Friday, June 27, 2008
ABC and a few other news outlets are using the sound bite this morning of "This was the worst June since the Great Depression!" Claiming that the 9% fall this month compares to the fall 78 years ago.
This is utterly ridiculous! While it may be technically correct (there have been no other Junes when the Dow has taken a 9%+ plunge), the spirit of the statement is meant to invoke fear, and fails to consider that for 2008, including June, both the Dow and the S&P are only off by 12%...a mild market correction. Compare that to the near 80% fall between late 1930 and July 1932. To compare these two is blatant fear mongering. (It is also reminiscent of the "creative statistics" recently used by the Clinton campaign when claiming Hillary had the popular vote.)
The few people whom I have personally known who lived through the Great Depression (including my grandfather) told me stories of those days such as only adults having shoes and saving pennies to bake a cake. Compare that to the multi-car families with 3000 sq. ft. houses, $300 footware, and spending billions on entertainment. Even the thought of comparing those two worlds gets me hot under the collar.
Thursday, June 19, 2008
This weekend, my girlfriend and I met up with my parents in Myrtle Beach for a few days of relaxation. Coincidentally, my girlfriend and I had recently been talking about timeshares -- and saying that it might be fun to get some freebies for sitting through a presentation. So when we were approached at a local restaurant to take a timeshare tour for a $100 visa card and two "3 day / 2 night vacations" we decided to sign up. They wanted $20 to hold our spot -- which I was leery of -- but I agree from their perspective seems to make sense so they don't have 50% no-show rate. We did get our $20 back when we checked-in the next morning.
While I have never taken a timeshare tour, I'm very familiar with the concept, the points system, and the retail and resale rates. I suggest if you are going to take one of these tours, you spend an hour reading on different websites before you go on your tour. It will provide you with plenty of ammunition.
How does this tie to building wealth? Simply put, building wealth is as much about avoiding bad financial decisions as it is about making good ones. As a rule of thumb, you should never buy anything (even something inexpensive) under pressure from a salesperson, and definitely do not make a large purchase on the spur of the moment. We live in a time where a world's worth of information is searchable at the touch of a button. There's a reason why a sales person wants you to buy immediately...because if you have a few minutes to go off and think about it and do a little research, they'll never see you again.
If you are considering taking a timeshare tour to get the freebies, here's what you should expect:
We arrived and the first thing that I noticed was that the group of people in the lobby didn't look like they could afford a $35k timeshare. When our salesperson came out, he greeted us and took us into a room with lots of tables, chairs, and balloons. He sat us down and began with the questions about where we were from, how we met, blah, blah, blah. He actually mentioned that he had only been on the job for 3 weeks. My guess is that the average tenure is not much longer than that.
Knowing that the next round of presentations wasn't until 12, my girlfriend and I figured we probably had 2 1/2 hours to sit through and we were right. After the fake chit-chat, we opened the "workbook" where he began to ask us questions about our ideal vacations. Knowing the cons of timeshares, we purposefully stated things that we knew timeshares couldn't fulfil. Such as we enjoy traveling spur of the moment, going to off-the-beaten-path destinations, and the flexibility of choosing from a wide array of accommodations. I got a kick out of the fact that he only wrote down the ones that he wanted and that he had a good comeback for. I actually stopped him and made him go back and write down the others.
When he saw the pros and cons list wasn't really working out, he went on to the next page, which was "rent vs. own." I got a kick out of this as well, because they try their best to equate timeshare ownership to home ownership. Of course the two are completely different, but they play on the fact that "everyone wants to own." We continued to come up with good reasons why "renting" on vacation was optimal, so he brought over his manager for a little chit chat and convincing. We played along.
Next they did a little "cost analysis". He asked us what we spent on vacations, and we stated about $800 a year. So he said over 30 years, we'd be spending $28,000. "Did we really want to waste all that money?" Of course, when I pointed out that the fees on a timeshare (maintenance, points network, etc) are fairly comparable, they tried to glaze over that fact by saying that "as long as you refer 20 people a year, you don't pay maintenance fees!" Wow. They also tried to convince us that the $28,000 would be more like $75,000 because of inflation. It is amusing to me that they don't do the flip side and calculate the $30k sales price, 30 years of maintenance fees and network fees, and the cumulative interest from the sky high interest rate.
Next we got around to the portion where they show us the website. We both laughed when one of the "benefits" was "discounts at restaurants" and the domain in the browser clearly showed entertainment.com. I stated I already bought an entertainment book for $15 from work, so I already had access to those discounts.
Finally, we got to the portion where we took the tour. We got in the salesperson's humongous diesel truck and drove a few miles down the road. The ride was the most interesting part to me, because I got the guy a little off his script. I told him that my side business was a website about saving money (savvydollar.org) and gave him a card. We then drove past the "Bass Pro Shop" where he said that he was approached for a timeshare demo just a month earlier. He then showed us his drivers license picture where he had long hair and a scruffy beard and told us how they told him he needed to shave and come back in a tie. He also told us that things were going well in his first 3 weeks, and that he had even sold 2 timeshares in the same day and had been salesperson of the week for selling the "gold" package to a football player the week before. (This is where I felt a little sorry for this guy. He sounded like an honest Joe...working for a living...trying to move up in the world. I really don't believe he understands what he is selling....or what he bought himself. ) He also had a New Testament bible in the console between the seats. My gf and I wondered later if that was part of the show.
When we arrived at the "resort," my gf and I were really surprised at how dingy it was. Seriously, you'd at least think they would show you the good stuff, but this was seriously in need of a good cleaning. It certainly didn't have the "luxury" feel.
We tried to hold in our chuckles as we looked out over the balcony and the sales person let out a "Ahh..." at the beauty of the beach. We laughed later because it was obviously overcrowded and dirty.
On the drive back, I told him that I might consider timeshare ownership, but only on a resale. I said that I would never buy something full price that I could buy at a 90% discount on craigslist or eBay. (This is where my gf says that she saw the confusion on his face -- that perhaps he was unaware of that and was wondering whether he had made a wise purchase himself.) When we got back, he was ready to get rid of us, but still put on a fake "so are you ready to buy?" He gave us a $25k price tag for a 12,000 point package, and we just smiled and said no. He brought over his closer, who honestly didn't try very hard, but he did give us the "teacher's discount" with some other lines about "we'll pay this and that" the first year. I would love to know what other creative "discounts" they make up on the spot.
We finally got out of there...after 2 1/2 hours...and got our $100 gift card. The "2 night vacations" weren't worth the paper they were printed on (full of "notification in writing" clauses) so we tossed them in the garbage. I called the automated visa number to ensure there was $100 on the card.
In the end, it was sort of fun if you go in knowing enough about timeshares, resale, points systems (RCI), etc. After an hour of reading online, you'll likely know more than your sales person. We figured the return on our time was pretty low ($20/hr each), but it was sort of a fun experience, paid for our gas down to Myrtle Beach, and gave us plenty to laugh about on the 3 hour drive home that evening.
So, what should you do if you fall for their sales pitch? Well, there's still hope. If you signed the contract in the last few days, you may be able to wiggle out of it thanks to your "right of rescission." This means that you typically have 3-7 days (depending on the state you live in) to cancel the contract you signed.
Tuesday, June 3, 2008
Here are some of the advantages of a 529 plan:
1. Anyone can contribute to a fund -- This means that parents, grandparents, friends, and even the child can contribute to the fund.
2. Tax Savings -- The earnings are tax free, and that's a lot of savings when compounded over 18 years.
3. Easily Change Beneficiary - If the original recipient does not attend college, the beneficiary can easily be changed to be another family member.
4. No Harsh Withdrawal Penalty -- If the original designated person receives a scholarship, (or meets a few other conditions such as going to a military academy) the only withdrawal penalty is to pay the tax you would have paid anyway on the earnings. Now that's what I call a no lose proposition. (If you withdraw the money for a non-qualified reason, there is a 10% additional tax on the earnings, but not the principal.)
Now that I have you convinced that a 529 is worth thinking about, you should know that each state offers a different plan, and you are eligible to pick almost any of the state plans you desire (not just the state that you live in). However, if you (or whoever will be making the contributions) are an NC resident, and plan to stay in NC, the North Carolina 529 is an attractive option. If you are not a resident of NC, or plan on moving sometime soon, your best option is the Utah plan. Let's take a quick look at both.
There are three facets that distinguish between plans and that quickly take large groups out of the running. Those three items are total fees, tax benefits, and fund options.
The North Carolina plan offers low administrative fees, the option to invest in diversified Vanguard funds (low fees, stellar reputation), and offers a tax break to residents. (The $2500 allowed deduction for a single person and $5000 per couple results in tax savings of approximately $175 and $350 per year, respectively.) The fees for the NC plan are 0.25% of the average balance throughout the year, and are in addition to the fees (also about 0.25%) charged by Vanguard. While you also have an option for Seligman funds, their fees are significantly higher. You can find out more at the official website at www.cfnc.org/site/nc529/main/overview.jsp.
If you (or the person making the contributions) will not be a NC resident for the long term, Utah offers a very good alternative. You will not get tax credit if you are not a resident of Utah, however, their "maintenance" fee is capped at $20 per year and the funds charge a set 0.25% administrative fee. Utah also offers Vanguard funds, so it is easy to compare apples to apples when comparing with North Carolina's plan. You can find out more at the official website at www.uesp.org.
So as you can see, the only real difference is with fees and tax deductions. As a NC resident, the tax break seals the deal, but you really can't go wrong either way. The only real mistake you can make here is not opening an account.
Dan Griffin holds a Master's Degree in Business from the University of North Carolina, and is founder of SavvyDollar.org.