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.
Found on a train in Sydney. Did I use this picture already?
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.
I went to the midnight premiere of the second X-Files movie back in 2008. This has nothing to do with anything. Just a happy interlude to lighten the moment.
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.
Financial literacy!
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.
I went to see Mulder jam in Baltimore in 2017. A few days ago actually. Again, nothing to do with this article. I just wanted to give you something pretty to look at.
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.
Overdraft fees: Don’t depend on a bank to give you your balance. Only you know your checking account balance. The only way you can know your true checking account balance is by writing down every single transaction – every deposit, every swipe, every check. It is impossible for the bank to know about all the checks you’ve written. I recommend a check-free (check-less) account – a debit-card only account. Those post quite a bit faster and you never have to worry about a merchant holding a check for a couple of months before cashing it. But if you can’t keep a running balance in a check register, you have no business having a checking account.
Or better yet, use your credit card for everything you can. Use your bank account only to pay your credit card. And check in and say hi to your accounts frequently, so you know what’s going on in their lives.
This is a great article. Even among highly educated people, I’ve found the details of personal finance knowledge to be lacking.
A topic you can commit to for a lifetime! You have to look at the context and back story tho…
Material culture, immediate gratification, family structure, government action & agency…
Where do you wish to gaze?
Acknowledged government debt, not including unfunded liabilities? approaching 20 trillion dollars.
Student loan & unsecured credit card debt? each exceeding 1 trillion.
% of those over 50 with no meaningful savings? estimates range from over 50% to ‘shocking.’
deferral of gratification? so uncool.
Juxtapose with:
smart phone penetration of the populace.
vacation planning and expenses.
wedding expenses.
frocks, shoes and bags!
from Mr MM: SUVs & big trucks!
When I was but a sprout, no one had cells (land lines!), credit cards were rare, 1 car, 1 bath per family was the norm.
Better, worse, neutral? Beyond me…
I am not sure if the people are flunking prosperity or misusing debt instruments like children running wild.
Toss in the domination of ‘have it now’ over discretion and reason by the popular culture and… voila- insanity from high to low.
You, Mr MM and others are doing good work. Stay agile or your efforts will begin to resemble the efforts of Sisyphus!
Mulder?!? Really? (I now have a mental image of 12 year old future t gal watching da files.)
I almost never have any idea what you’re saying, but I think it’s all positive!
Bank insurance fees for accidential injury and death. The bank gives you $1000 for free and that makes you want to buy more. It’s only $1.50 a month, or if you want a few million dollars in case you lose a hand, you can pay over $10 a month. This is a waste of money if you already have life and health insurance from your employer. If you lose a limb, chances are you will get your money from a lawsuit or workers compensation. I have nothing against insurance, but I think people buy these without really understanding the odds and the value of what they are buying. It is also automatically taken out of your account every month so it’s easy to forget about it.
Most insurance in general, I think.
thanks for the shout out
😀
more…..
when someone says “it’s a can’t miss”–and they’ve never been vetted.
buying a condo before you read the “Declaration” and see an audited statement of the reserves.
annuities.
loaning money to a friend.
watch out for 30 day trials on a program… that automatically become a charge because you forgot to remember the 30 days.
boyfriends or girlfriends who are ‘short’…and you bridge them.
giving money to anyone on the street, you have no idea where that money is going, drugs, ASPCA?
buying anything at Starbucks or 7-11.
otherwise, you should be flush.
I’m okay with the free 30-day trials. I just put a calendar note to remind myself to cancel.
The truth is out there
Pyramid schemes…sigh. I grew up in poverty and my parents would fall for things like the Melaleuca pyramid scheme or this dude who ran “get rich quick” pricey real estate seminars and nurtured a cultlike following. All of this required them to spend money they didn’t have, but it was worth it because they’d make more money in the end. If not this time, then next time.
They still haven’t learned from all the times they’ve fallen for these scams (nor do they think any of them WERE scams). I think deep inside they genuinely believe that there’s a trick – a secret – to getting rich, some way to do it without putting much effort in or spending too much time at it (because no one could reasonably expect you to do *that*). And that people who’ve gone from rags to riches have somehow lucked into that secret. Or one of the secrets.
I hate the people who prey on people who are trying to get out of poverty and just doing it wrong, but what I find really frustrating is this kind of self-sabotaging worldview. My parents were always their own worst enemies…they really did do it to themselves.
(Not universally applicable of course; this is just my experience with one particular flavour of persistent poverty.)
(And one silver lining – knowing people like this, I feel completely confident in my own ability to stay in the top 75% of the economic spectrum, hah. Sad to say, that’s not true of my brothers. The generational cycle is real.)
Thank you for sharing and good on you for getting OUT of the generational cycle of poverty. I can understand how it might seem insurmountable when you’re at the bottom. :-/
Nice post and completely agree! i think it boils down to education. there is pretty much 0 education on finances in school (in the uk at least). its no wonder people generally struggle with finances. i am lucky to have parents who taught me the value of money and not to waste it. however they did not know much about investing so i took it to another level and taught them about investing. nothing is easy but you can make smart decisions early on that will impact you in a positive way in the future.
by the way thriftgal – i think i am a male version of you. About me: male, 34, left banking recently, indian origin, financially independent, although i do own my own property.
I would have thought the male version of me would be named Anito. 😉
One way to get around prepayment penalties is to pay your balance down to something really low, say $10. Wait a week or two and let that amount get set, then pay it off. I did this with a secondary mortgage loan with high interest. I had to pay a percentage of the amount paid off early as a penalty. My penalty was $0.01. This depends on how your paperwork is written, but it is a way to avoid the penalty.
Love it. Understand the fine print so you can use it to your advantage.
speaking of fine print…if you still give out legal advice, perhaps you can impart some knowledge on how to get around mandatory arbitration clauses? i understand protecting ones self from frivolous class action lawsuits and all, but it also shields corporate wrongdoing too. and if i read my Vanguard fine print correctly, mandatory arbitration clauses get around. too often i just feel like i’m signing my rights away just by doing business w/XYZ corporation. even General Mills tried declaring a few years back that anyone buying their products will enter into a mandatory arbitration clause w/them! they changed their mind after their fine print wasn’t so fine on the front page of every newspaper and online blog. although i’ve heard mandatory arbitration clauses are pretty bullet proof & something we as consumers will just have to accept forever and ever? let the MAC avoidance clinic proceed….
I don’t give legal advice anymore. 🙂
Just a thing I’d like to clear up from your post above (and I’m really not hating on you because I think you talk sense most of the time and I really enjoy your blog)- I think “stupidity” is the wrong word. Sometimes it’s a lack of information, sometimes it’s a lack of confidence. There may be a difficulty with maths or reading (this is not “stupidity”), or an emotional issue.
I’m in favour of financial education (in school, before people are exposed to the big wide world of consumer credit). A lot of people who are financially illiterate are nervous about money which makes it easy for unscrupulous people (PPI-sellers; banks who profit from people staying in low-interest savings accounts because it’s “safer” than investing) to rip them off and aren’t confident in doing something different from their parents (who had a different landscape to deal with).
I suspect emotional spending is at play a lot of the time as well. A number of people I know who have made big mistakes with money and debt have lost a parent at a young age, and while financial education might not be the only answer, it’s another piece of the puzzle.
Gemma, I love this comment so much. I agree with you completely. It’s fear and it’s emotion which is a heck of a lot stronger than logic.
This piece started off real strong but then it kind of fizzled between trying to be helpful, then compassionate and then ‘listy’. No worries, though, most people are not very attentive when they are reading and they will not notice it. I think literacy is the pass word here, and indeed it is a powerful one. If you are literate, you are in. Watch Carl Sagan’s Cosmos, the episode on ‘The Permanence of Memory’, to get a demo on how hard it is to convey the radical nature of literacy. Mr Sagan stretches his arms, ooh-ahs, toddles inside a big brain, walks along the isles of the New Your public library to show how few books a person can read in their lifetime, and doing all kinds of demonstrative things, and it turns out to be powerful and funny. Groucho Marx said once that he would not want to be a member of a club that wants him as a member and being literate is one of those those things. You have it when you feel you don’t, and you don’t when you feel you do.
Financial literacy is definitely the key to living a stable, secure, awesome life. Once you figure out money, life gets so much easier. I think one of the things that could be done to increase literacy is to replace useless subjects like “soil erosion” or “latin” with subjects like “how does a mortgage work”? “Why is debt bad” and “What is an ETF?” in schools. I don’t remember learning any of those useful financial subjects. Teaching financial literacy in schools would go a long way.
Btw, you mentioned that you are a huge fan of Your Money Or Your Life and Vicki Robin. Well, guess what? Vicki is going to be at Chautauqua UK this Aug! Want to come meet her in person?
100% agree wholeheartedly that this stuff should be taught in schools! How do we make that happen? 🙂
I read that Vicki Robin was going to be at the Chautauqua on Jim’s blog and promptly emailed him and told him how incredibly jealous I was! I went to the first retreat in Ecuador all the way back in 2013 and it was one of the best weeks of my life. Such fun and so encouraging to meet people who didn’t think my early retirement plan was completely ridiculous. It was something I really needed to experience at that point in my life.
I have a finance degree but what has driven me is the idea of being financially independent. I didn’t earn a lot to save for 25 years expenses so early. What I did was invest every penny of saving in land and that reaped the benefits. I still have those lands and not liquidated much because they are appreciating every year.