Monday, September 23, 2019

Countdown to Financial Fitness: The High Cost of Poverty

Countdown to Financial Fitness: The High Cost of Poverty: It’s wonderful to reach a point where you can stop working and let your money take over. And if you manage to spend less than what your mo...

The High Cost of Poverty

It’s wonderful to reach a point where you can stop working and let your money take over. And if you manage to spend less than what your money brings in, your nest egg continues to grow, adding even more money to work for you.

Unfortunately, for people living in poverty, the converse is true. Life costs more when you don't have money.

Banks and credit unions offer their good customers free checking, interest on deposits, and affordable loans. If you fall on hard times or don't manage your account well, you're hit with overdraft fees, low balance fees, late payment fees, higher interest rates on borrowed funds—extra expenses that eat up the spending power of your money.

People who don't qualify for bank accounts have to pay check-cashing services to access their money. And if they can't stretch their funds to cover their expenses until the next paycheck, they may be forced to pawn possessions or take out a payday loan at a usurious interest rate. More drain on spending power.

Those who try to avoid banking fees by keeping all their money in cash risk having it lost or stolen. And it's difficult to operate on the cash system only. No direct deposit, no compound interest. And try to travel or shop online without a credit card.

Workers who live paycheck to paycheck struggle to save anything for a down payment on a house, a new car, or higher education for their children. All of their money goes to support day-to-day existence rather than building a better life.

I always assumed prices should be lower in stores located in low-income neighborhoods. Just the opposite! Plagued with higher crime and more inventory erosion, merchants charge more for goods and services because they require more security to stay in business.

In poor communities, less is invested in schools and other infrastructure. Shopping in the better neighborhoods is often not an option because public transportation doesn't always go there.

So how do we break the cycle of poverty?

It’s a complicated issue, and I wish I had the answer. But the first step is to reverse the cash flow. Reach the point where more comes in than goes out. And those living in extreme poverty may need help to right the ship.

One program I’ve read about is microloans. These are tiny, short-term, low-interest loans made by individuals or organizations to provide start-up funds to an entrepreneur who may not qualify for a traditional bank or small-business loan. They’re used primarily in developing countries but have caught on in the United States as well. A small investment to steer the cash flow in the right direction. For example, lend a seamstress $500 to buy some fabric, which she uses to make clothes to sell at a flea market. With her profits, she buys more fabric, which supplies her with even more inventory that will generate additional profit. Eventually, she’s able to pay off her microloan, hire someone to help her, and someday afford to move into her own shop.

Habitat for Humanity is a nonprofit organization with a mission I support. Providing “a hand up, not a handout,” the charity helps make home ownership more affordable by giving low- or no-interest loans to build or rebuild houses with volunteer labor and donated materials. The recipient of the home has to pitch in on the project, as well as commit to helping on future builds, giving back to others. I’ve watched the joy cover a new homeowner’s face when we handed her the keys to her finished home—a priceless experience to share.

In my twenties, I was a caseworker for the Texas welfare department. I found it depressing to observe the cycle of poverty in matriarchal households, where fourteen-year-old girls aspired to get pregnant so “I can get my own grant.” I watched a few young women break out and start minimum-wage jobs, but in less than a year, they were back on the welfare rolls, because they couldn’t afford to lose their Medicaid, and childcare expenses ate up their pay checks. What was I doing? I felt like an enabler.

One evening at a party, I met a woman who was dating a friend of mine. When I told her what I did for a living, she exclaimed, “Welfare saved my life!” She told me the story about how she got pregnant as a teen and dropped out of high school. Her parents kicked her out of the house, and the baby’s father was not in the picture. At the welfare office, she made friends with another young woman in a similar situation. They moved in together and enrolled in computer school, attending during opposite hours so they could share childcare duties.

They scrimped and worked hard, but after two years, they’d both finished school and landed good-paying jobs. They weaned themselves off welfare and never went back. “But if it hadn’t been for welfare, I don’t know what I would have done,” she said. Her success story made me feel a lot better about what I did for a living.

The problem of poverty is not simple and might never be solved. And not everyone is motivated enough to take advantage of a hand up and do the hard work necessary to crawl out. But with compassion and judicious investment, we can make a dent.

What are your thoughts about reducing poverty? I’d love to hear your comments.

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

Friday, August 30, 2019

Countdown to Financial Fitness: Trusting Tourist Information

Countdown to Financial Fitness: Trusting Tourist Information: Whenever you travel to a new city, the Tourist Information Office is usually your best friend. Cheerful representatives hand out free ma...

Trusting Tourist Information

Whenever you travel to a new city, the Tourist Information Office is usually your best
friend. Cheerful representatives hand out free maps, make recommendations about what to see and do during your stay, and answer questions about attractions, hotels, tours, and local transportation.

But be sure you’re visiting the official tourist information office, not just a vendor who provides “tourist information.”

On our recent cruise to Iceland, we had a stop in Akureyri, Iceland’s second-largest city, located on the northern side of the island. The onboard port lecturer told us that all the city buses in Akureyri were free, and he encouraged us to use them.

When we got off the ship, the first building we saw displayed a big sign saying, “TOURIST INFORMATION.” We went inside. It was basically a souvenir shop, but they also had an information desk and free city maps. We asked the woman at the desk where we could catch the free public bus.

She made a face. “I have no idea where it stops; I never take the bus. Tourists shouldn’t ride it. You’ll get lost.” She was selling tickets for the Hop On, Hop Off bus for $25 each.

In many cities, the Hop On, Hop Off (HOHO) bus delivers good value. Sometimes, not so much. It depends on how long you’ll stay in the city, what you plan to see, and how close the major attractions are to one another.

If you’re going to be in town for several days and the HOHO stops near your hotel, a multi-day pass that includes discounts on attractions might be a great deal, because you’ll have plenty of time to get your money’s worth. If you’re only in port for a few hours, you might have time for just one loop—a poor man’s guided tour—and you won’t be able to reap all the benefits you’ve paid for.

And if the sites you plan to visit are within walking distance of each other, it could be more cost-effective to take public transportation or even a taxi to the center of town instead of trying to hop on and off every block or two. Also, pay attention to the schedule frequency and crowd size. I’ve seen HOHO buses in some cities packed so full, you can hop off, but when you try to hop back on, you have to queue up and wait for several buses to pass before you get a seat.

In Akureyri, we skipped the HOHO bus option and continued on foot into town, where, a few blocks away, we found the real tourist information office. That representative gave us a better map and told us exactly where we could catch the free bus. She explained that the number five and the number six made a complete loop, over the same route. One headed clockwise, the other counter-clockwise.

Before we boarded a bus, we decided to explore the downtown area. We hiked up a slight hill to the church (which was under renovation) and then walked to the botanical garden, a touted HOHO stop and also a destination for ship’s shore excursions. The grounds were beautiful and there were numerous plants in bloom. And admission was free.

When we finished our stroll through the botanical garden, we found the public bus stop. The number five wouldn’t come for twenty minutes, but the number four would be there in ten. Should we get on the four? What if we got lost, as the HOHO saleswoman warned? We noticed that the final destination of both buses was a stop called Midbaer. We figured we could take the four to Midbaer and then switch to the five.

Midbaer turned out to be the central station across from the real tourist information office. It was the end of the line for the four, and there was a five ready to depart (probably the same bus we would have boarded if we’d kept waiting at the botanical gardens). We hopped on the five, rode a complete loop, and since we still had time before we had to go back to our ship, we did another loop on the six.

We compared notes with a couple from our cruise who had taken the HOHO. The routes we had traveled were similar. “Just so-so,” was their assessment.

“Was the commentary interesting?” I asked them.

“You could barely hear it for all the static,” they replied.

Unlike the HOHO, the free public bus doesn’t provide commentary. But you get to chat with the locals, mingle with them as they go about their daily life. And you can’t beat the price…

Monday, July 29, 2019

Countdown to Financial Fitness: Should You Refinance?

Countdown to Financial Fitness: Should You Refinance?: We keep expecting interest rates to rise, but then they get cut again. If you're carrying a mortgage, maybe it's time to refinance...

Should You Refinance?

We keep expecting interest rates to rise, but then they get cut again. If you're carrying a mortgage, maybe it's time to refinance.

Should you do it? That depends.

If the value of your home has increased since you bought it, so has your equity. If you put less than 20% down on your home's purchase price, you're probably paying PMI (Private Mortgage Insurance). The rise in equity, combined with the principal retired since you took out the loan, may equal more than 20% ownership, which will enable you to drop the PMI when you refinance. (PMI protects the lender against the risk of foreclosure, and when the buyer has more skin in the game, i.e., at least 20% equity, the lender figures the buyer has less incentive to walk away.)

Some homeowners see that increased equity as an opportunity to borrow funds needed to make improvements. Add a pool. Renovate the kitchen. Finish the basement. Build a sunroom. Before you refinance your mortgage, compare available products with the mortgage you already have. Maybe it's smarter to take out a home equity loan for your project.

Look at the interest rates and terms being offered compared with your current mortgage. If you can lock in a low fixed rate, now may be the time to refinance that adjustable-rate loan, guaranteeing uniform payments for the life of the mortgage. When interest rates rise steeply, homeowners lured into adjustable-rate mortgages can get into financial trouble, with payments rising to unmanageable amounts.

When I still had a mortgage, the popular rule of thumb was, if interest rates go down at least 2%, refinance. But there are other factors to consider.

Refinancing isn't free. Just as when you took out your first mortgage, there will be closing costs. You'll need an appraisal of the home's value, credit reports, title insurance, bank and attorney fees. Some lenders may require you to pay "points." In mortgage lingo, a point is equivalent to 1% of the amount borrowed. Some institutions charge "origination" points, which are part of the closing costs to compensate the lender. They may also offer "discount" points, which I always thought was a misnomer (it's not a discount; it's an added cost to the buyer). Discount points are paid upfront to "buy down" the interest rate. Pay a chunk of interest at the beginning of the loan so you can enjoy slightly lower payments.

After you've compared products and estimated costs, calculate how long it will take to break even and start realizing the savings from lower mortgage payments. If you're planning to move before that, or if the timeline is so long you don't know what you'll be doing yet, perhaps refinancing is not a good idea.

Another disadvantage of refinancing is that you're starting over with a new loan. Most are for 30 years (some are for 15 or less, but they require higher payments). Maybe you've been paying on that mortgage for a decade or more, and you're starting to see light at the end of the tunnel. Maybe you plan to retire before your 30 years is up, and wouldn't it be nice not to have to keep making mortgage payments?

Retiring with a paid-off home and no debt can be exhilarating. With a small financial footprint, you need much less income to sustain the lifestyle you want.

And then some people consider mortgage payments a perpetual cost of living, no different from insurance or utilities. My mother-in-law refinanced her condominium multiple times during retirement, and she still carried a mortgage when she died at age 97, even though she'd lived there for more than 30 years. (She told people it was paid off because we'd switched her to automatic payments a few years earlier, and she no longer had to write out checks to the mortgage company.)

What experiences have you had with refinancing? Was it a good decision? I'd love to hear your comments.

Thursday, June 13, 2019

Countdown to Financial Fitness: Reduce Summer Expenses

Countdown to Financial Fitness: Reduce Summer Expenses: It's not even summer yet and many parts of the country have already experienced sweltering heat waves. Summer brings higher bills for ...