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As Consumers: We’ve Got the Power

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I often get e-mails and feedback from people frustrated with bad service, high rates, or rip-off fees.

But you have to believe that you and me as customers really do have the ultimate power. We often feel there’s nothing we can do about fees, charges, interest rates, or really bad customer service. But that’s not true at all. You have total power to fire any company you choose, and that’s the best and ultimate power of all.

One of the most powerful stories, which is now being heard around the world, is of a Halifax musician. I can relate to this story and my personal horror stories with this company. It’s from a musician by the name of Dave Carroll.

Dave flew on a United Airlines flight out of Halifax. When he got his guitar from checked baggage, it was damaged. He filed a report, and did what he was told to do. But United told him: too bad – they were not covering the damage to his guitar.

Well, Dave wasn’t done – AND he’s a musician. He proceeded to actually write a song called: United breaks guitars. But get this: He posted his song on You Tube (here is the link: http://www.youtube.com/watch?v=5YGc4zOqozo&feature=fvst ). So far, this video has been viewed more than FIVE MILLION TIMES.

At about two million views, United had a change of heart and contacted Dave to pay for a new guitar. Too late, Dave told them – it’s been two years, but did tell them they could donate the money to charity.

Another Canadian story is a web site on twitter where Canadians can vent their frustration at banks and their service, fees, or the likes, or just give others a heads-up on some bad practices. It’s been set up by ING Direct, the 7th largest company in the world, and a great alternative to the no-service banks, in addition to credit unions.

Sadly, ING takes out the specific bank, because they do not want to appear to be one bank knocking another. But all the information is there, ranging from a petition to venting and a number of polls. You can access it at: www.fairfees.ca

The Financial Times of London did an extensive survey asking who we actually trust. And for 92% of us it’s word of mouth from friends, associates, or colleagues. That compares to around 60% for traditional advertising.

The lesson is that a companies’ image is not what they it is, but what real people experience in the real world and spread through word of mouth.

Are We Gaining Ground or Going Broke?

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In a recent survey, 71% of respondents felt that their standard of living would be lower coming out of the current recession.

What? I was quite shocked when I read that. But to start with, what is a lower standard of living? Is it less income? Is it less cash flow to buy all kinds of stuff? I would bet, for the majority of people, those two make up majority of the responses.

But does our standard of living decrease when we cannot buy a new iPod every year? Are we somehow deprived when we cannot afford to go out for dinner twice a week, or afford the payments on a new car every three or four years?

How many of us are confusing consumer spending with wealth building? How many would take a cut in pay, if we were assured we would have more savings, a growing RRSP, and at least an emergency savings account? All of those build wealth, whereas our spending is a wealth robber!

Is our standard of living somehow affected when we DON’T drive a new car? I would bet for most people that may be their thinking. But isn’t it exactly backwards? If we drive a new car, we now have a big payment going out the door, and our standard of living decreases exactly BECAUSE we have this new car to finance! So is someone’s standard of living better or worse when they can bank a ton of money by not having car payments?

I ran into a lady recently, who really wanted some help in getting her monthly expenses under control. When I asked her how much a month she wanted to save, she didn’t have a number in mind at all. Well, isn’t that kind of like getting into the car and starting to drive, with no idea where you want to go? In order to save money, you need a number – a firm goal of where you want to go and what you want to accomplish! After that, it’ll become a whole lot easier, exactly because you have a goal and a fixed plan.

But while I was talking to her, she was playing with her iPhone. When I asked what her monthly bill was for the iPhone, she became rather sheepish, and it took a bit to confess that it was around $130 a month. Yikes! Mine is around $25 a month, and it makes phone calls, too. Yet, that was something she just didn’t think she could ever do without, and proceeded to attempt to “sell me” on the cool features and gadgets. Nice try.

There is something economists refer to as our marginal propensity to consume. It’s a fancy term for saying: when we make more income, we spend more money right along with it. A $500 raise, and pretty soon, we’re spending to our new and higher income level. It works for us average people just as much as the rich. It’s how Michael Jackson earned around a billion dollars, yet died about $500 million in debt!

We need to be careful with the yardstick we use to measure our standard of living and not confuse “stuff” with wealth. For many people, their thinking is backwards: It is their stuff which reduces their wealth, and not the other way around.

Greetings from Phoenix

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For the millions of Canadians who make a trip across the border to the U.S. each year, it is certainly easy to notice some huge pain, and some big differences, in the economies of our two countries. Here are just a few things:

There are some seriously great travel deals to be had south of the border: For my holiday, I am staying at the Marriott in Scottsdale, Arizona for $28 a night. Yes, you read that right, thanks to priceline.com, and the place is still only about a third full, from what I can see.

Here in Arizona, the state legislature is actually considering selling the state capitol building and leasing it back. They’re looking to fund the current deficit. Not to put it on the debt – just the deficit. If you sell your home to pay OFF the mortgage and bills – that’s often a great deal. But we’re talking about selling to pay this year’s utility bills and payments. But then, there’ll be a lifetime of lease payments which will make the budget worse in perpetuity. That’s nuts! But that’s how many politicians think: Worry about today, because years from now, they won’t be there to deal with the mess in the future.

Coincidentally, MSNBC, which is generally a soft liberal TV network, called this mornings’ two-hour program “sticking it to the kids.” It was a show discussing the $12 trillion national debt, the $1 billion health-care proposals, and that Medicare is already in a deficit right now.

I’ll share some more insights from south of the border in the coming weeks.

When You’re In Charge of Your Own Retirement Finances

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We talk about finances all the time, and one of the biggest financial decisions is probably your retirement savings. Now, this is not a shot against the current government, but a comment about government programs overall.

There are a few things the government does really well. Included in that list is the military, foreign affairs and the passport office which is just incredibly efficient and well-run. But generally, any government programs are not very effective, and you will always, always be able to do better, and do more on your own, without waiting or hoping the government will come to your rescue. They won’t – and by the time you’re done waiting for a bailout package, or meaningful help from the government – you’ll be dead, honestly.

There is no place where that is clearer than with our Canada Pension Plan: The CPP pays a maximum of $884 to you in retirement. Let’s use this $884 maximum, even though the average pension benefit recipient gets $481.

Let’s take the lowest working person in the country. We’ll take someone who works from age 18 to age 65 and makes $2,000 a month. So this is a person who never gets a promotion, never gets a raise, and never improves on that income – someone who literally makes a small $2,000 a month throughout their entire working life.

Until retirement, every month, this person has $42.28 deducted from their pay towards CPP. The employer portion is the same, because employers match the deduction. So, for this person, every pay period, $84.56 goes towards their CPP in order to get a maximum of $884 each month after retirement. Simple math so far?

Now, if this person took that same $84 a month and invested it, even at just a 10% return over their lifetime, they would have $1,084,000! That translates to a monthly pension of $9,033! Let me say that again: Taking the same CPP deduction of someone who makes $2,000 a month for life, and investing it on their own, would have a pension of over $9,000 a month, AND he or she would leave an inheritance of over $1 million to their family.

THAT is why I want you to pay yourself first every month, and have some savings deducted right off your pay where you won’t miss it. What would you rather have? The $884 CPP, or your own $9,000 each month?

What’s the Real Cost of Your Vehicle?

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Last week, I bought a new car. No, it isn’t new, new. It is a 13-year old Buick, but with 160,000km, it’s a major upgrade from my Chrysler, which I retired after 308,000km.

Anyone who has ever read the vehicle chapter in the It’s Your Money book knows that I am not likely to buy a brand new model. No matter what the incentives, there is no chance I want to pay for the average 20 to 30% depreciation in the first year. And low-rate financing doesn’t interest me, because adding interest costs to a car makes things worse, and more costly. Even at zero percent financing, I would be giving up the alternative of a rebate, and would now have monthly payments. That isn’t going to happen, because a car payment is the biggest monthly cash flow robber, and I would always be financing something that is worth less and less each month.

For anyone who does want to consider a new vehicle, www.edmunds.com has a great calculator which estimates the true cost of ownership over the first five years. They include gas, depreciation, insurance, and a host of other factors. Before heading for the dealership, it’s well worth a trip to their site. While it is U.S. vehicle prices and costs, the comparison between vehicles alone is very insightful.

In my case, since new wasn’t really new, I was happy to just write a cheque for $2,400 for my Buick. I’ll let you know in a couple of years what it’s actually costing me.

What I did want to figure out, without attempting to be smarter than a fifth grader, or doing more than a few minutes of math, is the real cost to drive my old Chrysler. In my case, the car cost me $133 a month. That’s an amount I can live with, even though my brother is quite a bit better off than me, at $71 a month, with his old Olds Achieva!

If you believe that a vehicle is a status symbol, you are likely destined to be broke. If, however, you think of a vehicle as basic, reliable transportation, you will likely be way ahead of millions of people, financially.

First, however, you need to know what your current vehicle is costing you per month, or per km. You can easily calculate your cost below, and do send me a note if you can beat my figure, which is used as an example on the worksheet. And remember three other points which will help you to avoid making your vehicle into a money pit:

• Avoid having a finance payment on your vehicle at all costs.
• If you have one, keep the vehicle after it is paid off and re-direct the same payments to a savings account. You won’t miss the money – you’ve been paying it all these years. But now it’ll grow for you, instead of going away.
• If you are in a lease – get out. There is very little chance you will ever have any equity and all those payments are just treading water before you’ll likely be giving the vehicle back to the dealer.

Vehicle Cost to Drive:

Original cash price of the vehicle: $10,200 $__________
Or:
The total of all payments:
(add up all the monthly payments, because
this will include the interest you paid to
finance the vehicle) n/a $__________
Or:
On a lease, add the monthly payment with
taxes AND the end of lease buyout amount n/a $__________

Add the rough total of any repair bills: $ 3,600 $__________

Do not include insurance, gas, basic maintenance, such
as oil changes, tires, etc. Yes, they have to be paid, but
they won’t be too different between vehicles.

Subtract the current value of the
vehicle, or the actual sale price: $ 2,300 $__________

Equals the total cost to own: $11,500 $__________

Number of months you owned the vehicle: 86 months __________

Total km you have driven:
(That is the mileage right now, less the
mileage when you purchased the vehicle) 212,000 __________

Your cost per km: 18 cents/km __________
(Divided the total mileage you’ve
driven by the total cost to own)

Your cost per month: $133 __________
(Divide the total cost to own by the
number of months you’ve owned it)

A Lot of New Stories This Week

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Starbucks, as if they didn’t have enough problems in a recession where people aren’t interested in spending four bucks for a coffee, had a big hiccup on the May long weekend. More than one million customers who paid with credit or debit card were double charged because of a computer error. The company fixed it internally, but it’s another reason to always, always check your statements!

An old 1980’s scam is back that you should make sure you know about. It’s that you’ve won the Jamaican lottery. But you need to first pay for the transfer funds. Sorry, you didn’t win – honest, but this fraud has really taken off again. In fact, gangs in Jamaica are killing each other in fights to get the sucker and reload lists, it’s that hot.

Bankrupt General Motors is cleaning house some more. They just sold their Saab division, which apparently never ever made a dime of net profit for them. OK, and they didn’t actually sell Saab – they gave it away to a small Swedish luxury car maker.

President Obama is proposing a new consumer legislation agency in the U.S. If it passes, and that’s not a given, one big goal of the agency is that disclosure on credit cards and other products be in plain language. The goal is to have any disclosure written at a grade 11 level, one page or less, where someone can read it AND understand it in less than four minutes. Now that’s a great goal.

Have you noticed that the big no-service banks are now in the product sales business in a bigger way? In a mailer this month from the Scotiabank, I received a flyer to buy a Garmin 255 GPS. Why is the bank selling GPS systems? Their price is $300, while Amazon sells them for under $200!

Last week’s American Express rewards catalogue had something I would really really like to buy with my points: A new 2009 Elise SC sports car from Lotus. It’s 14.2 million points. You might guess I’m a little short. But I’d like to know who runs up over $14 million of charges on their American Express!

There was a survey a couple of weeks ago that should be great news: When the economy recovers: 25% of people said that they will return to their regular spending habits, but 61% said that they will stay with their reduced spending and budgeting.

Would you like to have lunch with Warren Buffet in New York? Sure, who wouldn’t! It’s a fundraiser auction for the Glide Foundation and you can bid on E-bay until this weekend. But before you log on: Last year, the price was $2.1 million! It’s for you and seven of your friends. So if you do bid: I would love to be your friend!

Poor retailer Eddie Bauer. They went bankrupt for the second time in four years last week. This time it involves about $420 million in debt. Gees, you’d think they would learn the first time that heavy borrowing doesn’t work. But then, it’s another retailer that we can learn from, because, over the long term, debt doesn’t work for us, either.

A Small Town with a Big Mortgage Mess

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Merced, California is a small town of about 80,000 people that most people have never heard of, about 140 miles SE of San Francisco that was recently profiled in Fortune Magazine.

In February this year, the unemployment rate already reached 20%. A TV reporter recently stood in front of a new subdivision at the edge of town, right on a brand new four-lane highway, and waited for 15 minutes before anybody came along at all.

In 2002-2004, mostly San Francisco speculators drove home prices up over 50% in Merced. By 2005, the sleepy small town had a median house price of $382,000. In March of 2009, that was down to $105,500. Let me say that again: The price went from $382,000 to $105,500 – that’s less than a third in four plus years!

Back in 2004 and 2005, nobody asked, questioned, or seemed to care who was going to keep buying homes at these skyrocketing prices. Or even stopped to think who could ever afford to rent them! The population hadn’t grown – it was purely speculators who were buying these houses.

But it was more like gambling, instead of investing, because these investors were never going to move into these homes. They were only looking for the quick flip and profit, mostly with an interest only mortgage just to tread water. While the price wave kept going up, these investors/speculators or gamblers were looking for the next victim in a perfectly legal ponzy scheme.

At the peak of the market, the income needed to finance one of these average priced homes would have been $120,000. Two minutes of checking would have found that the town had always had unemployment issues, and the average income in town was $35,000.

There was no chance 90% of people in town should have gotten a mortgage, and no chance anyone was ever going to pay off one of these homes. For 90% of the population, even a 40-year mortgage was never going to be affordable.
The average resident with a $35,000 income could afford a $1,000 mortgage payment. That’s 35% of their income, and that’s the typical formula. But the average home was going to be $2,100 a month just for interest payments! Who could afford that? Someone whose entire net income was going to go to interest only payments and who NEVER paid property tax, gas, never bought groceries, clothes, car insurance or had anything else to pay, because this average home was going to cost them their entire net paycheck.

What a surprise to investors and all those mortgage lenders this didn’t work out! Yes, that was sarcastic but it just shows that for a number of years, the banks didn’t care about proof of income or that nobody was going to be able to pay these payments. And no buyers seemed to care either, and they’re just as responsible for the mortgage mess.
These so-called X subdivisions are the furthest out of town. It’s the last developments at the edge of town because land was cheap there. They will be the last to recover in prices, and it’s where the most foreclosures are. Economists might be talking about a recovery soon, but I doubt it. Logic says the housing market has to stabilize and right now, the foreclosure rate is still going up and there are over 1.6 million homes that lenders haven’t even put on the market. I would say don’t hold your breath.

Six Short Stories Worth Talking About

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It turns out that all that economic happy-talk is mostly that – talk. The U.S. Federal Reserve just released the minutes from their last meeting, and don’t really see much light – just more tunnel. They now expect the economy to shrink by over 2% this year and don’t see much improvement in consumer spending. That’s something I said for two months. About 95% of people get a tax refund this time of the year. Of course consumer spending looks good in March and April. But that’s not a trend.

Newsweek actually ran a story a few weeks ago with the headline: Stop Saving Now! Here we go again, politicians and now the media telling us to spend money to help the economy. Sorry, you gotta look after yourself first, and spending money we don’t have is exactly why we’re here in the first place.

We talked a few weeks ago that for us, just like businesses, debt is a house of cards that won’t last forever. By now, we’ve all heard the stories of the Phoenix Coyotes bankruptcy. The NHL team had over $80 million in debt, and was losing $30 million a year. That’s on top of the City of Glendale, where the Coyotes play, who borrowed $180 million to help build the arena! It’s another example of a business model based on debt that doesn’t work.

If you thought you’d heard of everything in the world of internet dating, think again. There is now a website, creditscoredating.com, where you’ll find dates based on your credit rating. Yes, this site does believe that romance and a good credit score equal success. I’m not sure how or why, but NOW maybe you’ve heard it all – for a while at least. I’m single but someone’s credit rating isn’t going to attract me to someone – sorry.

In this recession, our definition of what we think of as necessities versus luxury items is rapidly changing from three years ago. A Pew Research poll from April shows that our finances definitely influence what’s a must have, instead of a want-to-have:
We think of necessities as a home computer, high speed internet and our cell phone.
But what’s now considered luxury items include microwaves, televisions, dishwashers, and air conditioning.

No More Lineups?
IBM, and the grocery chain, Giant Foods, in the Mid Atlantic area, have rolled out a new way to get in and out of the grocery store in one-third of their stores.
What do we do now? We load items into a basket. Line up at the cash register and unload everything so it can be scanned. Then everything gets re-loaded into bags.
Well, a few years from now that will be about as antiquated as a typewriter. Instead, you’ll get a small portable scanner as you enter the store. Just pick what you’re buying off the shelf and scan it. The scanner will show the price of the item and keep a running total of what you’re purchasing. Put everything you’re buying into a bag, and walk out of the store. That’s it! The total will be debited right out of your bank account, or off your credit card – whatever you have already set up with the store.

Just imagine – no more lineups, no more cashiers, no more unloading and re-packing everything. It’s literally as simple as pulling your purchases off the shelf, scanning them and getting out of there.

Producer Michael Moore, who has done documentaries on President Bush, the U.S. healthcare system and GM, is now making one about Wall Street and the meltdown. It is still unnamed, but scheduled for release in October, and you have to know it’ll be controversial.

New Credit Card Regulations Right on the Mark

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Yesterday, Finance Minister Jim Flaherty introduced a number of new measures aimed at reigning in credit card practices. Here is a rough rule of thumb: If the credit card industry and the NDP are both unhappy, the regulations strike the perfect balance.

Yes, the credit card industry is complaining that their world will end, while Jack Layton claims the Finance Minister has capitulated to the bank. No, we will not need to have a wake for card issuers, they’ll continue do just fine. And a cap on interest rates won’t, shouldn’t, and can’t happen. Just like there won’t be caps on our incomes, that no car can sell for more than $20,000, or that retailers can only sell their products at a certain maximum markup.

What the Finance Departments’ regulations do address are four major areas which will benefit all card holders in measurable ways:

1) There will be a mandatory 21 day grace period of no interest on new charges. “Credit card inflation” has seen grace periods shrink from up to 26 days down to as low as 15 over the past few years. After all, the shorter the free ride, the more profitable each account becomes.

But the new regulation goes much further: Every card will now have this grace period, even if the account had a balance the previous month. What more than three-quarters of people don’t realize is that they never did have any grace period if they did not have a zero balance the previous month! Years ago, card issuers took that free ride away. It was “use it or lose it,” and even if the balance forward was one penny – all new charges were subject to interest immediately.

2) Credit card statements will now include a warning line that will show the length of time it will take to pay the balance in full, if making only minimum payments. And that will be a rude awakening for most people, and hopefully an incentive to step up their repayment plan.

3) Payments will now be allocated to balances in favour of card holders. Up until now, any payments were always applied to the lowest interest rate portion first. So, someone with part of a balance on a cool 1.9% rate, and a portion at 19.9%, could pay as much as possible, but not one dime would go towards the high rate portion of the balance. The new regulation now forces card issuers to apply any payments first to the higher rate balances.

4) You control your credit limit. The main goal of card issuers is to have us owing the largest amount of money and to pay the smallest payment possible. THAT is how they maximize their profit. To help their customers with this “going broke” project, limits keep increasing. After all, when the balance gets to be more than two or three months’ worth of income, there isn’t a chance someone can pay off the balance. Great for them – bad for the customer.
The new regulation requires card holders to explicitly consent to a limit increase. While a smaller limit does impact someone’s credit score, let’s be honest: If we claim we don’t let our credit card balances get beyond reasonable, why do we really need a limit of $10,000 or more?

In all these four areas, Finance Minister Flaherty found an appropriate balance of fairness to card issuers and us card holders. In fact, all four of the main regulations go beyond what the U.S. Government was recently able to pass in their “Credit Card Holder Bill of Rights.”

However, the most powerful impact Minister Flaherty can make is yet to come in the formation of the Finance Departments’ Financial Literacy Task Force, announced in the last budget. Why? Because I would bet that the vast majority of people reading the four changes will go: “I didn’t know that.” And THAT is precisely where the focus and efforts should be directed: towards financial literacy, starting in the school system where more than 85% of teenagers have never taken a course on finance or credit.

Don’t Even Think About Buying a New Vehicle Just Yet

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In January we talked about GM and Chrysler, and the possibility of bankruptcy. Right now, it’s one down and one to go, as I believe a GM bankruptcy is probably just weeks away. GM is working on a June 1st deadline to eliminate $27 billion of bondholder debt and come up with a new labour agreement or they’ll be pushed into bankruptcy.

For six months now, there’s been a cry that we can’t let them go bankrupt, because it would lose a gazillion jobs and end car manufacturing. I said then, and it’s obviously true, that the fear tactics were and are nonsense. Major changes were going to happen – with our without a bankruptcy.

Even GM has started to terminate dealers, shutting down production for months at a time, and laying off people. That has nothing to do with the possibility of bankruptcy. It has everything to do with a business model that’s not working! When the foundation of your house is collapsing is not the time to put in new windows, or paint the deck.

GM wants to close one out of every six dealers in the U.S., and get from 6,000 down to 3,600 by the end of next year. In Canada, the plan is to go from 700 down to 300. They call it a dealer rationalization plan, and the termination letters are expected to go out the end of this month.
If you do have the cash to buy a new vehicle, it is critical that you hold off on your purchase for another month or so. If not, you may be losing out on a huge amount of money.

Right now, the U.S. House of Representatives has passed a junker rebate program, and it is now in the Senate for consideration. The program is designed to get old junkers off the road and supply a rebate of up to $4,500 towards a new vehicle purchase that is more fuel efficient.

If the trend of Canada matching U.S. programs holds true, buying right now would cost you a 20 to 30% first year depreciation, and you’d miss out on that huge rebate of up to $4,500.
The U.S. government claims this is to promote fuel efficiency. Don’t believe that – it’s purely to boost car sales. For anyone trading a pickup, they only need to buy something that gets two more miles to the gallon to qualify for the maximum $4,500 rebate. Even Hummers just need to be traded for something that gets five miles per gallon more. That’s not fuel efficiency – that’s a sales promotion.

If you’re in the market for a new vehicle:
• Hold off until this program is in place or there is a clear decision that Canada won’t match it.
• Pay cash for your new vehicle, or better yet, buy a one or two year old that has some warranty left to avoid the new car depreciation
• If you’re going to ignore the “pay cash” advice, never finance a vehicle for more than four years.
• Never ever make the buying and financing decision on the same day. You’ll need to know the rebate that’s available and compare it to the low-rate finance offer. More times than not, you’ll be better off, financially, taking the cash rebate off the price and financing it with the credit union.

Hold off, too, if you’re considering a one or two year old model right now. When the new program becomes available, it not only drops the price of new vehicles, it also drops the value of one and two year old models about the same amount!