Today, a rant. About finances, and economics.
But isn’t this supposed to be a marketing and business essay? Well, yes. But I’m doing this rant here for a few very important reasons.
- I happen to have you as a captive audience here, and sometimes I just write about things because I can. Lame reason, I know — I promise the rest are better, and more about you.
- Because finances and economics are deeply intertwined with marketing. Perry Marshall says that marketing success happens because you hit the sweet spot between traffic, conversion, and economics. Gary Halbert famously taught that marketing was a mix between applied behavioral psychology and (money and statistics) math. Getting the very fundamentals of math right are CRITICAL to success in business and marketing in particular.
- Because, let’s be honest, you want more money, right? That’s one of the reasons we get into business. It’s one of the reasons we learn marketing. Because we want the financial rewards that come from success. Of course, most successful people have all sorts of other motivations, too. But the money bit is important. And understanding the kind of financial math I’m going to talk about here will go a long way to helping you grow steadily richer (and not steadily poorer) through time.
BONUS: Also, because in business, it’s always a little gratifying and reassuring to see how dumb some successful people are, and realize, “Jeez, if they can do it with that level of incompetence, then surely I can do it!”
Today’s target: a Forbes contributor and Fellow from the Adam Smith Institute in London…
For what it’s worth, Forbes does state that this writer’s opinions are not their own (in very small gray type).
This was a blog, not an article in Forbes magazine.
But still. When the average reader hits an article on Forbes’s website, that article represents Forbes.
And if there’s an act of economic ignorance or sheer stupidity taking place on their website, that’s their bad. And they should absolutely remove it, and probably can the contributor.
Let me rewind a minute.
I read a lot of financial news. Out of habit. Out of personal interest. And out of professional interest — as I’ve spent a lot of time writing marketing for financial publishers.
My attention is as easy to manipulate as the next person.
Give me a shocking headline, and I’ll probably read it. I figure even if it’s mostly trash, I grow by understanding the perspectives of all sorts of different people. It’s nice to get the justification someone has, no matter what their beliefs are, or how they might match or clash with mine.
And so I clicked on the headline…
“76 Million Americans Are Struggling Financially: And It Doesn’t Matter A Darn.”
Shocking clickbait, I know. But it worked. I wanted to understand the guy’s point.
Basically, there was a recent Federal Reserve report. It was meant to survey the economic wellbeing of Americans right now.
What this guy was challenging, at least to start his article, was the survey methods.
They used very qualitative survey questions. Now, I don’t know how much you know surveys, but you know marketing. And so it shouldn’t surprise you that you can basically word survey questions in a way that it plants thoughts and beliefs in the respondents’ heads for at least long enough to get the survey results to say whatever you want them to say.
And the more vague the questions, the less reliable they are, too.
And so survey respondents were asked where they were at financially. Then, they were given choices. Were they “living comfortably,” “doing okay,” “struggling to get by,” or “just getting by?”
The writer — Tim Worstall — argued that these were largely meaningless and totally relative subjective judgments. And that in any economic situation, at any time, you’re going to have a basic distribution of people across those answers. And that their answers have everything to do with what’s going on in their heads, and nothing to do with an objective financial reality.
This, by the way, is where the headline of the article came from. 31% of American adults — a number that works out to 76 million across America — report that they are “struggling to get by” or “just getting by.”
At this point, I largely agree with everything he’s said. I think he’s kind of a jerk in the way he presents it. And it does gloss over that there are huge economic imbalances in the country. And not all of them are a result of character flaws or an unwillingness to work hard, smart, or both.
But the logic that the number is meaningless based on the survey that generated it was relatively sound.
(By the way, if you haven’t found a few really useful business, marketing, and psychology lessons in this yet, you must not be reading!)
Here’s where he really went off the rails!
The other major finding revealed in this Federal Reserve report is that 46% of Americans don’t even have the savings to pay an emergency $400 bill.
So, for example, the work that I had done on my car last week… More than twice the amount asked about… Would be totally out of reach for about half of Americans if they faced it today.
Here’s where this guy’s economic incompetence began to shine.
He basically tried to argue that it didn’t matter. We have abundant access to credit today. If we don’t have the savings, we don’t have to worry. Because we can whip out the credit card and take care of it.
And the pièce de résistance?
He went on to argue — in the rest of the article and in comment replies to people who told him he was full of crap — that it was “economically equal.”
He said that in order to save, you have to borrow from present consumption, to pay for something in the future. To buy something on credit, you’re borrowing from present consumption to pay for something in the past.
Either way, you’re taking away money you have today to pay for something at a different time.
He argued that made the two scenarios — paying an emergency bill from debt, and paying it on credit — “economically equal.”
Here’s the thing. That’s totally, complete, and utter manure.
And if you rely on stories and commentary posted on the Forbes website for your financial education, this is a big, flashing red light warning you to beware.
What this guy — this professional economist — doesn’t understand is the most basic of economic principles… Interest!
Now, Warren Buffett grew to be the world’s richest man (before he gave a bunch away) because he understood interest. And especially, its compounding effects.
He understood credit. And that you can most definitely grow richer by being a creditor. But that you will pretty much always stay poor — under nearly every economic scenario — by being a debtor.
Let’s assume, for right now, that you can’t make any interest on your savings. The same Federal Reserve that issued this report has screwed that up, so we’ll just go with it.
By that I mean you’re not making ANY money on your money, by saving it.
So, you set aside $400 for this emergency bill, and you leave it in a savings account. Maybe you set it aside over months. Maybe it was a lump-sum deposit into savings. Either way, it “cost” you $400 to have $400 in savings.
Later, you do have that $400 emergency expense. Which comes out of the $400 savings, which cost you $400.
Now, let’s look at paying that same bill off via credit. You don’t have any savings, so you put the $400 emergency expense on your credit card. Now let’s assume that even though you have no savings and no cash to pay the bill, that you simply decide to split it into two payments.
You figure you’ll pay $200 per month. Now, you have pretty good credit, so you have just a 16% interest rate on your card (others pay well above 20% annual interest rate).
I stuck these numbers into an interest expense calculator. You pay $200 the first month. You pay $200 the second month. And that’s all $400, right? Nope! The next month you get a bill for $8.18 — the remaining interest charge from borrowing the money.
So, is $400 “economically equal” to $408.18? I think not!
And that’s under a pretty generous payoff schedule for someone who NEEDS credit to cover emergency expenses.
What if the credit card issuer has a minimum payment of $20. And because you don’t really have any cash sitting around for emergency expenses, you decide to just pay that every month until it’s paid off.
Well, if everything was “economically equal,” it would take 20 months at $20 per month to pay off the $400.
But our handy interest expense calculator tells us you’re going to pay a bit more. For borrowing that $400 to cover an emergency expense and paying only the $20 minimum payment… It’s going to pay you 4 EXTRA months to pay it off, and you’ll pay an extra $68.36 in interest charges.
Is $400 “economically equal” to $468.36? Whoever said NO gets a gold star — and apparently you’re overqualified to be an economist.
This is not a trivial thought experiment!
Let’s just get this straight. It’s not just about the $8.18 or $68.36 in this little math problem.
What happens when you rely on debt throughout your life? What happens when that’s your strategy for dealing with emergency expenses?
If you guessed, “it adds up,” right again!
All these little expenses add up to a whole lot. And let’s be honest… Nearly every month comes with some kind of unexpected or emergency expense. And so there’s a lot of little expenses adding up!
Debt is total financial suicide. It’s impossible to get ahead when you’re always playing catch up.
Just think — if you saved instead, you’d be keeping all that money that would otherwise go to paying interest. All the little expenses would be adding up in your favor, instead of that of the banks!
It has bigger implications, too.
Not to get too political, but our obsession with “buy now, pay later” has put our country into a seriously dire financial situation. A HUGE amount of our taxes — cumulatively — are going toward paying interest on an ever-growing national debt.
Again, this is setting up a long, slow financial suicide.
It’s a friggin’ mess. And nothing that any of our current crop of politicians will do much to fix.
But what you can do, for yourself, is go ahead and try to get rid of as much debt as possible, as fast as possible. And figure out how you can reduce or remove your use of credit from your life.
Is that saying you can’t use credit cards? Well, yes and no. For example, for convenience and airline miles, I use multiple credit cards (business and personal). But I typically don’t pay a penny of interest. I pay off what I owe, and collect the points while only paying a small annual fee.
I also have a mortgage that I’m in no hurry to pay off, because it’s at such a low interest rate that over the life of the loan I still believe that real inflation will outpace the cost of the debt (and I can do better things by keeping control of the money) — such that I will have come out ahead by holding the mortgage.
But no matter what you do, DO NOT listen to what the guy from Forbes said, who said paying emergency expenses on a credit card is “economically equal” to paying it from savings.
Instead, if you’re serious about understanding the enduring principles of wealth building, you could start with the book The Richest Man In Babylon. You can pick up a used copy for a penny plus shipping from Amazon, and it will turn out to be the best way you’ve EVER invested a penny before.
Tomorrow, back to marketing and business!
Yours for bigger breakthroughs,