Are Rewards Cards Really that Rewarding?


I have a huge amount of respect for Dave Ramsey.  I discovered him soon after I moved to Tennessee in 1998.  At that time we had just bought a new Jeep Cherokee and were making car payments.  I also had a couple of credit cards that I was paying off every month, which seemed to be working for me, until it wasn’t.

After I started listening to Dave Ramsey, we started paying off the car faster, paying it off in about three and a half years instead of the original six we were signed up for.   We then refinanced the mortgage from a  30-year to a 15-year, taking advantage of the lower interest rates, then paid if off in about 12 years, saving probably a hundred thousand dollars in interest. Thanks to Dave, we were on great financial footing by the time we reached our mid-thirties, despite starting off “normal,” as Dave would say, which meant that we were in debt with a car payment, spending money as fast as it came in.  (At least we never had credit card debt since we were paying the cards off each month.)

Pick up a copy of Dave’s book if you’re perpetually in debt beyond your mortgage and get started on your debt snowball – it can change your life:

I still held onto the credit cards since they did not seem to be hurting anything and we were getting a little cash back.  One day, however, I opened up a bill and discovered that I had been charged a bunch of interest, basically wiping out the cash back I was getting.  What had happened was that I had written a check for the full amount, something like $1759.65, but had mis-written the line where you write out the amount of the check.  The  box said $1759.65, but the line said “One-thousand fifty-nine and 65/100s.”  I had left out the seven hundred.

I’m sure that the people who received the check noticed the mistake, but didn’t call and tell me, letting me think that I had paid off the balance in full.  The credit card company (Bank of America) decided instead to cash the check for the lesser amount, then charge me for interest for the first month and the next month since I had not paid the amount in full.   Because I had particularly a large balance the next month, the interest came out to several hundred dollars!   At best I was getting a hundred dollars or so a year in rewards.  Needless to say, I was fairly upset.  When the company refused to refund the interest, I cancelled the card, sending in a check large enough to make sure I paid off the balance so that I wouldn’t continue to be hit with interest.

At that point I swore off credit cards, instead using only cash and a debit card for about eight years as Dave Ramsey advised.   Rewards cards were nice for the free stuff, but they’re ready to zing you if you make one mistake.  There is also the danger of purposely letting yourself carry a balance during an emergency event in your life.  Once you fall into that hole, while you think you’ll just pay everything off and be done with debt, things usually just keep happening to make you fall back in.  It is difficult to climb your way out.

   

A couple of years ago I did get a credit card again, but this time it is on automatic payment from my brokerage account such that they automatically pay it off in full each month.  So far this has mainly worked out, although I am still somewhat leery.  The only thing I don’t like about it is that they wait until the last-minute to pay off the card, allowing the balance to build up as I add charges for the next month, such that the balance can grow with time and even start to threaten to bump the credit limit if I’ve had some big charges.  I go in every so often and make a special payment to send it back to $0 to keep this from happening.

A few days ago, a gentleman from US News and World Report contacted me, saying that they had done a survey and written a piece on rewards cards, including how to select the best ones and how to manage these cards and was wondering if I wanted to include a link to it in my blog.  At first I was a bit leery to reference the report since I certainly don’t want to promote everyone rushing out and loading up on rewards cards since they really can bite you, but I was impressed once I read the piece in that they constantly made the reminder that you really need to pay the balance each month if you want to be “rewarded.”  If you carry a balance, the value of any rewards will quickly be swallowed up by interest payments.  It also does give some good information on how to select the right rewards card for you if you are so inclined.

The U.S. News & World Report’s 2017 rewards credit card survey and guide can be viewed here:

So if you do decide to get a rewards credit card, here are some things that I would suggest to help protect yourself from ending up in a bad place a few years later:

  1.  Make sure you have an emergency fund, meaning 3-6 month’s worth of expenses, saved away in cash to handle the little emergencies that come up.  Having a credit card for an emergency is a bad plan since that is how people often start to get into serious debt.  Instead, have the cash you need to cover things that come up before the next payday.
  2. Have as fool-proof a way as possible to make sure the bill is paid on time each month. Credit card companies purposely make you wait until after a certain day in the month before you can pay the minimum payment to increase the chances that you’ll pay late.  Watch out for their games that are designed to get you paying interest and penalties.  Find as good a method as you can to make sure that bill gets paid on-time (or early) each month.  Some people send in a check or do a transfer as soon as they make a purchase.  Using automated payment seems to be working for me.  
  3. Don’t ever let the teaser rates cause you to decide to carry a balance.  If you are late with a payment for any reason, and sometimes if you are late in paying another card or even your mortgage payment, they can jack your rates up to 30% or more.  Really, they can jack you rate up if Wednesday falls in the middle of the week or if it is hot in the summer.  They have all of the power in that credit card agreement you probably didn’t scan before you signed up.  You can quickly go from being able to easily handle the payments to just scraping by if the interest rates are raised.  There is no reason to carry a balance on a credit card, ever.
  4. Still use cash to help control your spending.   For most people, spending with credit is painless, where paying with cash hurts.  Think about going to Wal-Mart and shelling out ten crisp $20 bills to pay for a cart full of stuff, versus handing over a card and signing a slip.  One really makes you think about the money you’re spending, the other barely registers.  This means that people spend more with plastic than they will with cash, even when using a debit card.  That is why the fast food chains are now taking credit cards even though they pay a fee when they do.  The amount extra that people spend when using plastic more than makes up for the fees.  While your impulse may be to put everything on the card to maximize your rewards, it is still a good idea to use cash for things like dinners out where you may be tempted to blow your budget if you don’t feel a little pain when the bill comes.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Will the Republican Party Be Changed this Time?


img_0131

I was eight years-old when Ronald Reagan was first elected.  Like Donald Trump, he was an outsider, elected after years of a dismal economy under a President who tried Liberal policy after Liberal policy to fix it, only making.  Like with Donald Trump’s predecessor, many of the actions Reagan’s predecessor was taking were probably keeping the economy in the doldrums.

The effect of President Reagan’s presidency on my generation was enormous.  We saw that the Conservative, free-market principles, really worked.  If you cut taxes, the economy would surge as people worked more.  There were jobs everywhere because light regulations allowed businesses to do productive things instead of fill out reams of paperwork and businesses actually wanted to be located in the US.  We learned that if you gave people the freedom to take care of themselves, they mostly would.

Then came George H.W. Bush.  America returned from an outsider to a party insider.  We then started seeing typical Republican actions – talking about free markets and lower regulations, but not really fighting to reduce regulations and government influence in the markets.  He even reluctantly went along with the Democratic Congress and raised taxes after his famous, “Read my lips” statement in the debate.

Under President Clinton we of course saw taxes raised a great deal and all sorts of new regulations come into play.  We saw something interesting under Clinton, however, largely due to the push from Newt Gingrich and the Republican Congress elected under the Contract with America pledge.  We saw a requirement that those on welfare, who were able, go back to work.  I remember hearing stories of women who had gone into the workforce after knowing only welfare saying that they had dignity for the first time in their lives.  The other thing that was striking was something I didn’t realize until Bill Clinton mentioned it in a speech he was giving at the 2008 Democratic Convention for Barack Obama – that everyone was working in the late 1990s, and the economy was on fire.  I came to realize that a side effect of getting everyone to work is that you have a lot more things being produced, meaning there is more wealth to go around.

With the second George Bush, again we saw the typical Republican talk about free-enterprise but no a lot of fight for free markets.  We even saw regulation of the light bulb – phasing out twenty-five cent incandescent bulbs for $3 CFLs and $10 LEDs.  When the mortgage meltdown came in the end of 2008, rather than seeing the government simply support the money markets and protecting depositors as they could have done, we saw the government bailing out the large banks and insurance companies.  The people who made the bad mistakes kept their companies and their jobs, while the taxpayer was left holding the bag.  This was clearly crony capitalism, not free-enterprise.

Now, like Reagan, we have an outsider.  In fact, Donald Trump is even more of an outsider than Reagan since Ronald Reagan was at least Governor of California before he became President of the United States.  Trump has never held an ected office or even been an officer in the military – a first for America.  Donald Trump talks about using free enterprise principles – low taxes, reducing regulation, reducing the cost to repatriate money from overseas — to help those in America who have been exploited by the Democrats and ignored by the Republicans.  Hopefully he will do as he promises and the Republicans in the House and Senate won’t block him.  And, hopefully,  Republicans will see the support he has gotten despite not being the most elegant speaker or tactful politician and realize that really using free-enterprise principles is the path to a strong economy.  And that is the path to keeping the Presidency.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Teaching Personal Finance in School


dontschool

A dyed red-haired rapper criticizes the public education system in a viral YouTube video, “Don’t Stay in School“.  Looking back at my education, I remember learning the capitals of the states for no apparent reason.  Other than watching Jeopardy, I’ve never used this information.  Now my children are also learning the capitols, again for no reason.  With search engines this information is even more useless than when I was in school.

If we replace the teaching of useless and pointless things like this, or maybe the learning of the three types of rocks (igneous, sedimentary, and metamorphic), we would have time to teach children a lot of really important things for their lives like personal finance.  Much of the information about personal finance that keeps people from making bad decisions was not taught to their parents, which is one reason we see so many people buying new cars every three years or running up debt on 19% interest credit cards.  Here are some lessons that should be taught in schools instead of, say, the types of clouds.

The rule of 72.  If you take 72 and divide by an interest rate, that will tell you how long it will take an investment to double at that rate.  For example, if you put your money into a CD paying 4% interest, you will double your money about every 72/4 = 15.5 years.  Double that rate to 8% by investing in bonds and you’ll double your money about every 72/8 = nine years.  You get a better return because you’re taking on a little more risk since the bond issuer could default.  Go into stocks, which have a variable return, but one that averages around 12% annualized if you hold them for at least 20 years and you will double your money every six years or so.  If you invest your money for 30 years, $1000 will turn into $4,000 in bank CDs, $8,000 in bonds, and $32,000 in stocks.  That’s something worth learning.

The rule of 72 works the other way as well.  If you are taking out a home mortgage at 8%, you will pay in interest about every nine years about the amount of principle that is not paid off during that time. Because you pay back very little of the principle during the first two-thirds of a mortgage, if you have a $200,000 30-year mortgage, you’ll pay about $160,000 in interest during the first nine years and still owe about $180,000 on the loan, as if your payments just vanished.  Over the life of the loan, you’ll pay about $530,000 for that $200,000 mortgage.  If you use the rule of 72 and assume you’ll owe about the full loan value for the first 18 years and then a little over half of the mortgage value for the last twelve years or so, you would estimate paying $200,000 for the first and second nine-year period, then a little of $100,000 for the last 12 year period, which is pretty close to the $530,000 paid.  If you get a 15-year loan instead, you could estimate about $200,000 for the first nine years and then a bit more than $100,000 for the next six years.  The true amount you’d pay would be about $344,000 – fairly close to your estimate of a bit more than $300,000.

Note if you keep a credit card balance and are paying 15% interest, the rule of 72 tells you that you’ll be paying the full value of the balance in interest every five years.  If you keep a $10,000 balance on your cards, you’ll be paying $10,000 every five years or about $2,000 per year in interest.  That is a paycheck or two for many people, meaning you’re working a month of your life per year just to pay interest on your credit cards.  Maybe if people learned this in school, they would be more leery of whipping out the plastic for a vacation.

The power of extra payments.  And speaking of home mortgages, here’s a little trick that is not taught in school that would be very valuable.  If you look at your mortgage pay-off plan, you can determine how many payments you could remove from the loan by making an extra payment.  For example, in year one of a 30-year loan on $200,000 at 4% interest, you’ll be paying about $3,500 in principle and $8,000 in interest.  Monthly this is about $300 in principle and $670 in interest each month, for a payment of about $970 per month.  If you paid an extra $300 in a month (the amount of the principle paid each month), you would be eliminating one mortgage payment, saving yourself $970.  Pay an extra payment, and you’re eliminating about three payments, or $3,000.  If you make an extra payment during the last year of the loan, you’d only be saving about $60 since at that point your payments are going mainly to principle.  By looking at the amount of principle you are paying off each month, you can see how powerful making extra payments is.  Early in the loan (and the higher the interest rate you’re paying), extra payments are very powerful and well worth the money.  Later on, not so much.  Maybe if people knew this, they would try to hit the loans hard during the first several years and save hundreds of thousands of dollars.  People often get serious about paying off their loan at the end, but by that point, most of the damage has been done any you might be better off to invest the money.

Small amounts add up.  Let’s say you run by Starbucks every working morning and drop $6 on a sugary coffee drink.  If instead you made a cup of coffee at home for essentially free (compared to $6 per cup) and invested the money, you would be investing about $150 per month or $1,800 per year.  Invested in mutual funds, making 10% annualized over 30 years, you’ll have about $330,000.  That is enough to send a child or two (or three) to college.  So, just by changing your morning routine and making expensive coffee drinks an occasional luxury rather than a daily routine, you can pay for college.  Imagine how different things would be if almost everyone did this.

Got an investing question? Please send it to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.