I’ve been bumming myself out lately reading about poverty. Combine that with the occasional tidbits that slip into my attention regarding the priorities of the current political regime and I am seriously on edge. I mean, I’m not worried about me personally. I’m confident, barring something catastrophic, that I will be fine. Financial literacy is a powerful buffer against the chaos and uncertainty that is life.
I may have mentioned a time or two that I adore the book Your Money or Your Life. One of the authors, Vicki Robin, quotes her coauthor, Joe Dominguez, as saying:
“In the Great Depression there was 25% unemployment. That means 75% of the people were employed. Would you have been one of them?”
Yes, I believe I would have been. And, as you’re the type of person who reads blogs written by people who preach about financial independence, I think you’ll be fine too. We’re both probably in the top 75%, right?
The people that I’m worried about are the ones on the bottom of the heap in terms of luck and economic situation. So much of the suckiness of poverty comes from people who prey on desperation and stupidity.
Credit Card: Friend or Foe?
An example of using financial literacy to your advantage is the mighty credit card. Personally, I use credit cards for everything I can. They are one of life’s perks if you understand what you’re doing.
My credit card is a good friend. He follows me around, vouching for me, reassuring the merchant — “She’s good for it. Put it on my tab.” As long as I pay my credit card friend back in full the first time he asks, our relationship stays solid. I don’t make him look like a fool in front of the shopkeeper and he provides me a short-term, zero percent interest loan.
He also protects me. If I have a dispute with said merchant, he will put the payment on hold while he investigates. He’s biased toward me and often rules in my favor.
He provides fraud protection. If someone steals my purse, he’ll go look for the thief. He shuts down the account and sets me up with another one while he’s looking. Try asking cash to do that.
If you’re really smart, you can even convince your credit card friend to give you airline miles and cash back.
Credit cards make money from the merchant every time you swipe. That’s all the money they earn from me. Make that all the money they earn from you and that’s a big step toward financial independence. You know this.
Credit cards: good.
Unless the details suck. The devil is in the details.
Credit cards for those with no or bad credit: Here’s a piece of plastic that looks and works like a credit card. You pay your credit card “friend” money to take it home, say $100 for activation and origination fees, and he’ll bill it as a cash advance. You’ll also pay an account maintenance fee each month to use the credit card. It’s called fee harvesting and it’s VERY profitable.
There’s also a fee for going over your tiny credit limit. I think that one’s reasonable though.
Be a lender and not a borrower. Make compound interest work for you and not against you. Understand the fine print. Think about the offer in plain English. Here are some more examples that make me sad.
Rent-to-own furniture stores: You pay a small amount of money each week for several months. By the time you own the furniture, you’ll have paid four times what it was worth new. If you miss a payment, they take it back and won’t give you any credit for the money you’ve already paid.
Predatory land contracts: Here’s this uninhabitable house that needs extensive work and that this dude bought for like $10k. If you give this dude money, he’ll let you live in it and make all the repairs. He’ll be the owner on paper, but you’ll make monthly payments to him so that, in thirty years, you’ll own the house outright. You’ll pay many many times what the house is actually worth because the interest payments are really high.
Don’t worry about that though. You won’t be able to make the expensive repairs and keep up with the monthly payments, so the dude will kick you out soon enough.
Predatory loan officers: You borrow money at a crazy high rate of interest, maybe for some much needed repairs on the house you have equity in. The loan has a ridiculous prepayment penalty though so you can’t pay it back early and avoid the interest even if you wanted to.
The plain English thing works even if you’re not in poverty and just contemplating an “opportunity.”
Pyramid schemes: You give an organization some money and go recruit people to also give the organization money. If you recruit enough people, the organization will give you back a bit of the money that you’ve given them.
Investment advisors: You pay someone money to guess which companies will do well in the future. You give them their fee no matter how their guesses pan out.
Things you should look for
- Fees. You will pay fees for being financially illiterate, for being poor. Fees suck. I use Vanguard for my investing to minimize fees. That’s just an aside.
- Prepayment penalty. Run. Run for the freaking hills.
- Mandatory arbitration clauses can take away a lot of your power.
- I’m sure there are more.