Don't Feed the Alligators

Green Interest Rates

MITBeta — Wed, 15 Jul 2009 01:05:33 +0000

A week or so ago I got an offer in my email inbox from the credit union where we have our car loan. I glanced at it briefly — I wasn’t terribly interested in it since we’re only a few months away from paying off our current car loan, and we don’t have any plans to take out a new loan anytime soon.

However, before I clicked “delete” I noticed something interesting: Hybrid Vehicle loans enjoy a 0.25% lower interest rate than regular new or used cars.

It got me to thinking about why this could possibly be. Are hybrid car owners actually a statistically lower credit risk? Is the bank just trying to promote a “green friendly” image so that it can attract that demographic?

I don’t know what the answer is, and I’m sure that I’m not going to find out for sure any time soon, but I’m sure that this isn’t the last time that I will see Green based products get special incentives of some kind just for being green, even if it doesn’t actually make sense — like hybrid cars being allowed in the High Occupancy Vehicle lane with less than the minimum number of passengers.

I'm still looking for a few guest posts to appear occasionally on Don't Feed the Alligators. You don't have to be a blogger, you just have to be willing to tell an interesting personal finance story. Contact me if you would like to submit a story for consideration.

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Update: Getting Hit with A New Bank Fee

MITBeta — Sun, 21 Jun 2009 02:47:07 +0000

photo figure credit: rockstarassi

A couple of posts back I wrote about how my bank was implementing a fee for online bill payments. Imagine my surprise when just a few days later I received this email:

You may have read in our recent Terms and Conditions update that on June 1, we will change the terms and conditions on our FreeNet^® Checking and Yield Pledge^SM Money Market Accounts. Because of your current relationship with EverBank^®, the monthly account fee changes will not affect you at this time.¹

1. We reserve the right to impose our most current terms and conditions without notice at any point in the account relationship.

Well, this certainly made my life easier and restored my faith in EverBank. Although, I reserve the right to change my mind on this without notice.

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1980s Video Game as a Metaphor for Avoiding Lifestyle Inflation

MITBeta — Fri, 12 Jun 2009 02:37:27 +0000

photo figure credit: AdamL212

When I was a kid my family had a Commodore 128 computer. The vast majority of the time spent on this computer was in playing video games. We had a game called Ghostbusters which, of course, was modeled after the hit movie of the same name.

The object of the game was to respond to calls of high paranormal activity in buildings all around New York City. At the start of the game you are given an allowance of funds with which you can buy gear for catching ghosts. The amount of money that you start with is enough to buy the cheapest car and a minimum of ghost catching gear — just 1 Slimer trap, and not even enough money to buy an Ecto-1. When the trap is full, you have to return to Headquarters to empty the trap. You get paid for each ghost that you catch.

As the game progresses, the Keymaster and the Gatekeeper arrive on the scene. These two wander rather aimlessly around the city until they finally arrive at Zuul. When they arrive at Zuul, if you have caught enough ghosts (it was never clear to me what metric was used to determine whether you had caught enough), you are given the opportunity to sneak through the legs of a dancing Stay Puft Marshmallow Man, take a trip to the roof of Spook Central, cross the streams and win the game. If you manage to do all this, you get a code that you can use the next time that you play so that you can enter the game with more money.

What does all this have to do with personal finance and avoiding lifestyle inflation? Well, it was my experience that no matter how much money I earned in the game, it never did me any good to buy more and better equipment. Some of the options available were 4 different cars, each faster than the next, as well as the ability to buy several traps. Having more than one trap allowed you to catch more than one ghost before having to return to headquarters to empty it, and having a better car allowed you to get from ghost call to ghost call and back to headquarters much faster. It seemed, however, that the more money that you spent up front, the harder and faster you had to work to catch enough ghosts before the Keymaster and the Gatekeeper got together at Zuul. In fact, it was so hard to catch enough ghosts, that I was never able to beat the game by using anything more than the most minimal gear available.

I’ve been thinking of the parallels between this game and personal finance for a long time, and more lately as I read the popular personal finance book Your Money or Your Life by Vicki Robin and Joe Dominguez (more on that later…). I’m finding it less and less useful to want to make more and more money if one of the big problems that it’s going to create for me is to need to keep making more and more money to support our lifestyle. I would much rather be happy with what we’ve got and use any money that we happen to make above and beyond what we need to boost our retirement savings and lower our retirement age. Coming to realize that we don’t need more stuff or a bigger house to make us happy has been a very freeing realization, and one that will allow us to maintain our lifestyle more easily over time.

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Getting Hit with A New Bank Fee

MITBeta — Mon, 18 May 2009 03:01:48 +0000

photo figure credit: CarbonNYC

This week I received a letter from EverBank, which is where our checking, money market, and some CD accounts are held. We’ve banked with EverBank for a while now and have been happy with its services. Until now. The letter that I received indicated that EverBank will now start charging $8.95 for BillPay, which used to be free. The catch is that it’s free if our account balance (daily average) stays above $5,000 for the month. The letter also indicated that an account maintenance fee of $8.95 will also apply to any money market accounts with daily average balances below $5,000.

I wrote previously about how bank fees are for poor people. It seems that the definition of poor just broadened, at least according to my previous assessment.

We generally keep an average balance in our money market account of over $10,000, and previously we had been keeping a $1,500 balance or more in our checking account. What this new fee means is that in order to keep BillPay free, we’ve got to forgo some increased interest rate on an additional $3,500 monthly. Because of dismally low interest rates, the lost interest on that $3,500 amounts to just $1.87 per month. But if when interest rates go back to where they were 2 years ago, this difference rises past $10 per month.

It looks to me like we have two options here: we can increase our balance in our checking account to meet the new minimum requirement — effectively costing us $1.87 per month at this point, or we can find a new bank to take care of our BillPay services. I did some investigating for the latter option. Rather than having to open a new bank account somewhere, I looked at banks where we are already customers. The most appealing of these was our ING Electric Checking account. By simply cancelling our BillPay service with EverBank, we will avoid the fee and be left with the ability to write checks on the account. Our Electric Orange account will take care of paying all of our bills. Since our EverBank accounts are already linked to our ING accounts, it will be trivial to switch our BillPay services over to ING. All that will be required will be to replicate our Payee list and set up some automatic monthly transfers.

While $1.87 is not that much money, just over $22 per year, to me it represents a gradual erosion of my wallet. We already pay so much money monthly for everything that we have. If we simply accept EVERY $1.87 increase in cost for things, eventually it’s going to add up to a lot of money. I’m inclined to stand on principle here and close our checking account with EverBank. On the flip side, if I closed every account at a bank that irritated me somehow, all my money would be under my mattress (it’s not, by the way, so don’t look there…).

What do you think? How far would you go to avoid a small fee? What size fee is too big of a fee for you?

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Bizarre Credit Card Company Explanations

MITBeta — Mon, 27 Apr 2009 01:53:47 +0000

photo figure credit: Kecko

Over the last several weeks we’ve put a lot of mileage on our rewards credit card. We’ve been stocking up on gift cards from our local grocery store due to the fabulous deal that they offered during tax season. The use of our rewards card here sweetened the deal even more, since we get 5% cash back on grocery purchases, and the purchase of gift cards counts as groceries. Unfortunately, the credit limit on this card was not high enough for us to be able to put all of the cards that we wanted to buy on it in one cycle, so I made two mid-month payments to ensure that we could receive all of the rewards we had coming.

Because of a too strange to explain here situation, we actually charged $3,000 online and decided to cancel the order before it shipped. The merchant was great about the order cancellation, and we had no problem with this. I noticed on the credit card website, however, that our available balance went down significantly. I know how credit card transactions work, so I assumed that our card was authorized for the big purchase, which reserves the money on our card for some period of time, but the charge was never completed.

A few days went by and our balance was down to less than $100. My experience was that authorizations only last for a couple of days at best. I waited another two days, but there was no change in the available balance. I sent an email to the credit card company’s customer service department inquiring about why the available balance was so low. Here is the response that I got:

“Upon review of your account, the reason you are showing only $79.00 in available line of credit because you utilized your entire line of credit during this billing period in the amount of $XXXX.xx. According to the terms of [credit card company] Revolving Card accounts, you may utilize your entire assigned Line of Credit one time within a billing period. Even though you are making payments within the billing period, your available line of credit will not be reset until the next statement closing date on 04/30/09.”

So basically the credit card company was saying that the credit limit applies not to my balance but rather to how much I charge in total in a cycle. I thought this response was strange for a number of reasons. The first of which was that I had never heard of such a thing. The second was that the amount I had charged was already greater than 125% of my credit limit. I didn’t happen to have the terms of my account handy, so I took the company at its word and chalked this up as a way for the company to limit the amount of rewards they have to pay out each month.

Imagine my surprise when a day later our available balance suddenly increased by exactly $3,000. It seems to me that there are only two explanations for this: the first is that the credit card company took pity on our plight and gave us a break on the terms, in the amount EXACTLY equal to the purchase that we made and then cancelled. The second is that the authorization for the purchase finally rolled off the books. I’m going to assume it was the second, but I haven’t contacted the card issuer to confirm.

What intrigues me the most about the whole situation is why the credit card issuer answered the way it did. Either the terms cited are true but not observed, or they are not true and the customer service representative flat out lied. If the latter is true, why? Was it so hard to actually look at our account and see that there was an outstanding authorization that was limiting out credit line? I’m just baffled by the response on this one, and if the rewards program wasn’t so darned good I might consider at least calling them on this or even finding a new card to use. As it is, there’s been no harm, so no foul either.

Have you ever had a bank or credit card company do something bizarre like this?

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How has the financial crisis changed you?

MITBeta — Mon, 20 Apr 2009 18:51:31 +0000

photo figure credit: pfala

The May issue of Money Magazine has an article with poll results about how people have been changed by the current financial crisis. The results seem to indicate that there will be many lasting effects of the crisis in much the same way that the Great Depression changed the relationship that almost all of its survivors had with money. Savings rates are up, consumer spending is down, and people report that they value their families more and money less than they did before the crisis started. If this is the case, maybe the crisis isn’t such a bad thing?

From the poll:

Nine of 10 respondents said they have changed the way they manage their money as a result of the economic crisis

Seven of 10 said their priorities are shiftng as well

A “whopping” 94% said the recession will have a lasting impact on the way they handle their finances

Naturally, I started to think about whether and how the crisis has affected how we deal with money. I think that the basics of our money management system have not changed. We still make monthly contributions to our Roth IRAs, put aside some money for charity, add to our emergency fund, and plug away at our car loan, business loan, and mortgage. Because we are relatively young, we continue to invest most of our retirement money in stock market index funds (which have gained 30% in value over the last month, by the way…) diversified across a number of different global markets. Our monthly contributions are taking advantage of dollar cost averaging.

After ScrapperMom’s layoff in October, however, I became far more concerned about how long we could get by with no income — i.e. the size of our emergency fund. Currently all of the money that’s technically allocated for emergencies gives us a 3.75 month buffer (up by 1.45 months since August) and 4.9 months of savings if you count all of our cash on hand. This is still a pretty nice cushion, but in a tough economy it could take a year to find a job to support our current lifestyle (see Avoiding Lifestyle Inflation to keep yourself out of this situation in the first place). It took me 9 months to find work after the terrorist attacks of September 11, 2001. Few places were hiring at the time simply because of uncertainty.

So, if anything has changed in the last 6 months in the way we deal with our money, it’s that we have been putting more of an emphasis on building a larger emergency fund and lowering our fixed monthly expenses. Little by little we have been socking away more money to roll into our emergency fund CD ladder. At the same time, we have been paying down the debts that require us to make monthly payments, such as our business and car loans. Once these debts are paid off, then the “size” of our emergency fund will “grow” overnight by virtue of the fact that the same money will last longer should the need arise when we have fewer monthly obligations.

What about you? Have you changed the way you deal with money since the beginning of this crisis? Have you changed your investment strategy at all? If so, how? If not, why not?

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2008 Tax Return, Part II: Overcoming Irrationality

MITBeta — Mon, 06 Apr 2009 02:35:31 +0000

photo figure credit: “Irrational Bins” by MousyBoyWithGlasses

I finished up the preparation of our tax return today, and as you know, we are getting a sizable return. In fact, I can’t ever remember having to write a check to cover any unpaid taxes for the year. What bothers me, though, is that the government has been getting free use of my money all year.

I like to preach that people should strive to break even at the end of the year, or even owe a little bit rather than getting a refund. In this way you’re not leaving your own money on the table in the form of bank interest or investment returns that you could be seeing — or better yet, having free use of some of the government’s money all year long. This advice tends to fall on many deaf ears. It seems, shockingly, that people like to get tax refunds and hate having to write a check to the government.

Many people have told me that a tax refund at the beginning of the year is a form of forced savings for them. I tell them that they should adjust their withholding and then set up an automatic monthly or semi-monthly deposit to their high interest savings account of choice. They tell me that they fear they just don’t have the discipline to keep up with something like this and will simply squander the money over the course of the year and have little or nothing to show for it.

Up until recently I thought this line of reasoning showed some kind of character weakness on the part of the tax-refund-as-forced-savings-plan (TRAFSP) crowd. But as I get the same answer from so many people, I’m starting to re-think my judgement. We’re all human, and we need all the help we can get when it comes to doing what’s best for ourselves the better part of the time. I read the other day that when Warren Buffet wanted to lose weight, he bet his children that he could by giving them each an unsigned check for $10,000. Buffett is “someone who understands his irrationality and builds systems to cope with it.”

So while TRAFSPs may be choosing the default option rather than building a system, they still understand this aspect of their irrationality and continue to choose a system that seems to work for them. Personal finance is the confluence of a rational philosophy and irrational participants. If it were all about math, most of us would be rich by now. Instead, we all do irrational things when it comes to money at some point or another. Those of us who understand our own irrationalities and build systems to overcome or circumvent them are the ones who will ultimately be successful at this game. This might mean that we don’t always make decisions based on math, but rather on which option is more likely to be successful for us. TRAFSPs are one example. Another recent example that comes to mind is J.D. Roth at Get Rich Slowly’s decision to go with a longer term mortgage than he could afford. Lastly, a classic example of this is Dave Ramsey’s debt snowball. These are all cases where the math says to do something different, but the math doesn’t mean a thing if the concept doesn’t ever succeed.

With all this being said, I’ve put off taking my own advice for many years. The main reason for this is that we’ve had major lifestyle changes in each of the last 5+ years that have made our tax situation rather uncertain: we’ve changed jobs several times between us, sold a house, bought a house, started renting out a portion of our house, had kids, etc. But 2008 and 2009 look like they will eventually shape up to be very similar from a tax perspective, so I have gone ahead and changed my withholding amounts with my payroll department. I took home almost 10% more in my first paycheck because of this change. I already have set up a monthly automatic transfer to sweep this extra 10% into a medium term savings account for one of our financial goals.

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Let the banks fail? They already have.

MITBeta — Tue, 31 Mar 2009 02:44:48 +0000

photo figure credit: Cold Cut

A lot of Americans are mad right now. They’re mad at bankers and CEOs for causing such a mess in the financial markets. They’re mad at the government for seemingly throwing good money after bad in bailouts of all sorts. Many are even mad at themselves for living large for so long on borrowed money or the equity in their homes.

I get that.

What’s been bugging me lately, however, is this notion that some of these large banks and financial institutions should be left to fail. I’ve seen this idea repeated in newspapers, on TV news, on blogs. I’ve heard it from my coworkers, on talk radio, and at the coffee shop. Well, the truth of the matter is this: The banks in question here have failed. They’ve failed spectacularly. They’ve lost almost incomprehensible amounts of money. Their stock prices are worth next to nothing.

What they haven’t done, except for Lehman Brothers, is gone bankrupt. We, the people, have been spending hundreds of billions of dollars to keep these institutions afloat. And that’s a good thing. Here’s why:

These institutions all have deposit accounts, brokerage accounts, and other types of custodial accounts. They take your money, pool it together with other peoples’ money, and invest it in various vehicles according to your instructions. People are always adding to the pool and taking away. So normally the pool stays the same size or changes very slowly, and this keeps things on a pretty even keel.

If many people either want to put more money in or take their money out of the pool quickly, the pool is forced to buy or sell stock in large quantities, or to call in debt obligations from others. Buying or selling in very large quantities is ultimately detrimental to customers because it causes the price of the underlying stock or mutual fund to rise or fall very quickly, meaning the you’re either overpaying when you buy in or not getting the full value when you cash out.

If a large financial institution is unable to meet its debt obligations and has to declare bankruptcy, the first thing that is going to happen is that most, if not all, of its customers are going to want to get their money back. This will trigger a run on the money causing a massive drop in share prices for the underlying securities. If this price drop is big enough, the rest of the market could react at the same time, causing the whole market to drop. This is bad news for everyone who has money in the market, not just those who have money in the pool.

This is why it has been necessary for the government to step in to reassure customers of many troubled financial institutions that their money is secure. By keeping the institutions solvent, the government is preventing a massive run on money that could have far reaching effects on the whole economy. This is why some of the largest institutions are being called “too big to fail.”

While I certainly worry about what the long term implications will be with respect to taxes to pay for these bailouts, I don’t see any way around propping up these companies by partially or fully nationalizing them until things calm down for a while. What I would like to see implemented immediately, however, is a plan to put regulations in place to:

make sure that companies that are “too big to fail” are accountable for their business practices to be sure that they don’t fail
make sure that companies going forward can never become “too big to fail”
or some combination of these two.

What are your thoughts? Are you angry about the bailouts? Do you see them as necessary or a waste of taxpayer resources? Do you think we need more or less regulation to prevent these circumstances in the future?

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2008 Tax Return, Part I

MITBeta — Mon, 23 Mar 2009 02:18:05 +0000

photo figure credit: borman818

I have just about wrapped up our tax return for 2008 and it looks like we’re getting a pretty sizable refund. This poses two questions: What should we do with the refund?

and

Should we change our withholding to avoid getting such a large return next year?

This post is about the first question, and the second will be covered in Part II.

ScrapperMom and I talked for a while about what to do with the refund. Given the current economic climate and the fact that our emergency fund only has about 3 months worth of expenses in it, we considered simply saving the money. It would add about another 1.5 months to our e-fund. This would give us some extra security, but would not help us to reduce our monthly obligations at all.

The other option is to use the refund to pay down some of our other debts. We’ve got a mortgage, car loan, and low interest, fixed rate credit card. Throwing it at the mortgage would be decidedly unsatisfying for two reasons: one is that it represents about 1.5% of our balance, so I’m not sure it would even qualify as a dent. The other is that it locks up our cash, at least until we sell our house — and we have no short term plans to do that. The credit card debt is the result of a renovation that we made to our rental property, and represents a deductible business expense. The tax refund will pay about 2/3 of this debt. With the low interest rate and the tax-deductibility making the effective rate even lower, low monthly payments, and the inability of this payment to provide relief from our monthly minimum obligation, this is also an unattractive option.

The last option is the car loan, which has about the same balance as the credit card. This loan is through our credit union. We bought our van a few years back and stretched a bit for it. We did save a lot of money by buying lightly used, but we took a 6 year loan on it to keep the payments manageable. Since then we have been pre-paying by about 10% each payment, as well as throwing some extra money at it here and there. So far we have shaved over a year off the loan. An interesting thing about this loan that I have not noticed on other loans is that as we pre-pay, our next payment due date keeps getting pushed out. So according to our latest statement, our next payment isn’t due until next year. The nice thing about this is that if we find ourselves in a position where we can’t make the minimum payment on this loan, we can skip it for quite a while by pre-paying now. The same is not true for the mortgage or credit card: if we pre-pay, we’re still obligated to make the minimum payment EVERY month.

ScrapperMom and I have decided, therefore, that the best option for the bulk of our refund is to pay down our car loan. This will cut another year off of our loan, reduce the number of payments left at our present paydown rate to just over 6, and still preserve the security of knowing that, if we lose some or all of our income, the obligation to pay this loan is pushed back far enough to help keep us solvent while we find ways to replace that lost income.

What do you think? Is this the best of both worlds? Are you getting a refund? How will you spend or save your refund? Share your thoughts in the comments section below!

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A Fabulous Tax Time Deal on Groceries

MITBeta — Tue, 17 Mar 2009 02:36:57 +0000

photo figure credit: ScrapperMom

This past Sunday morning ScrapperMom was perusing the grocery store circular when this offer caught her eye (my emphasis added):

Choose your tax refund reward. Customers can purchase gift cards with their Shaw’s Rewards Card (for carded markets) at their local store’s Customer Service center. No tax form or refund check is necessary. Customers may purchase a grocery store gift card at $250 or $300. Each gift card will be loaded with an additional $20 for a $250 purchase or $30 for a $300 purchase. There is no limit for the amount of cards a customer can purchase. The additional bonus amount cannot be used for the purchase of alcohol, fuel, tobacco, lottery tickets, dairy products, prescription drugs or additional gift cards. Offer is available March 13, 2009 through April 15, 2009.

Shaw’s is one of our local grocery stores (same company as Star Market), and it ran a similar 10% bonus during last year’s Economic Stimulus check mailings. Apparently the response from customers and reward for Shaw’s was so great that they’ve decided to run this offer during tax season this year as well. The limit before was whatever the size of your stimulus check was, and we took full advantage. But I’m really psyched that there’s no limit on this offer.

Clearly this is a great deal no matter how you slice it. The offer is for a store that we visit at least once per week, where we spend at least $250 per month, and that sells necessities, namely food. The only real question is how much advantage we can take. There are a few factors that limit how many of these cards we should buy:

How much cash we have available.
What the cost is to tie up this cash for whatever time it will take to use up all of the cards that we buy.
Whether this is really a no limit offer.

Because we don’t live paycheck to paycheck, we actually have somewhere between $10,000 and $15,000 available on hand in cash that we could use for this “investment” that is not technically part of our emergency fund. It turns out that we also gave the government too big of an interest free loan last year, so we’re going to be getting a healthy refund which we can also roll into purchasing discount gift cards.

I ran some quick math to see how soon I would have to spend the gift card before we would have just been better off sticking the money in a CD. I figured out that if I could earn 3.5%, tax free, on a $300 investment today, it would take 34 months to earn 10% on the initial investment. That means that as long as I can spend the gift card within the next 3 years (because with taxes it will take longer than 34 months to accrue 10%) I will be getting a better return by buying the gift card.

I asked myself if there were any down sides to this offer as well. One that pops to mind is that we’ll be tying up lots of cash that we may need for other things. The nice thing about these gift cards, however, is that we can easily trade them for cash, and if things ever get that bad, we’ll still have to eat, so having grocery cards is not such a bad thing. Another thing we’ll need to be careful about is where and how we store the cards. Having the equivalent of thousands of dollars in cash laying around has risks: fire, theft, loss, etc. We’ll have to figure out a way to deal with that. Lastly, what if the store goes out of business? This is certainly something about which to be concerned, but this is a chain that has been around as long as I can remember, stores don’t usually just all of a sudden stop honoring gift cards, and as above we should be able to liquidate them quickly if it comes to that.

We still haven’t decided exactly how many of these cards we’ll buy in total. We spent about $5,400 on groceries in 2008, so we can buy a lot of these cards and still come out ahead. Yesterday ScrapperMom went to the Customer Service desk to buy 6 of them and was told that you can only buy 5 per customer per day. So there is, apparently, a limit, but I still don’t think it should affect how many we want to buy (though if it did I would argue that the ad does say “no limit”).

What do you think? Should we stock up on $10,000 worth of these cards (or the closest multiple of $300) and get an instant $1,000 back? Is this a deal that interests you? How many will you buy or would you buy if you could? Are there downsides or risks that we’ve yet to consider? Leave a comment below!