Handling Finances

Now that people are starting to get their tax rebates, our economy is in for some serious stimulation!  The idea is that we’re supposed to go out and buy new stuff which will keep businesses rolling along which will keep people employed.  Some might argue that we need a recession to drive inefficient companies out of business (freeing up workers and resources for better-run companies) but it’s a rather unpopular idea — especially now that our retirement savings are almost universally invested in the stock markets after years of our government giving tax breaks for 401(k) contributions.

If we step back for a moment and consider that the economy won’t totally collapse if every penny of the 100 billion is turned into profits and wages (it won’t), it will become clear that paying off debt will actually do as much or more to stimulate the economy than simply spending on consumer products.

Increasing future spending.

First of all, with every penny you pay back on your debt, you free up the monthly interest to be spent on other things.  Putting the $600 individual rebate toward debt could save as much as $150 a year in interest at an all-to-common 25% interest rate!  Today’s politicians are no-doubt counting on the stimulus today so they can take credit for the booming economy, but if we’re willing to think just a couple years out, the sustained effect of $100 billion less debt would be huge (and wouldn’t largely be wasted in profits to foreign countries).

Free up financial markets.

One of the biggest reasons for the current recessionary scare is sub-prime lending.  Sub-prime lending is hugely profitable as long as the economy is booming because lenders can charge exorbitant interest rates that more than cover defaults.  Of course, the banks book their profit each year and don’t generally set aside some of that profit to cover future defaults if the economy goes bad (or it wouldn’t be profit) so they’re stuck with huge numbers of bad loans that are no longer profitable as people become unable to repay them.

Banks don’t really want you to pay back your loan faster since they don’t earn as much interest that way, but in this case, the financial markets are so gummed up that every dollar they get back will be one more dollar they can lend out — further greasing the skids of our economy and getting everything moving again.

Ultimately, do what’s best for you!

Nobody’s trying to tell you what to do with your money, but I hate to hear people say that you should spend it or save it.  Politicians will benefit more if you spend it ASAP and make them look like they lead the economy well.  Companies worldwide will benefit more if you spend it on consumer products and a small fraction of it will go towards jobs.  The economy will benefit if loans are repaid (especially sub-prime loans) and banks will benefit if you continue to make minimum payments no matter what else you do.

In the end, look for where the money will do the most good in your personal financial situation.  While there are no strings attached, with the government running a huge yearly deficit (it doesn’t look so bad until you add in the regular “emergency was spending” to the budget), we’ll get stuck with the tab in the form of increased taxes or decreased services (say a 50% cut in social security payments?) in the long run.  While I’m a big fan of doing what’s best for my country and the world, ultimately, what keeps you self-sufficient will benefit those around you the most in the long-run.

It’s my dream card come true!  While perusing my daily dose of blogging, I found an article about the Revolution Card at CashMoneyLife.com.  This credit card is exactly what I’ve been looking for, but as such a new service, it isn’t yet accepted by the merchants I use regularly.

The Good Side

The credit card is friendly to merchants (unlike existing credit cards in the USA) as it only charges a reasonable 0.5% per transaction rather than the more common 2+%.  As much as I like getting cash back, I’d rather not throw even more money at greedy banks and keep it circulating in my local economy!  I find the high interchange fee rather unpalatable and perhaps even immoral as the pseudo-monopoly held by visa and Mastercard has restricted any competitive cost-down pressure.

The card also has no name or number embossed on the front and even better — it can only be used with a pin number, not a signature!  That means unlike debit or credit cards that can currently be used by thieves since nobody checks signatures, this card can only be used illicitly if somebody steals both the card and your pin number (not likely).

For even more security, you can generate temporary pin numbers — great for online purchases, or a one-time thing at a store you don’t quite trust.

The Down Side

Patrick at Cash Money Life had some good criticisms of the card — namely that since it requires a pin number, it will be more difficult to process in places like restaurants and bars where they’re traditionally taken or kept as collateral for a tab.  Since you have to be present and (presumably) sober to use your pin number, this card won’t be as handy for people who regularly eat out.  Still, I feel rather nervous leaving a credit card with a waitress as the magnetic strip can be copied and stolen so I would welcome an excuse to follow the waiter to a card swiping machine.

The biggest issue for me is the short list of stores that accept the card.  While they include large chains like Kohls, CVS, Walgreens and Rainbow, they don’t include my everyday stores like Cub Foods or Target or even any gas stations as far as I can tell.  I will apply for this card as soon as I feel like I would use it regularly, but they have some recruiting to do before I personally will take the plunge.

The Verdict

The advantages to this card are not huge.  While security is highly important to me, credit card companies universally cover any fraud past the first $50 so financially it’s not a huge issue.  It’ll still be a huge hassle to get your money back, but it’s not hard to get your money back.  I’d much rather have a card that largely prevents theft, but I don’t feel my money is in danger now.

Some people with good credit might be able to get competitively low rates (the rates are largely based on credit history) but you could probably get an even lower rate with a card that charges higher merchant fees for obvious reasons.

The main advantage, then, is the low interchange fee which users never see.  Quite honestly, I’d be paying a bit more for my purchases than I do currently as I wouldn’t receive kickbacks in the form of ‘cash rewards’ for my credit card purchases.  At the same time, the more of my money that goes directly to those that provide goods and services I want, the better for the entire economy.  It’s a small effect, but barring legislation like that in Australia that limits interchange fees to 0.5%, I’d prefer to vote with my wallet and use the more efficient method.

For me, then, the main down-side is the limited acceptance of the card.  I’ll be watching this card closely and as soon as I see it being accepted by gas stations or my local supermarkets (or even better, some of the smaller stores I shop at), I’ll get myself a card and ‘be part of the revolution’ (sorry — I couldn’t resist).

With recent worldwide food shortages causing riots, the scarcity and price of food is a serious issue.  Our food prices have increased significantly from flour and rice prices up 13% this year to eggs that are now 30% more expensive than last year!  While increasing prices are squeezing some who are just barely making ends meet, the truth is that the vast majority of us can easily absorb this kind of price increase simply by occasionally biking to the store or canceling our internet access or cell phone contracts.  The truth is that we’re not in danger of starving as in many countries.  I was surprised, then, to see an article from the Wall Street Journal advising readers to stockpile food as an investment (note: I linked to the Yahoo Finance page since it’s freely available to everyone)!

Be honest — how much money do you actually spend on rice every year?  I eat rice once a week or so, and I suspect I could “invest” $60 in a year’s supply of basic white rice.  Even if price increases accelerate (and they probably will), earning 20% on this investment will gain me $12 a year.  Yes, 20% is a lot, but thinking clearly for a moment, how much space am I willing to invest along with my money?  I’ve got to be honest, emptying out a closet for my food stockpile is not worth the $200 or so I could save a year.  And that’s not even counting the fact that I’ll eat a lot more of these stockpiled foods if they’re so easily available.

What Should We Do?

Are you really worried that food prices will continue increasing?  I sure am!  But instead of throwing out your kids toys to make space for bags of flour and rice, consider investing that money in companies that will profit from increased food prices.  Farmers will certainly make more money, and in turn they will buy more farm machinery and have more money for fertilizer and irrigation etc…  Of course, you could also invest in funds that buy wheat, corn and rice directly, but I find that pretty immoral — essentially you’re hoarding much more food than you could ever use and driving up the price at a time when people around the world are starving and rioting due to the scarcity of the food.

Also, I don’t see a problem with keeping your pantry full.  Don’t buy as little flour as possible because it’s more expensive, keep your flour bin full and as long as the prices continue to increase, you’ll always have some food at lower, pre-increase prices.  This strategy also gives you a bit of a buffer in case the locals go a bit crazy and buy all the rice in your town for a week or two.  While you won’t be contributing to the panic buying, you’ll also have plenty of food to last until new shipments come in and demand drops to more reasonable levels.  We’re not going to run out of anything — it’s just going to get a bit more expensive!

Why are Prices Increasing?

It’s really pretty basic supply and demand.  Countries like India and China are becoming much more wealthy, and as their citizens rise from poverty, they start to purchase more and more high-quality food.  At the same time, the global demand for bio-fuel like corn-based ethanol drives the prices of some specific crops.  When certain crops become more profitable than others, farmers abandon other crops, decreasing the supply of ALL crops and raising prices across the board.  Add in the occasional local drought or flood, and mix in some institutional investing (i.e. pension funds buying wheat futures for profit) and price increases aren’t all that surprising.

Stop Complaining and Give!

In the end, it’s no use complaining about it.  Some Americans will have to tighten their belts and maybe even give up high-end foods like porterhouse steak.  A few will have to choose between staples like clothes or food.  Most of us will simply have to accept that inflation works in cycles and be grateful that we’re wealthy enough that we don’t have to worry about whether we’ll survive the riot when we go to the supermarket.

Look at your rising food costs and instead of feeling sorry for yourself, consider those around you that truly can’t afford the increase.  Increase your giving to food shelves that are hurting badly at the double problem of rising prices and lower contributions in a slowing economy.  Consider donating to charities that specialize in bringing food to the neediest on our planet.  I’m particularly fond of CARE as they try to purchase food locally instead of dumping cheap food in a country and potentially harming local farming, but the issue is not one-sided, and in a time of crisis like this, any well-run charity that fights poverty will make good use of your money!  Check out Charity Watch for information on charities that use money responsibly and to weed out the scams.