Friday, June 22, 2007

Rule #1: Don’t Get Hosed

If you are a millionaire or a struggling college student, anyone with any money is at risk of getting hosed. Anytime you are forced to pay more for the same thing, you have been victimized by circumstances. Happily, you can often avoid the circumstance that caused the problem.

Important Concepts:
1. Everyone should strive to get the most amount of utility for the least amount of money;
2. When you have money, you have leverage and can make businesses do what you want;
3. When you need money, they have leverage and can make you do what they want.

Giant Credit Card Company hits two people with a $50 charge for paying their bill one day late. In addition, they attempt to raise the interest rate from 10% to 30%.
A. Bob has $5,000 in his savings account and $1,000 on his credit card. The late payment occurred when he went out of town on business and sent the check a few days later then normal. He charges $1,000 per month and pays it in full.
B. Brian has $500 in his savings account and $1,000 on his credit card. He has been paying the minimum payment to pay off his repairs to his car.
What will happen?
A. Bob will call the bank. Explain the error and ask them to waive the service fee and reduce the interest rate to 10%. The bank will say yes or lose his business. If the customer service rep balks, Bob will remind them he is a frequent customer (they make money). If necessary, Bob will threaten to pay the entire amount and close the account.
• For credit card companies, the cost of acquiring a new customer can be quite large. Within reason, they will do what the MUST to keep customers with options happy.

B. In all likelihood, Bob will be stuck paying the $50 fee and the higher rate. Once the bank realizes he has few options, they will be reluctant to give up revenue.

Bottom Line: Assuming they spent the money on the same purchase Brian is getting hosed. He is paying significantly more money for his purchase.

Later, we will discuss ways to make sure you are not Brian.

Attorneys and Math

A few years ago, I decided to stop practicing law to attend business school. As any MBA knows, the number one agenda for students is finding a job. Although I had graduated from college with honors in Finance, my pursuit of a job on Wall Street was hampered by prejudice.

Eventually, I had the opportunity to work on Wall Street; however, I turned down the opportunity to pursue a career in business. Although I sometimes wonder what an I-banking paycheck would be like, money cannot buy happiness.

Nevertheless, not having money can lead to unhappiness. This blog is about my ideas about personal finance. I will cover savings, investing, and spending. Occasionally, I will comment on legal issues impacting personal finance.