## Friday, June 24, 2011

### Walking on the Edge of a Cliff

Very few people actually fall into the Grand Canyon.  But that is cold comfort to the person who does.  Standing away from the rim is one sure way to protect yourself.  So why not do it?

According to one recent book, on average, only one person falls into the Grand Canyon every year.  Given the millions that visit the place, this is a pretty impressive safety record.  But of course, most of us obey the rules, stay back from the canyon rim, and don't mess around.

Others, like the fellow in the picture above, think nothing of standing at the very rim.  What a great view!  And what is the harm?  After all, they are standing on solid ground, right?  From a Physics point of view, they are correct.  Gravity has a vector straight down, and if the rim is solid, there is no risk of falling in.

But that is a theoretical argument based on Physics.  In the real world, a lot of things can happen that will push you over the edge (including someone physically pushing you over the edge, like a disgruntled spouse).  A gust of wind could bowl you over.  You may become dizzy and faint.  The edge may not be sound and crumble.  You may slip on a smooth rock.  There are hundreds, if not thousands of scenarios where, if you fell over, there is a 50/50 chance of falling in and plummeting to your death.

But those same scenarios, played out ten feet away from the rim, result only in you falling down and maybe skinning your knee.

So the obvious conclusion is, while the risks may be small while standing on the rim of the canyon, the odds are infinitesimal if you stand away from the rim.  If you can improve your odds like that, by doing something that costs you nothing, why not do them?

And this is why I say that speeding is silly, running stop signs is for chumps, and tailgating is for idiots.  You do these things, the odds of accidents increase dramatically.  It costs you nothing to drive more carefully - but the risk of accident drops dramatically.  And if you do this, you may end up like me, paying \$32 a month to insure two cars (as opposed to \$250 a month - or more - that most bad drivers pay).

Similarly, with financial instruments, it is tempting to walk on the edge of the canyon, often baited by cotton-candy promises of credit agencies.  They dangle out a treat, saying "frequent flyer miles" or "12 months same as cash!" and you walk along the rim, and maybe occasionally they give you a nibble of candy.  But you are taking a huge risk, for not a lot of reward.  And the finance industry knows exactly what it is doing - and you likely don't.  Who has more experiences in finances, VISA or you?  Be honest, here!

They make money when you plummet to your death.  The new financial model of the credit industry is to intentionally ruin people - because they make a lot of money destroying someone's life.  Loan out credit card money at 25% interest, and the poor sap will spend a decade paying it back.  And let's face it, making 25% rate of return is pretty sweet, no?  For the credit card company, that is.

And most of these "rewards" cards either have very high interest rates, or will "default" to a staggeringly high rate, if you should ever miss a payment or get into trouble.  One gust of wind, and over the edge you go.  And the friendly credit card people may actually push you - increasing your credit limit to beyond what you could ever repay, sending you offers in the mail, little paper checks for you to cash

With new bankruptcy laws, the best the poor sap who falls can hope for is that a bankruptcy court will wipe out the remaining interest (after having paid interest for years - more than the principal amount!) and then be given a "workout" payment plan on the principal, to pay back the credit company over 5 or 10 years.  The credit company loses nothing, gets all their money back, plus staggering interest payments.  Again, a pretty sweet deal - for the credit card company.

And if the poor sap is evacuated from the floor of the canyon by a life-flight helicopter, well, he's in even more trouble (\$14,000 bill, right there!).

These credit industry people are not your friends.  They are not dangling out cotton candy because they like you.  And you did listen to your Mother about strange men in white vans offering you candy, right?  Well, here is the same deal.  Don't get in the van!

The credit industry is your enemy, period.   At best, they will offer you secured loans - such as a mortgage - on decent terms, to be paid back over long periods of time, with enormous interest paid, cumulatively.   But even then, they will try to tack on loan fees, junk fees, origination fees, loan points and other crapola, which will make the cost of borrowing even higher (but obscure the overall cost).  And of course, they will dangle out the cotton-candy of a refinance, again and again, in your face, until you take a bite of that Turkish Delight, and end up in their spell, forever.

The friendly people at the Credit Card companies are not offering you frequent flyer miles or cash back bonuses because they like you.   Consumer Credit agencies do not offer 3, 6, or 12 months "same as cash" because they are friendly people who want to help you out.

They do these things - consciously, deliberately, and with precise mathematical calculation - to entice you into signing odious loan documents - to get you to walk on the edge, financially.  And many of us think we are smarter than these credit companies - who have eons of experience in the business, as opposed to our short years.  And we think we can outsmart the fox, steal the cheese out of the mouse trap, and torture metaphors until they scream.

But it is risk-taking, plain and simple.  And as with any risk-taking venture, you have to ask yourself, is the risk worth the reward?  What is the cost/benefit analysis?  You have to do this with every risk venture, otherwise you end up just driving off the cliff, convinced it is a shortcut.

And in this case, the credit industry has done the risk/benefit analysis for themselves and concluded that while a few people may make out well on frequent flyer miles or 12 months same as cash, a large enough number will screw the pooch by forgetting to pay it off on time (or not being able to pay it off on time) and all that high-interest (or default interest rates) will kick in, and push you over the edge financially.

And this happens with enough regularity that they make a lot of money on it.  And in fact, the people who fall off the cliff, are, unlike visitors to the Grand Canyon, the majority, not the scant minority.  And the credit card companies know this because they have the computers, the data, and a greater understanding of your own human nature than you do.  Why play their game?

(Casino operators are the same way - far smarter than you.  You can say you are just going to play the penny slots for a few minutes, but several hours and several hundred dollars later, well, something else happened - they expected it, you didn't).

Chasing after this cotton-candy is not only faux financial acumen, it is risky - very risky - to your personal finances, as we all saw play out two years ago.  If you win, you get a small reward.   If you lose, you lose it all.  Is this really a valuable use of your time and energy?  Are those really good odds?

I don't think so.  Wagering your life's finances and potential bankruptcy for a free flight to Duluth is, in my opinion, an idiot's bet.  The reward is not worth the risk.

My advice is this:  Stay away from the rim of the Grand Canyon.  The view is just as good 10 feet away as it is teetering over the edge.  And you will never fall in, 10 feet away, unless there is a tornado or something.   And the odds of that are long, and you can prepare for that - if you are 10 feet away.

So avoid Frequent Flyer or Cash-Back Bonus credit cards - their 25-30% default rates are not worth it, for a few baubles and trinkets.  No debt is far better, and low interest rate credit cards are truly something that can help you out "in an emergency".  Seek out the best deal on a loan - on its primary terms - and don't be distracted by ancillary gimmicks.

Avoid 12 months same-as-cash deals.   Pay cash and avoid taking on debt, even if it is nominally "interest-free".  Spending is spending, and the temptation when borrowing is to spend more.  And you don't make that payment on the 365th day - all is lost.

And just stay out of places like Casinos.  The idea that we have enough self control to overcome a machine (and casinos are machines) designed specifically by an army of experts to get you to spend, is, well, just ludicrous.  They have years of experience and have honed their skills in separating you from your money.  All you have is your vaunted "Self-control" - and a quick trip to the bathroom scale should remind you how well that is working out for you.

In short, seek out the most direct and simplest deals in your life, as these are the best deals.  Buying a lightly used car for cash from your neighbor is a far better deal than some convoluted leasing arrangement.  Paying cash and negotiating a discount on the PRICE of goods is far better than borrowing and trying to get 12 months same-as-cash.  The more baubles and trinkets you add on to a deal, the less and less a bargain it is for the consumer.  And the people offering the trinkets know this full well, as they have an entire industry of accountants, statisticians, advertising men, and even psychologists, crafting these velvet-lined traps for you to step in.

Spend your emotional and physical energy seeking out simple, direct, and good bargains.  Don't squander your time trying to get a free gimmick.  Not only will you get a worse deal, you will end up taking enormous risks, as well.

It ain't worth it!