DON'T ROB PETER TO PAY PETER

Self-fulfilling Prophecy Department---When we believe that economic times are getting tough, we curtail our spending and put away some extra money for that "rainy day" possibility. Less spending by consumers is a drag on the economy. Many employers can't stay afloat if customers aren't spending money to buy their products. So they lay off workers. Which means fewer people with money to buy things. Which sends the economy into a ditch. Round and round it goes until consumer sentiment perks up and times get better. One problem in this scenario is that too many people refuse to give up their spending patterns. Uh-oh. All too many people are borrowed up to the hilt. The credit cards are maxed out. The home equity line is capped. And lenders aren't eager to make new loans or grant credit except to those people who least need it. For those who still have some borrowing room in their portfolio, heed the following. There are some hard and fast rules when it comes to borrowing. They are all inter-related. #1) Don't borrow long to pay off short. Example: Taking out a 30 year mortgage to pay off last months credit card debts or last summer's vacation. #2) The term of any loan should be equal to or shorter than the life of whatever it is you're buying with the borrowed money. Example: If you trade cars every three years, your car financing should be for no more than three years. Otherwise, you'll end up still owing money on the old car when you trade it in. #3) Don't rob Peter to pay Peter. Too much of this is happening these days. Your normal cash flow (income minus expenses) doesn't leave enough to pay down your credit card debts. So you borrow on a home equity line of credit to pay the credit card debts. Or vice versa. Who are you kidding? You're swapping one debt for another---robbing Peter to pay Peter. Any combination of swapping debt, or otherwise reducing your assets, is just as foolhardy. Refinancing your first mortgage to make payments on your home equity loan? Dipping into your 401k or IRA plan to make payments on your first mortgage? Cashing in savings to replenish your 401k or IRA? You're just moving money around, accomplishing nothing and facing possible tax and penalty consequences, not to mention interest costs. When your expenses start to exceed your ability to pay, THE ONLY SENSIBLE THING TO DO IS TO CUT BACK ON YOUR SPENDING. It doesn't take rocket science to figure that out, but spending addictions can be hard to break. Here are a few suggestions as to how you might be able to cut your expenses without materially sacrificing your life style. Communications How much are you spending on your cell phones, land lines, Blackberries, iPhones and the like? Can you restructure your calling plans to reduce your monthly outgo? Are you going over your limit on cell phone minutes and getting into higher per-minute costs? Do you (or your kids) really have to be emailing photos and videos via your cell phone as much as you do? Can you reasonably cut back on what you're spending downloading music, ring tones and games on your cell phone? (See yesterday's posting for a broader look at this money gobbler.) Television It's wonderful to have all of those premium channels, but can you make do with one or two---or even none---instead of the whole smorgasbord? Movies on demand are a wonderful convenience, but at five bucks a pop aren't you being extravagent? Yes, I know, it's a lot cheaper than going out to the movies, but there are cheaper options still. Netflix? Or how about your local library, where there might be hundreds of good movies that are free? Driving Three-plus dollars per gallon might be just a wake-up call for the four dollar a gallon ripoff. The first and foremost way to save---if you haven't done it already---is to carpool to work, to school, to after-school activities. At $3 per gallon, a 20 mile round trip (10 miles each way) will cost $3 just for the gas, assuming you average 20 miles to the gallon. 20 trips per month uses up $60. How could you put that $60 to better use? Wear-and-tear and other expenses add a lot more cents to that per mile cost. Consolidate your trips to the market and mall---one per week instead of two or three. Keep a tight leash on the kids' often needless cruising. Ask if you can have a work-at-home day once or twice a week. Many employers might be happy to let you USE ANY MONEY YOU SAVE TO REDUCE DEBT, WHICH IN TURN WILL REDUCE YOUR INTEREST COSTS. When times get better you can always start borrowing and spending again---perhaps more prudently, if you learn any lessons from an economic slowdown. Meantime, make use of the budgeting and spending guidelines in Personal Finance, Chapter Two pages 57-64 and all of Chapter Three, pages 76-107. They're available at no charge in the textbook, which can be accessed by clicking on the box in the right column.

BEWARE CELL PHONE SMALL PRINT

"THE BIG PRINT GIVETH, THE SMALL PRINT TAKETH AWAY." These are days when people are saying, "You mean the interest rate on my mortgage can go up? But nobody told me to read the small print." You know the rest of the story. The same "But nobody told me" dithering is also true with the cost of cell phones. Have you read the small print lately? I have been astonished, to put it mildly, when I hear how much some people, particularly families with kids, are paying for their cell phone service. In many cases the amounts are real budget-benders. So I got out my magnifying glass to read the small print in their ads. All of the major cell phone networks are currently promoting unlimited cell phone use, all for a base monthly fee of $99.99***** (The asterisks mean that there's a lot of small print in the ads. Don't say you weren't warned. And why don't they just call it $100 and be done with it? Who are they trying to fool with that $99.99. But that's another story.) Verizon calls its plan "Truly Unlimited Calling." Sprint's is "The Simply Everything Plan." And T-Mobile, with a flair for the unimaginative, calls it "Unlimited Calling and Messaging." You can, if you like, consider that they are all the same. But when you read the small print you might come away having no clue as to what each plan will cost. Here, magnified for you at absolutely no additional cost, are some bits from each of their ads, all exactly as they appeared. Before I signed a contract, I'd sure want someone to translate this gibberish for me. From Verizon's full page ad: "Our Surcharges (incl. Fed. Univ. Svc. of 10.2% of interstate and int'l telecom charges (varies quarterly), 7c Regulatory & 70c Administrative/line/mo. & others by area) are not taxes (details 1-888-684-1888); gov't taxes & our surcharges could add 4%-33% to your bill." I know there's a telephone number in there somewhere, but to calculate how much this service would cost me? Fuggedaboudit. (Apologies for the "c"s after the "7" and the "70"---in the ad they are the cents symbol, but I couldn't get my PC to replicate them. From Sprint: "Sprint may terminate service if a majority of minutes or a majority of kilobytes in a given month are used while roaming. Services are not available for use as modem, in connection with server devices or host computer applications, other systems that drive continuous heavy traffic or data sessions or as a substitute for frame relay connections." Honest, officer, I know the traffic was heavy but I didn't know I was speeding. I thought I was just making a phone call. From T Mobile: "Per-line activation fee and 2 year agreement required for post-paid customers. 2 year agreement and $4.99/month control charges (unless enrolled in EasyPay) required for FlexPay customers. Regulatory Programs Fee (not a tax or a government-mandated charge) of 86c per line/month applies. Taxes approx. 6-28% of your monthly bill. Domestic only." Post-paid, EasyPay and FlexPay customers, you know who you are. Or do you? And "domestic only?" What's that all about. (Again, apologies for the "c".) All of this is on top of the $100 per month. Sorry, I know it's only $99.99, but I can't play into their silly games. All of these newspaper ads were full page---that's 12 inches by 22 inches, a lot of real estate in which larger type could have been used to encourage people to read the material without optical enhancement. If they really wanted you to know this information, they could have used larger type. Lots of space available. Small print is a devious way of hiding the facts. Why, you might ask, don't the newspapers' consumer reporters point all this out to you? What? And antagonize all those full page advertisers? So, you pays your money and you takes your choice, as the con-man would say. Like the people who were shocked to learn that their monthly mortgage payments were going up, cell phone users who don't read the small print could be in for some bitter pills in their bills. This article supplements Chapter 3, pages 75-88 of Personal Finance. Access the textbook by clicking on the box in the right column.

TIME TO DOWNSIZE HOME?

Are you now or will you soon become Empty Nesters? With a glut of unsold houses on the market these days, it might be a good time to shop for a smaller home. Of course, having a glut of unsold houses on the market could mean you'll have a tough time selling your home. So, you might ask, what is there to gain? There is no easy answer, but you have to ask the questions. First, let's crunch some numbers to see if down-sizing makes financial sense. Bear in mind that the real-life results in every single case will differ from this one, depending on the state of the housing market in your current home town, the market in a town you might move to, and a lot more. This is just to show you a pattern for your own calculations---mainly to see how it will affect your cash flow, which in turn affects your life style. Let's say you've been in your current home for 20 years. You bought it for $300,000 with a $50,000 down payment, and a 30 year fixed rate (7%) mortgage for $250,000. Your monthly payments (interest and principal only) are $1,665. The home is now---realistically---worth $400,000, and you still owe $150,000 on the original mortgage. (What?! After making payments for 20 years on a $250,000 mortgage you still owe $150,000? Sorry, but those are the realities.) You can buy a smaller house or condo that will suit you quite nicely for $300,000. You can pay $50,000 down and get a 30 year fixed rate 7% mortgage, which means your monthly payments will remain the same---$1,665, which you can handle with no problem. You sell your present home for $400,000 and pay off the remaining balance on the mortgage of $150,000, leaving you with cash in hand of $250,000. Subtract from that the $50,000 you use as a down payment, and you're left with $200,000. Let's say you invest that $200,000 conservatively and get a 4% return (after taxes.) You're going to net $8,000 per year from that investment. That's cash in hand, to spend or reinvest as you like. What would you do with an extra $8,000 cash per year? Of course the variables are myriad, but we're trying to get a sense of your cash-flow position by making this move. Yes, you could get $200,000 out of your current home via a home equity loan (which you'd have to repay) or a reverse mortgage (which you don't have to repay, but could cost you $10,000 to $20,000 in upfront fees. More on reverse mortgages in later postings.) But remember, we're considering that you want to move. So no borrowing against your existing equity. Bottom line: this overly simplistic example shows you how your cash flow can increase by selling the old and buying the new. The variables are almost imponderable, but you've got to start with some kind of base from which to do further calculations. THE VALUE OF PEACE OF MIND If you wait, will you be able to sell your current home for more? Or for less? Will the price of the new house go up or down? Will interest rates change materially? Will you, some time down the road, decide that you really would rather have moved to a different city---to be near grandchildren, to have better weather, to have access to more amenities, whatever? These are all uncertainties, and no doubt you can think of even more. It sounds almost foolish to just say that life is full of uncertainties. What's it worth to eliminate perhaps one of the biggest uncertainties---where you'll be living---by down-sizing now instead of waiting for who-knows-what? You can't put a dollar value on eliminating uncertainties, like you can on the cash flow issue discussed earlier. Only you can determine what the peace of mind might be worth. If nothing else, hopefully this article will get your thinking underway on what for so many is a major life decision. You'll have to fill in the blanks---when, where, how much, etc.---but at least this can give you a format for your planning. You can get all the online calculators you'll ever need for your number crunching at http://www.calculator.com/. Note that that site has an abundance of advertising, maybe like a mine field, so proceed accordingly. I'm not recommending any of the advertisers. You're on your own in making those choices. This article supplements Chapter 18, pages 517-520 in Personal Finance. Access the textbook by clicking on the box in the right column.

WHAT??? $30 FOR POPCORN AT THE MOVIES?

Our speculative historian, Hubert Hindsight, is here again. Dr. Hindsight, you may recall, wrote a book in the year 2020, titled "What Were They Thinking?," in which he looked back on many of the foibles and follies of our era. We have the only known existing copy of the book, and Dr. H. has kindly given us permission to print excerpts. Here is one: .....The movement began in late 2007, and within a few years it had gained seemingly unstoppable momentum: USE ETHANOL as fuel for automobiles to reduce air pollution. President G.W. Bush had signed energy legislation in December of 2007 that would have required the production of 36 billion gallons a year by 2022---just a hop and a skip from now. But the momentum stalled after the "Popcorn Boycotts." Emmie and Howard Zerm, a young couple in Dayton, Ohio, were at the epicenter of the boycotts. A new movie house had just opened near their apartment, and they were the first in line on opening night. They were shocked to find that the concession stand was charging $30 for a tub of popcorn (with genuine butter on it.) They protested, but to no avail. "Take it or leave it," the theater manager said. Within days every cinema in the country boosted their popcorn prices accordingly---explanation follows. The Zerms wrote an angry letter to their local newspaper urging that people stop buying popcorn at the movies, and they quickly became the leaders of the Popcorn Boycott movement. The boycott worked. Not only did concession revenues plunge, but ticket sales also took a nosedive. Movie theater owners panicked, as did movie producers and everyone connected with the making of movies. All of Hollywood went into mourning. All of the interested parties mounted a campaign to explain the $30 popcorn. Here is a letter that was published in full page ads in almost every newspaper in the nation. "Dear Movie-goers, We know how disturbed you are about the sharp increase in the price of popcorn, but unfortunately it is an issue beyond our control. The price we have to pay for the kernels has gone so high, that even at $30 a tub we barely break even. Since the government is supporting the production of corn, which is used to make ethanol, farmers all over the world are planting corn and selling it to ethanol factories at ridiculously high prices. We have to pay for corn accordingly, and to stay in business we must pass that higher cost along to you, which we deeply regret. We want clean air as much as anyone, but we fear that ethanol is not going to solve our pollution problems. To make ethanol, consider all the gasoline that has to be used to plow the fields, to harvest the corn, to transport the corn to the ethanol factories, to refine the corn into ethanol and then to distribute the ethanol to retail stations. And then there's the butter: cows are fed corn, and they have to be milked, and the milk has to be made into butter, which has to be distributed to the theaters and melted. All of that can cause more greenhouse gasses than using ethanol would reduce. Net result: More pollution, not less. Further, all around the world so much corn is being so profitably grown for ethanol that other necessary--and less profitable--- food crops are being ignored. This is likely to cause severe hunger problems in many parts of the world. Also, forests and grasslands are being converted to cornfields, which is yet another threat to the balance of nature. It's a huge problem, and the worst might be yet to come. If you are willing to go to the movies and NOT have popcorn, you'll be helping to solve the problems of pollution, of hunger, and of unemployed movie actors. We know how you love your popcorn, but we are confident that you love the movies even more. So please come back. We'll have other snacks at good prices, and we all will be happy. Thank you. The Movies The letter worked. People began returning to the movies and they were able to sit for more than two hours without nibbling popcorn. Biofuel scientists, intrigued by this phenomenon, began to study other renewable crops that could be used instead of corn without upsetting the entire economic/agricultural balances. Now, as 2022 rapidly approaches, the issue is far from resolved. Hydrogen is giving ethanol a run for its money as the fuel of choice. But now protesters are claiming that the newly perfected means of cost-effectively extracting hydrogen from its most abundant source---H2O, or water---could deplete the Earth's water supply, and wouldn't that cause more problems? Now it's in the hands of the politicians...... For other excerpts from Hubert Hindsight's book, "What Were They Thinking?", see postings on Feb. 14, 2008 and January 24, 2008.

HOW HONEST ARE YOU?

Everyone speculates about this once in a while: you find a wallet on the street....the supermarket cashier gives you back too much change....the waiter makes a mistake on your bill, in your favor....and so on. What do you do? Correct the error and pat yourself on the back for being honest? Or pocket the money and walk away, knowing that no one will know the difference. How's this story for putting someone to the ultimate test? This bizarre situation was described in the Los Angeles Times a few days ago. In summary: A young man named Xu Ting, in China, went to his bank's ATM to withdraw $140. He got the $140 from the ATM, and then, when he looked at the receipt, he saw that the bank had erroneously deducted only 14 cents from his account. What would you have done at that point? What would you tell your children to do? What Xu Ting did resulted in his getting a life sentence in prison! After observing the bank's error, Xu Ting stayed at the ATM and made 170 more withdrawals totalling about $24,000 over the next eight hours. He blew the money---gambling and other indiscretions---and eventually the police caught up with him. Now, a bank's ATM that allows 171 withdrawals totalling $24,000 from one account in a single day is, to say the least, inefficient. And someone who makes those withdrawals, and doesn't realize that the machine is---supposedly---keeping a record of them, is also, to say the least, inefficient. "Stupid" also comes to mind, but that's another story. Xu Ting was arrested for bank robbery, the penalty for which in China can be life in prison. Harsh, yes, but that's China. The saga doesn't end there. Apparently, ATM machines in China are notoriously glitched, and when mistakes are made it is always presumed to be the customers' fault. Example: If an ATM spits our blank paper or counterfeit money, the bank will claim that you have no proof that it came from the ATM. Go argue. You lose. Indeed, banking in China with the government-run banks is at the top of the list of Murphy's Law---anything that can go wrong, will. And the customer is to blame. The Times article noted, among other public grievances, that the average waiting time for service at China's four biggest government-run banks is 41 minutes! And you complain over a wait of more than a minute or two at your bank? Well, public anti-bank sentiment latched on to the plight of Xu Ting, and miracle of miracles, the do-no-wrong government caved in to the protests and agreed to give Xu Ting a new trial. A result is expected any day now, and hopefully I'll be able to track down the results for you. I suspect that Xu Ting will still be found guilty, but will get a lighter sentence---maybe only 40 or 50 years instead of life. He doesn't have a whole lot going for him. His family has stood by him, claiming he is innocent. His father said that Xu Ting is "naive," and "unlucky." I'll say. Xu Ting himself explained that when he got his hands on the money he kept it "to protect it for the bank." He said that he wanted to turn himself in, but a friend dissuaded him. You won't be seeing Xu Ting's case on Law and Order any time soon, but it sure does add some spice to the issue of whether you should turn in that wallet or give the cashier back the excess change you received. (Full disclosure time: Many years ago I was playing a dime slot machine in a Las Vegas hotel, and the machine went bonkers. I started winning on every pull of the handle, and soon a crowd gathered around me, cheering me on and waiting to take my place when I finished. A security guard saw the crowd and told me I could stay as long as I liked---house policy, since the glitch was not my fault---but when I quit he would close the machine. I walked away having won $90---that's a lot of dimes---and I kept it all. If I can risk money in a casino, the casino has to risk money on the accuracy of its machines. No guilt. No remorse. No jail time.)

JUST WHAT IS A RECESSION ANYWAY?

Yesterday George Bush assured the nation that we were not heading into a recession. Federal Reserve Chairman Ben Bernanke echoed the same sentiments. They blame the media for overplaying the news of high costs, slowing growth and low consumer confidence. So, amid all of this banter and posturing, just what is a recession, are we heading into one, and if so, what difference does it make? The standard definition of a recession is two consecutive calendar quarters of negative growth in the overall U.S. economy. The first quarter of 2008 is two-thirds over, and we might squeak by with a tiny bit of growth. The second quarter, then, will be the telling time: if our economy shrinks between April 1 and June 30, the "R" word could indeed be not far away. What factors will influence the growth or shrinkage of the economy? George Bush feels that the tax rebate, The Stimulus---which will put $300 to $600 in many people's pockets, and as much as $1,200 in others---will get the economic engines purring again. That money won't be in hand until May, and it won't all get put to use until June or July. A huge amount of it will just be used to pay off back debts, which won't get the economic engines to whimper, let alone purr. As I read the nation's mood, George Bush's enthusiasm will count for naught. So there go the only two positive factors that could prevent or delay a recession. NEGATIVES OUTWEIGH POSITIVES On the negative side we have the following: A) Higher gas prices, which are felt in almost every economic transaction---not just at the pump, but also in delivering raw materials to factories andfinished products to stores, and much more. Those higher prices will cause people to cut back on other spending. B) Tight credit, which will remain with us for months even if the Fed cuts short term rates at its March meeting, as is expected, will curtail new investments in production. Less production and less to buy as a result are economic negatives. C) The weak dollar will cause the prices of goods we import to go up, which dampens growth. D) All of the above will start to cause layoffs, which means less people buying fewer goods. E) Layoffs plus rising prices sours the mood of the public, and people start stashing money away for a rainy day instead of spending it. A + B + C + D + E equals recession, no matter how you or George Bush defines it. What difference does it make? Not a whole lot, over time. We've been this route many times, and we've always bounced back, usually within a year or two. Yes, there will be some short term pain. Yes, the "R" word will get over-used during the elections, with fingers of blame pointing in all directions, until the public begins to ignore it. Yes, a change in the Administration will prompt changes in the national mood---new brooms always do sweep clean, regardless of what they're made of. Yes, we will awake from a hibernation of slow and/or negative growth and get moving again. And, like childbirth (or so I'm told) we will quickly forget the pain. The biggest thrust of economic growth comes from consumer confidence. Regardless of interest rates or gas prices or credit tightness, will we regain confidence in our economic potential? Yes, but denial---such as that coming out of Washington---only serves to confuse the public and delay the misery. Let's face facts---tell the public the truth, and get on with it. Mr. and Mrs. John Q. know a lot more about their sense of confidence than any politician can ever know. And any politician who tells you otherwise is just.....well....a politician. This article supplements Chapter One, pages 16-26 in Personal Finance. Access the text by clicking on the red box in the right column.

LINKS.....LINKS.....LINKS

LINKS TO HELPFUL SITES THAT DON'T SELL ANYTHING...(plus a few that do.) Many years ago, at the dawn of the Internet Age, I compiled a list of websites to include in the textbook, Personal Finance, as an extra benefit to readers. It was very important to me that I refer only to websites that were not selling anything. I didn't want my readers/students to get trapped in a scam or otherwise be abused by overanxious vendors. I spent a huge amount of time finding and later updating those websites. In the Eighth Edition, which you can access at no charge by clicking on the red box in the right column of this page, the chosen websites were designated as "Quick-Clicks." Those 200+ Quick Clicks are no longer operative---thanks to the ongoing development of the web, they've been consolidated into a handful of links that will take you to wherever you need to go to enhance your knowledge of subjects in this website and the Personal Finance text. Here are those links, with brief comments as to their content. www.pueblo.gsa.gov This is the home site of the Federal Citizens Information Center (FCIC), and it is a massive collection of just about anything the federal government can do for you. It provides free articles, books and continuing links to other federal agencies and services. www.ipl.org Just like having a complete reference library at your fingertips. This is the Internet Public Library, and it has more internal links---to free sources---than anyone could ever make use of. One feature of particular interest is its access to the current internet editions of virtually every newspaper in the world. Huge amounts of free consumer info. It's easy to get lost in the IPL, so pack a lunch before you log on. www.bbb.org This is the site for the National Better Business Bureau (and can also link you to your local bureau). It's probably the best place to research the reputations of business you might become involved with, and the best place to file complaints. www.ftc.gov The Federal Trade Commission's home, where consumer protection is their main objective. (This can also be accessed through the Pueblo address above, but why not take this shortcut?) www.irs.gov The name speaks for itself. As with the FTC, this site can be accessed through the Pueblo address, after some navigating.) www.investopedia.com As the name implies, this is an encyclopedic collection of more than everything you've ever wanted to know about the world of investments. Caution: This site is loaded with advertisements, so proceed at your own risk. www.calculator.com Whatever type of calculator you might ever need for your personal financial concerns you can find here. As with Investopedia, this site contains ads, so proceed accordingly. If you know of helpful websites that aren't listed here, please send the details to info@universityofbob.com. Non-advertisers preferred.