Crazy (?) Money
In the top right corner of this page, there lives a tiny little description of me. In it, I mention that I tend to espouse contrarian strategies when it comes to personal finance. To wit, some of my current financial strategies involve:
When it comes to financial advice, one size definitely does not fit all. In fact, I'd submit that all of the advice regarding money that's available on the web falls neatly into three little categories:
For the financially illiterate, certain perspectives are prevalent. Debt is viewed as a means to finance things. Cash is viewed as a simple medium to facilitate the exchange of goods. Current wants outweight future needs. Consumption is a form of therapy. Concepts such as future value, compounding, and opportunity cost are foreign. The best form of advice for people in this category is to cut up their credit cards, make a budget, and set up automatic deductions to a savings account. Often, when they finally resolve to deal with their financial difficulties (often with the help of Suzie or Dave Ramsey), they begin to make the first important steps toward becoming financially competent.
At this stage, debt is limited to houses, cars and educations. Credit cards becomes tools of convenience where the balance is paid every month. Cash is saved judicously to purchase big-ticket discretionary items. An emergency fund is built up. Budgets are mostly honored. Investing in non-cash instruments becomes prevalent for long-time horizon goals. This is the fat part of the bell curve, where I suspect that most people reside.
At the far right tail of the curve are the financially savvy. At this point, debt takes on a different face altogether. It's no longer viewed as a tool to buy things you can't afford, but as leverage that can be used to boost your own returns. Suddenly, debt becomes an integral part of the balance sheet.
Credit cards form a subcategory here. 0% balance transfers imply an infinite rate of return (on your own capital) with virtually no risk, provided you return the funds upon due. A rewards cards means free money for purchases that you were going to make anyway. As such, credit becomes another tool in your arsenal to accumulate wealth.
Cash becomes a dynamic procreating animal. High-yield savings accounts and CD's become vehicles for dollars to multiply. Money itself becomes a tool to make more money. This concept is perhaps one of the single-most important ideas about money. You can either rent your time to make money (jobs, labor, digging for gold, etc.) or you can rent your money to make money (dividends, interest, capital appreciation, etc) Guess which one is easier.
Since the dollars you spend are no longer growing for you, the financially savvy pursue discounts, negotiate effectively, and defer spending until absolutely necessary. Buying on credit is out of the question, even for cars. Large purchases involve intricate decisions, where cost of ownership, resale value, and reliability all factor in to the decision to buy.
So next time you take a trip around the PF blog, consider what kind of audience your friendly neighborhood blogger is catering to. Much like Goldilocks, some of the advice may be too hot, some too cold, but some will be just right for you--the dear reader.
* As it were,
- all of the credit card debt is 0%APR
- my MAGI exceeds the allowable limit for IRA contributions
- my cash accounts are generating returns in excess of my mortgage rate
- and my new bank accounts are scoring me promotional funds in exchange for a lowered FICO score that's irrevalent to me since I have no need to borrow money.
- Accumulating as much credit card debt as possible
- Contributing nothing to my Roth IRA
- Making minimum payments to draw out my mortgage longer
- Lowering my credit score by opening new bank accounts*
When it comes to financial advice, one size definitely does not fit all. In fact, I'd submit that all of the advice regarding money that's available on the web falls neatly into three little categories:
- advice for the financially illiterate
- advice for the financially competent
- advice for the financially savvy
For the financially illiterate, certain perspectives are prevalent. Debt is viewed as a means to finance things. Cash is viewed as a simple medium to facilitate the exchange of goods. Current wants outweight future needs. Consumption is a form of therapy. Concepts such as future value, compounding, and opportunity cost are foreign. The best form of advice for people in this category is to cut up their credit cards, make a budget, and set up automatic deductions to a savings account. Often, when they finally resolve to deal with their financial difficulties (often with the help of Suzie or Dave Ramsey), they begin to make the first important steps toward becoming financially competent.
At this stage, debt is limited to houses, cars and educations. Credit cards becomes tools of convenience where the balance is paid every month. Cash is saved judicously to purchase big-ticket discretionary items. An emergency fund is built up. Budgets are mostly honored. Investing in non-cash instruments becomes prevalent for long-time horizon goals. This is the fat part of the bell curve, where I suspect that most people reside.
At the far right tail of the curve are the financially savvy. At this point, debt takes on a different face altogether. It's no longer viewed as a tool to buy things you can't afford, but as leverage that can be used to boost your own returns. Suddenly, debt becomes an integral part of the balance sheet.
Credit cards form a subcategory here. 0% balance transfers imply an infinite rate of return (on your own capital) with virtually no risk, provided you return the funds upon due. A rewards cards means free money for purchases that you were going to make anyway. As such, credit becomes another tool in your arsenal to accumulate wealth.
Cash becomes a dynamic procreating animal. High-yield savings accounts and CD's become vehicles for dollars to multiply. Money itself becomes a tool to make more money. This concept is perhaps one of the single-most important ideas about money. You can either rent your time to make money (jobs, labor, digging for gold, etc.) or you can rent your money to make money (dividends, interest, capital appreciation, etc) Guess which one is easier.
Since the dollars you spend are no longer growing for you, the financially savvy pursue discounts, negotiate effectively, and defer spending until absolutely necessary. Buying on credit is out of the question, even for cars. Large purchases involve intricate decisions, where cost of ownership, resale value, and reliability all factor in to the decision to buy.
So next time you take a trip around the PF blog, consider what kind of audience your friendly neighborhood blogger is catering to. Much like Goldilocks, some of the advice may be too hot, some too cold, but some will be just right for you--the dear reader.
* As it were,
- all of the credit card debt is 0%APR
- my MAGI exceeds the allowable limit for IRA contributions
- my cash accounts are generating returns in excess of my mortgage rate
- and my new bank accounts are scoring me promotional funds in exchange for a lowered FICO score that's irrevalent to me since I have no need to borrow money.
posted by Matthew at
9:20 PM
2 Comments:
matthew:
fyi... gmac bank is at 4.80%, presidential is at 4.87 but citibank e-savings is at 5.00.
- s.b.
By
Anonymous, at 3:18 PM
Prevailing interest rates are an important aspect to consider when selecting a bank. Further, convenient access to your funds, fee schedules, and bank financial health are also important issues to consider.
When I weigh all of those aspects, I conclude that GMAC provides the greatest "value" for my money.
Incidentally, GMAC has since pulled ahead of Citi since the date of your post.
By
Matthew, at 9:46 PM
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