moneymatters

Boom Boom’s Life Lessons #17

Posted on by boom booms room staff

One of the many gifts that Boom Boom gave us was the torrent of quips about how one leads one’s life.   He could say so much by saying so little.   A statement at just the right moment resonated in my young, eager eardrums.  How I interpreted or applied it was up to me.  No more words were spoken because no more words were needed.

Today U.S. Government Series EE Savings Bonds as an investment are about as popular as Donald J. Trump is in Portland, Oregon as a president.  But way back in the 1960’s and 1970’s they were backed (and still are) by the full faith and credit of the United States and paid about eight percent interest per year.

And way back in the 1960’s and 1970’s Boom Boom brought one home every other week in his briefcase.   I just didn’t know it.  I didn’t know it, that is, until one evening after supper.

In Lesson #4 we shared that on a couple of weeknights each week he finished dinner and headed to our spare bedroom that housed his desk, his adding machine, my mother’s exercise bike, and most of all an undersized pool table.  Yes, it was crowded.  He needed to do some “book work” he always said.  He struck the adding machine keys so quickly that it was not possible to follow.

His one and only son loved playing pool (competition and geometry combined is a tasty combo) and asked for him to”crack em” almost every night that his own homework didn’t get in the way and after his father’s “book work” was completed.

But this particular evening was different.  Boom Boom asked that I help him with his book work.  At the tender age of eight or nine I had no idea what that meant.  I had no idea until he took the bond out of his briefcase and pulled a short stack of them with a rubber band around them out of his top drawer.

“Son, these bonds are going to pay for your college.”  “College?” I stammered.  You see the dollar amount in the corner of each?”  “Yes.”  That will be how much each is worth when they mature.  And almost all mature seven years after you buy them.”  “Mature?” I asked.  “Yes.  I buy them for half of what their face value is.”  “Face value?”  “It’s the dollar amount in the corner.”

“Where do you get them?”  “Don’t worry about that.”  “Let’s add them up together to see how we are doing.”  “Ok, Dad.”

From then on every two weeks we would add another fifty or sometimes even a hundred dollar one to the growing stack and cross out the total to write down the new total.

“Save your money, Son.”  I heard that refrain every two weeks as the rubber band went “whack” around the stack.  “When you need it for something down the road you will be able to afford it without borrowing.  Save your money, Son.“

Bernie Isn’t (that) Crazy.

Posted on by boom booms room staff

Alice Cooper called it.  “School’s out, for summer.”  But, soon, Rodney Dangerfield and others will return.  “Hey, I am going back to school!”  And, when they do they need to bring their checkbook, and then some.

No one disputes the following.  One, the cost of a four year public college/university education in these 50 United States has spiraled out of control.  And, two, the debt that undergraduates and post graduates have incurred is huge at 1.6 trillion dollars and mounting by the moment.

Bernie Sanders and Elizabeth Warren and a few others have led or joined the battle cry to make college tuition free and/or forgive the outstanding student debt.  Each plan to do so essentially redistributes wealth from taxpayers to students and is fraught with inconsistencies.  More later.

But now, we ask, have you ever heard of Sallie Mae?  SLM Corporation (commonly known as Sallie Mae; originally the Student Loan Marketing Association) is a publicly traded U.S. company that provides consumer banking loans.   Its structure has changed dramatically since it was set up in 1973.   At first, it was a government entity that serviced federal education loans. It then became private in 2004 and started offering private student loans.

The company’s primary business is originating, servicing, and collecting private education loans.  Sallie Mae previously originated federally guaranteed student loans originated under the Federal Family Education Loan Program and worked as a servicer and collector of federal student loans on behalf of the Department of Education. 

So, the U.S. government started Sallie Mae.  It then decided the task too tall for itself and allowed it to privatize.  And it’s now government workers who are crying loudest about the soaring student debt.   And, they should.

We took a peak at Sallie Mae’s (now Navient Corporation, the largest servicer of federal student loans and collector on behalf of the U.S. Dept of Education) “generous” loan offers and terms there of last evening.  What’s our conclusion?  You might as well charge your education on your Visa or MasterCard.

Navient loans offered today start at a 7.5% interest rate.  They are tied to a marker of interest rates known as LIBOR, plus 5%.  They are variable, can even change monthly up or down, and are allowed to float as high as 25% if the market so chooses.  That’s 25% as a high side risk!  Seven point five percent isn’t cheap to begin with.  Ford will give you zero percent financing for that new F150.  Sallie Mae and Uncle Sam want more, much more.

But it gets worse.  Let’s take a 40k dollar loan as an example.  You have three options to repay.  All start with paying either $25 bucks a month while still in school, or the interest accumulated each month of $233, or foregoing paying anything at all until you have completed your education.  Tick tock goes the interest clock from day one of course.  The choices are bad, poor, and terrible.

The structured repayment schedule over the course of the next dozen or so years costs about $500 a month at the 7.5% rate, and much more if rates rise.  The total interest is 29k on top of the 40k.   But, here is the kicker of all kickers.  There is no interest saved for paying down the principal in any accelerated manner.  There is no incentive/gain for attempting to get out of the debt.  Sign up and Sallie starts counting her coins.

There is no bankruptcy filing that exempts anyone from repaying either.  Federal laws are written to absolve you of debt incurred when you can no longer keep your head above water, except if that debt is owed to your government.  It’s the golden rule.  He who has the gold makes the rules.  Sallie collects the gold for he who makes the rules.

Making college free (and it wouldn’t be free, just paid by others) and forgiving debt (and that would just be adding to the federal debt that we all are accountable for as well) isn’t the answer.  No answer is that simple.  And no answer should only be for the selected ones who are in debt today or in school tomorrow.   It needs to be equitable.   For example, shouldn’t trade schools be “free” too?  You can’t discriminate for just colleges can you Elizabeth?

Their approach is a big band aid and is designed to garner votes from the young and naive.  The bandage needs to be ripped off of the whole mess and the root cause needs a vaccination.   Otherwise, many will continue to fall down, scrape their knees, and eventually the wound will get infected.   A great start to this would be to examine the ridiculous terms of Sallie Mae and others in this federal loan business for students.  If you didn’t save for college at least there should be an incentive to get out of debt sooner.

Maybe Crazy Bernie isn’t so crazy after all in attempting to address this.  It’s just how, not handouts, that need to be looked at and changed.  Start with Sallie Mae and others just like her.   And, like the $22 trillion dollar debt, and ballooning government, the sooner the better.

Cashing In on Cashing Out

Posted on by boom booms room staff

After taking two flights, and driving through four states, and staying eight days in three different hotels, our summer vacation ended all too soon.  Good times were had by all on food, golf, gifts, hikes, bikes, a baseball game, and the like.  So, it goes without saying that it was smart to get $300, just to be safe, out of the ATM before the journey and all of the festivities started.  Or, was it?

Eight days later just shy of $275 remained in my pocket.  Cash is king, you know.  Or, at least cash was once king.

So, it got our staff wondering last evening.  Will we see a cashless society in the future?  We think the answer is yes.  It’s when, not if.

And, why not?  Every merchant in brick and mortar and any merchant in the virtual world of any kind takes some or all of Visa, MasterCard, Amex, Discover, PayPal, Venmo, Chase Quick pay, etc.  And, everyone has two or more of these forms of payment in their pocket, purse, or mobile device.

Cards give you rewards or cash back.  Cash gives you pesky change back.  What do you do with your loose nickels and dimes?  Ours are in the console of the truck, or in the luggage that we carried.  Sometimes the dreaded pennies make it into the pocket and all of the way into the house.  Then what?  Then they go into the large jar on the top shelf.  We hope the shelf doesn’t crash down one day from the weight of the copper and silver.

It took America two or three generations to nearly stop smoking altogether.  It’ll took Uber and Lyft about a decade to obliterate the dreadful taxi industry.  How long before cash is all but gone?

About the only need for it is when you directly interact with another citizen in the moment.  A tip for for this, or a ticket scalped outside of a venue come to mind.  Little else does.

So when you cash out, who cashes in?  Visa, MasterCard and PayPal come to mind.   Their build out for electronic processing allows hundreds of thousands of transactions a minute placing them far ahead of rivals mentioned above.  A very recent Barron’s article quoted some industry experts that feel like the electronic processing will continue its percentage growth in the high teens yearly for the next five years and perhaps beyond.

Remember when Apple Pay was going to change the world?  Guess who Apple partnered with to facilitate what they could not?  It’s Visa and MasterCard.  It seems like they are everywhere you want them to be.

Business to business is next.  Cutting checks to pay vendors and such is getting cut by the day.  Who’s there to help?  Yep.  It’s the next big growth vehicle for them.

Banks charge merchants and businesses two or three percent for the privilege of accepting these forms of payment and get paid well to do so.   Consumers win (or at least feel like they do) with one or more percent cash and/or points earned coming back to them.

But the real winners?  Yep.  They collect what seems like a very slim 0.15% of each transaction.  Mere pennies on the dollar you say?  Their shelf is very sturdy.  It has to be.  They collect millions and millions of dollars of pennies every day.

Cash was king.   Visa and MasterCard sit on the highest thrones now.