Debit or Credit?

Credit vs Debit

Imagine you’re at the checkout counter at your grocery store, or maybe a gas station. Once the teller has rung up all the items and you’re handing over the card (or swiping it yourself), you’re most likely facing a question: Debit or credit? It might also be phrased as “Do you want to enter a PIN number?” or in various similar ways. Sometimes it’s the teller asking, and sometimes it’s a machine. And you might be wondering: what’s the difference?

If you’re using a credit card, most likely the teller asked out of rote repetition, because it’s going to be credit either way.

But if you’re using a debit card, there’s an important distinction being made here. On your end of the transaction, the most important difference has to do with protecting yourself from identity theft. One of these two options offers better protection than the other, and it might not be the one you think. If possible, always run your debit cards as credit.

Why not debit? The need to input a PIN number sure makes it seem safer, after all. Here’s the thing about running a card as debit: if someone gets your card information and spends every cent in the account, you’re most likely out of luck. In most cases your bank is not required to reimburse you, though any debts incurred by the identity thief will likely be cleared. Also, inputting your PIN number offers identity thieves a chance to observe what it is. That puts them a big step closer to heading to the nearest ATM to clear you out.

Credit cards are automatically covered against identity theft, and any charges an identity thief makes will be canceled. If you run debit cards as credit, which is perfectly fine and legal, you will then enjoy the same protection. If someone were to steal the card or the account information at that point, you stand a much better chance of recovering your money. Let the financial institution eat the loss- they’re insured for it, and you put your money there for convenience and protection in any case. They’re also probably in a better position to recover from it.

Thanks for reading,

-Taylor

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What’s Your 500 Year Plan?

To quote the (for this week) popular meme: Well, that escalated quickly. A 500 Year Plan. Even without any details, that’s a proclamation that’s simultaneously captivating and intimidating. After all, how often do we really hope to establish anything in our lives that will still impact the world five hundred years from now? Aside from the few whose names will grace the pages of history eBooks, we generally don’t hold much hope of actually accomplishing any such thing.

And yet, maybe we can. Maybe we don’t have to stand tall on the world stage for the impact of our lives to still be felt by our far-off descendants. Even if you can’t change the world, you can still change your family tree. It’s all about legacy. That, and a whole different way of looking at investing.

I had the pleasure of meeting another coworker late last week, and we had some very interesting conversation. This was one of the topics discussed: Oftentimes those who have been diligent to save and invest and spend wisely come to the end of their lives still owning much more than they will ever need. Understandably, their wish is often to pass this wealth down to their children and grandchildren. They want to leave a legacy.

This isn’t an unknown idea in the financial world. Far from it. The 500 Year Plan is a quote attributable to the Green family, owners of Hobby Lobby and Mardel’s. Dave Ramsey talks about The Legacy Journey. Other financial  figures have their own ways of expressing it. It’s an awesome idea, but it’s relatively rare to come across a nuts and bolts discussion of what it means to leave a financial legacy.

Consider our elderly patriarch/matriarch. Most likely, their investments have gotten pretty conservative in recent years. It’s a standard practice for many people to cut back on risk as they become elderly.

That plan definitely has its place. In fact, I would say that’s what most people need to do. Everyone needs to do it to at least the extent of being able to be sure they’ll have enough to live on even if the market goes south.

And yet, is that all there is? Does it really make sense for everything to get pulled out of higher earning investments and stuffed into bonds and CDs because that’s just what you do when you hit 65?Maybe not- at least, not if you have enough stored away to take care of yourself and to set aside a legacy for your family. What I mean here is this: if the money isn’t really for you or for your benefit anyway, why would you invest with it as if it were? If it’s for the benefit of your children or grandchildren or every generation of your family for the next 500 years, why are you calculating the risk you can take based off the assumption that you’ll kick the bucket sometime in the next decade or three? It doesn’t make sense, and it could seriously impact the future earnings of the investment if it’s treated that way.

The risk you are willing to take and the return you desire to make should be determined by the purpose of the investment itself, and the circumstances surrounding that purpose. If the investment is separate from your life, treat it like it is. If it’s designed to make the rest of your life easier, treat it appropriately for that purpose. Just always be ready and able to step back and take a good, hard look at what you’re doing with your investments and whether or not that matches up with the supposed purpose for which each investment exists.

Thanks for reading,

-Taylor

Graduation & New Beginnings

Well, I can say goodbye to Undergrad. Now on to other challenges, like an MBA and the CPA Exam!

I’m hoping to find time soon to write more often, but until I get into a room I’ll be renting next month I don’t have a lot of internet access.

The main reason for this post is that I’ve just started a summer Tax internship with Grant Thornton LLP. I’m really excited about the opportunity and the challenge of working for one of the biggest CPA firms in the world. I’m going to learn a lot. There is, however, one issue that I need to address because of this new position: Anything I have posted or will post is not to be construed as being advice or commentary given by or on behalf of Grant Thornton LLP or its officers, etc. All of my content is represented solely as my own and that of any sources I use, where appropriate.

 

Thanks for reading,

-Taylor

Cash Flows on a Regional Scale

From: http://www.npr.org/blogs/krulwich/2013/04/16/177512687/a-whom-do-you-hang-with-map-of-america?utm_source=NPR&utm_medium=facebook&utm_campaign=20130417

The map you see above is a rather interesting critter. To get the full explanation of it, read this article: A ‘Whom Do You Hang With?’ Map Of America by Robert Krulwich. But here’s the short version: This map, using data from the Where’sGeorge? project, is a visual representation of how cash money flows across the United States. The blue lines represent areas which money doesn’t cross over as often: the darker the blue, the less money travels over the line. Faint blue lines are often caused by nearby cities pulling money toward them by the natural process of economics.

As you can see, the dollar bill is not always a respecter of borders. By extension, neither is the american consumer. Some areas of a given state, like the northern tip of California, do more business with other states than with the state they’re in. In other places there are starkly defined economic regions where cash flows easily within set borders: the region consisting of Kansas, Missouri, Arkansas, and Oklahoma being a great example. Though it is a bit odd that we Okies don’t do more business with Texas.

This map is far from perfect of course, and no one will ever seriously suggest redrawing the political map because of it. The biggest single reason for this is that most money moves through the dynamic duo of plastic and electricity these days, not cash. Factor in Amazon alone and you’ll warp the whole map over toward Seattle. Throw in Apple, Microsoft, and Google too (just for starters) and you’ll make things even crazier.

But that’s not to say this map doesn’t have its worth. A savvy small business owner could examine the region they fall into and could likely discover some cultural similarities. There’s always a service or product to be provided, so the combination of the two could be a powerful driver toward regional expansion of a business into multiple locations. After all, people spending money in the same region will, to some extent, be spending it on the same things.  Locate those things and you might just discover a competitive advantage.

Or not. Any single data set alone can’t tell the whole story, and finding a multitude of sources to rely on is essential. But this map might be a good one to include, as it is suggestive of possibilities.

 

Thanks for reading,

-Taylor

What Really Matters in Investing

Many people shy away from personal finance topics almost instinctively, and if you put yourself in their shoes it’s a pretty reasonable reaction. For most people the world of personal finance is a labyrinth of strange concepts and confusing formulas. It’s intimidating and confusing, and no one wants to too publicly point out their own ignorance. So we back off and do our best to ignore the whole idea.

That’s pretty understandable- I’ve been there myself. A few years ago I gained access to the small stack of cash some relatives gave me at birth to someday put toward college. There I was, not even 20 yet, armed only with the desire to not waste it and barely a clue as to what I was doing. So I gathered my shaky confidence and invested it. Since then it’s gone down and it’s gone up, and as a pleasant surprise it actually hasn’t done too badly. It’s not going to pay off my student loans by any means, but I haven’t lost my shirt either.

This illustrates to me what’s really important in the world of personal investing. We have this perception that we need to be experts before we make any moves, but that’s just not true. Over the last couple years I’ve come to agree with what I’ve heard several personal finance experts say: personal finance is 30% head knowledge, 70% attitude. Sometimes they even go in for a 20/80 split.

What does that mean? For investing it means you can be successful without knowing everything, because the knowledge is not what’s most important. Yes, try to do your due diligence in researching before you make a move, but your attitude is what really counts. Here’s how you do that:

  • Commit to being disciplined. Consistent investment is what pays off in the long run, so commit to investing the same amount every month. Resist the urge to stop your investment contributions “temporarily” to buy that new car. Make it a priority so it becomes a habit.
  • Don’t watch your feet. By this I mean that you need to take the long term view. Most of us are still decades from retirement, so what the market is doing right now is almost completely irrelevant to our plans. If the market crashes, don’t give in to panic. Instead, realize that you can buy a lot more stock for the same amount of money. Long term, stock you picked up cheap during a crash may be the best thing that ever happens to your investment portfolio.
  • Put your eggs in several baskets. Okay, technically this one is about knowledge. But this isn’t some technical mumbo jumbo. It’s just a simple principle: if you have a variety of investments, the failure of any single investment won’t hurt you as much. It’s common sense, really.
  • Never ride a wagon. If everyone is excited about a given investment, it’s probably too good to be true. This goes back to being disciplined: stick to your plan. Trendy investments often create bubbles that will hurt you in the end. Gold, for example, has lost 13.8% of its value over the past 30 days after enjoying a recession-driven run of popularity.

Adjustable Rate Mortgages

As I’ve noted before, Yahoo News can hardly be considered a good source of quality information. Yet from time to time I browse through the articles to glance at the odd, the ridiculous, and the very occasional piece of good information.

Today, unfortunately, I stumbled upon something particularly bad in the second category: Jeff Brown is the author of the article “Why it might be time for home buyers to reconsider an ARM.” I’ve never felt compelled to call an individual out on something like this before, but the advice he gives here holds the potential to severely injure the financial stability of anyone who relies on it. It’s egregious and irresponsible.

First, what’s an adjustable rate mortgage? Also known as an ARM, an adjustable rate mortgage is a home loan that starts off low- even lower than the going rate for a fixed rate mortgage. Then, after a given period of years (which vary from loan to loan), the interest rate adjusts according to where rates are at that time.

Here are some of the supporting facts that Mr. Brown brings out in order to support his position, followed by the flaws that negate this line of thinking:

1. The current rate for a 5 year ARM is just 2.7% compared to 3.5% for a fixed rate mortgage.

  • Sure, that’s true as far as it goes. But interest rates are still down near historic lows, so once those adjustments start hitting you’ve really got nowhere to go but up. The market seems to finally be recovering, albeit slowly and cautiously, and if nothing too terrible occurs we may not be in that bad a place in 5 years…and 0.8% is a really thin buffer to be relying on in such circumstances, since good economies mean higher interest rates.

2. Annual and lifetime caps on interest rate increases mean that from the 2.7% you’ll never pay more than 8.7%, which isn’t too high by historical standards.

  • 8.7% might not be all that bad over the scope of history, but 3.5% is one of the better rates we’ve ever recorded. Why not go for the sure deal rather than risk “not especially high”?
  • That 6% maximum difference? It’s expensive. If you put 20% down on a $300,000 house and use that 2.7% ARM, you’ll pay $1,348.43 per month for five years. If the next several years after that raise your interest rate to the max, you may spend the rest of the life of the loan paying $2,254.52 per month. That’s an extra $906 every month adding up to an extra $10,873 per year!
  • By contrast, the 3.5% fixed rate will only increase your payment by $104 per month and you get the security of knowing it will never rise.

3. ARM rates are going to rise, so the time to buy is now so that the maximum rate your loan can rise to doesn’t get any higher than it would with today’s circumstances.

  • Lord, save us from terrible logic. Mr. Brown tells us to consider buying an adjustable rate mortgage because the rates will go up over the next few years… Why would you ever buy an ARM knowing that its rate will soon increase beyond what a fixed rate can get you right now? To do that is to literally volunteer to pay more money.

In the closing paragraphs of the article Mr. Brown gives a nod to most readers’ reality. He points out that ARMs are really only good for people who can pay the home off within or shortly after the fixed rate period of the loan or for people who intend to sell the home within the fixed rate period. Even then, I’ll throw a caution out: be aware of the housing market in your area. If you plan on selling a newly bought house sometime in the next three to five years, you may actually lose money because you didn’t have time to build up enough equity to cover closing costs, etc or even because the value of the home dropped in the short term. So if you won’t be there long, consider renting!

Perhaps I’ve been overly hard on Mr. Brown. But the facts are that, for the vast majority of homebuyers, an ARM will cost an arm, and maybe a leg too. In a society and publishing medium with such a short attention span, it’s my opinion that his qualifications should have been front and center, not hidden at the back.

People tend to think they have more money and discipline than they really do, and often spend too much when buying a home in the first place. The ignorant or inattentive reader runs a definite risk of hurting themselves by relying on the article’s information in the way it was presented, and I don’t like that. Frankly, given the current interest rates and economic conditions, the article wasn’t appropriate at all.

Now, to be fair, ARMs do have their place. If the situation was more or less the opposite of what it currently is, and interest rates were looking to drop on the long term, then an ARM might be valuable for its ability to follow rates down without a refinance. And Mr. Brown has a point as it comes to those who can (and will) pay their homes off early- you can save some money if you’re in that group. But odds are very high that you aren’t. If it were me, I’d get the fixed rate mortgage and suffer a little bit of extra interest while paying extra on the principal anyway and having a safety net against any future lapse of discipline on my part.

Any time you’re looking to buy a house, keep this goal in the forefront of your thoughts: What can I do in this situation to maximize my chances of keeping this house if something goes wrong?

Hope for the best while preparing for the worst and you might just avoid having the bank knock on your door someday.

 

Thanks for reading,

-Taylor

Retirement: A Horror Story

Wow. Two months can sure fly by fast. Sorry for taking so long to post again! I’m heading into the final weeks of my undergraduate education, so the future’s bright even if life has been all too crazy these past couple of months.

Now, on to the post:

Image from http://georgedelapaz.blogspot.com

Frankly, I’m a little frightened for our future.

Okay, so that’s a bit sensationalist. Let me explain: recently I happened to be reading a Yahoo news article (not a great source of news by any stretch of the imagination, but at least you can filter out the majority of the bullcrap) when I noticed a poll at the bottom of the article. The poll’s question was, “Are Social Security and Medicare crucial to your retirement security?” At that point in time, approximately 601,000 people had responded…and 78% of them said that yes, they’re crucial.

That’s kind of frightening, and if it doesn’t frighten you maybe it should. Social Security benefits are paid out of the Social Security Trust Fund, operated by the Social Security Administration. That, supposedly, has about $2.7 trillion in it, held in trust for the benefit of America’s seniors and disabled. Unfortunately, if the Social Security Trust Fund were a warehouse, it’d be pretty much empty aside from a sticky-note from the federal government labeled, “IOU” laying around somewhere on the floor.

The government can just pay it back when that becomes necessary, right? Sure- that is definitely a possibility. Unfortunately, the government is wallowing in $16+ trillion total debt (including this debt), is near its debt ceiling, hasn’t had a real budget since 2009, and has proven incapable of finding a solution to this problem for several years. So it might not be all that likely as possibilities go.

I could make a whole series of posts about why our current entitlements structure is unsustainable, but here I want to look at the other side of the coin: personal effort, planning, and saving. If you want to retire with dignity, it’s on you to make sure that happens. No one else cares about your retirement like you do. Not your company. Not your government. Not even your kids. America is known for having one of the most individualistic societies of the modern world. With that individualism comes a requirement to be self-reliant, because you cannot live your life the way you want to and still fit in a nice, neat little government-proscribed box.

From the above it’s pretty clear that the government’s not really in much position to help, aside from keeping you over the poverty line by a razor-thin margin…maybe. Personally, that’s not the picture I want to see of my future retirement. It’s time we started stepping up as individuals to look ahead, choose where we want the future to take us, and start pushing ahead in that direction. That’s life, really: the pursuit of goals and dreams of all shapes and sizes. It’s warm and uplifting, and even though storms still come it will always be better than the cold comfort of subsistence on government handouts.

Thanks for reading,

-Taylor