Painless Change, More Money (Yet Another One)

May 23, 2012

 

Abandon all hope, ye who enter here

Control Your Cash Trivia Time!

Which will lubelessly rape your wallet the fastest while leaving the deepest scars?

  1. Incurring credit card debt
  2. Having children
  3. Going to a car dealer for repairs and parts

The answer is 2, of course, but that doesn’t make for as interesting a blog post as if we assume the answer is 3.

What turns most people off about personal finance is that so much of it is about economization. Go without, deny yourself one of life’s immediate pleasures, and maybe in the future you can enjoy a slightly greater pleasure. No wonder so many people just give up and decide to indulge themselves immediately.

But this is different. Here at Control Your Cash we consistently urge you to make painless choices that you won’t even notice after you’ve spent the initial few seconds making them.

Like the idiots we see waiting in the drive-through lane at Starbucks every morning. Yes, the “latte factor” has been analyzed to death already, but it’s still valid. These people not only pay 2000% markup for the privilege of patronizing Starbucks, they wait in line longer than it would take for them to brew their own coffee. So they’re not even purchasing convenience, however much that’s worth. They’re wasting money simply out of habit.

Log into your car insurance account, and your health insurance account while you’re at it, and check your limits. You’re probably overcovered, and throwing money away each month unnecessarily. Once you reduce your limits, you won’t be suffering through the privation of having reduced coverage. You’ll be saving more money, again with minimal effort, and all for a few minutes’ work. We’re not talking about forgoing that Fijian vacation you’ve been working towards and desperately wanting for so long. We’re talking about doing practically nothing and getting more money out of it. All because you were a tiny bit more cognizant and aware of your surroundings than you were before.

Which brings us to our multiple-choice quiz answer. Why do car owners go to the dealer for service? Because they don’t know any better, and because it’s convenient. Also, if you bought your car new, the dealership almost certainly offered you a free oil change and tire rotation or two when you closed the deal. Sometimes, depending on how naïve you look, they’ll go so far as to insult you by offering services that even Baker from Man vs. Debt could perform on his own. Like replacing windshield wipers, for instance, as if that’s something that anyone with opposable thumbs couldn’t do.

Merchants have been offering “free” goods and services for millennia, and still people get suckered in. It’s not that the merchants are necessarily cheating you, but rather that you need to take into account what they’re selling you beyond the free stuff. Free socks with that new pair of sneakers? Maybe, just maybe, and you’re not going to believe this, Foot Locker factors in the (minimal, to them) price of the socks and still makes a tidy profit off you when you buy that pair of Reebok RealFlex CrossFit Nanos.

Even without the free oil changes, the dealer relies on your presumed comfort level to make you a lifetime customer. The friendly man who sold you the car? There are even friendlier men working at the dealership as service advisors!

Of course they’re friendly, you’re responsible for financing their fishing boats and summer cabins.

We’ve discussed it on this site before, and elsewhere, ad nauseam. Like the time we priced a job that included replacing both sets of front brake pads and the calipers, cleaning the rotors and bleeding the lines. The dealer quoted $871.45. Oops, left my credit card at home. It’s the darnedest thing. How about I bring my car back this afternoon?

The shop down the street offered to do the same job for $398.34.

Only with rare exceptions should you take your car to the dealer. For warranty work, obviously, but beyond that the reasons you should let the dealer touch your car are selected and rare. Resetting the factory satellite radio unit, for instance.

Even the most meaninglessly inconsequential items are cheaper just about anywhere other than your dealer’s service department. Case in point, Motorcraft Part 15K601:

Price on FordOwner.com, $55.71

Price on Amazon: $7.50.


Damn, those internet retailers really are killing Main Street. We didn’t even think about visiting the neighborhood mom-and-pop key fob store.

Once more, repeat after us:

Poor people are poor largely because they choose to be.

It was only a few years ago that “comparison shopping” meant driving across town and burning a day or two to find the best deal. Today, that’s not an issue. While reading this post, there’s nothing to stop you from opening a couple more tabs and finding meaningful savings on your next purchase of whatever. The money you save, you can buy assets with. This is how you get rich. There really isn’t much more to it.

This article is featured in:

**The Carnival of Personal Finance 364: The Art of PF Blogging Edition**

Filed Under: Healthy Living, Making Smart Choices, Personal Finance Tagged With: , , , , ,

Expose Yourself For Fun And Rewards

May 11, 2012

She's smiling because she's AB-. That'll get you $20 a quart.

A company is struggling, and the struggle has no quick resolution. (How) can you profit off this situation?

Case in point, and a real-world example. We needed an polyurethane iPad Smart Cover, which is made by Apple and sells for $40. It’s the only accessory we could find that hit the multiple criteria of a) being made especially for the product it’s supposed to accessorize and b) coming from a trusted manufacturer (Apple itself). There are plenty of knockoffs available, but we’re not interested.

While we’re certain the Smart Cover does what it’s supposed to, we still wanted to take a look at it rather than just read the description on Apple.com. So we headed to Best Buy, America’s dominant electronics retailer since the demise of Circuit City. You can touch and play with the iPad Smart Covers there. We did.

Then we bought one on eBay for $23. With free shipping and no sales tax.

Here’s an immutable law of commerce that we’re already seeing regular examples of and will continue to for the next few years: Businesses that operate as showrooms, rather than as businesses, are at a huge disadvantage. Look at the position retailers such as Circuit City and Borders (and now Best Buy, and others to follow) have put themselves in. You can walk in off the street and examine the merchandise at your leisure. The employees range from obsequious to unobtrusive, but none of them are going to give you the hard sell. (Imagine a car dealership operating the same way. More specifically, imagine walking around the floor looking at new models and responding to every salesperson with “No thanks, I’m just looking.” The car dealership would kick you out within minutes. Maybe electronics retailers and bookstores need to place their staff on commission.)

The old business model isn’t just old, it’s counterproductive. Using a retailer/marketplace like Amazon or eBay, plus the wireless provider of your choice, you can walk into Best Buy, look at the items available, buy them from someplace else, then discreetly leave the store. If you really enjoy irony (as distinguished from coincidence), you can buy the items from Amazon or eBay with a phone that you bought at Best Buy. If you’re feeling really daring, you can do it with a floor model display computer.

There’s no obvious solution to this, either, short of Best Buy drastically lowering its prices. Either that or the company could get out of the retail electronics game, and operate exclusively as a seller and installer of large appliances and car stereos. When Best Buy hires us as consultants, that’s what we’ll suggest. Until then, our ideas are merely opinions.

As a customer, your options are plentiful. As an investor, you can make money here: you just have to be resourceful about it. Imagine a market so relatively free that it lets you sell stuff you don’t own.

BBY seems like a perfect example of something worth selling short. This is vastly different than selling a house short. You borrow the stock, hope it loses value, then buy it, then return it to the lender at the original price.

Sound like too much work? Heck, it’s an opportunity. The holder of BBY obviously thinks it’ll appreciate, so it’s only fair that there be a mechanism for profiting off daring him to be wrong.

The compact explanation is as follows. BBY is currently trading at around $20. Say you borrow $20,000 worth of shares, which you can hopefully figure out is 1000 shares. You wait 3 months, and the price has fallen to $16. You then buy $16,000 worth of shares, sell them to the entity you borrowed the original 1000 shares from, and pocket $4,000 (less borrowing charges.)

But instead of following the predicted downward trend for those 3 months, Best Buy gets a patent for a perpetual motion machine. Or finds an oil patch underneath its corporate headquarters (which would be noteworthy, seeing as it’s in a Minneapolis suburb.) The stock shoots up to $60, and the lender wants his 1000 shares back. That’s going to cost you, Ace. $60,000, to put a nice round number on it. You’ll be out $40,000 for your little exercise in semi-sophisticated trading (again, plus borrowing charges.)

What about the actual specifics of short selling? It starts by opening a margin account. E*Trade*, for instance, will let you open a margin account with a minimum balance of $2000 if you already have a regular account with them. When you use a margin account, you’re borrowing E*Trade’s money. You can’t run away from them if you come up short. They know where you live, and they have your money.

So say BBY falls in value, but not by as much as you’d like. After your arbitrary 3-month period, the borrowed money comes due with the stock sitting at $19.53. How much would you make?

This isn’t hard to figure out, and you can probably do it in your head. $470, right?

Go back and read the post again. From the top. E*Trade (or anyone else, other than a particularly dupable family member) is going to charge you interest. Your net profit for that imperceptible decline in the stock price is 0.

Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.
Never make an investment without knowing the interest rate you’ll be charged on any money you borrow. 
Never make an investment without knowing the interest rate you’ll be charged on any money you borrow.

Should we say it once more, underlining this time, or did you get the message?

Brokerages start with something called the “base rate”. E*Trade set its at 4.14% a couple of years ago, and it’s remained untouched since. If you have half a million dollars in your margin account, you get to borrow money at the base rate. (Put a million in your account, and they’ll take 25 basis points off the base rate.) But the less your ability to repay, the higher the interest rate you’re charged. That’s why unsecured credit cards charge so much, which you shouldn’t be paying interest on anyway. With that $2000 minimum balance in your margin account, you’ll pay a 430-basis-point premium on the money you borrow. 8.44%. You’re almost better off borrowing on that credit card. Almost. Here’s the list of interest rates, segmented by size of account balance:

 

Making money’s a pain, isn’t it? For a beginning-to-intermediate investor, better to find something undervalued and buy it long than search for something overvalued. The worst thing that a stock you perceive to be undervalued can do is fall to 0. A stock that you think is overvalued, but isn’t, can rise so high that you’ll lose your margin account, your house, your 401(k) and the respect of your friends and family. Now, who’s up for some trading?

 

*Technically, the name is supposed to be in all caps. They should consider themselves fortunate that we’re deigning to indulge even one of their typographic fantasies by spelling the company name with an asterisk. The asterisked name spawned an asterisked comment, adding to the confusion, a confusion that this asterisked comment can’t hope to resolve. 

Filed Under: Investments, Making Smart Choices, Net Worth, Personal Finance

€V€RYBODY PANIC

April 6, 2012

 

Not that kind of euro. Alright, as long as we're making jokes, and this is probably the 3rd image we've run of a guy with a purse, what is the purpose behind this? What does a man ever need to carry beyond keys (one pocket), a wallet (another pocket), and a phone (third pocket)? With a standard 4-pocket pair of pants, that leaves one pocket free for lollipops to give to itinerant children.

 

Unless we’re stuck in a foreign airport, the vast majority of us don’t exchange currencies. But good Lord, do we hear about it. Will (European country) drop the euro? Will its value fall through the floor? Is the recent talk about the euro’s troubles just an indirect ploy to get us to buy gold? How does this affect the U.S. economy?

Nobody knows anything. Nor does anyone remember anything.

Financial journalists have to report every 1¢ swing in the value of the euro as of great significance. Each movement the markets make in a given day – even a given hour – is reported upon ad nauseam. Why? Honestly, the biggest reason is that there’s a 24-hour news cycle to fill. It’s human nature to overemphasize the importance of how we each choose to spend our time. If you don’t believe that, find a teacher and listen to her yammer about how important her job is. The same applies to everyone whose job it is to provide you with financial information. Something utterly unimportant – the euro losing a tiny bit of its value vis-a-vis the dollar – can inspire a 6-person roundtable discussion on CNBC.

That being said, some wags are already calling for the euro’s funeral dirge. Here’s why, kind of:

The euro entered the world on the first day of 1999, trading at $1.174. A year later, it fell to the point where it equaled the dollar for the first time. That fall the euro sank to its nadir, around 84¢. It again outvalued the dollar in July of 2002, briefly (and barely) dipped below again, and has been worth at least a dollar since that November. In July of 2008 it reached its zenith, trading at $1.58. Now it sits at around $1.32, and that alone gives many cause to question the euro’s future.

The euro is the national currency of France, Germany, Italy, Spain, Greece, Andorra, Montenegro, Kosovo, Vatican City, San Marino, Monaco, Slovenia, Slovakia, Portugal, the Netherlands, Belgium, Ireland, Luxembourg, Malta, Finland, Estonia, Cyprus and Austria.

Notice any European country missing?

Yes, Switzerland too. We were thinking of a nation slightly larger. Come on, you can do this. Bad food, no fluoride, used to have an Empire that the sun never set on?

Correct, the United Kingdom.

In 1990, back when the euro was not even a foul thought in its father’s head (a line stolen from Phil Hendrie for just such an occasion), Prime Minister Margaret Thatcher was steadfast in her opposition to eventually dropping the pound sterling in favor of a transnational currency. Steadfast, and outnumbered. Her objections had nothing to do with convenience, national pride or exchangeability. They were much more pragmatic.

Thatcher argued, in print no less, that a modern and robust economy – we’ll call it Country A – and a basket case like Country B can’t share a currency. For one thing, a transnational currency would lower (and has lowered) interest rates. The weaker the replaced national currency, the greater the decrease in the interest rate. Which makes sense – a transnational replacement currency is necessarily weaker than the strong currencies it replaced and stronger than the weak ones it replaced. The interest rate is the price of money. The cheaper money is – i.e., the less it costs to borrow – the lower the interest rate. The countries that had weak currencies going in, such as Portugal and Italy, now found it easier to borrow money. And borrow they did.

Greece, too. Thatcher even mentioned Greece by name. It’s “Country B” above. Country A is Germany, Europe’s most powerful.

There are legitimate advantages to a weak currency; one weak when compared to others, that is (as contrasted with one weak when compared to itself historically.) For one thing, it makes exports cheaper. The U.S. dollar has lost around 10% of its value relative to the New Zealand dollar over the past year. American exporters who would never have been competitive enough to sell to Kiwis before have a brand new market/clientele. To a New Zealander, American goods are now that much cheaper. When a small country has the weak currency and larger countries have the comparatively strong ones, the effect on the small country’s potential for exports (and hence growth) is even greater. But the American dollar and the New Zealand dollar are necessarily different and unequal. It’s when two countries’ currencies should differ, but are prevented from doing so, that problems exacerbate.

Trouble arises when a small country (Greece) can now borrow more money than it did under its old currency, while sharing the new currency with stronger economies. When the euro become reality, it artificially made Greece’s currency more robust while doing the opposite to Germany’s. Greece could borrow more than before. And did. Boy, did it ever. Overextended itself, couldn’t pay its bills. So Germany, by virtue of being the local heavyweight, has to lend billions to Greece. If it doesn’t, Greece has incentive to quit the euro. A less-circulated euro means other weak countries would want to follow suit.

This is what the pound sterling has done with respect to the euro since the latter’s inception. The higher the graph, the stronger the pound. The Brits might be buying goods cheaply from the continent while having to sell them elsewhere, but at least they’re not worrying about their currency imploding.

One more thing. To use the euro, a country needs to qualify. (Several other countries are in line to adopt it as their currency: Latvia, Lithuania, and Denmark, among others.) Qualification means keeping inflation and long-term interest rates under particular thresholds, and the same for debt and deficit (relative to gross domestic product.)

Guess what? When all a government has to do to get access to cheap money is provide certain numbers to the European Central Bank, that government wants those numbers to look as good as possible. Honesty is at best a secondary goal here. The Greeks lied through their ouzo-scented teeth. The Portuguese, Italians and Spaniards weren’t all that forthright either. But now, it’s too late for the ECB to say, “No, you have to go back to your original currency.” Don’t think for a moment that something similar couldn’t happen in the United States, with a Department of the Treasury telling enough lies to keep the cheap money flowing. There’s no transnational currency for the U.S. to back out of, but there’s plenty of economic havoc to wreak.

It’s hard to appreciate how an artifice can create such damage, but it can. In a healthy system, currencies can trade against each other in the open market, correcting imbalances and reinforcing the economic soundness of each currency’s issuing government. When drachma and marken are operating as de jure equals, Greece eats itself into a coma. Which Germany then has to arouse.

“Adapt or die” is a truism throughout life. It’s hard to adapt when you’re forcefully prevented from doing so.

This article is featured in:

**The Carnival of Personal Finance 357: Hotel Room Edition**

Filed Under: Capitalism, Education, Personal Finance, Travel Tagged With: , , ,
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