Don’t Feed the Alligators

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

Archive for April, 2009

Bizarre

Creative Commons License photo figure credit: Kecko

Over the last several weeks we’ve put a lot of mileage on our rewards credit card. We’ve been stocking up on gift cards from our local grocery store due to the fabulous deal that they offered during tax season.  The use of our rewards card here sweetened the deal even more, since we get 5% cash back on grocery purchases, and the purchase of gift cards counts as groceries.  Unfortunately, the credit limit on this card was not high enough for us to be able to put all of the cards that we wanted to buy on it in one cycle, so I made two mid-month payments to ensure that we could receive all of the rewards we had coming.

Because of a too strange to explain here situation, we actually charged $3,000 online and decided to cancel the order before it shipped.  The merchant was great about the order cancellation, and we had no problem with this.  I noticed on the credit card website, however, that our available balance went down significantly.  I know how credit card transactions work, so I assumed that our card was authorized for the big purchase, which reserves the money on our card for some period of time, but the charge was never completed.

A few days went by and our balance was down to less than $100.  My experience was that authorizations only last for a couple of days at best.  I waited another two days, but there was no change in the available balance.  I sent an email to the credit card company’s customer service department inquiring about why the available balance was so low.  Here is the response that I got:

“Upon review of your account, the reason you are showing only $79.00 in available line of credit because you utilized your entire line of credit during this billing period in the amount of $XXXX.xx. According to the terms of [credit card company] Revolving Card accounts, you may utilize your entire assigned Line of Credit one time within a billing period. Even though you are making payments within the billing period, your available line of credit will not be reset until the next statement closing date on 04/30/09.”

So basically the credit card company was saying that the credit limit applies not to my balance but rather to how much I charge in total in a cycle.  I thought this response was strange for a number of reasons.  The first of which was that I had never heard of such a thing.  The second was that the amount I had charged was already greater than 125% of my credit limit.  I didn’t happen to have the terms of my account handy, so I took the company at its word and chalked this up as a way for the company to limit the amount of rewards they have to pay out each month.

Imagine my surprise when a day later our available balance suddenly increased by exactly $3,000.  It seems to me that there are only two explanations for this: the first is that the credit card company took pity on our plight and gave us a break on the terms, in the amount EXACTLY equal to the purchase that we made and then cancelled.  The second is that the authorization for the purchase finally rolled off the books.  I’m going to assume it was the second, but I haven’t contacted the card issuer to confirm.

What intrigues me the most about the whole situation is why the credit card issuer answered the way it did.  Either the terms cited are true but not observed, or they are not true and the customer service representative flat out lied.  If the latter is true, why?  Was it so hard to actually look at our account and see that there was an outstanding authorization that was limiting out credit line?  I’m just baffled by the response on this one, and if the rewards program wasn’t so darned good I might consider at least calling them on this or even finding a new card to use.  As it is, there’s been no harm, so no foul either.

Have you ever had a bank or credit card company do something bizarre like this?

That's all that's left!

Creative Commons License photo figure credit: pfala

The May issue of Money Magazine has an article with poll results about how people have been changed by the current financial crisis.  The results seem to indicate that there will be many lasting effects of the crisis in much the same way that the Great Depression changed the relationship that almost all of its survivors had with money.  Savings rates are up, consumer spending is down, and people report that they value their families more and money less than they did before the crisis started.  If this is the case, maybe the crisis isn’t such a bad thing?

From the poll:

  • Nine of 10 respondents said they have changed the way they manage their money as a result of the economic crisis
  • Seven of 10 said their priorities are shiftng as well
  • A “whopping” 94% said the recession will have a lasting impact on the way they handle their finances

Naturally, I started to think about whether and how the crisis has affected how we deal with money.  I think that the basics of our money management system have not changed.  We still make monthly contributions to our Roth IRAs, put aside some money for charity, add to our emergency fund, and plug away at our car loan, business loan, and mortgage.  Because we are relatively young, we continue to invest most of our retirement money in stock market index funds (which have gained 30% in value over the last month, by the way…) diversified across a number of different global markets.  Our monthly contributions are taking advantage of dollar cost averaging.

After ScrapperMom’s layoff in October, however, I became far more concerned about how long we could get by with no income — i.e. the size of our emergency fund.  Currently all of the money that’s technically allocated for emergencies gives us a 3.75 month buffer (up by 1.45 months since August) and 4.9 months of savings if you count all of our cash on hand.  This is still a pretty nice cushion, but in a tough economy it could take a year to find a job to support our current lifestyle (see Avoiding Lifestyle Inflation to keep yourself out of this situation in the first place).  It took me 9 months to find work after the terrorist attacks of September 11, 2001.  Few places were hiring at the time simply because of uncertainty.

So, if anything has changed in the last 6 months in the way we deal with our money, it’s that we have been putting more of an emphasis on building a larger emergency fund and lowering our fixed monthly expenses.  Little by little we have been socking away more money to roll into our emergency fund CD ladder.  At the same time, we have been paying down the debts that require us to make monthly payments, such as our business and car loans.  Once these debts are paid off, then the “size” of our emergency fund will “grow” overnight by virtue of the fact that the same money will last longer should the need arise when we have fewer monthly obligations.

What about you?  Have you changed the way you deal with money since the beginning of this crisis?  Have you changed your investment strategy at all?  If so, how?  If not, why not?

Irrational Bins

Creative Commons License photo figure credit: “Irrational Bins” by MousyBoyWithGlasses

I finished up the preparation of our tax return today, and as you know, we are getting a sizable return.  In fact, I can’t ever remember having to write a check to cover any unpaid taxes for the year.  What bothers me, though, is that the government has been getting free use of my money all year.

I like to preach that people should strive to break even at the end of the year, or even owe a little bit rather than getting a refund.  In this way you’re not leaving your own money on the table in the form of bank interest or investment returns that you could be seeing — or better yet, having free use of some of the government’s money all year long.  This advice tends to fall on many deaf ears.  It seems, shockingly, that people like to get tax refunds and hate having to write a check to the government.

Many people have told me that a tax refund at the beginning of the year is a form of forced savings for them.  I tell them that they should adjust their withholding and then set up an automatic monthly or semi-monthly deposit to their high interest savings account of choice.  They tell me that they fear they just don’t have the discipline to keep up with something like this and will simply squander the money over the course of the year and have little or nothing to show for it.

Up until recently I thought this line of reasoning showed some kind of character weakness on the part of the tax-refund-as-forced-savings-plan (TRAFSP) crowd.  But as I get the same answer from so many people, I’m starting to re-think my judgement.  We’re all human, and we need all the help we can get when it comes to doing what’s best for ourselves the better part of the time.  I read the other day that when Warren Buffet wanted to lose weight, he bet his children that he could by giving them each an unsigned check for $10,000.  Buffett is “someone who understands his irrationality and builds systems to cope with it.”

So while TRAFSPs may be choosing the default option rather than building a system, they still understand this aspect of their irrationality and continue to choose a system that seems to work for them.  Personal finance is the confluence of a rational philosophy and irrational participants.  If it were all about math, most of us would be rich by now.  Instead, we all do irrational things when it comes to money at some point or another.  Those of us who understand our own irrationalities and build systems to overcome or circumvent them are the ones who will ultimately be successful at this game.  This might mean that we don’t always make decisions based on math, but rather on which option is more likely to be successful for us. TRAFSPs are one example.  Another recent example that comes to mind is J.D. Roth at Get Rich Slowly’s decision to go with a longer term mortgage than he could afford.  Lastly, a classic example of this is Dave Ramsey’s debt snowball.  These are all cases where the math says to do something different, but the math doesn’t mean a thing if the concept doesn’t ever succeed.

With all this being said, I’ve put off taking my own advice for many years.  The main reason for this is that we’ve had major lifestyle changes in each of the last 5+ years that have made our tax situation rather uncertain: we’ve changed jobs several times between us, sold a house, bought a house, started renting out a portion of our house, had kids, etc.  But 2008 and 2009 look like they will eventually shape up to be very similar from a tax perspective, so I have gone ahead and changed my withholding amounts with my payroll department.  I took home almost 10% more in my first paycheck because of this change.  I already have set up a monthly automatic transfer to sweep this extra 10% into a medium term savings account for one of our financial goals.