We look back over twenty years to the fall of 1996 in today's throwback to a column Nancy wrote in the Mississippi Business Journal. She shares how her views on money were influenced by her grandparents, who grew up in the wake of the Great Depression. This event shaped that generations' attitudes towards debt and spending, and it will be interesting to see the long-term affects the Great Recession have on the generation that was coming of age during it.
Both my parents were born in 1929 - the year of the stock market crash. And while none of their family members personally lost money in this event, they grew up with the specter of an economy in ruin. Each family farmed on a small scale, which kept them from starving through those hard years. My grandfather was one of the fortunate few who brought in extra money by working for the WPA.
The Great Depression is part of my family's folklore, a story told many times and in many ways. It shaped how my parents managed their money, and, in turn, shaped how I manage mine.
One other fact about my family impacted my finances. My father is a minister, as was his father before him, as was his father before him. The verses, "Where your treasure is, there will your heart be," and "Thou shalt not steal" remind me on a daily basis to be a good manager of my money.
Where your treasure is, there will your heart be. - Matthew 6:21
I know you should never mix religion with politics, but these two areas influence how we handle a very touchy subject - debt.
My parents and the people of their generation live by the motto that all debt is bad debt. They have lived more modestly than their children, accumulating a nest egg to support them in the event of another 1929. They pay cash for their cars, when possible. They pay off their mortgages early, and they use credit cards sparingly. Their vivid memories and their fear of the unknown encourage them to live on a cash basis.
The generations since have no firsthand knowledge of that catastrophe. And they obviously have not listened to the family stories. We live by the motto, "Charge it." We have only a small pittance set aside for retirement and we have few emergency funds. We finance cars for five years, or we lease them. We have mortgages that keep us one step ahead of the bankruptcy judge. And we use credit cards like they were free money. We have no fear of the unknown.
Each of these perspectives has its flaws. What most people cannot understand is that money is a commodity and the price you pay for it is interest. If you can really believe this, you will be able to use debt wisely.
Credit card companies despise me. I always pay my balance at the end of every month. They don't charge me interest. I get to use their money for a short period of time, earn points toward my next GM purchase, and have the convenience of their recordkeeping for business purposes. They don't make a dime off me!
Credit card companies love people who only pay their minimum each month. They rack up interest charges in the 10-21% range. They make you feel like you just have to have that new stereo - go ahead, you deserve it! And, meanwhile, they watch their profit margins grow at ungodly rates. They target people who are easily enticed, like students. I even read recently that they love people who have declared bankruptcy since they know they can't go bankrupt again anytime soon. What little devils!
So, what do you do if you find yourself in a credit crunch? The first thing you do is play their game. Every day, I get notices from companies offering cards at low introductory rates. The credit card business is a cutthroat one. Take advantage of the competitive environment and switch those balances around to get the lowest rates. Remember, you don't have to live in Kalamazoo to have a credit card from there. But watch those time limits. Most introductory rates only last for six months to a year. Mark your calendar and switch to another when the time comes.
Or, go to your bank and get a consolidation loan with a lower rate. Most people are afraid to ask their banker for money. I'm telling you to strut in there and ask for cash with confidence. Banks don't make money off those paltry checking fees (although my fees keep getting larger). They make money by loaning money. If they are reasonably sure you'll pay it back in a timely fashion, you're in.
The next thing you need to do is examine your spending habits. My preacher's kid values tell me that if you buy something knowing you can't pay it, it's nothing short of stealing. I also know that if I say saving for my kid's education is important to me, but I consistently rack up charges for frivolous items, I'm a liar. Check out where your treasure (debt) is, and you'll find your heart, or number one priority.
Begin making a conscious effort to kick the credit card habit. Pay off those cards, starting with the highest interest rate on down. Use them only in an emergency, and try to pay off the balance each month. Put those receipts in a prominent place. (How about your bathroom mirror?) The real key to avoiding this pitfall is to develop an emergency cash fund to cover those big ticket items we don't budget for.
And what advice do I have for my parents' generation? Don't get in such a hurry to pay off that mortgage. The interest on your mortgage loan is about the only tax deduction we have left. If you are paying 8% on your mortgage, and you are in the 28% tax bracket, that loan is actually costing you 5.76% (8% x (1 - 0.28)). If your investments are making more than 5.76%, you are better off holding onto that mortgage.
Remember, money is a commodity. If you want to use debt wisely, shop around for the best rates in mortgages, car loans, and credit cards. Use the competition to get the best deal. Don't charge something that you find on sale if you can't pay it off before the interest charges eat up your savings. Do use the mortgage interest tax deduction to boost your overall earnings.
One last pitch. Go to church on Sunday. Then go have lunch with your Grandmother. Get her to tell you about the Great Depression.
--Nancy Lottridge Anderson, Ph.D., CFA, Mississippi Business Journal, September 2, 1996