Sunday, March 27, 2011

A Single Action Colt 45 or a Visa Platinum Card?

We have had one credit card for 25 years. I put off getting a credit card until I was 35 years old. Even in my twenties, I saw a number of my peers get themselves into serious trouble with plastic money. However, at that point in my life, not having a credit card was getting pretty ridiculous and quite inconvenient. Fortunately, I had a father. This is a man who taught me how not to blow my fingers off with firecrackers, the safe handling of loaded weapons, and a healthy fear of debt. I have paid off my credit card every month for over 25 years. Perfect record. Never carried a balance, ever. It can be done.

I treat my credit card very much like a loaded handgun. It does not go off unless I have chambered a round, checked the safety, made certain the range is clear, and taken careful aim at what I intend to hit.

In a recent article from U.S. News and World Report entitled Ten Worst Credit Card mistakes, the author examines some astonishingly bad practices. The most outrageous mistake listed was giving your credit card information to someone else or giving signature authority to someone other than your wife or husband. This is called inviting identity theft into your life. I found it shocking that anyone could be that naive or careless. Then some parents have been known to leave loaded guns lying around a house full of unsupervised children. The author suggested one exception, parents giving a responsible teenager a credit card for limited use under strict supervision. I can add another. Power of Attorney granted to an adult child by an elderly incapacitated parent. It happens.

Number 3 from my list of 10 Basic Rules for Young Couples states, “Don’t use a Credit Card unless you can pay it off every month.” The article warns about spending more on your credit card than you have in the bank. Credit Card debt is particularly toxic because the interest rates are so high. I am really hard core on this issue. If you can’t pay that card off every month, lock it up in safe or a safety deposit box until your monthly balance is zero. As part of Dave Ramsey’s Financial Peace University he encourages the participants to cut up their credit cards and collect the remains in a large glass jar.

I expect the most common mistake is improper or inadequate management of statements and payments. The credit card companies do a remarkably good job of accurately charging your account when you use their card. However, every month sit down with your credit card accounts. Go through the charges, line by line, matching the listed charges with your receipts. If you see a charge you do not recognize, ask. Start the investigation with your spouse. If that does not produce an answer, call the company that is listing the charge. It doesn’t seem like it should be necessary to tell an adult to do an item by item check of their credit card statement, but there are functioning adults who have never balanced a check book.

Another recommendation: never use a credit card in an ATM. With most credit cards the bank will charge a flat fee for use of their machine. In addition, the credit card does not wait until the end of the billing cycle to start interest payments. You will begin paying interest immediately. I have not had a bank account in over 25 years. Instead, I have been a member of my workplace credit union. This is not only cheaper and safer than dealing with a bank, but extremely convenient. I have never found it necessary to use an ATM. However, our Credit Union does provide us with the ability to use ATM networks if the need should ever arise.

If you do find yourself with credit card debt always attempt to negotiate a better rate. This is particularly effective if you actually have a better offer. Credit cards are such lucrative profit centers, the bank has room to be flexible and still make an obscene amount of money. “When the going gets tough, the tough change the rules.”

Oh, one more thing. Don’t sign up for a credit card just to get that really cool hat or similar trinket. Unfortunately, that happens every day.

The author sighs in disbelief, “People please let’s be careful out there.”

Friday, March 18, 2011

The Man Who Broke the Bank at Monte Carlo

In a memorable scene from the movie Lawrence of Arabia, Lawrence is riding alone across the desert, as he nears some mountain cliffs he begins to sing the popular English music hall favorite, The Man Who Broke the Bank at Monte Carlo. Listening for the echo, he hears both his own voice and applause from a British major standing on the rocks.

I've just got here, through Paris, from the sunny southern shore;
I to Monte Carlo went, just to raise my winter's rent.
Dame Fortune smiled upon me as she'd never done before,
And I've now such lots of money, I'm a gent.
Yes, I've now such lots of money, I'm a gent.

It turns out there really was a man who broke the bank at Monte Carlo. His name was Charles Deville Wells, a notorious con artist, swindler, and gambler from the late Victorian era. In 1891 he defrauded investors of £4,000 in a scheme to sell musical jump ropes. He then took the money to the Monte Carlo Casino. According to Wikipedia, “In an eleven-hour session Wells 'broke the bank' twelve times, winning a million francs. At one stage he won 23 times out of 30 successive spins of the wheel. Wells returned to Monte Carlo in November of that year and won again. During this session he made another million francs in three days, including successful bets on the number five for five consecutive turns.” Breaking the bank refers to an occasion when a gambler wins more money than is on a table. The expression in French is, "faire sauter la banque." When this occurs, the table is shut down and covered with a black cloth until more money is brought out from casino count room.

I stay indoors till after lunch, and then my daily walk
To the great Triumphal Arch is one grand triumphal march,
Observed by each observer with the keenness of a hawk,
I'm a mass of money, linen, silk and starch -
I'm a mass of money, linen, silk and starch.

The casino hired private detectives to find out what system Wells used to beat their Roulette wheels. Much later he admitted he just hit a lucky streak while “doubling down” after a loss.

As I walk along the Bois Boolong
With an independent air
You can hear the girls declare
"He must be a Millionaire."
You can hear them sigh and wish to die,
You can see them wink the other eye
At the man who broke the bank at Monte Carlo.

In 1892 Fred Gilbert wrote a popular song about the event making Wells something of a celebrity. He used his new status to promote himself as a brilliant engineer with a fuel-saving device for steam ships. To “test” his new invention he bought a very large yacht and returned to Monte Carlo with his new mistress. He lost all of his money and that of his investors. He was found guilty of fraud and spent eight years in an English jail. Convictions for additional frauds netted him three more years in English jails and five in French jails. He died in poverty.

The reality of the American millionaire is far less interesting than the antics of a few crooked bankers, Wall Street hooligans, and the odd behavior of disturbed television stars. A recent survey indicates there are 8.4 million American households with a net worth in excess of one million dollars. There are roughly 115 million American households. Therefore, roughly 1 out of 14 American households would be considered millionaires. That’s a lot of millionaires. Who are these people? Turns out they are a pretty boring group.

In the famous book, The Millionaire Next Door: The Surprising Secrets of America's Wealthy, authors Danko and Stanley study the behavior of millionaires. Want to find a millionaire to study and emulate? Visit a modest suburban neighborhood. Look for well made brick houses from the 1950s or 1960s with big trees in the yard. In that neighborhood, find a self made small business owner who loves his job and his wife of 30+ years. It is likely he will be driving a car like a low mileage 10 year old Buick. For some reason these men buy cars by the pound, the cheapest decent car they can buy on a per pound basis. If he is wearing a shirt from J.C. Penny, you have hit pay dirt. J.C. Penny is the millionaires’ go to clothing store. They spend less than they make. They invest in a consistent disciplined manner over a lifetime, usually in pretty safe, boring things like blue chip stocks, low cost mutual funds, or in conservative cash flow based rental properties.

They do not buy things they don’t need with money they don’t have.

Go thou and do likewise.

Sunday, March 13, 2011

Another Post on The Emergency Fund

It was just one of those things. It could have happened to anybody. A little while back my wife got lost in a bad rain storm. It could have happened to me. On occasion I get lost. My wife left her cell phone at home, so she stopped at a mattress store and gave me a call. I quickly determined where she was and told her how to get home. She said she was going to wait until the rain let up. Fifteen minutes later I received a second phone call from a more distressed wife. She had locked the keys in the car and left the headlights turned on. I picked up the spare set of keys and drove the 40 minutes or so required to get to where her car was parked. Problem solved. The battery still had plenty of power to start the car. I comforted my wife and we drove home.

If someone has a spouse or a teenager with a driver’s license, this scenario is not a serious problem, just an irritation. If I was out of town, my wife could call a wrecker or some sort of roadside assistance company. I imagine that would cost $200 or more, particularly since it happened on a Sunday afternoon. That would be a kick in the pants, but certainly not the end of the world. But let’s say this happened to a single mom who worked at a minimum wage job. What if she put it on a credit card then couldn’t pay off the card? She would get hit with all sorts of fees and high interest charges. This simple little chain of events could wreck her finances for several months.

This is why an emergency fund is an absolutely critical first step to financial solvency. For whatever its worth, the emergency fund is number seven on my list of ten Basic Financial Rules for Young Couples.

Start a “rainy day” fund in a bank or a money market fund. The goal here is six months cash reserve (six months take home, both salaries). It will take some time to reach this goal. Don’t beat yourselves up about this but keep putting a little something aside every month.

I am not alone here. A thousand dollar emergency fund is Dave Ramsey’s baby step number one. Dave Ramsey’s baby step number three is a full emergency fund with three to six months take home salary. Suze Orman is even harder on the emergency fund issue than most financial teachers. Currently, the average duration of unemployment has hit an all time high of 37 weeks. Therefore, Suze Orman is calling for an emergency fund of eight months take home pay. In a change to her former teachings, she now considers the emergency fund a higher priority than paying off credit cards. A year ago, I put up a post based on an article by Liz Weston entitled, “Why You Need $500 in the Bank.” By the way, this minimal number matches Dave Ramsey’s suggestion for a family with a combined household income below $20,000 a year.

The numbers are pretty awful.

64% of households with incomes under $25,000 have less than $500.
38% of households with incomes between $25,000 and $50,000 have less than $500.
17% of households with incomes over $50,000 have less than $500.

And believe it or not!

5% of households with incomes in excess of $100,000 have less than $500 on hand.

Please, if you don’t have an emergency fund, start one today. Even a few dollars a week could save you from an unforeseen credit disaster.

Saturday, March 12, 2011

It's Tax Time

It’s that time of year, the time when Americans spend hours preparing their tax returns or pay someone to do it for them. Before we owned a house, I prepared my own tax returns. A simple return wasn’t rocket science. Then we bought a house. Trying to clarify a point in my tax return, I called up the IRS twice and received two different answers to the same question. At that point I threw up my hands and carried the entire mess over to the local CPA. He found deductions for me that I know I could have never have located by myself. The CPA had a book case with about a four foot long shelf filled with three ring binders detailing the tax code and recent court decisions. He told me he subscribed to a service that provided him with weekly updates to the tax laws. He showed me one week of such updates. It was about ½ an inch thick. Since then, my taxes have been done by a CPA. Currently my taxes include buying and selling stocks, foreign income taxes, and something called a form K for a limited partnership. Preparation by a licensed professional costs me $225 plus something like $58 for insurance in case my return is audited by the IRS. I consider this money well spent.

I am suspicious of storefront tax preparation stores, like those run by H&R Block. How good are those part time tax preparers? Over the years I have read articles by consumer research organizations and local investigative reports. Generally speaking, using such services is a crapshoot. Some of the preparers are experienced and competent. Some are less than competent. Repeated experiments have proven that 10 different tax preparation services will produce 10 different results at 10 different prices.

Something has happened in the passage of time. My current CPA does not have a book shelf filled with court decisions and the text of the tax code. She has a computer and access to a massive tax preparation program for professional accountants. After she does her thing the computer spits a copy of my 58 page tax pack to my email address and a copy to the IRS and the Comptroller of Maryland. I was surprised to learn most of my coworkers use Turbo Tax, a low cost cousin to the more sophisticated codes used by corporations and accountants.

I found an article in USA Today, “Test Drive Highlights Tax Software Limits”, by Sandra Block that evaluates various tax preparation packages. The author contends that any of the major products are OK for normal tax returns. However, for filers such as retired folks with substantial portfolios, the author recommends a professional. She observes that determining the cost basis of a stock purchased in the 1980s is not something the uninitiated should attempt to perform without supervision. The biggest headache thrown at the software products turned out to be the conversion of a traditional IRA to a Roth IRA. None of the packages could properly determine the optimum tax strategy. For some filers it is more appropriate to defer part of the tax bill for others it would be better to pay it all now. Turbo Tax handled this problem better than the other products but it still required the user to do the calculation by hand on a separate piece of paper. H&R Block just deferred the income without explanation. Complete Tax offered the user an option but the testers found the explanation vague and confusing. If this question was posed to the help section, the user was offered the option of buying an upgrade to receive an answer. Tax Act wanted to tax all the conversion in 2010, producing a tax bill so large the author experienced heart palpations. After talking to the company that produced this product, the author learned the user had made a mistake, but she still contends that any normal user would have problems with this package. While all of the packages handle casual income from a part time job without any problems, small businessmen are encouraged to seek professional guidance when preparing their tax forms. An upgrade to Turbo Tax Home and Business Version @ $75.00 handled part time or consulting income better than any of the tested standard versions.

Bottom line? Turbo Tax is the winner, although users found the automatic updates irritating. H&R Block is a good product that costs 25% less than Turbo Tax. Tax Act is the cheapest product and quite suitable for simple returns or for people who have a good understanding of the tax laws. If you want any guidance you will have to buy an upgrade.

One more note, my broker Schwab is offering its clients up to 35% savings on Turbo Tax products. When you buy Turbo Tax from Schwab the company will prepopulate your return with the numbers from your form 1099 and cost basis information on your stock sales. How cool is that?

Here are the products reviewed in the article.

TurboTax Deluxe, Desktop: $59.95, includes federal and state tax return. Online version: one federal return, $29.95; one state return, $36.95.

H&R Block at Home Deluxe, Desktop, $44.95, includes federal and state tax return. Online: $29.95 federal; state tax return, $34.95.

CompleteTax Deluxe (online only): $29.95 federal; $29.95 state.

TaxAct Deluxe: Desktop, $12.95 federal; federal plus state tax return, $21.95. Online: $9.95 federal; $8 state.

Saturday, March 5, 2011

Identity Theft 2011

Most of the information in this article comes from a newsletter by Sid Curry. It was sent to me by a friend of this blog.

I saw something very scary on one of those investigative journalism bits on the local TV news. A guy selling security services went undercover with a TV reporter and a cameraman to expose the vulnerabilities inherent in the new credit cards that have an imbedded Radio Frequency Identification Chip (RFID). You can tell if you have one of these new cards. It will have a little black circle that appears to be emanating black circular arcs that might be radio waves. The security specialist put his laptop in a backpack, wired himself up with a little probe that connected to the laptop, and headed down the street. He would walk past a “victim” and use his system to collect the data off any cards with RFID chips that happened to be in their wallet or purse. Then the TV reporter, the cameraman, and the security specialist would reveal themselves to the victim and tell them their card number, expiration date, PIN number, and address. Very scary stuff. The security company sells little wallets that protect your card from this kind of fraud. I am told they are lined with aluminum foil, but I have not verified this as fact.

Identity theft is running at about $37 Billion a year. The good news is that number is dropping as consumers become more cautious and credit monitoring services and the government become more sophisticated in fighting these crimes. Still there were 8.1 million victims of identity theft in 2010. That the number dropped from 11 million in 2009 is of little comfort to the 8 million who lost an average of $631. Also straightening out these messes is taking the consumer an average of 59 hours. This number is up from 41 hours in 2009.

Debit card fraud is increasing. Remember, your debit card is not protected by the same laws as a credit card and you may be on the hook for a larger portion of the losses. Also you may lose access to your bank account for an extended period of time.

The big news in identity theft crime is counterfeit cards. Using various methods and devices, criminals collect the necessary data and make exact duplicates of your cards.

Another disturbing trend, in 43% of these cases, the criminal was a friend or family member. Parents are even applying for credit cards in their children’s names to fraudulently obtain cash. Disgusting!

Here are 13 security suggestions from Sid Curry:

1. Don't sign the back of your credit card - put "Photo ID Required" - it puts the liability on the merchant if they don't check.

2. Print checks using initials - you need a full name to establish credit.

3. When paying credit cards, only put last four digits on the check - the credit card company will know where to apply your payment, just include payment stub.

4. Put office phone (never home phone) on checks.

5. Use P.O. Box as your address on all info if possible - most lenders will not accept a P.O. Box when applying for credit.

6. Photocopy all wallet contents (front and back). Saves time and frustration - criminals know that they have two hours to do the most damage and they know it will take you much longer to find the information to report and cancel the cards.

7. Cancel cards as soon as possible - within the first hour is preferred.

8. Immediately file a police report in the jurisdiction the crime took place -filing a report gives you creditability and often confirms that it is not friendly fraud.

9. Call all three credit bureaus to place an alert on your account.

Equifax - 800.525.6285

Experian - 888.397.3742

Trans Union - 800.680.7289

10. Call the Social Security Administration at 800.269.0271 if it has been compromised.

11. Contact the Federal Trade Commission at 1.877.382.4357 or ( - they track and shut down fraud rings but can't do it without your help.

12. Over 50.2 million consumers have credit monitoring services - it is worth the money.

13. Many banks have free monitoring services for your checking, debit cards and credit cards, SIGN up immediately. You will be instantly notified of any and all account activity.

I have an identity theft rider on my home insurance policy. It was so cheap, I just added it. At the time I knew what I was buying, but today I don’t remember the details. I think that identity theft insurance is a good idea. I also think I better check on what I am carrying I might need better coverage.

And Hey! Let’s be extra careful out there.