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Archives for May 2015

The Real Reason Poor People Can’t Save

By Frugaling 29 Comments

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The Real Reason Poor People Can’t Save. People in poverty will continue to sit back and watch as others’ lucrative capital increase until something changes.  #savingmoney #savemoney

The Great Recession was “solved” by a number of rapid fire actions by Congress and the Executive Branch. They came together to fund stimulus bills and negotiate with massive banks. They found a way to save most people’s retirements, despite the corruption and chicanery of companies that caused the mess.

We were in a horrible bind. Most people’s entire wealth was wrapped up in real estate and investments, which were tanking. The bubble had popped. Previously, people with little credit and, sometimes, no down payments were able to buy homes. It inflated everything, as people were buying more than they could ever afford.

After the collapse, a lengthy program called for zero-interest borrowing and quantitative easing. The Federal Reserve (U.S. central bank) doled out massive amounts of money to banks at zero and near-zero interest. Effectively, this would enable banks to give borrowers easier access to mortgages, small business loans, and more. The hope was that banks would generously loan out the money.

Then came quantitative easing. Because the interest rates were already at zero, the Federal Reserve (central bank) couldn’t prop up the banks this way any more. They made a last ditch effort and started buying bonds (or, debt) of financial institutions (i.e., Bank of America, Chase, and Wells Fargo).

Every time there was speculation that the discount window to interest-free loans or quantitative easing would come to an end, the stock market would hiccup. Investments would nose dive and a panicked market pleaded with Federal Reserve chairs to hold back – the economy was still “soft.”

Economic stimulation of this sort allowed people to spend more, too. By acquiring low-interest debt, people could buy more, bigger, and better. Everything seemed more affordable when loans were artificially depressed (heck, that’s why I bought a car I couldn’t afford).

Screenshot 2015-05-28 17.29.08People with money bought and bought. And they invested like mad. Those who invested post-Great Recession were rewarded handsomely. From the bottom of the crash to now, the Dow Jones Industrial Average (DJIA) has returned approximately 173%. In other words, investors who got in mid-2009 and 2010 have nearly doubled their money!

One of the saving graces of today’s economy is that inflation has held constant. Throughout 2014, the inflation rate ranged from 0.8 to 2.1% every month. And inflation is an important variable in this conversation, because it’s essentially a measure of affordability. When inflation increases, the consumer price of all goods increases. Everything from bread to cars to homes is affected by this measure.

Thus, in 2014 the average inflation rate was 1.77%. Not too shabby! When you compare that to deflationary or atmospheric inflation, we are in a pleasant sweet spot. The price of goods are increasing at a controlled, moderate rate.

For most of us, the stimulus has worked. My investments are doing better than ever and I’m seeing some sizable gains. The future of my money looks brighter.

Additionally, I have fewer “savings” than ever, and that’s a good thing because I have more invested than ever. I followed the financial advice of the world and realized that cash is a drag. I don’t mean that tongue-in-cheek. Cash suffocates returns, because checking and savings accounts pay next to nothing (even if you choose an online bank). To let cash sit in those accounts means that we accept a pittance and suffer from inflation rates.

Let me put this together. We have benefited from the Federal Reserve’s decision to provide easy capital to banks, which then presumably went to consumers. Similarly, quantitative easing has further supported banks recovery and ability to loan. Investments are spectacular right now, too. But this combination of events has wreaked havoc on the most desperate among us.

The advice for someone like me (who has some – albeit small – amounts of money) is to invest. Don’t suffer the cash drag. Unfortunately, that financial advice doesn’t apply to the poorest among us. Those with irregular and/or unknown paychecks by amount and/or interval can’t invest the money. By investing their funds, they could put themselves at risk because they don’t have enough liquidity. Additionally, they might not be able to invest because they barely have enough at the end of every month to scrape by.

That’s where the advice between wealthy and poor individuals diverges. Our financial commentators tell wealthy people to invest, and the impoverished to save. If only the poor would save more, their lives might be better. Except, if you’ve been following along, “saving money” doesn’t mean protecting money. The average interest rate of savings accounts was 0.06% in 2014. At Bank of America, Chase, PNC Bank, and Wells Fargo – all the brick and mortar banks that those in poverty are more likely to use – the interest rate is a dormant 0.01%.

Let’s say you’re Joe Poverty, trying to save. Mr. Poverty has turned on CNBC, Fox News, and CNN to listen to all the financial advice he can get his hands on. He’s motivated and leans in. He wants to live better, eat healthier, and save for the future. He wants to pay his daughter’s student loans, and he feels guilty that he couldn’t support her. His first step is to open a checking and savings account at a local, popular bank. He needs to be able to pay bills and receive paychecks, but he also wants to begin saving. The checking and savings accounts will pay him 0% and 0.01%, respectively.

Now, here’s where things get really sad. Joe Poverty is going to stay in poverty using this method. Unless he can drastically increase his income and build a huge safety net, he won’t have enough to invest each month. Because he’ll be precluded from investing, his only hope is to save. So he does. And he does. And he does. He’s motivated, remember? He cares about his daughter and wants to succeed.

He drops money here and there into the savings account. But each month that money is worth less and less. Despite his attempts to save at 0.01%, the inflation rate hovers around 1.77%. Effectively, he loses 1.76% every month in spending power. The savings are hibernating, as the world around those dollars is ablaze. The market is benefiting nearly every day from free-flowing capital, but the poorest have had to sit by and watch it happen. Every month, having less.

At some point, Joe Poverty feels like “he’s failing.” He turns on the channels, rereads books, and looks at his savings account. Despite his efforts, he can’t afford to pay off his daughter’s loans. Her loans accelerate at 6.8% interest, as his savings lingers.

This economy disincentivized savings. It trumped up how easy it is to spend and invest, while ignoring those most in need. Savings rates used to 3%, 4%, and 5% only a few years ago. They could easily beat the inflation rate, and incentivize savings. People really added to their wealth when they saved.

Even worse, by disincentivizing savings, those who might need positive reinforcement didn’t receive it. In fact, they were punished for saving. They had less and less each month. The savings were an illusion, and the purposelessness was degrading. Who wants to continue trying to save and add to their income – following the advice of wizened “gurus” – only to find out they’re failing?

The Great Recession hurt nearly everyone. The actions that the government took are debatable. The necessity of those actions are questionable. But the result is undeniable. People have been encouraged to spend free cash and invest for the long term. Neither are bad options in a low-rate environment. Sickeningly, that advice doesn’t apply to everyone.

People in poverty will continue to sit back and watch as others’ lucrative capital increase until something changes. We need the Federal Reserve and the government to incentivize savings like mad. We need an economy and country that’s prosperous for a greater whole, not a select few. The discount window for loans must raise their interest. The quantitative easing must stop. And the world must compromise investment performance for a short while – adjusting to the new rates – to encourage everyone to save.

It’s no longer enough to verbally smack and accost the most destitute without understanding the systemic factors that prevent their success. It’s time we advocate for respect and change these financial practices. Then, and only then, will the advice to “save” make cents.

Filed Under: Save Money, Social Justice Tagged With: Account, Bank, Income, invest, Investments, money, poor, poverty, savings, Social Justice, Wealth

Frugal Articles of the Week

By Frugaling 2 Comments

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Reading Nook Photo

Every week I like to feature a few frugal articles that caught my eyes. Curl up in your favorite reading nook and enjoy. Hopefully these encourage you to live frugal lives!

How to have a great first date when you’re broke or frugal by Martin Dasko
Boy can I relate to this quandary! Martin tackles the challenging topic of dating when you either don’t have enough or are on the frugal path. Either way, it requires changing your dating approach.

Appeal of Savings Bonds Wanes in Ultralow Interest Environment by Ann Carrns
The Federal Reserve has maintained very low rates for borrowing and it’s prevented savings and bonds rates from becoming more attractive. Unfortunately, that has dire consequences for those who might need it most. This article provides a nice review of the current financial offerings.

The radical political implications of spending time outdoors by Chris Mooney
What if I told you the secret to saving money was simply walking out your door? Could it really be that simple? Would you care for the environment, spend less, and save big? Potentially!

How A Year Of Extreme Frugality Changed Us by Mrs. Frugalwoods
In a fun, important review, Mrs. Frugalwoods catalogues her adventures in frugality. She cut back on everything and found a way to enjoy it! Along with saving money here and there, Mrs. FW made goals and planned for a more frugal future. That’s a wicked combination.

Filed Under: Save Money Tagged With: Accounts, adventure, articles, dating, Frugal, frugality, outdoors, Savings Bonds, week

Don’t Buy This Ad

By Frugaling 8 Comments

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Photo Christopher Michel/Flickr

Flip an axis, make millions

Vietnam, hippies, and the civil rights movement all fomented into a powerful decade: the 60s. Flowery colors exalted a message of happiness and love over war. The Baby Boomer generation entered the workforce in droves.

Profits were to be made, and companies were eager to snatch even small portions of this new market. The continued growth of suburbs spawned a movement towards independence via cars. At this time of great economic and scientific potential, one auto company, VW (Volkswagen), created one of the most iconic advertisements ever made.

Printed in black, bold lettering was the word, “Lemon.” And above the text was a classic VW Beetle. Lemons were unreliable cars, and the VW ad suggested that the company carefully screened out those cars. Only perfection would be accepted; or, as they stated, “We pluck the lemons; you get the plums.”

Turning a word on its axis and daring readers to read on was risky. The advertisement had the potential to make consumers think, “VW Beetle is a lemon.” If they stayed for the explanation, the ad became clear; subtly, they were suggesting that other companies don’t care about reliability as much. By using “lemon,” they capitalized and succeeded in selling significantly more cars. It worked.

How “don’t buy” becomes “buy more”

In 2012, another company took a big risk: Patagonia. The corporate and marketing teams noted that there was a growing movement towards sustainability. Encompassed in this trend were simple living aficionados, minimalists, and value-oriented consumers. These careful consumers wanted great quality in responsible packages.

This Patagonia’s niche for quite some time. They advertised fair-trade, organic, and environmentally friendly products. Sales were growing, but then they decided to bet the farm on one massive ad in The New York Times. With bombastic, bold text, they wrote, “Don’t buy this jacket.” Behind the text was a Patagonia jacket.

Underneath the ad, the company focused on five key words: reduce, repair, reuse, recycle, and reimagine. Every word was paired with a communal pronoun of “We.” It took everyone to reduce the carbon footprint, make the garments last, and find good homes for them after use. Patagonia seemed to be advertising that consumers take good care of the goods, and consider repairing them before throwing them away. All solid virtues.

These value-laden terms were inspirational to those who had suffered through The Great Recession. Because the company struck a chord with the current market demands, the company profited royally. After that advertising campaign, the company saw double-digit growth.

Ironically, that’s unsustainable. Double-digit growth, compounded repeatedly, would make the company larger than Apple in a few years. And never mind the horrible environmental costs that would be necessary to produce these garments.

Your values can become a manipulation tool

Nefarious. That’s the word that comes to mind when companies manipulate us through our values. The trick is subtle, and if you blink you’ll miss it.

For the aspirational types, there’s Gucci, Coach, and Louis Vuitton. For the trend setters, there’s H&M and Express. For the recreational, there’s The North Face, Columbia, and even Patagonia. Each brand is shaped by its consumers, but also shapes their consumers – the effect is bidirectional. In other words, we affect brands and they affect us.

If our values center on sustainability, kindness to the Earth, and repairing over ridding, a chicanery of sorts can be used against us. Without the brand awareness and heavy advertising, we could go to Goodwill or any other secondhand store for options. The clothing would be in fine shape or could even be repaired to return to like-new status. But we don’t, and there’s a reason why.

Corporations are powerful. Even the kindest ones can sway us from choosing another, more affordable option because they espouse “our” values. We like when we see our values portrayed in mission statements. We like that connection and feeling of being a part of something larger than ourselves. The brands fill that void. They provide a home for values.

So, should I buy that shirt?

Patagonia plainly states “Don’t buy this shirt.” Unfortunately, to those that connect with anti-consumption, anti-materialism, and minimalism, it’s hard not to foam at the mouth with lust for this company’s ad.

I love it! That’s the ad for me. It speaks to my heart. Despite the clear declaration to avoid purchasing their clothing, I can’t help but be intrigued and want to support them.

Subtly, the company is able to supplant a more frugal choice when the time comes to buy something. Goodwill doesn’t have the marketing budget of Patagonia, so the first reaction isn’t to shop there. But it’s more sustainable, frugal, and creates jobs for some of the most disenfranchised in the community. That’s a win-win-win, and it doesn’t cost us $80, $90, or $100.

To be clear, there’s nothing wrong with supporting companies that share your values. But know that this is a marketing trick, and when you choose VW or Patagonia after seeing that advertisement, it’s worked. They got you.

Filed Under: Social Justice Tagged With: ads, advertising, Anticonsumption, Clothing, Consumption, Marketing, Materialism, Patagonia

YOLO For 80 Years!

By Frugaling 3 Comments

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Electric Daisy Carnival EDC

There’s a conundrum that we all face as humans: we are born and must die. For many of us, that’s the most frightening thing imaginable. It stops us in our tracks, and we can’t cogently plan for the future. We are literally scared into avoiding death because death is scary. The irony!

The cyclical loop of fear allows our minds to run wild and appreciate only these few moments right now. We don’t know how many more we’ll have. But unfortunately, that tends to come with some significant financial consequences. The attitude can quickly become: charge it now and worry later; heck, you might die before you have to pay it back.

Because death is an unknown – we don’t know until it’s too late – many try to appreciate only the present moment. The Millennial generation, with the help of popular musician, Drake, have a helpful acronym that’s all about living in the now: YOLO. The vowel-laden term stands for, You Only Live Once. In that spirit, we are tasked with spending, eating, and drinking to enjoy the moments we do have. The hope is that when death comes knockin’, we lived our lives to the fullest. Nobody wants to die without living it up.

YOLO has inspired countless teens and 20-somethings to travel the world, and eschew traditional day jobs. And who can blame them? Countless generations before them searched and scoured the world for self-discovery, too! Life seems short, might as well enjoy it, right?

What seems absent from these aspirational lives and depictions is the reality that for most people, life expectancy is about 80 years. Most of my grandparents lived well into their 80s and 90s. That means that while we are trying to live life to the fullest by spending our way into blissful oblivion, we seem to be discounting the fact that humans tend to live long lives. Really LONG lives.

A lot can be done in 80 years, and it needn’t all occur at 18, 19, and 20. In fact, it’s rather depressing thinking the only time to travel and party like a rockstar is at such a young age. Life is full of adventure and opportunity – it doesn’t end at 30, 40, or 50.

YOLO isn’t inherently a bad term, but it’s important to remember that we have 80 years to do it. And if we have 80 years to YOLO all over the place, shouldn’t we plan beyond this one moment? We compete with unknown variables of death, desire, and saving for a long future. Evolutionarily, we have come to appreciate the present moment to procreate and build foundations for progeny.

While these archaic evolutionary bases of behavior affect our behaviors today, our society has changed significantly. We no longer deal with daily threats. Most of us aren’t running from lions, tigers, and bears – oh my!

Regardless of these competing demands – one for YOLOing and the other for living well into old age – there’s an emotion we all seek: spontaneity. Sustainable, life-long adventure requires healthy budgeting and savings. To take that random road trip, we must save and stop spending on credit. This choice necessitates a reinvention of spending habits. YOLO cannot become yet another excuse to party lavishly and become a gluttonous individual. Millennials and people everywhere have an opportunity to better themselves and the world around them. But they can’t do it while swimming in toxic debt.

Filed Under: Save Money Tagged With: Aging, death, debt, Frugal, Life, life expectancy, Millennials, saving, YOLO, Youth

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