Thursday, October 8, 2020

Countdown to Financial Fitness: Get off the Interest Train

Countdown to Financial Fitness: Get off the Interest Train:   My husband's VISA account required an intervention last week. When his statement arrived, we noticed an interest charge of 97 cents ha...

Get off the Interest Train

 

My husband's VISA account required an intervention last week. When his statement arrived, we noticed an interest charge of 97 cents had been applied. He has set up automatic payments of the full statement balance on the due date, so there shouldn't be any interest charges. 

However, this VISA card, issued by his credit union, doubles as an ATM card to make withdrawals from his checking account. Last month, on a trip to Frankfurt, he withdrew euros from an ATM, and instead of a debit to his checking account, the transaction was processed as a cash advance. He was immediately on the interest train. 

The interest train is like a snowball rolling down a hill. It's the magic of compound interest working against you. As long as any part of your loan balance remains unpaid, interest accrues. Paying the statement balance won't stop it because interest continues to accrue between the date the statement is prepared and the date the payment is posted. And that interest carries through to the following month's balance, accumulating more interest. Once you're on the interest train, all your subsequent purchases accrue interest. 

Unlike purchases, cash advances begin accruing interest as soon as they are posted; there is no grace period. And once you owe interest, there is no more grace period for anything. The only way to get off the train is to pay the account down to zero. As soon as possible. 

Fortunately, it's easy to do online now. Payment can be instantaneous, so interest will stop. Although my husband's statement reflected only 97 cents in interest, that amount had grown to $2.27 by the time we noticed it and paid the account down to zero. 

These are small amounts, because we nipped it in the bud. But this scenario illustrates why so many financial gurus counsel against using credit cards. An item can end up costing you twice its purchase price if you finance it, use your credit card heavily, and then make only minimum payments, especially if you get behind and incur penalties as well. 

I believe credit cards are a convenient, safe form of payment. But only if managed properly. And that means paying your balance in full, on time, every month. And avoid cash advances. 

What are your thoughts on using credit cards? I'd love to hear your comments.

Sharon Marchisello is the author of Live Well, Grow Wealth.

Sign up for her newsletter at sharonmarchisello.com

Monday, September 14, 2020

Countdown to Financial Fitness: Reversal of Fortune

Countdown to Financial Fitness: Reversal of Fortune: Even though stock market indexes have almost returned to pre-pandemic levels and unemployment rates are declining again, all is not well. Wh...

Reversal of Fortune

Even though stock market indexes have almost returned to pre-pandemic levels and unemployment rates are declining again, all is not well. While some industries are thriving, others are a long way from recovery.

Only time will tell if they'll go the way of buggy-whip manufacturers after the invention of the automobile.

Event planners and owners of conference halls and theatres are still hurting. With so many free Zoom webinars now available, can organizers really charge as much for a virtual experience? All the businesses that supported large events are now scrambling for customers, and the smart ones are reinventing themselves. Could we see the return of drive-in movies?

My husband works in the airline industry, which has been hit particularly hard. In February, employees received record-breaking profit-sharing checks. In March, the airline cut its schedule by 90% and was burning through $50 million a day. Thousands of employees were encouragedor forcedto take voluntary leaves or exit packages. Government assistance was the only reason the airline didn't immediately furlough most of its workforce and demand pay cuts from those who remained. We all know that's coming once the assistance runs out. 

We used to take a lot of cruise vacations; in 2019, we took four. This year, none. We'd scheduled a cruise for April, but then the cruise line suspended its voyages ahead of the no-sail order. I still receive weekly emails from travel agencies touting enticing sailingsfirst for fall and winter of 2020, now for spring and summer of 2021but I'm not biting. It took us over 60 days to get our refund from our April cruise that got canceled, and the no-sail order keeps being extended. I feel sorry for owners of travel agencies and people who work in the tour industry. I believe demand will return one day, but how long can they hang on until that happens? 

Stocks in these industries have suffered accordingly. Investors have made money through short-term speculation, but if you purchased these stocks before March, you're still in the red. 

No one can predict the future, determine tomorrow's winners and losers, so how do you prepare? 

If you're an investor, diversify. Tech stocks are hot now but don't put all your money there. Remember the tech bubble at the turn of the century? If your nest egg is spread out among different baskets, you're unlikely to lose it all if one sector tanks. As I mentioned, the Dow is soaring again, but a different mix is driving the averages. 

If you're an employee or a business owner, build expertise that will transfer across industries. Take advantage of downtime to learn new skills or update proficiency. Never stop networking and don't burn bridges.

Having emergency cash is essential. I've done several posts about the value of accumulating and maintaining an emergency fundat least three to six months' living expenses in a liquid, low-risk account. The only reason most of the airlines are still in business was that they had billions of dollars in cash on hand, accumulated when business was booming. Even so, only government assistance saved them from burning through all that cash before revenues could return. Such a reversal of fortune!

Look for ways to shrink your financial footprint. Cut unnecessary spending, reduce debt. The less money it takes to sustain your lifestyle, the longer your emergency funds will last, and the less likely you are to suffer a reversal of fortune. 

What are your thoughts about preparing for the unexpected? I'd love to hear your comments.

Sharon Marchisello is the author of Live Well, Grow Wealth.

Sign up for her newsletter at sharonmarchisello.com

Wednesday, July 29, 2020

Countdown to Financial Fitness: Working with a Financial Planner

Countdown to Financial Fitness: Working with a Financial Planner: A friend of mine just took an early retirement package and immediately turned all his savings over to a financial planner. He's ecstat...

Working with a Financial Planner


A friend of mine just took an early retirement package and immediately turned all his savings over to a financial planner. He's ecstatic. I'm worried for him.

I'm not saying he shouldn't work with a financial planner. Unlike me, he has no interest in managing his investments. He can rebuild a car's engine; I don't even change my own oil.

But whether you do the work yourself or hire someone to handle it, you still need to know what you're getting, and how much you're paying.

For Christmas, I gave him and his wife a copy of my personal finance book, Live Well, Grow Wealth. They have yet to read it. (The problem with writing about personal finance is, the people who could really use the advice aren't interested, and the people who are interested already know about most of it.)

Before my friend visited the financial planner, I suggested he ask some questions. The most important one: how does the adviser get paid? I reminded him that in Chapter Six of my book, I cover working with a financial planner/adviser/broker/whatever and provide a list of questions/points to consider. If he and his wife didn't want to read the whole book, they should at least skim those few relevant pages before their meeting.

Right. He barely wanted to talk about what questions to ask, much less read about them.

The adviser came highly recommended. His parents and all their friends have been using the guy for years. He's a vice president at a major financial firm.

"Did you find out how he gets paid?" I asked, after my friends had signed over their nest egg.

"Oh, he doesn't charge us. We didn't pay him a cent."

Really? Is he a relative, doing them a favor? How does he stay in business if he doesn't charge his clients for his services? "Are you sure he doesn't charge anything? Maybe his fee comes out of the investments?"

"Yeah, it just comes out of the investments. We don't pay anything."

"Do you know what percentage he takes for managing your investments? One percent? One and a half?"

"I have no idea. I don't pay attention to any of that stuff. He's a genius, so whatever he charges, it will be worth it."

"Do you know what he's having you invest in? Mutual funds? Individual stocks? Bonds?"

My friend shrugged. "He had us move everything out of Fidelity over to his firm. I guess it's a mutual fund. My parents have been in it for years." (I couldn't help thinking about Bernie Madoff.)

"He sold everything?" I suspect the broker earned some hefty commissions from all those transactions.

"Yeah, he said it's better to sell everything and start fresh."

"Does he use publicly traded mutual funds? Or something proprietary to his firm?" (With publicly traded products, you can track performance independently. And if you ever decide to change brokerages, you can transfer the securities in kind, rather than having to sell everything at once, when it might be an inopportune time for some of them.)

Another shrug. "I don't care about that. He said we're on track to retire at 65 and we don't have to worry. He said we've done pretty well with Fidelity, but it's good we came to him when we did, because now we have the right mix going forward."

My friend is happy, and I hope he's right about being on track. He'll never know whether he could have saved money… or how much.

What are your thoughts about working with a financial planner? I'd love to hear your comments.


Tuesday, July 21, 2020

Countdown to Financial Fitness: Savings During the Pandemic

Countdown to Financial Fitness: Savings During the Pandemic: It's been four months since our lives were turned upside down by the coronavirus pandemic. Dream vacations have been canceled. Wedding...