Yes – I was fooled by the data. Were you?

According to the Federal Reserve reports I earlier found encouraging, consumer credit balances actually decreased in each quarter from the 4th quarter of 2008 all the way through 2009. Unfortunately, the March 5 data release from the Fed showed an increase (annualized) in consumer credit of 2.5% during January 2010.

Is this a sign that we are reverting to spending money that we don’t have? Or are we just easing back into spending in a moderate fashion.

Actually, that data is even worse than it appears in the Fed report.

Revolving credit balances (the kind that do not have fixed repayment terms, e.g., credit cards) have declined for 16 straight months. Doesn’t that tell us that consumers are using cards less and dedicating themselves to paying down existing balances?

Sadly, it does not.

According to this article, most of the consumer debt “reduction” has come from write-downs by creditors, not payments from debtors. More specifically, although credit card balances fell by $93 billion in 2009, only $10 billion of that decline came from payments. Write-downs accounted for the other $83 billion.

This comment is from one expert quoted in the article:

“For the first time in my 30 years in this business, the dollar amount of card loans finished the year lower than they started,” he said. “That would mean that consumers have either put their credit cards in a safe-deposit box and only get them out for special occasions or that some are cutting them up and not using them at all. And we don’t think any of that is going on.”

What is going on is bankruptcy.

According to Moody’s, credit card charge-offs hit a new record in August 2009 at 11.5%.  Now experts are predicting further increases in charge-offs, setting another record sometime this year.

The journey towards responsible spending is not over, for either the government or for the people. The harder truth is that the final destination remains uncertain.

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Vegas has taken a beating economically. The energy level here is palpably lower compared to our visits of 10-15 years ago. This makes sense because most of the spending that occurs is here is high up on the frivolous scale. When we first came here as a family in 1995, Vegas was in the middle of its attempt to brand itself as a family destination. We had a great time then. All of that family-focused ambiance is gone. I would not bring a young family here today.

Surprisingly, I haven’t been motivated to gamble yet. That may happen tonight, as we are going to visit a relatively frugal off-the-strip casino recommended by fellow blogger Lazy Man and Money. Today we spent some time watching NCAA basketball in the sports books at the Bellagio and Caesar’s Palace. It is amazing to see the level of interest in horse track betting, even in the midst of post-season basketball.

Everything is increasingly expensive here: taxis, food, show tickets, you name it. There are bargains to be had in some places and at some times. For example, we were able to obtain discounts on a show that is never discounted. But the bargains are not enough to compensate for the other costs for someone trying to function in a frugal economy. My guess is that if weren’t for the convention traffic, there would be a lot more business failures in this town.

All that being said, we are having fun while taking in the experiences within rational limits. That’s not easy to do in a city that promotes and preys on the irrational.

I’ll probably have more to write about our Vegas Interlude next week.

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The conventional wisdom says that if you lack the time or expertise to make informed decisions about your own financial planning, the next best thing is consulting a fee-only financial planner.  These advisors are paid only for their time. They do not sell financial products on commission and are not paid based on the amount of your money they are managing.

A recent study by a behavioral economist, however, is casting doubt on the benefits of using a fee-only planner to provide investing advice. According to the research, most planners reinforce bad investment behaviors rather than give advice that will correct those bad behaviors. They are, more often than not, “yes men” (or women.)

The data was acquired by sending actors around to different financial planners, pretending to need investing advice. According to the summary of the outcome:

The result was nearly always the same: The actors walked out with advice that mimicked the biases in the original portfolios. Investors who wanted to find the next hot sectors, for example, were put in actively managed funds that try to beat the market. The cash-sitters were more likely to be told to take the cautious step of buying index funds.

Why did this happen, even in cases where the planner was paid by the hour?

The theory is that the financial planners were concerned that giving advice that contradicted what the clients were already doing would alienate the clients, causing them not to return for more advice. Once again, human frailties cause self-interest to trump objectivity and hard truth. Planners want repeat business, even if it means handing out sub-optimal advice to get it.

You can also fault the typical client who tends to reject financial advice that does not align with their own ideas. Why pay for advice if all you want is affirmation of your own choices, good or bad?

This is why I am and will remain a DIY financial planner.

Source: Fortune article

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This guy was an interesting subject.  He was close to my age and working as public works truck driver. He had a decent income, particularly considering that he could not read or write! I learned this from the woman who came with him to aid in the exchange of information between us. I don’t often meet older adults who are born in this country but have remained functionally illiterate.

I say he had a decent income but alas, he had no money to spend. He had a mortgage with payments exceeding $1200/month. On top of that, he was sending $1000/month to the bankruptcy court. Those two payments don’t leave much left. When I asked him if he had purchased a vehicle in 2009, he said he couldn’t because of the bankruptcy. He added that he couldn’t get a credit card either. He said it in a way that suggested that he would be borrowing like crazy if he could. I’m guessing that his lack of education and reading ability contributed to a lack of financial self-control.

Oh, and did I mention that he was supporting his 48 year old cousin, who had been living with him throughout 2009?

Another interesting taxpayer was an older woman who had been widowed in 2007. When her husband died, she decided to sell their two story house and move into a senior high rise. She talked about the task of trying to get rid of a house full of “junk” (her word) that they had accumulated over the years. We will be facing that eventually and I’ve already been thinking about how to do that. One strategy: Imaging the memorable junk  before giving it away should solve a lot of the emotional problems associated with “stuff separation anxiety.”

This nice lady’s retirement income was from a small pension, a small Social Security benefit, and interest from bank CDs. The CD interest income exceeded all of her other income combined. When she sold her house, she put all of that cash into the CDs. That was before the crash so she lucked out. I don’t think she will be changing her strategy now, although interest rates are lower than ever.

A third taxpayer also lived in a senior high rise. I asked he if she enjoyed it. She said that she did – lots of activities, great view. It was interesting to me that she selected this particular residence specifically because meals were not included. She said that she did not want to be told when to eat. I can understand that, as long as you have the energy and temperament to cook and eat by yourself.

Next week we will be in Las Vegas for a family trip so no volunteer tax stories until the week after. But, I may have some interesting Vegas stories to report. Stay tuned!

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According to this student genius, public education is now a human right worth a fight to the death.

At UC Berkeley, political science student Luis Reyes, 21, kicked off a noon rally on Sproul Plaza by telling a crowd of several hundred people that “March 4th is just the beginning.”"Today we march!” he shouted. “Today we strike! Today we show solidarity with workers! Today the crisis has brought us all together. Public education is a human right we’ll fight to the death!”

via Day of education protests heat up.

He lost me at “solidarity.”

Please add “political science” (how can they even call what they pretend to do “science” ) to the list of college majors that are counter-productive to a robust economy. Need more evidence? Count the number of political science majors who end up in law school. Double econo-buzzkill.

Lots of discussion this week about ol’ ballpayer turned Senator Jim Bunning refusing to give “unanimous consent” to yet another $10 billion extension of unemployment benefits. His reason? He wants Congress to pay for it with cuts elsewhere. Congress doesn’t want to do that – it’s too hard to think about cutting. Spending by unanimous consent – that’s easy.

I’ve always wondered why the cost of  unemployment insurance is 100% paid for by employers and taxpayers. Why don’t the employees contribute to the cost? This week, Jim at Bargaineering raised the question of whether unemployment benefits reward laziness. In general, I think they do not. But when there are seemingly endless extensions of benefits, you start to wonder if we are creating a group of people for whom not working is an elective lifestyle.

Interesting personal story of delayed gratification at Get Rich Slowly. The theme is one espoused by Dave Ramsey: “If you will live like no one else, later you can live like no one else.” Too many folks hear this and think “why should I deprive myself now, I could die tomorrow.” Well, the first answer is that if you die tomorrow, you won’t know or care that you deprived yourself today. Second, the concept is more about consumption smoothing than deprivation. If you live a life you can afford today, your economic life is unlikely to be any worse tomorrow and may be better. Mess up the order of spending and saving and the future may well be different, in a way you won’t like.

Over at my Go To Retirement blog, I highlighted an article about how to discourage your parents from squandering your inheritance. One reader took me to task about writing from a lofty perch. Another came to my defense. My position is that I have to write about what I know (or think I know) and what I experience. Anything else is just pretend. Sure, I can be arrogant but you can read a lot of pretend stuff elsewhere.

Finally, check out this week’s Carnival of Money Stories and Carnival of Personal Finance where my writing appeared.

I’m embarrassed to admit that I’ve never asked this question before: What blogs do you think Mr. ToughMoneyLove should be reading on a regular basis? I read many but I’m probably missing some good ones.

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All of the taxpayers I helped gave me something to remember, and each for a different reason. The first was a woman in her 70’s who had the simplest tax position you can imagine. A small Social Security retirement benefit and – end of tax story.  I was so tempted to ask how she lived on such a meager income but I didn’t feel it was my business to pry. She was a also a renter. Not a word of complaint about being poor or deprived. Note to self:  Don’t worry so much about money.

The second taxpayer was 89 years old and sharp as a tack. She was embarrassed that she did not have all of the information I needed immediately at hand (we found it) and vowed to do better next year. After she made a point of saying how old she was, I complimented her on how healthy and happy she looked. She responded by saying that she wasn’t 100% free of health problems but that “it doesn’t take any more energy to smile than it does to frown.” You gotta love home-spun philosophy like that. Note to self: Don’t frown so much.

The third and fourth taxpayers were sisters. One sister was mentally handicapped but was able to live alone and worked for an organization that helped people with employment challenges. The healthy sister was married but her husband was absent because he was physically disabled.  She didn’t complain at all but she sure looked worn out. She had a potential tax problem. Her mother died in 2006 without a will. Three years of paperwork later, the healthy sister received five-figures worth of mutual fund shares. Unfortunately, she promptly sold them, perhaps triggering a capital gain. We have to revisit this after she gets the 2006 basis established. Note to self: Update my will and keep that long term care insurance.

My final taxpayer was also in her 80’s, living alone in a home that she had worked very hard to pay for. She told me that she was mortgage-free because she had made extra principal payments to shorten her amortization period to 19 years. There is a sad part of this story, however. I asked her if she enjoyed living in a paid-for home. She said not any more. She wanted to move into a senior-citizen high rise. Her neighborhood had deteriorated. She said her neighbors were mostly unemployed or underemployed, receiving Section 8 housing subsidies. They took no pride in where they were living. She also told me that frequently a furniture rental truck would show up at a neighbor’s house, trying to recover rented furniture that no one was paying for. The neighbors would not answer the door. My taxpayer lady was completely fed up with “these young people and drug dealers” as she called them. Despite all of this, she left smiling. Note to self: Don’t ignore a changing neighborhood .

Final note: At least once each volunteer session I am asked by a taxpayer how much they owe for our services.  I’m starting to think I should pay them for teaching me so much.

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It’s about time. Rangel can’t even spell the word “ethics” let alone understand its meaning.

I have been on Rangel’s case and ethical misdeeds since September 2008. The facts were there yet Rangel’s Congressional colleagues just sat there for months, ignoring them.

Even in his last words before stepping aside, Rangel’s dishonesty was on display. Catch this tidbit from the article:

Pushed on whether he would step aside temporarily, he replied, “No.”

He said he was headed back to his office to work on jobs legislation, and when a reporter asked if he would still be the committee chairman on Wednesday, Mr. Rangel said, “Yes, and I don’t lie to the press.”

Well, actually he did lie to the press because this is Wednesday and Rangel is no longer the Committee Chairman.

Everyone should be relieved that Rangel will no longer have the opportunity to direct his “mother of all tax bills” through the House. On the other hand, I have no doubt that the morons in his district will re-elect him.

We don’t need mere “change” in Washington. We need an earthquake – for Republicans and Democrats alike. Our collective financial future still hangs in the balance.

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