Frugal in the Fruitlands

The Credit Card Accountability Responsibility and Disclosure (CARD) Act of 2008, S. 3252 was introduced before the Senate in July of 2008 as a way to control abusive and deceptive credit card lending practices. It is intended as a followup to HR 5244, which passed the House earlier this year. The Senate has still not voted on S. 3252, which means there’s still time for citizens to voice their approval or disapproval.

Why Should I Support This Bill?

As we review The Two-Income Trap we’ll talk about how deregulation of the lending industry is one piece of the middle class insolvency puzzle.

While some are eager to point fingers at irresponsible consumers, I think Warren and Tyagi have shown that American overconsumption is largely a myth. What people are spending money on today, it turns out, are the necessities of life - not plasma TVs and Prada bags, but housing and related costs.

It follows that if you’ve bled the rock dry, those expenses end up on credit cards - and credit card companies are eager to punish consumers for the privilege.

One of the major differences between 1970 and today is how deep a hole one can dig under oneself with credit. Previously, for example, the limit of credit card interest rates was set at a federal level. With deregulation, these limits were set at a state level, and were only enforced on lenders within the state, no matter where their customers were.

So what happened? Credit card companies just moved to states whose rates favored them (have you wondered why so many credit card companies are based out of Delaware? That’s why).

Here are just some of the ways credit cards currently cheat Americans:

• Universal default: even if you’re in good standing with that credit card, the company is permitted to raise rates related to behavior on other lines of credit - without notice. There is currently no limit on how high they can raise these penalty rates, either.
• Two-cycle billing: your finance charge is calculated based on balances you’ve already paid off.
• Sending bills out late and dinging customers for late fees as a result (even if the payment is postmarked by a certain date).
• Distributing payments first to lower-interest debt. This will prevent you from paying down high-interest rate balances until you’ve paid off low-interest ones first.
• Targeting young people who don’t have established credit

I would argue that as many as 90% of credit card companies engage in these practices. I know when I was in the market for a new credit card I struggled to find one that didn’t do two-cycle billing.

It may surprise many people (although it shouldn’t) to learn that credit card companies make more off you when you struggle to pay and rack up late fees then when you pay on time. Some would call this “business.” I call it exploitative.

All of this is made more challenging by the fact that a credit card contract is what’s called an adhesion contract - it’s a “take it or leave it” proposition. Since so many credit cards offer these terms, it’s not like a consumer can just go elsewhere. People who put this burden squarely on the shoulders of consumers forget this.

What Can I Do About This?

Consumer Reports’ publisher and advocacy group, Consumers Union, offers advice on protecting yourself and your credit.

If you’re in the market for a new credit card, I recommend using a site like Card Trak to find a card with the terms most favorable to you. Money magazine also does a regular feature on the lowest card interest rates. As a warning, some credit card rate searches are just there to shill for certain card companies - I was dismayed to find that bankrate.com, who I used to recommend, has started doing this. If you don’t find banks you’ve never heard of (like “First Tennessee” or “Pulaski”) in the first page of search results, then it’s probably not legit.

Most importantly, you need to urge your senators to pass this act. Consumers Union has established CreditCardReform.org to tell the story of this legislation. Here they explain a little bit more about the history of the legislation and invite you to take action by sending a letter to your senator to support S. 3252. I encourage you to individualize the message, especially if you have a personal story to share. Stories can be more powerful than facts.

Also, I apologize for the terrible picture on the CreditCardReform.org main page. It looks like that poor woman is about to be assaulted.

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photo credit: Cyril Cavalié

The Two-Income Trap: What’s It About?

In spring of 1999, Harvard Law professor Elizabeth Warren was investigating data from the Consumer Bankruptcy Project. She was immediately struck by what she thought had to be an error: between 1981 and 1999, the number of single women filing for bankruptcy had jumped from 69,000 to 500,000.

But it wasn’t an error - and thus began a journey to explore the causes of financial insolvency in the middle class, a journey which Warren continues even today.

Over the next few weeks, I’d like to present five posts that will review The Two-Income Trap: Why Middle-Class Mothers & Fathers Are Going Broke. Written in 2003 by Warren and her daughter Amelia Warren Tyagi, this book chronicles Warren’s investigation of the financial situation of the middle class.

I’ve said before on this blog that this book is informational, inspirational, and transformational. I really believe every person in the U.S. - or at least every personal finance blogger - should read it.

For too long we as personal finance bloggers have been content to throw stones at our fellow citizens for fiscal irresponsibility as the cause of today’s economic failures. The truth is, the story is more complex than that. Over the course of these reviews I hope I will convince you that myriad atmospheric conditions created the “perfect storm” for the middle class in the U.S.

Here are the primary topics covered in Warren & Tyagi’s book that we will address:

• The myth of American overconsumption
• The bidding war for good schools
• The realities of surviving on a single income
• Bankruptcy - not fun for the whole family
• Dangerous credit deregulation

If you don’t already have the book, you may wish to read Warren and Tyagi’s Boston Review article, “What’s Hurting the Middle Class.” This will serve as an introduction to some of the issues we’ll be talking about over the course of this series.

Without further ado, part one:

The Myth of Overconsumption

Many maladies are explained away by the Over-Consumption Myth. Why are Americans in debt? Sociologist Robert Frank claims that America’s newfound “Luxury Fever” forces middle-class families “to finance their consumption increases largely by reduced savings and increased debt.” Why are schools failing and streets unsafe? Juliet Schor cites “competitive spending” as a major contributor to “the deterioration of public goods” such as “education, social services, public safety, recreation, and culture.” Why are Americans unhappy? Affluenza sums it up: “The dogged pursuit for more” accounts for Americans’ “overload, debt, anxiety, and waste.” Everywhere we turn, it seems that over-consumption is tearing at the very fabric of society…

But is it true?

Warren and her daughter acknowledge that “institutions and anecdotes” are no substitute for real data, so they turn to the Bureau of Labor Statistics’ Consumer Expenditure Survey, a set of longitudinal data on over 20,000 households. The authors sought to systematically compare the results of the 1972-1973 CES - adjusted for inflation - with those of the 2000 CES. If Americans really are overspending on luxury goods, the results should be evident here.

Warren and Tyagi compare prices in several different categories and come to some surprising conclusions. While the allocations of funds does differ between the generations, overconsumption is not any more rampant than it was in the previous generation.

Here are just some of the conclusions drawn from the CES data:

• The average family of four in 2000 spends 21% less on clothing per year than their 1972 counterparts. The cost of clothing has decreased overall, and the need for more formal clothes - and the maintenance they require - has lessened as business casual has taken hold in the workplace.

• The same family of four in 2000 spends more than the 1972 family on restaurant meals, but it spends less at the grocery store. In total, the 2000 family is actually spending 22% less than the 1972 family on food, including restaurant meals!

• Appliances that are necessities to the 2000 family, such as a dishwasher or central air conditioning, were unlikely to be found in a 1970s home. Nevertheless, the 2000 family spends 44% less than the 1972 family on major household appliances.

At the end of the day, middle-class families today do spend about 23% more on home entertainment than the 1970s counterpart - but that difference is more than offset by the differences above! In light of this, it’s not hard to think of all the things we no longer spend money on that we used to - “the average family spends more on airline travel than it did a generation ago, but less it spends less on dry cleaning. More on telephone services, but less on tobacco. More on pets, but less on carpets… in other words, there seems to be about as much frivolous spending today as there was a generation ago.”

There is one major place where the family of today sinks its money, however: the home. It is evident that the cost of home ownership has increased dramatically since the 1970s. This alone accounts for many of the spending increases over a generation ago.

Overconsumption pundits would have you believe that this is because we are all moving into 4,000 square foot McMansions. While the authors acknowledge that the average size of a new home (i.e. new construction) has grown by nearly 40 percent, most middle class families aren’t living in these homes! In fact, nearly 60% of families today own a home that is more than 25 years old, and nearly a quarter own one that is more than 50 years old.

We’re also not paying for more rooms - the median family house size has increased by only a half a room between 1975 and 1999. Usually this room becomes a bathroom or an extra bedroom.

If the 21st century family is paying more for housing, it’s clearly not paying more for luxury.

So why is this American overconsumption myth so pernicious in the face of these statistics? Warren and Tyagi present a very simple, yet beautiful answer:

… it is a comfortable way to explain away some very bad news. If families are in trouble because they squander their money, then those of us who shop at Costco and cook our own pasta have nothing to worry about. Moreover [emphasis mine], if families are to blame for their own failures, then the rest of us bear no responsibility for helping those who are in trouble.

Amen. Just stop to think about it for a moment: with all your penny pinching, if you or your partner lost your job and couldn’t find another, or became gravely ill and couldn’t work, would you be able to make your mortgage payments? How close are we all to bankruptcy or foreclosure, really?

The next post in this series will explain the “demographic force” that drove home prices through the roof and moved many middle class families to live beyond their means. We’ll also see how Warren and Tyagi brilliantly forecasted the corresponding housing market fallout.

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September was a goal-less month, but I covered a lot of ground, nonetheless. The number of subscribers to Frugal in the Fruitlands grew to around 40, and I visited topics as diverse as productivity, price comparisons, identity, local eating, and fashion.

The most popular post this month was Identity: The Problem Money Can’t Solve, thanks in large part to Paid Twice’s kind referral. Some of the other popular posts from this month were:

• Coupons vs. Generics, Round One: Contact Solution
• Interview with Nick Pagan on Establishing Alternative Income with Limited Energy - if you haven’t had a chance to review this meaty article, I invite you to do so now. Nick’s wisdom is worth your time.
• Shopping in the Fruitlands

I also talked a lot in the past couple of weeks about the $700 billion bailout of Wall Street, and why I was against it. With the Senate backing the bill, the outcome is looking more and more certain, but the bill still does not address what I feel are the biggest issues with the credit markets - the need for re-regulation. To quote this Mother Jones article:

Perhaps, the greatest lie resides at the very top of the proposed plan: that the bailout will somehow “[assist] American families in preserving home ownership, stabilizing financial markets, and protecting taxpayers.” The only way to protect citizens is to re-regulate the industry along the lines of Glass-Steagall: divide its players and their books into understandable, less risky, more transparent entities… The Democrats inserted a lukewarm provision into the bailout legislation to have the government aid in renegotiating borrowers’ mortgages to better terms, but they didn’t include any enforcement measure requiring lenders to comply.

That said, and my opposition to this bill in its current wishy-washy format registered, the American Housing Institute presents a cogent discussion of pro-bailout thinking. I understand where they’re going, but I reject the assertion that most of these bad debts the government is buying up are “real Vermeers.” I also don’t believe that this bill will encourage the credit industry to reinvest the proceeds in the economy - at least not in a non-toxic way - without credit re-regulation.

And with that thought, I leave you to pursue Day Two of Web Browing Reduction Month. (Day One: Success!)

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If the lenders are blameless in this economic situation, and it’s really all caused by those math-impaired cretins who borrowed the money, then why are Fannie Mae, Freddie Mac, AIG, and Lehman Brothers being investigated for fraud?

One quote: In June, [the FBI's] Mortgage Fraud Task Force arrested more than 400 mortgage brokers, lenders, appraisers and other industry insiders who, it said, were responsible for more than $1 billion in losses.

I’m still trying to decide my opinion on the $700 billion bailout plan. While it’s being presented as taxpayer-focused, the recent writings of a certain Mr. Fengi are making me realize that the $700 billion number is a nice round number pulled out of someone’s ass, and that all this bailout will do is allow lenders to go back to their previous predatory behavior, hoarding profits and passing expenses on to taxpayers.

And lest you think the Candidate You Support will do something to stop this, keep in mind that both Democrats and Republicans know who their corporate masters are.

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Or at least as angry as I get on this blog.

If I read one more “blame the borrowers for the subprime mortgage crisis/FM bailout” post, I may be forced to scratch someone’s eyes out with a nail file. This line of thinking is so misguided that it’s morally reprehensible.

In the next couple of weeks, I am hoping to write a multi-part review of Elizabeth Warren and Amelia Warren Tyagi’s The Two Income Trap. This book, written in 2003, brilliantly predicts the situation the economy is in today. It discusses the effects of unregulated lending on the middle class; it presents the now-popped housing bubble as a bidding war for educational quality; it blows apart the myth of American “affluenza,” it talks about the real causes of bankruptcy; and it even juliennes fries. It should be required reading for every American, or at least every over-privileged frugality/personal finance blogger who has ever naively spouted off that the cause of our economic situation is simply people buying too much dang stuff.

In the meantime, let us take a moment to consider that most of us - yes, even me - are probably a job loss or serious illness away from bankruptcy.

I’m an atheist, but I think that Jesus guy said something about the mote in one’s eye.

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I want to bring your attention to this thought-provoking article on Unclutterer, Depression-era mindset and clutter. While not in the frugality niche, per se, it struck a chord with me because it made me realize how disturbing I find the glamorization of Depression-era thinking in the frugality blogosphere.

“Frugality bloggers glamorize the Great Depression! Surely you don’t mean that!” But, come on, it’s everywhere. From articles that ask us to consider if a recession might really be a good thing, to Dollar Stretcher articles that talk about cutting the bad spots off half-rotten fruit because goddammit, our grandparents only got a single orange for Christmas, to that old saw, “Use it up, wear it out, make it do, or do without”… it’s clear that frugality bloggers believe that there is great wisdom in the mindset of people brought up in great poverty.

Let’s look at the other side of the equation, as Unclutterer has done. I’m sure it’s not a 1 to 1 correlation universally, but there’s a strong connection between that kind of thinking and hoarding. The down side of growing up with not a lot is that suddenly your mind switches into famine mode; everything that passes through your hands must be kept for the hard times ahead. “Well, what’s wrong with that?” Within reason, nothing. However, it is often coupled with an ingenuity that might lead such a person to refill ketchup bottles with ketchup packets from fast food restaurants or save butter wrappers to grease pans. Stuff builds up, because everything is potentially useful; in the end, this Depression-era hoarder ends up drowning in their own stuff, bereft at the thought of letting any of it go.

If you think I’m exaggerating any of this, imagine me, eight years old, spending my after-school hours and summers with my grandmother, born in 1925. She lives with my aunt in a tiny house that couldn’t even be generously called a “ranch.” It’s a single floor, cobbled together from spare lumber. There are two bedrooms and one bath off a central kitchen and living area; and a screened porch.

It’s a tiny space, and yet every spare inch is filled to capacity with: old newspapers, old TV Guides, my mother’s childhood toys, my childhood toys, clothes my grandmother bought at garage sales and never wore, clothes and other personal items my grandmother received as gifts and never used, and on and on.

Some of my unhappiest moments of that time revolved around my aunt’s attempts to clean. She did her best to keep the place manageable - she worked as a house cleaner, after all - but any time she tried to throw out, say, a stack of old and unread newspaper, my grandmother would yell and scream and cry and be totally lost. I still remember the blank look in her eyes when my aunt tried to do this.

I think the culmination of my grandmother’s hoarding behavior was that one day, I walked into her bedroom to discover that she had been saving the used urine test strips she used to manage her diabetes.

After my grandmother’s death, my mother spent months cleaning up all this crap, finding, among this, young children’s toys that my grandmother had bought as gifts to me but had never given me. My mother’s insight on this would be to point out an estate sale she once attended, where everything a deceased woman had owned - literally, everything - was thrown on the lawn to be sold. Dresser drawers had been upended, and the woman’s old ratty underwear were scattered in the breeze.

This is why I reject this kind of Depression-era thinking, even while being a frugality blogger. I think it leads down the road to hoarding; to a life remembered by crap no one else wants to clean up.

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My friend Django brightened my day with this point about my weighty mortgage:

The other thing I was going to console you with is that, with the markets in the state they’re in, your financial position is actually perfect. [You're] heavily leveraged, i.e. a debt-to-net-worth ratio of close to 1.

The most likely result of a market crash is inflation as the fed pumps ever-more money into the economy… ditto tax relief, etc. In any inflationary situation, the ideal place to be is in debt up to your eyeballs, with the money from that invested in real assets (i.e. not credit card debt), since, as inflation pushes up prices and salaries, the amount of debt relative to income goes down. In the worst-case scenario (China dumps US currency, runs on the dollar, hyper-inflation) your debt becomes meaningless and you get a free house.

Conversely, in that worst-case scenario, the place you DONT want to be is holding bonds, pensions, or other fixed-income instruments (or just dollars) - because if a loaf of bread now costs $10,000, your pension isn’t worth very much.

This is what happened to Germany in the 30s (which they engineered deliberately, to get out of their debts to England and France) or Russia accidentally in the 90s, after they lost most of the countries money to a pyramid scheme.

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In the open-source software community, it is often said that “Linux is only free if your time is worth nothing.”

In the frugality blogosphere, in our hurry to convey Ten Great Tips for Trimming the Cost of Toilet Paper, we tend to forget the price of our our own life energy in any equation of savings. We also forget the opportunity cost of spending two hours trying to save a few pennies.

Here are some of the biggest offenders in the time-money tradeoff:

1. Clipping coupons. I’ll admit it - I do use coupons myself. I belong to MyPoints, and I can “clip” online coupons through them and get rewarded with points. I don’t spend a lot more effort than that on it, though; I probably use about three or four coupons a month.

The biggest problem with coupons is a) the amount of time it takes to coordinate the coupons one has with the items one actually needs, an b) the tendency to move items into the “need” category that shouldn’t be there as a result. We all like to think we’re smarter than that, but the notion that we’re getting a bargain can be pretty powerful. A Harvard Business School study shows that the redemption of a $10-off coupon increases an individual’s spending and that, furthermore, the increase in spending stimulated by the redemption of a $10-off coupon is focused on groceries that customers would not purchase in the absence of such a coupon.

Basically I look at coupons as just another advertising ploy to get us to buy. Proceed with caution.

2. Re-using sandwich/storage baggies. I keep telling myself I should pick up this habit. But inevitably the dirty baggies pile up next to the sink and the cats get to them and leave tiny teethmarks on the corners, forcing me to throw them out.

Eventually I realized this: I hate dishes enough. It is just not worth my time, considering the only money I’m saving is a) the cost of a new box of bags, or b) the space they take up in my trash. (We have a “pay as you throw” garbage system in Lunenburg).

I know, I know. Amy Dacycyn of The Tightwad Gazette said this was cost-effective - she can’t possibly be wrong, can she? But I, unlike Ms. Dacycyn, work a full-time job at a location which is not my home - the value of my time, as measured by the value of my pay, is probably worth more than hers. Plus, I always thought her estimate of how long it took to get a plastic baggie clean was way too low.

If you value reducing your trash production for environmental reasons, a better long-term solution is to buy a quality set of reusable plastic containers. You don’t even need to buy them new; I see these at garage sales all the time.

3. Cutting corners on food. It’s a conundrum that the food that’s healthiest for us is most expensive, but food needs to be a priority spending category. Packing your diet full of processed products only means you won’t be around long enough to figure out those ten great tips for saving on toilet paper.

Keep in mind, too, in paying the premium for quality, sustainably harvested food, what you’re getting is not only better taste and nutrition - you’re contributing to a living wage for small farmers everywhere. Given the worldwide food shortages going on right now (caused in part by an emphasis on certain subsidized crops over others), you are quite literally putting your money where your mouth is when you do this. Spending more now on quality foods means that you’ll actually have these foods when times get even tougher.

That said, there are ways to save money on your food bill. Don’t dine out every night, shop around the outside of the store, stick to unprocessed or minimally processed foods, and look for generic versions of healthy or organic foods. Hannaford, for example, has a great line of its own organic foods, and my local one has recently started offering foods from a local farm.

It is also important to consider the quality of the food you feed your pets. A more expensive food may cost more in the short term, but you’ll be reducing your bottom line on vet bills, grooming bills, and the cost of litter. I’ll be the first to admit I’m a bit of a pet food snob, but the lowest quality food I would consider feeding is Iams or Science Diet, and I would highly encourage all pet owners to educate themselves on feline/canine nutrition and seek out the highest quality food they can afford.

4. Make your own X. It pains me to say this, because I am the biggest DIY geek in the tri-state area, but in our modern society, it is almost never cost effective to make your own. I’d be dishonest if I said that the money and work I’ve put into, say, my garden, is cheaper than what it would cost me to buy a season’s worth of vegetables. Even Trent of The Simple Dollar, maker of his own detergent, admits that it would cost less to buy his detergent at a bulk discount store.

Caveat: there is one big exception to this DIY rule; namely, cooking for yourself (based on the fact that restaurant meals are incredibly inflated relative to the cost of food).

Savings aside, part of the reason I so often do-it-myself is because I want a product just so, and the effort of finding it that way may, in fact, be more time-consuming. My husband and I are foodies, and we’re attempting to grow our own vegetables because biting into a vegetable that’s still warm from the sun can’t easily be replicated.

This ties into another pleasure of DIY: the amount of satisfaction you get from doing something with one’s own hands. In a world so divorced from physical labor, this is priceless.

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Bankrate.com presents Market History: Learning What to Do From Past Recessions. Everything old is new again, as Bankrate discusses the history of oil prices, real estate bubbles, gold, and foreign investments. I wish they had brought up what Money mentioned last month: that over the past 100 years, stocks have consistently outperformed gold. That’s advice that some people I know desperately need right now.

Delayed, but good: Robert Reich, former U.S. Secretary of Labor, writes about The Real Recession Problem: Consumers Are At the End of Their Ropes (h/t to Brian). We’re finally reaping the whirlwind of widening inequality and ever more concentrated wealth, he writes, acknowledging that there is more to this financial situation than just “HOMG yuppies bought bigger houses than they could afford!” This makes him rare among American finance writers I’ve encountered, who seem to ignore the social inequalities in how sub-prime mortgages were sold to minority and immigrant families by shady lenders. (The BBC’s The U.S. Subprime Crisis in Graphics in another good resource).

On a lighter note, I’ve discovered the new-ish Retirement: A Full-Time Job blog. I, too, aspire to be a “young retired bitch.”

Leo writes about The Magical Power of Focus and reminds me that- ooh, shiny!

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Last night, my favorite vendor of perfume oils, Black Phoenix Alchemy Lab, released a bevy of limited edition autumn/Halloween-themed scents. I’m finding it very difficult to keep my mouse finger still and not snap up the entire collection, despite the dire state of my expenses and the fact that I already have more BPAL oils than I can possibly use before they go rancid.

I’m moderate in so many things - why do I go crazy for little bottles of smellies?

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