The credit card is one of the most divisive products among all the financial tools available. Ask around and you’re sure to find people who pay all their expenses using credit cards as well as others who swear the products are the embodiment of pure evil. Opinions among financial experts and thought leaders are just as mixed. Dave Ramsey won’t even let customers pay for his products using credit cards, and his large following is adamant about the destructive powers of credit and the virtues of debt abstinence.

A credit card is nothing but a tool. Whether its effects are helpful or harmful depends on the skills and knowledge of the user, a person with the power to choose how to use the tool. Here is everything you need to know in order to make the most out of this particular financial tool, taking advantage of its benefits without falling into any traps. Here are some of the common traps for dealing with credit card rewards.

Credit cards are not for everyone. Like tools, in the wrong hands, they can be dangerous. If you have personality traits like a tendency to lack self control, if you’re in the process of repairing your finances, or if you’re not ready for personal responsibility, avoid credit cards until you are mentally and emotionally prepared.

What is a credit card?

Physically, a modern credit card is a rectangular piece of plastic, graphite, or a metallic alloy, that identifies a financial account. All contain a magnetic strip on the back, and some contain an RFID chip. An account number and the owner’s name or business name may be imprinted on the front.

Behind the scenes, the credit card represents a type of financial account. By using credit cards, customers can offers a bank’s money instead of their own to pay for a product or service today, and over time, they repay the bank. For the benefit of using someone else’s money, customers will often need to pay interest, as expected with other types of loans. This is where problems can arise. Using other people’s money is often preferable than using your own because it lets you keep your own money available for other purposes, but if you buy something with someone else’s money while not being able to repay that type of loan, the results can destroy your own financial future.

Credit cards are like DVRs for money. Digital video recorders allow users to “time-shift.” Television channels, at least for now, have regular schedules during which they air programs, but if you’re not free at 8:00 PM to watch The Big Bang Theory, your DVR allows you to watch the program from the beginning at your convenience.

When this is the philosophy behind the use of credit cards, users avoid financial problems.

How does a credit card work?

When you choose to pay with a credit card and you hand the card to a cashier or submit your card number over a secure internet connection, the merchant you’re dealing with validates your account and whether the bank will allow the purchase to go through. If everything looks good, your purchase is added to your credit account. Many companies are involved with each swipe of a credit card, and money exchanges hands between all these companies each time a card is used. Merchants pay fees to accept credit cards, and eventually the card-issuing banks receive part of this as revenue.

Once a month, the bank accumulates your credit card purchases and sends you a bill. The best option, and only option I recommend, for dealing with that bill is to pay in full by the due date. If not, you have to pay a minimum amount, determined by the bank, to avoid extra fees.

Even if you avoid extra fees, an interest fee will be added to what you owe the following month. Interest adds up quickly, and could make a $100 purchase cost $200 in total or more rather quickly. When this happens, it’s more than just time-shifting; it’s as if waiting to watch your 30-minute recorded show would require 60 minutes of your life.

When you pay on time and in full, the bank considers you a well-behaved customer, and will report this behavior to other companies that evaluate whether you’re a good borrower. You want these companies to consider you a good borrower, because it could have financial consequences in the future.

Banks, in their roles as credit card issuers, don’t want all users to be well-behaved customers. The companies profit from these customers, but the most profitable customers are those who don’t pay bills in full but are rarely late. Because of all this profit, some taken from merchants, stores often have no choice but to raise prices for everyone as a result of the increased popularity of credit cards.

Why do people hate credit cards?

Using a credit card makes it easier to spend money. Scientific studies have shown that people are more likely to complete a purchase if they intend to pay with a credit card than if they intend to pay with cash. Cash just seems more scarce, so people are more likely to try to conserve it. Credit cards don’t produce the same kind of psychological barrier.

Also, with cash only, you can never spend more money than you have. With credit cards, that’s easy. The bank doesn’t check your savings account before approving your purchase, they just check to make sure you’re under your credit limit — a total amount the bank determines you’ll be allowed to borrow at any one time — and the transaction doesn’t appear to be fraudulent. In fact, even if the transaction would put you above your credit limit, the bank will likely approve the transaction anyway just so they can charge you a fee for being over the limit.

As a result, people spend more money with credit cards than they would otherwise. This just creates more profit for the banks while making it possible for users to destroy their financial future. In practice, many people do let credit cards harm their financial future, and they do so without even realizing the mess they’ve made for themselves until it’s very difficult to clean up.

Credit cards are like hammers. Hammers can be a very useful tool. You can drive in more nails with a hammer than you can without, but you can also hurt yourself if you aren’t paying attention and smash your finger. Other see credit cards more like guns. Guns have only one purpose — to kill or maim — and likewise, the real purpose of credit cards is to create significant profit centers for banks.

What are the benefits of using credit cards?

With the potential for harm, why even use credit cards at all? First, the concept of using other people’s money for a short period of time. Time-shifting your money can come in handy if you need to buy food for your family today, a day before your pay check arrives (though this can create a dangerous precedent). Credit cards can also help you organize your expenses, but that’s only a minor benefit.

There are three major benefits to credit cards, without which, it wouldn’t be worth the hassle to use these products instead of debit cards or cash.

Credit cards create a barrier between merchants and your own money. If nothing else, credit card companies are good at handling fraud, and they create a line of defense between fraudsters and your money. You should always check the rules when you open a credit card, but in almost all cases, you are not liable for any unauthorized use of your credit card account. And unlike a debit card, unauthorized use doesn’t affect your bank account, so you’ll still have your money if you happen to need it for something else on the same day someone uses your credit card account.

If you pay with any other form of money and later have a problem with the store, you have more power when you use a credit card. If the store refuses to provide a refund and clearly should, you can tell the credit card company to reverse the charge. Stores have a bigger incentive to try to work with you to resolve the issue because too many of these reversals can result in problems for their businesses.

Extended warranties and protections. In most cases, buying a product or service with a credit card automatically gives you more choices if you have problems with the purchase. Many credit cards extend the manufacturer’s warranty. Some offer purchase protection, where if you damage the purchase in some way not covered by the warranty, the bank will replace it. In some cases, credit cards offer purchase price protection, so if a store lowers the price on a product within a certain time period after you buy it, the bank will refund some or all of the price difference.

I’ve shared more about these benefits in an article for BusinessInsider.

Credit card rewards. This happens to be one of the best marketing tools of all time. In order to gain more users and more credit card transactions, banks offer a variety of incentives to encourage new customers to apply. The issuers entice customers with promises of sign-up bonuses, cash back rewards, airline miles, and 0% introductory interest rates.

The savviest credit card users take accumulating these rewards to an extreme. I’ve heard of people using credit card to buy money directly from the U.S. Mint, at cost, to accumulate miles or cash back. When banks offered savings accounts with better interest rates, I’ve heard of people using a 0% APR cash advance to earn and keep the interest on the bank’s own money.

The more extreme the tricks one attempts, the riskier it gets, and banks will do everything legally possible to cause you to make a mistake with your rewards. Just one mistake, like needing to pay interest one month, undermining the advantage of credit card rewards. Some banks in the past have “forgotten” to send bills. Some allow — and seems to be continuing to allow without properly investigating — mysteriously stolen rewards.

How do I qualify for and choose a credit card?

Just about everyone in the United States over the age of 18 with an income can qualify for a credit card. In some cases, an income might not even be necessary. For those who don’t have a credit history or an income, secured credit cards are available. For these cards, users need to place a deposit with the bank, and the credit is drawn from the deposit. This is a good way to build up credit history to qualify for an unsecured card in the future.

For consumers with a credit history and healthy income, the choices are much broader. Determine which credit card fits your needs based on the benefits. Some types were mentioned above, but there are more options at the bottom of this article.

Study credit card reviews from other customers and determine which card you’d like to sign up for. Read the terms and conditions, and understand the consequences of not using the credit card properly. Understand the fees, particularly if there is an annual fee just for owning the card. Complete the application, verify your identity, and in most cases, you’ll have your answer within the same day. Sometimes, you can be approved in a matter of seconds.

Choose a credit card that matches your needs. It can help to browse card reviews that pertain to the type of card that works for you.

• The best credit cards for 0% APR on balance transfers. These are good for eliminating balances on high-interest cards where you aren’t able to pay the full bill each month.
• The best cards for accumulating frequent flyer miles. If you travel often on a specific airline, having a card branded for that particular airline can help you save money on ancillary travel fees (like baggage checking) and airfare. These are similar to travel rewards credit cards, which often are more flexible.
• The best credit cards for earning cash back. Cash back is the holy grail of credit card rewards. They often provide the biggest benefit per dollar spent on the card, particularly for someone who doesn’t travel on the same airline frequently. Every purchase earns some form of cash back, sometimes up to a rate of 5%. In many cases, you can make your rewards go further by redeeming them in the form of a gift card for a store you had planned to visit anyway.
• The best gas rewards credit cards. My state is full of commuters who live here but work in New York City. New Jersey is perfect for gas rewards. Compared to other states, the cost of gasoline is low, but it’s a major expense in many residents’ budgets.
• The best credit cards for students. College students are at an impressionable age, and there’s some sense that they are not yet prepared to use credit cards responsibly, particularly without an income. Some cards in this category help encourage appropriate financial behavior by rewarding it. They’re often easier to qualify for without a credit history.
• The best credit cards for small businesses. Small business owners often have financing needs that differ from typical consumers. Banks address some of these needs by creating cards suited for business owners. They often provide cash back rewards tailored to a business’s needs, but also provide credit under the business’s name and help proprietors and CEOs separate their personal expenses from those for their businesses.

If you have any thoughts about what might be necessary for people to know about credit cards, please leave your comments here. This covers just the basics; there are tips for the more advanced credit card user that will be appropriate for savvier Consumerism Commentary readers.

Photo: Flickr

Credit Card Basics: Everything You Should Know is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

In 2010, Congress passed the Tax Hike Prevention Act, which among other things reduced the payroll tax from 6.2% to 4.2% starting in 2011. For two years, workers saw higher take-home income than they would have had the law never existed, and consumers responded favorably by using the extra money throughout the two years to save, invest, pay off debt, and spend.

Of course, short of burning bills in a bonfire, that’s all there is to do with money, if you consider charity to be spending.

The payroll tax holiday ended at the beginning of this year, and as a result, that treat in the form of higher net pay is gone. There are other variables that determine take-home pay, such as raises, new jobs, changes to withholding exemptions, but for those who pay payroll tax, if the law had been extended, net pay would be higher this year.

With less money in their pockets, consumers are spending less. The Federal Reserve Bank of New York surveyed 370 individuals with the intent of determining how this pay decrease is affecting consumers’ spending and saving habits. The economists are aware of the limits of self-reported surveys, so they use the information meaningfully. They compare the reported spending and saving behavior with the extra money during the payroll tax holiday with the reported behavior or planned behavior this year.

For example, of those who mostly spent their extra pay in 2011 and 2012 rather than mostly saved or mostly paid down debt, 86.2 percent are decreasing or planning to decrease their spending to compensate for this year’s higher payroll tax. Only 1.1 percent plan to make up for their shortfall by increasing their debt. Of those who mostly used their extra pay to reduce debt over the prior two years, only 80 percent plan to cut spending but 4.3 percent plan to increase debt.

The survey assumes that people understand their own financial situations and the implications of the payroll tax cut, and I have serious doubts that a random selection of 370 individuals is going to able these questions with accuracy. The self-reporting bias encourages people to answer the questions as if they were their “ideal self,” but beyond that, some might not be able to accurately describe their past behavior or predict their future behavior, despite good intentions.

Furthermore, the survey phone call might have been the first time some respondents had heard of the payroll tax cut, and some might not have noticed changes in their paychecks had someone not called to ask about it.

That’s why I like economic studies based on measurable behavior rather than self-reporting. I do find it interesting when studies compare self-reporting with actual, measured behavior; it tends to shed a light on how people don’t know or understand their behavior and how people have less control over their environment than they think.

Back to this survey from the Federal Reserve Bank of New York, another interesting point is how planned behavior differs depending on the respondents’ level of household income. It’s notable that the economists decided to use an annual income level of $75,000 to be the boundary between lower and higher-income households. In 2011, the median household income in the United States was $50,502 — but these economists are based in New York City, so maybe they’re making an unconscious adjustment for a higher cost of living in their own neighborhood.

Of these “lower-income” households, only half of whom have reported seeing a pay decrease this year, the average household plans to reduce their spending by 77 percent of their loss of income compared to last year. Among the higher-income group, where about two-thirds have seen a decrease in net pay, whether due to the elimination of the payroll tax cut or some other change, the average household will reduce its spending by only 64 percent.

On the surface, there’s nothing in the report that’s earth-shattering. With less money, people spend, save less, and increase debt. This year’s behavior is a reversion to behavior prior to the payroll tax holiday, so it appears that the Tax Hike Prevention Act did its job by temporarily changing consumers’ behavior, and that’s just a small part of the recession-inspired economic stimulus.

As more actual spending, saving, and credit data become available, researchers will be able to determine whether people’s actions are correlated to their self-reported intentions.

Have you noticed a decrease in your take-home pay this year? What variables affected your net pay besides the elimination of the payroll tax cut? How has it affected your spending and saving behavior? Are you struggling more this year?

Chart: Federal Reserve Bank of New York
Federal Reserve Bank of New York via CNN Money

Elimination of the Payroll Tax Cut Reduced Consumer Spending is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Senator Elizabeth Warren, the architect of the Consumer Financial Protection Bureau, introduced a bill in Congress to give student borrowers a break. The premise is that students, whose education is important to the economic growth of the United States, should receive some of the same advantages as banks, who receive preferential treatment in the form of low-interest loans from the Federal Reserve.

Since the midst of the recession, the Federal Reserve has kept its overnight lending rate low, below 1 percent, so banks could kick-start the economy by being able to afford to borrow. Overall, this strategy hasn’t worked. The financial industry instead used low-cost loans to increase their assets in their financial reports, an important move to show institutions were well capitalized, and to continue to pay executive bonuses despite upsetting short-term performance.

Money is fungible — you can’t track each dollar of business revenue and each dollar of loan and determine which dollar was used for which expense, but you should be able to expect banks to cut back on excesses during periods when the industry is being carried on the backs of taxpayers. After all, when taxpayers pay for public teacher’s salaries, newspapers publish salary tables and citizens are critical of waste in the system; you should expect the same scrutiny when taxpayers are footing the bill, at least temporarily, for financial industry CEO bonuses.

A well-educated populace is good for the economy and for this country’s competitiveness on a global stage, so it makes sense for those who have pursued a college degree to receive some benefits of economic stimulus. Students are leaving college is a low-employment environment. Half of the jobs added over the past few years have been low-paying jobs, and as a result, more people — not just recent graduates — are underemployed.

The interest rates for federally subsidized student loans is set to double to 6.8 percent this July. Every year, Congress goes through the same theatrics, and more often than not decides to lower this rate. Students who take out student loans today receive a favored rate of 3.4 percent. That’s a better deal, certainly, but not as good of a deal that banks receive, somewhere near 0.75 percent.

Elizabeth Warren sees this as an injustice. She says: “… [O]ur students are just as important to the economic recovery as our banks, and the debt they carry poses a serious risk to that recovery.” This isn’t wrong. Students saddled with high repayment obligations after college have less money to contribute to the economy right away. They’ll wait before getting married, before having children, and before moving into their own houses. Even income-based repayment plans, were your monthly student loan bill is reduced, doesn’t help in the long run.

Students bear responsibility for borrowing only what they can afford, but that depends on them having effective guidance. Student loan guidance before borrowing is completely ineffective.

Furthermore, society continues to push the idea that education is worthwhile regardless of the cost. I’m a strong believer in the importance of life-long education, which for me includes degree programs, but not in borrowing at any cost. Everyone should be able to afford a college education, but perhaps we shouldn’t subsidizing as many students who choose to attend expensive private schools rather than the more reasonable state colleges and universities.

To receive those interest rates of 0.75 percent, banks have to put up collateral. Student loans are somewhat riskier than loans to banks. First, these are overnight loans for the banks — very short term, very low risk. Student loans live for a decade or more, and students have a stronger chance of being unable to make the payments. That leads to higher interest rates — those who dutifully pay back their loans in full help subsidize those who have problems.

Yet, a student loan is the only type of borrowing that cannot be discharged in a bankruptcy, and that helps reduce the risk to lenders (while making life difficult for some borrowers).

Warren is looking for a reduction of the student loan rate to 0.75 percent for just one year, at which time Congress would need to vote again.

My gut reaction is that Warren is right — it’s not “fair” that students have to pay more to borrow money than banks. There is a solid economic for the difference in rates, though. There’s no question that a well-educated populace is better for society, so what could the government do to help students without increasing risk to lenders?

• Perhaps there needs to be a more discriminating table of interest rates for student loans rather than one rate for everyone. Each student’s own situation, including proposed course of study and society’s need for jobs in a certain industry, should be evaluated to determine interest rates on an individual basis.
• Perhaps there should be more student loan repayment assistance for those who graduate and take a job in a sector that is in high demand.
• Another option is for there to be more policies that encourage private organizations to offer education grants and scholarships.

Policies for students ignore the bigger problem of the skyrocketing cost of education. You can’t control costs when society is continually making it easier for more people to afford college. Educational institutions need to control enrollment, and they can do that by raising the sticker price. The more free and low-cost credit is available to students, the more colleges can raise tuition without damaging their enrollment.

In the end, the problem of education affordability is multi-faceted, and while I would vote for a bill such as this myself, I don’t expect Congress to pass it. I expect they will continue to do what they usually do: lower the interest rate from 6.8 percent, but without going as low as 0.75 percent.

Photo: Flickr

Banks Borrow Money at Low Rates, Why Can’t Students? is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

I’m looking forward to seeing Baz Luhrmann’s new film treatment of The Great Gatsby. The book, of course, is a seminal piece of American literature, and the new movie is yet another in a long line of interpretations. I like the director’s previous works, and I expect I’ll enjoy the new film.

I read The Great Gatsby only once, and it was a long time ago. The book was likely on my essential reading list in high school. It’s probably worth another look before I see the movie.

I remember the concept — the book is an indictment of materialistic culture. The story focuses on the life of a millionaire through the eyes of Midwestern salesman, new to upper-class Long Island. The narrative is not kind to the lifestyles of the rich and famous, nor to the enduring promise of the American Dream, which at the time had grown to be less about personal liberties and freedoms than about freedom to be wealthy and flaunt it.

For a book about resistance to societal change and adaptation, it’s interesting that little has changed in the way the American Dream is interpreted.

The release of the movie this year is timely. We’ve seen through the recession that if you have enough wealth and power, you can survive unscathed. The financial industry brought down the global economy, yet operations continue as normal, without meaningful protections for consumers. The recession was an opportunity for the rich, whose wealth increased, while the underclasses have been plagued with unemployment, foreclosures, and less access to credit.

We may certainly be in a new gilded age — at least, if it’s the same gilded age from a century ago, people are no longer afraid to admit it. As evidence, hotels are using the popularity of the movie and the familiarity with at least the title of the book to promote excess.

The Plaza Hotel in New York City, a brand that has never been shy, is offering a 700-foot “Fitzgerald Suite” starting at $2,795 a night. In Newport, Rhode Island, the Vanderbilt Grace is presenting the “Grace Gatsby package,” which includes lodging, food, and sailing for $1,100 per couple. NBC News has a collection of these Gatsby-themed deals.

The hospitality industry isn’t the only group taking cues from F. Scott Fitzgerald.

While you could argue that it may just be 1920s fashion and art deco making a comeback, fascination with similar times and the promotion of the new movie release have some effect among brides. The Huffington Post, which recently offered a slideshow of gilded age-inspired weddings, made this observation of current trends: “Despite the less-than-perfect romance at the center of the story, brides are turning to Fitzgerald’s heroine, Daisy Buchanan, for bridal attire inspiration, and dapper grooms are looking to Jay Gatsby for the perfect Big Day look.”

CBS instructs viewers how to throw a Great Gatsby party, focusing on cocktails that exude the essence of the Jazz Age. While the masses can’t live the full Roaring Twenties life as exemplified by Jay Gatsby, they can get a little closer by drinking the same drinks, wearing some of the same fashions, and even listening to the same music.

Brooks Brothers now offers a clothing line to help young men dress like Jay Gatsby, with a direct tie-in to the the movie. The costume designer based the wardrobe featured in the film off Brooks Brothers’ own catalog from the 1920s, and the store fabricated the costumers worn by the actors. Brooks Brothers had no problem with a promotional tie-in with a movie that is critical of the characters who wear the company’s clothing, because these characters continue to be revered for their style.

There are two reactions to this trend.

• For some, these are good deals. Those who have the money to spend are more than welcome to spend money on whatever they like. In fact, these are the kind of experiences that can make someone happy, more than using the same money to buy things. Researchers prove that experiences lead to happiness more often than objects.

• They’re missing the point. If The Great Gatsby is supposed to be an indictment on materialistic culture, are those buying into the latest trend that puts Gatsby’s materialism on a pedestal just unfamiliar with with purpose of the novel? Is it showing that, for the most part, people are unfamiliar with what is probably one of the most popular works of American literature?

  Does this new, open popularity of the culture of living rich ignore the fundamental premise that living in decadence be detrimental to society?

The answer to this question is that the people who set these trends — marketers, mostly — do not miss the irony at all. Living a life of fancy parties and flaunting wealth is so appealing is due to its destructive nature, not in spite of it. Glorifying the culture that is mocked in The Great Gatsby isn’t the result of ignorance of the book’s themes — although it doesn’t preclude ignorance — it’s an acceptance that even though materialism and holding fast to the “good old days” is a hero’s downfall, the showiness of wealth allows people to not care.

After all, The Great Gatsby is based on the middle-class perspective, something that those who live like Jay Gatsby can safely ignore. Celebrating this culture even when the world around you derides it amplifies the same instincts that drive those who celebrate it. If materialism and excess weren’t part such a critiqued lifestyle, its celebration wouldn’t have so much meaning for those who use it to glorify their sense of being among an elite.

What are your thoughts on the increased prevalence of Gilded Age culture, as the release of the new film adaptation of The Great Gatsby helped uncover?

Photo: Flickr

The Great Gatsby Backlash is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Happy Mother’s Day! Take some time to thank your mother for any good personal finance lessons you learned while you were growing up, whether by positive or negative example.

A few times a month, Lance from Money Life and More will stop by to share some of the best articles from across a variety of publications, including other blogs and mainstream media.

Things always seem to have a way of not going 100% as planned lately in our household. Recently, we found out our friend that was going to be our tenant for our townhouse rental could no longer rent it as planned. It was just another reminder that you shouldn’t mix money with friends and family.

Of course that is just a small problem for us personally. Nationally, MSN suggests that the middle class is resigned to stagnation. According to their article, the middle class is no longer striving to get ahead, but simply struggling to not fall behind.

Then there is the question of what is too honest? Is it too honest for an employee of a company to tell a customer that they can get a better deal elsewhere? I thought this was a really interesting situation, but I bet it happens more often than you’d think it would.

Speaking of being honest, a gambler found a game machine that had a programming bug in it. If a certain setting was turned on, it was possible to beat the machine and make a significant amount of money. He didn’t change any settings, but simply only played machines in which the setting was on. Now he’s getting prosecuted. I don’t see it as a crime, but what’s your take?

Last on the list this week is something I never thought about. How would you bank if you lived in a country with a foreign currency? It turns out banking in a foreign country is a lot more difficult than you’d think. Keep this in mind if you plan on retiring in a foreign country. It isn’t as easy as you’d think it could be in today’s digital age.

I hope everyone is having a great Mother’s Day weekend! Personally, I’m just hoping I don’t have to go to work.

Photo: Flickr

The Honesty of Companies, Middle Class Stagnation is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

American culture has long promoted the idea that home ownership is key to the fulfilling middle-class lifestyle. You can be sure the National Association of Realtors will continue to do its darnedest to keep this interpretation of the American Dream alive; whether you’re buying or selling, it’s always a good time for Realtors to earn their livings.

The government wants its citizens to own houses. All recent presidents have promoted the idea of homeownership, through speeches and policies. To my memory, only Obama has said that not everybody should own a home. Nevertheless, the policies that encourage home ownership remain in place, like federal support for banks that lend money to prospective home buyers and like the mortgage interest tax deduction for owners.

Only half of all home owners claim the tax deduction either because they don’t know about it or they don’t have enough itemized deductions to be able to take the deduction. This may be because deductions reduce taxable income, and that’s more of a benefit for households with high income. A tax credit, on the other hand, would reach more homeowners, benefiting low-income home owners the same as those with higher incomes.

I can’t believe how many times I hear people suggesting that the tax deduction could be a major factor in the decision to buy a house. Even those who claim the deduction only get back a portion of their interest spent — interest they would not be paying if they were to rent instead. Say your friend wants you to let him hold $200,000 of yours, but this holding comes with a fee of $500 a month. He claims it’s worthwhile because once a year, he’ll pay you $2,100. That’s not exactly a good deal.

Renters don’t exactly have an advantage. Rents pay the owners’ interest — owners do get the deduction and renters receive nothing.

This country’s efforts to promote home ownership may drive resources towards a goal that could be harming, not helping, the economy. Several studies show that homeownership is correlated to — and may be the cause of — higher unemployment. A study in 1999 that outlined this relationship was largely ignored by economists. After all, the study was funded by the National Multi Housing Council, a trade group and lobbying organization that represents the interests of corporate landlords.

Since then, more studies, like this new study by David G. Blanchflower of Dartmouth College and Andrew J. Oswald of the University of Warwick confirms that home ownership levels determine unemployment levels. And the effect is particularly strong: an increase in home owners causes double an increase in unemployment. Because the effect is delayed by up to five years, however, it’s been easy for observers to ignore the evidence.

This doesn’t show that home owners are more likely to be unemployed themselves, but increased home ownership causes externalities that affect unemployment rates. The new study’s authors explain these externalities:

There are four main conclusions. First, we document a strong statistical link between high levels of home-ownership in a geographical area and high later levels of joblessness in that area… Second, we show that, both within states and across states, high home-ownership areas have lower labor mobility…

Third, we show that states with higher rates of home-ownership have longer commute times… Fourth, we demonstrate that states with higher rates of home-ownership have lower rates of business formation…

While this study focuses on the United States, other recent studies come to similar conclusions in Europe.

It’s easy to be skeptical of studies that show these results. We assume that home ownership encourages stable living, and stability contributes to lower crime in a region. Homeowners tend to be more involved in their communities than renters, and community involvement increases local job opportunities. The data show that these benefits aren’t enough to overcome the tendency for home ownership to cause unemployment.

A question with any study is whether the data show that there is a causation or just a correlation. For example, even though there are more large-company CEOs per capita living in Connecticut than in other states, you won’t be more likely to become a large-company CEO by moving to Connecticut. A good researcher has to wonder whether there could be some independent variables affecting both the tendency towards home ownership and the increase in unemployment.

The authors of this latest study are confident that they’ve ruled out independent variables. They show that home ownership directly causes the following:

• Lower labor mobility. People can’t quickly move somewhere else to find a new job, and so a household that rents can follow a new job quickly while a household that is rooted to a community through home ownership is more likely to pass on the new job or not be willing to look elsewhere for new employment.
• Longer commutes. People buy homes where they can better afford the housing for their particular job. Jobs are centered around cities, home ownership exists in higher numbers in suburbs. Commuting is expensive for both employers and employees.
• Fewer new firms and establishments. Higher home ownership results in more space being zoned for residential living, making it difficult for potential business owners to open new business near these communities. The “not in my backyard” attitude of home owners prevents economic development, resulting in fewer available jobs and higher unemployment.

The authors of the study are confident that they’ve controlled for variables, and therefore the data show an explicit causation between home ownership and unemployment, before the housing bust, after the recession, and through the recession. They admit, however, that researchers must undertake more experiments to build off these findings. The results as they are should be troubling for policymakers that promote home ownership.

The challenge in getting this message across is that home ownership is such a core component of the middle-class American life. When studies seem to attack someone’s way of living, people take the findings very personally. The choices families have made, in this case the choice to own a house rather than rent, contribute to a weakening of the labor economy, and no one likes to be told that their choices are “bad.”

Findings that are incongruous with established culture are more often than not rejected by the public. Because there still are positive externalities associated with home ownership that one might say outweighs the effects on unemployment, and because the results are an affront to society’s drive to make as many people home owners as possible, I expect it will be a long time before we see changes to society and policies that encourage household mobility over home ownership.

Do you think home ownership causes unemployment down the road?

Photo: Flickr
New York Times, Slate

Higher Home Ownership Linked to Higher Unemployment is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

When staff writer Sasha introduced Consumerism Commentary readers to Mint.com in 2007, I began to think about the power of massive consumer financial data. As more people signed up for this online service that connects directly to users’ credit card accounts and bank accounts, Mint.com, or any other similar services, would be able to analyze more accurate spending data than government surveys that rely on self-reported data, and possibly even industry surveys.

Now with 13 million users, Mint.com has penetrated mainstream culture beyond just techies, who love tracking information online, and personal finance lovers, who look for any tools available to help them manage their money. Of these 13 million users, 2 million have opted in to this program, allowing Mint.com to aggregate their transactions anonymously.

The company has now used the transaction data from this sample size of 2 million to produce what it’s calling the Intuit Consumer Spending Index. Intuit is the software company that now owns Mint.com. From the first quarter of 2009 to the first quarter of 2013, overall spending is up 9 percent, from $3,870 per month to $4,220 per month. Intuit announced its new index recently.

Because Mint.com categorizes every transaction and knows where its users live, the analysis of the data behind the index can go into much more detail. For example, in the District of Columbia, spending has increased 30 percent over the time period, much more than the 9 percent national average. Why has spending increased so much in the nation’s capital? The report from Intuit doesn’t say specifically, but the underlying data might have some clues.

The index can also describe spending by category within each state or nationally, and the information exists to explain why spending within a category has changed. For example, spending on groceries has increased 17 percent over the time period.

While an increase in food prices may contribute to some of that increase — although inflation is taken into account when calculating the index to reflect real changes in spending, not nominal changes — the transactions categorized as groceries indicate that more spending has shifted to boutique grocery stores like Whole Foods. 19 percent of grocery shoppers shifted to Whole Foods while spending at Safeway decreased by 3 percent over the same time period.

Mint.com also knows the ages of the 2 million users who have opted in to aggregation by sharing their personal demographics. For users aged 26 to 31, spending on healthcare increased 45 percent from 2009 to 2013, and the same consumers are also spending more at restaurants — an increase of 40 percent. The report also highlights different spending patterns between men, who spend more on entertainment, alcohol, and restaurants, and women, who spend more on clothing.

I had several concerns about the Intuit Consumer Spending Index.

• Is the 2 million user sample representative of the nation’s total population?
• What is the possibility that many of the transactions are categorized incorrectly?
• For people who use checks, how can Mint.com know the recipient of the payment?

Intuit handles the first problem my normalizing its sample against the government’s Current Population Survey. For example, if people aged 18 to 24 comprise 25 percent of Intuit’s data but only 10 percent over the overall population, Intuit’s data is weighted to reflect the actual composition of the population. Intuit performs the same reweighting along all its demographic measures.

One way the company tries to focus on accuracy by ignoring transactions over $100,000, which are often recorded as mistakes, not actual spending, and by validating their data against Census Retail Sales data. That doesn’t help in categories where people don’t typically pay with credit or debit cards, like spending on cars — maintenance, auto loan payments, etc.

Unfortunately, the raw data used to create the index does not seem to be available. I suppose that’s understandable, as Intuit is a business enterprise, not a government entity, but it doesn’t allow any deeper analysis by economists — or financial writers. We have to rely on the information Intuit chooses to disclose in its press releases and reports. The company’s team does seem to be accessible, so I’m confident that I can relay any questions to the company’s own economists should there be any, and if I wanted to write about spending in a specific category or in a specific location, I could get the data from Intuit to use in a story.

It’s probably been a few years since I’ve logged into the Mint.com account I created when the service became open to the public. It took me a while to log in because I couldn’t remember which email address I used to sign in — and I discovered by searching my email archives that it’s an email address I no longer use or have access to. After logging in, I saw that most of my accounts haven’t been updated in two or three years. I track my spending and investments with the desktop version of Quicken, so Mint.com never appealed to me much.

Checking my account profile, I see that at some point I provided basic demographic information about myself — now outdated — so in some way, my inaccurate data, both inaccurate demographics and missing transactions, was included in the aggregation that resulted in the Consumer Spending Index. According to the methodology, my information was likely just ignored, like many users who haven’t visited the website enough for there to be meaningful data.

Mint.com Tracks Two Million Users to Create Spending Index is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

There is a link between wealth and happiness, but it’s not that having more of the former results in more of the latter. The Journal of Consumer Research published a study involving a scientific analysis of the link between money and happiness designed and analyzed by researchers at the University of British Columbia, Harvard University, and the University of Virginia. The study indicated there is a direct link between wealth and self-reported satisfaction with one’s life, but no such correlation between wealth and a measurement of happiness.

The study looks at reasons this may be the case, and through a number of investigations, concludes the following:

This suggests that our money provides us with satisfaction when we think about it, but not when we use it. That shouldn’t happen. Money can buy many, if not most, if not all of the things that make people happy, and if it doesn’t, then the fault is ours.

I understand this. When I look at my life objectively, I see I should be happy. I’m financially independent, and I have access to anything I need and many things I want. I am in charge of my daily schedule, and I can spend my time doing whatever I like. Objectively, my life is very satisfying. So why am I not as happy on a day-to-day basis as I think I should be, given these circumstances?

According to the study, it’s because I — and, on average, everyone else — don’t spend wealth in a way that would lead to happiness. Maybe you can relate to this, too. Wealth provides access to many things that can contribute to a happy life, like better nutrition, healthcare, leisure time, and jobs, but these don’t necessarily contribute to self-reported happiness.

The analysis group of studies included in the published paper leads to eight approaches to spending money that will result in more happiness. Some of the suggestions are common-sense approaches to money management that I’ve written about on Consumerism Commentary, while others seem to oppose what financial advisers, planners, and authors present as good money advice. In the coming weeks, I’ll address each of these eight principles more in depth.

1. Buy experiences instead of things.

A few years ago, Laura Rowley, author of Money and Happiness: A Guide to Living the Good Life, was a guest on the Consumerism Commentary podcast. She pointed to an earlier study that showed that happiness plateaued at a household income of level of $75,000. There’s a lot of criticism of this study because, among other things, $75,000 in one location like New York City means something else to a family than $75,000 earned in rural Ohio. The study itself was recently debunked, but some of the conclusions still make sense with the new information.

One of these conclusions is that it’s better to to frame your financial choices in terms of experiences, as Laura Rowley mentioned in the podcast. Experiences create memories that contribute more to happiness than what you might achieve by buying products.

2. Help others instead of yourself.

Anything people due to nurture social connections with others increases happiness, and wealth can be used in such a manner. The study showed that those who spend more of their wealth on gifts for others and on charitable contributions than on bills and gifts for themselves are happier. Not only does prosocial spending affect self-reported happiness, but another experiment shows that the behavior created happiness that’s visible when observing the brain’s neurons.

3. Buy many small pleasures instead of few big ones.

The study uses this example to illustrate this point: “Eating a 12 oz cookie is not twice as pleasurable as eating a 6 oz cookie because the first X% of a cookie’s weight accounts for more than X% of its hedonic impact.” This is one of the reasons why it’s better to take your finite financial resources and spread them out over many things you find pleasurable rather than reaching for the experiences that are the most expensive. While the first principle might say it’s better to go on one $2,500 cruise than buying one $25,000 television, this principle says it’s better for your happiness to go on 50 dinners than one cruise.

4. Buy less insurance.

Most Americans are under-insured. An emergency fund is a type of self-insurance against the likelihood of a short-term financial setback, but this often needs to be supplemented with health insurance, life insurance, car insurance, and renter’s or home insurance. Many people need some form of general liability insurance, too.

These are all good uses of money, even though they might not correlate directly to happiness. But because consumers overestimate how much they’d be affected by a broken object, they’re led to extend the concept of insurance to the things they buy. Salespeople use this apprehension to sell extended warranties for products. Studies show that people are not generally affected negatively when products break without a warranty or generous return policy. If you are told that “all sales are final,” you appreciate the purchase much more.

5. Pay now and consume later.

The societal norm today is to consume now and pay later. That’s the premise of the credit card industry, and we’re lured into that spending behavior with generous cash back offers and other perks. We can delay the pain of parting with our money at the same time we advance the opportunity to consume. Shortsighted behavior results in financial problems in the future, and that’s one reason why the opposite approach increases happiness.

The other reason is that delayed gratification increases anticipation, and resolution of the feelings of anticipation inspire happiness.

6. Think about what you’re not thinking about.

When you daydream about the future, you’re more likely to think about it in abstract terms. As you get closer, whether in time or in physical space, details begin to emerge that cloud your happiness. This is apparent when you’re planning for a vacation. Six months in advance, your trip to Walt Disney World seems like a great idea, but as the time to depart gets closer and the details come into focus, you begin to think about all the frustrations you will experience. Those details, good and bad, will affect your level of happiness when the time comes, more than just the fact that you and your family are at Walt Disney World.

Thinking about those details in advance will prepare you for the future and will help you make better decisions about the future in terms of your happiness.

7. Beware of comparison shopping.

This gets interesting. Comparison shopping is a tool of the frugal consumer. It’s good to make a purchasing decision based on all data available, even if price is just one part of the comparison. Comparison shopping so so popular that there are even sections of Consumerism Commentary designed to help people make decisions about their money. Consumer Reports helps people, too, by rating products within appropriate categories to make informed decisions about spending money.

It turns out that shopping based on comparisons — which focus on how one version of a product differs from another — take focus away from attributes that are more likely to make someone happy. You can use online tools to compare a car’s specifications. Shoppers can determine what facts from among the categories will result in the best purchase, but the factors that contribute to happiness with a car purchase — perhaps the feeling of envy from friends, whether the driver’s seat fits you perfectly, or whether there’s enough room to make love in the backseat — are not listed or not really considered when shopping using a financially responsible, comparison-based approach.

8. Follow the herd instead of your head.

The best way to predict enjoyment of an experience is to see how much other people enjoyed the same experience. Going back to the Walt Disney World example, if more of my friends shared with me, more stories about their enjoyment of the vacation, the more I will enjoy my vacation there. Seeing that others are happy with their decisions increase our own happiness with the same decisions. In an experiment, women predicted how much they’d enjoy a date using two methods. The first was by photograph and biography of their date alone, the second was based solely on another woman’s previous analysis of the date. Those who received the photograph and biography made more inaccurate predictions of how they would enjoy their date.

Is your goal in life to be rich in financial terms only or do you want to be rich in happiness, as well? If you like the idea of living one happy experience after another, then it takes more than just wealth and financial independence. How you spend your money determines whether you’re happy. These principles should help you use your money in ways that are more likely to produce happy feelings.

There is much depth in these principles, so this article is just an overview. Each principle deserves its own analysis. For more information on the experiments conducted that led the researchers to these suggestions for happiness, read the study linked below.

Journal of Consumer Psychology

8 Scientifically Proven Principles of Happiness is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

After a rocky beginning to the relationship, I’ve grown to appreciate Amazon.com. For the most part, the online retailer still boasts the best prices, shipping can be free, and if your purchases are delivered to New Jersey or one of several other states, Amazon doesn’t add sales tax to the purchase.

Lobbyists that represent all retailers, almost all of which are not Amazon and other smaller online businesses, see the avoidance of sales tax as unfair competition. Under current law, online retailers only charge sales tax when the company has a physical presence — a warehouse or an office — in the same state as the buyer (or recipient of the delivery). The issue of sales tax is one for the states and cities.

Brick-and-mortar stores are already at a disadvantage. They have to pay for retail infrastructure, like storefronts and employees to manage and sell products in those stores. With higher costs, stores with physical locations need to sell their products at a higher price to maintain profits. From a shopper’s perspective, especially a frugal-minded shopper who shops around for the best price, brick-and-mortar stores need to price more competitively. These old-fashioned retailers need to adapt to a changing environment if they want to be profitable and survive. That’s free-market capitalism.

The proposed law will change the rule. Any business with more than $1 million in annual sales will need to charge sales tax for every customer who lives in a state that has a sales tax — all but five. Each business will need to know how to calculate that correct sales tax for each customer. That’s easy enough for a company like Amazon, but for a family business that has taken its shop online only to see viral success, this could be a burden. Trying to determine the correct sales tax for a delivery in New York makes business owners cringe thanks to the variety of tax rates on the local level, within the same ZIP code, and a small business will not be equipped to handle this.

There is some good news for some businesses. If you are a accountant who provides services for retail businesses, your pool of clients is getting bigger. If you are a software developer in the retail industry, many businesses will be looking for affordable solutions for calculating and collecting sales tax. The new or increased need for these services must be paid for, and that’s most likely to come from an increase in product sales.

The $1 million exemption should ease the burden on truly small companies.

Not only will customers also have to pay sales tax when shopping online, but the prices they pay will eventually be higher, which goes further to negate any pricing advantage shoppers see from online retailers.

Did you know you’re supposed to volunteer to pay a tax for purchases where the retailer doesn’t collect sales tax? Each state with a sales tax has a special question on their income tax returns. If you made a purchase at an out-of-state retailer or an online retailer that did not charge sales tax, you are supposed to let the state know about any purchases that qualify and pay the appropriate sales tax when you file your income tax return. As I understand it, very few people do this, and states have no ability to enforce the law.

States lose about $12 billion in total revenue because of their lack of enforcement ability. The new law will recover all of it. With many local governments operating in financial crisis still due to the economic recession, the newly-found revenue will help necessary local government services remain functional. This won’t have the same impact or reach as recent federal stimulus plans, but having $12 billion is better from a planning perspective than not having $12 billion.

By the same respect, that’s $12 billion less in the consumers’ hands for spending on more products; in fact, when the products and services you can buy today cost $12 billion more “tomorrow,” when the tax goes into effect, that could be considered backdoor inflation — where increased costs are the result of tax law changes, not necessarily an increase in the money supply.

I’m most interested in how you think this change to the collection of sales tax will affect your shopping. Will you be, as the lobbyists hope, more likely to patronize your local stores once your favorite online retailer charges sales tax for internet purchases?

I don’t think this will affect my shopping behavior. Once you grow accustomed to the convenience of online shopping, you will be more likely to continue that convenience, even if it comes at a cost. But I may be different than other people. Will you shop differently?

Will an Internet Sales Tax Change How You Shop? is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Everyone starts their path to financial independence from a different position. The popular belief that everyone born in this country has an equal opportunity for financial success is a Utopian myth. It may be an ideal foremost in early European settlers’ minds as they escaped a society where wealth was determined by little more than birthright, but the playing field isn’t quite as level as some Founding Fathers would have liked. From the moment of conception, all are created equal, but after birth, we are each subject to the environment in which we live. The environment can be toxic if those around us do not place a high value on education, self-efficacy, and positive financial behaviors.

As children, we have little control over the environment and the behaviors of those around us define our attitudes in life, and as an adult, if there’s no compelling reason for change, the cycle will continue for yet another generation, embedding negative behaviors deeper into a social microculture.

If poor attitudes towards money and harmful behaviors approach the point of manifestation, it’s already beyond the point of recognizing the problem. It’s not too late, though. About a month ago, I addressed the psychological barriers to admitting there’s a problem and some thoughts for overcoming mental constructs that get in the way of financial success.

Even after admitting a problem exists — coming to terms with the idea that one is not on the road to financial independence and may in fact be approaching poverty or lifelong debt — the road ahead is a long one. Taking the first step to changing your life is daunting and frightening.

As I’m writing this, I’m reminded of a trailer for a new movie starring Will Smith and his son. I haven’t seen the movie, but the advertisement for the movie includes the actor offering the following advice when faced with difficult challenges for survival:

If we are going to survive this, you need to remember: fear is not real. It is a product of the thoughts you create. Now do not misunderstand me; danger is very real. But fear is a choice.

Now, fear isn’t exactly what prevents most people from saving a portion of their income, curbing over-shopping habits, setting up an emergency fund, and paying off debt. I would guess that the only fear might be the fear of losing one’s money deposited in a bank. The fear is irrational, and there is no real danger. But fear is a mental construct like the more specific psychological barriers that prevent people from taking the first step.

The article by James M. Olson, PhD in the Canadian Family Physician, which I referred to last month, describes these barriers.

Lack of knowledge

Education is always the first step. With “Financial Literacy Month” now concluded it’s a great reminder that learning the facts about money and the appropriate behaviors is not nearly enough to change the way people behave. I’ve written about the lack of effectiveness of financial literacy programs extensively, most recently discussing the virtues of positive financial role models. Guest author William Cowie also recently discussed four invalid excuses preventing people from investing.

On financial literacy, in the last few weeks, the chorus of agreement has gotten louder. Jason Zweig from the Wall Street Journal added his voice:

There is even some evidence that fin-lit classes can make people worse off. One study found that soldiers who had studied fin lit ended up significantly less likely to have systematic control over their household budgets. Another showed that people who had taken a fin-lit class in high school later reported that they were less thrifty, less likely to pay their credit-card bills in full and more likely to bounce a check.

After all, a little knowledge is a dangerous thing: Taking a fin-lit class might well give the least financially knowledgeable people just enough confidence to make them think they can safely take extra risks…

In one Federal Deposit Insurance Corporation survey, nearly two-thirds of banks said they participated in a fin-lit program because it was a way of “taking advantage of a good business opportunity.”

If financial education is not effective or even harmful, how can the psychological barrier of the lack of knowledge be conquered? The reason we turn to financial literacy in schools, non-profit organizations, and free seminars from for-profit entities in the financial industry is because it’s so difficult to impart skills and positive attitudes through the only effective means — being there for children during their formative years, exemplifying the positive behaviors and attitudes and being living examples of the results of these behaviors and attitudes.

I don’t know if there’s an answer to this question that has proven to be effective, but it’s something I’m interested in discovering.

Low self-efficacy

William Cowie described one of the four excuses preventing people from investing as the attitude that causes people to think, What’s the point of investing? I’ll just lose money anyway. There is some truth to this. Unless you invest enough money into a company to be part of the management team or oversight board, you don’t have much control. All shareholders can vote, but it’s rare for any one individual shareholder to dictate the operation of the company. When you invest in a company, you put your faith in management to make the right decisions. When you invest in an actively-managed mutual fund, you put faith in the fund manager to make the right investment choices. When you invest in an index mutual fund, you put your faith in the stock market. There is a lot that is out of the investor’s control.

But you do have control of certain things. You have control over the companies in which you investments. You have the ability to research your investment options, make choices for yourself, monitor your progress, and adjust as necessary. The choices you make have a direct bearing on your investment results, although that might not be apparent until later.

Low self-efficacy isn’t limited to investing. If you are convinced that paying off debt it pointless because you will just return to debt, or if you’re convinced that society has placed you in a situation like poverty or homelessness that is difficult to climb out of, you’re blocking yourself from moving forward.

The choices you make can have a profound impact on your financial health. And while external resources can help you move in the right direction, they only work when you actively pursue improvements yourself.

Dysfunctional attitudes

The Canadian Family Physician article describes two types of dysfunctional attitudes: unfavorable attitudes towards healthy behaviors and favorable attitudes towards unhealthy behaviors.

The second type is easier to describe and understand. Although people know smoking causes cancer and death, smokers do it anyway. Some will never make any attempt to quit simply because it’s a behavior they enjoy. Reasons often go deeper, but harmful behaviors are often fun and activate the brain’s pleasure centers. The idea of owning a beautiful house and driving fast cars is appealing to a lot of people, but if the financial groundwork to support those behaviors isn’t in place, these desires can lead to financial difficulty and delayed or prevented independence.

The other type of dysfunctional attitude usually consists of poor excuses:

• Budgeting is a tedious chore.
• Savings accounts earn paltry interest rates, so an emergency fund would actually lose value.
• Insurance is a financial industry scam.
• Banks are useless for people in my community.

To overcome dysfunctional attitudes, it takes an external force. When people are genuinely scared for their life, quitting smoking suddenly becomes an easier task; in fact, even the chemical barriers contributing to addiction seem to disappear, and though people speak of it being difficult to quit, the “cold turkey” method is suddenly effective. (Why? The danger, which has always been real, becomes too obvious to ignore.)

The external force for getting over dysfunction attitudes and taking the first step is most effective when it manifests as a serious problem affecting someone’s life. We can try financial education. We can write articles about diligently paying off debt until our fingers fall off, but if someone isn’t ready to hear the message, it won’t break through embedded attitudes.

Like physicians have a role in helping patients overcome their dysfunctional attitudes, financial advisers can play this role. But while everyone has — or should have — a doctor they see regularly, someone who can monitor their progress, relatively few people have a financial adviser to guide them on a personal level.

Another dysfunctional attitude is the belief that making the wrong choice with your money can be worse than making no choice at all. Financial advisers and writers like to argue about things like whether it’s better to use extra cash flow to pay a mortgage off early or invest, but in the end, either choice is better than spending too much time analyzing the possible outcomes.

The first step in the direction of financial independence can be the most difficult. This may be a long article that addresses some of the finer points of what, in a person’s brain, prevents him or her from starting a path to change, but it comes down to will power. When you want something bad enough, you make it happen. To want something bad enough, you have to see the future, one future that looks bright, and another future full of trouble. Some won’t see the future until it’s plainly in front of them. Some need help seeing the future.

The more we can communicate the physical danger of a life making one bad financial choice after another, the more effective we can help others take the first step. And for readers and those who might need to take the first step, consider that the only way to be truly free — free from debilitating stress, free to do what you want, when you want — is to be financially independent, and the only path to financial independence is making a habit of responsible choices with money.

Photo: Flickr
Canadian Family Physician [pdf]

Three Psychological Barriers: Taking the First Step is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

A friend of mine once lamented publicly: “When did the standard restaurant tip change from 15 percent to 20?” Sure, I remember paying typically 15 percent for a tip when I first started dining out with my friends. That was when I gained my first sense of independence from my parents twenty years ago, as a teenager in high school. At some point within these intervening years, I recognized that social convention called for a 20 percent tip. I didn’t complain; if you can’t afford to participate in the social expectations for dining out like tipping exceptionally, you can’t afford to dine out.

Perhaps some time in the past, a long, long time ago, the purpose of tipping was “to insure prompt service,” but that’s not the case today in the United States. (Actually, the word “tip” or “tips” was not coined as an acronym; someone retrofitted the oft-cited phrase to the word after the word had been in use, and it caught on like a pre-internet meme.) I’m not complaining, just pointing out how providing a small bonus on top of a published price is customary and expected for a number of services.

According to an informal survey conducted by Tom Frank, one of the founders of P.F. Chang’s China Bistro, 40 percent of restaurant-goers see tipping as an obligation and tip the same amount, 15 to 20 percent, regardless of their servers’ performance.

In other words, the waiters who don’t attend to your water glass and who don’t return your under-cooked meat generally earn the same tips that others do meet their patrons’ expectations.

In an article on Kiplinger, Frank suggests customers should reserve their best tips for when they receive the best service. The assumption here seems to be that by using tips as reward, ineffective waiters will determine what they need to do in order to warrant the best tips. Can you train your waiters with a monetary reward, like you might train a puppy with a treat?

I don’t think so. There are several problems with this theory.

What makes a tip a reward? In order to train someone using rewards, the reward must be recognized as such. If you leave a 20 percent tip to thank your waiter for performance, but many other customers also leave tips around the same amount, why would the waiter perceive this as a reward? He doesn’t know you normally tip 15 percent unless you’re a regular customer.

What exactly is the reward for? For a reward-based behavior modification system to be effective, the reward must come immediately after the behavior you wish to imprint. The last thing a waiter does before you tip is generally delivering the check. And many waiters seem to know that this is their chance to modify your behavior. Studies show that customers tip more when presented with a check with a hand-written “Thank you!” or a hand-drawn smiley face (the latter only if the waitress is female).

Because the tip is separated in time from the specific behavior, you can’t use a good tip to reinforce that positive behavior. The waiter doesn’t know what it was that inspired you to leave what you thought was a generous contribution.

Who really gets the tip? Although in the customer’s mind, a tip is reinforcement for the waiter’s behavior, in many restaurants the waiters pool their tips and must share their earnings with busing staff. The waiter may appreciate your extra five percentage points, but if that bonus gets spread among a group of people, he doesn’t benefit much from the reward. At the other end of the spectrum, under-tipping could punish more than just your own server.

The communal nature of tips in establishments managed with this method decreases the incentive for performing well unless the entire staff agrees to perform well.

Here is my tipping and restaurant behavior philosophy. I rarely receive what I perceive to be poor service, but I’m not saying I’m always a perfect customer.

• I enter with a positive attitude. Being happy, inviting, friendly, and courteous are infectious. It starts a relationship, even one that will last no longer than two hours, on the right foot.
• I know someone who used to treat waiters and waitresses as if they were house servants, using a tone of voice that subtly communicated that she was of a higher social standing than the lowly restaurant workers. It was a behavioral trait she inherited from her parents, but when she changed her behavior, she found that she received better service and her friends were no longer embarrassed to dine out with her. I always treat waiters with the respect I’d want in their position.
• I admit I get frustrated sometimes, but I deal with it without taking my frustrations out on anyone else. For example, I generally choose to drink water rather than soda, and a lot of it. If my glass is empty for an extended period of time, I’m looking around. Usually, I see the server is busy with other tables so I leave him alone. I take a deep breath and relax.
• If I want to leave feedback, I speak to the waiter. I don’t assume that he or she will know what I’m thinking based on the size of my tip. Now, I don’t like when people tell me how to do my job, so I assume that the same goes for anyone else. So any feedback I give is positive.
• There’s only one way to make a statement with a tip, and that’s to leave one large enough to be recognized as a real bonus. Think 30 to 50 percent.
• I didn’t realize this was “wrong” until I started seeing restaurant checks with suggested tips listed below the amount of the bill, but I always calculate my tip on the total price, not the pre-tax subtotal. And if I’ve received an item gratis from the waiter, I add the price of the item back in before calculating the tip.

I don’t believe my tips, or anyone’s for that matter, have a direct impact on the behavior of waiters and waitresses. Perhaps some waiters will give some thought to what they’re doing if they consistently receive lower tips than everyone else they work with, but if tips are pooled, the only incentive to perform better would come from peer pressure. Tipping within social norms is customary, therefore necessary for anyone wishing to dine out. Under-tipping at restaurants hurts customers more than anything else, so I agree with Tom Frank’s statement regarding that. If you’re looking for good service, be a good customer.

How do you tip at restaurants? Do you try to influence your waiters or waitresses with your tip?

Photo: Flickr

Can Tipping Change a Waiter’s Behavior? is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis. I’ve partnered with financial planners who will offer some guidance along the way. This month, the participants and experts are discussing, among other things, tax planning. Read this introduction to learn more about the series.

Kathleen is thirty-one years old, single, and living in Portland, Oregon. She loves her job, even if it isn’t very lucrative. With her $33,000 income last year, she’s looking to make more money from “side hustles” this year, such as her blog, Frugal Portland. To learn more about Kathleen, read her bio here. Kathleen is on Team Sara, with Certified Financial Planner Sara Stanich.

For Kathleen’s progress over the past year, see her 2012 wrap-up. Kathleen has already made great progress this year, as you can see from last month’s February update.

This month’s report, below, includes Kathleen’s progress over the three months leading up to the end of March 2013. Following Kathleen’s own self-analysis, normally Sara Stanich would offer thoughts from her perspective, but this month, Neal Frankle, CFP is standing in. Following Neal’s comments, budgeting expert Jacob Wade from iHeartBudgets will also provide his own insight.

Neal Frankle, CFP appears courtesy of Wealth Pilgrim and Wealth Resources Group.

Comments and analysis from Kathleen

March was a good month for me! I have less than $1,500 left on my car loan, and I have more money in savings than I have ever had before. I had a friend, who is a CPA, help me out with my taxes, which were a little more complicated this year than I can recall from past years. I hit a few incorrect buttons and the tax software told me to expect somewhere around $8,000 back. I just didn’t see how that was possible.

Turns out, it wasn’t. He fixed some of those problems, and now I’m expecting around $1,000 back. Still better than a poke in the eye! And a lot less “Hey let’s audit Kathleen” than it was with my bad math.

I don’t have many exciting things to say about taxes, sorry Luke and Sara! My next update will be a heck of a lot more exciting.

Feedback from Neal Frankle, CFP

Congratulations on your progress. This is really outstanding. Indeed, your net worth has grown by a factor of three over a year. That is really something to be proud of. Here’s an important question:

What did you do differently? To what would you ascribe your success in turning this thing around? Whatever it is, keep it up, friend.

On your tax return, I am of course very happy that you were able to get assistance and get it straightened out. I’m wondering if you feel comfortable doing it yourself and if you understand how to avoid those errors going forward? That’s important because the last thing you need is an IRS audit as you pointed out.

It sounds like you are also very excited about April. I assume that’s because the good times are continuing to roll. That’s very cool.

One suggestion that pops out at me is it would be great to see a monthly personal cash flow statement or profit and loss report. That has really helped me and my family, especially since we can compare month to month. We use You Need A Budget but you can use a spreadsheet if you prefer. It doesn’t matter so much what you use as long as you use it and refer back to the information.

The last piece is the car loan. I am of course very happy that you are just about paid off on the loan and I’d like to see if it’s possible for you to never have a car loan again. Did you buy a new car? Have you considered buying a car that is one or two years old next time? Last, is it possible for you to set up a sinking fund to replace your current car when it runs out of gas — for the last time?

Other than that, I think you are really doing wonderful and I am so fortunate to be able to chime in this month. Keep it up!

Feedback from Jacob Wade

KILL THAT DEBT! KILL THAT DEBT!

But seriously, I’m excited to see you debt free in the next month or so. Now, I know you don’t do budgets (blasphemy!), but I do have some advice for what to do once you’re debt free if you are not already doing this. Take that money you were using toward your debt, and get a month ahead on your expenses. Trust me on this. It will suck any financial stress right out of your life, and allow you to really plan your next steps with a clear mind. Plus, heck, it acts as a mini emergency fund, which is also sweet.

Glad to hear you’ve got a CPA helping you out. I’m sure the IRS wouldn’t be happy about a $7,000 tax mistake! Once you start receiving self-employment income, things can get a little hairy, and hiring a tax professional is always the best bet.

Kathleen March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series. This month, the participants and experts will be discussing tax planning as part of their analyses.

SteveDH is retired, and he and his wife have two grown kids. By the time he retired in 2008, he had reached his retirement asset goal of $500,000. His goal now is to ensure his savings last as long as he does. Read his bio to learn more about SteveDH. SteveDH is on Team Roger, with Certified Financial Planner Roger Wohlner.

This is Insurance Month at Naked With Cash, so each participant has been encouraged to share details about their coverage, and the experts will provide their perspectives on the topic.

Keep reading to see his net worth report, updated for March 2013. For SteveDH’s progress over the past year, read his 2012 summary. Following the analysis from SteveDH, Roger Wohlner will offer his own thoughts and guidance from his planning perspective. Jacob Wade, a budgeting expert who publishes from iHeartBudgets, will also provide commentary.

Roger Wohlner, CFP appears courtesy of The Chicago Financial Planner.

Analysis from SteveDH

After the cruise and trip last month, March proved a bit boring (I’m not a fan of basketball) but it was the end of the quarter so the accounting looked better.

March was a long month and since we had previously reduced our staples we spent more on groceries than normal. Otherwise, spending was down overall, despite having the garage door done and paying the other half of that bill from our general spending account. Cash flow was great, aided by the quarterly dividends and spring weather that included over a foot of snow. I told my wife that the snow should have waited a week or so then I could have hidden Easter eggs and candy in the driveway and given the grandkids shovels.

We spent 71% of our fixed income and only 58% of our total income thanks in part to the quarterly dividends. I should note here that April dividends will also be a little higher than normal because not all of the March dividends made it to the books. Because of the month ending on a Sunday and Good Friday, some of my dividends won’t be posted to their accounts until after April. This month’s topic is taxes so here goes.

• Taxes are good. I like the infrastructure and services they provide.
• Taxes are bad. They come out of my pocket. Too many laws make the process a total mess. We can do better, but we won’t –- at least not in my lifetime.
• Taxes will get worse. Social Security means-testing is a broken promise that should have never been approved and there is more to come. I think that our political system has a growing depth of corruption that can’t be blamed on either party or any affinity group and our tax system reflects that growing corruptness.

I worked for 42 years and planned a retirement based on promises and programs as they existed during that time. They included free medical care for life (in return for 20 years military service) and Social Security benefits based on prior earnings — not diluted by other income sources. Neither promise was kept entirely.

Although my means are sufficient to maintain my retirement, I’ve had to make adjustments and commitments along the way to compensate for the lack of integrity within government. Maybe I deserve a nice piece of cheese with this whine but my doctor’s diet recommendations prevent that.

I can sympathize with all who try to plan for retirement not knowing which promises, either by government or by employers, will be kept and which ones won’t. I will have to fork over another $1,300 in taxes in April (most of it to the feds) because of my selfish under-withholding. Just kidding; the tax bill was actually the result of some sloppy estimating on the IRA conversion last year as I failed to include a stock sale that added over $2,600 of capitals gains to my income. The whole idea of the conversions is to avoid the 25% marginal tax bracket for as long as possible but this year I will pay 25% on $2,049 –- my bad.

Feedback from Roger Wohlner, CFP

Overall your situation looks good. My one question surrounds the continued IRA conversions. Have you ever sat down and calculated what the ultimate advantage in doing this is? You are saving some amount in taxes at some point down the road, but can you quote me a number or a range of numbers that will quantify your anticipated tax savings (presumably from not having to take required minimum distributions from your Traditional IRA)? Also what is the net present value of these savings once you factor in the amount that you have to take from your cash to pay the taxes now? I’ve never felt that an IRA conversion makes sense in your age range, but I’d love to see the numbers and be proven wrong.

Feedback from Jacob Wade

Up $6,000, nice work! Aren’t dividends a wonderful thing? As a tax professional myself, I totally hear you on the taxing issues. Let’s hope they don’t start taxing gains on the Roth IRA!!! And here’s to hoping April has some better weather heading your way.

Not much to add here except to keep doing what you’re doing. It’s awesome to see someone retired living frugally and having their net worth grow month over month instead of being depleted. Well done!

SteveDH March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

A few times a month, Lance from Money Life and More will stop by to share some of the best articles from across a variety of publications, including other blogs and mainstream media.

Life has been extremely busy for us over the last few weeks! I recently bought a house and had to write a huge check for it at closing. Well, at least it was huge for me. It is weird not seeing that big chunk of cash in my bank account but we still have our emergency fund intact.

We’re hoping that the new house won’t lead us down the path of the Diderot effect. Paula at Afford Anything explains that the Diderot effect very well, and luckily we haven’t fallen victim to it in a major way yet. I have a feeling we’ll be more susceptible down the road though so we’ll have to keep our guard up.

Len Penzo says you can call me almost anything but please don’t call me cheap. Have you ever done something and had someone call you cheap? Len explains the difference in his mind between cheap and frugal. Do you agree with his assessment?

Frugal Rules shared an awesome example of customer service. LL Bean is an awesome company with an awesome policy. Unfortunately you normally only hear about bad customer service stories on the internet so this was a nice change of pace. You can read more about what LL Bean did for her when she contacted them about her many year old worn out slippers. It is an awesome story.

Michael from Financial Ramblings offers a few tips for haggling, even for those who hate haggling. It’s a great way to save money here and there, and sometimes all you have to do is ask. Michael shares seven “magical” words that help get the haggling started.

Finally, J. Money at Budgets Are Sexy reminds us about the paradox of our time. I think everyone can relate to this poem. Take the time to read it. It’s short and helps us remind us what is important in life.

I hope you’ve enjoyed these posts from around the internet. Take some time this weekend and do something you’ve wanted to get done. There is no time like the present! Until next time…

Buying a House, The Diderot Effect and Awesome Customer Service is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis. I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series. This month, the participants and experts will be discussing tax planning as part of their analyses.

Anonymous S is a 24-year-old engineer earning $67,000 a year plus bonus. He also builds websites on the side for an hourly fee of $20 to $35. Read his bio here. Anonymous S is on Team Roger, with Certified Financial Planner Roger Wohlner.

Last month, Anonymous S described his progress as of February 2013. You can also catch up on his net worth history through 2012 by reading his fist Naked With Cash monthly entry. Keep reading to see his net worth report for March 2013.

Following the analysis from Anonymous S., Roger Wohlner will offer his own thoughts and guidance. Following Roger’s feedback, Jacob Wade, budgeting expert and founder of iHeartBudgets, will provide additional commentary.

Roger Wohlner, CFP appears courtesy of The Chicago Financial Planner.

Analysis from Anonymous S

March was awesome. I left my job in mid-March. I then traveled to Malaysia for two weeks to visit my girlfriend (who is now back in the country), visited by grandparents for a week, and I will visit San Francisco for a week before my new job in New York City states.

I received by $2,700 tax refund, and converted all of my paper savings bonds to electronic bonds using TreasuryDirect. I then redeemed all of the bonds returning under 4%, all of which were actually returning under 1%. I’m not quite sure what the tax implications are, but I’ll make sure to have some liquid assets next year for the potential tax bill.

I also received a check from my old employer for the equivalent of my eight unused vacation days. This was truly unexpected, since I didn’t think I would be reimbursed for them. I was taxed at a very high rate for this check, so I’m expecting some of the taxes to be refunded next year.

I had a few more travel expenses than normal, but otherwise I spent less on food due to the travel. Food and travel in Malaysia are much cheaper than in the United States.

I decided to cash in and withdraw most of my non-passive index investments to consolidate my holdings. I will continue this in April. This includes Motif Investing and LendingClub. I’m not sure what my taxes will look like for these transactions, but my LendingClub account didn’t do so well last year.

I’ll be starting my new job in April, but without a company-sponsored 401(k), I’m not quite sure what to do with my savings. I think I will direct deposit most of it into my mutual fund account, and in the future will ask my employer about setting up a SIMPLE IRA.

I think I’ll leave my old 401(k) where it is right now. There aren’t any fees associated with leaving it, and the funds are pretty good. In the future I may move it.

Feedback from Roger Wohlner, CFP

The idea of lobbying your employer to start a SIMPLE retirement plan is a good one. I believe that you have funded your IRA for the current year, but if not this should be a priority. Other than that it is important to continue to fund retirement, even if you need to do this on a taxable basis. If at some point you do generate some self-employment income you can always start a retirement plan on your own for some of that income.

I would try to quantify the tax implications of the savings bonds and the investments you sold and factor any potential withholding shortfall into your W-4 withholding once you start working so you don’t get caught short at the end of the year.

Once you are settled in New York City and get into your routine you will have a better idea of where you stand in terms of any excess cash flow and can make some investing decisions if you have extra cash. I would suggest instead of “dabbling” as you did with Motif and Lending Club that you put together a financial plan and work that plan in terms of how you invest.

Feedback from Jacob Wade

You jumped up your net worth by about $7,000. Not much to say except congratulations! Keep rocking it! Since this month’s theme is taxes, you’ll want to know a few things about selling off your investments. The easiest way to break it down is between short and long-term capital gains. If an investment was held under a year, its realized gains are short-term. If over a year, long-term. The difference is in the tax rates. In 2013, the long-term rates are 15% (if you make under $250,000 a year). Short-term rates are taxed at your ordinary tax rate. You won’t see much of an impact if you had more losses than gains for the year, and since your LendingClub didn’t do so hot, I wouldn’t worry about it.

I do have a question for you, though. What percentage of your income are you putting away? It seems you have a knack for saving and are active in your investments, and I’m just wondering if you have a set percentage, or just put away everything you can outside of your regular monthly expenses? Have you put together a monthly budget? Since we’re getting into the details here, I’d love to see a breakdown of your spending. Either way, you’ve got a good thing going, and it’s cool to watch your progress in this.

Anonymous S March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis. I’ve partnered with financial planners who will offer some guidance along the way. The participants and experts are discussing tax issues among their commentaries this month. Read this introduction to learn more about the series.

JW is thirty-one years old and a father of one with another one on the way within a month. He works in retail and is underemployed, and his wife and son are on state medical plans, and their income is supplemented by SNAP (food stamps). Read his bio for more information about his family’s situation.

His goal is to be able to provide for his family while still tithing 10% of his income to his church. JW is on Team Neal, with Certified Financial Planner Neal Frankle. For JW’s progress throughout 2012, read his summary from earlier this year. Today’s financial report describes his progress throughout March 2013, with comparisons from the two months leading up.

Keep reading for JW’s March update. JW’s own analysis and comments are followed by feedback from Neal Frankle and budgeting expert Jacob Wade, founder of iHeartBudgets.

Neal Frankle, CFP appears courtesy of Wealth Pilgrim and Wealth Resources Group.

JW’s comments and analysis

Income. Income was down some still from time off for our new baby. This should be up next month.

Piano. We set aside $275 for the tuning the piano. There were some sticky keys that needed to be fixed as well. The final cost was $220. A complete full-day servicing of the piano would be about $1,000. That is a future expense for further down the road. With piano lessons, my wife is contributing approx $500 gross to our monthly budget, with average expenses of around $100 per month during the school year. We expect about $350 during the summer months.

Food budget. We adjusted the food budget during the month. Family came into town to meet their new niece. We knew that the family was coming to visit but did not plan accordingly at the start of the month. We increased the dining out portion of our food budget by $100. We shaved down many other categories ($5 here, $10 there, etc.) to account for this increase. This moved the food budget from $250 to $350 for the month.

Underemployment. In effort to increase my marketability within my company I have completed our company leadership training courses. This is usually only pursued by those already in management positions. The biggest area I need to focus on is my networking skills. I tend to be tentative and reserved when networking, and I struggle to focus on ways to help others instead of just focusing on what I’d like to gain out of potential meetings. I am unsure of where and how to focus my efforts to improve.

Job search. I have two openings within my company that I was aware of and have been preparing for. They are manager positions at two different newly-opening stores. To prepare for these interviews I researched the hiring manager and general manager I expected to be in each interview. Next I compiled a list of expected interview questions and compiled similar but tailored answers for each question depending on the location. One of the two contacted me and I now have a pending interview.

On March 20 a third store posted a similar position. I know my wife would prefer living near this third store. This posting was not expected. I have applied and have had my general manager reach out to the hiring manager in the other store to provide a reference for me. This position usually remains open for two weeks before any contact is made to plan interviews. I am currently waiting to see if I get an interview.

I have been contacted for an interview on half of these positions. This leads me to believe my resume and application are well tailored for this position. I’m working to improve my interview skills and techniques.

Outside my company I had only one viable job lead. This is a position I applied for three years ago. At that time I was not doing my homework on the position or interview personnel. After that interview I discovered I knew multiple people who knew the hiring manager — including my wife. I am following the same preparation process for this interview as I have for the positions within my company. The position is still open and interviews are not yet scheduled.

Credit cards. The balance listed above includes purchases that are being reimbursed. $150 in doctor bills will be reimbursed through my Health Savings Account (HSA). $100 in concert tickets were reimbursed through a pre-paid Visa gift card (counted as cash in budget) and $120 for a family purchase that was reimbursed in cash.

401(k). My wife still has not gotten setup for online account access for her old 401(k).

Taxes. We filed our federal tax return the day that the IRS started taking returns. Each year I begin to prepare our taxes in December once I have the final pay-stubs for the year. Once the new year begins I only need to wait for tax forms to arrive to ensure they match the numbers I have already entered.

At our family planning conference each October or November we plan how we will use tax returns of various amounts. We usually use about half of our return for a week long family vacation. Around 25% goes towards debt payments. The remaining 25% goes to different spending depending on the year based on family goals and plans.

Feedback from Neal Frankle, CFP

Thanks for a comprehensive update and congratulations on the baby once again!

On the income, you expected this drop and you’ve made provisions to make it up. No worries. I like that you are clear on your priorities.

Piano. My only questions:

• If you invested the full $1000 to fix the piano now would it help increase revenue?
• Are you budgeting for that extra repair cost? If so, when will you have it? You might want to set up an auto deposit into a bank account like Ally Bank to achieve this goal. I would take a certain amount out of the income your wife generates from lessons and have that money set aside for this expense.

This is a business expense and you are thinking about it correctly. That’s extremely positive in my book.

Spending. On budgeting, I like the way you handled this unforeseen increase in food costs. This is great because it demonstrates responsibility. Keep it up man.

Career.Great action on taking those training courses to advance in your career. I also get the difficulty of networking. I think that a fantastic resource for you would be Toastmasters. It is just about free and a great way to enhance your self confidence in speaking and meeting others.

On the job, you have taken action in doing the research that very few people do so I’m basically more and more blown away by your determination. One idea would be to compile a list of questions you have for the boss. I went through a hiring process for my firm recently and was appalled that nobody asked me about my goals and what problems I need to overcome as a business owner. The candidates just kept trying to sell me on them (to solve their problem) rather than try to understand my problem and how they could help fix it.

Taxes. You are on top of it sir. I don’t really have any suggestions on this point. It sounds like you are in control and on top of your tax situation.

I would close with the one suggestion that you clarify your goals. You’ve had a lot going on and nobody in their right mind would say that you aren’t doing your best. As I said, I am in awe of what you are doing and how hard you are working. I just want to hear from you what you’d like to accomplish over the next 12 months and then hear a plan (daily/weekly/monthly) on how you plan on achieving that goal.

Feedback from Jacob Wade

Great to hear about the progress on the job search front. I think the one thing that will solidify these opportunities is a confidence in the interviews. It’s awesome that you are rehearsing for potential questions and have researched a bit. Just make sure you don’t default to pre-written or rehearsed answers, because they might throw some curveball questions and that could throw you off. Just be you, be confident, and let them know why you’re the best man for the job.

On the tax return side, what amount do you usually get back? I only ask because, depending on the amount, using half of it for a vacation based on your current financial situation might not be the best use of that money. You have an income problem at the moment, and vacations should not be a priority. I understand that getting away is important for stress levels and emotionally can really recharge you, but doing something like camping at the local state park or visiting family where you don’t have to pay for a place to stay or eat might be your best options instead of spending your return money on it. Something to think about.

Your net worth didn’t move much, but it also didn’t go down, so you’re still maintaining, which is good. Things are tight now, but a boost in employment can change that. The great part is that you are now used to a tight budget and frugal lifestyle (I can relate, we don’t make a lot either), so you can continue that trend with increased income, knock out your debt and really start to see your net worth grow!

JW March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Every food produced has a market price. As I’m writing this, the price for corn is about $277 a metric ton, but sophisticated traders are looking at what they expect the future price to be, which right now is about $251 a metric ton in May. Speculators trade on the minute-by-minute or second-by-second expectations for future values, and trading is such a big business that the cost of these futures gradually affects the price of corn in the store.

Corn is a natural food, grown and farmed in various locations throughout the world. It appeared in nature originally without intervention by humans, but now humans cultivate the crop, sell it, and help feed people all around the world.

It’s difficult to see much difference between corn, and other natural foods, and water. The planet is 70 percent covered in ocean water. Our bodies are 65 percent water. Water evaporates and returns to earth in the form of rain and other precipitation. Water is a basic building block of life as we know it. The first cities were always located very close to natural water because, among other life-providing uses, water was — and still is — the primary method of long-distance travel for a mass of people.

Can a natural resource like this be turned into a market commodity like corn?

Today, water is relatively inexpensive. Cities provide water to their residents. Water service has spread to the outskirts and suburbs through municipal planning. Residents of rural communities without water service, in most areas, can still get their own water through a private well. But there’s a problem: access to clean water is not available to everyone living everywhere. Where public water supplies are contaminated because communities can’t afford to clean or because communities were willing to accept outside corporations to pollute their lands in exchange for the promises of a growing economy, the lack of clean water leads to poverty and disease.

Across the world, the quality of life correlated to the quality and availability of water. For an individual family, moving from a poverty-stricken area to a modern city is a good solution, but there are several problems.

• Moving a household costs money, and it is difficult for a family living in poverty.
• Because of the difficulty, it can be a long process, taking several decades to raise the money and resources.
• Even after moving, the households needs to adapt to a different culture.
• Any one family moving doesn’t solve the particular problem of poverty in locales with no access to clean water.

The good news is there are large non-profit organizations working on the problem, but adding to the difficulty is the fact that private enterprises are jockeying now for the ultimate marketization of water as a resource.

Nestlé, Coca-Cola, and PepsiCo all see the advantages. If all drinking water throughout the world were to be controlled and distributed by private companies, shareholders would profit. Water is a basic necessity to life, even more than any particular solid food. When not provided for free, people would be willing to pay whatever they can for access to clean water. On a human hierarchy of needs, whether you’re looking at Maslow’s model or talking to a doctor about basic survival, our bodies must have water at all costs, clean water in order to avoid disease.

The potential for profit is virtually unlimited.

Here’s where a private water market becomes dangerous. And the concepts are easily recognizable with memories of the Enron debacle still fresh. With the privatization of energy, resources shifted to whomever was able to pay the best price for the service. This created artificial shortages in some areas — keeping supply low and demand high kept prices moving upward while at the same time depriving households of the resources they should have had. To benefit shareholders, corporations take shortcuts and play as close to the line of legality as possible. They employ clever people who determine how much can manipulate while escaping legal scrutiny, while at the same time, these corporations spend billions of dollars from their revenue to lobby lawmakers and fund politicians around the world so once in office, they owe favors to the same corporations.

If drinking water is owned and controlled by private corporations, society would recognize that access to water is not a basic human right. Humans also need oxygen from the air to live. Do we have a right to breathe or will we someday need to pay for our access to clean air?

With privatization, the lack of universal access to drinking water will no longer be a societal problem, it will be an economic problem. Those who can pay for clean water will have it, those without the wealth do not. This is already the case at a community level; poor citizens in wealthy cities have access to the water they need, but poor citizens in poverty-stricken areas do not.

There seem to be two options: either the government controls the water supply or private corporations do. It’s often argued the private corporations can do what governments do more efficiently precisely because they have to answer to shareholders who expect efficiency and profits. The question is whether we can trust private corporations with a public good, and in many cases as seen throughout recent history, we cannot. Shareholders’ priorities often conflict with providing a public need democratically to all citizens. I’m not anti-capitalist, but the shareholder form of capitalism is poorly suited for handling societal issues.

That isn’t to say we can trust governments fully with these responsibilities, either.

The eventual privatization of water seems to be unavoidable. In today’s world, private money seems to always win these discussions. Therefore, consider what the future will look like and what we can do now to prepare for this inevitability.

If you’re in the “upper middle class” or you are able to build up your savings month after month, you probably won’t notice a difference in your life. Most Consumerism Commentary readers are going to fall into this category. It’s in a corporation’s best interest to make sure its class of shareholders have access to their “product,” so this particular class of consumers, those who are more likely to invest in the stock market, will be shielded from most economic obstacles to access.

If you own a home that falls under municipal water access, you already have a bill you pay, and you already budget for the expense. Even if the price of water increases to be more along the lines of your electricity or gas bill, you could probably still afford it. Keep in mind you also pay state, local, and property taxes which help municipalities provide water service; don’t expect those taxes to decrease just because the rights to water have been privatized.

For those in the above category, there may be some minor occasional inconveniences. For the most part, your life won’t be disrupted, but as the industry matures, expect some inconveniences. Just like we saw the the privatization of energy and Enron, regulations may not always be able to stop manipulation of the market. Droughts, now brought on by the weather and climate change, will be controlled by private corporations looking to manipulate the market. Corporations will have more control over people’s lives than ever before.

Expect swings in the price of water. Once water is listed on a commodities exchange, with a price that fluctuates constantly as traders and their algorithms try to predict next month’s price, water pricing will be more volatile, like the price of gasoline at a pump. Speculative bidding causes prices to rise and creates market bubbles. That will make it harder to budget for the family and can result in shortages.

The shortages will affect those living in poverty. First of all, poverty-stricken regions already have poor access to clean water. Privatization promises a more efficient way of delivering the product, but it’s clear that corporations have no interest in customers who are not profitable. Conditions will get worse for those already disadvantaged. The result will be disease, famine, and death around the world.

Charitable organizations committed to water access will rise. To fill in the holes left by corporate-controlled water, non-profit organizations will rise in prominence. As the need for financial help to pay for water increases, so will the efforts of charity. One of the most popular non-profit organizations in recent years with a mission to increase access to potable water is charity: water. This organization builds wells; in the future, charity may take the form of providing water subsidies to help pay for the cost of water from a private company.

Make changes today that could save your family and community in future generations. My ancestors moved from Europe to the United States. Some were more financially successful than others, but all saw the conditions in Europe as unfavorable and did whatever they could to secure the potential for a better life, even if only for their descendants. The voyage was strenuous and long, so the parties who arrived were different than the parties who departed. Migration out of economically depressed locations is the selfish solution, but is the only solution for those unable to change conditions in their homeland.

Prepare for war in locations where the issue is most pronounced. Big economic gaps between the rich and poor — and in this case, wealth is represented by access to clean water, those with, and those without — in close proximity foment violent rebellions. With privatization the gaps that currently exist will only become more pronounced, as corporations provide their services to where they can mine the biggest profits.

I confess that I’m a small part of the problem. Although there’s nothing wrong with the water provided by my town, I’ve been drinking bottled water — and a Nestlé brand at that. I chose this because for whatever reason, I don’t like the taste of my tap water, even after filtering. As a child, I don’t remember ever drinking bottled water, and I believe this is part of a societal trend. As a whole, middle class society is much richer than it was twenty or twenty-five years ago, but we might not feel wealthy because our expectations of a middle class life have changed so much.

I’m already taking part in the privatization of the water supply. I’ll make a concerted effort to switch to tap water, but the world is already on the road towards full privatization of a water market. In business, people talk about five-year plans as if they represent a long-term view. In a societal shift as important as this, you might want to consider your fifty-year or hundred-year plan for your family and your descendants.

The market will bear a significant price increase for clean water because it is, besides clean air, the only substance needed to survive at the most basic level. If you’re not in a position to be able to afford water at prices ten to twenty times what they are today, start shifting your world now so your grandchildren will have a chance to survive.

Watch the former CEO of Nestlé discuss the privatization of water.

Human Beings Have No Right to Water (hat tip: Beth Ellen Cooper-Davis)

Get Ready For Water As a Market Commodity is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Naked With Cash is the year-long series on Consumerism Commentary where seven readers’ households share their financial progress on a monthly basis, and April is “tax month.” I’ve partnered with financial planners who will offer some guidance along the way. Read this introduction to learn more about the series.

Calvin is in his early 40s, earning a salary of $120,000 plus bonus as an IT project manager in New Jersey. He has just recently finalized a divorce and has a teenage child. Read his bio here. Calvin is on Team Sara, with Certified Financial Planner Sara Stanich.

Last month, Calvin shared his financial update up through February. To get an understanding of Calvin’s financial position, it may be helpful to read his first update, which discussed his progress throughout all of last year.

Below, Calvin reports his financial progress through March 2013. His own analysis is followed by feedback from Sara Stanich, CFP, as well as from Jacob Wade, budgeting expert and founder of iHeartBudgets.

Sara Stanich, CFP appears courtesy of Stanich Group and Cultivating Wealth.

h3>Analysis from Calvin

This past month was a good month for me, and I think I made some good progress towards my goals.

My primary goal right now is to get to a point where my monthly expenses are covered by my monthly salary. I currently have a shortfall of almost $1,000, and I am trying to close that by lowering my expenses. My goal is to have a balanced budget by the end of this year or very early next year.

To that end, this month I was able to switch my car with one that’s cheaper. I had previously bought a 2011 Honda CRV, which is a great vehicle, but is just too expensive for me at this point. I was able to trade it in at a local dealer and buy a 2003 Toyota Corolla with very low miles.

This I estimate will lower my transportation costs by $300 a month, from the car payment as well as from the increased efficiency of the smaller vehicle. I met my target goal of $300 in savings, and I am very pleased with my new vehicle.

In April, I will begin apartment hunting in earnest for my next place to live. My goal again is to save $300 a month. I will also be getting a salary increase in April, and that should add another $160 to my income after taxes. In March I received a bonus which allowed me to catch up on some things and put a small cash cushion in the bank — but I will spend the savings down fairly rapidly between moving and putting a security deposit down on a new place.

I also use that cushion each month to cover the monthly shortfall.

I have a budget question for Sara Stanich: I am now getting paid every two weeks. When I develop my monthly budget, do I base it on two paychecks a month or do I calculate one-twelfth of my annual take-home pay, since two months out of the year will have three checks in it? Obviously the latter results in a much smaller monthly deficit but I am not sure which way is more practical.

This month’s topic is taxes. I am not sure exactly what to say. This year I was pleasantly surprised by getting a tax refund from both my state and federal returns. Since I have an outstanding tax obligation from a prior year, the IRS took it upon itself to apply my 2012 refund to my outstanding tax obligation. I guess I can’t blame them, but I was hoping to use that money in some other way.

This year I should also do pretty good with my taxes because my alimony is tax deductible and also because my divorce agreement says I will be able to claim my daughter as a dependent this year. I am tempted to raise my withholding allowances to put more money in my pocket each month, but I think I will hold off at this point.

My plan for my state taxes refund is to add it to my savings account and use it as needed to cover my monthly shortfall. Next year when I have a balanced budget I would like to be able to use these kinds of windfalls to pay off debt or create an emergency fund.

Feedback from Sara Stanich, CFP

Calvin, you had a really good month! I can tell that you are motivated, taking positive action and making meaningful changes. I think you were initially resistant to making changes with your car and apartment, but you are making it happen. Your net worth increased by $7,700 in one month. Progress feels good.

I am especially pleased that you completed the change in your car. Three hundred ($300) per month is a meaningful improvement. Congrats on your raise and bonus as well.

Your initial target was to close your monthly cash flow gap of $1,000. I see $300 in monthly savings on the car, and you expect another $300 on the apartment. Your recent raise improves the income side of the equation by $160. $300 + $300 + $160 = $760, so I would be looking for another $240 in monthly savings (you may have already found some of this). Does that make sense?

Regarding your budget question, I recommend you calculate one-twelfth of your annual take-home pay and use that. Sure it would be great to live on two checks per month and have “extra” on the months with three paychecks, but you have a cash cushion now and it will be easier to “win” (reach positive cash flow for the month) based on one-twelfth of your annual income. I want you to win!

This month’s theme is taxes. Tax debt sucks, doesn’t it? I agree that you should leave your withholding the way it is. You could use a forced savings program, and a refund next year should wipe out your tax debt for good.

Good luck apartment hunting!

Feedback from Jacob Wade

First, congratulations on bringing your net worth up about $8,000, that is quite an accomplishment! You are making all the right moves to lower your monthly costs so they are more manageable.

As for the budget question, that is my expertise. I suggest budgeting bi-weekly, and the extra paycheck twice a year is just a bonus to throw at your debt. This way you are budgeting for the actual amount coming in because that’s the schedule you are paid on. Ideally, you would save up a cushion and get a month ahead on your budget. That way it wouldn’t matter when you get paid. But don’t worry about that until your expenses are reduced below your earning.

And I know things are really tough at the moment, but once you gain some momentum, I do suggest putting away $1,000 or so in an emergency fund right away. This is critical in keeping your momentum going, and to help curb any unexpected emergencies that could stall your progress. Mental wins are sometimes more important that financial wins, and nothing is more mentally crushing than finally making progress only to have an emergency stop you in your tracks.

All in all, you are making some big decisions, and they will ultimately help get you out of the red. The only other thing I suggest is starting to look at day to day expenses and find some areas where there might be leaks in your spending. Plug those as soon as you identify them, and you could be positive sooner than you think!

This communication is intended only for the person or entity to which it is addressed. Any taking of any action in reliance upon, this information by persons or entities other than the intended recipient is not recommended. Any information provided is for informational purposes only and does not constitute a recommendation. Every investor’s situation is unique and you should consider your investment goals, risk tolerance and time horizon before making any investment. Be sure to contact a qualified professional regarding your particular situation before making any investment or withdrawal decision. Raymond James and Sara Stanich, CFP, are not affiliated with and do not endorse, authorize or sponsor any third party websites, their respective sponsors, or user comments found on this or other sites.

Calvin March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

This is a guest article by William Cowie, who writes at Bite the Bullet Investing. While I considered myself a late bloomer in the world investing, not doing much with my money besides spending it until I was about twenty-eight, William started much later in his life. In this article, William describes how certain attitudes prevented him — and prevent many people — from investing.

I didn’t start investing until I was in my fifties, despite having a comprehensive education in finance and business. When I finally started, I was fortunate in many ways to be able to make up for lost time, and that enabled me to retire recently and start blogging about investing.

A good friend asked me the other day why, with all my financial education, I waited so long before getting started.

Good question. If someone asked me when I was younger if investing was a good thing, I would have said, “Of course!” But I didn’t invest. Why not?

As I was thinking about the question, I started asking other people why they don’t invest. I wanted to see if I was the only one, but I also wanted to get a better understanding of what I believe might be a common problem. As I put it all together, four excuses that hold people back from investing seemed to emerge.

Here are the common threads:

• I don’t have money to invest.
• I don’t have time.
• What’s the point? I’ll lose all my money anyway.
• Investing is over my head.

I don’t have money to invest.

I thought this was a valid excuse for many years. Initially it may have been true; very few people come out of college raking in “drop-dead” money, and this was my situation. However, it wasn’t long before my wife and I had three cars between us, all purchased new (financed), and an oversized house. We were always able to make the payments, but it never occurred to me that this was just a silly way to manage your money.

It was only after some time that it hit me: I always seem to have money for the things I really want.

How does it get there? By saying “no” to other things. And that’s what I started doing: saying no to everything not totally essential for our basic needs, and saving the rest. It’s amazing how much you can squeeze out of your budget if you’re really serious.

Initially I didn’t even have enough to open a brokerage account. So I opened a new savings account and put all amounts I could spare in there, just like a child’s piggy bank. It earned no interest, but I didn’t care. After a couple of years — and it did take that long — I finally had a few thousand bucks saved up, enough to surpass the broker’s minimum initial deposit amount. I used that to open an online brokerage account and make that year’s IRA contribution. That was the small start.

Where there’s a will there’s a way. No way too often means no will. It did in my case.

I also learned that even though it may look like nothing for the first few years, there is no ending without a beginning.

Starting small isn’t the killer, starting late is.

I don’t have time.

This is something I used to say while I was in my hamster-wheel career. But when I took some time out for a mid-career break, I found I had the time then, but I still didn’t invest. That’s when I learned that when anybody says they don’t have time for something, nine times out of ten it’s just code for, “I don’t want to do it.”

I learned that we all make time to hike, bike, or buy a house. If we want to do it, we’ll make the time. And investing is not a full-time job — not even close.

Once I had the desire to learn about investing, the time magically appeared. It always does.

What’s the point? I will lose all my money.

This is the reason I hear more than any other when I talk to people about investing. It’s just fear of the unknown. I got cured of this early on through a friend who was an investor. He had made the transition from living off an income from his business to living off his investment income.

As I got to know him, I saw him make money on some investments and lose on others. What I learned is most investments allow you to cut your losses quickly, but you can ride the increases as long as you want.

Is fear a valid reason for not investing? Consider something else we all do: driving. Have you ever gotten a ticket for anything? If so, you lost money. Did those fines wipe you out or stop you from ever driving again?

No. You’re aware of the risk of a speeding ticket, so you watch the speed limit and, for the most part, stay within it.

Driving is about mobility and freedom, not about fines. There’s the occasional fine, but the fines don’t define driving.

Same with investing. Investing is about gain. There might be a loss or two along the way, but those losses don’t define investing. There are some speed limit signs, if you will. When you heed them, your performance improves and the gains outweigh the losses.

Fear of loss is reason to be cautious, not to refrain from investing altogether.

Investing is over my head.

Can you buy a house? Really? What qualifies you as a house buyer? Shouldn’t you rather call a real estate agent, a real professional, and tell her to just go out there, find a house she thinks will be good for you, buy it, and let you know where it is and when you can move in?

I didn’t think so. Even if you buy a house for the first time, you do your homework, you find out what it’s all about, you schlep from house to house until your feet ache. You may not know exactly what you want, but as you see what’s available you figure out what suits you.

It’s the same with investing. You get yourself up to speed, you see what’s out there, you schlep from one investment to the other (figuratively) until you have an idea of what suits you.

If you can buy a house, you can learn to buy an investment.

Why invest?

In life you get an income from only two sources:

1. Your job or business (labor), or
2. Your investments (capital).

Most of us can think of something better than the grind we’re in right now. To get there, you need to move from number one on that list to number two.

And starting early is the only effective way to do that. I didn’t have someone to tell me that when I was younger, and I lost out big as a consequence.

Man learns from his mistakes. A wise man learns from another’s mistakes.

Thanks to the internet you can learn from my mistakes. There are a plethora of resources to learn about investing before you have the money. With knowledge, any fear of “losing it all” will fade away, and you’ll find yourself becoming excited about the opportunities and find the time to learn even more.

Four Excuses Prevent You From Investing is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

This month is Insurance Month in the series Naked With Cash. Each month, seven Consumerism Commentary readers anonymously share their financial reports to gain insight about their progress towards their goals. Read this introduction to learn more about the series.

LastDollar is thirty-three years old, an entrepreneur and single mom with two children with learning differences in private school. To learn more about LastDollar, read her bio. LastDollar is on Team Neal, with Certified Financial Planner Neal Frankle.

LastDollar’s update this month includes LastDollar’s net worth as of the end of March, followed by her own commentary and analysis. Neal Frankle, CFP joins us to share his thoughts.

This month, the Naked With Cash participants are discussing their taxes as a focus within their monthly financial status updates.

Neal Frankle, CFP appears courtesy of Wealth Pilgrim and Wealth Resources Group.

Comments and analysis from LastDollar

March was more of a struggle compared to February. Some of my clients paid early in February, which was great because I was able to pay for everything on time, but it’s a double-edged sword. It also meant March would have a lower income unless I found new clients in the meantime. In March, just about all of my recurring clients were paying late. You’ll see an inflated amount as my cash balance in March -– this is only because some payments came in at the last second of the end of March, and I hadn’t yet used it to pay bills while creating this update.

In April, I will play catch-up for anything that wasn’t paid in March and hopefully keep up with what is also due in April so I can enter May on-schedule.

It’s tax season. My paperwork is currently with the accountant and should be completed this week. Then I’ll have a better idea of what I owe. I expect to owe; I haven’t gotten a refund in years because I don’t always keep up with the estimated tax payments I should pay. I;m still paying for 2011 taxes on an installment plan as well. I know I need to get better at setting aside money from all income I receive to put toward taxes, but it is really difficult to do when I have things that are due right now, or things that are late and will be shut off if they aren’t paid right now.

I’m not really sure how to get past this; the more I earn the more I owe in taxes, yet if I set the income aside for taxes more of my bills will go late or unpaid with the money sitting in the bank.

I had to pay $400 to the oil company this month. That did not go against our back balance or the monthly payment plan and wasn’t planned for. I’m supposed to send them $360 a month on the budget plan, but there were a few months that I didn’t do that. I would get caught up, then fall behind, get caught up, fall behind, etc. I currently owe the oil company $846, so when I run out of oil now I need to pay for the delivery when it arrives. (They won’t let me add to the balance or extend me additional credit until it’s paid off again.)

In March, I needed to get two deliveries of 50 gallons each, which was $200 each time. They told me the average family would last only one week with the temperatures here, but I’ve been able to stretch 50 gallons over about two and a half weeks by freezing our butts off!

Anyway, that was an extra $400 going out in March I really didn’t plan on just to keep hot water and minimal heat in the house so the pipes don’t freeze. It’s still freezing in New York as I write this. I’m hoping it warms up in April so I can get that balance caught up before winter hits again!

Feedback from Neal Frankle, CFP

Thanks for your response. I am sorry to hear that March was a difficult month. I understand that the cash flow associated with being in business for yourself can be a big challenge at times.

Here is the overall take-away from your update. You are working very hard but still struggling. The common thread is budgeting. This is nothing you don’t already know. I don’t get a sense that you spend like drunken sailors at all. But we need to get you back to an even keel. In a perfect world, I’d love it if you could pay off your credit cards and tax liability for starters.

How to do that?

The approach that comes to mind (not knowing you all that well) is to:

• Take massive action to bring in additional revenue through a part-time job.
• Refinance your debt with family.

I know both of these are difficult and they may seem impossible. But what you are doing now doesn’t seem to be as effective as we’d like. Bottom line -– and this may sound more harsh than I mean it to -– but are you willing to live with the current situation? If not, and if you don’t do anything differently, do you have any reasonable expectation for a change to come about? If you answer “no” to the prior two questions, the remaining question is, what are you willing to do differently?

LastDollar March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

Non-profit organizations and for-profit businesses promote financial literacy education as the solution to a society of citizens unskilled with managing their own money. If only we could have mandatory money management classes in high school and earlier, advocates claim, the United States would be a nation of savers, free of most debt other than mortgages, with an emergency fund in every garage.

This concept is promoted so heavily, there is even a month for it: April is Financial Literacy Month. The event is organized by Money Management International, a non-profit credit counseling organization. As an advocate for making better financial choices, how could I not support bringing awareness of financial literacy to as many people as possible?

Financial literacy: the good

Financial literacy leads to better financial decisions. A report from the TIAA-CREF Foundation, which admittedly has a vested interest in encouraging more people to invest for retirement, concludes the following:

… People with a high degree of financial literacy are more likely to plan for retirement, and that people who plan for retirement have more than double the wealth of people who don’t… Conversely, people who have a lower degree of financial literacy tend to borrow more, accumulate less wealth, and pay more in fees related to financial products. They are less likely to invest, more likely to experience difficulty with debt, and less likely to know the terms of their mortgages and other loans.

I’m so much in favor in transmitting good financial skills that I’m considering starting a non-profit organization whose mission is to do just that. There wouldn’t be much justification for starting a new non-profit organization that takes the same approach as many others.

There’s good news for those like myself interested in starting something new: The old techniques, promoted heavily by the financial industry, even Federal Reserve Chairman Ben Bernanke, simply don’t work, so there is an opportunity for breaking through with a new approach.

Financial literacy: the bad

Studies have shown — and this has been discussed here on Consumerism Commentary — that financial literacy classes in school haven’t worked. The students who take these classes perform no better on tests of financial literacy than those who do not, and in some cases, perform even worse. How is this possible? The design of a financial literacy curriculum has been carefully planned by the industry, yet those who graduate with financial literacy credits to their name have not absorbed the basic skills they need.

• A report from the McGraw-Hill Foundation and the Financial Access Initiative at New York University says: “… New studies show that the relationship between financial literacy and the ability to make and stick with good financial choices is a complicated one. Financial literacy is necessary, but often insufficient. There’s frequently a big leap from knowing what to do in principle and actually making it happen in daily life.
• A panel of experts at the 2011 “Future of Life-Cycle Investing” conference at Boston University School of Management concluded that financial literacy advocacy doesn’t touch the people who need it the most, and therefore isn’t successful. That’s according to financial writer Janet Bodnar, who attended the conference.

There are studies that show money management classes in high school have an effect on the improvement of financial choices, but not necessarily “literacy,” and there are studies that show that these classes do have a positive effect on literacy over the long term. There is a clear correlation between level of education overall and financial literacy, but that’s not due to money management classes, it relies on the fundamental relationship between level of education and a supportive family system with available resources for children as they develop from kids to young adults.

Financial literacy: the ugly

What we see is that regardless of the existence of money management at the high school level, children who are able to grow up in a supportive environment develop better financial skills. Children who struggle through childhood due to an unstable living condition do not have the opportunity to learn good financial behavior from their parents.

Teachers can work hard to pass knowledge onto their students, but if those students see behavior that reinforces the opposite, or if they see their role models at home not prioritizing education, and in particular, an understanding of financial skills, those school lessons will lose their efficacy. Skills and knowledge need to be constantly reinforced to stick.

It comes as no surprise that lower-income communities have a greater need for financial education, and poverty and poor choices become generational problems, which are much more difficult to reverse.

These communities do not keep up with the education levels of middle class communities. Education isn’t a priority when a family’s primary concern is putting food on the table day by day. When parents can’t plan years in advance for their children because of financial stress today, children don’t get to see the things we associate with positive financial behavior, like investing for the future, compound interest, and use of mainstream financial products like savings accounts.

Without good financial role models, any money lessons taught in high school, when some who need the skills have already dropped out of school and others are too busy prioritizing the base level of Maslow’s hierarchy of needs to care about a class like this, will be lost.

Mentoring from within

The answer — if there is an answer — lies somewhere between the mission of the many organizations that promote financial literacy and organizations like Big Brothers Big Sisters. The latter encourages well-adjusted adults to become role models and mentors for younger kids who may not have positive role models in their lives. When the role model comes from within the same community as the kids, it’s much easier to make the connection. If this person who grew up like me can be smart about his money and successful in life, I can be, too. This type of relationship can prove to be a powerful motivator.

Imagine if everyone was perfectly versed in the concepts of good financial behavior. Every individual or family would save money and earn interest, spend less than they earn, focus on income-generating opportunities, plan for retirement, and buy modest houses will within their range of affordability. With everyone taking the same conservative approach to spending, it could dampen the economy, which through the twentieth century increasingly relied on credit spending for growth.

But that describes a situation that will never exist, so those who do spend prudently will have a financial advantage over those who don’t, and the economy will survive. There is no economic danger to introducing financial skills to a wider community, but expensive check-cashing storefronts and payday loan services might need to adjust their business plans in order to hold onto their customers.

One of my long-term goals is to establish a non-profit organization whose goal is similar to what I have described, combining financial literacy advocacy before high school with the role models necessary for reinforcing good decisions over the long term. This is one of several projects that have been stewing in the back of my mind for the last few years, but I have not yet had a chance to move forward. One of the first steps is forming a Board of Directors. Once I have some time to move forward, I might be reaching out to a few people I have in mind, but if you’re reading this article and are interested in changing the world in what could be an effective manner, contact me.

Photo: Philip Taylor PT

Financial Role Models vs. Money Classes is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

This month is Insurance Month in the series Naked With Cash. Each month, seven Consumerism Commentary readers anonymously share their financial reports to gain insight about their progress towards their goals. Read this introduction to learn more about the series.

Anne and Matt are twenty-seven years old, living in the Midwest, with two children. Read their bio here for background about their financial situation. Anne and Matt are on Team Neal, with Certified Financial Planner Neal Frankle.

Their goals are to strike a balance between saving for the future and enjoying the present and to save enough for retirement. Keep reading to see their net worth report, comments about the report and their progress, thoughts from Neal Frankle, and feedback from budgeting expert Jacob Wade, founder of iHeartBudgets.

This month, the Naked With Cash participants are discussing their taxes as a focus within their monthly financial status updates.

Neal Frankle, CFP appears courtesy of Wealth Pilgrim and Wealth Resources Group.

Anne’s comments and analysis

As I predicted last month, our tax refund and our third check really boosted our net worth.

We used some of that extra cash to get a month ahead on our spending. So, we set aside $5,500 in an earmarked savings account, and we’ll use that money to pay all of our bills, investment contributions, fixed savings, and miscellany. Income exceeding $5,500 will go toward our other goals. The paychecks that we receive in April will be saved in that savings account, to be used the following month.

I had always struggled with the biweekly paycheck cycle, and also sometimes there was a delay with Matt’s employer actually paying him. It would be just a few days, but it would often mean I’d have to move money from savings to cover an automatic bill payment. Frustrating, but no more!

I mentioned I’d try You Need a Budget. I wanted to like it, because I know so many people do get a lot of benefit from it. But I just couldn’t get it to work for me. At first, I realized that it was because I wasn’t yet a month ahead on my spending (and I do think this principle is awesome).

Even though I could import transactions, I never felt confident that my YNAB balance was my true available balance to budget. I know you can reconcile accounts, but even so I felt confused with it. I didn’t like having to add every transaction myself. I’m glad I did the trial. Perhaps if I bought it and committed to it for a few months, it would eventually make more sense to me. However, I don’t want to spend the money on it, because truthfully I’m probably not going to use it in an effective way.

I also restarted my Mint account to track spending. I think I prefer that setup more, because it’s pulling data and categorizing it on my behalf. My hands-on part of it is much smaller, and I appreciate that. I know you can use it as a budgeting tool, but I haven’t set that up yet. Mostly, I want to see where our spending patterns have been lately.

I’m not particularly interested in reducing our spending by much, though. I don’t think we’re being reckless. I’m not interested in spending the least possible dollar at the grocery store, for example. We value quality produce, meats, and ingredients. Sometimes that costs more, and I don’t care. I’m just thankful we can swing it, whereas a few years ago we really did have to keep our food budget under a set amount so we could meet our other obligations.

At the risk of sounding like a huge jerk, our net worth has gone up every month we’ve been tracking it. We are fine. I don’t know what benefit we’d receive by pre-planning every dollar we’ll spend on discretionary purchases.

This month, the Naked With Cash participants are talking about taxes.

For 2012, our AGI was $96,000. The taxable income was $61,000, and our yearly federal tax obligation was $6,100. Our effective tax rate was 5.46%.

I anticipate a larger tax obligation this year, as Matt’s new job began mid-2012. We’ve adjusted the withholding so that we’re not going to get a big refund, but will still pay enough so that we won’t have to owe a lot, either. At some point, it will be worth meeting with a CPA to make sure we’re making the most out of our tax situation.

Our property taxes are affordable, at roughly $1,700 per year. We live in a state that levies a 7% sales tax. Our state has an income tax, but it’s among the lowest of states that tax.

Overall, I don’t feel burdened by our taxes. I do wonder what will happen in 2014 with the health care changes. I expect our health insurance to likely continue to be expensive, and I don’t know that we’ll qualify for much in the way of tax breaks.

Feedback from Neal Frankle, CFP

Congratulations on having a banner month. But I do want to point out a few items that might help going forward.

First, your net worth is important of course but I wouldn’t use it as a gauge of success or failure. Your net worth changes in the short-term because of market fluctuations and cash flow irregularities. Case in point, you commented that the extra money you received in March is going to pre-fund some spending.

So by that measure, it’s only going to show up on your balance sheet until the spending takes place. I would hate to see you berate yourself when your net worth declines over the short run because of:

• a market decline, or
• the spending flow catches up with you.

Net worth is something to look at long-term in order to really be helpful in my experience.

You mentioned also that YNAB didn’t work for you, and that’s fine. I’m really pleased you gave it a shot. However, you also mentioned that you are going to put a month’s salary aside for spending but then said you couldn’t use YNAB because you can’t put a month’s salary aside. So that confused me.

Ultimately it doesn’t matter. If Mint works and you use it, that’s plenty good enough. You can also use bank statements as I’ve already mentioned. And many online banks like Everbank offer many free tools to help you master your budgeting too. These are all great free resources.

Just keep in mind that you can import data for YNAB and it does automatically assign categories. I just want to be fair to You Need A Budget.

I really liked that you very clear about not wanting to reduce your spending and that you are proud of your progress. I agree and that should be acknowledged.

I don’t have any comments for you on the tax side. It sounds like your situation is very straightforward, and you have a great handle on it.

My question is this however: What do you want help on, and what are you willing to do in order to achieve a different result? It sounds like you are quite content. There is nothing wrong with that — I am very content myself, financially. But as a CFP, I always try to understand what the problem is before I dive it to providing solutions.

What is the problem you want to fix right now?

Feedback from Jacob Wade

You guys are in a great position, especially for your age. I know that because you are kicking my butt, and I’m 27 as well :)

I am super glad to hear you are now a month ahead on your budget. My wife and I have been on this plan for over 4 years now, and it has been the single most important financial move we have made to reduce stress. I hope it results in the same for you!

Sounds like you’ve got a great CPA, glad to hear it. As a tax pro myself, I can definitely recommend hiring a good CPA to take care of your taxes, because the government isn’t getting any simpler, and I wouldn’t count on it anytime soon!

My question would be: Do you have any goals? I use my budget as a means to achieve my goals, so once I write them down, I reverse engineer how I’m going to get there, and then put those plans into action in my monthly budget. Whether is a sweet vacation or buying a new car, I put the money aside in a savings bucket each month to ensure I get there. That is the one place I could see being advantageous for you to plan for with a budget or budgeting software. Of course, I’d argue that there are 4,587,300 other reasons for a budget, but that’s the one that I think you’d enjoy most.

Anne and Matt March 2013 Net Worth is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

It happened after September 11, Katrina, Sandy, the Boston Marathon, and other disasters, man-made and natural, around the world. After serious tragedies, when a compassionate public is at its most vulnerable, unscrupulous individuals find taking advantage the world’s generosity comes easy. Within hours — even minutes — of the news, new operations spring up, offering to collect donations in support of victims.

Thanks to today’s electronic environment where sharing news is effective and fast, with only one mouse-click, well-meaning people spread information at a faster rate than ever. Who has time to fact-check when lives are on the line? That’s how one message on Twitter, purporting that the owner would donate $1 to Boston’s victims every time the message was shared, spread so quickly.

Just pausing for a few seconds to look at the basic facts about the owner of that Twitter account should have been enough to signal the lack of validity to the statement, but the rewards of sharing such a message outweighed the risk. After all, the Twitter message wasn’t asking anyone to send any money.

In the scam spectrum, this was pretty tame. Once money is involved, the stakes are higher. Use common sense before giving any relief organization your money:

• An official-sounding name doesn’t make an organization official. Make sure the organization shares important information online, like its founders and board members.
• Organizations must file with their state before soliciting donations. It’s worth a call to the appropriate Department of State before sending money.
• Sites like CharityNavigator can tell you more about a non-profit organization, but even legitimate pop-up charities might not be listed in the immediate aftermath.
• The IRS website allows visitors to search for an organization’s 501(c)3 (non-profit) status. But the IRS can take months to grant the status, so again, if timely giving is important, you might not yet know whether your contributions are tax-deductible.
• Don’t give anyone cash, and don’t give money to an organization that calls you out of the blue. The Office of the New Jersey Attorney General puts it best: Don’t give simply because of a pathetic “sob story.”

Not all charities are tax-deductible. If you are giving to a fund that helps a specific person or family, your money may be put to good use, but the organization will not be listed with the IRS as a 501(c)3 non-profit organization. Organizations can get into trouble if they claim donations will be tax deductible and are later unable to receive the blessing from the IRS, and when you pay your taxes, you could be hit with penalties and interest if you claim a donation is tax-deductible when it’s not.

Once you’ve parted with your money, your options are limited if you later find out the organization was fraudulent. Getting back your money could be a long process. There are some helpful suggestions from the New York Department of State, and I have amended with my own thoughts.

1. Contact the authorities.

You should report the suspected fraudulent charity with the details of the incident in which your money was solicited to the proper authorities. These include:

• Your state’s Department of State, and the Department of State from wherever the fraudulent charity operates.
• The Attorney General’s offices for both states. If there is enough evidence of fraud, the states will want to sue the organization to recover the money for the donors and possible pursue criminal charges as well.
• Contact the Federal Trade Commission and report the incident.

2. Share a warning through social media.

When the “Blogger” software was released, its tagline was “push-button publishing for the people.” The World Wide Web had been around for years, but new software made it very easy and fast for anyone with an internet connection to have a voice, spreading news and opinions. The world hasn’t slowed down since. The next video seen by millions of people is not going to be a program broadcast by a major television network or a blockbuster movie in a theater. It’s going to be a clip uploaded to YouTube, spreading from one person to around the world like a fast-moving virus, made by some kid with nothing more than a webcam.

This gives a power of influence to anyone, and you can use that power to let others know about the fraud you experienced. There are laws against defamation, so before you publicly slam a company for committing fraud you better be prepared for that company to come after you; but if you can get the message out, warning the public and sharing the facts, you can help bring attention to the issue and possible prevent others from falling into the same trap.

3. Recover your money.

If you paid with a credit card, you’re in pretty good shape. If you become aware of the fraud rather quickly, you can contact the credit card issuer. You will have to show that you made an effort to recover the money directly from the perpetrator, but a fraudulent organization will be difficult to contact after they take your money.

Disputing the charge will most likely end up in a cancellation of your payment to the organization, and you won’t be liable for what you paid.

If you paid with a check that has already cleared, getting your money back might be more difficult. You might need to wait for your state to take legal action, and that could be a long process.

In times of crisis, don’t let your guard down. Compassion is a great virtue; I’m thankful knowing that the human spirit is alive and people, emotionally moved, are looking to help in the face of a crisis. I think everyone who’s been aware of the news lately has seen similar support after the recent events, the bombing at the Boston Marathon and the explosion in West, Texas.

The urge — the need — to help immediately is powerful, but it can’t be an excuse for making bad decisions about money. Don’t give money without due diligence, and if you find yourself a victim of a charity scam, report it to the authorities and warn others.

What To Do If You’ve Donated to a Fraudulent Charity is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

For most citizens of the United States, tax season is over. There’s no longer a need to run around gathering documents. You’ll stop seeing television commercials for TurboTax and H&R Block in which each insinuates the other is a deficient company. You can stop thinking about government’s wasteful spending and income redistribution — which always seems to benefit someone other than you — for a year.

Unless, like me, you filed for an extension.

Did you or will you be receiving a tax refund this year? If you received a refund, it doesn’t necessarily mean that you are being subsidized by other taxpayers; it more often signifies the fact that you’ve paid more than you owe to the government. How very generous of you to offer the government an interest-free loan; you can be sure that if you owed the government money, by not settling your tax bill in full for example, they’ll charge you interest.

The debate over whether it’s better to receive a refund or owe the government a balance in April is hotly contested, with proponents of receiving a refund enjoying the “forced savings” throughout the year. I don’t think that’s a great benefit. Exercise some self-control and manage your money for yourself.

Nevertheless, it’s April, and those refunds are coming fast. Getting a check from the government seems to elicit an explosion of glee. Savings isn’t foremost on everyone’s mind. The refund isn’t free money. Unless you’re a lazy employee and manage to get paid for sitting around taking up space in an office, you worked for that money.

Previously, I’ve explored several ways to use your tax refund for fun. Sometimes, a refund can be like a windfall. It’s money you weren’t anticipating — a bonus. Why not throw caution to the wind and go crazy?

Or, if you’re an adult with responsibilities and no flexibility in your budget, you may want to consider more reserved options. These aren’t nearly as fun, but if you’re looking to get to financial independence faster, so you can have more fun spending your money without that nervousness in the back of your mind about the potential consequences to your prospects for wealth, consider the following.

1. Keep your refund in your savings account.

This year, Harris Interactive conducted a study on behalf of the American Institute of CPAs, an organization for accountants. The study involved a survey through telephone calls to a sample of the public, and the results indicate that this year, savings is the number one target for tax refunds. That’s great news, even if it means that Americans are already somewhat insecure with their accumulated savings.

Even though interest rates for even the best savings accounts are annoyingly low, they are important tools for establishing an emergency fund.

A tax refund could go far in insulating a family against a loss of income or a change in career direction.

2. Pay off debt.

While the Harris Interactive survey ranked paying off debt third among the tax refund priorities of Americans, I see debt reduction as tied for first, or at worst, second. Paying off debt will actually have a better financial return at the moment than boosting savings, because chances are good your debt is at a higher interest rate, even after considering any tax benefits like a student interest loan credit or the mortgage interest deduction, than what you can earn in savings.

Use your tax refund to bid adieu to a stubborn student loan. Get your credit card balance to a more manageable level (and resolve never to pay interest on credit card balances again). If you can do so without a penalty, ship some of your newly received cash to your mortgage company as a prepayment, and continue to send your normal payments in the future to remain ahead of schedule.

Putting a tax refund towards debt is simply one of the most responsible uses of money. Your future self will thank you when she arrives at a point of financial independence sooner.

3. Invest for retirement.

Retirement is a valid concern for today’s young worker. The threats to future Social Security benefits are getting attention in the media, and while the media often explain that prudent savings can add to to $1 million for retirement over thirty years, writers and gurus also fail to mention that the present course of inflation will likely render $1 million insufficient for funding the lifestyle that a millionaire might enjoy today. If you’re retiring in twenty, thirty, of forty years, aim higher. Much higher.

Anything you can add to your retirement funds will help you in the long run, assuming you live long enough to reap the benefits. There’s always that risk, as morbid as it sounds. So retirement needs should be carefully balanced with making the most out of the time you have today.

An IRA is an ideal choice for investing a tax refund. You can choose between a traditional IRA and Roth IRA, and the selection depends on your expectations for taxes now and in the future. After depositing your refund into the bank, you can easily transfer the money into a new IRA opened at Vanguard (my recommendation), Fidelity (also a good choice), or any other discount online broker that offers free investing in their own low-cost index mutual funds.

4. Donate your refund to a charitable organization.

Unless you’re considering a potential tax deduction, giving away money is not exactly the quick path to building wealth. But you don’t give to charity just for the tax deduction. Even if you believe that money you give comes back to you in the future, that’s still not why you give. I’m not saying I believe pure altruism actually exists; I think most people give to causes and organizations they care about because helping others provides the giver a sense of purpose, accomplishment, and efficacy.

With an extra $5,000 to spend, you’d likely use it for something with little meaning. Give it to a non-profit organization, and they’d use the money to help in disaster relief, buy materials for building houses for the poor, or supply a school with musical instruments or other learning materials. You could fund a small scholarship.

5. Invest in yourself.

Your personal human capital doesn’t get the attention it deserves. The focus is on net worth so much that people may often forget that today’s numbers aren’t the full measure of a man or woman. Yes, by improving your human capital also means a higher potential for lifetime earnings, but being well-rounded is its own reward.

To invest in yourself, you can use some of your tax refund to enroll in for-credit classes that get your closer to another degree. You should also consider courses that, while not destined for a degree, improve your skills in your current career or open a path towards a new career.

If you have the capacity to be successful with a business on the side, in addition to your day job, your tax refund may be the capital you need to get started or to get ahead. Investing in your own business shows that you are serious about taking the nest steps towards building a career for yourself, with the goal of independence from corporate careers.

If you have your financial priorities squared away, are in no danger of going over your budget, and are already cruising towards financial independence, it’s understandable to forgo these responsible choices in favor of something more fun. Buying yourself presents, like vacations or improvements to your house or car, can give you satisfaction that may not come for a while if you’re investing for your retirement instead. There’s a right time and a wrong time to spend money frivolously, even taking into consideration the importance of treating yourself and your family.

It’s been a long time since I’ve received a real tax refund. I do try to slightly overpay on my estimated taxes, but that small refund is no consolation to me when I sign much larger checks for the government’s benefit.

Are you receiving a tax refund this year? What do you plan to do with the money?

5 Responsible Uses for Your Tax Refund is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.

There may come a time when you have no need to keep your credit score as high as possible. Perhaps you have no need for debt now and in the future. It’s not common, but there are a few methods of arriving at that point.

• You’ve fashioned a life for yourself off the grid. You are completely self-sufficient.
• You’ve been able to save enough wealth that any need you could possibly have can be covered with cash.
• You have no concern about any missed investment opportunities.
• The idea of using other people’s money as leverage bears to concern for you.
• You may be winding down your life, with no pressing medical issues and with the comfort of knowing your financial needs are winding down.
• You live in a community where credit isn’t a way of life. but if that’s the case, this article wouldn’t be of interest to you, anyway.

I applaud people living in modern society in economically developed nations who have shunned the use of credit despite its prevalence. To save money for everything before making a purchase is an admirable goal.

Credit will touch most people’s lives at some point, if not through the use of borrowing money with credit cards through a mortgage for buying a house. I frequently hear from people who have sworn to live a debt-free life, or are celebrating because they’ve paid off all their outstanding debt, but when asked, they add a caveat: “Oh, I’m not counting my mortgage.”

Don’t get me wrong — I’m always happy to hear when someone has completely paid off their credit card debt and their loans outside of their mortgages, but the missing piece represents the need for most people to maintain a strong credit history and high credit score.

If you’ll need to borrow money in the future, refinance a mortgage, apply for some jobs, or seek out an apartment or a house to rent, you’ll need to stay on the credit grid — in the system, so to speak — to ensure you’re not denied credit and to qualify for the best interest rates.

An interest rate that’s one percentage point lower than your neighbor’s rate can save you $50,000 over the course of a $250,000 30-year mortgage. And you could do a lot with that $50,000, and invested over time, that $50,000 could become a significantly higher nest egg.

Credit cards affect your credit score.

Two significant factors in determining your FICO credit score are the length of your credit history and your debt-to-credit ratio. Because these two factors are so important in determining your credit score, and therefore your qualification for the best interest rates in the future, there are some guidelines to follow to help you take advantage of your existing credit.

The most important guideline is simply to keep your old credit cards open, even if you don’t use them anymore.

I know there’s not many things more satisfying than paying off a credit card, shredding the plastic card, and calling the issuer to cancel the card. I’ve experienced that satisfaction first-hand.

This could have been a big mistake.

When I was working for a non-profit over a decade ago, I needed to earn some extra money, but I was starting from nothing. Actually, I was starting from less than nothing, several thousand dollars in debt due to student loans, an expensive commute, and my need to buy just the essentials for my life on credit. I wanted to build websites as a side business, and I was quite skilled at this at a time when web design and programming was a nascent industry. Unfortunately, I had no tools. I had a desktop computer that I moved from one living situation to another that was several generations beyond usefulness, and was beyond its capacity of functioning as hardware.

So I did what I could to jump-start the business. I used a retailer’s twelve-month introductory 0% APR special on their store-branded credit card to finance a purchase of a new notebook computer.

This was thirteen years ago, and I wrote on my personal blog at that time:

How can I afford it you ask? How could I not afford it? [...] Happiness costs about $1500. (Thank you Mr. Best Buy Financing Guy.)

That Best Buy credit card, issued by a company called Household Retail Bank, or HRS USA, became a thorn in my side. Like other customers experienced, after a few months, the issuer stopped sending credit card statements. As I was not particularly organized, I neglected to pay the bills every month from that point on. Had I received the statements, I would have paid — if I had the cash, anyway.

When I did receive a bill, several months later, I noticed HRS USA had charged me penalty interest back to the date of the purchase. I called and complained about the lack of statements, had them remove the penalty, and paid off the balance on the card.

And then I closed the account.

In the end, it’s a good thing I closed this particular credit card. The credit limit was low, $500 if I remember correctly, and it was my newest card. Those are the two things most important to check before considering closing a card. It did feel good to eliminate my interactions with that business, and it turned me away from Best Buy almost as much as their high prices.

Your credit cards contribute to your total available credit.

I don’t plan on closing any of my current credit cards, even though some are inactive. According to my Equifax credit report, which I checked today for free by using AnnualCreditReport.com, I have two open credit cards with a limit of $500, both American Express cards, two cards with very high limits, several with limits between $1,000 and $10,000, and one card — a Bank of America card — that does not report a limit.

According to the same report, my debt-to-credit ratio (or credit utilization ratio) — how much of the available credit I owe on a monthly basis — is 3 percent. Since I pay my credit card in full every month, that number won’t be consistent, it’s based on a snapshot of my credit at any particular time.

If I were to close my card with the highest limit, my debt-to-credit ratio would almost double, and that could negatively affect my credit score.

Your credit cards contribute to the age of your credit history.

According to my credit report, the average age of my credit lines is just over seven years. That’s not that long for someone who is thirty-seven years old, such as myself, and it’s only this long because it’s greatly assisted by my student loan account with the U.S. Department of Education, though now closed, originated in September 1995, my second year of college.

If I had a credit card at that time, the account been closed over seven years, not only no longer helping to increase the average age of my credit history, but not even listed as a closed account on my Equifax report. I have noticed that credit cards closed over seven years ago still appear as closed on the TransUnion credit report, so each bureau may handle this differently.

Like the Best Buy card opened in late 2001 and closed in early 2002, Equifax no longer keeps a record of the card’s existence. And therefore, they also no longer have a record of my missed and late payments.

I’ve had most of my active credit cards for less than my average credit history of seven years, so I wouldn’t close them now. There’s a good chance that closing one or more of those accounts will reduce the credit history as calculated by the credit bureaus, and that could reduce my credit score.

Sometimes, the choice to close a credit card isn’t yours.

I’ve had two credit cards closed by the issuer due to inactivity. Only some issuers will close a cardholder’s credit line if unused. Try to avoid this; since reading terms and conditions documents can prove to be a frustrating endeavor, call the issuers for any cards you don’t use that you’ve had longer than your average credit history. Ask the customer representative whether the card will be closed due to inactivity.

If so, keep the card active by using it for an automated expense each month, followed by an automated payment. That will keep the card active, and the automation will help you stay organized.

If you have two cards from the same issuer and want to close one, call first.

Suppose you find yourself with two Chase Visa cards, one a Chase Sapphire Preferred you opened one a year ago. The other is a standard Chase Visa card you didn’t realize you had until you reviewed your credit report and saw it listed as an active account from ten years ago. Call the customer service number and ask them to do the following:

• Assuming you didn’t know about the ten-year-old credit card because you don’t have it in your possession or your address has changed and you never received a new card, ask Chase to update your account and send you a new card for the old account.
• Ask the representative to add whatever your credit limit is on the new card to the credit limit on your old card. This way, your total available credit and your debt-to-credit ratio won’t be affected.
• Now you can close the younger card while potentially increasing your credit score. With one fewer young account, your credit history’s average age will increase.

Don’t give into temptation.

If you’re the kind of person who would use any credit card that still is valid, giving into temptation whether through a compulsion to spend or just a lack of self-control, the typical advice is to close the cards and take the hit to your credit score. This is a valid decision when cost of interest from overspending outweighs the chance of getting better interest rates on future credit.

This indicates a problem that extends beyond the use of credit cards. Spending compulsions or shopping addictions are concerns you should address independently of your credit card situation.

If you keep old cards active but cut them into pieces, you may be able to better control your spending. It’s only a small barrier, though. That won’t stop someone determined from using their cut-up credit card online — card numbers can be easily memorized.

It would be nice if we could design our financial lives to be free from the credit industry. Unless you meet one of the conditions I mentioned at the top of this article, keeping a high credit score should be a concern. Therefore, it pays — in concrete savings through better interest rates — to adopt these practices which can help ensure your credit score remains as high as possible.

Photo: Flickr

Keep Your Old Credit Cards Open is a post from Consumerism Commentary. New to Consumerism Commentary? Start here.