Profiting from our financial ignorance

The Thinker by Rodin

Do you have a degree in finance? I sure don’t. Sadly, if you want to successfully navigate through today’s financial minefield, you arguably need a degree in finance, or its equivalent. Failing this, you probably need someone who understands personal finance in its mind-numbing complexity: a financial adviser, who of course does not come cheap.

The carnage of financial ignorance is all around us. Yet even before there was a housing crisis and a Great Recession, most of us were still happily reveling in our ignorance. We spent beyond our means and pushed up our credit card balances. Our financial plan consisted of spending as much as we earned and often more, and assuming that we would remain gainfully employed indefinitely.

For every action there is an equal but opposite reaction. When your financial life implodes, vultures are ready to swoop in. Debt collectors will hound you day and night on the promise of a percent of the money they collect from you. Investors will buy foreclosed properties and hang onto them long enough to turn a profit on them when the market turns around. Credit card companies will laugh all the way to the bank, which is not hard because they are the bank, and the huge fees and interest rates you pay to live beyond your means simply adds to their shareholders’ profits.

Even tiny steps to address our financial ignorance are vigorously opposed by financial barons. The Consumer Protection Financial Bureau cannot get a permanent director because Senate Republicans won’t confirm one, leaving the president to appoint one through a recess appointment. Attempts to simplify credit card rates and fees into something that might make sense for someone with a high school education draws howls of protest. Clearly, there is big money to be made in financial obfuscation, and it appears that those vested in the current system want to keep it that way.

Financial ignorance is hardly bliss. Financial ignorance can saddle you with a lifetime of poor financial decisions and result in an old age, if you make it that long, mired in poverty. No high school or college that I am aware of requires that you pass a Personal Finance 101 course in order to graduate. Even if you have the knowledge, there is no guarantee that you will use the knowledge. Competently managing your personal finances takes time and worse, persistence.

I wear the green eyeshades in my house. I try to keep the seams of our financial ship caulked, but I know there are always some leaky planks. On a good week I can take care of our financial stuff in a couple of hours. This mostly involves putting last week’s financial transactions into Quicken, watching our budget and paying bills.

If I were doing the job properly, it would probably take six hours or more a week. I would be filing documents and pruning old ones from my files. I would be methodically reading insurance policies and pondering coverage changes. I would be finding the best credit card rates and planning my next vacation. I would be looking at my investments and pondering whether to shuffle my funds around.

Needless to say, little of all this interests me. At best I can only see a few years ahead. Seeing into the future is hard. So I’ve hired a financial adviser. The only problem is my financial adviser actually retired, which means I need to hire another financial adviser, which takes additional time and money. I finally found a local firm that I have some confidence in and we are working on a new financial plan. This guy of course brings a different perspective than my last financial adviser. Right now it means feeding him reams of data about our current financial situation so he can sift through it all. Soon he will give me a plan, which is a good thing, until you look at what is required to actually implement the plan. It’s not hard to imagine since I’ve been down this road before. It will involve shuffling lots of funds around. In spite of the fact that I have a financial planner, specifically hired to make my financial life simpler, it looks like I will be spending even more time managing my finances. If I were independently wealthy, I would hire someone to manage the work my financial planner wants me to do.

This whole process is so frustrating. I figure that if I am frustrated by it, most people are even more frustrated. The really annoying part is that it doesn’t have to be this way. Through law we have constructed a large financial minefield specifically designed to profit from general ignorance. There are sporadic attempts to simplify finances for the 99 percent. Federal employees like me have a 401K system called the Thrift Savings Plan. Over the last few years, the TSP has unveiled a plan that automatically moves and rebalances your funds based on your age and planned retirement date. This means that you have one less thing you have to worry about. Many companies contract with financial services firms that offer similar services.

Of course, there is no guarantee that these financial stewards will put your money in the best investment vehicles, but it is better than nothing. At least someone is doing this for you instead of you remembering to do it once a year on your own, something that most of us simply will not think about. Many employers also offer an automatic “opt in” 401K. This too is a step in the right direction, since many of us will never get around to putting away money for our retirement if we have to take explicit action.

Is this socialism? Is it a big nanny state at work? Who knows? These are really just small and measured steps to make the system work for most people instead of those whose paycheck depends on your financial ignorance. We have the illusion of choice in our financial life when the reality is there are so many choices it’s impossible for the average person to work through them all. By default most of us will choose whatever is easiest or least intrusive. In the process we will probably get saddled with poor investment advice and all sorts of usury fees. Moreover, there is no gatekeeper to warn us before we make some really stupid financial decisions. I cringe when I hear about people who use their banks to get investment advice. What a bad idea: to entrust your financial future to an institution that sees you only as a profit center.

Our new Consumer Financial Protection Bureau is a great idea, providing it can stay true to its mission of protecting consumers. Right now it is having a hard time just conducting any sort of business at all. When Republicans win the White House again, its mission, if it is not abolished, will likely quickly steer away from doing anything that actually benefits consumers. Instead it will probably become yet another organ designed to maximize profits for those already reeling them in, adding more financial obfuscation rather than leveling the playing field.

Which means you are likely to keep getting screwed by all those interests that profit off your ignorance and lack of time and attention. If you do not have at least a basic financial literacy you had best squeeze in the time to get it. Or you probably need to get some help, even if you cannot afford it.

What do you do? I have one possible solution: use the in-house financial advisers available at many credit unions. While I don’t believe banks have your best interests at heart, I think that credit unions do. This is because when you belong to a credit union, you become an owner. The National Credit Union Administration has a tool for finding local credit unions. Some credit unions have special requirements for membership, but it is likely that there are several that you could join and that are reasonably local to you. Call them first to see if they have a personal financial adviser and if so what fees, if any, they charge. Any fees they have are likely to be low. In addition by being a credit union member you are likely to save tons of money on banking fees and credit card interest rates. Just make sure when you move your money into the credit union that you also make an appointment to see their financial adviser too. And yes, sorry, but make time in your schedule to practice financial literacy, because you will need it. A Dummies book may be a good place to start.

 

Socialize your money and join a credit union

The Thinker by Rodin

So I am at the Gold’s Gym listening to a Marketplace Money podcast. I am hearing all the details of the new credit card law freshly signed by President Obama this week. The law was certainly overdue, given the egregious ways banks lately have been unilaterally raising interest rates, changing credit card terms and tacking on usury fees.

To me the whole credit card debate was moot. I like millions of other Americans do not worry that much about my credit card interest rate or fees. Why? I get my credit card through my credit union. Its credit cards work just as well as the banks’ credit cards, but with better rates and less volatility. I don’t worry that much about my credit card interest rates going up or down because my credit union has no financial incentive to shaft me. This is because when I put money in the credit union, I become part owner of the credit union too. Credit union management is not going to want to tick me and the other members off that much because if they did I can petition that they be replaced. A credit union exists to serve my interests, not theirs.

Now, if I had an account at a bank, like Bank of America, I would merely be a customer. Bank of America would see me as a profit center. It would have every incentive to squeeze every possible dime out of me. Banks nationwide are trying to make up for declining profits and bad loans by squeezing their customers. Investing customers’ money is not very profitable anymore, but they can make customers pay more just so they can use money. Hence, the higher fees and interest rates on credit cards, as well as many other loans they may offer.

For about a quarter of a century my wife and I have put most of our working capital into credit unions. Would I close a credit union account and go with a bank instead? Hell no, not unless I had no other choice. I haven’t worked in the Pentagon since 1998 but I still belong to its credit union. In fact, my relationship with the Pentagon Federal Credit Union has deepened since I left. I not only have savings and checking accounts with them, I also have a personal credit card through them. My wife and I also have our home equity loan with them that we can draw on up to $100,000.  Our credit limit has remained unchanged even with all the financial uncertainty. We also have our mortgage with Pentagon Federal. The only downside is that I no longer want to visit a branch office, since it is twenty miles away. However, I can get my money out through no-fee ATM machines where I work or one a mile from my house. If I have checks to deposit, I just mail them in. It costs me a postage stamp and a couple days.

You may be thinking, “Credit unions are all right for you, because you work some place that offers a credit union. What about the rest of us?” In many communities, you still qualify for membership in one or more credit unions. Check it out. I live in Fairfax County in Virginia. Down the street is a local branch of the Fairfax County Federal Credit Union. What are its qualifications for joining? You simply have to live in Fairfax County.

What are you losing by joining a credit union as opposed to a bank? These days, you lose virtually nothing. Both banks and credit unions are fully insured, just by different institutions. (In fact, credit unions have been markedly more stable than banks during the current financial crisis, probably because they are better managed and more risk averse.) Some communities may not yet be served by a public credit union, so you may have little other choice than to put your money in a local bank. You may also have to drive out of your way to get to a credit union branch office. Banks can now offer brokerage services, although some credit unions have separate companies that also offer brokerage as well as real estate services. Bankers though have proved to be poor brokers, as witnessed by the recent stock market collapse. Most credit unions now offer services that you used to have to go to a bank to get, such as mortgages and home equity lines of credit. After more than twenty-five years of using credit unions, I can state that their checks, ATM and credit cards work just like the banks’.

For many of you, the only question may boil down to: do you want to socialize your money? You are not really socializing your money, but credit unions are similar in concept to a food cooperative. When you join a credit union, you are taking a philosophical stand that you should get maximum value for your money. You are betting that by pooling your money with others you will all make and save more money than you would at a bank, which these days is a very safe bet.

Here is how I look at it. Credit unions like banks really should not be where you put your long-term investments. Yet, some part of your money needs to be invested for the long term. Most of us do this through 401-K accounts through our employers, but many of us also need brokerage services so we can buy stocks, bonds and mutual funds. Long term investing is a different problem than having financial instruments to take care of our ordinary financial needs. Savings and checking accounts, credit cards, loans and mortgages are now just commodities. A credit union though offers a way to keep much more of your money while having access to all these financial instruments. My credit union, for example, does not charge any checking account fees, nor does it assess a charge for sending me a paper bank statement. If I use the right ATM, I do not have to pay for the privilege of withdrawing my own money either. I have no idea how much money I am saving compared to the bank you may be using, but I bet it amounts to hundreds of dollars a year. If you can too, then why would you want to give this money to a bank? Wouldn’t you rather do something else with your money?

Particularly in these turbulent financial times, if you have access to a credit union, consider joining. I expect your experience will be like mine and you will be wondering why you waited so long.