Activism – Tippyfi Financial Education

The Two Credit Card Trick

04/30/2019 1 Comment Richard Thripp Activism, Credit Cards

When juggling credit card debt, a hidden “gotcha” is that the credit card companies have two classes of customers:

1. Those who pay in full each and every month.
2. Those who carry a balance (even $1!) from month to month.

Card issuers word their cardmember agreements so that those in Class 1 enjoy an interest-free loan each and every month, but those in Class 2 are hit with interest charges each day from the date a charge is made to the date it is paid off.

To avoid this “gotcha,” use the Two Credit Card Trick: On your card with the $5,000 balance, stop making new charges, but keep paying as much as you can each month. Use a new credit card (or dust one off from the sock drawer) for all your new purchases going forward, being sure to pay the full statement balance by the due date each and every month. This way, you’ll be enjoying an interest-free loan each month for the second card, while avoiding needless interest charges on the card you are carrying a balance on.

Another way to further capitalize on this trick is to do a balance transfer to a new credit card with a promotional 0% APR. The Chase Slate card is a great card to do this on, because it offers 0% APR for 15 months on balance transfers and is the only major credit card to offer this with no balance transfer fee (if the balance transfer is completed within the first 60 days of card membership). Many cards charge a one-time fee of up to 5% on the transfer—$250 for our $5,000 balance. I am not going to link to Chase here but you can find this via Google (note that they only approve applicants who have had four or fewer cards opened in the past 24 months).

A pitfall of the two card trick is that it could lead to bad financial outcomes if you do not control your spending behavior. Research shows that people spend more when using plastic instead of cash and coins. Mathematically, it will certainly lower your finance charges as compared with the alternative of continuing to use just one credit card on which you revolve a balance. However, this is of little benefit if opening or using a second card causes you to spend more. One must examine one’s underlying issues relating to income, cashflow, expenses, and behavior to rein in debt. Avoiding interest-bearing debts is ideal, and one can certainly look to many examples of people who managed to do so when it seems they should not have been able to do so, although on the other hand there are examples of people who have no way out of the debt trap such as Chase Bank’s recent ridiculous behavior of blaming Americans for their financial problems while looting the country (and earth) to the tune of trillions of dollars. Financial literacy does nothing for one’s financial wellness when in an intractable financial situation.

Nonetheless, there is no prize, award, or recognition for succeeding despite having come from a background of disadvantage, nor much compassion or remuneration given as reparations for it, regardless of one’s putative successfulness or lack thereof. There is also no penalty for people from backgrounds of privilege who present themselves as paragons of ingenuity and Protestant work ethic despite having accomplished zero when adjusted for the level of difficulty they have played the game of life at. Distilled, this is the satirical “blame yourself” movement I presented in a 2016 piece, where people are coerced into taking on a mantle of shame for the ramifications they face in life due to injustices committed by others (e.g., the 1%). The rich prod the poor by demanding to know, “What are you doing to help?,” whilst they fly their private jet a handful of miles to avoid a little bit of traffic (Elon Musk), or write songs about ostentatious frittering of wealth (Ariana Grande) rather than doing anything that would be even a little helpful to anyone. All the while, they remain indignant and entitled about it.

I like to look to the hyper-financially educated on websites such as Mr. Money Mustache and Bogleheads for what financial literacy and capability can do for someone even from a humble background (potentially). However, I recognize that such examples are still laden with privilege, hypocrisy, and survivorship bias, and pointing them out invites delusional lines of reasoning whereby the poor are blamed for their poverty while the wealthy are praised for presumed effort and ingenuity when in fact they are brazen murderers. In fact, I am one too. No coalescent discussion of any human issue, including financial literacy and education, can omit climate change. By flying across the globe, as I have brazenly done and in fact misguidedly praised as an antidote to materialism, I quite literally may as well be killing people in 2150 or even 2075 from climate-related calamities that will disproportionately kill off the poor and disadvantaged.

When, then, do the wealthy, even as they accumulate more and more grotesque quantities of wealthy, continue in 2019 in the age of information and the Internet to be entitled, ostentatious, and indignant that they bear no responsibility for the harm they are causing others via their behavior? How can the bulk of the world’s wealth, or even a sliver, for that matter, not be being dedicated toward ameliorating human-caused climate change? And, what does all this have to do with the Two Credit Card Trick? Well, if you can’t see the forest for the trees, then you are lost.

Combating Investing Profiteers and Their Propaganda Against Low-Cost Investing

01/27/2019 1 Comment Richard Thripp Activism, Investing

No one knew better than Jack Bogle (1929–2019) that the interests of the financial industry are diametrically opposed to the interests of the common person. Low-cost index-tracking funds now comprise about 20% of the market for U.S. stock mutual funds, and this share continues to grow. However, Americans’ financial and investing literacy remains low, and those seeking out information are overwhelmed by propaganda from profiteers, which makes it hard to discern the truth.

John Paulson, a wealthy profiteer in the hedge fund industry, surprisingly shared some truth in a recent Bloomberg Opinion column:

“The other thing I love about this business, when I say why I went into this business, is the fee structure,” he [Paulson] added, detailing how much he could make in charging a 1 per cent management fee and 20 per cent performance fee on different levels of assets.

“The more money you manage, the greater the fees,” he said. “Now ultimately we managed over $30bn, and there were years our returns were well in excess of 20 per cent, so to get to those levels, the fees just pour out of the sky.”

The column author (Matt Levine) continues, elaborating on how Paulson profited even while screwing over his investors:

Also if you start losing money you don’t have to give the fees back: “The 63-year-old money manager said that almost 75 to 80 per cent of the money managed by Paulson & Co was now his own capital, reflecting years of disappointing returns that have driven outside investors away”—though also reflecting earlier years of huge returns and huge fees that allowed him to have billions of dollars of his own money in his fund—and “he would consider turning his firm Paulson & Co into a family office ‘in the next year or two.'”

Hedge funds aren’t even open to the ordinary investor; you must be an accredited investor with at least a $1 million net worth excluding one’s home, or income over $200,000 in the past few years. Supposedly, hedge funds are where “smart money” goes; accredited investors are sometimes referred to as “sophisticated” investors, such as in Australian law. This is ironic, because it is foolish to pay 1% per year of portfolio value plus 20% of gains, when active investors are demonstrably incompetent. Above, we see that Paulson had a few good years early on causing foolish investors to pour into his fund, followed by many years of terrible returns that led them to pull out. All along, he collected about 1% per year in management fees plus about 20% of investors’ gains during good years, while losing nothing in bad years. This is highway robbery.

Vanguard, the company Jack Bogle founded, fought profiteering on multiple fronts. They fought against “load fees,” which are sales commissions for stockbrokers that come as a percentage of invested assets. Up until the 1970s, no-load mutual funds were almost unheard of, and it was common for brokers to get as much as 5% right off the top—if you put in $10,000, only $9,500 got invested and they kept $500, immediately kneecapping your returns. Now, investments with load fees are the abnormality. And, although Vanguard has always offered actively managed funds, they pioneered index-tracking funds with much lower fees. Tracking an index, such as the S&P 500, has shown to be consistently better than active management. Most fund managers produce returns that are lower than an index fund. When you add sky-high fees on top of this, you are guaranteed to lose money. Conway (2014) writes in a Barron’s article:

How hard it is to predict who will do well. This isn’t part of the latest S&P study, but the index maker’s previous work on the subject suggests there’s no statistically significant persistence among funds in the highest-performing groups. There’s no new evidence suggesting that’s changed.

When you look at your 401(k) plan, you will almost certainly see investment options that don’t belong there. There are almost assuredly funds in there that charge fees of 1% per year or more, and sometimes a low-cost index fund, with an annual fee of about 0.05%, isn’t even available. The profiteers’ reach is deep, and it extends even to our teachers who are scammed by 403(b) annuity plans, in cahoots with lawmakers and administrators who partner with profiteering companies to only put bad investment options on the table.

Online, the propaganda against low-cost investing is widespread. The industry reaps massive profits while creating little value, not unlike the tobacco companies. They have a lot to lose. This is why there are daily propoganda pieces in the news saying things like “if everyone invested in index funds, it would be a catastrophe” and stuffing Wikipedia pages with propaganda such as “many investors also find it difficult to beat the performance of the S&P 500 Index due to their lack of experience/skill in investing” and purporting that unsuccessful active managers are actually “closet indexers,” justifying high fees while failing to deliver the product (active management) that purportedly produces profits.

In truth, active management is a nothingburger. You pay high fees and get lower returns than an index fund. It’s sort of like going to a bank and paying $200 to arrange to be mugged in the parking lot.

Even without sales commissions, financial advisors and other financial professionals still have plenty of ways to profiteer. They do this via an annual or quarterly fee assessed against “assets under management” that you have made them custodian of, which is usually around 1% per year. Framing this as 1% per year actually does a disservice to the investor, however. The stock market only returns about 10% per year as a long-term average, before inflation which is roughly 3%. One percent of 10% is actually a 10% fee, and if adjusting for inflation, a 14% fee. Would you pay a real estate agent 14%?

On top of this, the investments financial advisors place you in, even if index funds, likely do not have the 0.05% or even lower annual fees that are offered by Vanguard, Fidelity, Charles Schwab, and others. You might see your money in a fund that is substantially similar yet has a 0.5% annual fee, with your advisor receiving a cut from the affiliated company. If you can expect a long-term average of 7% in real returns before fees, then 1.5% of fund and advisor fees gobbles up 21.4% of these returns. Each and every year.

The FINRA foundation’s recent study of Millennial investors found that Millennials are actually eager to work face-to-face with financial professionals rather than do-it-yourself investing or using a robo-advisor. Also, Millennials had no idea that you need substantial assets to work with a financial advisor, and they expected an advisor to take a whopping 5% of assets under management as a fee each year. Such lack of knowledge is kryptonite to achieving financial independence. Even a high income cannot compensate. “A fool and his money are soon parted,” as the saying goes. In this industry, it is not helpful that wolves masquerade as sheep and sheep do not even notice they are being eaten.

The common American does not have access to a hedge fund or even a financial advisor, yet they still have a 401(k) plan available, chock full of bad investment options. There might only be one low-cost index fund available in their 401(k) fund menu, or even none at all. About half of Americans do not invest in stocks at all, and if they do, they don’t know that buying and holding the whole market is the best strategy. This fact is both counterintuitive and pilloried by propagandists in the financial media. To combat profiteering and propaganda by vested interests in the financial industry, financial education is key, but must be coupled with outlawing and derriding profiteering practices. A good place to start is with 403(b) plans for public school teachers. Teachers lack financial knowledge, shape the next generation’s knowledge, and are besieged with low pay, awful pension plans that no one ever gets a pension from, cringeworthy annuities masquerading as investment options, and sales representatives that stake out school cafeterias to cajole them into financial ruination. Therefore, for my forthcoming Education Ph.D. dissertation at University of Central Florida, An Investigation of Investing and Retirement Knowledge Among Preservice Teachers, I am surveying the next generation of teachers to provide (a) evidence to support reforms both nationally and locally and (b) instructional design recommendations for financial education programs.

Before Adjusting Capital Gains for Inflation, Try Interest on Savings Accounts

09/03/2018 No Comments Richard Thripp Activism

Recently, a proposal has been discussed by U.S. Treasury Secretary Mnuchin and President Trump of adjusting capital gains for inflation when it comes to taxation of those gains. This has rightly been criticized as a tax break for the rich, but what has not been widely discussed is the hypocrisy and inequity of not including savings accounts, certificates of deposits (CDs), Treasury bills and bonds, and corporate bonds, which yield “interest” instead of “capital gains,” in the inflation-adjustment proposal.

Although there are no legal restrictions preventing most Americans from investing in stocks (equities), about half do not. Reasons include more pressing financial concerns, fear of loss, and a lack of understanding of how stocks work. Therefore, adjusting capital gains for inflation will mainly be helpful to wealthier Americans.

Capital gains already have numerous tax advantages over earned income, such as:

No 15.3% payroll taxes (7.65% employee and 7.65% employer share)
If older than one year (long-term), the tax rate is much lower or even 0%
Long-term tax rate tops out much lower (20% instead of 37%) for high earners
You can choose when to incur capital gains taxes (when to sell)
Capital gains tend to be received by high-earners, who gain the most from these advantages because they are in high tax brackets

Presently, interest on savings accounts, CDs, T-bills/bonds, and corporate bonds is taxed at the same rate as earned income and short-term capital gains. Except certain corporate bonds, these types of investments do not yield any capital gains, but rather yield interest only. Thus, none of the above benefits of capitals gains apply. Americans, especially those with lower incomes and net worths, are more likely to put their money in savings accounts, CDs, and Treasury securities rather than stocks. Therefore, they miss out not only on the capital appreciation power of stocks, which is much greater than low-risk assets over the long term; they also miss out on preferential tax treatment that already exists. To add an inflation adjustment on top of this is ridiculous.

Some may quip that stocks do pay something similar to interest, in the form of dividends, which are taxed like earned income and short-term capital gains. This is false; for most “buy and hold” investors in index funds and many individual stocks, the vast majority of dividends are treated as “qualified” dividends which are treated not like interest, but as long-term capital gains. Again, investors in stocks get preferential treatment.

Each year, banks, the U.S. Treasury, and other firms must issue Form 1099-INT to report how much interest income you received in the prior tax year on savings accounts, CDs, T-bills/bonds, et cetera. However, we should not forget that savings accounts typically pay low interest rates—sometimes as little as 0.03% annual percentage yield (APY), with the best accounts paying no more than about 2.0% APY. If we were to adjust savings interest for inflation, which is around 2.4% presently (or 2.9% including food and energy), this would be a loss rather than income! If we adjust capital gains for inflation, shouldn’t we adjust interest too?

Logisitcal challenges aside, if we were to go a step further, offering an above-the-line deduction (like we do with student loan interest) for lost purchasing power on Americans’ savings, capital gains would still be far too advantaged.

Due to the unfairness of how interest is treated, with no consideration of inflation, some have dubbed saving money a suckers’ game. Although a majority of Americans do not understand this, investing, on the other hand, is a winners’ game. The prudent step would be for the government to begin adjusting interest income for inflation but not capital gains. Even then, investors would still be receiving highly preferential treatment as compared with savers.

The above article is also posted on Thripp.com.