Are you on track?

When you’re face to face with an adorable animal, it’s easy to fall in love.  You’re not thinking about what it will cost to feed, train and groom that little (or large) ball of love.  Let alone what your vet bills, monthly meds and the occasional pet sitter will cost.

My colleague Kathleen Stevens of Balliett Financial Services had a great story about choosing her Newfoundland.  From start to finish, she did her homework, researching breeds, visiting dog shows and asking questions.

To drive home the importance of doing your homework, Kathleen cites a recent article in the New York Times that says that between five and seven million pets end up in shelters each year.  The responsibilities – and cost – of pet ownership are a big part of the reason.

So stay away from temptation until you’re sure you know what your long-term commitment looks like.  Kathleen can help you figure it out.

From buying a pet to moving to a new retirement community, make sure you are planning for all of your financial goals with professional help. Contact us today, subscribe to our award-winning monthly  e-letter, “The View From the Porch,” or check out our Resources page for more info.

Know anyone who might be a potential victim of incompetent, unethical or illegal financial planning practices?

Many people, especially the elderly, turn to financial advisors to guide them to the best choices for their financial situations. Not all of these professionals, however, really have the client’s best interests in mind. The Federal Citizen Information Center, run by the federal government, recently added this CFP Board publication, Consumer Guide to Financial Self-Defense, to its catalog.

Learn to recognize the unscrupulous ones and protect yourself, friends, and family from their pitches.  The catalog can be found at: http://www.pueblo.gsa.gov.

After my recent trip to India, where garbage is omnipresent (see my travel blog at hollysholidays.wordpress.com if bicycling through developing countries with no physical preparation is of interest to you), I’ve been making comparisons about “here” and “there.”  Although India has three times as many people, and very few landfills that I could tell, I would wager we have a LOT more garbage.

Today is garbage pickup day in my neighborhood.  This morning on my walk, I was amazed at how many people’s garbage overflowed the giant bins the city provides for regular garbage, and how many had two or three full-to-overflowing recycle bins on top of that.  (By the way, are orange juice cartons and cat food cans really recyclable?)

I suppose if I wanted to be a true economic scientist about it, I would have picked through the garbage to analyze it.  But I refused. (Maybe that’s why I don’t have a Ph.D. )  Nevertheless, I couldn’t help but notice large quantities of cardboard boxes.  You know, the kind that you get when you shop online?  Maybe it’s Christmas boxes, or maybe it’s after-Christmas-sale boxes, but, regardless, the impression I kept getting was, “What in the world are all these people buying in these boxes??”  As I was wondering that, a UPS truck passed me on the dead quiet street.  To deliver more cardboard boxes.  Which will end up in the garbage.

Our curbside pickup in the city comes twice a week.  Most weeks, my husband and I don’t use the recycle bin and we barely have one bag of garbage.   I’m guessing that’s because we don’t buy very much.  Ironic, isn’t it?  When we buy more, we throw away more.

I’m torn. As an economist, I should be happy about overflowing garbage bins.  We need the consumer-driven economic activity. But, as a personal financial professional, I have to ask, do we need all the stuff in the boxes?  Where are we putting all the stuff?  What do our closets look like compared to an Indian’s?    Is all this stuff making us any happier and producing a more fulfilling life than a newly-middle-class Indian who just got their first cellphone, a member of the first generation in centuries that doesn’t go to bed hungry on a regular basis?

I didn’t see very many cardboard boxes in India.  Mostly I saw candy wrappers and newspapers left on the side of the road for the goats.  That’s what I call India’s recycling program.

Hmm, I wonder.  Do goats eat cardboard boxes?

Every year, financial magazines and newspapers come out with a “Best Mutual Funds” issue. They pick which ones have the best 1, 5, and 10 year track records. They print flattering reports on the fund managers and their philosophies. For once, then, I was surprised to see Fortune magazine, in December 2009, went back and analyzed what percentage of actively managed funds actually beat their assigned index. In other words, what percentage of the time would investors have been better off by just buying an index fund instead of picking one of those profiled in the magazines? A recap of the results, compiled by S&P:

For Large Cap (index is S&P 500): 37%
For Small Cap (index is S&P Small Cap 600): 32%
For Foreign Stock (index is S&P 700): 13%
For Int. Term Bonds (index is Barclays Interm Gov/Credit): 20%

In other words, somewhere between 13% and 37% of managers accomplish the mission of beating their assigned index. This data was compiled over a 5-year period. Academic studies that look at rolling 5-year periods find that the managers who fit in that 13% – 37% category changes. In other words, for a particular 5-year period, most managers who “rise to the top,” were at the bottom in some 5-year period prior to that point. So, the trick then becomes, picking the right “horse,” at the right time, and staying on it for exactly the right ride. For more information and data on how difficult this can be, see Stuart Lucas’s book on “Wealth,” or Burton Malkiel’s “Random Walk Down Wall Street.”

“But I get miles with that card!”

This I have heard many times when I ask about consolidating plastic in someone’s wallet. I said it myself in the not-too-distant past. A few years ago, I attempted to quantify what I was actually getting, and what I was giving up, by stubbornly desiring to earn “free” trips with my frequent flier miles.

After all, who doesn’t want a freebie? Miles and points feel like freebies for spending on “stuff I was going to buy anyway” (Uh-huh. Really?) In my consultations, I frequently come across the all-too-familiar psychological pull of freebies, and a steadfast reluctance to give them up.

My conclusion from my analysis? We are better off with cards that earn cold, hard cash. And some of us are better off with no cards at all. Here are four reasons:

Reason 1) Miles are something we crave that is not in our best interest. Recently my sister, the mother of a 7-year-old, told me about the latest kids’ fad, Silly Bands. Evidently kids are so crazy about these colored rubber bands that they collect, trade, barter, and, of course fight over them. To me, frequent flier miles and “points” are adults’ version of Silly Bands. They are like foreign currencies you can only spend abroad, or Monopoly money that is only good on the game board. With frequent flyer miles, airlines run the printing press for their currency. They also run the cash register.

Conversely, cash, specifically the U.S. dollar, is boring, but is spendable almost anywhere. If I have a fee-less card that pays cash back (and I do), I get a discount on what I have already spent, rather than on something I might spend in the future.

(Of course I am assuming the card gets paid off every month. For anyone who does not do this, a discussion about miles is irrelevant. Comparing the cost of interest relative to the benefit of miles is like comparing the Empire State building to my house.)

Reason 2) Miles “Inflation.” Some say when they look at how many miles or how many points they get, compared with, say, 1% cash back, the miles and the points are worth more.

What if you can get a $500 ticket for 25,000 miles? That’s twice the cash back rate. However, my observation lately is that airlines are reducing available seats for frequent fliers, increasing fees, and increasing miles required per flight. Here is a personal example. I earn miles the old-fashioned way – by flying. In December 2009, I was looking at a January 2010 trip to Canada. Although the airline appeared to advertise my “miles” price would be 25,000, those seats did not happen to be available for the flights I wanted. But, voila, the seats magically appeared if I was willing to spend 50,000 miles. On top of the miles price, the airline charged a “booking fee” of somewhere between $20 and $50, each way. I would have paid between $40 and $100 for the sake of getting a “free” trip, and inflated away my miles value from a penny per mile to half a penny per mile. Overall, the airlines’ inflationary printing press is making sure that miles are worth less and less. (Additionally, for this reason, I use my miles as soon as possible. Tomorrow they could be worthless, and there would be no “airline FDIC” to save my miles. Is the miles program too-big-to-fail?)

Reason 3) Time Value of Money. Continuing the currency analogy, with my cash-back card, I get to use my cash right away, because my card applies it against my purchases. Miss Miles-Card has to wait until she spends $25,000 to get to use her Silly-Band-Monopoly-money miles, assuming she can get a ticket for 25,000 miles. How long does it take to spend $25,000? Is reaching the $25,000 mark something that should be rushed for the sake of accumulating miles?

Reason 4) If I meet someone with a spending or saving “problem,” (meaning anyone who has not saved enough to meet their goals but has had time and circumstances to do so), I look to the credit cards. Even if they have sufficient income or assets to pay off the cards every month, the problem with using credit cards, psychologically, is that they provide no limit or check on our spending. They encourage spending behavior, not saving behavior. Studies show that, on average, if we use credit, we spend 130% of our income.  Our society is filled with enough stimuli telling us what we “need,” or “should have,” or “have to have,” and not enough messages about how to get them responsibly. Credit card companies team up with airlines to bombard us with ads for earning miles and points. Miles and points! More miles and points! Even more miles and points! I am suspecting that miles-and-points must be wildly profitable to the ad-sponsoring enterprises, and not-so-wildly-profitable for me.

Miles addiction can be a tough habit to break. What if, instead of “banking” miles, we just “banked” 1% of our spending? Would we be as satisfied with watching that savings account balance grow as we are watching our miles account grow? I admit, like my 7–year-old niece and her Silly Bands, I get a thrill watching my collection grow. But even a .25% savings account pays better than miles.