An answer to a question about investing

A question from @lastmojican on Twitter:
What are your thoughts about investing in the stock market? I want to invest but I have lost faith knowing that greed and ignorance created this problem. How do we trust again?
Great question.

I understand your fear about being in the stock market right now. The simple answer to your question is in the question itself: “greed and ignorance created this problem.” How do you combat greed and ignorance in investing? You do so with knowledge that informs a well-crafted plan focused on your own goals rather than simply the accumulation of more.

The truth about what happened in the meltdown is that many people jumped into investments they didn’t understand. And you’re right, they did so out of greed. The unfortunate part is that all of us suffered to some extent because of that greed.

The silver lining, though, is that on the other side of a stock market drop is essentially a fire sale. Just like when your favorite store has a clearance, prices on shares of many solid companies and funds are well below where they should be. That means investors can buy more and make steady gains, especially if you follow dollar-cost averaging strategy (which just means you invest a specific amount at regular intervals over a given amount of time).

The most important thing to remember is that investing is not gambling. Many novice investors make the mistake of letting the word “investing” conjure up the image of some guy locked in his home office, risking his kid’s tuition money trying to time the market. Before you dive in, arm yourself with as much knowledge as you can about the basics of investing by going to the library and checking out something as simple as “Investing for Dummies”. There are all kinds of resources out there to help novices become literate about investing and the more literate you become, the more confident you’ll be. Take your time and take it slow.

I cancelled my credit cards. Will it hurt my credit score?

I’m staring off the week with some of the great questions I got my new Twitter followers (thanks to @jemelehill):

I paid off and canceled my two credit cards about seven months ago. I don’t want to get another one. My friend’s mom told me I need to have at least one credit card and use it regularly to build credit. She made it sound like I was actually messing myself up as if nothing else mattered. Is it really that big of a deal? I don’t want another credit card.

Yes, it really is that big a deal for three reasons:

1) The ratio of your available credit to your actual debt is a huge factor in your credit score. Once you close a card, you immediately lose the available credit part of that equation. Follow me here:

I have two cards with $10,000 limits and I’m carrying a $2,500 balance on one of them. I’m using just over 10 percent of my available credit of $20,000. That’s excellent because the credit bureaus and lenders like to see that you’re using as little as possible of your available credit. It’s supposedly a sign that you’re not overextending yourself.

If I close one of the cards, I have the same $2,500 debt but with available credit of only $10,000. That’s a ratio of 25 percent of your available credit. In other words, it looks to the credit bureaus like I’m suddenly borrowing more than twice what I was just a month before.My score takes a hit.

2) Also, since the length of your credit history is a factor in your credit score, closing both your credit card accounts hurts because it erases any good credit history you’ve built up by using those cards responsibly. If you had those two cards for 10 years and a car note from a year ago, suddenly your the oldest active account you have is a year ago, not 10 years old.

3) You really can’t afford to not have a card unless you’re wealthy enough to be certain that you can pay for any and every expense that comes up in cash, all the time. You need it for basics like getting a plane ticket or renting a car. True you could use a bank debit card, but some companies will charge you a fee to use a debit card instead of a credit card. And of course, there’s always emergencies.

Thanks for the question and good luck.

photo courtesy of freedigitalphotos.net

I’m unemployed. Should I take money from my retirement account?

Another good question from twitter:

Don’t raid your retirement even to put food on the table when you’re out of work. Agree or disagree?

For the most part, I agree. That is if by “raid your retirement”, you mean take an early withdrawal from a tax-deferred account like a 401(k) or 403(b). With a few exceptions like taking cash for a downpayment if you’re a first-time homebuyer, early withdrawals from these plans do far more long-term damage than short-term good. For one, you lose the principal (the amount you take out) and thus any interest you’d make on that money over the years. That could be a substantial loss if you’re in your 20s or 30s and still have two decades to pile on that interest.

Second, by taking an early withdrawal, you’ll pay a heavy penalty on top of being immediately assessed taxes on money that you otherwise wouldn’t pay until after you’ve retired, when your tax rate would be lower anyway. If you’re in dire straits now, think how you’ll feel when the government’s tax bill comes at the end of the year.

That said, if taking money from your retirement is your only option and you’re really, seriously on the verge of starving, it’s probably better to not starve. But for most people who are still capable of finding some kind of way to put food on the table (have you filed unemployment or sought part-time work??), this is an absolute, positive last-resort of all last-resorts.

Why the homebuyer tax credit should be extended

I saw this question on Twitter yesterday and had to post it: Do you think the 1st time homebuyer tax credit should be extended past November?

The credit was approved by Congress last year to try and fix the foreclosure problem. It expires soon, so Congress is debating whether to extend or even expand it to a $15,000 credit.

My answer is it should be extended for another year. Here’s why: though some are optimistic the recession is ending, we can’t afford another “-less” recovery — as in “job-less” or “homebuyer-less”. The economy needs housing stability to be really strong and that’s not possible until people have jobs again. Employment will likely be one of the last things to recover, so without help, people still won’t be making major purchases like homes.

Note to haters: I’m NOT suggesting that the government subsidize home purchases for the unemployed. My point is that average people don’t judge the economy’s strength like economists do; we go by what we see in our checkbooks and what’s happening around us. If a lot of my friends are still out of work or being laid off, I’m not likely to be comfortable borrowing a few hundred grand for a new crib.

On the other hand, the one good thing about the recession is that it caused working people to re-evaluate their financial habits. I believe a year from now, many people who weren’t previously able to save enough for a down payment and to clean up their credit will have done so, and at that point there won’t be a real need for an $8,000 or $15,000 tax credit anymore.

But that’s a year from now. Until then, I fear for people like my friend who’s home in suburban Cincy has lagged on the market for more than a year without a single offer, despite repeated price drops and an attempted short sale. Congress should renew the credit.

If I’m paying off my credit card; can Ann Minch bail out on hers?

This morning I made the penultimate (next-to-last) payment on my credit card, a $176.23 testament to beating the debt monster I’ve been carrying in my wallet since college. I’m quite proud of myself for the obvious reasons (a PF writer with a mountain of unsecured debt is not a good look; looking forward to that TV that’s been at the top of my ‘reward yourself’ list for three years) and the not-so-obvious (freeing up cash flow for investments, savings and a sprucing up of the crib that is in great demand from certain quarters).

But my fortune at being disciplined and financially stable enough to pay off my Visa makes me consider the millions of people in the US who are neither as disciplined nor as fortunate; people like Ann Minch, who the HuffPost profiled for her refusal to pay off a Bank of America credit card because, she says, they’ve gone too far in jacking up her rates. Here’s Minch on video talking about her “debtors revolt”:

Is Minch right? Should we have the right to just say “screw you” to lenders who are treating us unfairly, or is this the rant of someone who made irresponsible choices with credit and needs to do what I did and just pay up?

Should I sue my condo association?

I received this question via email:

Hi Keith, I have a question regarding a condo association. We have recently experienced a building fire and are now all displaced. The condo association is requiring all owners to continue to pay monthly assessments. Is this legal? We have been told that we will not be able to live in the building for one year. The building has 80 plus units, imagine all of that money not being used! Help! Do we have any grounds to sue for these assessments back? Any input will be greatly appreciated. I have no where to turn. Also, any suggestions on how we, the homeowners, can get the ball moving? It has been 3 months since the fire and no work has been started. We are all worried that our individual insurance will run out before the building is finished, and then what? By the way, our condo association is not pleased that we are contemplating the possibility of litigation.

Thank you for your assistance

Since I’m not a lawyer and I’m assuming the reader (who didn’t want her name used) isn’t either, my first and best piece of advice is that she needs to consult an attorney before proceeding with anything. Litigation may or may not be a good option, but qualified legal advice is certainly a great option.

One thing to remember is that as an owner, you are a member of the condo association and technically part of your building’s management. In other words, if you brought suit against the association, you’d in part be suing yourself.

Otherwise, I wouldn’t necessarily assume that your condo fees aren’t being used. The association must continue to operate after a catastrophe like a fire. Expenses like filing insurance claims, getting estimates and yes, legal fees, have to be incurred whether you’re living in the building or not. Look into what kind of cash reserves your association has and what kind of insurance policy as well. That will be important.

Good luck.

Credit card debt almost gone

If you’ve been following me for a while, you know I’m a big advocate of getting rid of any and all credit card debt. While it continues to be the bane of most Americans’ financial existence, it’s particularly crippling to young people who are just starting out in their careers and families.

So as to lead by example, I’ve been keeping tabs — publicly, on how my quest to get rid of more than $8,000 in credit card debt has gone since last year and today I’m happy to report that the magic number is down to a mere $679.45!

No secrets, no tricks, no gimmicks or TV commercials, just common sense budgeting and consumer discipline is all it took. And even though a trip to Florida (for business) and school shopping for my son were a setback in August (I was supposed to pay the whole thing off last month but wound up adding more than $700 to the balance); I used the same discipline to quickly pay every penny off and keep the balance right where it is. $679.45.

Can’t wait till the first week of Oct. to blog/tweet that zero balance.

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All you can fly for $599 on JetBlue

If you’re like me you’re both disciplined with your cash and love to travel, which means you know that the two can be in conflict with each other. Enter JetBlue (which along with Southwest is my fav airline), which is selling the airline equivalent of a monthly bus pass: $599 gets you all you can fly between Sept. 8 and Oct. 8.

I haven’t yet read the fine print but on the surface it sounds like a great deal, provided you live in a JetBlue city and will fly more than $600 worth in the next month. It could be an even better deal if JetBlue’s competitors match them; airlines are a copycat business and usually what one does with fares, the others will do, too. If other airlines are inclined, we’ll probably know no later than Monday.

Back from hiatus

OK, so it’s not a full re-launch like I promised. But after a busy summer, I figured too much time had gone by and it’s time to get back in the groove. So while we haven’t been redesigned just yet, there are a few changes:

• From now on, I’m going to try to keep posts in one of a few categories: personal finance, work & career and consumer/spending.
• Tags: I’ll still use multiple tags for each post, but every post will include at least one of those categories from above in order to make them easier for you to find. So for example, if I’m writing about a change that will affect Visa card users, I’ll tag it “credit cards, visa, consumer/spending”.
• Also, I’m making the blog more visually appealing by using a photo next to every post.

I hope you enjoy.