Acting and Reacting

Is the world getting safer or more dangerous? Data about crime, wars and accidental deaths indicate that life this century is much safer than it was in the past. These events are very noticeable and easily measured. On the other hand, we often ignore or excuse less immediate dangers that arise as our interactions with the world become more complex.

As I have been describing behavioral examples of errors in the five key dimensions over the last 10 years, it becomes clearer that much of the human race is still attacking twenty-first century problems with cave-man level of skills. Just as the hunter-gatherers required immediate reactions to survive, when they heard a rustling in the bushes that may or may not be a snake or predator, humans retained those instincts, following a course of acting first and analyzing later. 

Likewise the practice of not trusting or even attacking people from a different tribe or with a different belief system carries over today in many forms. “My god is better than your god” is not necessarily ancient grounds for confrontation. It happens in a modified form daily on social media.

These instant reactions and mini-superstitions come to us immediately, before we have a chance to engage our critical thinking. Thus critical thinking is often omitted from our decision process, used only to justify or rationalize actions after the fact.

Several recent books describe this psychological phenomenon in detail: Thinking, Fast and Slow by Daniel Kahneman; Nudge, by Thaler and Sunstein; and The Power of Habit by Charles Duhigg are among them. They tell how, as humans evolved, we developed mechanisms to be able to make quick decisions in times of panic or emergency. We react instantly, responding to emotional triggers often before we are aware of them. We are more comfortable following our established patterns of behavior. These programmed, intuitive reactions saved our ancestors, but they serve us poorly today.

That explains in part the need for COVID-19 bail out packages. According to Market Watch: “A shocking number of Americans are living paycheck to paycheck.” One survey says it’s at least half, another estimates 74%, as “one in four families making $150,000 a year or more are living paycheck-to-paycheck” and three in ten families having no emergency savings. No wonder it’s a crisis! The article says people are struggling.

This problem keeps coming up year after year, yet there is no change. 

Apparently what people need is something called financial literacy. An article in Ideas.TED from late last year asks: How financially literate are you?” and tells “3 things you should know about your money.” These three things are not close to rocket science: knowing how much money is coming in vs. how much you are spending; knowing your credit score and knowing how much credit card debt you have. Do we really need seminars and newsletters to teach people how to spend less than they earn to have a little left over at the end of the pay period or to read a credit card bill? These are third-grade skills.

Don’t blame it on credit cards or the eagerness of banks to lend customers more money than they can afford to borrow. These excuses are a cop-out. But this problem arose only in the last half-century or so. The world gets increasingly complex while we still try to cope using our cave-man instincts, act now and analyze later.

Critical thinking does not come naturally. It’s hard work and can sometimes be unpleasant. But it’s increasingly needed to keep up with the new products and services that technology throws at us at an ever-accelerating pace.

Flashback – Social Security Myths

[Here is a brief excerpt from a long rant on Facebook about how unfair the Social Security system is and looking for support. 

“This is NOT a benefit. It is OUR money, paid out of our earned income! Not only did we all contribute to Social Security but our employers did too! It totaled 15% of our income before taxes. (This should be enough for you to forward this message, If not read on.)”

Despite my posting only 6 months ago the following full explanation of why this idea is complete hogwash, the misunderstanding continues. If you pass anything along, this should be it, because it is the truth.]

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Social Security Myths

People keep saying and posting on social media thoughts on Social Security that are dead wrong. These myths and misconceptions have been going around for years, and apparently too few people take the initiative to look for the facts. Instead they express righteous indignation against an imagined injustice that they can't control. Their anger and frustration are amplified by cowardly politicians eager to feed into the fear in order to blame the other side rather than to do anything about it . 

First: It’s my money. I paid in, and I expect to get it back. (Wrong)

Second: Congress raided the Social Security trust fund to pay for their pet projects and wars. (Wrong)

The concept behind Social Security is that the government collects money from working people, salaries and wages, to pay retirees at a set rate. Here is the way the government explains it: “Under a pay-as-you-go program…, the taxes of each generation are used to pay for benefits to prior generations and are not used to advance fund their own benefits.” The money you paid in goes to pay someone else; it's not set aside for you.

Previously, there were far fewer retirees than workers, so SSA collected more than they paid out. Surplus funds were (by law) invested in government bonds. Like any other investment in bonds, they accumulated interest. By a recent estimate, Social Security earns $80 million per year from the interest on this investment.

That surplus is sometimes referred to as a trust fund, giving the false impression that they are holding your money in a separate account to fund your retirement. As shown above, this is clearly not the case. Money collected this month is paid out to retirees this month with any excess invested. As more people retire and live longer, the surplus has gotten smaller. Beginning very soon there will be no surplus. Social Security will begin cashing in those bonds to cover monthly payments. 

By 2032 the surplus is expected to be used up. The only money available to pay out will be the money collected. That amount will cover only about 75% of the set rate. For many years politicians have avoided trying to fix this problem, because anyone who mentions it is accused of stealing from old people, instead of trying to address a known problem.

What about raiding the mythical trust fund? The reason a government (or any other entity) issues bonds is to borrow money from investors. They can use that money in any way they wish. There has been no raiding or stealing. They treat money borrowed from Social Security the same as any borrowed from any other bondholder. They spend it. Otherwise they wouldn't borrow it in the first place! As mentioned above, they also must pay interest on the money borrowed - that's the opposite of raiding. 

At times the government has changed the way it accounts for Social Security collections. Sometimes they were counted separately and sometimes they were included with all other tax revenues. This affects only how the deficit is calculated and reported. It has nothing to do with how much is available to pay out but has been misrepresented as raiding. CBS News debunked this myth back in 2012, but did anyone listen?

Furthermore, the agreed payout can be and has been unilaterally changed many times in the past. A cost of living adjustment was added in 1975. The month when that adjustment was applied changed in 1983. Part of the payment became taxable in 1984. The age for full retirement was adjusted in 1983. The contribution rate has grown since its inception and the cap changes every year with inflation. 

That means the government can change the rules if necessary. Here is how the Social Security Administration explains it. “We use the term obligation in lieu of the term liability because liability generally indicates a contractual or legal obligation. No contractual or legal obligation exists for paying full scheduled benefits on time once the trust fund reserves are depleted. In fact, current law requires that, when the trust fund reserves are depleted, benefits paid should match income received.”

It’s not your money. There was no raiding. There is no firm promise to pay, and it was never meant as the sole source of retirement income. Look it up!

(Also, for a full explanation of whether Social Security is an entitlement follow this link.)

Taking Retirement Seriously

When I started my first job after leaving the army, part of my orientation was a description of the company’s pension plan. That didn’t seem important to me at the time. It was not realistic to be looking 40 years into the future after just two days on the job. Unfortunately, some people seem to have a similar reaction as they reach their 40s and 50s. They will reach retirement age and be forced to keep working, painting themselves as unfortunate victims of the economy (or something else). In other cases, they barely scrape by, and look for help from the government or AARP lobbying while complaining about being on a fixed income.

“According to the research, the average retirement savings for people in their 50s was $124,831 in 2018. It was $163,577 for the people ages 56 to 61.” That’s not nearly enough. In a different article, CNBC states, “Although $1 million is the oft-cited amount needed to retire comfortably, data shows it might not be enough” to maintain a comfortable lifestyle based on current life expectancy. The recommendation is to have saved at least 10 times your annual pay.

But one million dollars seems like an enormous sum in this environment where data from earlier this year shows that “just 40 percent of Americans could pay an unexpected $1,000 expense.” Can’t save a thousand; can’t even imagine saving a million! Most consider having a million dollars set aside as being rich.

The secrets (if they can be called that) lie in discipline and perspective and were summed up in three articles I read recently.

The first was about how to become rich and gave two pieces of advice that could apply to any saver. “Take a percentage of your income, say 5%, and have it automatically invested.” Then adjust your spending to correspond to what’s left. This can be adjusted upward as time passes. (Retirement websites advise setting aside 10% as a minimum.)

The second piece of advice is to be thoughtful about life’s major purchases. “A big reason people struggle to save 10% or so of their income is they buy houses and cars they can't afford.” Houses on average appreciate only at the rate of inflation. Some get lucky on the timing but in general, a house is shelter, not an investment. And cars depreciate over time. Look back 50 years. The fact is that average house size grew while family size was shrinking.

Those rules are a good start, but the problem remains of adjusting lifestyle after setting aside savings. Market Watch had a recent opinion piece with some suggestions. “These 16 money wasters are why so many Americans can’t save for retirement.” Here is part of the list as presented with the comments abbreviated and modified:

• Vacations. Never go into debt to pay for one, even adding to credit card debt. Relaxation does not require traveling.
• College. Consider affordability over prestige.
• Restaurants. Eating out is expensive, especially the daily luxury coffee.
• Opportunities lost. The standard examples are the employer match on a 401(k) plan or other tax-free opportunities such as Roth IRA or a flexible spending account.
• Transportation. As mentioned above, don’t buy too much car or an unnecessary truck.
• Credit cards. If you use them, pay them off monthly.
• Lottery. Don't throw money away on a long shot.
• Clothing.“The average adult spends $161 a month on clothing. We are obsessed with keeping up with the latest fashions” and fads.
• Shoes. See clothing.
• Extra Stuff. Many of my neighbors can’t park in their garage for all the stuff. Look at the explosion in the self-storage business.
• Holidays. Spending too much on gifts, decorations – Halloween costume for the dog?
• Toys. For children and adults.
• Haircuts. In most cases there are less expensive options (barber vs. salon).
• Cell Phones. Besides demanding the latest model, “Americans also spend approximately $88 a year on apps and unlimited data plans typically cost around $80 a month.”

That is not an exhaustive list, but it all adds up. It takes perspective to separate wants from needs, and discipline to stick with those decisions. It may not sound like any fun, but what fun is it to try to retire when you're broke?

Save Your Vitamin Money

At least once a month we see reference to one or another survey or report about people being unable to afford retirement. They haven’t saved enough money, but may not be able to keep working either. But now just when it’s needed, along comes a reliable tip on how to save a little more: Don’t waste your money on vitamins. 

This is not the first time I have written about the waste and potential dangers of dietary supplements. The last entry on the subject of supplements in general was about two years ago where I quoted from the New York Times saying that annual spending in America averages about $100 per person. I focused on vitamin and mineral supplements as recently as last September. I was hoping after many attempts to have wrapped it up, but it’s good advice, so I will give it another shot based on some fresh headlines.

About two weeks ago researchers from West Virginia University School of Medicine published a study in the journal Annals of Internal Medicine showing “that although reduced salt intake and certain supplements may lower the risk of cardiovascular diseases, most nutritional supplements do not improve the risk for heart disease or death.”

An article reviewing that study quotes the lead researcher: “The reason we conducted this study was that millions of people in the United States and across the world consume supplements or follow certain dietary patterns, but there was no good-quality evidence to suggest that these interventions have any effect on cardiovascular protection." 

The study itself was not a clinical trial but a review of 277 other studies with a total of nearly one million subjects. It looked at the effectiveness of many popular nutritional supplements and 8 diets. “Findings show that of the 16 dietary supplements, only two showed beneficial effects on heart health, namely omega-3 long-chain fatty acids and folic acid….[whereas] selenium, vitamin B6, vitamin E, vitamin C, iron, and vitamin A, among others, show no significant effect on heart health.” 

Other important findings were that some supplements by themselves, not just the tainted ones that appear in the news from time to time, are potentially harmful. Another surprising finding was that “most diets, like modified fat intake, the Mediterranean diet, and reduced saturated fat intake, had no effect on the heart at all.”

Some other sources reporting on the same study had more watered down headlines. This one says, “For Heart Health, Some Popular Supplements Aren't as Helpful as We Thought.” But the sub-headline is more direct: “Consumers should ‘stop wasting their money on these products.’ ”

Another one is even more careful in its wording: “Nutritional supplements and diets not always protective, research suggests.” But they did provide a link to another study from 14 months ago that also came to the conclusion that “most commonly consumed vitamin and mineral supplements provide no consistent health benefit.”

The final conclusion as always is “only eating a healthy balanced diet is the key to overall health.” That shouldn’t come as a surprise to anyone who has been paying any attention to and looking into health news over the years. Once again, it’s looking for the easy, magical answers that cause us to waste time and money on pills and fad diets. Avoiding that mindset is, though, an easy way to come up with some extra money for that problematic retirement savings plan. 

Government Shutdown Hardships

A week ago CBS reported on IRS workers' problems that came from the shutdown. “After a month with no pay, real hardship does exist for IRS employees including not having the money needed to get back and forth to work or to pay for the child care necessary to return to work right now.” Even some cities have been struggling as spending and the related sales tax revenues decreased. There were many other reports from around the country about similar hardships: food, utility bills, transportation, credit card payments, rent, etc.

It’s sad to see about 800,000 Federal workers furloughed with no pay. Many were required to continue coming to work not knowing when they would next be paid. They would struggle until the dispute was settled and back pay arrived. I have no solution to propose to avoid shutdowns, but I know what should happen immediately upon the workers' return. All government workers should be given a class in personal finance.

Suze Orman is not the only one who has been advocating for many years that everyone have an emergency fund, but she gives familiar advice. Here from a 2015 article is a typical example. “Your long-term goal is to have eight months of living expenses set aside in your emergency fund. I know that’s a lot, but I want you and your loved ones to be okay if you were ever laid off, or sick for an extended period of time.” Other experts are more conservative, recommending 3 to 6 months. But still, that’s more than a few weeks.

Of course, no one has been listening. Unfortunately, government workers thrown into a panic, resorting to food banks after missing a single paycheck does not strike the public as unusual. An emergency fund of only $1000 would be a good start, but a Bankrate survey from 2018 showed “only 39 percent of survey respondents said they would be able to cover a $1,000 setback using their savings.” That leaves 61 percent of the entire population out in the cold – or going to a food bank – soon after losing a job.

Admittedly, losing their job is not usually on the minds of government workers. Their job security is enviable. However, there have been four shutdowns in the last six years, each with the potential to cause similar problems. Between that and the same chances of personal emergencies that they share with the rest of the population – auto accidents, illnesses, personal injuries, etc. – their lives overall are not that much different or more secure than the rest of us.

Critical thinking dictates a need to build an emergency fund. Discipline is required to stop living paycheck to paycheck in order to do that. Responsibility implies that hardships after only a month without pay gives them no right to play the victim. That status, however, is too convenient for politicians trying to shame the other side, trying to shift the focus away from their own inability to act like competent leaders or even like adults.

This is yet another crisis that can be laid at the feet of individual behavior. The news media has this same information, but don't expect them to report it that way. They are too busy pushing sob stories and manipulating our emotions to keep the ratings up, to ask what personal choices could have allowed those crises to be averted.

Why Do We Work?

On Labor Day it’s probably appropriate to ask yourself the question: Why are you working? Popular culture will tell us “Everybody’s working for the weekend,” but there must be more to it than that.

In reality we work to pay the bills, to put a roof over our heads, to eat and be comfortable most of the time, to pay for education and to afford transportation. (In the last two instances, many pay them off after the fact.) One important, less obvious reason – we work so that some day we can stop working. It’s called retirement. It’s not something that just happens by magic, and it’s getting to be more and more challenging. 

Although for ordinary people it is a fairly recent development, less than 90 years old, with the help of organizations like AARP, most of us take it for granted. But it’s not a right; it’s something that must be earned and planned for.

Social Security has been in place since 1935. We see the deduction from every paycheck. It’s easy to assume that retirement is taken care of. This Motley Fool article warns that is clearly not the case. Some struggle to get by on Social Security alone, however one emergency can put a senior behind financially with little hope of catching up; healthcare costs continue to rise, especially for older people; and the annual COLA doesn’t keep up with real cost increases. “Social Security benefits are clearly insufficient to live on under the current system – but things could actually get worse. Social Security's trust fund reserves are expected to be depleted by 2034, and if no steps are taken to fix funding shortfalls, Social Security will only be able to pay 77% of expected benefits.”

This is not because the government is stealing from the so-called trust fund. It’s a feature of the original design that did not account for the baby-boomer generation or for the trend toward fewer workers. (For those still stuck on the myth that “it’s my money and they owe it to me,” here is a clear explanation from about two and a half years ago of why that’s not the case.)

Another article from Yahoo Finance tells the stark reality of the current situation: “Despite the fact that it was never meant to act as a main source of income, nearly one in five married retirees and one in two unmarried retirees say they rely on Social Security for the bulk of their income, according to the U.S. Social Security Administration.” To make ends meet, they must rely on Food stamps and other government programs.

With traditional pensions disappearing and Social Security an inadequate replacement, retirement savings cannot be considered a luxury. No one can afford to wait.

On average Americans are far behind. To be on track, by the age of 30 workers should have saved the equivalent of one year’s pay. Most are behind but have time to make it up, unlike their parents. “According to the research, the average retirement savings for families aged 50 to 55 is $124,831. For families aged 56 to 61, it's $163,577. Those figures are far less than the $1 million that many experts recommend as a target for retirement savings.” The one-million-dollar figure may be high, and this site, complete with calculator, recommends only $480,000 – still a lot more than the average of $163,000.

The answer then is simple. You are working to some day not have to work any more. But it’s not automatic. It takes planning, perspective and discipline. Without it anyone could end up in the category described in this CBS report: Broke and Bankrupt in Retirement.

Simple Calculations

I’ve always liked numbers. That’s why I was so disappointed when I got into the first grade and found they were not teaching arithmetic. In my school in my time, arithmetic didn’t happen until the second grade. Today not knowing your numbers and being able to do a little adding and subtracting when you start kindergarten means you missed out on the preschool or Head Start program that would have properly prepared you.

In any case I learned some arithmetic in the second grade.  The third grade had two classes taught by Mrs. Ener and Mrs. Bugbee. You were lucky if you got into Bigbee’s class because she was the “easy one.” But I got Mrs. Ener, who required every student to pick a day to stay after school, stand next to her at her desk and give the answers to the 100 addition facts on a book as she pointed to each one. If you missed a single one or took too long, you were out.  Come back and try again.  It was considerable pressure for an eight-year-old.  Besides, you had to give up your free time, staying after school and waiting in line behind others, giving you plenty of time to psyche yourself out.  After you successfully ran that gauntlet three times earning three stars on the bulletin board, the same routine followed with subtraction, multiplication and division – perfectly three times each.

As nerve-racking as it was, perhaps everyone needs a Mrs. Ener somewhere along the academic path, because so many problems we run into in daily life come down to simple arithmetic. One example was when I handed a cashier $22.59 to pay a $7.59 bill.  She thought the $20 bill was a $5 bill and rang up $7.59 on the cash register, which told her not to give me any change.  A co-worker pointed out that I had given her a twenty and panic set in. How much change should I get?  How about 20 – 5 dollars?  (The matter was resolved after a couple of wrong guesses.)

Here is another I came across in a magazine ad for a wristwatch selling for only $29 plus shipping and handling. The copy read: “Precision timing that’s accurate to four seconds a day – that’s more precise than a 27-jewel automatic priced at over $6000.”  That sure sounds impressive – until you do the numbers.

Four seconds a day means 4x30 seconds per month (approximately) = 120 seconds or 2 minutes. So far the calculations are easy. Two minutes a month will not make you late for very many appointments, although it might make catching a train in Tokyo a little iffy. But 2 minutes a month times 12 months (another easy, do-it-in-your-head calculation) comes out to 24 minutes a year – almost half an hour! Is that precision?

When we change time twice a year (from EST to EDT and back) and I have to reset the clock in my car, I just push the button to adjust the hours. I don’t expect the minutes to be about 12 minutes off. I expect the minutes to be pretty darn close, and they are! Does that mean the clock in my car is enormously more accurate than a $6000 wristwatch?  Maybe so, but it’s what I expect.

Doing simple calculations is a small part of critical thinking. Do the advertisers think that most people will breeze right by without thinking, accept their assurance of world-class accuracy, and  send in their $29 plus S&H? Apparently so. This great deal is limited to the first 1900 that call with the special offer code – better hurry (and not think about it too much)!

The simple-calculations habit can save a lot more than $30 over the course of a lifetime!

Help With a New Year's Resolution

People want to save money (for education, for retirement) but find it difficult and sometimes scary.  Is putting money in the stock market the same as gambling?  Let’s take a look.

Here is a story from 2015 reporting that Americans spent $70 billion on lotteries the prior year, “more than $230 for every man, woman and child in [the 43] states where the lottery is legal.”  This amount varied from $36 in North Dakota, to nearly $800 per capita per year in Rhode Island.  (It could have something to do with access to high-paying petroleum jobs in North Dakota while the Rhode Islanders might catch a glimpse of all the rich people’s yachts and want to join them – or maybe not.)

To update the information a bit, I found a  CNN Money piece from last year giving the total lottery spending of $80 billion.  That would move the current average closer to $260 per person per year.

I’ve written about lotteries before, about what a bad deal they are, how the states consider them voluntary taxes, how you get better odds from casinos and how they generally prey upon the poor.  This is well reported on the news and should not surprise anyone.  But the bets are small and seem affordable even if the odds are terrible.  You can get rich quick but are much more likely just to be making a weekly donation to your state’s tax revenue.

What is the alternative?  If everyone took their (average) $260 per person and put it into a conservative investment portfolio, the results would add up surprisingly well.  After 10 years such a fund could have grown to over $3,600 per person or about $11,000 for a family of three.

To get those numbers I used a theoretical mix of real index mutual funds with 62% invested in stocks, 32% in bonds and the rest in a money market fund.  This is a very conservative and reasonable mix for a younger person (30-45).  It is also highly diversified and automatic by virtue of being an index fund.  When I looked up the returns for that mix over the last 10 years, the rate was 6.1% compounded annually.  Remember, that 10-year period includes 2008 when the stock market was seriously tanking and 2017 when it was soaring.  There was much variability, which can be scary, but the overall trend over long periods has historically been positive.

The question is whether it’s smarter to invest your money at those pathetically poor lottery odds – 10,000 to 1 on a simple pick 4 card or about 290 million to 1 for the Power Ball – or to actually have (in your pocket, so to speak) $11,000 for your family.  Making the right decision shows strong behavior in critical thinking and discipline.

Other sources of potential savings with no downside include homeopathic remedies.  After I mentioned them in an essay before Christmas, a reader sent this link to CBS with this excellent summary.  “The market for homeopathic ‘medicines’ has grown to $3 billion, according to FDA. These remedies are often sold next to bona fide treatments like Tylenol and aspirin despite little evidence they actually succeed at treating anything at all. In fact, homeopathic products have sometimes been ripped from shelves due to deleterious side effects, as when more than 100 people lost their sense of smell using products with zinc gluconate in 2009, or when a brand of teething tablets was linked to seizures and death in infants and children.”  Throw in another $28 billon spent on nutritional supplements and we are looking at the potential for big bucks in your own account, not gambled away on the lottery or outright thrown away on ineffective medicine.

My Credit Card Pays Better Interest than My Bank!

Here is an odd realization.  My credit card actually gives me a better interest rate than my bank.

“How can that be?” the crowd will scream.  Everyone is always complaining about high interest rates on credit cards.  They currently average around 16.1% and some are much higher!  Not only that, but if you make a minimum payment or even a partial payment, the interest applies not only to what is left after the payment, but to the entire amount you owed them before the payment.  It takes many years to pay off a credit card if you pay just the minimum, even if you never use it again.  Typical advice from financial advisors and planners is to pay off your highest interest debt first, and that is invariably credit card debt.

This high interest seems like a scheme for banks to make more money, but it is partially due to the need to cover the risk they face when lending money, which a credit card is.  Some of those people will default on their debt and never pay them back.  The default rate on credit cards is up this year, but usually hovers around 3%.  That’s 3% of people who walk away from their debt leaving the banks holding the bag.  They charge the high-risk people more because they are more likely to default, but they charge everyone else more (except for those low, teaser introductory offers to get you hooked) to make sure they have collected enough to cover their losses.  As I’ve written elsewhere, businesses and governments really have only one source of money:  our wallets.  We all end up paying the price for bailing out the deadbeats.

Given all that information, what I’m saying about getting interest from the credit card company doesn’t seem to make sense.

But I’m not talking about the interest consumers have to pay.  I’m talking about the interest the credit cards pay us in the form of those cash back bonuses.  Discover pays 1% on all purchases (with some 5% quarterly specials) and a Capital One card advertises 1%,  2% on groceries and 3% on dining.  So here is the catch; when I pay off my credit card in full every month I get a cash bonus for every dollar I have spent and I pay them no interest.

When I look at a typical bank savings account I find an interest rate of 0.1% at Chase, for example, (or 0.4% for a Premier Account with monthly fees and/or monthly limits unless the balance is over $15,000).  So for practical purposes, the Discover credit card pays me 10 times as much for the money I spend each month as the bank would pay me if I let them keep my money for a year (assuming I did not have to pay any extra fees).

I know it’s not a pure comparison, money spent is clearly not the same as money saved, but the contrast is still interesting.  The credit cards don't pay me interest for lending them my money.  They pay me to borrow their money hoping I will end up paying them more in interest in return - but I don't!  It’s a curious result from some creative critical thinking.

More Discipline Evidence

I was not surprised, more discouraged, to see this headline on CBS:  “Nearly a third of Americans have no emergency savings.”  Five months ago a similar survey from Bankrate.com reported that about 63 percent would be unable to deal with a $500 car repair or a $1,000 emergency room bill.  Surely this doesn’t mean one-third of Americans don’t have emergencies.  Rather it’s more evidence that Americans have a problem with discipline in their spending habits.

The CBS piece points out that the number who have enough stashed away for at least six months has risen from 22% to 28% in the last year, but it’s still not good news for the non-savers or for the rest of us who may be affected if they begin defaulting on bills. 

Of course a natural reaction when someone is accused of weak discipline is to find an excuse.  (Weak discipline often goes hand in hand with weak responsibility.)  Here CBS comes to the rescue with “11 Tricks Retailers Use to Get More of Your Money.” 

These tricks can be condensed into a few categories.  Some have to do with offering prepared foods:  precut or prewashed or heat-and-serve.  It would be cheaper to do the washing and cutting and preparation at home, but buying prepared foods should be the result of a conscious decision to trade your money for free time rather than an automatic decision.  Another category covers bargain displays, soothing music and confusing store layouts to delay shoppers, getting them to spend more time (and money) in the store.  Finally, constant sales and promotions try to make almost everything look like a bargain, even when a product rarely sells for the full price.  Most of these tricks can be defeated by the age-old advice of shopping with a list and sticking to it.  (I’m surprised the writer left out the common trick of pushing an extended warrantee to get you to buy breakdown insurance on a brand new item.)

I wrote last time about how going after false advertising and other fraudulent activities keeps the FTC very busy.  They can hardly be expected to protect us from these little “tricks” too.  Americans need to take some responsibility.

Finally, some people attempt to control their spending by eliminating credit cards.  This strategy has some significant hidden implications and costs.  Not using a credit card (responsibly) affects your credit score, which in turn can make it more difficult to buy a house, a car or other big-ticket item.  Lower credit scores increase the cost of insurance and travel and may reflect poorly on you when applying for a job.  In addition, credit card companies become your ally when you face cases of fraud or have a dispute with a seller.  You also benefit from any cash-back program, have a complete record of spending and don’t have to carry a large amount of cash, especially for emergencies.  When used properly, credit cards have many benefits.

Even though the trend is in the right direction, a large proportion of Americans still have inadequate savings.  It’s futile to blame it on retailers’ tricks or to try to fool yourself by cutting up credit cards.  The right answer, the real solution, is to know it’s up to you, and only discipline will do.  It is hard to imagine that a large percentage of those without savings and living from paycheck to paycheck can’t find at least one small sacrifice or habitual extra outlay to cut as a source for a small savings plan.  It may seem to hurt at first, but it’s a lot healthier than living with the constant stress of dreading the arrival of the next unexpected bill or emergency.