A Rational Limit to Saving

Trawling The Consumerist for something to write about I was excited to find a post entitled An Argument For 401(k) Minimizing. It turned out to be about a post at Punch Debt in the Face that, at most, argues against 401(k) maximizing. Still, that’s something.Blackboard Lecturing Crop

I like Punch Debt in the Face. Although I am clearly at least a generation too  old to fully relate, and the layout still reminds me of a ransom note, the Twitter graphic alone is worth the click. And the blog’s author, Debt Ninja, is endearingly hostile to conventional wisdom and insists on doing his own math. My kinda guy.

Debt Ninja’s post contains what ought to be a mundane discussion of reducing his 401(k) contribution from 8% to 5%. He also contributes to a Roth IRA and makes the argument that being a very rich 60 year-old in exchange for being an impoverished 25 to 59 year-old is not a good deal.

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Now Suze Hates Cards

Saturday night before last, Suze Orman issued yet another directive to her followers about credit cards. Readers may recall that back in March Suze told Credit-cards Lotus Headus that we should make only the minimum payments on our cards until we had an emergency fund equal to eight months’ expenses built up. That inspired one of my many unsuccessful business ideas.

Well, March was a long time ago. Stock and house prices are up, the recession has ended, and it even looks like the unemployment rate has crested. So I guess it is time for Suze to change strategies once again. This time the idea is to drop the cards. "Let’s go back to the times when you literally paid cash for everything. That’s right. Cash. Stop using your credit cards altogether.”

I don’t watch Orman’s show. I found out about this from a post at SmartSpending, as well as a post at Get Rich Slowly. That post, written by our friend Baker from ManvsDebt, has the virtue of an embedded video of Orman challenging us to spend only in cash. You can even sign up to join her Back to Cash Movement.

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I Will Guarantee Your Treasury Bonds

I have managed to go since August 20th without mentioning Brett Arends of the Wall Street Journal. It hasn’t been easy, but for 59 posts I have stayed on the wagon. Until now. Arends’ Wednesday column was just too strong a temptation. It had the siren-call title of "Are Your U.S. Treasury Bonds Safe?" How am I supposed to ignore that? I US-Treasury-Smallam only human.

Needless to say, the column lacked a yes/no answer to its headline. Sure, "Standard financial theory defines "the risk-free rate of return" on money as the rate of return you can earn on Treasurys" but this time is different: the government is now in the control of politicians who like to spend money and don’t like to raise taxes.

But as the U.S. government piles borrowing atop more borrowing, it begs a financial question that is not utterly ridiculous: Are your U.S. Treasury bonds safe?


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Pay More for Less at American Express

Investing was actually my second career. For the six years between college and B-school I wrote software. Back then, we Dilberts had a phrase we used to parody the marketing types who sold what we made. "It’s not a bug, it’s a C Cards 2 (Andres Rueda)feature!" In other words, that obvious flaw in the software is not, in fact, a mistake that makes it less useful, it is a brilliant design decision that actually makes it better and worth more to you, the customer.

I also, at this time, had an American Express card, paying, I think, $50 or $75 a year for the privilege. I honestly forget why. I think I got it while still in college under some kind of special deal. And there was this store I frequented that in those days only took Amex. Anyway, by the time I was 25 I came to my senses and cancelled the thing. They sent me a nice letter saying that if I ever came back I could still have a card that said "Member Since 1986".

So I’ve got that going for me.

I was reminded of both these things from my past by a brilliant new marketing campaign from American Express. For those of you not familiar with such things, let me explain that the conventional Amex card is not a credit card but a charge card. That is, they do not provide credit for longer than it takes them to send you a bill. You are expected to pay the full balance every month.

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Why You Haven’t Strategically Defaulted Yet

Last week The Consumerist had a post telling readers to Go Ahead, Strategically Default On Your Underwater Mortgage. This was based, more or less, on a paper from a law professor at  the University of Arizona which addressed the legitimate conundrum of why strategic defaults are not more common.

A strategic default on a mortgage is when a borrower can make the payments Upsidedown House attrb Stopmangohome but chooses not to. In other words, the borrower hands the keys over to the lender and walks away. It is important to remember that, despite much play in the media and academia, this is still a rather exotic maneuver. In order for a borrower to even begin considering such a move two things need to be true.

First, obviously, the house has to be worth a lot less than the outstanding mortgage balance. Or, in current slang, it needs to be substantially underwater. Swapping ownership of the house for extinguishing the debt is, essentially, selling the house for what is owed, and if what is owed is not meaningfully higher than what the house is worth, this would be a bad deal.

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