How Credit Cards Could Nuke Your Finances (But Not in the Way You Think)

I’m back! Sorry for being totally MIA this week – work has been absolutely crazy, which left me almost no time to have lunch, blog, or poo. Yes, I just said “poo” on my blog.

So one of my top reads this week was Ramit Sethi’s Big Wins Manifesto which is a helluva long article but superduper highly recommended (If you’re too lazy to read the whole thing, go knock your head against the wall like 10 times cause you’re an idiot, but the summarized message is that you should be focusing on a few “big wins” that would give a disproportionate effect on your personal finances, rather than many different small “tactics” that could save you a couple of bucks here and there but wont really make a real difference. And wow, that was a long sentence.)

So Ramit talked about his 7 big wins of personal finance, which I simply loved. It’s kind of like an awesome to-do list. I’ve blogged previously on some of ’em, like 1. Automate your finances and 2. Start investing early, so I figured I’d blog a little bit about what I know about number 3, which is to improve your credit score.

The hidden cost (or benefit) of credit cards

So we all have credit cards, and we all love/hate ’em. We all know that they give us awesome perks like 1-for-1 drinks (woot woot!) and frequent flyer miles. We also know that they’re a pain in the freakin’ ass cause you have to check your statement every month and trudge to pay ’em off. (By the way, if you’re still doing that, first shoot yourself in the head, and then read my post on automation) We’ve also all heard the same tired arguments that you should pay ’em off on time, or we’d get charged a really high interest rate, yadda-yadda.

But did you know that credit cards could potentially cost you tens of thousands of dollars without you ever realizing it?

There’s a hidden cost of not paying your bills on time other than a couple of extra bucks of interest on what you owed last month – every late payment you make affects your credit score, and that has a bigger impact on your finances than you think.

This example from Iwillteachyoutoberich.com says it all: Consider 2 people, one has a great credit score, and one has a poor credit score. Both decide to buy houses which cost $200,000. “Simply by virtue of having different credit scores, the person with poor credit will pay over $68,000 more than the person with excellent credit.” (In Singapore, where houses cost easily 3x that amount, that difference is even larger).

For my Singaporean friends, don’t assume that this applies to Americans only. Credit Bureau Singapore states that paying your bills on time as far as possible is the number 1 way to improve your credit reputation.

Control your nuke

A lot of people don’t realize that credit cards are more than a cool way to pay for stuff – they’re a freakin’ nuclear weapon on your personal finances. Use them well, and you could boost your credit score and save tens of thousands on your house. Use them poorly, and they could erase your entire gains from investing/working your ass off.

So how do you maintain control, and not have them blow up in your face?

The answer: Automate your credit card bills, which will ensure that they’re paid off on-time, every month. How many times have we missed a payment because it was just too much of a hassle to remember to pay it off, not realizing that it could have cost us thousands of dollars in interest? Don’t leave it up to your own “effort” – you’re bound to forget sooner or later. Instead, check your statements when they come, and if there are no mistakes, let the system take care of it for you.

There are other ways to improve your credit rep, which you can read about here, but I won’t go into them for now. First focus on automating your bills, and notice how awesome life is when you don’t have to worry about remembering to pay your bills on-time. You’ll also be able to sleep soundly knowing that you’re quietly building your credit rep in the background and saving tens of thousands of dollars.

PS: anyone had any experience with the effects of credit cards on your housing loan? I’d love to hear from you. Leave a comment or drop me an email at cheerfulegg [at] gmail.com – I read every one 🙂

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The Absolute Moron’s Guide to the Euro Crisis

Came across this yesterday, and thought that it was way too awesome not to share! Presenting:

The Absolute Moron’s Guide to the Euro Crisis Part I and Part II   (Hat tip Barry Ritholtz)

Totally awesome for those of you who’ve been trying to wrap your heads around this Euro crisis thing, so you have something smart to say at that awkward moment when it’s just you and your boss in the elevator. (I didn’t do so well – today, I got stuck in the elevator with my boss and I stammered at how awesome it was that our company has an annual fire drill. Smooth, Lionel, smooth.)

My favorite parts (SPOILER ALERT):

“Also, there are still a lot of question marks surrounding the bailout — where the $125 billion will come from, what the terms of the bailout will mean for existing Spanish bondholders, and whether the troika will require Spain’s government to enforce any spending cuts.

THE TROIKA. Sorry, it just sounds like a badass weapon from Game of Thrones.”

And also:

“Anyway, after months of speculation and hand-wringing, Spain agreed to take a bailout — which some people are calling “Spailout” because it’s fun to combine words — that will help it recapitalize its banks. 

Recapitalize? Is that like when you’re texting on an iPhone and you want to type “mark” but it keeps changing it to “Mark” because it thinks you’re talking about your friend Mark and then you scream at Siri, “I’m not talking about Mark, Siri!!!”

Coursera: Free Online Classes from Top Universities

This is probably a little late, but I just stumbled onto Coursera – a website that offers free, high quality, online courses from Top Universities like Princeton, Stanford, Michigan, and my beloved alma mater, Penn. ❤

Some examples of courses offered: A History of the World Since 1300, Algorithms, Model Thinking, Social Network Analysis and dozens more.

So I think one of the key facets of a truly rich life is lifelong learning – because it makes you rich in your views of the world and of life. Snide remarks about having to complete annoying assignments aside, I’d say this is education at its best – attended only by people who truly want to learn, and not because they’re targeting a good grade or a job. I think platforms like these are going to revolutionize the education landscape – moving away from structured, syllabus-based, commodity-like obligations to organic, inspired, and customized forms of learning.

I’ve already signed up for a course starting in September. I don’t know about you, but I am super psyched.  🙂

Don’t Walk Under Ladders

ladder

You know that superstition that says it’s bad luck to walk under a ladder? So we totally know that it’s based on myth and has no scientific basis whatsoever (If you’re curious, wisegeek gives a possible explanation on why this superstition exists), but we adhere to it anyway. Why take a chance, right? There’s this study that indicates around 70% of people in Britain still aren’t willing to walk under a ladder if another option exists (I’m still trying to figure out how the hell they managed to conduct that one – “Hey! Here’s 5 bucks, would you walk under this ladder please?”).

Here’s a possible reason why we stick to superstitions that we know aren’t true: BECAUSE WE DON’T WANNA DIE FROM A FALLING LADDER. It’s a sad way to go. I’d much rather die from taking a bullet to save someone’s life. Or flying a jet into the bellyhold of an alien spacecraft to save humanity. Or overdosing on delicious ramen from Ippudo. Or having too much sex. So I think the whole ladder superstition thing is to prevent an untimely Death by Ladder – and we stick to it because it just makes sense.

It’s entirely possible to adhere to something even though we don’t believe in it.

Anyone heard of the Efficient Market Hypothesis (EMH)? If you haven’t, check out this ridiculously boring Wikipedia article on it. Essentially, it’s this really cool academic theory that lots of professors and econometricians and financial economists believe in. It’s also the entire foundation upon which my Masters degree in Finance and Economics from the London School of Economics is based on…. and it’s also entirely wrong.

Say whaaaaaat?!

In a nutshell, EMH states that financial markets are essentially unpredictable, and that the only way to invest is to buy-and-hold an index fund – because while you can’t predict where the market will be in any given day, month, or even year, over the long run it will rise (because of various factors, which I outline here).

However, we now know that the EMH simply isn’t true. It’s been proven wrong over and over again by academic after academic after academic. But while we know that it isn’t true, it doesn’t mean that we should throw index investing out the window. In fact, even if we don’t believe in the EMH, passive index investing may still be the best way to invest.

Let’s look at performance

Okay, if the EMH isn’t right and financial markets are totally predictable, what’s the best alternative to index investing? Investing in a sexy, shiny MUTUAL FUND of course! (also known as “unit trusts” for my Singaporean friends) So these funds are run by really smart guys and girls, who have dozens of research teams under them and spend day after day analyzing the markets. If anyone could take advantage of predictable financial markets and beat the index, it’s them, right? Wrong.

Check out the findings from this paper, Passive Investment Strategies and Efficient Markets, by Burton Malkiel (yeah, I love reading nerdy academic papers in my free time because I’m geeky like that. Stop judging me).

“Over the 10-year period ending 31 December 2001, 71% of actively managed equity funds have produced total returns (including dividends and capital charges) that were inferior to the returns achieved by the index fund, after expenses… The same kinds of results have obtained for earlier decades.”

“In 1970, there were 355 equity mutual funds holding broadly diversified portfolios… Note that more than half of these funds did not survive over the 32-year period. We can be sure that the non-survivors had even poorer records than the surviving funds… Note that of the remaining 158 funds, only five produced returns that were two percentage points or more in excess of the index fund returns. Clearly, trying to select a winning fund is like picking a needle in a haystack. The likely result is to achieve well below average returns”

Smarter than the market?

So you can give me any strategy – value investing, momentum trading, small caps, technical analysis, whatever. It may work out well in theory, but the fact is that the majority of the professionals who have pursued these strategies were unable to beat the market at its own game. As Malkiel puts it: “Whatever predictable patterns may exist and whatever inefficiencies may occur, they do not give rise to profitable investing strategies.

The success stories we’ve heard about – Warren Buffett, George Soros, etc are the proverbial needles in the mountain of haystacks of investment managers who have crashed and burned. The reality is that it is almost impossible to identify the next Buffett or Soros and invest in them.

And if the majority of professionals are unable to beat the market – I think it’s also highly unlikely that the average person, armed with his $49.95 book on Security Analysis, would be able to beat the market. Not impossible of course, just highly unlikely. Just sayin’.

Walking around ladders

As for me – I prefer to play where the odds are in my favor and invest in index funds. After all, they are far more likely to outperform the majority of investment professionals in the long run. Because while I don’t believe in the EMH or that walking under ladders may bring bad luck, why take a chance?

Freshly Pressed Ping

freshly pressed

So last night, in my sleep-deprived, mentally frustrated state, I dashed off a post – Revenge of the Ping – about how the Ping totally ruined my plans for yesterday. I totally didn’t expect it to get featured on the Freshly Pressed section of WordPress.com, generating more than 5,000 hits, 74 comments and 79 followers (and counting!) in a single day! Woweeee!

Ironically, today was my biggest Ping day ever with my WordPress app buzzing every other minute and my inbox flooding with WordPress notifications. Lots of people also commented that the only way to stumble across my post was to submit to… the Ping. Oh, the irony of it all 😀

Something struck me while I was reading through the comments: We could be from anywhere in the world, but we’re all pretty much the same when it comes to situations like these. EVERYONE’S been hit by the Ping before and screwed up their plans, so don’t feel too bad about it if it happens to you. Take a breather, then switch off your phone and your chats and your email client, work on that to-do list, and hunker down and work your way through it. Guilt never got anyone anywhere.

(Pretty much everyone also agrees that the phone stack is an awesome idea, and quite a few people share my distaste for Justin Bieber’s single “Boyfriend”. So that totally made my day.)

So anyways, I just wanted to say thank you. Really. It’s superduper encouraging to know that there are actually people who appreciate the stuff I write about here. (When I first started blogging I got kinda worried that the only people who would be reading this blog is some drunk college kid trying to google how to fry an egg at 4am.) A friend told me that sometimes people just need to get reminded about the painfully obvious things that we forget – which are sometimes the ones that would help us the most.

So thank you for the encouragement and the love! I’ll keep blogging as much as I can. Leave a comment if there are any personal finance / rich life topics you’d like me to write about – I read every one 🙂

Revenge of the Ping

I’ll make this quick – today, I planned for a totally productive night of getting shit done. I was gonna review my budget, research some investments, blog a little bit, and organize my articles. Yeah, I can tell that you’re totally jealous of my ridiculously awesome life of sex, drugs and alcohol.

But it all started going downhill from work – First, I was given a big task to do in the morning. Instead of focusing on that, I spent my day answering emails, attending discussions, customizing templates, and intermittently going back to that task. And then my colleagues mucked around at the snack corner so of course I had to join them for that. And so I had to work late, and I decided to reward myself with a Swensen’s dinner (come here you, chicken baked rice and US fries and dips, you!), and then I decided to read a few chapters of my book, and check out a few other blogs at the same time… and before I knew it, it was bedtime. Dang!

So hey, if I couldn’t do any of that other stuff, the least I could do was squeeze in a blogpost, right? So much love for you, dear reader, so much love.

Saying “no”

So I thought I was being awesome my multitasking my ass off (generating Pivot Tables while shooting off emails? pssshhttt. No problem.), but I was actually unknowingly falling prey to the insidious monster known as the Ping. The Ping creeps up on you, often disguised as activities like “multitasking” or “urgent priority”, but really, it just pulls you away from the most important things you’ve gotta get done today.

This article from HBR talks about staying focused on only the most important things. It sounds cliched as hell, but we don’t realize how crucial it really is to prevent us from crashing and burning:

“Never before has it been so important to say “No.” No, I’m not going to read that article. No, I’m not going to read that email. No, I’m not going to take that phone call. No, I’m not going to sit through that meeting.

It’s hard to do because maybe, just maybe, that next piece of information will be the key to our success. But our success actually hinges on the opposite: on our willingness to risk missing some information. Because trying to focus on it all is a risk in itself. We’ll exhaust ourselves. We’ll get confused, nervous, and irritable. And we’ll miss the CEO standing next to us in the elevator.”

More data = more noise

At the risk of sounding like I’m writing a General Paper essay for junior college, we live in a hyperconnected world. Breaking news, stock prices, tweets, and drunk photos of you last Friday night on Facebook are literally at our fingertips. (Of course, I could do with some types of media being not so easily accessible – such as Justin Bieber’s latest single Boyfriend. Shudder.) But as Nassim Taleb shares in this article, having more data makes it even more likely for you to make mistakes. More data generates more noise, which makes the likelihood of finding what you need – the signal – even lower.

Keeping up with the flurry of information is a loser’s game. In fact, it is very likely that all that information could screw you over. Or kill you. (statistics show that in 80% of car crashes, the driver was distracted during the three seconds preceding the incident.)

Staying focused, #likeaboss

So make your to-do list before you start anything in your work day, and stick to it. Turn off your email alerts and your instant messaging chats. Leave your phone in a place where you cant reach it. And do just ONE THING at a time. You’ll be way more effective than trying to “multitask” everything away.

Something non-work related: When you’re having lunch with friends, try putting your phones in a phone stack. I tried it last week and it was one of the most enjoyable lunches I’ve had in awhile 🙂

And the next time you hear the siren call of the Ping, tell it to go screw itself.