As the recession continues, more and more people are finding themselves stretched for cash, some to the breaking point. An old board game favorite, Monopoly, wittingly or unwittingly, provides amazing lessons in fiscal responsibility.
Just a few great points:
1) The best investments aren’t always the flashiest. Growing up, it was the dark blue properties (Boardwalk and Park Place) that were the crown jewel possessions. Nobody thought much of the orange monopoly even though statistically it’s a significantly better investment. In monopoly, the right investments pay off over time. Yes, chance could land you on Park Place AND Boardwalk every time around costing you thousands while your opponents magically avoids your properties. But chance could also win you the lottery. Over time, the best investments will win out.
2) It pays to know how much money you’ve got, and you can’t (shouldn’t) spend what you can’t afford. According to the official rules of monopoly, when you land on income tax, you need to make your decision to pay whether to pay two hundred dollars or ten percent of your net worth before you count your money. If you don’t about your financial health, you could turn down an incredible opportunity or lock yourself into a deal that you simply can’t afford. Also, monopoly punishes people when they spend beyond their means. When you buy houses, you can only sell them back for half price. When you mortgage property, you have to pay an extra ten percent to get it back. In real life, opportunities abound and some have very specific time limits. You can’t borrow from the bank for free, you can’t rack up charges on your credit card, and when you declare bankruptcy, the game is done. Over. Finished.
3) Slow and steady wins the race. You can’t win monopoly in one turn. You can’t even win it in one trip around the board. Some will complain that this makes it a more boring game, but it mimics real life. We want instant gratification and our newer games reflect that. Instead of wanting to play sports games like NCAA football that mimic the actual grind-it-out nature of the sport, we settle for NFL Blitz that not only creates basketballesque scores with football, but also offers instant, violent gratification by allowing players to body slam opponents with late hits.
Look at the house rules people have implemented over time. Free parking, according to the rules, is just an empty space, but it’s turned into a lottery where a lucky (not skillful) player lands on it and wins a certain amount. Landing on go now doubles your salary. These advances are based purely on luck – not skill – and provide instant gratification, unlike the other investments offered by buying property around the board. This is the same thinking that has turned us into a credit card culture and fueled the credit bubble that has recently imploded.
Board games aren’t every thing, but when our culture is immersed in rewarding chance and providing immediate gratification, watching shows like “Deal or No Deal” that use absolutely no skill certainly doesn’t promote financial responsibility. Some may object to using innocent games to indoctrinate people with life lesson, but – for better or worse – everything teaches a lesson. Why not make it one that will help them avoid the pitfalls that have led to this recession?
Showing posts with label Finance. Show all posts
Showing posts with label Finance. Show all posts
Sunday, May 17, 2009
Tuesday, February 3, 2009
Credit Cards are like Prescription Drugs
In the right hands prescription drugs can do wonders – cure illness, relieve pain, and stop the spread of disease. In the wrong hands, even unqualified hands, it can cause dependence, sickness, and even death. In the same way, credit cards can be an excellent method of securely paying for purchases, keeping track of expenses, building a good credit score and even earning some cash back on everyday expenses. However, careless spending and missed payments can negate those benefits and even lead to financial death – bankruptcy.
Credit cards first came into popular use after World War II and have steadily grown since then. Now, almost everyone carries at least one credit card in their wallet. It offers convenience and security. Yes, cash is still king. I have yet to encounter a store that turns away Lincoln, Jackson, and Franklin, but gas stations that charge two different prices for cash and credit are almost as common as the California condor and I’ve seen as many brick and mortar stores that do the same as I’ve seen dodo birds. More and more people are realizing that when – not if – their wallet is misplaced or stolen, losing a piece of plastic is much easier to rebound from than having Grant get kidnapped. And with the internet becoming the world’s largest shopping mall, credit not just the preferred method but the only method.
How do these credit cards make their money? A portion comes from what amounts to a commission on the sales paid for by credit cards that merchants pay – typically about two percent. The bigger portion comes from consumers who carry over balances or run up fees such as for going over their credit limit. Credit card debt isn’t covered by collateral, like a mortgage, so credit card companies charge very high interest rates – sometimes over 20%. If an investment returned 20% per year, you would double your money in less than four years. Like a prescription drug, once you’re hooked, it’s hard to break the addiction.
So how are credit cards not closer to heroin than penicillin? First, used properly, they’re a great way to build credit. I’ve had a credit card since I was sixteen – yes, my mom cosigned my first one and I rarely used it back then – but I haven’t missed payments or had an other negative effects so now creditors can see that I’ve been able to handle credit for years making my credit score better. No, you don’t get a check just for having a good credit score, but it will mean lower rates on loans and opportunities for more favorable credit cards.
No, not all credit cards are created equal. While I’m sure platinum cards with high annual fees have their uses, I refuse to carry a card that I have to pay for. There are some that can over decent merchandise or travel rewards, but I’ve found the best return is cold hard cash. There are a number of credit cards that offer one percent back on all purchases. With a little searching, you can find cards that offer double, triple, or even centuple that. If you want to get fancy, you can find different cards that give specific benefits for different spending categories. I’ve got one card that I use solely for gas because it gives me five percent back. Another card gives me three percent back on the top three categories I spend in for the month – and then if I wait until I have two hundred dollars in rewards it pays back two hundred fifty, a twenty-five percent increase. Now that’s an investment I like.
It takes management and discipline not to overspend, but a little saving here and there can really add up.
Credit cards first came into popular use after World War II and have steadily grown since then. Now, almost everyone carries at least one credit card in their wallet. It offers convenience and security. Yes, cash is still king. I have yet to encounter a store that turns away Lincoln, Jackson, and Franklin, but gas stations that charge two different prices for cash and credit are almost as common as the California condor and I’ve seen as many brick and mortar stores that do the same as I’ve seen dodo birds. More and more people are realizing that when – not if – their wallet is misplaced or stolen, losing a piece of plastic is much easier to rebound from than having Grant get kidnapped. And with the internet becoming the world’s largest shopping mall, credit not just the preferred method but the only method.
How do these credit cards make their money? A portion comes from what amounts to a commission on the sales paid for by credit cards that merchants pay – typically about two percent. The bigger portion comes from consumers who carry over balances or run up fees such as for going over their credit limit. Credit card debt isn’t covered by collateral, like a mortgage, so credit card companies charge very high interest rates – sometimes over 20%. If an investment returned 20% per year, you would double your money in less than four years. Like a prescription drug, once you’re hooked, it’s hard to break the addiction.
So how are credit cards not closer to heroin than penicillin? First, used properly, they’re a great way to build credit. I’ve had a credit card since I was sixteen – yes, my mom cosigned my first one and I rarely used it back then – but I haven’t missed payments or had an other negative effects so now creditors can see that I’ve been able to handle credit for years making my credit score better. No, you don’t get a check just for having a good credit score, but it will mean lower rates on loans and opportunities for more favorable credit cards.
No, not all credit cards are created equal. While I’m sure platinum cards with high annual fees have their uses, I refuse to carry a card that I have to pay for. There are some that can over decent merchandise or travel rewards, but I’ve found the best return is cold hard cash. There are a number of credit cards that offer one percent back on all purchases. With a little searching, you can find cards that offer double, triple, or even centuple that. If you want to get fancy, you can find different cards that give specific benefits for different spending categories. I’ve got one card that I use solely for gas because it gives me five percent back. Another card gives me three percent back on the top three categories I spend in for the month – and then if I wait until I have two hundred dollars in rewards it pays back two hundred fifty, a twenty-five percent increase. Now that’s an investment I like.
It takes management and discipline not to overspend, but a little saving here and there can really add up.
Monday, February 2, 2009
Saving for a Rainy Day in the Middle of a Thunderstorm
Sun Trust has an ad showing now that says some people woke up and stopped trying to keep up with the Joneses, stopped wanting flashy and started wanting solid.
Thanks for the heads up Sun Trust. Oh wait, it’s not foresight, it’s hindsight.
It seems that as long as people aren’t content to have an average amount of wealth, the economy is always going to be cyclical. And it seems that the best time to have money to spend is during a recession because everyone’s lowering prices. To most Americans, this is a paradox – how can someone have money to spend during a recession? Well, it starts by saving money during more prosperous times.
For those of who don’t know what I’m talking about when I talk about “savings”, don’t feel bad because you’re not alone. “Savings” refers to money that is put aside for future use, whether it be for a large future purchase, emergency, unemployment, or retirement. A survey released in 2008 by the American Savings Education Council and America Saves revealed that only 62% of people have “a savings plan with specific goals” while 47% of Americans save less than 5% of their incomes but only 43% thought that they weren’t saving enough for retirement.
So that means the 4% of the US thinks less than a sub-5% percent savings rate was sufficient for retirement. But I’m sure that 4% are the richest 4% who are still saving millions even though it reflects a small portion of their income. NOT. The study also shows that the higher your income the more likely you are to save, and save at higher rates. So the rich get richer – not only because they make more money, but they also save more money – and the poor get poorer.
In the end, at lot of it comes down to education. Typically, the better educated you are the more money you make. It should come as no surprise then that the individuals with the highest incomes save the most. In fact, education is likely to be the confounding variable. Certainly saving more money is easier with a larger income, but it is both possible to do with a smaller income and not to do with a large income. While not all professional athletes are stereotypical dumb jocks, many are not scholars either, and about 60% of NBA players go broke within five years of retirement.
Not only does a better education teach people to save to prepare for the future, but it also prevents them for falling for budget-breaking scams – both legal and illegal. Predatory lending obviously preys on the uneducated, but so do payday loans and even the lottery. The lottery is a horrible investment – if you can even call it an investment. A typical return on the Mega Millions lottery is about $0.50 per $1 you spend; see http://www.durangobill.com/MegaMillionsOdds.html for all the math. How many people knowingly make an investment that is EXPECTED to lose 50% of it value? Personally, it’s great for me that other people are making charitable donations to the government so I have to pay less in direct taxes, at least until the government has to pay unemployment and welfare. And then everyone is forced to foot the bill.
So start saving for the next recession now so when the price of your dream home, car, or even flat-screen TV drops, you’ll be ready to buy – with cash, not credit.
Thanks for the heads up Sun Trust. Oh wait, it’s not foresight, it’s hindsight.
It seems that as long as people aren’t content to have an average amount of wealth, the economy is always going to be cyclical. And it seems that the best time to have money to spend is during a recession because everyone’s lowering prices. To most Americans, this is a paradox – how can someone have money to spend during a recession? Well, it starts by saving money during more prosperous times.
For those of who don’t know what I’m talking about when I talk about “savings”, don’t feel bad because you’re not alone. “Savings” refers to money that is put aside for future use, whether it be for a large future purchase, emergency, unemployment, or retirement. A survey released in 2008 by the American Savings Education Council and America Saves revealed that only 62% of people have “a savings plan with specific goals” while 47% of Americans save less than 5% of their incomes but only 43% thought that they weren’t saving enough for retirement.
So that means the 4% of the US thinks less than a sub-5% percent savings rate was sufficient for retirement. But I’m sure that 4% are the richest 4% who are still saving millions even though it reflects a small portion of their income. NOT. The study also shows that the higher your income the more likely you are to save, and save at higher rates. So the rich get richer – not only because they make more money, but they also save more money – and the poor get poorer.
In the end, at lot of it comes down to education. Typically, the better educated you are the more money you make. It should come as no surprise then that the individuals with the highest incomes save the most. In fact, education is likely to be the confounding variable. Certainly saving more money is easier with a larger income, but it is both possible to do with a smaller income and not to do with a large income. While not all professional athletes are stereotypical dumb jocks, many are not scholars either, and about 60% of NBA players go broke within five years of retirement.
Not only does a better education teach people to save to prepare for the future, but it also prevents them for falling for budget-breaking scams – both legal and illegal. Predatory lending obviously preys on the uneducated, but so do payday loans and even the lottery. The lottery is a horrible investment – if you can even call it an investment. A typical return on the Mega Millions lottery is about $0.50 per $1 you spend; see http://www.durangobill.com/MegaMillionsOdds.html for all the math. How many people knowingly make an investment that is EXPECTED to lose 50% of it value? Personally, it’s great for me that other people are making charitable donations to the government so I have to pay less in direct taxes, at least until the government has to pay unemployment and welfare. And then everyone is forced to foot the bill.
So start saving for the next recession now so when the price of your dream home, car, or even flat-screen TV drops, you’ll be ready to buy – with cash, not credit.
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