Personal Finance Education is Essential

Attending a recent Board meeting for an agency that helps working homeless families obtain sustainable permanent housing, a thought struck me. We partner a licensed clinical social worker with families to help them on their journey while we offer temporary rent subsidies based on the client’s ability to afford 30% of the housing and utility costs relative to their monthly income,

Much of what these social workers do is help with budgeting for “needs” and prioritizing less “wants.” Yet, another key element is to require the parent(s) to attend classes on personal finance training. We partner with another agency to do just that.

The thought I had is we should require high school students to take a semester course on personal finance. One of my sons took this course as an elective, so I know the curriculum exists at least in our public schools. And, he benefited from it.

This course could run the gambit from monthly budgets to checking/ savings accounts to investments to credit/ loans to ID theft prevention. We are largely a financially illiterate nation. This would help educate people to make more informed decisions.

To illustrate my point, there was an economic study in New York several years ago called “Class Matters.” The study demonstrates that people in a lower socio-economic class ask fewer questions of advisors, bankers, lenders, etc, when they should be asking more. I call it the “suit and tie” effect. This is how people can sign up for mortgages they cannot afford, how they can succumb to predatory lending on car loans or make the mistake of using a pay-day lender. These folks are preyed upon because of their financial illiteracy. This also is one of the reasons for the 2007 housing crisis as lenders provided mortgages to riskier lendees.

I am not saying mandatory personal finance training will end homelessness or poverty, but it will arm our graduates to budget better and ask more questions. Avoiding 23% car loans can impact a budget in a major way.

If you agree, please reach out to your local papers and politicians. To me, this a sustainable and impactful change.

Payday Lending continues to prey on the vulnerable


I have written several times about the payday lending industry. The industry is the worst form of legitimized usury and preys on the people who need help.

With flipped loans (where a new loan pays off an old loan), the effective annual percentage rate (APR) of interest can build very quickly. The average borrower will flip a loan several times, so the APR can grow to over 1000%.

Many states have clamped down on the industry, placing a ceiling on the APR that can be charged. But, the industry continues unfettered in more than a few states.

One of those states is South Dakota. As of this writing, there is a bipartisan proposal that has been placed on the ballot which would limit the maximum APR to 36% per annum. In a perfect world, this ballot initiative would pass.

But, to combat this common sense proposal, the payday lending industry has put forth its own ballot initiative which would limit the maximum to 18% per annum. Wait, you may ask, isn’t that better? Well, there is a significant catch. The payday 18% ballot initiative says, the maximum will be 18%, unless the borrower agrees to a higher rate. Why would the borrower agree? To get the loan  the lender is willing to lend. So, the lower maximum is moot.

I do not begrudge a company trying to make money, but taking advantage of vulnerable people is poor form. This is such poor form that Dante created a special layer of hell for usurers in his Inferno. And, the Christian bible is not too kind to these predators noting usury as a sin, especially when it involves poor people.

If you know anyone in South Dakota, please encourage them to vote for the 36% maximum APR ballot initiative. The industry 18% ballot initiative ruse is just a continual license to perpetuate fraud. It is the ultimate bait and switch. And, please do everything in your power to avoid payday loans and tell anyone who asks to do the same. Payday lending is a self-fulfilling death spiral of debt.

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Note: PBS Newshour covered this issue on January 6, 2016. A link follows:

http://www.pbs.org/newshour/bb/fighting-the-debt-trap-of-triple-digit-interest-rate-payday-loans/

 

These truths should be self-evident, but many are not

This Monday we get a day off to create a nice long weekend. Memorial Day is a wonderful celebration, but is one where we should honor those who have given the ultimate sacrifice for our country. We tend to promote jingoism, which is an ugly term, to beat on our chests and talk about how mighty we are. Yet, I believe we should honor our valiant soldiers who died fighting our battles, by being truth seekers. We owe it to them to do so.

I believe the following truths are self-evident. If you disagree, I welcome your comments. I am not looking to blame anyone, but learn from our mistakes and realities of the situation. In my view, we cannot address our problems, if someone is telling you the problem is not real and we are so great that we can make any problem go away. In no particular order.

– We went into Iraq with insufficient troops and hardware and without a clear-cut plan for success. General Shinseki actually resigned because of this initial failure. The later “surge” is what Shinseki had argued for in the first place. Winning battles is easier than maintaining the peace, which is what Shinseki noted to his bosses.

– We overreacted to 9/11 and as a result underreacted to Syria and pulling out of Iraq, so says a military historian. Al Qaeda was small in number and now we have a much greater enemy. We are a war-weary country and made many mistakes from the outset and along the way. We had the Iraqi police force fired, many of them later became part of ISIS. This concern was noted at the time of their firing ten years ago.

– Torture of prisoners has made us less safe, because we have grown larger, multi-generational groups of people who do not hold America in high regard. What little intelligence we have gained is dwarfed by this continuing animosity and mistrust.

– The Middle East is a hard to solve conundrum. America cannot win a war that will solve this problem, as proven in Iraq. Again, winning battles is easier than maintaining the peace. We have been fighting in the Middle East for over thirty years and spent trillions of dollars – what do we have to show for this asks another military historian and Vietnam veteran. He noted we did not learn the lessons of Vietnam.

– While many are grandstanding with chest beating opinions, it is good to be negotiating with Iran over limiting nuclear development. The non-diplomatic options are not worth considering as they could lead to a deadly result for many. In any situation, we owe to our troops and to their families to exhaust all other means before we send them to die.

– The same is true for Ukraine which gets lost in the news these days. Vladimir Putin is not a trustworthy individual. We need to continue to hold his feet to the fire as an international pariah. We need to help Ukraine be stronger, but also continue a joint effort to call Putin on the carpet.

– We also owe it to our troops to protect them and their families from predators here at home. Pay-day lenders and expensive and ineffective for-profit colleges have had a license to steal from our military families. The former will get our families into a 1000% annual effective interest rate pretty quickly. The latter spends more money marketing than teaching and graduation rates are in the low teens if that high. Also, the diet supplement business which is largely unregulated (due to some well-funded senators), has led to deaths of many soldiers who bought diet supplements (from on-base stores to aid with their training). You cannot support troops and screw them over like this. It is not right.

We owe it to our troops and their families to make sure we have exhausted other means, before we send them into battle to risk their lives. We owe it to them to have a clear-cut plan for success and a reasonable end strategy. We owe it to them to learn from our mistakes and not placate political egos to gain favor with voters. Finally, remember the quote from the movie “Troy,” when Achilles is consoled by his cousin – war is old men talking and young men fighting. Let’s honor those young men and women and treat them and their families well.

 

 

 

Don’t let Black Friday take you into the red and other savings ideas

In the US, the day after Thanksgiving is known as “Black Friday” which is the official launch of holiday shopping. Some even start on Thanksgiving, which is usurping the best family holiday in America, for people to spend money. If you are an American or know one, you know that Americans like to do two things more than anything else – be entertained and buy stuff.

I have written before about ways to save money, as we have too many folks who want yours. Let me use this Black Friday to rehash a few of them and speak to the holiday season where buying gifts is done in excess. If you follow a few of these, you will end up with more money to live better, have less stress, retire earlier, and be more in control of your life. In no particular order:

– you don’t need to participate in Black Friday. Trust me, the retailers will get desperate closer to Christmas and layer in discounts. You will also be less tempted to buy if you take your time.

– speak with your family and friends about gift giving. Maybe you could limit the giving to the kids or have a charity donation for adults donating a small sum to a favorite charity of the recipient.

– for year-round, do not play the lottery. I have written several posts on this, but my favorite line is from John Oliver who stated your chances of winning the lottery are the same as being struck by lightning while being bitten by a shark. Save the $10 a week and at year-end you will have $520 plus interest.

– for borrowing, tear up all credit cards but one or two. You do not need more than that. My wife and I get 3 to 5 offers a week for new cards. You get very popular when you manage your debt and save a lot of money.

– do not borrow from pay-day lenders. They are one step above leg-breakers and you will quickly spiral into a rabbit hole of debt with over a 1000% interest rate. I am not making this up. This is about the worst thing you could do if in trouble.

– be wary of credit consolidators. They are not all created equal, so do your homework. Also, there are a number of non-profit advisors who can help you consolidate or manage your debt.

– be wary of for-profit colleges which are 5 to 6 times the cost of community colleges. A rule of thumb, the bigger the celebrity advertising the college, the worse its record for graduating. These colleges prey on veterans, spend more on marketing than education and graduate less than 15% of their students.

– if you have no health coverage, sign up for the Affordable Care Act at http://www.healthcare.gov. Subsidies to pay for premiums are available up to $95,000 in income for a family of four, higher if a larger family and lower if smaller. Healthcare coverage will get you doing preventive medicine rather than reactive medicine and keep you from going bankrupt.

– if you work, save in your 401(k) plan or something similar. Using payroll deduction, it is like paying yourself first, especially when the employer will match your savings.

Finally, be wary of scammers. If it sounds too good to be true, it usually is. Many scammers prey on church and association leaders to get at others, prey on the elderly with confusion, and prey on everyone with fear (IRS scams, power shut off scams, computer repair scams, etc.). If someone offers you a potential high rate of return with no risk of loss, it is a scam.

If you do all of these things, great. If you know someone who would benefit from the advice of an old fart, please send them this link. Always remember, you do not have to buy anything except food, water, minimal clothing, transportation and shelter. The rest becomes wants and can be managed. Happy holidays.

A Fighting Chance – Senator Elizabeth Warren’s mantra

If Hillary Clinton chooses to run for President, she would be the odds on favorite to carry the Democratic nomination and likely the White House. The irony is, at least on domestic issues, she may not be the best female candidate from her own party. That might fall to Senator Elizabeth Warren from Massachusetts, who is the inspiration and instigation behind the establishment of the Consumer Financial Protection Bureau, the watchdog created for the common citizen. Warren has said she won’t be running for President, but she would be a formidable candidate.

I have been a fan of hers for several years, especially after I heard her utter these apropos words when asked why she did not like Wall Street. She said, “I like Wall Street, I just don’t like cheating.” As an attorney and professor at Harvard, she has been a subject matter expert on bankruptcy in the US. This helped formulate much of her fighting spirit against cheating or rigging the system against those in need. When even bankruptcy judges incorrectly noted why people were becoming bankrupt, she did her own research and noted they tended to be people who worked hard, tried to start businesses or got overextended and had no recourse. She also noted banks made money preying off people who were on their way to trouble and did not want to stop that gravy train. The banks actually fueled the fire by offering more credit or consolidated credit when the person should have torn up their credit cards.

I just completed her latest book called “A Fighting Chance” which is an excellent read about her journey and fighting for people. She truly is the champion for the common person. And, yet if you mention her name in some circles, you may get a more negative reaction than to Hillary’s name. Banks do not like her as she called them out. The banking lobby spent $1 million a DAY to lobby against the Consumer Financial Protection Bureau being included in the Dodd-Frank Act. Her name was dragged through the mud and she was a target of undue criticism and innuendo. To many, the banking lobby’s zeal to prevent this bureau from succeeding is prima facie evidence that it is needed.

Banking used to be one of the more honorable professions, but the leaders of the industry threw that out the window by taking advantage of its customers, especially those who could ill-afford it and did not ask enough questions trusting the people in suits. There is a study of a few years ago called “Class Matters” whose principal finding is economic class matters in people’s decision-making. The lesser the class, the fewer questions are asked of service providers. These folks do not have the education or confidence to ask questions to explain what something meant. So, they would not fully understand that a variable mortgage could increase their interest rate by 200 basis points and would sign on the dotted line.

I would encourage you to not only read her book, but check out what the Consumer Financial Protection Bureau is all about at http://www.consumerfinance.gov/.  The purpose of this agency to protect consumers when banks, pay-day lenders and mortgage lenders are aggressively and fraudulently marketing their products. They have fined lenders close to $4 Billion for selling products and services that consumers did not ask for, aggressive marketing or even malfeasance. Over 90% of the monies collected go back to the impacted consumers, with the remaining amount going to fund better education and tools for borrowers and consumers. As an example, Bank of America was fined earlier this year for over $750 million for selling additive services to credit card holders that they did not ask for.

It will be arguable that when the Obama administration is viewed retrospectively, the creation of this agency will be one of his shining moments. He owes it to Elizabeth Warren. She gave and continues to give people of all persuasions a fighting chance. And, if you hear someone denigrate her name, that should be a lightning rod that shows which side that person’s bread is buttered or that person is getting their information from a source which caters to people who do not need her help. Reading this book shows how an industry and their spokespeople on the Hill tried to mow her down along with the agency. The rest of us need an advocate like Warren in our corner, now more than ever. But, don’t take my word for it, check out the book and the website link above, and draw your own conclusions.

Pay-day Lending – there is a reason they spam you

I am quite certain my fellow bloggers are inundated by spammers who love your blog or post without commenting on anything specific. One of the more popular spammers comes from various pay-day lending groups. When we talk about bad types of capitalism, pay-day lending ranks close to the top. It is the worst form of usury as people in need get preyed upon by these folks. The pay-day borrowers do not realize they are paying an interest rate north of 200% as it is so easy to do.

Yet, what happens are the people in need set themselves up for a death spiral that is hard to pull out from. They begin a journey of paying more and more interest to pay off the use of funds a few weeks before their pay check. These lenders were outlawed in NC, which just meant they moved across the border to do more sales. I have heard people who say they provide a useful purpose, yet in essence they don’t. People are getting immediate money for a need coverable by their pay check. Yet, end up paying more than double or triple the amount they borrowed. And, it does not stop. You are beholden to the pay-day lenders for a long duration.

The lenders used to set up shop just off the military bases. This is unfortunate as they would prey on married couples who are separated by an ocean with one distracted  by war. The one at home needed the money and did not have the counsel of two heads asking is this the right path forward. In the volunteer charity work I do with homeless families, quite often the families are paying interest rates of 23% on a car loan. This type of car payment puts a huge bind on their budget and we help them get away from this loan and into a better one. Yet, for the pay-day lending, you have to multiply the 23% loan interest rate by a factor of 10 or more.

If you do not believe me, let’s do a simple exercise. If I have bi-monthly take home pay of $1,100 and need to get it now, the pay-day lender will give me $1,000. That will likely include a processing fee of some sort, but let’s say it is $0 and the rest due is interest plus the loan. So, the next pay-day, the lender takes my $1,100 payment to settle the loan. That is a 10% interest for a 1/2 month time period. Since there are 24 such time periods in a year, using simple interest, that is a 240% annual rate of interest.

If that is not bad enough, come the end of the 15 day period, I find I need my paycheck, so I reborrow it. So, I give them my paycheck, they take out another an extra $100 (I am rounding to make the math easier) on the interest I owe and they loan me $900 rather than $1,100 in take home pay. So, now I owe $2,200 on the use of $1,900. Assuming I could pay it back in 15 days, that would be a 1/2 month loan rate annualized to the tune of 379% per annum. However, I cannot pay the full loan back as my next pay check is only $1,100. So, I borrow yet again. The take out $200 more in interest due on top of the next $100, so I get $800. So, now I owe $3,300 on the use of $2,700.

I used a fictitious interest rate for the ease of the math. Yet, I also did not factor in a processing fee either. Yet, the purpose of the illustration is to show how fast you can get in over your head. Even if you did not borrow against a portion of your paycheck, you can soon end up owing the entire amount. A key problem is the people in need are the least likely to run the numbers. They just need the cash.

I am presuming the audience reading this is fairly astute, much more so than the average Joe’s and Josephine’s. If you have friends or relatives who are going down this path or who are considering it, help them look at other options. There are an increasing number of microloan possibilities whose lenders do not prey upon the borrowers. There are some other financial assistance programs that go under varying names. There may be some co-lending options as well. The dilemma is the pay-day lending is a vicious cycle that is difficult to break. So, help people avoid that cycle and try to get out of it if they can.

I do not begrudge anyone making a reasonable profit. Yet, I do find fault with people making an excessive profit off the backs of people who can least afford it. If you have a story about pay-day lending, please feel free to share it. Others need to see how this death spiral can affect people.