Friday, June 26, 2020

Talk Money to Me

The best financial advice I’ve heard sounds impossible to most people.  To reach these people, you have to offer them small improvements to how they handle their finances, and you have to avoid making them feel bad about their past choices.  This is the approach Kelley Keehn takes in her book Talk Money to Me: Save Well, Spend Some, and Feel Good about Your Money.

The best car advice I know is to pay cash for cars.  The financial benefits of saving up for cars and buying modest cars are enormous.  However, most people think this is impossible.  And once they’ve built a lifestyle with debt, paying cash for a car may well be impossible.  Keehn’s focus is on steering her readers to doing research on cars and car financing before entering a showroom.  This will have her readers making somewhat less financially damaging car choices.  So, she’s looking to help people a little with advice they might follow instead of giving great advice that few will follow.

A more extreme example of good but useless advice is to not be a shopaholic.  Keehn offers practical steps to spending less money while scratching the shopping itch.  The book covers several other areas with advice designed to steer people to better choices.

Keehn mentions an interesting issue that never occurred to me.  As companies gather information about our spending histories, we could be forced to share these spending histories.  For example, we could be forced to share our spending history at the U.S. border to see if we’ve ever bought cannabis.

On the subject of asset allocation, Keehn treats your career and future income as a component of your portfolio.  How steady your income is affects how you should invest the rest of your money.  One caution I’d add is that we tend to underestimate how risky future income really is.  Few jobs and careers are as safe as people think they are.

There are a number of details in the book that I found confusing or where I disagreed.  On credit reports: “If you order a free report …, your score will not be listed, so it won’t be as useful; I’d suggest always paying for the full report.”  I think it’s better to learn how elements of your credit history affect your score, and work on improving your financial habits.  As your credit report improves, your score will take care of itself.  I don’t see the need to pay to see a score.

On making credit card and line of credit payments, I found “Always pay the minimum every month” jarring, until I realized the intended meaning was “at least the minimum.”  Apparently, some people think that if they make a payment of double the minimum one month, they can skip the next payment.  As the book explains, it doesn’t work this way.

Among the ways of holding some available cash, Keehn includes money market mutual funds.  These aren’t as safe as they seem.  A high-yield savings account is a better idea.

Despite repeated mentions of the importance of an emergency fund, we get this advice: “If you’re able, then it makes sense to invest those funds and rely on a line of credit if an emergency were to arise.”  Just two pages later we get “Your lender can even take your credit away entirely if your credit score drops dramatically.”  Counting on borrowing money in an emergency is how many people get themselves into big debt troubles.  Emergency funds matter.

In a checklist for different types of insurance, the book includes “Do you have insurance on your credit cards, and is it right for you?”  Naive readers could be left thinking that they should get credit card insurance.  In reality, the question should be whether you’ve made sure you don’t have credit card insurance.

The book refers to the “miss a payment” option on a mortgage as a “handy feature.”  This feature of a mortgage feels more like another tool for banks to keep people permanently in debt.

In answering the question about houses “What can you afford?”, the book goes through the usual explanations of gross and total debt service ratios.  Unfortunately, these ratios leave people thinking they can buy a far more expensive  house than is best for them.  Banks lend money without caring whether you’ll end up house poor.  It isn’t until a few pages later that the book mentions that you might not want to borrow as much as a bank will lend on a mortgage.

On the subject of mortgage insurance, the book fails to mention post-claims underwriting.  The insurance company doesn’t check if you qualify for insurance until after you’re dead.  Not knowing if you’re really covered is a huge negative for mortgage insurance.

Numbers in a few places didn’t seem to make sense.  In one place, the annual interest rate on a payday loan is over 500%, but only 47.71% in another place.  In another figure illustrating costs on a 14-day $300 loan, the figures for lines of credit, overdraft protection, and a credit card cash advance imply annual interest rates of 50%, 62%, and 64%, respectively.  Even if we make the loan period a month, the annual percentages are 23%, 29%, and 30%, which still seem too high.

The book includes a glossary with some definitions that seem strange.  For example, a dividend is “A financial bonus for investing in a company (when you buy a preferred share).”  This seems like an attempt to write for the masses, but it didn’t work out well.

This book is useful for helping people who don’t handle money very well, which is most people.  I found a number of things that seemed odd, but none are central to the mission of giving people practical tips for improving their finances.  For anyone looking for financial advice that doesn’t seem too extreme, this book fits the bill.

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