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I’m Desperate For A Financial Makeover

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Looking at a map

A year ago I read Burton Malkiel’s seminal text on investing, A Random Walk Down Wall Street, and concluded that it made sense to invest in exchange-traded funds (ETFs). He imparted a challenging message: people are inherently poor stock pickers, but we can be better through diversification and buy-and-hold strategies. ETFs would be a quick, affordable, engaging way to diversify, too.

Despite the logic, my brain wouldn’t relent — I wanted to invest in an individual stock. Like a horse being kicked and yanked to the right but continuing left, I decided, against my better judgment, to place an investment in a risky, small cap stock. I’d been following it for quite some time, and made a small prior investment. I wanted to put more in, though.

Only two weeks after doing so, I lost $400. How could this happen? Why did I fall for this logical fallacy and bias? I was berating my brain for the errors. The company looked poised for a rapid expansion. I had drunk the Kool-Aid.

I knew better than to make this recent individual investment, and did it anyways. Humbled, I was the definition of many of the investing problems and fallacies individuals have a habit of engaging in.

Like my flawed investment, I realized much of my financial strategies had become stale. Having money to invest was a new feeling, and the do-it-yourself route wasn’t working. I needed to refresh my checking, savings, and investment streams. And I wanted to feel secure in my financial future. Here’s how I analyzed and reviewed it all.

1. Analyze current accounts

Almost all banking goes through Ally Bank. With 1% and 0.10% on savings and checking accounts, respectively, Ally is an industry leader. I’ve been with them for years, and appreciate the domestic ATM-fee reimbursements and free checks.

After paychecks are deposited into the account, about 40-50% of the money goes to regular, immediate bills. Then, another large portion gets spent on food and regular expenses throughout the month. This variable amount is something I continue to work on and struggle with. Reducing food budgets is something I’ve written about before, and will likely talk about again. It’s vital for a frugal life. But after all is said and done, there’s only about $300-400 in leftover funds.

Right now, I’ve been putting the surplus into a savings account. Additionally, I’ve been investing in individual stocks, but with mixed results. At this point, and with such little money at the end of every month, I need to be smart about what I do with any extra funds. These funds will be used to travel for job interviews, licensure, work clothes, moving expenses, and other emergencies. It’s important to have a fair amount on hand for all these moments.

After looking at the accounts, I can see that I have two piles: a checking and savings. There aren’t specific accounts for individual goals. Money is one big slush fund of fun.

Another major unaddressed part is regular investing. As mentioned it’s a weakness within my current financial management.

International travel has been also concern financially; not necessarily the cost, as I use bonus miles for most travel, but the currency exchanges. When I traveled to Colombia about a year ago, I needed local currency and had no method to get cash without fees. It cost me quite a bit to talk to a money exchange business and have them take my USD for Colombian Pesos.

2. Consider other accounts, options

Based on this analysis, I will stick with Ally Bank as my primary checking and savings method. Direct deposits will continue to flow to this checking account first. The goal will be to use this to manage all regular bills and upcoming expenses. Ally has really earned my respect over the years, and I’m happy to stay with them.

Staying with Ally doesn’t mean I’ll be staying with the same strategy, though. I’ll be opening up a new savings account and calling it, “Vocational Expenses.” This will be specific for interview, moving, and other work-related expenses incurred over the next three years. Now, how much should go in here and how fast? I will likely need $4000-5000 over the next few years, but this is a rough estimate. To meet this target, I’ll deposit $250 per month automatically out of every paycheck (Ally checking account) for the next 16 months on the first of the month.

International travel currency fees have been abysmal. To remedy this problem, I’ll be opening up a Charles Schwab Investor Checking account and solely using my Capital One Quicksilver credit card. The interest-earning checking account provides most of the features that an Ally Bank affords, but includes ATM-fee reimbursements for international ATMs and no foreign transaction fees for purchases out of country. The account is widely regarded as the best travel debit card in existence. And unlike Ally’s checking debit card, Schwab’s debit card has a chip and pin. In preparation for any travel, I will place a budgeted travel amount into the Investor Checking account, but leave it at low levels, as there’s no minimum balance necessary. Moreover, I’ll use the Capital One Visa for all international transactions, as it has no foreign transaction fees.

The last revised strategy will be a regular, monthly deposit into a taxable Wealthfront account of $100 on the first of the month. Wealthfront provides low-cost (and free for those under $15,000 invested) asset management, and automates the entire process. They choose real estate, emerging markets, and domestic stocks. They reinvest dividends and provide timely updates.

Now, I don’t need to worry about rebalancing my portfolio or looking for low-load or low-fee funds. I’m exceptionally happy with their service and professionalism. Because I might need the funds sooner than retirement, I’ll be placing them in a taxable, brokerage account for now. Eventually, when I have more cash flow and income, I will place more in my Roth IRA to invest without incurring additional taxes.

3. Review decisions and new strategy

With any financial management plan, there are going to be hiccups. When you make as little as me, automating savings and investing helps, but can also hinder my plans. Sometimes, I don’t have enough money one month and can’t make the savings necessary. At the same point, the plan motivates me to earn and save more. Maybe it’ll even encourage me to save on food!

As I analyzed and reviewed my current actions and future plans, I reflected on interest rates and banking business. Today, banks are not in the business of encouraging you to save. They nickel and dime customers — especially brick and mortar banks — for every little thing. Checks? That’ll cost you. Overdraft fees? You bet. Minimum balance not met? Say hello to my lil’ fee.

Banks earn more when you spend. They profit when you’re in peril; a tragic irony that places their interests (pun intended) above yours. From car loans to mortgages to credit debt, banks increase their margins by marketing these products to their customers.

To save requires great care, forethought, and hours of hard work. To spend takes the swipe of your card.

Reviewing and updating your financial plan is one of the most important actions you can do. If anything, it helps you understand your financial fitness and maximize interest earnings. And maybe still, it challenges you to look for new ways to save and scrimp.

Should We Put An End To Mortgages?

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Apartment Complex

“The reason they call it the American Dream is because you have to be asleep to believe it.”
–George Carlin

Mortgage loans have been around for centuries. In the late 1700s, colonists used loans to encourage settlement and economic expansion on federal lands. The leaders of the new world parcelled out land, while encouraging lower classes to settle and build. Ironically, these lands were calculated, bought, and sold as if these new owners always laid claim to the land — denying Native Americans the right of ownership, executing them, and pushing them further and further West.

Nonetheless, the colonies and post-Revolutionary War period in America included basic mortgage loans. Eventually, in the 1900s, these loans grew in popularity and necessity. Homes, condos, and bare land was more expensive and unaffordable for the working classes. Increasingly, people needed financial support to invest in real estate — to find shelter.

Thankfully, banks were available to help everyone out. Without financial institutions and their mortgages, it’s unclear what would’ve happened. In today’s economy and real estate market, most people are unable to afford a house without credit. On the surface, it seems that many Americans would be homeless or forced to forever rent — unable to own. We’re forced to choose mortgages without a substantial alternative.

But let’s hypothesize for a moment. What would happen if mortgages suddenly disappeared? What if they weren’t an option for the impoverished, working classes, or even middle classes of America? What if banks were unable to write even one more loan?

For starters, it’s likely the entire real estate market would collapse. The decimation of domestic markets would domino throughout the world, and cause an economic meltdown. People would be unable to eat, shop, or pay for their continued existence. Landowners would quickly benefit from skyrocketing rental prices, but huge swaths of population would be forced to seek shelter elsewhere. The working classes would need to leave en masse from cities.

The end of mortgages would spell destruction and terror for the financial institutions that profit from their existence. Banks — big and small — would go belly up. Insurance companies would cease to exist. And a slew of related industries would (i.e., from appraisers to real estate agencies to utility companies) struggle to continue. The stock market would follow the steep declines elsewhere as the economic engine would slow to a halt. Money would be stuck. Over time, trillions of dollars would disappear — poof! — from the world markets. They wouldn’t return, either.

My, how powerful a few documents can be! Imagine how one contract prevents global catastrophe — end times. Moreover, that this agreement separates people behind walls — street and shelter.

Mortgage loans make little sense, though. The continued propping up of home prices through financial instruments ensures working classes spend the rest of their lives working. Renting isn’t much better either. With little incentive to build affordable housing for working classes, builders have increasingly constructed luxury condos for upper middle classes and beyond. A recent Yahoo Finance article highlights this shift:

“…a growing number of Americans must spend more than 30 percent of their income on rent — a level that the government considers financially burdensome. Over the past decade, that number has jumped from 14.8 million to 21.3 million, or 49 percent of all renters.

“A surge in apartment construction has done little to help address this problem because in many metro areas, a large proportion of new apartments are concentrated at higher-income levels. The median rent on a newly built apartment was $1,372 a month in 2014, about $500 more a month than what about half of renters could afford without being financially burdened.”

This story exemplifies the catch-22 for working classes: either fork over astronomical, burdensome amounts in rent or “purchase” a home through mortgage loans. Either way, banks and other financial institutions are complicit in the bubble. They own your future. Unless you’re independently wealthy, you lose.

Increased access to capital through mortgage loans encourages people to buy bigger homes than need at prices they can’t afford. Homebuilders respond by building bigger homes and charge more for new developments. Families and households buy more to fill bigger homes, as well. The cycle is vicious, expensive, motivated by consumption, and facilitated by an endless supply of cheap money via the Federal Reserve. It’s the antithesis of minimalism, frugality, and simple living, but we have little choice than to participate.

As the story continues, wholesale gentrification of vulnerable communities can occur. Those with poor credit and/or unable to make down or monthly payments must vacate. To refuse the paradigm means leaving good neighborhoods and schools. Home prices are propped and buoyed by the continued investments of the masses. Banks encourage people to spend more than they can afford on spaces larger than they need. And all I can think is, “Who were these mortgages meant to benefit?”

A mortgage is less a contract with your bank, and more a contract with your employer. To take out a 30-year mortgage loan is a financial conscription to work. It’s a benefit to your employer and guarantee for decades. You can’t stop working, as the consequence would be disastrous. Mortgage loans are the perfect economic engine for the wealthiest of our economy. They can make vast sums from borrowers and sit back to watch their money multiply.

Sadly, we’ve accepted these rules. We’ve cozied up to banks and pledged to pay them back for half our remaining lives.We’ve played the game by repeatedly checking FICO scores. We’ve shown them our good credit (when possible) as examples of personal responsibility, when it says nothing of systemic bias, racism, and uncontrolled job loss.

We are left with few choices. I dream of resisting the system and regularly think about living in a van or tiny home, but I’m afraid my partner and family wouldn’t care for this reality.

As a future psychologist, I’ll be lucky to make $65,000 to $75,000 to start out, which would necessitate participation in the mortgage loan game. And this says nothing of the student loan debt that would be necessary to pay off six years of doctoral education.

No house could be purchased outright unless I worked for decades and lived in a passenger van in the meantime. Yet, one of the most fundamental psychological needs is shelter. Without it, we cannot talk about saving money, cooking at home, or living well. People need the safety of shelter, but over the centuries, our homes have ballooned in price and size. Our inflated budgets have been decimated by a simple financial tool that we accept as a necessity for existence.

Nobody seems to bat an eye. Nobody says this is senseless. Nobody resists the status quo. Rent or “buy,” the same trap is set.

So, as preposterous and provocative as it might sound, what if we killed mortgage loans?

The Curious Case Of Rising Interest Rates

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Watch your savings rate!

On Wednesday, December 16, the Federal Reserve opted to raise interest rates for the first time since 2006. The Fed pointed to healthy economic indicators – specifically, job growth – as the key motivator for action. Chairman Janet Yellen explained that rates would rise from 0 to 0.25 to 0.25 to 0.5 percent. Experts are suggesting this is just the beginning for rate hikes.

I’m not a Federal Reserve expert, fan boy, or aficionado. Nor have I spent years chastising its existence and advocating for a gold standard (I’m looking at you, Ron Paul). But I fundamentally understand the borrowing window. When the Fed keeps rates low, it makes borrowing cheaper. Vice versa, higher rates tend to make borrowing more expensive. Rates can also discourage or encourage greater savings rates.

The Federal Reserve seems to hold the reins on savers. As an advocate for frugality, I wondered how banks had changed their rates since last Wednesday’s decision. CNBC reported that Wells Fargo, JPMorgan Chase, and U.S. Bancorp “almost immediately” changed their “prime rate” (for borrowing). With a higher prime rate, new borrowers would see more expensive car loans, credit card interest, and home mortgages. It should bring new revenue to the banks, too.

A couple days ago I received a notification regarding my American Express credit card. Despite perfect payments, a near-800 credit score, and constant monitoring, my interest rate was being changed. The credit card would now inflict a 22.49% interest rate for carried balances. In other words, if I purchased something and wanted to pay it off over time, I’d be taxed an extra 22.49%. The move corresponded perfectly with the Fed rates, as my interest rate was previously 22.24% (still astounding).

When it comes to credit and borrowing, the changes were swift. Curiously, my savings rate remains unchanged. I still receive 0.10% and 1.00% for my Ally checking and savings accounts, respectively. These sit stagnant. While I understand that banks have an interest in protecting and securing greater profits through higher borrowing rates, I’m struggling to see the same “immediate” benefits for savers. Where is this additional quarter-point interest rate to encourage more savings?

It seems banks play the best of both worlds. When rates lower, they advertise and sell huge amounts of loans. Suddenly, the economy becomes bloated with cheap money and people spend instead of saving. And then higher rates create reason and rationale for banks to raise loan rates, with little care for updating savings rates.

Unfortunately, as banks keep rates low, the average saver suffers. Many low income and vulnerable populations rely on strong savings rates, but haven’t received them for years. Heck, I remember a time when my savings account paid 2-3% interest. Those days seem to be long gone — even with higher rates on the horizon. Today, savings rates can’t even keep up with modest inflation. Maddeningly, putting more in savings simply means you’re losing money each month!

As we consider this double standard in the banking world, let’s consider what we can do and where there’s money to be made:

1. Stay on the capital side

There’s power in capital. Whether you’re lending cash through peer-to-peer lending programs or investing in rental properties, those who put their money to work are handsomely rewarded. The game doesn’t shift much when interest rates change moderately. However, if you don’t have much savings, it’s important to build a little egg before engaging in these tactics.

2. Invest your spare cash

If you’re unable to buy real estate or invest larger amounts in lending, make a simple portfolio to invest your spare cash. There are various platforms that can automatically invest spare change, but nothing is easier or cheaper than opening a Vanguard account and choosing their exchange traded funds (ETFs). I’d recommend Vanguard Total Stock Market ETF (VTI) and Total Bond Market ETF (BND). Together, they afford rapid exposure to the markets with reduced risk due to diversity. Depending on your risk allowance or aversion, portfolios can be split 50/50, 60/40, 80/20, or even 90/10 between the VTI and BND. You’ll likely get a fantastic expected return no matter what you decide — in comparison to savings rates.

3. Advocate for higher savings rates

Unfortunately, the default — savings accounts — are too miniscule to help people who need it most. Despite the Fed’s decisions to raise interest rates, it seems that many interest bearing cash accounts aren’t receiving the benefits. As banks continue to hit record profits, there seems to be some wiggle room for better interest rates. Advocacy isn’t often talked about in personal finance, but speaking out and up is one of the most effective ways to change situations. Write your representatives in Congress and tell them you are waiting for banks to reward savings. Tell your bank that you’re looking for alternative locations for your money, and maybe even leave for a credit union (as they tend to pay better rates).

Think You Can Trust Credit Card Reviews? Think Again.

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Advertising in New York City. Flickr photo by Pascal Subtil

These ads are everywhere!

The multinational, multibillion-dollar bank, JP Morgan & Chase, spent about $1.9 billion on advertising in 2013. That was down from a peak of $2.35 billion in 2011, but still one of the largest amounts by any bank. With that kind of money, you should be curious what they get in return.

Advertisements for companies like Chase, Citigroup, Barclays, and others are plastered over billboards, magazines, newspapers, and websites. You’ve likely passed by one of their ads today if you live in a modest size city. Heck, there could be one next to this article, due to the Google ads running on Frugaling!

That money is spent to attract new “customers” of credit. Their hope is to entice people with signup bonus offers, and keep them for life. After they click an ad, sign up online, and begin to swipe, the banks begin to profit. From credit card transaction fees to late payment fees to cash advance fees to interest rate fees, companies enjoy lucrative profits. For every new customer, banks trust they’ll make hundreds of dollars over the next few years – if not more.

Personal finance writers are easily influenced

Those advertising pressures and interests can trickle down. Websites that aim to address personal finance concerns and offer advice might succumb to the fire hose of potential profit available to them. With my hat in hand, I must admit I was one of them.

I made thousands of dollars in about 1.5 years by marketing credit cards. By placing links to select offers, I was able to make $50, $75, and even $150 per person who signed up. The affiliate money helped me radically change my life and pay off my debt. But as it helped me pay off my debt, I began to see how I had been duped.

In financially unsound and uncertain situations, people do things they’d rather not do. Frankly, society sometimes encourages us to put our heads down and work through the pain and ethical dilemmas – ignore your internal compass for the good of the company, profit, and revenue. I had become one of those people.

When reviews are really advertisements

Reviews aim to feature both the pros and cons of certain products. Readers want honest feedback and advice from authors, but they weren’t getting it. Visitors to my site were coming droves to see my “reviews.” But that’s not what they were really getting.

Unfortunately, moneyed interests in banking have a tremendous sway on the rating of products. Look through many websites that market credit and banking products, and you’ll begin to notice an overwhelming pattern of 4- and 5-star reviews – across the board. With this positivity, you’d expect credit cards to wash your dishes, clean your laundry, and chauffeur you to work.

How could any company’s product be rated this highly? There’s a reason for optimism and it all comes down to money. Those advertising dollars – billions from banks – trickle down to the simplest of bloggers, directly influence the content, favorability, and overall reviews.

Visitors who are interested in honest, open advice might be shocked to know that when they click that link to sign up, they are crediting that blogger hundreds of dollars in the process. Even more, that the entire review was fabricated to drive more clicks to the bank’s site. When I wrote these articles, I suppressed the negatives to encourage clicks. I was advertising products, and framing them as reviews.

Credit cards aren’t the devil, but they’re not for everyone

We live in a world where big banks spend billions to get at us. Their money travels onto TV, print, and diverse digital media. Eventually, it even lands into the pockets of personal finance websites. That’s when the magical influence occurs, and people end up following the manipulated “advice” of trusted sources.

With revenue pouring over the Internet from companies, my real advice is simple: be skeptical. My hope is that no one gets tricked into thinking that a writer completely – and out of his or her own volition and without profit motive – decides to write a credit card review.

Here are 9 important questions you should ask yourself before following any credit card review:

  1. Do the reviews link directly to the bank’s sign up forms?
  2. Are there affiliate tags embedded in the links?
  3. What makes the writer optimistic about the company and card?
  4. Do they personally use all of these cards that they recommend?
  5. What income bracket is the reviewer in?
  6. What’s their credit score?
  7. What was their experience with customer service representatives?
  8. How long has the reviewer been providing advice?
  9. What makes them an expert in credit cards?
  10. How might incentives influence the quality of this review?

Credit cards aren’t the devil, and they don’t tend to be the sole contributor to debt. Usually, it’s a lifestyle of spending more than you can afford, with little income to pay the bills. That doesn’t mean excessive purchases at Burberry and Hermes; rather, that any amount over what you take in will lead to debt (groceries included). Credit cards just facilitate that process – faster – as the fees quickly compound.

When personal finance writers begin to weigh in, it’s vital that their advice be accurate, fair, and balanced. Unfortunately, it’s frequently manipulated by advertising revenue potential. I learned how the money could influence what I ultimately write, and I no longer want to lobby for an industry that sometimes preys off of people that genuinely need help. If you see a review article from me, it’s my hope to be as analytical as possible.

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