Saturday, May 23, 2009

Home Ownership Revisited

On March 17th 2008 I wrote: Home Ownership, The Biggest Financial Scam of the 20th Century. I said that home ownership is a terrible way to build wealth and that in fact it won't build wealth for the majority of people who own a home. I said home ownership as a way to build wealth is a scam because all of the participants in the housing bubble knew that long term home owners would in fact lose money on their homes. My article was controversial. I quoted financial planners, the comments that I received from the many sites the article was published were largely skeptical. In December, Dennis Cauchon of USA Today wrote: Why Home Values May take Decades to Recover. Yale Economist, Robert Schiller wrote about the long-term appreciation of home values. It is about as dismal as the long term appreciation of stocks that I outlined in The Great 401K Experiment.

Why Home Values May Take Decades to Recover:

Dennis Couchon, USA Today
Rick Wallick moved into a new, three-bedroom $200,000 home in Maricopa, Ariz., in October 2005. Today, the home is worth $80,000.

The disabled software engineer stopped making mortgage payments this month. His $70,000 down payment is now worthless. His dream house will be foreclosed on next year.

"We're so far underwater it's not funny," says Wallick, 57, who had to return to his original home in Oregon to care for a sick family member and tend to his own medical problems. Wallick, one of the hardest-hit victims in one of the states hit hardest by the housing crisis, lost 60% of his home's value in three years.

His story is an extreme example, but home values have fallen so sharply since hitting a historic peak in the spring of 2006 that many Americans are wondering how much more prices can for the rest of the article.

Thursday, May 21, 2009

Credit Card Bill of Rights Part 2

I just received this update from The Simple Dollar on the "CC Bill of Rights"

The Credit Cardholders’ Bill of Rights Act of 2009 Is Here: What Does It Mean For You - And What Might It Mean for the Future?
Posted: 20 May 2009 07:00 AM PDT
On Tuesday, the Senate passed the Credit Cardholders’ Bill of Rights Act of 2009, an act that will quickly be passed into law with the signature of President Obama, likely within the week. This bill has a huge number of ramifications for credit cards - for users who are late on their payments, for those who pay their bills on time, and perhaps even for the ability to use credit cards in stores.

Washington Wire summarizes the bill very succinctly:

Existing balances: Issuers cannot retroactively change the rate on an existing balance unless the account is 60 days delinquent.
Payments: A consumer payment above the minimum applies first to the balance with the highest rate.
Teaser rates: Issuers cannot raise rates for the first year after an account opened. Promotional rates must last at least six months.
Bills: Issuers must send a bill 21 days before the due date.
Over limit: Issuers cannot charge over-limit fees on credit cards unless the consumer has signed up to allow such transactions.
Minors: For consumers under 21 years old, a company must get the signature of a parent or another to take responsibility for the debt, or it must obtain proof that the under-21 consumer can repay credit.
Disclosure: Cardholders must get 45 days notice of change in terms.
Fees: Issuers cannot charge fees to pay by mail, phone, and electronic transfer or online, except for expedited service.
Gift cards: All gift cards must have at least a five-year life.

Meanwhile, The Wallet offers a few predictions for what this means:

“We’re in uncharted territory here,” says Curtis Arnold, head of, a credit-card comparison site. Mr. Arnold says consumers can expect issuers to work overtime to lure high-end, high-volume clientele while adding fees and rate hikes for customers with less-than-stellar credit profiles.

The rationale is that credit-card issuers make money off interchange fees (fees merchants pay to card issuers). So customers who charge everything and pay off their balances are seen as less risky and still profitable by card issuers.

The future of rewards programs is also up in the air. Mr. Arnold advises cashing in reward and airline mile points, as their purchasing power has been on the decline in the last year or so. However, he points to new cards from brokerages like Charles Schwab and Fidelity, which offer higher cash-back rewards that lure customers to their brokerage products.

Mr. Arnold also advises those customers with existing balances to pay them off as soon as possible and consider transferring them to smaller banks and credit unions, which may be able to offer more generous rates and repayment terms. He, and others in the industry, expect interest rates on existing balances to keep climbing before the proposed legislation kicks in. (An optimistic guess would be that card issuers would have to comply nine months or a year from now.)

Something else to keep an eye on: Annual fees. The era of reward cards, or even non-reward cards, with no annual fees may be at an end. Stay tuned to notices from your card issuers and the changing fine print of your statement

So what does this mean for you?

First of all, these rules do help people avoid getting into trouble with credit cards. I applaud the change that requires minors to get parental approval or to prove they have the ability to repay before getting a card. I also like that all extra payments always go to the portion of the balance with the highest interest rate - no more shenanigans with companies applying overpayments to 0% balance transfers. Eliminating fees for different types of payment is also a plus.

But what else will change? It’s important to remember that the full ramifications of this bill won’t be seen immediately. Obviously, the credit card companies will try to keep their level of profits the same, which means that, inevitably, they’ll have to change their business in some ways. However, as Arnold noted above, they don’t want to kill the golden goose - the interchange fees that they rake in as a result of wide credit card use.

So, beyond the immediate impact for credit card users noted above, I’m going to make a few predictions about how this bill will affect things over the long term.

Interest rates will keep climbing. The days of easy low-interest credit are ending. That means the role of the credit card will begin to change as smart consumers begin to use credit cards more like charge cards - they pay off the balance in full at the end of each month.

What this might mean for you: Paying down your credit card balances as soon as possible is more important than ever! If you’re carrying a credit card balance, now is the time to start buckling down and wiping out that debt. If you aren’t carrying a debt on your cards, don’t start one - stick to spending less than you earn and keep using the credit card as an intelligent tool.

The credit card syndicates (Visa, Mastercard, etc.) will seek to raise interchange fees as a first line of attack. Credit cards work most effectively when lots of consumers have them and then expect this service from merchants. Think about it from Target’s perspective, for example - if half of their customers use credit cards to pay, they’re somewhat tied to offering that service to customers. Thus, I predict credit card companies will use that to their advantage and raise interchange fees, particularly on large retailers.

What this might mean for you: Many merchants will attempt to recoup this increase in interchange fees by passing the cost along to the consumer, so I would expect a slight bump in prices - 1% or so, spread out over many purchases and items. For most people, this will largely go unnoticed and will be seen as normal inflation.

Credit card issuers will get clever with fees, but annual fees won’t return. Most consumers have come to expect that their credit card will have no annual fees, so I don’t believe these will return in wide use. Instead, the companies will see other avenues for fees - cards that require a minimum number of uses per month, cards that have fees to enroll in particular rewards programs, and so on.

What this might mean for you: You’ll have to be more careful with credit card offers in the future. Also, when there are updates to your terms, you’ll need to read them carefully. Again, if you keep your balance paid, your credit will be good, so you can walk away from any cards that try to slip sneaky fees in on you.

I don’t believe rewards programs will go away. I would expect, though, that rewards programs will become more tied to specific “partner” retailers, like Target and Amazon, and away from more general programs like Drivers’ Edge. Why? Merchant-specific cards encourage loyalty to those merchants, and that has quite a bit of value to the merchants - those aren’t programs they will want to see go away.

What this might mean for you: Don’t be surprised if you find some of your rewards programs changing, particularly when your current card expires. For now, though, stick with what works for you.

Any thoughts or predictions on this new world of credit card rules?

Credit Card Bill of Rights

I just spoke with a friend angry at the "Bill of Rights" to be signed into law over the next week. We are concerned and just a bit angry because reward cards may become a thing of the past as a result of this "Bill of Rights". As always the full implications of this new law won't be known for years. Our credit card debt is in the trillions! See the YouTube video.

Wednesday, May 20, 2009

Developing Your Personal Financial Philolophy

Philosophy is defined as the most general beliefs, concepts and attitudes of an individual or group. A financial philosophy, therefore, is the development of general beliefs and attitudes as they relate to money and business transactions.

I began to think about this article months ago when it dawned upon me that I simply wasn’t getting the level of enjoyment out of my money that I ought to be. Each new purchase has become a cause of fear and anxiety rather than a cause of joy at having the resources to make the purchase. I poured over consumer reports for months looking for the perfect purchase until I realized that I hadn’t had a salad in weeks, produce freezing without end in my old refrigerator. I picked up a copy of Rich Brother, Rich Sister by Robert and Barbara Kiyosaki thinking that the Buddhist teachings of Barbara Kiyosaki would inform my spiritual thoughts about money. It didn’t. I have watched affluent friends research purchases until the joy of the purchase has long passed and finally, today, I read an article on a widely-read financial blog, The Simple Dollar, about haggling. The article was a about a reader who had proudly written in that they had haggled successfully at a dollar store!

I am reminded of Dr. Depek Chopra’s audio, Creating Affluence. To paraphrase: If you are constantly thinking about money, spending it, how to get more of it, then regardless of the dollar amount in your bank account, you are really poor. The antidotes to psychological poverty? Carefreeness and charity.

I was not brought up in poverty, the popular claim of so many financial authors, my upbringing was solidly middle class. My father always had a wad of cash on his person or nearby. When he passed on, I came to believe that his wad of cash was the only tangible asset that my father had. My grand parents were business people who thrived even in the segregated South. When my grandfather died, my grandmother managed the assets that he left her for almost 40 years. I always heard that my grandmother was cheap. I preferred to think of her as frugal. She had the funds to do what she needed to do and, in many cases, what she wanted to do. When she became ill in her later years, it was her resources, not the resources of her children, that paid her medical bills and assisted living expenses. My mother, like my father, is highly educated. She always earned a good living. “He is going to die and go to hell” was the mantra that I often heard in childhood when an unexpectedly high utility bill came due and my mother was afraid to show it to my father.

In the 1970’s, when I grew up, the dollar was worth something. Food and energy were expensive, iceberg lettuce was in, salmon came in a can, steak was a treat, and I thought the best cakes were made by Duncan Hines.

I was the kid who had a wad of cash hidden away in a coffee can.
I was afraid to spend it and afraid someone would ask me for it. Wanting only to accumulate, and afraid to spend, I was afraid to make decisions about money.

My mother and I had a fight about money when I was in college. She wanted me to move some money to a different account and needed me to get some paperwork notarized. I resented the request and didn’t do what she asked. I didn’t feel trustworthy in the area of money and was angry that my mother had told me to do something I wasn’t comfortable doing.

My solution trustworthiness around money was to depersonalize money and to think of it as a tool, something to help me move from point A to point B. Since money was just a tool, it did not matter to me who owned the tool as long as I got to use it. I was therefore content to rent the tool. My mother tried to teach me financial lessons by sharing a credit card with me while I was in college. She had to take the card back because tool ownership was not a concept that I had learned to embrace. When I went to graduate school, I got a credit card of my own. Seemed a great deal that I could charge a lot and pay a little. Citibank and I became business partners, a relationship that would last almost 16 years. By the time I left graduate school I owed a manageable amount to Citibank. By the time I left professional training, I owed double the amount. By my second year in practice, I owed 12 times the amount plus a car, plus student loans, plus a mortgage and open lines of credit at other retail outlets. Yes, my philosophy was that money was a tool, but because I was only renting and didn’t own the tool, I found myself in bondage to Citibank, forever focused on the next pay raise as the solution to my problems.

My financial philosophy of buying what I want, using someone else’s money at a high rate of interest was not working. My nights were sleepless. I felt enslaved as much to my own habits as I was to Citibank. I read the Millionaire Next Door and my philosophies began to change. Robert Kiyosaki came into my life and I learned that income is not wealth and that my home is not an asset. Kim D. H. Butler, of Partners 4 Prosperity, came into my life and I realized that I have to have each dollar do as many jobs for me as it can, that one of my major responsibilities is to generate as much income as I can and that to the extent possible I have to retain control of my money, remain as liquid as possible and shun situations in which access to my money is restricted by law or the economic climate.

My key money philosophy shifted from one of renting the tool to owning or having clear control of the tool.

My clearest thought and philosophy about money is that it is to bring joy. Not that money buys happiness. It does not, but it does facilitate ease. It is the unexpected, but necessary, trip home to see family, the trip overseas, the gifts to charity, the new kitchen, the new car, the flower garden, the work of art. I developed some clear money rules about how and under what circumstances money could leave my account. But on the road to money acquisition new philosophies can clash with old money rules and the old dissonances can occur anew. That is certainly what has happened at times for me.

Save for a major purchase and forestall buying even if it means missing a major sale and saving money. Does that make sense?

Understand the time value of money, but does that mean that every minute not spent in revenue generation is a minute wasted?

Understand what it costs in work, sweat, and time to earn the money to buy a car and we understand the true cost of the car.

Developing a financial philosophy that serves and empowers rather than imprisons us is a personal development activity that never ends. Our relationship to money is defined anew as the complexity of each transaction increases and our thoughts about ourselves in the market place evolve.

Without evolving philosophies we risk slavery to poverty and sacrifice carefreeness and charity even as we gain material wealth. This is one of the greatest ironies of our time that differentiates the cheapskate, from the person driven by value and the haggler from the person living in abundance.
About 3 weeks ago I wrote in "The Great 401K experiment and 16 Ways to Create Wealth, that gaining new skills was essential. Today, The Simple Dollar posted this article about gaining transferrable skills.

The Power of Transferrable Skills - And Six Areas to Work On
Posted: 19 May 2009 01:00 PM PDT
When I was in college, the vast majority of my classes were effectively training for a career in research and scientific data management. Seven years after graduation, though, I find myself drawing instead on the transferrable skills I picked up in other classes: public speaking, writing, leadership, information management, and so on. To put it simply, transferrable skills are those things that you can utilize no matter what specific career path you find yourself on.

Transferrable skills are often left by the wayside in competitive college majors. In order for a computer science major to get a leg up in the post-graduation workplace, for example, it’s often preferable to jam in another programming or algorithms class than it is to insert another public speaking class. Even if the program does require classes on transferrable skills, those classes are often looked down upon as “blow off” classes - ones that have to be finished in order to get down to the real classes within the major.

I believe this is a mistake. As change in this world accelerates, people are spending less and less of their life strapped to one particular career. They have the freedom to choose other avenues - starting a new career, starting their own businesses, and so on. In that environment, transferrable skills become more and more valuable. In fact, a well-polished transferrable skill makes for brilliant resume fodder no matter what your job - communication skills and leadership experience are a plus for almost any post-college job you might apply for.

Obviously, course loads often aren’t very flexible in a college environment, so my recommendation would be for college students to seek out other sources for picking up and mastering transferrable skills - extracurricular activities, internships, and other sources. Beyond college, transferrable skills are useful for everyone to work on at any stage in one’s career

Here are six significant areas of transferrable skill well worth working on, both to improve yourself and to prepare for your future.

Leadership Can you actually lead a team? Can you herd a group of people towards a greater purpose? Are you self-motivated enough to do this? Can you set goals and actually achieve them? Can you plan large projects and push them forward?

How can I get it? Join a community or student organization and take charge of a large project. Later, run for a leadership position within that group. The best way to learn leadership skills is to learn them in the laboratory of life, and organizations provide the perfect opportunity.

Administrative skills Are you able to prioritize the tasks in front of you? Can you analyze information and then describe it in layman’s terms for others to understand? Can you interpret rules and use them effectively?

How can I get it? Get involved in the planning of as many large projects as you can. Project planning teaches you many of the administrative skills you’ll need in life. If there is a large project, volunteer to help with the planning - if there’s already a planner in place, learn everything you can from that planner.

Information management Can you actually research a topic? Can you take a pile of research and use it to answer worthwhile questions? Can you communicate those facts to others? Can you manage a budget and handle financial records? Can you use a wide variety of computer programs?

How can I get it? If there are opportunities to present anywhere around you, take them, even if you aren’t familiar with the topic. Of particular use are topic areas where you’ll have to do some research in order to get the presentation right. Another great avenue is to volunteer to be the secretary or (particularly) the treasurer for a group. Such activities will require you to carefully manage a large amount of information on behalf of a large group.

Creativity Can you come up with interesting ideas of all kinds? Are you good at coming up with marketing ideas? Are you good at formulating the next step in a process? Are you good at creating visually appealing layouts?

How can I get it? Create some websites for groups - and learn how to do it along the way. Whenever there’s an opportunity for brainstorming, get involved and throw out ideas. Creativity is something that is best learned by practice - so practice it.

Interpersonal communications Are you willing to speak in public? Can you communicate your ideas well in writing? Can you lead a conversation? When you communicate with others, do they understand your ideas?

How can I get it? Participate in conversations and meetings instead of just sitting there. Volunteer for any and all public speaking opportunities that come your way. Volunteer for difficult and arduous tasks of documentation - that’s the best way possible to practice writing to communicate information.

Personal development Can you use the experiences in your life as a source for growth and personal change? Do you have a personal moral code that you actually follow? Can you effectively and honestly evaluate the strengths and weaknesses of others (both people and things)? Can you deal with stress?

How can I get it? Don’t shy away from challenges - step up to big projects. Keep a journal and use it to explore what you really think about things, particularly the people around you.

Every moment you spend learning the above skills is a valuable moment. You’ll find yourself returning to these skills time and time again throughout your life - and they’ll provide a surprisingly strong backbone for your career and personal success.

Friday, May 8, 2009

Setting Goals and Failing

Goal Setting may be oversimplified, overrated and downright dangerous. Business school professors from the University of Arizona, Northwestern, Harvard and the Wharton School examine the downside to goal setting. This article has unleashed a storm of controversy.
Read it at