The Best Financial Product Ever Created – Credit Cards

It has dawned to me that people have taken for granted the use of credit cards. One day, I was in a bank and the person standing in front of me was complaining to the bank employee. He insisted that he has received a pre-approved card and wants it to be returned and deactivated immediately. The bank employee simply explained that being a valued customer, the bank has chosen him to receive a pre-approved gold card. The bank employee further explains that the card was free from any annual fees for the first year. If he ever so decides that he doesn’t want to use the card, he can simply discontinue or have the credit card cut. But the guy insisted that he wants to return the card today and have it deactivated immediately. He explained that he had heard a lot of stories people drowning in credit card debts.

As I was standing behind him, I couldn’t help myself but be sad for this guys situation. He was given something wonderful but he thinks and focuses that a Credit card is something evil and it would probably bring him enormous debt that he wanted to disposed of it right away. I believe credit cards is the exact opposite. These so called “plastics” were made to make life simpler, convenient, and give us opportunity to spend in cases of emergency. Although some consider them to be a double edge sword, it’s actually our knowledge and discipline that needs to be checked when using it. A few tips on how to they should be used:

1. Use your Card to pay for something that you already have cash to pay for. Instead of carrying your cash every single day, you bring along with you your credit card for convenience. But never pay for something or a service without setting aside the cash to pay it off when your due date arrives. Once you start using a Credit Card expecting NOT to pay the full balance in it’s due date, that could be the start of accumulating credit card debt.

2. You can actually extend the number of days of your due date. When you will receive your billing statement which usually arrives 2 weeks before your due date to settle it, you can actually start using your credit card at that time. This would mean that those purchases you made right after you receive your billing statement for that month would mean that it would be included in your next cycle of billing. This would mean you have extended the number of days till your next billing due date.

3. Don’t completely think that these cards sole purpose if for purchasing things that we need. These cards can actually be used a source of funds for business. Let us say you have a friend from another country who is looking for a laptop. It so happen that laptops in the United States are typically much cheaper compared to the other countries. So you intend to buy one and sell it off with a small markup to your friend. Instead of putting out cash you can use your card to purchase it, travel and sell it to your friend, come back and probably that would just be in time for you to pay off your Credit Card bill. You can even purchase that item by amortizing it and paying in small amounts monthly while you sell your item and get paid with the full amount in cash.

There are really a lot of advantages of using credit cards that’s why I would certainly consider this to be the best financial product ever created. Just have discipline in using this wonderful product and not fall into a Credit Card debt.

When a Financial Product Sounds Too Good to Be True

It probably is. I’ve recently heard about such a product, one that guarantees you 10% return for the next seven years, and 5% for life after that. It’s even in writing. Doesn’t that sound great? Who wouldn’t want that?

But the devil is always in the details. Let’s examine the details of this particular offer, which is an annuity. Let’s say you invest $100,000 in this product. At 10%, you’ll double your money in about seven years. You’ll have $200,000.00. Fantastic. So far, so good, right?

But here’s where the details come in. If you read the fine print, you’ll probably discover that the $200,000 does not belong to you. You can’t ask for a check for that amount. You’re not allowed to touch that $200,000. In fact, if you do, there are penalties. Instead, you can take an income from the 5% for life that was guaranteed, which will be $10,000. So let’s say you were paid $10,000 a year for the next ten years. How much have they paid you now? $100,000. Guess what just happened? Over that ten-year period, you were paid back the money you originally invested. In a nutshell: You invested $100,000 in this product, you waited seven years to see $200,000, and then you had to wait ten more years while you were paid $10,000 a year. You made back your money 17 years later.

The guarantee was all true. The value of your investment rose by 10% and you did get 5% for life. But I don’t think this is a good deal. If it were, I could retire right now. I could put all my clients in this deal and never have to do another day’s work. I wouldn’t have to worry about the market. I wouldn’t have to worry about anything. Unfortunately, there is no free lunch, and there’s no such thing as a risk-free product that guarantees a 10% return. And if someone tells you there is, read the fine print very carefully. Ask questions. Be an informed consumer. Remember that the devil is in the details, and if something sounds too good to be true, it probably is.

TO POLITICIANS: STOP BEING NICE

I wish the politicians would stop being nice. We’re getting closer to the fiscal cliff, and all this playing nice stuff is getting on my nerves. We’re all Americans. We’re not Democrats. We’re not Republicans. We’re Americans, and the politicians need to do what’s best for the American people. Take the gloves off and let’s get the fight going.

They’re wasting time. The fiscal cliff deadline is January 1st. We don’t have a lot of time to get this thing resolved. I’m concerned that they’re just going to talk nice, not resolve anything, and have a fight at the last hour-and that the market will drop dramatically as a result. I don’t doubt that they will find a way to extend the deadline, but they might wait to make a decision with only seconds left on the clock, like they did last year.

During the debt ceiling debate last year, we saw the market go down 19% before they finally decided to raise the debt ceiling. I think we’re seeing all the earmarks of the exact same thing. Do you want to take massive losses while you wait for those guys to resolve their problems? Why not take some profits off the table? Then, when they do announce that they’re gonna postpone, band-aid, or resolve the situation, how about going in the market at that time? Maybe buying in at 19% down? I don’t know if the situation will play out like that, but I think we can learn from the past. We can use past experience to navigate this market in hopes of coming out without losing too much money. And we can hope that the politicians stop being nice and get down to work.

Financial Products Aren’t Bad, They’re Just Sold That Way

Oftentimes when meeting with clients and prospects, we caution them about putting too much credence into the rantings of the popular financial press. We remind them that these writers and pundits are in the business of selling magazines, newspapers, books or investment courses (or some combination thereof). Due to limited space, and in order to stand out from the crowd, they must take very strong stances, pronouncing some financial products “good” and others “bad”.

It has been our experience that, save for outright illegal products, it is ridiculous to attach a “good” or “bad” moniker to a particular financial product. Any tool, financial or otherwise, is “good” for some situations and “bad” for others. Very rarely is a particular tool flat out good or bad in all circumstances. Would you say that a screwdriver is a “bad” tool because it doesn’t cut wood? No, of course not. What you might say, however is that the screwdriver is a bad choice for cutting wood but a good one for it’s designated purpose of turning screws.

All financial products are, like that screwdriver, merely tools to help you achieve your financial goals. Most financial products available are good for some situations and bad for others. Problems arise not from the design of the tool, but when it is sold for an inappropriate purpose by either an unscrupulous or poorly trained financial advisor.

Let’s use a product that we see getting bad press all the time – annuities. Various columnists we’ve seen (who shall remain nameless), when asked about annuities will say simply that they are “bad”. They’ll argue that annuities are illiquid, expensive, pay huge brokerage commissions and that you absolutely don’t need one. What these columnists fail to tell you is that annuities are a great tool when used for their primary purpose – providing a stream of income that you cannot outlive. When annuitized, they work much like traditional pension plans, providing a steady stream of income that will last a lifetime. For a segment of the population this guarantee provides the priceless benefit of peace of mind. Is your money illiquid? Generally speaking yes, for a finite period of time. Does the guarantee of not outliving your money come with a cost? You bet. We all know there’s no such thing as a free lunch. Did your broker get a commission? More than likely, yes. The fact that the broker receives a commission doesn’t make it a bad product; it just makes it imperative that you understand the potential conflicts of interest the broker may have had in selling it to you. Do you not need an annuity? We don’t have a clue. Until we’ve met with you for a full review of your entire financial picture, we can’t tell where an annuity fits in the mix. Nobody can. In fact, we recommend you run far and run fast from any advisor that makes a recommendation without asking a LOT of questions first.

Hopefully we’ve learned two important lessons here: 1) Remember that newspapers, magazines, radio and TV shows are in the business of selling more of their product, so take what they say with a grain of salt, and 2) Be very wary of anybody that tells you that a product is “good” or “bad” without understanding your unique financial situation. To paraphrase a line from the movie “Who Framed Roger Rabbit?”, “Good products aren’t bad, they’re just sold that way.”