Credit Card Brains

Would you do this? Watch the video, then take the poll. I think it’s really interesting, but doesn’t seem very credible.

Random reader question time!

Today’s super fab question comes from fellow Chicagoan Aideen, who asks:

“I love you website! I am 26 and a former NYer who moved to the windy city. I try to budget and am doing an okay job of it. Do you have any posts on the best ways to save for buying a condo or house. Is socking away money in a savings account the best way or should I invest the money. i’d love to know what other people do.”

That’s a great question, Aideen. And since I am in the same boat as you, I’m probably not the best person to answer your question. But I am totally curious, so I asked someone who’s a little more credentialed on finance - Eric Brotman, CFP, CLU, MSFS, and president of Brotman Financial Group, Inc. - to help us out. Here’s what he said:

A: “Where to save for a first home is largely dependant on the amount of time it will take someone to put together the amount needed for a down payment and closing costs.

Normally, the best option is in a money market account, as they tend to pay a higher rate of interest than a traditional savings account. There are several good online options, including ING Direct and HSBC. (Budgeting Babe note: This is what I’m doing, and I’m at Emigrant Direct.)

Another option is a certificate of deposit, with one caveat. The CD must either have no penalty for accessing the funds before maturity, or a maturity date must be selected which is in advance of the anticipated home purchase.

Investing the money for a first home is only a reasonable idea if the time-horizon is at least two years out, and if that is the case, a moderate allocation portfolio with low transaction expenses would make the most sense. First-time home buyers can also access their Roth IRA for up to $10,000 towards the purchase. Checking with a CPA or tax advisor to see if someone is eligible for a Roth IRA is a good first step. It will provide tax-favored growth while the savings/investments are being accumulated, but not everyone is eligible.”

Eric Brotman is President of Brotman Financial Group, Inc., an independent financial planning firm specializing in wealth creation, preservation, and distribution. Mr. Brotman began his financial planning practice in Baltimore in 1994, and founded Brotman Financial Group in 2003. He provides investment, retirement, estate, insurance, and business planning for professionals, executives, and business owners. Mr. Brotman’s clients benefit from his technical expertise, extraordinary client service, and a knowledgeable team of insurance and investment specialists.
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As a side note, Aideen, I was tracking with Eric’s answer until he threw out the term “moderate allocation portfolio.” I looked online and determined he means that if you choose to invest in a mutual fund or group of stocks, pick one that’s not too high risk. You don’t want to lose your downpayment fund when you’re three years away from buying a house! (If you like this moderate risk option, a lot of people on my site have said that Vanguard is a good place to start investing because it has really low transaction fees.)

I got kind of lost during the Roth IRA part, so I appreciated that he mentioned seeing a professional. I heard that borrowing against yourself is pretty common, but I wasn’t sure it was recommended by financial professionals. I’m sure peeps will write in the comments about it. If you have an answer, let us know! I’ll also go back to Eric and ask him if that’s risky or recommended if you’re eligible.

I generally don’t do blog “tagging” games. Mostly because I could never actually figure out what they actually are. But Twiggers over at In Debt Because I Like to Have Nice Things kindly explained how it worked, and now that I’ve read a couple posts, it’s actually pretty fun to read everyone’s lessons learned.

Here’s my deep and meaningful contribution:
SAVING TOTALLY BORES ME. OH WELL.

Most other memoirs were super serious so I thought I’d change it up.

Seriously, for those of you who are rock stars and love going out, saving will be a challenge. But there are some things you can do to spice it up. Like getting a cheap hobby; I’ve tried about 500. Knitting? Super cheap but kind of hot for the summer. Step aerobics? Dangerous… I fell off it and hurt myself. Getting a pet to keep you company? So not cheap. Eh… oh well. In the end, I’ve emerged a stronger, healthier, more content, less chaotic person with a lot to live for and a simple, chill life to enjoy. So call me boring. I do not mind. I’m having fun.

I’m not going to tag because I know it can be laborious sometimes to participate in these things. That said, take a quick read at these memoirs for a nice snapshot of different people in various stages of their financial journeys, and feel free to post your own so-called memoir here. It’s actually pretty cool to think about.

IDBILTBNT: “You can’t take it with you“
Young Broke and Fabulous: “At least you have the experience“
Beachgirl’s Budget Blog: “Do what is best for you“
The Debt Hole: “Falling down. Getting up. Trying again.“
Frugalista Files: “Peace, values and a decent wine.“

Who else should I add up here???

Yes, credit cards can have costs. There are two main costs associated with credit cards: (1) interest rates; and (2) annual fees. Interest charges result only from the use of a credit card. Annual fees, on the other hand, are charged regardless of whether or not you actually use your credit card.

You should never have to pay to use credit cards. However, this is the exact effect of an annual fee. An annual fee is a payment by you to the credit card company for the privilege of using that credit card. There are far too many good credit cards out there that do not have an annual fee for you to obtain one with an annual fee. In essence, do not get a card with an annual fee, it is that simple.

In addition to annual fees, credit card companies charge other fees of which you may not be aware. If you are ever late on a payment, there is usually a fee. If you go over your credit limit, there is usually a fee. Know what these fees are and factor them into your decision as to whether to obtain that particular card. It is important to note that almost every credit card will have these fees. Therefore, do not refrain from obtaining a good credit card simply because these fees exist. Should you do so, you will not find a credit card.

Interest rates are another fee charged by credit card companies. First, you should notice that the interest rate is different for credit purchases and cash advances. Cash advances always carry a higher interest rate. Additionally, your monthly payment will not count towards your cash advance balance until your credit purchases balance is paid off. This is because cash advances carry a higher interest rate. Therefore, the longer that your balance remains unpaid, the more money the credit card company makes.
Also, make sure that the interest rate that is advertised is not an “introductory” rate or a “variable” rate. Introductory rates only last a couple of months (at most, one year). After that introductory period, your interest rate resets to the default rate. The default rate is usually a lot higher than the introductory rate. Therefore, be aware of what you are getting yourself into because you do not want to see your interest rate jump over twenty points at the end of your “introductory” period.

Variable rates change with economic conditions. Therefore, you could have a great rate one month and a terrible rate another month. Granted, the rate changes are not dramatic. Therefore, you will not go to bed one night with a 9% interest rate and wake up the next morning with a 20% interest rate. The changes are gradual. However, do not play a guessing game with your credit card interest rate. Get a low fixed rate, and you will be much happier.

Know the costs that are associated with a credit card. By doing this, you will be able to make the best decision possible based on your needs and wants.


Undergoing MyBlogLog Verification

From the NY Times: Recession Diet Just One Way to Tighten Belt

Spending data and interviews around the country show that middle- and working-class consumers are starting to switch from name brands to cheaper alternatives, to eat in instead of dining out and to fly at unusual hours to shave dollars off airfares.
…
Wal-Mart Stores reports stronger-than-usual sales of peanut butter and spaghetti, while restaurants like Domino’s Pizza and Ruby Tuesday have suffered a falloff in orders, suggesting that many Americans are sticking to low-cost home-cooked meals.

This is classic behavior in tough economic times. In economics, “inferior goods” doesn’t refer to the quality of the goods, instead it refers to goods where demand changes inversely with income. As incomes rise, people buy less of the inferior good. But as incomes fall, they buy more.

The excerpt above describes people buying more spaghetti to cook at home (inferior good), and ordering less Pizza (a “normal good”). And on beer:

Sales of inexpensive domestic beers, like Keystone Light, are up; sales of higher-price imports, like Corona Extra, are down …

I expect to see more generic brands (inferior good) soon on the grocery shelves!

Given the size of my small apartment, space is always an issue. Our apartment is essentially one big room that encompasses our living area, eating space, office, library and pet homes (we luckily also have two bedrooms). Within our small space, I consider it an engineering marvel that my closets don’t spill out the minute you open the doors. Whether I’m shopping for paper towels, sleeping bags, sports equipment or just a new hand bag, the question always pops up: “Where are we going to put this?” I considered buying an armoire for extra storage, but then realized I didn’t have the floor space for it.

It’s not just storage space that causes problems. Try asking two people put away five bags of groceries or simply cook a meal in a ten-foot by six-foot kitchenette. Try enjoying “Rock of Love” in the living room while someone else is attempting to write a 30-page legal paper that’s due tomorrow in the same room. Luckily, despite our lack of space, B and I have managed to make our small apartment work.

And given that many of you are living in small urban spaces with roommates (or someday will), I thought you could use some tips for getting along and living in a place that actually fits your budget, if not your lifestyle.

Tip one: Give stuff away. If you like to shop, and your space is limited, you’re in trouble. I have imposed the following rule to prevent my closet from overtaking my living space: If I can’t fit the new items in the closet or home, I must give old stuff to friends, family and Goodwill (or the Salvation Army) to make room. (I’ve also heard that Freecycle is good, and certainly e-bay is another option if you have valuable things). I stay away from throwing clothes, shoes, accessories or household items in the trash if they’re still usable. If I can’t stand to part with anything, I don’t deserve the new goods.

Let’s apply this rule… if I go shopping and come home with two bags of new spring clothes, I automatically weed through my closet and pull old pieces. You’d be surprised at the old stuff lurking in your closet. I still find clothes from college (which means they’re about eight years or older) in my closet. I don’t wear it, but for some reason I can’t let go of it. Well, tough. Now, if I’m not wearing it, I can’t keep it. Someone out there probably needs my old sorority T-shirts and sizes-too-small mini-skirts more than I do. (I kid. Typically, it’s my old work clothes, warm sweaters, winter coats and gently worn shoes that make their way out. I gave away the minis long ago.)

One other cool idea: A friend of mine had a bunch of clothes, accessories and make-up in great condition that she had shrunk or just didn’t want to wear/use anymore. She invited us all over for dinner and drinks, then opened up her closet and let us all pick what we wanted. I got some amazing work clothes and she got much-needed closet space back. It was a win-win for all.

Tip two: Buying stuff isn’t always an option. I would really like a tent for when we go hiking and camping, instead of always borrowing my parents’ huge old complicated one. But I seriously have nowhere to put it, so I can’t buy one. Same goes for my eating nook (I really want an actual table, with chairs that have backs), kitchen appliances (we have the smallest coffee maker EVER), seasonal apartment decorations, a treadmill, a rocking chair, a bigger TV screen, an entertainment center… you name it, I can’t buy it. And that’s fine by me, because I probably can’t afford it anyway. What I have fills my living space to the brim. And that’s enough.

In terms of household items, I would like to be able to buy some non-perishable things in bulk, like paper towels, toilet paper, soaps, shampoos, etc. But for now, we just have to say NO! because we can’t handle it.

Tip three: Organize with removable shelves and bins. Is there any storage problem that Rubbermaid can’t help with? Check out their Web site for new ideas for your closet, junk drawer and shared spaces. I optimize all my space with extra sliding drawers, bins, etc. Come to think of it, I will be buying more today to organize my coat/cleaning supplies/wrapping paper/board games storage closet.

Tip four: Keep it clean and uncluttered. I am never in a worse mood than when my apartment is cluttered or untidy. And with only one main living area, that seems like always. The slightest amount of clutter - office papers, coffee cups or junk-mail - on one surface makes it seem like my entire apartment is in chaos. Not only does a messy apartment make me cranky, it also makes me feel like I want to move to a bigger, more expensive one. Keeping the place clean goes a long way towards making me feel content, so if you feel trapped in a tiny apartment, try cleaning and uncluttering before you think about getting a bigger place or buying before you’re ready. It might help you stick with your lower rent place.

Tip five: Understand your personal space needs. I grew up in a family of six. In college, I never lived with less than six people. I like a full house, I like contact, I like constant conversation. B, on the other hand, was one of two kids, and prefers to be a little quieter, a little more solitary and have a little more space. Our different upbringings play out like this: If he’s in our small kitchen, I like to be standing a few feet away from him, chatting. He feels claustrophobic if we’re both standing in the tiny kitchen together.

When we first moved in together, I think we were both surprised that the other felt so differently about personal space. But we talked about where our needs come from, and we respect them. In the end, I learned the value of having quiet time to myself (which sometimes requires me to get outdoors for a walk or just sitting down by myself with a good book), and B learned to appreciate having someone nearby with whom to communicate.

Whether it’s roommates or a loved one, living together can be difficult. Living together in a small space can be even tougher. Communicating about, understanding and respecting personal space needs will help make life easier.

…..

I could probably ramble all day, but I hope these five top tips will help you better appreciate your small, tight, unloved apartment or condo a bit more before you grow out of it.

In addition to the tips above, here are some sites that can help as you look to furnish or rework your small space:

• Tiny Living
• Domino Magazine
• HGTV: Small Space, Big Style Gallery
• HGTV: Small Space ideas
  
• Ikea
• Nate Burkus’ Small Space Miracle
  

For those of you with small-space love, give us some of your best tips!

Roubini writes:

[On CNBC] I fleshed out my arguments on why the US recession will be severe and protracted, lasting four to six quarters.

… later in the CNBC program Nobel Prize winner Joe Stiglitz explicitly agreed with my view that this will be the worst U.S. recession since the Great Depression. In some ways Stiglitz was even gloomier than I have been.

Later that morning on CNBC Mohamed El-Erian, co-CEO of Pimco, fleshed out the arguments on why this crisis is not over. That interview followed up his excellent op-ed column on the FT today where he argued that we are now moving to a new stage of the economic and financial downturn.

Here is the Financial Times piece by Mohamed El-Erian: Why this crisis is still far from finished

… During the next few months there will be a reversal in the direction of causality: the unusual adverse contamination by the financial sector of the real economy is now morphing into the more common phenomenon of recessionary forces threatening to undermine the financial system.

Economic data in the US have taken a notable turn for the worse. Most im­portantly, the already weakening employment outlook is being further undermined by a widely diffused build-up in inventory and falling profitability. History suggests that the latter two factors lead to significant employment losses.

… The sharp slowdown in the US real economy will occur in the context of continued global inflationary pressures. As such, the Federal Reserve’s dual objectives – maintaining price stability and solid economic growth – will become increasingly inconsistent and difficult to reconcile. Indeed, if the Fed is again forced to carry the bulk of the burden of the US policy response, it will find itself in the unpleasant and undesirable situation of potentially undermining its inflation-fighting credibility in order to prevent an already bad situation from becoming even worse.

It is still too early for investors and policymakers to unfasten their seatbelts. Instead, they should prepare for renewed volatility.

I will be attending the Milken Institute Global Conference on Monday April 28th. There are a couple of sessions of special interest related to real estate:

Real Estate: Where Is the Bottom?
9:35 AM - 10:50 AM (PT) (includes Sam Zell)

The Future of the Mortgage Market: Where Do We Go From
Here?
4:00 PM - 5:15 PM (includes Lewis Ranieri)

Also at 4:00 PM is a session with several prominent economics bloggers:

Econobloggers: Real-Time Information and Analysis From
the Keyboard Next Door

The panel includes several bloggers that Tanta and I frequently reference:
Felix Salmon, “Market Movers” at Portfolio.com
Yves Smith, “Naked Capitalism“
Professor Mark Thoma, “Economist’s View“

Hopefully - laptop willing - I’ll be blogging live from the conference.
Best to all.

From Bloomberg: Target Writes Off 8.1% of March Credit-Card Loans

Target Corp., the second-largest U.S. discount chain, said it wrote off 8.1 percent of its credit-card loans in March as consumers grappled with job losses and the biggest housing slump in a quarter century.

Defaults during the month totaled $55.5 million, the Minneapolis-based retailer said in a regulatory filing today. The charge-off rate was 6.8 percent in February.

This is pretty ugly - especially the increase in the charge-off rate from 6.8% to 8.1% over one month (this is another company pointing to significant problems in March).

Note: Target didn’t write off 8.1 percent in March - that is the annual charge-off rate.