Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for July, 2008

Zero Pressure

Creative Commons License photo figure credit: Brooke Novak

My credit card balance is $41,654.02.

I charge everything that I can to it.

I make the minimum monthly payments.

This behavior has resulted in at least $600 in profit to me over the last year — just in interest payments alone.

Confused?  Let me start over.  Last year, ScrapperMom and I decided to open a 529 plan for our daughter.  We knew that we would not be able to contribute much to the plan from our monthly spending plan, so we went looking for a rewards credit card that would allow us to earn cash to fund this account.  We decided on the Chase Freedom card which gives us at least 1% cash back for everything that we buy. In addition to the interest earnings, we have earned $750 dollars (and we’re closing in on $1000) from the cash bank bonus on the card.

I applied for the card, and it arrived with a fantastic offer: 0% interest on balance transfers and purchases for one full year.  Perfect, I thought, what better way to make even more money.  We started using the card to buy everything that we could: groceries, fuel for the cars, dog food, insurance payments, DirecTV, Netflix, and anything else that was in our spending plan and accepted credit.  Each month when the bill came due, I would make the minimum payment, and transfer the difference in the balance to our high interest earning money market account with Everbank.

Little by little the balance rose and as it did, the interest payment at the end of the month got larger and larger.  The unfortunate part is that interest rates fell pretty steadily all year, so the larger and larger balance each month ended up netting about the same amount in interest every month.

When we started this arbitrage experiment, I felt that we were ready to get our feet wet on the right side of the Credit Card Continuum.  We had been through the other phases already: in debt up to our eyeballs, swearing off credit cards as evil and unnecessary, slow digging out and becoming disciplined, and now it was time to get a little back from the credit card companies.  So for the past year, each month we have simply borrowed a little more money from the credit card company at no cost, and put that money to work for us collecting interest.

Interestingly, about halfway through the year we were pushing up against our credit limit on the card.  So after having made nothing but minimum payments for 6 months and approaching our credit limit, I simply asked through the webpage for an increase in our credit limit and got one large enough to cover us for the rest of the year.  Aren’t credit card companies great?  On top of that, I got a letter a few weeks ago indicating that Chase is switching our account to one that has no pre-set spending limit.  I’ll talk more about that in a future article…

Next month the free ride comes to an end and we will have to set up the largest online billpay total we have made.  It’s a little disappointing to have to see this balance get wiped out all at once.  I have investigated the possibility of rolling the balance to another 0% offer somewhere to keep the arbitrage going, but I have been unable to cobble together enough credit to do so.  So we’ll reset the counter, and possibly even apply for another Freedom card in ScrapperMom’s name.  We’re rookies at credit card arbitrage, so maybe by next year we’ll be in a better position.

What do you think?  Do you practice credit card arbitrage?  Do you think it’s risky, smart, or does it simply depend on the person?

07.29.2008
Nudge

photo figure credit: http://www.nudges.org/

Last month I finished reading a great book called Nudge: Improving Decisions about Health, Wealth, and Happiness by Richard H. Thaler and Cass R. Sunstein.  In short, this book was fantastic and I highly recommend it.

The authors indicate early on that they wanted to subtitle the book Libertarian Paternalism but didn’t think anyone would read it if they did. “Libertarian Paternalism?”  you may be asking, “isn’t that an oxymoron?”  Well, it is and it isn’t.  The central point of the book is that we all make choices on a daily basis.  Some choices are easy: which breakfast cereal to buy or what to have for dinner.  Some choices are hard: Who to marry or what house to buy or how much to save for retirement.  The authors argue that more choices are always better than fewer (libertarianism), but that most of us don’t have the information, context, or practice in making some of the hardest choices and that it would be great if there was some way to “nudge” us in the right direction (paternalism).

A classic “nudge” exists thanks to recent laws regarding how employers can handle 401(k) and other retirement benefits plans.  Employers can now automatically enroll new employees in the company 401(k) plan when they start.  So a new employee would, from paycheck #1 on, see a 5% contribution to a moderate blended fund in the 401(k) plan of the company.  At any time, the employee can march down to the Human Resources office and change the contribution or allocation or discontinue it altogether.  However, research has shown that inertia is a powerful factor that works equally well in keeping people in the plan as it does keeping them out when no such automatic enrollment is used.

Another great “nudge” was a recent law in New York City that requires restaurants to post their board of health ratings in the front window.  No change was made to the board of health standards, but almost overnight the average restaurant health rating rose substantially.  After all, who wants to eat in a restaurant with a D- posted in the front window?  As a result, NYC emergency rooms have seen a marked decline in food borne illness cases.  NYC could have had the same outcome by instituting more stringent restaurant hygiene laws and consequently increasing the time and money it would take to enforce those laws, but this solution avoids additional government intervention AND achieves the same outcome.  Plus, restaurants still have the choice of whether to clean up or not, but the “nudge” comes from their lack of business rather than a government edict.

Let’s face it, modern life is complicated, and we don’t have to look far to see the results of ordinary people making poor choices on really important things like mortgages, health care, etc.  Nudge argues that we get better at making good choices the more we practice (just like anything else).  We get lots of practice making choices about things that have relatively low consequences.  If you choose the wrong cereal, you’re out $4 or a week of dissatisfaction for 10 minutes every morning.  But most of us only purchase a few houses in our lifetimes, and the consequences for choosing poorly can be disasterous.  Just look at the current bankruptcy and foreclosure crises to be sure.

So how do we start “nudging”?  It starts with any person or organization who has the responsibility of presenting a list of options to someone else.  The book provides proof that just by the way choices are arranged in a list that the “choice architect” influences the outcome of the choice (this ranges from lunchrooms to polls).  All “choice architects” are going to influence the outcome of the choice, so they have a social responsibility to structure the choices in such a way so that most people will make the best choice if they know nothing else.  If possible, even, a default option should be available so that if a person makes no choice something will automatically happen.

The book cites the recent change in the Medicare Prescription drug benefit program as an example of how not to nudge.  People eligible for this program who made no selection from among the 43 separate plans available were randomly assigned to a plan.  The authors argue that at the very least a patient’s prescription history could have been surveyed to come up with a plan close to what they need, but this was not done.  Additionally, the tools for figuring out which plan was ideal for any given person were severely lacking and often contradictory.  While libertarianism was observed here, paternalism was not, and there are currently many people on drug plans that cost them too much or don’t deliver enough or the proper benefits.

One of the final recommendations in the book is for the development of “asymetric paternalism” in choice architecture.  The authors argue that “sophisticated” choosers should be free to make a well informed decision that best suits them and that “unsophisticated” choosers should have as much paternalistic intervention as necessary.  I agree, however what’s not clear to me is how one defines and sorts out the sophisticated from the non.  I remember trying to argue my way out of a mandatory youth group ski class because I had been skiing once before (and was, therefore, an expert!).  After the instructor pointed out that my ski boots weren’t buckled even though I was clicked into my bindings, I shut my mouth and took the class.  (Today I enjoy taking advanced level classes…)  The point is that most of us think we are sophisticated when we are not, so the choice architect has to be very careful when he applies his nudge…

The book defines the Jekyll and Hyde nature of the choosers within all of us.  The “Human” is akin to the Homer Simpson in all of us who has absolutely no impulse control and makes choices without thinking.  The “Econ” is akin to Mr. Spock of Star Trek fame who was always absolutely logical in making decisions.  The planning Econ in all of us makes great decisions on paper (by making a shopping list) but the Human comes home with donuts anyway (Mmm… donuts…).  Nudge offers us a new set of “tricks” for making difficult decisions easier.  It’s a great read and probably available at your local library.

If you liked this article, you may be interested in seeing some related articles:


07.26.2008
Feeding the Firefoxes

Feeding the Firefoxes
Creative Commons License photo figure credit: Glutnix

It’s been another busy week in the MITBeta and ScrapperMom household. But I’m feeling like things are a little more under control since I started reading the now well known but still great book Getting Things Done by David Allen. I’ll have more on that in an upcoming post, but in the mean time I wanted to share some of the best articles that I read this week:

In National News:

With this week’s hike in the minimum wage, Nickel examines the historical minimum wage level relative to the value of a dollar and finds that those on minimum wage have been seeing the value of their salaries fall for the last 25 years.

The Freakonomics blog wonders are we a nation of financial illiterates?  I’ll reserve judgement for now, but what do you think?  Did you answer the quiz questions correctly?

Personal Finance

Shilpan at successsoul.com reposts Warren Buffett’s 7 Secrets for Living a Happy and Simple Life.  There’s some great advice here that really forms the basis for most personal finance: don’t try to keep up with the Joneses, be happy with who you are, not what you have, etc.

Mrs. Micah writes about an error in her paycheck and how thankful she is that she is not living paycheck to paycheck.  This reminded me of something similar that happened to ScrapperMom a couple of months ago.  Mrs. Micah also has some great tips for breaking the paycheck to paycheck cycle.

Home Economics:

EconomistMom writes about “a big family infrastructure day” that took a serious bite out of her bank account.  She makes a couple of great points in this article, especially in explaining why the health care problem is such a difficult nut to crack.

J.D. asks readers to help a fellow reader who asks “how can I get my wife to talk about money?“  Chronic disagreements about money are cited as a leading cause of divorce.  However many astute readers rightly point out that it’s never just about money.  As near as I can tell, open communication is the only way to truly make a marriage work.  In fact, that’s the best way to make nearly any interpersonal relationship work.

Social Psychology:

Steven Levitt at Freakonomics shares a great anecdote about performing a blind taste test to see if his colleagues could tell the difference between expensive and more frugal wines.  Can you guess what the results were?  Apparently there is now scientific evidence to support the idea that taste can be influence by pre-conceived notions about something.  I wonder if this means I can think my way into liking onions…

Giveaways:

Frugal Babe is giving away a $100 jewelry gift card to Diamond Nexus Labs in the spirit of switching away from mined diamond based bling.

Baby Cheapskate is giving away $200 worth of BumGenius cloth diapers.  As you may know, using cloth diapers is a great way to save money and save the environment.

07.23.2008
Charlie Brown knows American Sign Language

Creative Commons License photo figure credit: A.M. Kuchling

Take it from us: Save yourself some frustration. Teach your toddlers to sign. I know it probably sounds crazy and same naysayers may think it prevents or delays speech, but the facts are your babies are able to gesture before their speech is such that you and others can understand them. Babies often wave long before their first birthdays and may not say their first words until 18 months. A friend of ours recommended baby signing (we basically use American Sign Language with a few shortened signs for ease). We have prevented a lot of tantrums this way and have probably saved a lot of frustration, as well, on both of our parts.

I started signing with our daughter around 6-8 months and must admit I was frustrated by around 1 year. I think you could start around 1 year and still get the benefits. At around 1 year something amazing happened, she started signing back! At first they were very common and necessary ones: Milk, More, Eat, Baby and Bath. In 6 short months her signing vocabulary has grown to include all kinds of signs: Help, Drink, Cracker, Water, All Done, Daddy, Mommy, Dog, Please, Thank You, Bird, Train, Plane, Cat, Hat, and ones that hopefully will become very important in the next few months to a year: Potty and Diaper! By having her know what she needs and being able to sign it, we have avoided a lot of frustration. She is also very proud when we tell her what the signs mean. She knows she is able to communicate with us. She does babble and has a few words in her spoken vocabulary, but it’s quite normal for her age and until all the words solidify this is an excellent way to get over the hump of toddlerhood.

One important note: you may want to show babysitters and grandparents some important signs or they may feel like they are hearing/seeing a foreign language. Some helpful ones for them are her favorites: Milk, Help, More, Please, and All Done.

The teaching video I recommend is Baby Signing Time. There are two main volumes and if you are lucky your local PBS station may carry the show. As Michelle commented on another post, it probably would be a good idea to show your support and buy the video and I am ashamed that I haven’t done so yet as I really love its approach to teaching babies to sign. The family that produces the video has a great, captivating and educational style and I feel that I should better support their business. But alas, this is a frugal blog as well, so we save when we can (but hint, hint to the grandparents for gift ideas!). The format of the video separates signs into groups and each group has a catchy song that goes along with the signs. This way it’s easier for mom and dad to remember the signs as well, since you are learning too! During the song Rachel, the singer/signer, tells you why signs are the way they are; milk: like you’re milking a cow, eat: like you are bringing a piece of food to your mouth. Then the song is accompanied by toddlers (under 2) signing and demonstrating the action. I believe the babies signing really helps captivate our toddler and lets us see variations of the signs when performed by babies. For a while our daughter was tapping her nose and I had no idea what she meant, but she was signing bird, which is actually your thumb and forefinger forming a beak at your mouth, but I realized she did it every time we heard birds singing! Just like speech, their first sign attempts may be cryptic! We were able to use Netflix to rent a few other signing videos, but they were not nearly as good as this series. We also have a board book that has signs in it.

So although it doesn’t have a lot to do with finances, getting your child off to a good start with communication is a great thing. Whether you teach a second spoken language or sign, you are taking advantage of the fact that children at this age are sponges and love to learn and imitate you. Also they say it is great for old people like us parents to exercise our brains as well by learning new skills. So drop me a comment and tell me if you have had experience signing with babies/toddlers and if your child is older, how you may use that now. Our friend who recommended sign language to us has told me that, “We love sign language and although he is fully vocal, sometimes we use it for games (guess the sign) or when we need to speak to him “in private”!” So have fun with it and even if you only pick up a few, you may find it’s a great tool.

07.20.2008
AT&T Tilt

Creative Commons License photo figure credit: galaygobi

In the time-is-money category, I have discovered that Google Reader works quite nicely on my mobile phone. After going away for 4 days in June, I found that I was very far behind on my RSS feeds from other blogs. I tried the reader on my phone and sure enough it works great.  Now when I’m taking the dogs out, waiting in line, waiting for this or that, I can fire up Google Reader Mobile and catch up on my feeds.

With that in mind, you may notice that I have installed a few new plug-ins here at Don’t Feed the Alligators.

  • The first new plug-in is one that renders the blog into a format suitable for mobile devices.  This plug-in should even automatically detect that you are using a mobile device and render the articles appropriately.
  • I have also added a “Related Links” section to the bottom of each article so that if you like what you read, you can see what else I have written that’s similar.
  • Lastly, I have added a plug-in that prevents links that I put into my articles that point to other articles that I have written from creating trackbacks.  This has mostly an administrative use, but prevents it from looking like my blog has lots of comments when mostly it has very few (hint, hint…).

Here’s a sampling of some of the other articles and conversations that I have enjoyed over the last couple of weeks:

  • Nickel exposes the safest online banks.  Clearly this list is not all inclusive since the bank we use, EverBank, is not in this list, but is an online bank and scores a solid 3.  But the point here is to make your way over to Bankrate.com (again…) and check out the rating for your bank.  This was how I found out that my former bank, NetBank, was about to fail.
  • Nickel also makes an excellent point about making sure to keep up with maintenance items before they end up costing you even more.
  • Jeremy writes about the fears that many investors have when the market goes into a slump.  He cautions about keeping things in perspective and making sure that you don’t miss the inevitable upswing.  I personally like to watch the growth in the number of shares that I own, rather than their worth, because the worth of a stock only matters when you sell it.
  • JD has a great article on the difference between a career and a job.  I bounced through a string of seemingly disconnected “jobs” early in my “career” and then hit on my current job which relies a great deal on the skills that I acquired collectively at each of those disconnected jobs.
  • JD also writes about the reasons to invest in index funds.  This is not an uncommon topic in Personal Finance Blog circles, but certainly bears repeating again.
"Some people complain that an index fund dooms you to mediocre
investment returns. “Absolutely not,” Bernstein replies. “It virtually
guarantees you superior performance. Over the typical ten-year period,
most money managers would kill for index-matching returns.”"
  • Lastly, Madison posts her reply to a request from a friend to figure out how to get out of debt.  See the top 7 answers from her readers here.

Hope you had a nice weekend!