Tuesday, May 9, 2017

Squash that advice

Every once in a while, I get to see the financial world through other people's eyes -- that is, the eyes of people who think of shopping as entertainment, who confuse spending with wealth, and who think of debt as not only normal but also necessary.  I sort of like being in my own frugal bubble most of the time, but  I also don't mind emerging every once in a while to rub elbows with non-frugalists (if that's a word).  I know that those people are out there.   I know that they mostly get along fine in their non-frugal lives.   But I didn't think that those people would masquerade as financial advisors for young adults.

And yet, I was wrong.  Last fall, N-son's squash team coach decided to do the very admirable thing (I thought) of bringing in an "expert" from a local Credit Union to give a presentation to the players on the team and their families. We got to have pizza, we "learned" about finances, and we had a Q&A at the end.  I was totally jazzed for this event, figuring it would be great to have my kids hear about the importance of financial prudence from someone other than me, for a change.  But sheesh!   If you're going to teach kids to be responsible with money, maybe you ought to have the teacher be someone who is actually responsible with money, y'know?

The "teacher" in this scenario was a relatively young person who worked at a nearby Credit Union.  She'd been provided with a script and a power point presentation, but it was clear that she didn't entirely understand the script she'd been given, especially when it came to debt.  For example, here are some of the notes I jotted down, once I realized (to my horror) what she was telling these middle/high school kids and their parents.
  • The only way to get a car is with debt, she implied. She and her husband bought a car with a 5-year loan, and her car died after three years.  “Oh well, that’s what happens!”
  • "You want to have a little bit of debt so you build up your credit card rating."
  • "Debt is just a fact of life.    Everybody has debt; I do, too!  Life happens."
  • "The average American has $40,000 of credit card debt."    (How she came up with that number, I do not know.  Nerd wallet says the average debt is $16K, but that's among American households -- not individuals -- and even then, it's only among households that have debt in the first place.  PR newswire says that, contrary to what our presenter said, one in four Americans is debt free.) 
It was not surprising, then then the rest of her presentation was . . . well . . . not exactly the kind of a presentation a Miser Mom would have given.   Her power point said that people should have an emergency account, which she translated as 
  • Get a 3-months-of-expenses savings account in place before you attack debt.
(I know that there are other reasonable people who would agree with her; I just think that attacking high-interest credit card debt is probably more urgent than putting money into a low-interest-bearing savings account, especially if building up that much of a cushion is going to take you a year or more).

Her power point presentation told her that she should urge people to think about long-term financial goals.  This advice, she translated into the following example:
  • "Our long-term goal: My husband and I want to buy a house in five years. "
(I'd have said that a 5-year plan is a medium-term goal; "long-term" goals would be more along the lines of retirement, or children's college funds, or other goals for 10+ years into the future.  If you buy a house but don't have a longer-term savings plan that includes maintenance and upkeep, you're in for a rude awakening when you start getting those repair bills).

Speaking of retirement and long-term savings, she had this to say:  
  • "They say 'Invest with mutual funds', and I guess that’s not a bad thing to do.  It’s okay to invest your money."
Ummm . . .  it's "okay" to invest money?  It's "not bad"?!?!??   This, from the person who works at a credit union?!?  

Sheesh.  What I will say about this presentation is that, when the speaker was done, the other parents started speaking up.  They emphatically told the kids that "if you rack up debt, you'll find out that there are lots of things you want to do in life that become way more expensive, or even impossible".  One of the moms told heartfelt stories about the dangers of credit card debt leading to difficulties renting a decent apartment.  I was worried that if I said anything I'd be too strident, but the other parents had no problem jumping in and starting a bit of a rant.  It was nice to find that I had compadres in the room, after all.


  1. I have regularly heard the advice about having debt to build your credit rating. I honestly do not understand that. Maybe taking out loans to improve your credit rating? But I have heard lots of people say that you should carry some CC debt to prove you can pay off debt. I always respond that paying off my CC in full each month proves I can handle debt before it even happens.

    I regularly talk about money with my students (when they bring it up -- not typically in the scope of my class). And we definitely talk about living frugally, saving money, and avoiding debt entirely. I proudly shared with my students when I paid off our 5 year car loan in just 4 months. To be fair, we took out the loan because we needed time to shift money (hadn't meant to buy the car so quickly) and not because we didn't have the money. Kids definitely need good financial role models!

    1. Maybe people are confusing the advice to "get a credit card" with "carry a balance on your credit card". ??? I actually admit I don't know all the bizarre combination of factors that goes into having a good credit rating, but I have a kick-butt high rating myself and never carried a balance. So there's one more data point.

    2. My understanding is that it's never beneficial to carry a balance.
      There are different credit scores, and different (mysterious) formulas (e.g. my citi card says my FICO is 826/900, whereas my barclay card claims it's 808/850. Neither of these is the exact formula I'll need for a mortgage, but they do soothe my ego).
      What *can* be beneficial is to A) keep the cards in active use. Netflix, at $8 (oh wait, scratch that, it's outrageously!!!!! gone up to $9 now!) a month is fine for that. That's more to avoid icky things like the card company charging a dormancy fee or closing the account than because it directly helps the score. But having more accounts that aren't used *does* help your score, so it comes up.
      B) creditors report to the credit bureaus at different times, once a month. You can't necessarily know when they'll do this. At the moment they report is what you are considered having out in revolving credit. So if you pay your credit card off *on the due date*, using the grace period, you may very well "carry a balance" as far as the credit score formula goes (even if you never pay a dime of interest let alone a late fee!). However, this counts toward your credit utilization ratio. So if you pay for your $80 electric bill each month, and you pay off your card on the due date, you have used $80 worth of your credit. On a $250 credit limit card that'll put you over the relevant 30% credit utilization ratio cutoff that the credit score factors in. If you are super anal about paying off your card every day you get a charge, you will generally avoid this issue, but if you are a heavy user of cards for rewards, it means there is actually a benefit to having a higher credit limit you never use.

      To optimize your score: get a credit card. Get one yesterday, because age of account helps.
      Get a high credit limit, and then never charge much on it, because credit utilization ratio matters.
      Do not get a weird AmEx charge card instead of a credit card. Do not use debit cards. Otherwise, it shouldn't matter which kind you pick.
      Next, get something *other* than a credit card. Get a secured loan type (e.g. car or mortgage) because credit "mix" helps. Make regular payments. One thing I don't know is how long you really need to keep a loan. But if you're going to prove you can pay a loan, it's much better to do this and not mess around with credit cards.

  2. I know what you mean. We stopped going to the high school "College Financial Aid" nights when we realized that all they told us what to fill out the FAFSA and then get a student loan. Nothing about scholarships, nothing about work-study, nothing about working hard and saving money towards tuition. With literally millions of dollars out there in scholarship money it was astonishing that the counselor didn't explain where to look and how to apply. Crazy!

    1. Sheesh. One of the things that's hard about teaching personal finance is the same thing that's hard about teaching math: where do you start? It depends a lot on what people already know. So some people need to hear "pay down debt", while others need to hear "target date equity funds will probably outperform a hand-picked stock portfolio". But to not mention scholarships or work study opportunities when thinking about college, that's truly a stunning omission.