http://www.cnn.com/2009/POLITICS/03/19/aig.bonuses.congress/index.html

Beyond the possible prevention of a predicted cataclysm, what reasons does a capitalist society have for purchasing private companies with public money?  All I hear is “they can’t fail, it would be catastrophic to our society”.  How about the loss of $1.6 trillion from the public coffers?  How detremental is that in terms of cutbacks to our much needed services?  Are we going to see necessary expansion to our police and education budgets?  How about the roadworks, infrastructure upgrades, public transport initiatives?  All I hear there is that bridges are close to crumbling and police are having to triage 911 calls due to overwhelming demand and underwhelming numbers.  Are those not equally catastrophic to our society.

As a worker and U.S. taxpayer, I expect part of the money we all collectively pay to our government each year in order to improve our public services and our communities, not to go into the pockets of another unethical twathole responsible for our current plight.

Furthermore, what about AIG’s competitors?  What do they get from this deal?  When they ran into hard times because people like AIG used their size to force them out of the market, there wasn’t any deal for them.  They are trying to compete in a ruthless market by making smarter business decisions and providing better services yet when their competitors finally do fail due to horrible mismanagement, the government comes in and props them up.  If I was in the insurance business right now I’d tell every single one of my employees to go home, close my doors, and just get out of the business.  You can’t compete in a market that gives $170B to your competitors every time they make mistakes.

The same goes for the auto industry.  Why do we have absolutely no diversity in the car manufacturing market?  Because establishing a new auto manufacturing company in this day and age is unbelievably difficult to do.  The big automakers can push you out of the market so fast you won’t even get your logo on your first plant before you’re shut down.  How must those same fledgling business feel now, watching their competitors (who have made disasterous decisions over the last few decades) getting propped up by government funds.  The fledgling business can’t ever survive when their competitors monumentally fail.  Just quit the business and let the government run the lot.

On Friday the check engine light in my Mazda stayed on after I started the car.  It’s probably something small, but my car is now awaiting a diagnosis to find out what repairs are necessary.  I’m sure it won’t be free.

This morning I was reminded that I have a dentist appointment tomorrow to get fitted for a second crown, something I’ve been putting off for far too long.  I had a crown done last year and it was an extremely successful procedure, however it was also fairly costly.  I’ve been delaying the second one for a while to soften the financial blow.  I apparently delayed it until January.  The cost will be split between the preparation work tomorrow and then the actual crown fitting in a couple of weeks.  Either way, it isn’t going to be free either.  Our health insurance covers a basic percentage of the cost but also with basic materials that really don’t get the job done right.  I get penalized for wanting a porcelain crown and proper molding and settling materials and equipment.  Shame on me for wanting the job done right!

I’m actually not worried about it at all though.  We did well keeping to our budget over Christmas and have a couple of spare dollars in the account this month.  The final balance for the wedding in July is looming but overall I’m satisfied with our fiscal exit from 2008.  Nice to get a few of these jobs knocked off too.  2009 is a year for finishing; time to bring closure to some long running jobs.

I especially like “Spend time with your family and friends. Enjoy each other and create a support network to get through to better financial times.”  What a great perspective.

Thanks Ted!

You have to wonder where this will end. I feel really bad for the people of Zimbabwe. They people there are powerless to stop the financial crisis happening around them.

Thanks to @geoffrey_mcgill and the re-tweet from @shanselman for the link.

Presidents come and go.  Political and economic policy sails in and out and the majority of people are none the wiser.  “Yeah, that was a bad policy or a bad time, but we’ll come through it, everything will be ok.”  Now I’m not proferring that the end of the world is currently rolling up our driveways, but I have to take a stance of “Yes, it does fucking matter!  It affects billions of people on a daily basis.”  It makes me wonder if the last twenty years have been altogether too shielded from harm.  We’ve never truly seen consequences for our actions or for our apathy.

Most people look at global warming with an “oh yeah, is that still going on?” sort of attitude.  The economic crisis is “scary” and everyone “knows someone” who is having problems with their mortgage payments or retirement plans.  However, the overarching response I seem to get from people on these topics is a look of general boredom and an expression similar to the vocalized phrase of my friend: “Does it really matter?”

Well, to the people in Iceland right now: it matters.

To the people in California leaving everything in their homes for a “trash out” team to throw into a dumpster: it matters.

More subtly, for all of us who might suffer under another ignorant and uneducated administration: it matters.

I am sick to death with the apathy, opinions of entitlement, and complete lack of self-responsibility that I have observed over the last decade.  The world does not revolve on a wheel made of gold.  Sooner or later, no matter how many government bailouts and social blinders we employ, the consequences of our apathy and greed are going to affect us all.  The worst part of it all is that most people agree on a foolproof method for determining when it matters:

as soon as it starts affecting you.

As far as freecreditreport.com go, they are an Experian powered portal proferring a “credit monitoring service”.  This can be loosely translated to “report summary”.  The dashboard provides a quick view of the same data that is contained in my Experian report, as well as a couple of less than useful graphs that “track my credit score” and show “alerts” on my report.  To be fair, I was able to get my Experian report for free, use the freecreditreport.com account to sign into Experian and then file a few disputes about typographical errors on my report.  Nothing huge, just missing apartment numbers on addresses etc…  These things are fairly typical errors on a credit report but it doesn’t hurt to get the disputes filed and clean it up.

How to make sure your FREE credit report is actually FREE
If you are considering using freecreditreport.com then there are just a couple of things you should know:

• You will need to enter credit card information in order to get your free report.
• Your credit card will not be billed until 9 days after you sign up
• After 9 days you will be charged $14.95 monthly for their service
• In order to cancel you should call 1-877-481-6826

How to get the most out of it
To get the most out of your free credit report, here is what I advise that you do.  First go to freecreditreport.com and sign up for a free account.  You will need to enter your username, password, address, social security number, answer a security question, and supply a credit card or debit card number.  This will create your free account. After you have satisfactorily used the report, be sure to call them at 1-877-481-6826 and cancel your account.  There is no option on the website to do this.  When you call they will try to sell you other services and distract you from the cancellation request.  Just persist and after about 30 seconds they should accept that you just want to cancel.  Be sure to persist here.  You will receive an email a few minutes later confirming that your subscription has been cancelled.  You can now continue to browse your free report for the next 9 days.

I am hearing so much talk about the bailout, failure of the bailout, failure of the financial markets, and the impending doom we are all promised is rolling up our driveways.  However, I find myself not alone from my friends and peers in asking “What exactly can I do about all this?”  We are not economic powerhouses with the ability to stimulate or restart the economy.  If you’re anything like me then you have a couple of car loans, one or two credit cards, and a comfortable apartment or small house.  You have a 401k investment plan into which you have added a percentage of your paycheck.  In your daily life you will awake, go to work, pay your bills, eat, and sleep.  Your options to solve the crisis in the financial markets are somewhat slim.  We all would like for the “financial crisis” to be over but we lack the means to directly effect that change.  Furthermore, you are probably looking for ways to ensure that over the next six months you can still feed your family and pay the rent/mortgage.  Grander designs will have to wait for a fuller wallet.

So what can you do in the meantime to help ensure that you are able to ride out this crisis?  There are a couple of things.  Please bear in mind that I am not a financial advisor, nor a qualified or certified financial consultant in any way.  I have opinions and observations, all of which could be (and probably are) entirely false and misguided.  However, I have had many friends over the last few weeks ask me for ideas about keeping themselves safe through troubling times.  To that end I will share the ideas and techniques I am using to insulate myself from whatever economic change is forthcoming.

Float (or Rainy Day Fund)
The first thing is the concept of a float or a rainy day fund.  We all know that a nice little savings account would give us a warm fuzzy feeling, however seemingly fewer of us have succeeded at putting one together.  A float is there to simply insulate you from short term bumps in the road.  It should only be used as a last resort to help cover emergency expenses and should be the first thing restored after the emergency need has passed.  The biggest problem most people face with a float is how to get one started so lets start by addressing that first and then progress from there.

Starting a Float
It takes only a small amount of discipline to successfully put together a float.  The most important thing is to get a system going that you can stick to.  The technique I used to get a float going was to first establish a weekly amount that would be set aside for the float only.  I chose $50 but you can tailor it as necessary.  The key is not to set aside the $50 at the start of the week and then hope that you won’t need it by the end.  All that does is put $200 aside in a box that is then spent at the end of the month when money runs out.  Instead try to actively find items during the week that you can consciously do without before you spend the money.  Then take the money you were about to spend and set it aside (in cash if possible) in a box or envelope clearly marked “Float money – DO NOT SPEND”.  When the float has got $50 in for that week then any other purchases are fine to make.  At the end of the week (or month depending upon your schedule) take the money from the box or envelope and deposit it into a savings account.  Doing the deposit in person is important because it mentally reenforces the activity and helps to form the habit and strengthen the system.

For example, I play a lot of video games and will periodically browse the local stores for new games I’m interesting in buying.  I would sometimes pick out a couple of second-hand titles that I would like.  Think carefully before a purchase.  Putting one of the titles back on the shelf, taking out $22.95 from my wallet (I rounded to $23) and then going home with only one second-hand game still made for a great Sunday afternoon.  It also put $23 in the float for that week.  As another example, I sometimes get home from work and think “I’m tired.  Why don’t we just get a take-out delivered tonight?”  Instead think whether you could just heat something from the freezer and put $20 into the float box instead.  It soon reaches $50.  In fact, simply putting back an impulse purchase at the store and putting $4 into the float can help a lot too.  If you keep up the habit of getting to $50 each week then you’ll end up with a $2,500 savings account in just under a year.  This is a really great float.  It may take until next fall to get it built up but the point of this post was what things you could be doing right now to protect yourself against the effects of an economic downturn.  It’s hard work and frustrating at times (I hate putting games back on the shelf) but the lowered stress and peace of mind a float can bring is enormous.  I promise it will significantly improve the quality of your life to have a float account.

Reduce your Debt
Debt is a pain.  None of us want debt and yet nearly all of us have it.  We all mean to pay it off but somehow the action doesn’t line up to the original intention.  Lowering your debt is something that takes focus.  The companies that have loaned you money do not want you to pay it off.  They want to keep charging you interest on that loan and turning a profit.  If you simply put the debt on the shelf in your mind and pay the minimums each month then the companies you owe money to are going to keep fixing the system in their favor to take as much money as they can from your pocket.  The only way to reduce your debt is to face up to it, research it fully (most people could not tell you what they owe), and then set forth a plan of action to pay it off.  If you have multiple credit cards I would consider targetting one first.  Just pay the minimums on the other cards and devote additional resources to getting rid of the one focus target.  Choose the one with the lowest amount owing.  The mental reward of actually clearing a card is very valuable and by choosing the card with the lowest balance you ensure that feeling is as close as possible.  Try to find additional ways to send a little extra money to pay off this card every month.  Similar to the tricks for the float account, setting aside just $10 here and $20 there can quickly add up to a large additional payment.  Remind yourself every month when you pay your bills of all the reasons why you shouldn’t put anything on a credit card.  Don’t add to your debt.  You’re already building up a float for emergencies.  You do not need these credit cards.  They are an anchor on your life.  Find ways to pay them off and avoid using them at all costs!  When you’ve paid off the first card then turn to the next one and focus on that.  You’ll be surprised how quickly you can pay them off when you focus your sights on them.

Pay Yourself Early
Humans need rewards.  We respond well to rewards for actions.  Positive reenforcement has been shown to be the most effective way to encourage beneficial behavior.  At the start of the month (or whenever you receive a paycheck) take out a little money and set it aside.  This money is yours for the month.  I know that sounds strange but something we all must realize is that our paycheck is not our money.  That money belongs to our landlord, the electric company, visa, and a whole host of other people we have already promised to pay.  Take aside a little money from your check as soon as it comes in and make that yours.  Subtract it from the total in your head of how much you got paid.  If your after-tax total is $1,300 then take out $100 and say to yourself “Great, I earned $1,200 this check.”  That $100 is yours to spend on yourself and to do with whatever you like.  However, like an allowance once it is gone then it is gone and you must wait until next month to get more.  By setting the money aside you are making the remainder of your budget much more predictable.  If you don’t set the money aside then you will end up spending it anyway.  As the month progresses you will find that you need this or that and spend it because you need a reward.  However, because you aren’t tracking it you will probably spend more than $100 and also make your budget that much less predictable.  Ever find yourself at the end of the month wondering why you’re $40 overdrawn because a bill went out that you’d forgotten about?  Paying yourself at the start of the month and then leaving the rest of the balance alone will really help to mitigate that.

These are just a few ideas of things that you can start doing today to help your financial situation.  Wall street may get a financial bailout when they make a mistake but I can assure you that you and I will not.  We need to take steps to protect ourselves, especially if tough times are ahead.  Taking action now will pay off bigtime over the next couple of years if you are cautious and careful.  Don’t go out on a big comfort spending spree.  Instead reduce your risks and get a savings account started.  You’ll thank yourself when the day comes that you need it.

As someone who has held off buying a house for a long time, instead saving carefully, paying off student debts and car loans, putting away money for a down payment on a house someday, I’m mighty chagrined at the news.  It’s a complete disincentive for being responsible.

“Oh but people were tricked into taking these loans!”  No.  A small percentage of people were misled.  Others knew exactly what they were doing and spouted lines like “You should totally buy a house, stretch as much as possible, you can make a great profit on it.  It’s free money.”  Yeah, that’s true for those who can afford the houses they took mortgages for.  That’s called responsible investment.  Others were just being greedy.  Take some fucking responsibility for the money you borrow.  If you can’t afford to pay back the loan, don’t take it in the first place.  Now we’re using US$700 billion in tax dollars to pay off the loans borrowed in poor faith instead of using them for growth.  That’s an awesome use of resources.  Makes me so proud to be a taxpayer.  I know, maybe next year I can pay for that Mercedes you couldn’t afford too.

http://www.oregonlive.com/environment/index.ssf/2008/08/pdc_board_oks_5_million_for_st.html

We’re spending $5M on the plans for a streetcar extension that may or may not get funded?  Granted that I really have no concept of how much civil engineering projects cost but that seems like a hell of a lot of money to spend on something that might happen.  It makes me wonder how many other projects have been researched and then dumped without any final product.  Is this really the best use of our limited funds?

This is one of many summaries that you can find at kiva.org, an online charity that manages micro-loans abroad.  Here is the concept in a nutshell:

• Overseas entrepreneurs register loan applications with kiva.org.  For example, Obidallah needed $1,025 for his grocery story.
• You make a micro-loan to one of the many entrepreneurs.  This can be as little as $25 or as much as you have to spare.
• The entrepreneur receives the full loan once enough lenders have been found for his enterprise.
• Over an agreed period (in this case 12 months) the entrepreneur pays back the loan in small increments.
• Kiva then redistributes the funds to the micro-lenders.

Kiva are a none-profit organization that take 0% (that’s none) of the loan in overhead or processing fees.  100% of the amount loaned gets into the hands of the business owner overseas.

A little over one thousand dollars is sufficient in developing countries to expand a fledgeling business, not as a donation but actually as a loan.  These are hard-working people who require a little up-front investment in order to become self-sustaining and generate a steady income of their own.  So far Obidallah has hit every one of his repayment dates; a man with a business that is profitable.

I chose to lend $25 for my first micro-loan because I wanted to see how the system worked.  I’m now confident enough to loan larger amounts of money because I’ve developed faith in the Kiva system.

The important difference between Kiva and other charities to me is the fact that with loans I am able to help out in ways I couldn’t hope to with donations.  I donate money several times during the year to charities that perform very necessary and very worthwhile work.  However, like all of us I have a limited amount of money that I can spare.  With a loan I am simply deferring posession of the funds to a later date.  It’s very similar to sticking money in a mattress.  Consider that you want to save up for a sofa, for example.  The sofa you would like costs $1,000.  Ouch!  In the back of your mind you think “I should save up $100 per month for that sofa and in ten months I could buy it.”  Others think “I could spend $1,000 on a credit card and pay it off over ten months” (although more often than not the “paying off” but fails, and you end up spending $1,400 for the sofa by giving $400 to VISA).  Not only that but it lingers on your credit card for what, 2 years, 3 years?

What if there was a different solution?

It might require a little more patience, but consider that each month you loaned $100 to an entrepreneur overseas via Kiva.  That would take ten months to complete but would be a total amount loaned of $1,000.  Assume then that the payoff period for each loan is twelve months.  After twelve months from the date of the first loan you’d get back your first $100.  You put this in a savings account.  Next month another $100.  This would continue until 22 months from your the day you made that first loan.  At this point you’d have about $1,080 in your savings account (assuming you made about $80 in interest over the year).  Now you can go buy your sofa and you still have $80 to make another loan with!

In just 22 months you’ve saved up for that new piece of furniture instead of putting it on credit.  During that time you’ve helped 10 (ten!) different entrepreneurs start their own businesses and provide for their families.  That’s ten other families that got a break by you exercising a little patience in buying that sofa.  I guaran-damn-tee you that is a much better use than VISA would put your $400 of “convenience charge” to.

We have great wealth over here and the amazing part is that a very, very small portion of that wealth can do amazing things in other countries.  I can’t even fill my gas tank for $25 any more.  In the right hands that money can be used to rebuild an infrastructure that is in very dire need.  There are entrepreneurs who are willing to put in the long hours and hard work it needs to build a future for themselves, they just need a little help getting started.

Meaghan and I are saving for a wedding next July.  We’re going to celebrate our life-long union with our friends and need to save several thousand dollars to pay for the ceremony and celebrations.  What a nice thought that the process of saving for the celebrations of our life union will pay for dozens of families abroad to get their lives started too.

Just a thought.

Stuart Thompson

Specifically I’m referring to the section where the home-building industry “didn’t think the boom and bust would be so severe.”  Let’s step back and think for a moment about that shall we?  First of all, the article cites the primary reason for a housing market boom as being the relaxation of crediting and financing policies to include previously untapped consumers.  Between 2004 and 2007 loans were issued to consumers with poor credit, no down payment, or salaries that didn’t justify the amounts borrowed.  Why is it a surprise that this isn’t sustainable growth?  This is another classic case of people being naive on purpose.

I know, here’s a great idea.  Let’s pretend everyone earns twice the salary that they actually take home with them.  What we’ll do is allow them to spend more than they make every month by loaning them some large amount up front and see how long the growth lasts.  Oh look, after a few months we ran out of new consumers.  Even worse, the consumers that did sign up now can’t make the payments.  Hmm, I wonder why it wasn’t sustainable?

My advice to everyone who is reached by the “Buy Now Oregon” style campaigns is to hold off for a while.  At the end of the day houses sell for “$$as high as possible” (read largest amount of money we can get you to pay).  This is how people expect to make money by turning houses over.  Long-term it’s a myth.  I’ll explain my reasons for that belief in a moment.  For now, suffice to say that the housing market is tumbling.  Oregon is typically one of the last to fall and one of the last to recover.  Therefore, why would buying a house now be a good idea?  All you’ll end up with is something that is going to lose value over the coming months.  As always, I could be completely wrong on this so please use your own judgement wisely as your mileage may vary.  However, my instincts tell me that things have yet to truly tumble.  Do you really want to buy a house for $400,000 today that is worth $280,000 in two years time?

The point I’m making here is to view the model in the long-term and see if your common sense tells you this is a good idea.  Expanding your house-manufacturing business in times of high demand is a good idea.  However, not thinking that the bubble would burst- not so smart.  If this was genuine growth I’d be singing a whole different tune, but those who know me have heard me saying this for the last five years.  I saw the boom coming and predicted the bust over half a decade ago.

Think of the US as one big monopoly board.  The amount of money “in play” on the board fluctuates a little, but in general (and especially for your average US family) the amount of money on the board stays fairly constant.  Minimum wages (and subsequently the wages above that) rise about in accordance with inflation but it’s not like we all doubled or tripled our salaries between 2000 and 2004.  In Oregon the minimum wage went from about $6 to a little over $7 per hour.  Salaries above that grew in roughly similar proportions.  People earning $15 per hour rose to about $17 per hour and so on and so forth.  So assuming that the amount of money people have available to spend has remained about constant, how is it that everyone’s house suddenly gained $100,000 (for the sake of argument) in value?

The answer is that they didn’t.  It’s a trick, a clever trick, but a trick nonetheless.  Back to the monopoly board.  It was flagging.  The number of players who owned hotels wasn’t growing, no new hotels were being built.  Many players were going around the board with hopes of buying property, but they spent so much time paying money in rent or getting “Car repairs due, pay $50″ chance cards that they never got ahead enough to actually buy a place.  Then someone had a great idea and said “this game is getting a little boring, how about if we spice it up by letting you purchase a property and only pay of $1 of the price every time you go around the board?”  That way everyone can have a property and everyone can grow.  The game will be more interesting and we’ll generate more money.

What are the flaws here?  The first obvious one is that no extra money is actually present on the board.  People are still going around the board at the same speed because the dice rolls didn’t get higher.  They still collect $200 for passing Go about once every 8 – 10 turns.  But wait!  Everyone owns a property now.  They should be making money by having the value of that property rise shouldn’t they?  Well, in theory yes, but in practice no.  Given that there is a fixed amount of money on the board, who is paying for the growth?

That’s where the problem comes in.  Nobody is paying for the growth because no-one has really grown.  This was illustrated very clearly to me during a discussion with a friend of mine on the topic:

Friend: But we made $40,000 on the sale of our first house.
Me: Wow!  That’s great.  You were able to put $40,000 into a savings account from the sale of the house?
Friend: No.  We still owed $290,000 of the original $300,000 mortgage.  But we sold it for $360,000.
Me: Hmm, I think I see.  What did you do with the profit?
Friend: We bought a house for $360,000.
Me: How are the payments going on that house?
Friend: Well, we took out a mortgage (or two) for $360,000 and used the $40,000 profit from the first sale to cover some of the gap.
Me: So now you owe $310,000 on your mortgage?
Friend: No.  With closing fees and some payments to get the 2nd mortgage sorted we out about $350,000.  But we cut a deal to only pay the interest on that loan for the first 3 years.
Me: Oh, so the profit you made is in equity in the house.  You could sell it today and come away ahead?
Friend: No, we have to wait for the house to appreciate.  Then we can get a bigger loan for the house we really want.

Now don’t get me wrong.  I’ve seen a lot of people make a lot of money in real estate and appreciation.  I’m not saying that bricks and mortar aren’t still one of the best investments you can make.  The point I’m making here is that it only works if you’re actually paying off some of the mortgage at some point, otherwise all you’re doing is paying more interest to banks on bigger loans.  This is not sustainable growth.  Period.

At the end of the day, everyone has to do what is right for them.  Truly.  However, to stand there with big doe eyes and say “How could this have happened?”.  No.  Not so much.  Pretending that everything we put our money in doubles in value is great in theory, but who’s paying the bill here?  I would love to give everyone in the world a $200,000 appreciation on their house.  The problem is: “Where did that $200,000 for everyone come from?”  Someone has to lose.  Salaries and equity have not increased by that much, therefore the values of houses haven’t either.  Everything grows in value, that’s why we work, pay our taxes, and build equity.  To think that the price could gain more in 4 years than houses have gained for over three decades — well, I’m laughing as I type this.

What we did here was fake the appearance of growth by injecting demand.  We did this by selling people houses they couldn’t afford and loaning money to people who think they are making a profit when really they are just paying bank interest.  Bottom line: if you can’t afford to make twice your monthly mortgage payments then you can’t afford for a “crisis” month.  If you can’t show me the $40,000 in the bank then you didn’t make a profit, you just wrapped up the numbers in the next loan.

When it comes to investments, always remember that at some point you actually need to realize profit in the form of $$$ in the bank.  I highly encourage people who have managed to sell a $280,000 house for $360,000 to put some of the profit in a high interest or retirement account.  Buy your house, do it up, appreciate the value, sell it, and bank the profits, don’t just buy a bigger house.  Otherwise, when the bubble bursts, and yes it will burst, you are the one left holding a $360,000 house that is worth $180,000 wondering where the hell your life went wrong.

Let’s face it, nobody would enter that kind of an agreement with a friend.  Why is it then that the same rational, forward thinking people agree to those terms with a perfect stranger; in fact a perfect stranger that is a faceless multinational corporation?

One of the largest threats to our own personal growth is the fact that we’ve allowed major credit corporations to invade our lives and get away with daylight robbery.  It’s time we put a stop to it right now and the first step to doing that is understanding how it works and how they manage to trick an intelligent person like you.

Let’s first look at the items that I believe are the minimum required to really understand why credit cards are evil.  We’ll just look at these questions first.  Then we’ll walk through the steps we can use to get the answers to them.  When we’re done, I think you’ll agree that this exercise was worthwhile.  Somebody is stealing from you every day and you need to stop them right now!

1) What is your APR and how does it compound?
2) Paying only the monthly minimums, how much will you pay back in total and how long will it take?
3) What is an underperforming loan and why is it a bad thing?

If you’re anything like me before I got wise and stopped giving away money for free, these are questions that we all know we should be able to answer but have just never taken the time to look into.  Please, I’m asking you not only for the good of your own financial wellbeing but as a friend trying to tell you that someone is stealing from you.  Grab a recent credit card statement and play along.  It won’t take long and might just open your eyes to how you can keep the money you earn.

Question #1: What is your APR and how does it compound?
Let’s start by finding out about our APR.  If you look around on your credit card statement, you will find a section indicating what your Annual Percentage Rate is for this card.  It is probably broken out into a couple or more sections: Purchases, Cash Advances, and perhaps another.  Check out the “average daily balance” for each category as well as the APR.  The APR is the percentage of that balance per year that will be charged to you in interest.  Most companies will list out both the APR and the periodic finance charge that they are charging this month as a result.

Let’s calculate the periodic finance charge on a couple of sample statements and see how your current APR can affect the outcome.

Jane owe’s $4080.48 on her HellaGouge VISA card. It is all in “Purchases” which has an APR of 11.40%.  Therefore, the finance charge this month is $38.76.  Do we just trust HellaGouge corporation, or should we verify this number?  Let’s verify:
($4080.48 * 0.114) / 12 = ~$38.76

Excellent!  HellaGouge was telling the truth!  What we did here was multiply the owed balance by the 11.40% rate (remember that 0.114 is the way to multiply 11.40% as a percentage- shift the decimal point to the left two places).  Now from this we learn that Jane is going to pay about $40 in interest this month.  What happens if Jane misses a payment and her rate is increased to 29.95%?

($4080.48 * 0.2995) / 12 = ~$101.84

Holy cow Batman!  That means Jane is paying almost three times as much in interest just because her APR changed.  Worse, she’s paying almost $100 just in interest.  That is why knowing your APR is important.  But please, bear with me…we’ve only just started!

What the heck is compounding?
From the calculation above, can we then just imply that if Jane is paying $100 per month in interest on her card that she would be paying $100 x 12 = $1,200 per year in interest?  That seems like a lot of interest to be paying.  Well, the truth is that Jane is actually paying even more than that in interest per year because of a little trick called compounding.  There is a kind of financial sleight of hand that is being played in a heavily premedidated way to ensure that even this loan can gouge Jane for every last little dollar that she earns.  Compounding is the effect of taking the interest owed on a principal (the balance to you and me) and adding the two numbers together to get the new principal.  How often this is done is the compound schedule.  Monthly compounding means that interest is added on to the principal monthly, whereas quarterly compounding means that interest is added on to the principal every quarter, i.e. four times per year.  Financial institutions are required to inform their customers which compounding schedule their loan is on.  If you do not have this information, call the number on the back of your card and ask customer service.  It is very important that you fully understand the rules concerning the money you have borrowed.

Question #2: Paying only the minimums, how much will you pay, and how long will it take?
If I was loaning you some money, say $20, you’d probably ask me “When do you want me to pay you back?”  If we’d talked about interest, you’d want to know how much I was going to charge you and when.  Because I’m a friend, someone you trust, you want to know absolutely everything about our agreement and how much you will owe me.  However, if I was a faceless corporation offering you $2,000 then you wouldn’t want any of that information, right?  You wouldn’t want to know how long or when, or what the total interest payments would be.  Let’s change that.  Let’s figure out exactly how much Jane is going to pay and exactly how long it will take.  I know that lingering in your mind is that doubt about whether you even really want to know the answers to these questions.  I’ve been there.  Trust me though.  The only way to start fixing this is to know your enemy and understand just how much money these accounts are taking away from you every month; money that you could have in your pocket.

I’m going to throw out a math formula now, not because I’m a cruel person but because it is a tool just like a screwdriver that you can use to solve a problem.  Ignore the fact that it has a lot of symbols and instead start up the Windows Calculator (Click Start then Run… then type Calc and click OK).  We know that Jane owes $4080.48 and has an interest rate of 29.95%.  Now we’re going to figure out how that balance will compound over a few years.  Here’s the screwdriver that will let us do it.

A = P (1 + (r/n))^nt

Breathe!  It’s just a formula.  The ^ symbol means “to the power of” and the rest should be pretty familiar.
P = principal amount
r = annual interest rate
n = number of times per year the interest compounds
t = number of years
A = amount after time t

We’re going to do this together and I want you to click along on the calculator to get comfortable with using this formula.  First, click View->Scientific from the pull-down menu at the top of the calculator window.  You’ll need that to do the ^ (power-of) part of the calculation (it’s a little x^y button).  Try to play with this calculation until you can get the numbers to come out the same.  It’s important that you know how to use this screwdriver and it should only take a few minutes.  Earning thousands of dollars in a few minutes sounds pretty good, right?  That’s what knowing how to use this screwdriver could turn into.

Sooo if we calculate for 5 years:

P = 4080.48 (balance)
r = 0.2995 (apr)
n = compound 4 times per year
t = for 5 years

A = 4080.48(1 + (0.2995 / 4))^(4*5)
A = 4080.48(1 + 0.074875)^20
A = 4080.48(1.074875)^20
A = $17,293.01 after 5 years.

Wait a minute.  That can’t be right?  Jane’s balance (if not paid off) will rise to $17,293.01 after just 5 years!  That seems like we made a math error, but the sad truth is that we did not.  We found earlier that Jane’s minimum payment per month is only slightly above the interest that is being charged each month.  That means that Jane is only really covering the interest that is being charged each month and never really touching the balance.

The slimeball revealed: the dirtiest trick of them all!
Dirty Trick #1: Your balance is not your balance
It gets worse!  There are two really dirty tricks at work here, so much so in fact that I still get sick to my stomach when I think about them.  If Jane’s balance kept on going up and up towards $17,000 then alarm bells would start to sound in her head and she’d pay enough attention to the situation to want to fix it.  However, because the “minimum payment” just about covers the interest (in fact even taking a very small amount off each month) Jane is able to convince herself that she is paying off the debt.  Furthermore, she reminds herself that all she owes is $4,000 and that she is paying if off over a few years.  This perception is very wrong.  Take a second to think about it.  She is not paying four thousand dollars off over five years.  She is paying seventeen thousand dollars off over five years, and pretending not to have wasted twelve thousand dollars because the monthly total on her statement stays roughly the same.  This is one of the most cruel financial sleight of hand tricks anyone can ever play on you.  It is wrong and it is happening to thousands of people every single day.

Dirty Trick #2: Your balance never changes
As if all of this wasn’t bad enough, HellaGouge have figured out a way to close that last little gap in the perfect daylight robbery.  They have figured out that because Jane is paying $112 (her minimum payment) and only $102 is being put back on in interest each month, she is actually reducing what she owes them by $10 per month!  HellaGouge will not stand for this!  Given (4000 / 10 = 400 months = 33 years) thirty three years Jane could actually be free of the debt.  She might live longer than that and HellaGouge want their money so each Christmas they send her a letter indicating that they understand that Christmas is expensive, offering that she should “skip” a payment this month to ease an already squeezed December.  However, they still charge interest on the account, funnily enough they charge the typical $102 that they charge every month.  Jane managed to pay off $120 that year, remember that she’s paying $10 per month, and now HellaGouge just set her back $102.  That means that Jane only actually paid $18 of the $4000 she owes this year.  Ever wonder why your credit cards never quite seem to get paid off despite the fact you’re sending $100 per month to them?  This is why.  They are literally taking everything you have, right from under your nose.

Question #3: What is an underperforming loan and why is it a bad thing?
Loans are intended as a way for people to get the money they need to start making more money and get themselves on their feet.  The whole purpose of a loan is to get you started so that eventually you can make your own money without the need for loans.  It doesn’t really sound like Jane’s credit card is helping her out in this way at all.  In this way it is considered to be underperforming.  A performing loan is, as it’s name suggests, one that performs a function for you, specifically the function of making you more financially independent.  If a loan isn’t actively working to make you more money then it is not performing.  Educational debts are an example of performing loans.  Each day that your degree earns you a higher salary, the student loan that got you there is performing for you; the money is being put to good use.

Take a moment to think about the dollars that are on a credit card, where they came from, and what those items and purchases are doing for you right now.  Some are in recreation, some in household items, some are forgotten expenses, and hopefully a few are towards expenses that are actively helping you to get ahead.  The sad truth is that almost all credit card balances carry 100% underperforming debt.  The money is doing absolutely nothing to get you ahead whatsoever and is simply a burden on all of the hard work you are doing.  That is the essence of loan performance and is why underperforming debt must be done away with as quickly as possible.

I’m going to continue to write articles on this topic, bringing forth the murky and undiscovered atrocities that are occurring every single day in the bills on your kitchen counter as well as try to provide strategies to get out of this situation and start paying yourself instead of credit corporations.  I hope that in raising some awareness with real examples that you can perform yourself in the Windows Calculator that we can start getting more money in people’s pockets and stop bleeding it away to the slavers of our modern world.  Stop working for them now.  You wouldn’t do it for me; don’t do it for them.

What followed was one of the most drawn out processes I have had to endure for quite some time.  The initial claims adjuster assigned to my case was based in Colorado.  After I sent the body shop estimate to the claims adjuster, they almost instantly disputed it and in a very arbitrary feeling way.  Not once had they sent any representative to inspect the car.  The only evidence of the damage were the photographs I had emailed to the adjuster and the very rough textual description of the visible damage I had been able to give over the phone.  Armed only with that very vague information, the claims adjuster proceeded to inform me that they had found the estimate from the body shop to be inaccurate to the tune of exactly $70.  Furthermore, the dispute was with the labor rates of the shop.  What sat most unpleasently with me about all of this was that when I asked the adjuster how they came to this conclusion about the inaccuracy, she replied “Well, I just know what it costs to get a car fixed, and this is way more than local mechanics charge and I disagree with the damage assessment.”  Therein lay the key that caused me to now dispute this quite vehemently.  ”What local mechanics charge” and “disagree with the damage assessment.”  I pushed the issue more harshly now, asking just quite how someone in Colorado familiar with their “local rates” could come to such an accurate discrepancy as $70 having only seen several emailed photographs of damage to a car several states away.  The phone went pretty silent and the voice on the other end sounded quite shaky when I indicated that I had a full transcript of the entire claim history and that I would like very much to be put in contact with a supervisor.  It was less than a day later that my claim had been transferred to a local adjuster who approved the original estimate without even asking me for a copy of it.  The only question I was asked was “Did I hear right that this claim is for less than a thousand dollars on a 2005 Mazda 3?” I replied that, yes, the person had heard correctly, to which the local adjuster responded “Well then get your car scheduled in for repairs and let’s get this claim settled. This is an easy one.” Within a few hours, I had my car scheduled for repairs, a rental car agreement in place courtesy of the insurance company, and a feeling that finally sanity was starting to return to the process.

The following is a short list of the most major events involved in the process.  I have removed references to the real people involved in the claims process, instead referring only to “Progressive claim adjuster” and “American Family claim adjuster”.  While this may seem an overly pedantic log to several people, it was the evidence that this transcript existed that actually allowed me to gain traction during the period that the claim was stalled.  Having detailed evidence of the events proved extremely useful once dicussions involving supervisors and escalation of the problem entered into the picture.

Order of Events
08/21/2007 09:00   Discovered damage to car and discovered note on windshield claiming responsibility.
08/21/2007 09:04   Called Progressive directly to start the claim process.
08/21/2007 09:57   Called Progressive again and was put in touch with a Progressive claims adjustor who was unavilable.  Left voicemail containing full details of the claim.
08/21/2007 10:16   Progressive claims adjuster returned my call indicating that they had been assigned to the claim.
08/21/2007 10:40   Progressive claims adjuster called again and provided the name of the American Family Insurance claims adjustor.
08/21/2007 12:43   Contacted Autowerks NW to discuss their availability to give an estimate and learned that I could receive an estimate today up to 4:30pm.
08/21/2007 13:38   Took a call from American Family claim adjuster regarding the claim. “We (American Family) are still waiting to contact the responsible party regarding the claim before they will accept liability.”
08/21/2007 13:45   Voicemail from American Family claims adjuster containing their fax number and email address.
08/21/2007 14:30   Arrived at the Autowerks NW lot to request an estimate. Provided the information about American Family Insurance, claim adjuster contact information, and the claim number.
08/21/2007 15:00   Car was inspected by a representative from Autowerks NW. I received a copy of the full estimate.

08/22/2007 12:05   Faxed the note left by the responsible party and a copy of the estimate from Autowerks NW to the claim adjuster from American Family Insurance.
08/22/2007 12:13   Left voicemail with American Family claim adjuster to ask for confirmation that the fax was received and for an update on the claim status.
08/22/2007 12:47   Called and left voicemail with Progressive claim adjuster to keep them in the loop about the current status of the claim.
08/22/2007 14:17   Received return call from American Family claim adjuster confirming that they have accepted liability and that the fax of the note and estimate were received.
08/22/2007 14:22   Emailed photographs of the damage to American Family claim adjuster.  Included a note in the email that I wish to receive a copy of any revisions to the estimate and that only NEW parts are to be used.
08/23/2007 13:41   Call from American Family claim adjuster to inform that the revised estimate had been sent to the body shop and that she would contact again once the body shop approved. I noted that I had explicitly requested to receive a copy of that estimate.
08/23/2007 14:07   Call from Progressive claim adjuster regarding a call made to American Family claim adjuster to check on the progress of the claim.

08/24/2007 09:43   Called Autowerks NW for an update on current claim status. Said that they would call me back once they had looked up the latest details.
08/24/2007 10:38   Received call from Autowerks NW. American Family had faxed a different estimate to Autowerks NW for $70 less that the original estimate.
08/24/2007 10:52   Called American Family claim adjuster back regarding the revised estimate.  Left voicemail asking about the problem with the estimate and how to progress from here.
08/25/2007 09:21   Received voicemail from American Family claim adjuster requesting a callback.  (It’s Saturday. I will return the call on Monday morning.)

08/27/2007 09:10   Called American Family claim adjuster back regarding the hold-up with the repair estimate.
08/27/2007 13:15   Called Autowerks NW to try to get an update on the claim status.

08/28/2007 09:03   Received call from Autowerks NW indicating that a local adjuster would now become involved because the $70 difference had become a blocking issue.
08/28/2007 14:01   Received a call from Progressive claim adjuster regarding update on the claim, that they were aware of the dispute over $70.

08/29/2007 07:30   Received voicemail from a new American Family claim adjuster (a local adjuster) indicating they would be handling the claim from this point forward because the first adjuster had messed things up.
08/29/2007 07:39   Returned call to local adjuster.  Left my phone number for callback.
08/29/2007 08:49   Received call from local adjuster.  He gave the OK to get my car scheduled in at Autowerks NW to get the repairs completed for the original estimate amount. (Finally some progress!)
08/29/2007 08:53   Called Autowerks NW to schedule Mazda in for repairs.  September 10th is the earliest available date.
08/29/2007 09:02   Called local adjuster back to confirm repair date and inquire about rental car details.
08/29/2007 09:03   Called American Family Insurance (Enterprise rental) to schedule a rental car.  They will direct bill the insurance company for the rental.
08/29/2007 09:28   Received call from Enterprise car rental confirming the time day, duration, reservation number, and drop-off/pick-up location.

09/10/2007 07:55   Dropped off Mazda at Autowerkz NW and met Enterprise rental representative.  Drove away in Dodge Charger rental car- uggh!
09/15/2007 14:00   Received call that Mazda was ready and returned rental car to Autowerkz.  Picked up Mazda in repaired state.  Woohoo, it’s finally over!

It took almost a month!

The fact that such a simple claim had to take so many steps to resolve simply baffles me.  I’m sure that insurance companies play hard-ball because they get plenty of fraudulent claims, but why is it that I seem to be the one paying the price for that?  I’m glad that we were eventually able to get the repairs made to my car and that a rental car was provided for the days in between to avoid a problem getting to work.  However, the enormous expense involved with all of the long-winded communication and arguments over the phone to get there seems completely wasteful to me.  An enormous amount of human effort and productivity was lost in simply filing a perfectly legitimate claim.  All I did was park my car cleanly between the lines of a parking spot in my apartment complex lot where upon it was hit by a another driver.  The insured party left their full details and I followed absolutely every step required of me to the letter.  Despite following every guideline published by insurance companies for such a process, I found it to be extremely inefficient and time-consuming and I question that I would have received a positive outcome had I not been extremely persistent and repeatedly insistent that the insurance company uphold their part of the deal.  I doubt that most people argue so voraciously and are willing to confront people on the phone repeatedly to get the service they are entitled to.  That is a very sad state of affairs indeed considering that the claim in the situation was almost ideal.  Both parties had full insurance and all insurance information was provided as soon as the damage was discovered.  The damage was not serious, the repair estimate was very low considering that this is a fairly new car, and no additional medical or psychological damages were sought.  All paperwork and requirement documentation were fulfilled and provided in an extremely timely manner, and yet still the claims adjuster felt the need to fight it.  That really sends the wrong signals to a truthful and honest insurance consumer who simply wishes to get their car repaired in a timely fashion.  Needless to say that American Family Insurance have joined the list of companies that will never see a dollar of my business.  You get one chance to do business with me.  Don’t try to screw me, or it will be your last.