to saving money. I’m not denying any of that.

Even though budgets can be a great tool, they have some weaknesses that I think take away from their overall effectiveness. Kind of like diets, the vast majority of budgets ultimately fail miserably. They’re a complicated, time consuming, inflexible way of managing your money. Sure, they can work, but would you call something that has a very high failure rate successful?

Think about the time spent doing your budget. If you have any sort of detailed budget, it can be incredibly time consuming. First there’s the inputs. Those aren’t really that bad. It’s tracking your spending that gets so time consuming. You have to save all your receipts, enter them into a program (or add them up yourself) and then tabulate the results from there. I don’t know about you, but I don’t have the time or energy to do all that.

There’s a much easier solution. Figure out what you’d like your savings rate to be (I’d recommend 10% of gross income, but whatever does it for you) and set up your bank account to withdraw it every time money comes in. You can do it in 10 minutes at your local bank and it’s done. Use the money for savings, investments or to pay down debt faster. It accomplishes the same goal in a much simpler way. No fuss, no mess.

If budgets work for you, by all means, keep at it. How about the large part of the population that, for whatever reason, just can’t stick to a budget? Before you condemn them for being irresponsible morons, realize that there are different ways to the same financial goals. My way happens to be much easier to implement. Isn’t the result more important than the process?

Just because I advocate paying yourself first, doesn’t mean that I want you to ignore your spending entirely. It just doesn’t have to become a monthly thing. Yet if you’re accomplishing your savings goals, then what you spend the rest of your money on doesn’t really matter. The heavy lifting of saving is what matters, not the other part. Ideally I’d like to see someone start their savings at 10% and use spending cuts to get it to 15-20%. But for most people, I don’t think that’s really feasible. So let’s get some new ideas out there that will hopefully get more people off the hamster wheel of debt.

This post was featured in the Carnival of Personal Finance, edition #245.