Keeping up with the Joneses

I may be 15 years late, but I  just finished reading The Millionaire Next Door. It was inspiring and eye opening all at the same time. Some chapters I plunged into whole-heartedly, while others I quickly skimmed, such as, “You Aren’t What You Drive.” I really don’t car much for cars, but bookmarked it for my husband to read, the car afficienado! Some of the data is a bit old, but the ideas behind who the truly rich are and how they accumulated their wealth isn’t out dated at all.

I don’t mean to turn this post into a book review, so many people have read this book, but it inspired me to do some thinking about how our society has had the wool pulled over our eyes for so many decades. The opulence we see on television is an illusion of who we’re supposed to think the rich are, the ultimate advertising campaign that drives many people into purchasing items they can’t afford and really don’t need. This misconception, that rich people live in large mansions, drive Bentley’s, and wear $10,000 Rolex’s is what might be keeping the average Joe (there’s something about the J’s!) from ever reaching their financial goal or becoming millionaire’s themselves.  Constantly keeping an eye on the “Joneses” and following their lead may be detrimental to one’s financial health.

But who are the Joneses? Where did they come from? Why do we try to keep up with them?

The Joneses origins come from a comic strip around 1916 written by Arthur R. “Pop” Momand, apparently they were the main character’s (The McGinis Family) neighbors that were never seen in person (Wikipedia). Based on images I’ve researched, the main characters compared themselves with their neighbors with the intention of “out doing” the Joneses through consumer spending. The strip was meant as a parody, or mockery, of the main characters behavior. Who knew that the title of this comic strip would become so ingrained in the lives of Americans!

Nearly 100 years later, the phrase is still used to describe the conspicuous consumption of middle-class families. Of course envy, jealousy, and greed have existed since the dawn of humanity (that’s the anthropologist in me speaking!) We’ve just been able to create a catch-phrase to make is sound snappier and less gauche.

Finishing Millionaire I realized that the Joneses aren’t who we’ve been thought to believe they are. Which is quite ironic considering the Joneses in the comic strip were never seen, so who really knows who they were? Here is a breakdown of how I’m beginning to see the real “Joneses”:

• Deep in debt. In order to continue the illusion of wealth, they purchase items beyond their salary on credit.
• Low or negative net worth. I’ve finally figured out the net worth calculation thanks to the book; age times salary divided by 10 should be your net worth. Today’s Joneses are lucky to be in the positive.
• Living Pay Check to Pay Check. The idea that wealth is based on how much one owns is a fallacy. It’s really how much one’s saved. Unless you have access to their bank accounts, there’s no way to know based on outward appearances.
• Feeling insecure about the future. The Joneses are deep in debt. People up to their eyeballs in debt, spending much more than what they earn must feel very uncertain about what the future holds for them. A loss of income could be devastating.

As popular as Dr. Stanley and Dr. Danko’s book was, not enough people have been exposed to the ideas behind who the millionaires really are and this is deplorable. More education should be dedicated towards personal finance with the hopes of enlightening the masses. Perhaps a new comic strip should be created for today’s readers, entitled with the same mellifluous sound such as The Savvy, Spend-Thrift Smothers. It could be about the trials and tribulations of living frugally, reusing, recycling, and saving your pennies! Each week, the comic could total up the family’s retirement account showing how much the family has saved. It could inspire a whole new generation of conscious consumers.

For what I’ve learned is trying to maintain the illusion of wealth through spending is no way to live. So, forget the Joneses, we never knew them!

Cut up those credit cards?

One of my goals for this year, that I have partly accomplished, is raising my credit score. I need to get my score above 740, at minimum, so that when I apply for a mortgage loan, I’ll be able to get the best rate. I still need to raise my score about 40 points (this is an average as all 3 credit bureaus are reporting slightly different scores). One thing I’ve learned about improving my credit score, is keeping my debt to credit ratio low. Since I’ve paid off all of my credit cards, I’m looking pretty good here. However, another factor that affects a credit score is how much total credit banks are willing to loan you. Since I’ve been on a mission to improve my poor credit history, I haven’t had much credit extended to me these past few years leaving me with very low credit limits.

So, here is my dilemma: I have two credit cards with low credit limits that are charging me monthly fees and/or annual fees (totaling approx. $155 for the year) . I don’t use these cards at all anymore. However, there is a catch with these two cards: they were originally a way to pay off old collection debt. These cards were offered to me about 6 years ago to pay off two other credit cards that had gone into collections. Once I paid the old debt off in full, they extended a limited amount of credit to me. I’m now thinking of canceling these two credit cards now that they are paid in full, but then my overall total available credit limit will be reduced by almost $1,000. How will this affect my credit score? Will it ding my score by a few points? Since I’m hoping to apply for a mortgage loan with in the next year or so, I’m trying very hard to keep the activity on my credit report to a minimum.

After doing some research, canceling my two credit cards would probably affect my credit score a little bit. By how much, I don’t know exactly. I have two options; A.) I cancel these cards and save $155 annually, with the potential of losing a few points off my credit score, or B.) I keep these cards until I am able to purchase a home.  That could be up to 18 – 24 months meaning I would have to spend up to $310 on fees, but I’d be saving my credit score.

For now, I think I will keep the cards. If purchasing a house becomes ever more elusive and my time frame extends to more than 24 months, I might just go ahead and cancel these two cards. I do know that when I obtain that mortgage loan, these two cards are getting the ax!

What do you think? Would canceling these cards now be beneficial? Am I making the right choice by keeping these cards a little longer?

Hi – this is Mr Credit Card from www.askmrcreditcard.com. Little House has written about credit on this blog and I’d thought I’d share some thoughts on how the cheap credit that became in the 2000s has led to our current financial situation. If you are looking a for credit card, please check out my best credit cards list.

Little House mentioned in her post about life before credit, how credit became more available to folks after the eighties. I would like to take this opportunity to expand on this phenomenon, especially after 2000, when the real estate market seems to have taken off. And how this easy cheap money has nearly ruined us. At the end of the day, I think there are lessons to be learned when things are cheap and come too easy for us. It almost always ends in tears.

The 90s was a decade best remembered for President Bill Clinton actually balancing the budget and having a budget surplus. It was also a decade of boom in the stock market as low commodity prices allowed big blue chip stocks to outperform earlier in the decade. It was also a decade where then Federal Reserve Chairperson Alan Greenspan made reputation for himself for having the Midas Touch. In reality (and on hindsight), what Greenspan did was simply to lower interest rates and print money wherever the first sign of economic trouble was in sight.

In 1998, after the Asian crisis and the Russian Default, Mr Greenspan lowered interest rates on fear that the US economy will slow down. Well, it slowed down a little, but the effect of low rates was a bubble created in the internet stocks and NASDAQ in particular. He then raised rates when the economy was overheating, and when 9/11 happened, Greenspan slashed rates to unprecedented levels. Rates stayed so low for so long that access to credit became really easy. There were some unintended consequences.

Firstly, it was the beginning of a housing boom that would devastate us years later. Cheap money and easy credit meant even that folks who should never have bought a home could get a mortgage. Everyone knows now that this was really the root cause of today’s financial crisis. But even folks like General Motors began their famous 0% financing. “Buy America” was deemed to be patriotic. That was also the beginning of 0% balance transfer credit cards. “Transfer your balances over because we want to make money of your interest!” – was what the credit card companies were saying. Even college students could get multiple student credit cards even with no income! Even if you had bad credit, there were cards available. Want to buy a furniture but have not saved up, there is always 0% no interest payment for 24 months financing! So rather than saving money, consumers were “encouraged to take credit”. (Note: Thank goodness Little House had very little access to credit!)

Proliferation of real estate related jobs!

One of the most damaging aspects of the easy credit of the 2000s was that the real estate boom led to all sorts of job creation, but in the wrong sectors. We had obviously a proliferation of real estate brokers, mortgage brokers, contractors, construction workers. Do not get me wrong, there is nothing wrong with job creation. But the jobs created by these “easy and cheap money” did not create products. These folks were mere middlemen whose earnings were really a tax on transactions. They did not really add value to the economy.

Next came the proliferation of real estate investment books and seminars, get rich quick schemes. All of a sudden, every one became a real estate “investor”. Everyone wanted to get a “second property” as an investment! As credit became easy, I know folks who took out second mortgages and tried to be like the big boys and invested in “commercial property”.

But almost all the jobs that were created by easy credit conditions were not manufacturing sector. In fact, we are steadily losing our manufacturing capacity to other “cheaper lower cost countries”. Therein lies the problem. We have a trade deficit (we export less than we import). We have a federal budget deficit (and Obama is proposing a budget that has a one trillion deficit this year). Listen again : ONE TRILLION DEFICIT. Can you imagine if you propose a budget to your spouse with a deficit! Put in this context, the jobs that we have created amount to nothing more than “internal wealth transfer” and did not make us richer as a nation.

I think there is a lesson here to be learned. And that is when something comes too easy, there are always unintended consequences. And if you do not understand the root causes, you will get into trouble. Let’s use a few examples.

1. Easy Money In Your Job – Many folks who got to be mortgage brokers or brokers got lucky during boom times and made lots of money. The problem when you “by chance” entered an industry that is booming is that you run the risk thinking that the good times will last forever. I know folks in Silicon Valley that made good six figures in the late 90s and have not been able to find a job that pays anywhere near since!

2. Your kids get good grades too easily – I’ve seen this a few times. Young kid does very well in math in elementary school. It comes easy for the kid. So he never learns to work hard because he or she does not have to. But there comes a time in middle and high school when the subject gets tougher and all of a sudden, they cannot cope because they never to fight through adversity in studies.

3. Large home equity line of credit and credit cards in your wallet – Many folks have gotten into this trap. Back a couple of years ago, getting a home equity line of credit and credit cards came super easy. Hence, many folks assumed that that they could be used for silly purposes without saving money – like renovating their kitchen, taking vacations!

5. Kids who excel in sports early in life – Ever seen a kid who is eight years old and you think will become the next baseball star only to see him fade away. When things come too easy, the kid forgets that to get ahead, you always have to keep improving.

Is your job merely involve a transfer of wealth in the economy?

Perhaps the biggest question we are all asking ourselves if how safe is our jobs. One good insight is to find out if the job you have adds value to the economy or are you simply a toll taker like a real estate agent. Because we as a nation had debt up to our eyeballs, it is very unlikely that consumer spending will recover anytime soon. I think you have to ask yourself if you are working for someone with a unique product that people around the world would want. For example, if you work for Microsoft or Apple or an equipment company that sells products worldwide, then at least you know that you are helping to contribute to the wealth accumulation of this nation. But if you are in any sector that depends on “consumer spending”, I think tough times lie ahead.

If you have been laid off, or are considering a career switch, kindly consider what I have said. Don’t be fooled by easy “network marketing” or any other “easy money makers”. There is no such thing as easy money. If there is, the good times never last. And we should all have learned that by now.

This may seem like a strange topic..When to Give Advice, especially considering I just finished a credit eBook that gives advice on improving credit scores. However, because I have learned many things about how credit works along the way to my own financial freedom, I’ve been asked to give advice to a friend or two recently.

Just yesterday, an older woman who I’ve helped over the years, asked me what she should do about her credit card debt. Now granted, this particular case is unusual and interesting, so my answer wasn’t complete because there are so many variables affecting her life of debt. Some background on this woman to put things in perspective:  She is nearing 65 years of age and has accumulated $120,000 of credit card debt over the years. Her excuses for this behavior are plenty: her mom died (10 years ago), her husband left her (12 years ago), her dad died (4 years ago). Her excuses go on and on. Her income is generated from her family’s businesses and her ex-husband’s social security and residual income, it comes out to about $80,000 annually. On top of this income, she also has investment accounts that her parent’s left her. Basically, she hasn’t really had to earn much of her income over the past 25 years, it just sort of accumulated from relatives. Her grasp on finances has dwindled due to this and other factors.

She asked my advice about calling and asking a credit card company to increase her credit limit or reduce her APR. The reason being was that Chase reduced her credit limits on two of her cards. She has stellar payment history, but her credit to debt ratio is well over 30%. I explained this to her, as it was one of reasons listed on the Chase letter she had received. She didn’t understand why they were looking at her overall debt including all of her credit cards. Once I explained that they see her as a risk because she is using much more than her 30%, she sort of understood, but felt it was unfair. My advice to her was to call Chase and ask them to either reinstate her original credit limit or reduce her APR. My thought on this was that it doesn’t hurt to ask, the worst they can say is no. Obviously the better option is to reduce the APR.

She then asked if she should pay more towards that card, thinking it might act as an incentive to change their minds. My advice to her was that she needed to figure out what the goal was: Was she thinking she wanted to pay off the card quicker? Her answer was no. Was she thinking of paying a large portion of debt off this year due to some additional income coming her way? Her answer was she wasn’t sure. I then explained to her that if she receives this additional income she is expecting, she might want to put a large portion of it towards her debt. However, by the end of the conversation it was clear she just wanted to reinstate her original credit limit of the card.

After I hung up with her, my husband who had overheard the entire conversation chimed in that she really needs to speak to a financial consultant. She did that two years ago, but didn’t like their answers: 1) Pay off the entire debt and save up to $20,000 a year on finance charges, or 2) file for bankruptcy. But I realized what the underlying problem is that’s causing her to be indecisive: She doesn’t realize that by paying off her debt, she will be saving the money she spends on finance charges.

There are some great calculators out there, like CreditKarma’s Debt Repayment calculator. I think my next strategy with her will be to show her how long it will take her to pay off her debt with the online calculator. Maybe then she’ll realize the sooner she pays it off, the better!

What are your thoughts? Obviously, this is an unusual scenario. She makes plenty of money, but just can’t seem to see the big picture. How would my credit eBook helped someone like this 25 years ago?

Okay, so I finished my credit eBook and am now looking for constructive criticism. My pamphlet is based on personal experience as well as sound advice that I have learned over the past few years. I’m trying to decide if I should offer my eBook for free, offer it for a nominal fee, or throw it in the recycle bin! All comments are welcome. Just remember that I am a sensitive human being.

P.S. I am temporarily hosting it on the adobe site for now. Once I receive feedback and figure out how I want to offer it, I will have a downloadable link from my site to my eBook.