A few things too small for posts of their own have been cluttering up my (virtual) desk.
CreditMattersBlog today has a post on a column a few weeks ago in the Wall Street Journal by our friend Brett Arends on using your credit cards to raise money for an emergency fund. It’s a stupid as it sounds. The column, I mean, not the blog post. I have a rule not to pick on the same guy twice in a week, so I will keep from saying anything bad about Arends. I’ll just give you a link to where somebody else does it. (Note to any WSJ editors reading this: I would be happy to do Arends’ job for whatever you are paying him.)
CreditMattersBlog apparently noticed the Arends piece from a post by Liz Pullman Weston at MSN Money with the (for me) irresistible title “Why Suze Orman is Wrong – Again”. In case you missed it, good ol’ Suze put out some advice on March 1 that caused quite a buzz.
I want you to only pay the minimum due on your credit card balance and instead make it your top priority to build as much of an emergency cash fund as you can.
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I’m not against paying off mortgages. I’m not particularly in favor of it either, any more than I have a general opposition to, or support of, latex paint or front wheel drive.
Dave Ramsey is most certainly in favor of paying off your mortgage. Granted, he does consider it a special category of debt, setting it aside to be dealt with in Step 6 rather than in Step 2 with the ordinary stuff. But it’s still debt, and Ramsey takes no prisoners in his fight against that evil scourge.
Arguing against this is a little difficult because there are certainly cases and situations where paying off a mortgage is indeed the best course of action, and it is hard not to fall into the trap of framing the discussion as always vs. never rather than always vs. sometimes.
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Yesterday’s Wall Street Journal had a column by Brett Arends in which he wrote positively on a relatively esoteric strategy, namely investing in the S&P 500 index while writing (i.e. selling) call options on that index. It’s just the sort of thing that, in a different time and place, big media journalists would condemn as the foolish scheme of too-clever-by-half financial engineers.
I never know how much or how little to explain about the mechanics of financial instruments, but since I generally advise folks to steer clear of options, I will assume that a relatively long explanation of what Arends is talking about is in order. So excuse me if the next few paragraphs are painfully obvious for you.
A call option is an option to buy something at a specified price for a specified time in the future. So you might have an option to buy a share of GM stock at $5 on June 30. If on June 30 GM is trading above $5, then your option is “in the money” meaning that the ability to buy at that price is worth something. (It’s worth the difference between the current price and $5.) If it is trading for less than $5, then the option isn’t worth anything, since buying at $5 would be pointless.
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I hope everybody liked the quiz last week.
One of the questions involved reducing your real estate exposure by buying a house with a big mortgage. I wrote it intending that the right answer be that the size of the mortgage had nothing to do with your exposure to real estate, but as I entered it into the quiz template I realized that there was another argument to be made. And sure enough, somebody suggested in the comments that mortgaging a house up to its full value does reduce your exposure because you have the option of walking away from an underwater house, i.e. one that becomes worth less than the balance on the mortgage.
The idea that you can just send the keys to an upside down house to the mortgage holder (“jingle mail” or more properly “ruthless default”) and be done with it seems to have gained some popularity of late. Apparently, some people are beginning to believe that this is something special about houses. New cars that were bought on credit are usually worth less than what is owed on them at the start. Does anybody think they can reconsider the purchase after a few months and just hand it back to the dealer, no questions asked? Are houses different? Can you just mail in the keys?
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This is, as you undoubtedly know, Financial Literacy Month. (It is also, apparently, National Anxiety Month and International Guitar Month.) So to celebrate, I have prepared the following personal finance literacy quiz. And who doesn’t like quizzes?
I expect this to be relatively hard for most folks, although every question involves issues that an ordinary person might encounter in their financial lives.
I’m a little uncertain about the technology here, so if there are bugs, I apologize. Also, I assume that it will not work with RSS readers. Sorry.
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