Trying my best not to imitate Dolly Parton, “He’s Alive!” The Centsei is back in action, here today keeping you up to date on the latest goings-on and analyzing a real-life personal finance decision that has kept me from this blog for over two years.
In the summer of 2021, I started my Master’s in Business Administration, more commonly known as an MBA here in the U.S, and I’m pleased to announce that I finished earlier this week. The program is a post-tertiary degree that covers a broad spectrum of business-centered topics such as accounting, economics, entrepreneurship, finance, leadership, marketing, and technology. Many programs, like mine, also allow for a specialization, much like a college “minor,” that provides a focus area for electives.
The choice to acquire additional education, at its core, is a personal finance decision. Even those of us strange enough to enjoy school will understand the tradeoffs involved in an expensive endeavor such as this. On the one hand, MBA graduates tend to earn higher salaries, improve their professional network, build stronger resumes, and learn valuable skills that could help propel their careers. On the other hand, the degree can cost $60,000 in the states, requires 500-600 hours of class time alone (plus another 1,000-1,500 hours for homework and studying), and may not be applicable to a variety of professions. Furthermore, not all degrees are created equal.
There are many things to consider, so let’s examine a few scenarios that come into play when contemplating an MBA.
Estimated Salary Increase
According to a 2022 Fortune Study, the starting salary for an MBA graduate is $115,000 compared to an undergraduate $75,000. There may be some “correlation not causation” here if the MBA’s are a self-selecting group who were prone to higher earnings anyway. We can nevertheless posit that at least half of the delta, or $20,000, likely results from the degree.
Full-Time vs Part-Time
A part-time MBA student can complete their degree in three to four years while working full-time alongside their studies but may not have access to the highest quality programs, as many don’t have a part time offering (see below). A full-time MBA student can complete their degree in two years and can attend any school but does so at the cost of not being work, gaining experience, and earning a salary. We’ll assume the full-time MBA student foregoes $100,000 in after-tax wages over two years: the $75,000 cited above, minus taxes, plus two years professional experience. For this reason, it’s recommended to only go full-time if you either (a) got into a top program, or (b) can afford to delay working for two years.
Quality, Type, and Cost of Program
There is certain a difference between excellent full time schools (Standford, Wharton, Booth), great part-time schools (Booth, U.C. Berkeley, Northwestern), and less-reputable options that you might have heard on late-night TV or seen in an online banner ad… if you know of them at all. Top programs can cost $100,000 but will put you in the best likelihood for long-term earnings.
It may also be worth considering a traditional MBA vs an executive MBA (EMBA). EMBA’s are designed for more experienced working professionals and tend to have longer, more rigorous courses on nights and weekends that can be completed in fewer years. Some EMBA’s require or strongly recommend employer sponsorship, so these may not be accessible to everyone.
Find the one that is right for you based on your location, needs, and academic background. Do your homework from reputable third-party sources, alumni, and research.
Employer Sponsorship, Scholarship, and Student Loans
A major factor to consider is whether your employer will pay for some (or all) of your degree. An employer that pays $5,250 (the federal tax-free limit) per year over five calendar years can cut the cost of a $60,000 degree in half and double your return on investment, though you may not wish to take that long.
Similarly, the school itself may offer scholarships to well-qualified students. Fortune also reported in 2021 that 50% of students at Harvard Business School receive aid, with the numbers falling to 20% at less expensive schools. Scholarship amounts range from 10-50%, so the financial impact can be considerable.
For the portion that you pay, consider how much you have and savings, as well as the total cost of any required student loans including interest. Borrowing the same $60,000 at 6% interest (optimistic in today’s environment) and repaying it over 10 years could halve your return on investment.
As a graduate student, MBA’s are able to submit the Free Application for Federal Student Aid (FAFSA®) here in the U.S., which may qualify you for government aid via loans or grants. Some loans have a small chance of being forgiven if you meet certain conditions.
Your Age
While many MBA students and programs prefer having five or more years’ work experience, there is no question that someone in their 20’s or 30’s will see benefit for more years than someone in their 40’s or 50’s. This isn’t to say an MBA later in life is bad, just that you’ll likely have fewer working years to recoup your time and money.
Personal Goals and Family
For me, higher education was a personal goal as well. I admit I love learning and feel a sense of accomplishment for powering through the challenge. Regardless of the financial implications, if school is important to you, you should consider that.
Your family situation is a critical factor as well. Students with children often need to consider the cost of childcare or the impact this commitment will have on their spouse (and their career). Those without children still need to consider what part of their day they will give up during the degree, whether it’s time with family, friends, fitness, sleep, hobbies, or even blogging!
THE 60-SECOND TEST
SHOULD I GET MY MBA?
This quick test will help you determine whether an MBA is right for you. Write down the number (1, 2, 3, 4) of your answer for each question.
How much do you expect an MBA would increase your earning potential in your current/future industry?
A lot. I work (or want to work) in finance, banking, healthcare, technology… or similar area. I would want to be a manager or entrepreneur someday.
A little. I work or want to work in one of those areas, but I may not want to be a manager/entrepreneur.
Not sure. I just want to keep my options open and an MBA might help.
Not much. I work in a non “business” area and would likely continue to after the degree.
Would you be attending full-time or part-time?
Part-time while working full time
Full time while not working
Executive MBA
Part-time while not working
What is the quality and cost of the program?
Top 10 MBA program
Top half program but under $60,000 for all classes (2022 dollars)
Top half program but over $60,000… or bottom half program but under $60,000
Bottom half program but over $60,000
*If you’re outside the U.S. use “one year’s gross salary of an average worker” in place of $60,000
Would you receive employer aid or scholarships, and how would you finance the rest?
Scholarship and employer sponsorship, and I’d pay the rest from savings/income
Scholarship and employer sponsorship, and I’d pay the rest from student loans
No scholarship and employer sponsorship, and I’d pay the rest from savings/income
No scholarship/sponsorship, and I’d pay the rest from student loans
How old are you?
20’s
30’s
40’s
50+
What best describes your goals and family situation?
Formal school and education are important to me, and I do not have significant family obligations for the next few years
School is important, but I do have family obligations
School is just a piece of paper, but I do not have family obligations
School is just a piece of paper, and I do have family obligations
SCORING
For each of the six questions, add the following:
Answer 1 = 5 points
Answer 2 = 3 points
Answer 3 = 2 points
Answer 4 = 0 points
If your total is:
20-30 points: An MBA is very like right for you. Begin researching the best program for you and the right options for paying for it.
10-20 points: An MBA is might be the right choice but consider all options. The specifics are critical here, so be sure to carefully weigh the personal and professional pros and cons very closely and consider if there are better ways to reach your goals or other degrees that would be a better fit.
0-10 points: Don’t waste your time. There’s very likely a better option for your elsewhere, and it’s 100% OK to say that an advanced degree is not for you.
My Experience
Getting an MBA was the right choice for me.
Upsides:
At the time I started, senior leaders in my company all had MBAs. Although it was not explicitly required, this signaled to me that the degree was relevant for my career progression. Halfway through the degree, I started a new job. The “in progress” MBA alone was likely not the main reason I got the job, but even if it was a small factor, I believe the payoff is already underway. A few high-level execs even applauded my being done, so I feel like the work has been noticed.
Logistically, I was fortunate to have a great part-time program near my house with a hybrid option to attend in person or online on a class-by-class basis. This made networking, both with professors and other students, easier and more enduring.
Academically, I found the coursework challenging and rewarding, but not overwhelming. The most demanding class required about 16 hours of work (class + homework) per week for 17 weeks, and the least demanding class maybe 6 hours per week. The prerequisite classes like marketing and accounting were good if you had no experience but do try to get them waived if you’ve taken them before. The core MBA classes (ex. technology, value & supply chain, leadership, strategy, global, law & ethics) were valuable. Lots of learning by studying cases and examples with the “theory” being broad. The electives were overall amazing and really let me focus on the areas that interested me the most.
Financially, I was extremely grateful to have a combination of a scholarship and employer tuition reimbursement for two years, which combined cut the cost of the degree in half. Between savings and careful budgeting, I did not need to take out student loans to cover the rest.
Downsides:
You hear that MBA’s are “all about networking,” but I didn’t find that to be the case. Don’t get me wrong, I liked my classmates and will stay in touch, but I didn’t get the impression that everyone was oozing to network. Maybe the pandemic and hybrid classes changed things to where networking will be primarily virtual. However, I wasn’t expecting to network with professors, but that might prove to be the more valuable piece. We will see.
While no class was a waste of time, some parts of some classes felt that way. Some of the curriculum felt a little more relevant to what you’d expect from an MBA of the 70’s-90’s rather than the 2020’s, and my school was more progressive than most as it relates to staying on top of current issues (which we did). For example, we studied six sigma and LEAN in three classes, which itself is becoming more outdated by the minute in our modern, tech-driven, service-oriented economy.
Overall: 9/10. Would recommend to a friend… if they scored high on the test!
Tax season is here, and filing does not have to damage your pocketbook.
I like to talk. I like money. I like the internet. I like to talk about money on the internet. While I hope you find some value in articles like this, keep in mind this blog is for general information and entertainment purposes. Everyone’s situation is different, especially when it comes to taxes, so always consult an expert.
That said, I had a moment of pure Centsei giddiness last weekend, ironically, when I filed my taxes for the year. No, not because of the fact I owed a little bit (darn), but rather because I finally figured out a way that nearly anyone can file their U.S. taxes – federal and state – online for free.
My last article was plenty long, so let’s not waste time. Here’s how to do it.
Option 1: Credit Karma
Credit Karma has primarily been known for tools devoted to improving your credit score. However, they recently launched their own online tax filing service that lets you file both your state and federal income taxes for free, regardless of your income. This feature is the first of its kind, and I must admit that I’d been paying $50-100 per year to file mine with the brand-name services. Never again. The software was intuitive, robust, and thorough. I filed both returns in under an hour, despite having a litany of tax documents that Lady Centsei and I gathered throughout the year. They even offer “audit defense” and guarantee the maximum refund. Only downside seemed to be that it may not yet be available in some states, though I could not find a list.
Quick note that I am not sponsored by Credit Karma in any way. I just genuinely like this product and think it would benefit my readers. Per my disclaimer, even if I ever do get sponsored or sell out, it will *always* be for a product that I actually use or truly believe would benefit my readers.
Pros – Easy-to-use software available to everyone; Completely free regardless of income; Very intuitive
Cons – Reportedly not available in every state; Not recommended for highly-complex tax scenarios
Cost – $0.000. Free for both federal and state.
Option 2: Name brand filing companies (e.g. Turbotax)
Approximately 70% of Americans make less than $72,000. Luckily, the IRS requires that filing companies like TurboTax make their software available for free if your adjusted gross income was less than $72,000. While the federal return is free to file, some providers charge to file the state return, so read the fine print.
Pros – Easy-to-use software available to most
Cons – Free version is limited to incomes below $72,000 (incomes above that must pay); Some providers charge to file the state return, so read the fine print
Cost – Free (federal); Free or paid (state) depending on the provider
Option 3: Fill it out by hand
For many years, I filled out my tax return by hand. While it might seem intimidating at first, it’s straight forward, especially if you receive a W-2, plan to take the standard deduction, and don’t have any unusual personal circumstances. The IRS provides instructions here, and there are some YouTube tutorials to help for visual learners. Sadly, the IRS got rid of the incredible handy on-page 1040-EZ in 2018, but the regular 1040 can still be manageable to navigate for most situations. If you owe money, you can include a check payable to the Internal Revenue Service or make an electronic payment online.
Pros – Truly free; Can be faster than filing online
Cons – More adding and subtracting than you’ve had to do since middle school; some terms and language can be confusing; 1040-EZ was discontinued in 2018; not recommended for complex tax situations
Cost – Free, minus the cost of a stamp
That’s it! You have until May 17th 2021 to file your federal taxes this year, and with these services, you won’t have to pay a thing. If you own a business or have other advanced tax needs, please consult a professional. If not, I hope this article saves you from those expensive filing fees – forever.
This article will be updated as current events unfold.
Centsees, we absolutely haveto talk about one of the most mind-boggling financial stories that we may experience in our lifetimes. The craziness that has unfolded in the last week is like nothing I’ve ever seen before, and before you ask, yes, I was an adult during the 2009 Great Recession. It could be a once-in-a-lifetime event with consequences for decades. Grab a healthy beverage, sit back in a comfortable chair, and stretch your “Diamond Hands” because this adventure is really that good.
It’s safe to say that no market expert knew what to expect going into 2021. The stock market is soaring but so is unemployment. The vaccine is imminent but so is the closing of many struggling businesses. Vaccinations rates are increasing but so is the threat of a new strain of the virus. Interest rates are low but so is the recovery for poorer Americans.
What no experts could have predicted, however, was the focus that would be given to one small stock and the massive political, economic, and societal implications that would subsequently come into play. Nevertheless, nearly every major news outlet like CNN, Bloomberg, The Wall Street Journal, and New York Times have united in following one saga that has captured the attention of the world.
This is the story of GameStop.
Quick Tip, Note, and Definitions
Quick Pro Tip: I’d recommend to my readers to not engage in the behavior exhibited by either side of this story. There are safer and more reliable ways to make money, and much safer and more reliable ways to protest inequity. Nothing in this article is even remotely financial advice, though always try to learn from the mistakes of others.
Note: This is one of the more complex topics we’ve covered in TheCentsei so far. If you feel lost at any point, check out the Analogy and Summary sections at the end. Also, feel free to leave your questions in the comments. I’ll get to them all.
Definitions:
••••• Buying a Stock – As someone with an interest in personal finance, you likely understand the idea behind buying a stock. A stock is a small percentage ownership in a company. Stocks are worth money if either (a) the company pays dividends to its owners or (b) the stock price goes up and you sell your stock for a higher price than you paid for it.
The maximum amount of money one can lose is whatever he/she invested in the stock, no more. The maximum amount of money one can gain is “infinite,” since there is technically no specific limit to how high a stock can go or how much it can pay out in dividends. For example, if buy a stock for $30, the most you can lose is $30 and the most you can gain is thousands or millions (very low chance, but you get the picture). People generally buy a stock if they believe the price will go up so they can sell it later at a profit.•••••
••••• Shorting A Stock – What may be less familiar to you is the idea of short selling a stock. Under a simple form this model, the investor will borrow a stock from its owner (the lender) and sell the stock on the market at the current market price. When the borrowing period is over, after, say 30 days, the borrower must then repurchase the stock at the then-market price and repay the stock to the lender.
This repurchase price may be higher or lower than what the short seller originally paid. If the new market price is lower, the short seller makes money because he/she and pocket the difference when the stock is returned to the lender. However, the short seller will lose money if the re-purchase price is higher than the amount originally paid.
The maximum amount of money one can earn as a short seller is the original market price of the stock, no more. The maximum amount of money one can lose is “infinite,” since there is technically no specific limit on how high a stock can go (and therefore how much it will cost to repurchase the stock at the specified time). For example, if you short a stock for $30, the most you can gain is $30 but the most you can lose is thousands or millions. People generally short a stock if they believe the price will go down.•••••
••••• Short Squeeze – Most factors that affect a stock’s price can be explained by underlying fundamentals, such as the company’s financial performance, positive or negative public news, or announcements about a change in strategy. A short squeeze refers to a rare phenomenon where there is a rapid increase in the price of a stock due to unexpected technical factors in the market rather than underlying fundamentals. This can occur, for example, when there is a lack of supply and an excess of demand for the stock due to short sellers covering their positions, buying back stocks.
Recall that a short is basically someone borrowing the stock and promising to buy and return it at a certain date in the future. There’s nothing fundamentally wrong with this, except the rules allow for a stock to be shorted multiple times. In other words, Person A shorts it to Person B, who shorts it to Person C, and so on. A double or even triple short, for lack of a better term. In effect, more stocks are effectively loaned out than exist for repayment. A house of cards, in a way.
When a shortage of stock exists, short sellers now knows that they will be competing against other short sellers for a low amount of stock. As demand quickly increases, so does the price. The holders of the stock also know that the short sellers are going to have to pay off their debt in the future so they may be less likely to sell, hoping for a better price as demand intensifies. Other people may also enter the buying and selling market in hopes of making a quick buck. In the end, some short sellers are not going to be able to fulfill their obligation to rebuy the stock at the specified time. Thus, they are “squeezed” into either buying the stock at a massive loss, posting collateral (cash) to cover their potential loss, or doubling down on their short sale in the hopes the price returns again (but multiplying their losses if it doesn’t). The stock price, of course, continues to soar as more and more of these short become due.
With that out of the way, on to the good stuff!
1984-2016 “The Rise Of A Retail Goliath”
If you have so much as entered a mall or outlet strip in the last 20 years, there no doubt that you would recognize the white and red logo that has become synonymous with video game sales, GameStop. GameStop was founded in 1984 as a company called “Babbage’s,” but after rebranding and acquiring toy goliath E.B. Toys in 2005, GameStop has held a near monopoly on video game retail stores for the last decade and a half. The company grew to over 5,000 retail locations, earned $400 million in net profits per year, and was listed as a Fortune 500 Company.
Credit: Wikipedia; Mike Mozart from Funny YouTube, USA; licensed under the Creative Commons Attribution 2.0 Generic license.
2016-2020 “The Fall Of An Empire”
GameStop has faced significant challenges over the last five years. The demand for physical copies of video games has been slowly replaced by digital downloads of games. Nearly all major video game developers now offer games via download and connect to consumers electronically with platforms like Xbox Live, PlayStation Network, Nintendo eShop, and Steam. Gamers can purchase games instantly from the comfort of their home, and the developers save on the manufacturing, shipping, and retail costs. Furthermore, mail retailers overall have been struggling to adapt to changing consumer purchasing behaviors, and GameStop is no exception. Finally, with the rise of the pandemic in 2020, GameStop has seen the closure of many store locations around the country.
This unholy trifecta of market conditions had a devastating effect on GameStop’s financial condition. The company went from $500 million in profits in 2016 to a $670 million loss in 2018 with equally poor results in 2019 and expected in 2020 as well.
After hitting a rise to $56.53 in November 2013, its stock (NYSE: GME) price plummeted to an all-time low of just $2.80 in on April 3rd, 2020.
This Google chart shows the stock price between over the from the year 2000 to early 2020
2019 (Player 1) “DeepF**kingValue” from r/WallStreetBets”
They say there is a sub-reddit for everything, so if your passion is making risky stock picks and posting your results online, then r/WallStreetBets (which I’ll start calling WSB in this article) is for you. WSB started out as a forum for inexperienced investors to make a “bet” by investing considerable amounts of money in an unpopular stock and posting their results on WSB to the delight (or mockery) of others in the forum. In a lot of ways, this sub-reddit was a culmination of things that we don’t normally promote in this blog: glorifying stock-picking with an unhealthy dose of social media dopamine reinforcement.
In September 2019, one member of WSB called DeepF**kingValue or DFV (this is a family-friendly blog, folks, but fill in the blanks!) decided to invest $50,000 in GameStop as the stock price plummeted and bankruptcy was expected in its future.
DFV, however, felt that GameStop may have been undervalued, and there may have been a nugget of truth to his inclination. Investor Michael Burry had just broadcasted optimism in the stock because Sony and Microsoft had announced 2020 release dates of their next generation game consoles with physical disc offerings. DFV was unphased by negative news surrounding GameStop, and even after his $50,000 original investment, he continued to buy more and more stock throughout the past year, reporting many of his moves on Reddit. At one point, he posted a screenshot where he was down $34,000. He earned a reputation of being persistent and nickname of having “Diamond Hands.”
Notice the verbs here in past tense. We’ll get to that.
DFV is Player 1 in our story.
2019-Present (Player 2) “Melvin Capital Management” and other short-sellers from hedge funds
Recall from our definitions that people buy stocks that they think will go up in value and short stocks that they think will go down. The average investor buys and holds stocks as part of a long-term investment plan and will not generally short stocks because of the risk of losing substantial amounts of money in a short period of time.
However, large investors like hedge funds have the wealth to both buy and short stocks because they can absorb the risk.
One such investor is a company called Melvin Capital Management LP, which is based in New York City and reportedly has $20 billion in assets under management as of September 2020. Melvin Capital has engaged in a substantial amount of short selling of GameStop’s stock in the past year or two under the belief that the company is overvalued and the stock price will fall.
Melvin Capital is Player 2, along with all other hedge funds, investment firms, and banks that engage in significant amounts of shorting of GameStop’s stock.
Summer 2020 “Hope For GameStop?”
After a third of its physical stores closed their doors at the start of the pandemic, reports showed that GameStop had experienced a 519% jump in online sales, though the company was still losing significant amounts of money. A few months later, Chewy.com co-founder Ryan Cohen announced his intent to purchase 9% ownership of GameStop. Finally, the company formed a multi-year strategic partnership with Microsoft to boost its digital omni-channel ecosystem.
The company’s digital sales increased, and GameStop slowly began to see its stock price rise from a low of $2.80 per share in April 2020 to $14 in October after the announcement. Cohen increased his ownership to 13% 2013, potentially signally further optimism in the company.
Nevertheless, many of the large investors like Melvin Capital believed that the price increase was temporary and would return back down over time.
Note that nothing particularly unusual has happened… yet. GameStop’s turnaround is a nice story but hardly unprecedented. Some people believed in the stock, others didn’t. The next few months, however, is where things start to get wild.
October 2020-Present “The GameStop Short Squeeze”
Around this time, other users of WSB (the sub-reddit) noticed an unusual characteristic of GameStop’s investing characteristics. Data was beginning to show that GameStop was one of the most shorted stocks on the market, implying that huge investors like Melvin were betting against GameStop in records numbers. One source said 90% believed the stock price would go down.
In fact, at one point, 140% more GameStop stock had been shorted than existed on the market.
WSB began rapidly buying up the stock, having identified that these short sellers might struggle to repurchase the stock in the required timeframe. Given that the double and triple short positions had led to staggering amounts of the stock being shorted implied that the stock might suddenly fluctuate in price, not due to underlying fundamentals but rather due to unexpecting market conditions.
Thus, the GameStop “Short Squeeze” was born, and foreshadowed massive losses for the short sellers as rapid increases in demand and little supply meant that the price was about to spike.
January 27th 2021 “Hold The Line”
Most short squeezes are ultimately resolved when the price reaches a point where enough stockholders are willing to sell and the short sellers can clear their position.
However, WallStreetBets isn’t your typical stockholder. Through a series of coordinated Reddit posts, WSB collectively agreed that they would hold their position (i.e. not selling their GameStop shares). In some cases, users vowed to hold until the price reached at least $1,000 per share, while other vowed to hold no matter what. Some users even purchased what is known as options contracts to effectively double down on their position.
To Reddit, GameStop had become more than way to make money and post about their earnings. It had become a symbol of smaller, poorer individual investors now being in control of the market and profit massively off the larger, richer corporate investors like Melvin Capital. The Reddit users understood hedge funds’ detrimental role in the Great Recession, the K-shaped recovery of the pandemic, and political and economic problems that had affected their lives and their country. They galvanized around GameStop and saw the squeeze as as a way to collectively punish the hedge funds greed to the tune of billions of dollars for a small investment made by thousands of WSB users. David vs Goliath.
As of Wednesday January 29th, their plan had worked. GameStop had risen to $370 at one point and the WSB Reddit called for people to “hold the line” and not sell their stock so the damage to the hedge funds would multiply.
Google shows the success of the GameStop short squeeze, where the stock price nearly tripled in a single day
January 28th 2021 (Players 3 and 4) Goliath calls for backup: “Robinhood” and “Citadel”
Founded in 2013, Robinhood owns and operates an app that serves as a brokerage (place where people can buy stocks). Where websites like Fidelity and Vanguard have traditionally been used by older generations for years, the Robinhood app is particularly popular among small investors from younger generations, who enjoy the apps features like buying fractional shares and trading at zero-cost. Many Reddit users solely use Robinhood as their primary means of buying and selling stocks.
On the morning of January 28th, Robinhood announced, without warning, that it was restricting its users’ ability to buy certain stocks Robinhood believed to be “high risk,” including GameStop. Robinhood customers could sell, but not buy, GameStop stock. A few other brokerages took similar measures, but Robinhood’s actions caught the market by surprise. Immediately after Robinhood’s announcement, GameStop’s stock price fell from its all-time high of $469 at 10AM Eastern to $132 at 11:30AM. The stock price had dropped 70% in less than 90 minutes.
GameStop’s stock price dips by 70% in less than 90 minutes after Robinhood announces restrictions on buying (but not selling)
It’s very difficult to prove cause and effect when it comes to the stock market. Did Robinhood’s action cause the stock to fall, or was it other factors? We can only speculate.
Either way, the result was that at that moment, the Reddit uses lost billions of dollars in equity, and the hedge funds mitigated billions on losses on their short sale. Investors who wanted to buy or sell the stock during that timeframe were banned from doing so. Robinhood claimed the buying restriction was for the good of its users.
It may strike you as a bit odd that Robinhood would do this. Wouldn’t they want people using their app for trades, especially a high-volume stock that interests its core users – young internet-savy small investors?
THEORY 1 (Robinhood’s claim): Clearing problem
Apps like Robinhood don’t actually record the trade and settle money immediately when you attempt to buy or sell. Rather the process goes through a transaction settlement process using a “clearing house” like APEX Clearing Corp, and the process can take 1 to 2 days. These parties basically ensure that the buyer has money and the seller has the stock, and that neither party has gone bankrupt in the time it took the transactions to clear.
When a stock is particularly volatile, a clearing house will sometimes require the brokerage (Robinhood) to pay a cash “reserve” to protect the clearing house from unfulfilled transactions. The clearing house doesn’t want to lose money if the transaction can’t be fulfilled, so it sometimes puts restrictions in place to protect itself if it can’t afford the cash reserves required to guarantee the transaction. If the brokerage can’t or won’t fund the reserve, the only other option is to stop trades entirely. Indeed, multiple brokerages other than Robinhood put restrictions on stocks like GameStop because of their clearing houses.
Robinhood has said that the reason it suspended buyers on Thursday was because of an issue like this with its clearing house. It’s clearing house required a reserve, and Robinhood couldn’t (or wouldn’t) pay up. Some investors wondered if Robinhood was facing financial troubles and couldn’t afford the reserve, but Robinhood’s CEO denied these allegations.
It’s not yet independently confirmed whether this was the case with Robinhood and its clearing house. It’s also not independently confirmed what, if any, financial problems Robinhood is facing and what implications such financial trouble would mean for its users.
THEORY 2 (Reddit’s claim): Market Manipulation
Market manipulation is the act of artificially inflating or deflating the price of a security/stock for personal gain. In most cases, market manipulation is very, VERY illegal.
Citadel had recently made a $2.5 billion investment in Melvin Capital. Yes, the same Citadel that has a deep partnership with Robinhood also has a $2.5B ownership stake in Melvin Capital, the hedge fund that could stand to lose $10-20 billion+ if GameStop stock kept going up. If, hypothetically, Citadel were to “pressure” Robinhood to stop its users from buying GameStop stock, Citadel would also be able to save Melvin from a massive loss and thus protect its billion dollar investment in Melvin.
The WSB users filed a class action lawsuit in the state of New York because of Robinhood’s actions.
In short, Citadel has a partnership with Robinhood (who restricted sales of GameStop Stock) while also having an ownership in Melvin Capital (a hedge fund who shorted GameStop stock and would benefit from such restrictions).
Some WSB users suggest that this potential conflict of interest could have led to coordinated market manipulation between the parties. Citadel/Robinhood/Melvin deny such allegations and blame Robinhood’s actions on its clearing house.
Both parties are calling for the SEC to intervene and regulate the other group.
It is up to you, the reader, to decide which of the two theories you believe. Perhaps time will tell, if evidence is gathered and whistleblowers come forward.
January 30th 2021 – Present “GameStronk”
After most of the platforms like Robinhood partially or completed removed their restrictions on Thursday or Friday, GameStop recovered some of its value on Thursday and returned to $325 by the close of trading on Friday the 30th.
Melvin has reportedly closed its short position in GameStop, though these reports rely on a Melvin spokoesperson. Many politicians and celebrities, include Alexandria Ocasio-Cortez, Ted Cruz, Elizabeth Warren, and Elon Musk, have voiced their opinions about the subject, most siding with Reddit and the people, commending their taking a stance against the injustice.
Our friend DFV, Player 1, posted that his investment this week was worth $22 million on paper, though he is going to remain “GameStronk” (strong) and hold his position.
Keep in mind, however, that none of this has anything to do with the fundamentals of GameStop as a company. Though they have seen some growth in a few areas, the company is still losing money, retains lots of debt, and will struggle to keep its stores open during the pandemic and the move to digital downloads from game developers. GameStop did not suddenly solve all these problems in the last week, and likely isn’t a good investment from a fundamental perspective. The changes in price were primarily the result of a short squeeze rather than the improved financial performance of GameStop.
Toilet Paper Analogy
Let’s make this situation easier to understand with an analogy.
Lessons Learned
Here are the lessons we can take away from this situation:
1) Don’t bet on individual stocks and don’t bet on shorting stocks as fundamental tools for financial success. Neither is much better than gambling, so if you choose to partake, be prepared to lose everything. A much better financial plan is to invest in wide-sweeping index funds with low expense ratios that meet your risk tolerance. Invest as early and often as you can and hold for the long term. If you choose to invest on specific stocks, research your investments and understand them fully, using multiple sources and verifiable financial data and focusing on the company’s outlook. Hype and speculation do affect stock prices in the short term, but they are not a reliable path to long term wealth.
2) Additional regulations in the investing space are needed, particularly short selling. As we saw with the Great Recession and again now, these investments are dangerous and prone to foul play. Short selling provides no creation of value for the economy. It is illogical that more shares can be shorted than exist in the market as a result of these double and triple shorts. It’s also unfair that a platform like Robinhood can restrict the buying decisions of its users without consequence. More clarity is needed on who reserves the right to stop buying and selling of stocks (ex. Robinhood and the clearing houses), as well as how market manipulation is defined. No conflicts of interest should exist between various parties in buying, selling, and shorting. Finally, there is a significant inequality of information between small investors (who operate based on dated information and inferior access to trading services) and large investment firms (who have the resources and technology to make faster, more well informed decisions). These problems don’t have simple solutions, but we can hope that the regulatory bodies that oversee the largest market players will learn from this experience. “Hope.”
3) It’s noble to take a stance against injustice when you sense it but do so in a way that is likely to enact change, not meme about it. We’re not even sure Reddit will be successful with any kind of reform, and I wouldn’t recommend jumping on a Reddit bandwagon to fight your battles (and really don’t recommend social media at all). Rather, you’re much better off getting involved in your community, staying active in local politics, supporting politicians who best reflect your value, and doing your best to educate your loved ones (or the general public with a blog) to avoid falling into social or financial traps. We do need to take action to correct the economic injustice that has kept so many from participating in the market, but putting up money to buy some stock won’t be as effective as those using the legal and political system to enact change.
Summary
TL;DR. GameStop had been doing poorly financially for years. As some small good news began to come out about the company, many users for Reddit’s “r/WallStreetBets” group began investing substantially amounts of money into GameStop. Large hedge funds and investment companies who had shorted GameStop’s stock stood to lose a lot of money as the stock priced sored to 100x its prior price in the span of a few weeks. Reddit users, determined to punish the hedge funds for its history of actions that came at the expense of the poor / small investors / the economy, collectively decided to hold the stock rather than let the hedge funds clear their short. One of those hedge funds, Melvin Capital Management, may have used the powerful relationship of its parent company, Citadel Securities, to force Robinhood (a stock buying app) to temporarily block the sale of GameStop stock for Melvin’s substantial financial gain. Lawsuits have been filed, and the story is not yet complete.
This article will be updated as the saga unfolds. Please consider sharing it with your friends and staying connected via Twitter or RSS feed when new posts are completed.
When I was in elementary school, life was grand. School days were short, recess was long, free time was plentiful, and homework was minimal. As you might expect, this lifestyle changed over the years. As I entered middle and high school, my afternoons became quickly filled with studying for tests, practicing for band concerts, and socializing with friends. I was forced to adjust my schedule to make time for these competing priorities, and it was at this point that I developed my first after-school routine.
Routine = A sequence of tasks performed regularly or at specified intervals
After arriving home from school and using the bathroom (I avoided those school bathrooms like the plague), I rewarded myself for a hard day’s work with a snack. After the snack, I immediately started my homework and worked on it until completion. When I was done, I used my allotted 30-60 minutes of “screen time,” after which I finished my chores. With any luck, my daily tasks were done by dinner, and I could enjoy my evening reading with my family.
A funny thing started happening though once I was a few weeks into each school year. I’d arrive home and be greeted almost immediately with the urge to use the bathroom and have a snack. With the snack finished, I’d feel a sense of refreshment that gave me the motivation to do my homework. My screen time was then even more enjoyable knowing that my homework was behind me. Finally, my chores were easier to complete knowing that dinner and my relaxing evening where coming shortly. I was able to flow from one activity to the next without the need to muster any motivation or make any difficult decisions of what to do next. In fact, it began to feel uncomfortable when I couldn’t complete my snack-to-homework-to-screens-to-chores repertoire after school. My afternoon routine was effectively on autopilot and had transformed into a habit.
Habit = A routine that has become a behavior with little or no conscious thought.
Of course, the ritual changed as I got older, with snack time becoming a power nap and screen time becoming internet time. Band practice, sports, and clubs would occasionally alter the exact time at which things would be completed. Nonetheless, by adding just a little bit of routine and structure to my life, I was able to complete my daily tasks without the burden of deciding the order in which to complete them. I generally tried to stick to the idea of school à snack à homework à break à chores à evening without much variation.
“We are what we repeatedly do. Excellence, then, is not an act, but a habit.” – Misattributed to Aristotle
Finally, it’s important to consider that some patterns of behavior and habits can eventually leave a person with almost no ability to act differently. These habits often include substances, which are consumed as part of a habit (caffeine, nicotine, alcohol, other drugs) or produced by one’s own body resulting from the habit (dopamine, adrenaline). People generally have a harder time making good decision because of their dependence on a substance or behavior, and willpower is removed from the equation as the substance takes control of the body. Significantly more time, effort, and expertise are required to change the behaviors, and this change often demands an integrative, long-term plan to treat physical symptoms like withdrawal. These behaviors eliminate the presence of choice entirely and can transform into an addition.
Addiction = A habit with a powerful physiological component that leaves the individual with almost no choice to behave differently.
The word “addiction,” in fact, is derived from a Latin term addictus for ‘enslaved by’ or ‘bound to.’ An addiction often eliminates the ability to consider any alternatives other than the one to which the body and mind are addicted. For that reason, experts consider addition a disease that often requires medical help to treat properly. Addictions can range from the relatively mundane (caffeine) to the completely debilitating (certain drugs like heroin).
PUBLIC SAFETY NOTE: If you or someone you know suffers from addition, please seek professional help. In the United States, you can call SAMHSA’s National Helpline 1-800-662-HELP. It is important to understand that addiction is not “just a matter of willpower.” If your behavior is having a negative impact, or you are putting yourself at risk, or if you are experiencing withdrawal symptoms, it is critical to obtain the proper assistance and treatment from professionals. It is not too late, and help is available.
Moving back to the topic of habits, however, we can examine the idea of building strong behaviors and eliminating/avoiding poor ones. Consider a simple behavior that (hopefully) we have all learned already: washing your hands. A young child would have no intuition of this behavior and would need be taught by an adult via repetition after each use of the bathroom. Ideally, this routine would become a habit that eventually requires no reminders and no thought by the child at all. At some point, adults should develop an aversion to not washing their hands.
This idea outlines a critical difference between routines and habits. A new routine often feels comfortable when we skip it. Skip going to the gym (when you’re not used to it)? Heck yes! Stay up late watching YouTube on your phone rather than going to bed? Sign me up! Forego budgeting this month since you still have a little money in your account? No problem! As a result, routines can be hindered by procrastination and inconsistency. Habits, on the other hand, often feels uncomfortable when we don’t do them. Not looking both ways before you cross the street? Not putting on your seatbelt when you get in the car (I hope…)? Not peeking at your cell phone when it beeps or buzzes? Bet the very thought of those things just feels wrong.
Remember Penny? She helps us more easily differentiate between the two
Transforming desired behaviors into routines and habits can be powerful tool to improve your life. However, it’s important to consider that not all routines can become habits. Certain activities that behaviors that require concentrated effort or careful deliberation not habits because they will always require effort. Deep work tasks like reading Shakespeare or writing a doctoral thesis won’t become a habit so don’t blame yourself if particularly challenging tasks never take on the same level of automation as washing your hands. Nevertheless, you can build a routine or a habit of preparing yourself for deep work, eliminating outside distractions, and organizing your to-do list proactively.
Routines and habits are particularly crucial when it comes to taking care of your mind and body, like working out, eating well, meditating, and sleeping. If you can complete these tasks at pre-set times during each day/week, you will drastically improve the time you spend working because all other decisions have already been made for you and your willpower can be entirely devoted to the task at hand. Both involve the relationship between a stimulus and a response (in my example: school à snack; homework à screen time), and both can be molded to create a favorable outcome (homework and chores completed before dinner).
Of course, we cannot disregard the power of routines and habits to create a not-so-favorable outcome. The same “magic” that can motivate you to work out without thinking about it can also cause you to act destructively without thinking. If, for example, you (a) check your beeping phone while you’re speaking to someone in person, or (b) pull into the drive-through during lunchtime or (c) indulge in procrastination until the last minute, you may have developed a habit that is working against your best interests. Habits are a two-sided coin, so by learning better about the ways in which our behavior is governed by them, we can better assess how to utilize the “good side” of the coin while avoiding the bad side! The encouraging news is that you can break a bad habit by creating a new habit to replace it.
“[Humans] acquire a particular quality by constantly acting a particular way.” – probably Aristotle
The positive notions of habit-building are very appealing, so much that it seems like everyone from amateur bloggers (*raises hand*) to professional self-help authors seem enthralled with the subject. It would be perfect if we could simply teach our body to work, eat well, exercise, save money, floss, and call our family members without consuming much will power. As you might imagine, however, humans need a proper strategy in order to develop productive new habits and stick to them.
How can you build a new routine or habit? Let’s break it down into some manageable steps;
1) Commit fully and publicly
There’s a great Clayton Christensen quote that says “100% is easier than 98%,” and I firmly believe this. Giving up soda entirely is easier than giving it up ‘except on special occasions.’ Walking a mile every morning is easier than going once or twice a week “when I have the time.” Furthermore, tell your friends and family exactly what you’re doing and how you’re doing it. This isn’t to brag but rather to hold yourself accountable. Nobody wants to feel the shame of reporting back a week later telling them you quit, so being public (yet humble) about a new habit can be the key to ongoing success.
2) Allot the appropriate time
Most new behaviors take a certain amount of time, so by planning for this in advance, you increase your chances of success. For example, I complete the monthly budget, check all bank and credit card statements, report any suspicious transactions, and work through ways to improve our finances on the first weekday of every month at the same hour. I’ve blocked off this time in my calendar and do not allow for conflicts. Consider doing the same for your goal; give yourself the proper amount of time in advance and minimize any variance from the schedule. I recommend working on one habit at a time, since it is much easier to find time for a single change than many.
3) Start with a routine
Set a recurring alarm on your phone to remind when you should start and finish. Then take the first step towards doing it. The hardest part of going to the gym isn’t the workout itself; it’s getting out of bed and putting on your gym clothes. If you have a routine of waking up at the same time, putting on your gym clothes, brushing your teeth, getting in the car, and going to the gym, the do that routine every weekday with precision. If you’re feeling unmotivated, at least get up for the alarm and put on your gym cloths. Nine times out of ten, you’ll then be motivated to finish the routine. Finally, make the routine easy for yourself. For example, you can leave everything ready the night before so your gym gear is accessible – avoid giving yourself an excuse to skip out on your routine.
4) Seek accountability
The buddy system is a powerful force in building better habits. Whether it’s one person or a group of people, a social circle to keep you accountable can be the difference between success and failure. Don’t be ashamed; I fully admit that I need accountability when it comes to tasks I sometimes procrastinate like a exercising routinely or writing blog articles. Your friends and loved ones want to see you succeed, so it’s OK to ask them for support. After all, the multi-level marketing companies use this social psychology to their advantage, but you can use it to your advantage too.
5) Reward successes
You can support a new routine by giving yourself a reward when you do it, like I did with my screen time after school. Offer yourself a quick reliable reward at each step, though avoid addictive substances or things that offset your good habit with a bad one (sorry, no ice cream after running for a mile!).
On this note, some research shows that while experiencing pleasure is indeed motivating, avoiding pain is even more motivating. This idea can be delicately applied to certain habits. Things like a buddy system for working out (the fear of being ashamed if you skip a day) or a chore-system (for when you cheat on your diet) can help you mold your behavior. Be careful when applying punishments for building a long-term habit, since you don’t want to reach the point where you associate the habit with something negative.
Regardless of your exact method, reinforcement, both positive and negative, really do work!
6) Measure your results periodically
Thou Cannot Manage What Thou Does Not Measure. It’s important to look back and acknowledge what parts of your routines and habits are working and what aren’t. The most effective way is to record and measure your successes. Did you put the right amount of money into savings this month? What number of days did you make it to the gym? How many articles on TheCentsei did you complete (hopefully all!)?
Follow these steps and modify based on the behavior or goal you’re trying to accomplish!
Remember, the goal of a productive habit is to minimize the number of decisions needed to complete it successfully. By committing, starting with a routine, allotting time in advance, seeking accountability, and following through, you will free up the mental space needed to be successful. A routine and be easier than doing nothing (but thinking about it), and a habit can be easier than a routine. As Samuel Johnson put it, “The chains of habit are too weak to be felt until they are too strong to be broken.”
“As it is not one swallow or a fine day that makes a spring, so it is not one day or a short time that makes a man blessed and happy.” — actually Aristotle.
Take some time to consider which behaviors are present in your life today. Which would you like to make into a routine or habit? Which would you like to eliminate? Which would you like to avoid? As indicated already, it’s OK to acknowledge that some things will take time, some may fail on the first try, and some will not become a habit at all. Still, you have the ability to build a routine around nearly any goal in life to maximize your chances of success. You can (it’s our philosophy)!
If you enjoyed this article, you might enjoy some further reading on the topic from one of my favorite bloggers, the very “Centsable” Mr. Money Moustache. And if you’re wondering what habits to add and what to avoid, tune in for a future article!
Of the awards and trophies I earned over the years, this lamp, in some ways, is the sweetest.
As a child of the 90’s, there is no question that my life was devoid of certain luxuries that are all but universal in certain parts of the world today. A tablet was something Indiana Jones might have dug out of the ground, Fortnite was a vocabulary word from Charles Dickens in English class, and Tik Tok was a sound made by my uncle’s creepy clock that kept me awake when I visited his house. Still, there is at least one thing that most kids today will never get to experience in the same way that we 90’s kids did: Arcades.
Nothing quite beat a warm summer day at the beach with my mother and grandmother. The sun, the fried dough, the cool water, and the rides came together nicely with our first stop: the arcade. My brother and I would receive $10 in quarters to split evenly and play games for as long as the money lasted us.
We would invariably start with an exciting match or two of with my grandmother of Street Fighter II or Mortal Kombat. Nothing gets the summer adrenaline going like the threat of being hit with a devastating “Hadoken” attack by a fierce button-mashing relative!
Trust me, you haven’t learned humility until a 75-year-old beats you at this… repeatedly
Most of our quarters, however, were spent on games that generated tickets rather than pay-til-you-lose classic video games. Wikipedia even has an article for Redemption Games like this. Redemption games were games of skill that rewarded the player for achieving a certain score or outcome, and in our case, the reward was tickets.
Arcades today have cards or even apps for storing tickets, but back in the day, we collected physical tickets. Eventually, the arcade upgraded to allow for tickets to be redeemed in bulk for larger tickets (100’s) or even slips of paper, but these tickets were bone fide gold. They represented hours of work and pure arcade game mastery!
I hope the future generations get to experience the euphoria of hitting the jackpot and seeing this
A little-known secret was that the arcade would let you trade in your tickets for higher value tickets to help you save up. 100 individual tickets could be redeemed for a larger ticket worth 100 make storage a bit easier.
Incredibly, my mother managed to find a few of these lying around the house. Guess I could buy a hundred Tootsie Rolls for Halloween this year!
My brother and I weren’t your average arcade goers though. We had a system, a system to generate as many tickets as possible for as few quarters as possible. This took dozens of trips to the arcade to master a variety of games, but the true secret often involved teamwork, a bit of math, and knowing the behavior of the arcade employees.
Here were some of our favorites, as well as some of the most ticket-profitable.
Wacky Gator
“I’m gonna get you!”
Teamwork was a must to whack as many of these gators as you could in the limited time you have. Two boys have four arms and quick reflexes, and the tickets came pouring out.
Feed Big Bertha
“Feed me another one!”
No, this isn’t something out of a Stephen King movie. Big Bertha was “hungry, hungry, hungry,” but so were we. With two people throwing plastic balls into her mouth, we could double our ticket output per quarter. Talk about efficiency!
Pokerino
You were supposed to roll the ball to try to get different winning poker hands, but imagine the possibilities if you had long skinny arms and the arcade employee wasn’t always the most attentive… a four of a kind or a royal flush just might happen to show up and generate tons of tickets. Is this cheating, or just using biology and oversight to your advantage? Only time will tell!
Ski Ball
“WOW! 5,000 points!”
Ski Ball was a win-win. My mother and grandmother loved playing and would often provide some extra quarters to play as a family. The added bonus? The family’s tickets were split between the two of us.
Our system did not stop with just maximizing the number of tickets earned per game. We wanted value for our hard work when it came to the prizes!
The arcade assumes that most children will redeem their tickets on the day they are earned. Ten dollars’ worth of games might generate 100 tickets to the average kid, so most of the inexpensive prizes were showcased in a glass display in the rear of the arcade. These prizes would range from a Tootsie Rolls for 2 tickets all the way up to a cheap plastic toy for maybe 200 tickets.
My brother and I had our eyes on something bigger: one of the “shelf prizes.”
These prizes were on display high above the glass counter on large shelves with huge tags representing the number of tickets needed to earn them: A skateboard for 3,000 tickets, a video game for 5,000, a new TV for 40,000. The arcade no doubt used these prizes to get kids to spend more money per visit with the illusion that they might hit a jackpot and take one home. The reality, of course, was that most kids aren’t great at saving would just redeem their tickets that day and never save up enough for a shelf prize.
Among the shelf prize treasures was the object we desired most: the lava lamp.
This decorative lamp consists of a special-colored wax mixture inside a glass vessel. When the wax is heated by a special light bulb, the warmed wax rises through the surrounding liquid, cools, loses its buoyancy, and falls back to the bottom of the vessel. Lava lamps were among the coolest objects a kid in grade school could display in his or her room, but we needed 4,000 tickets for this must-have.
The two of us pooled our tickets together and saved up for several years to earn our lava lamps. Even when we had enough tickets for one, we held off until we had enough tickets for two – one for each of us. It wouldn’t surprise me if we made 20+ trips to the arcade over the course of 6-7 years, but we were finally able to obtain our prizes one day. I don’t remember much about the purchase itself, other than the employee needing to give us one from the back and the one on display, saying something about how “people never actually buy prizes like this.”
If you’re wondering, yes, I still have it, and it’s picture at the top of this post.
I’ll leave the parenting advice to the bloggers who are parents. However, in the light of this being a personal finance and happiness blog, I did want to share this story in that light (pun somewhat intended). If you see your kids developing potentially good personal finances habits, like delaying gratification by saving up tickets at the arcade, consider doing everything in your means to foster those habits. My mother and grandmother could have just as easily made us use our tickets each visit to avoid the hassle of storing them until the next time. Instead, they helped us accumulate tickets over many years and thereby achieve this “financial” goal of ours at a young age. I found it helped me learn about the value of planning ahead, saving up for something you want, appreciating trade-offs, and exploring how to satisfy my needs given constraints in their resources.
They helped me become a “Lava Lamp Kid,” and other kids have the opportunity to become one too.
Selling a car privately on a site like Craigslist can be fast, economical, and safe if you follow a few simple steps.
Quarantine life is a strange life. What once may have been unthinkable becomes increasingly customary. No, I’m not talking about growing a garden, hoarding toilet paper, getting tipsy during a work-sponsored virtual happy hours, or throwing a party with the intention of trying to catch the virus; this is a finance blog (that last one is a bad health and financial decision, but that’s a topic for another day)! I’m talking about harnessing your inner Centsei with a dash of Marie Kondo and cleaning out your dojo by selling things in your life that no longer bring you joy.
For me, this valuable was my 2011 Mazda 3, as seen above, and unfortunately my wallet had to take a hit before I got the motivation to act.
Lady Centsei and I have owned two cars for the entirety of our relationship, as seemed to be the norm for people like us living in the suburbs. In fact, two cars in a single household is below average for the United States, and over a third of households own three or more.
However, we’ve both been working from home and will do so indefinitely during the quarantine. As a result, our car usage has dropped by 90%. We maybe leave the house once or twice per week, often together. There has not been a single time since March when we would have both needed a car for separate destinations at the same time. Even when we begin going to the office again, it’s only a 5-minute detour each way for me to pick her up or drop her off. Two cars might not have been necessary before, and they certainly aren’t necessary now.
You might initially think that having a paid for car sitting in the driveway no using gas doesn’t cost anything. Unfortunately, cars cost a great deal of money whether you drive them or not.
Since the beginning of the year, I’ve bought new tires, got an inspection, paid the registration fee and excise tax, replaced the battery, purchased insurance, and re-done the rusting breaks on a 10-year-old basic model car that I’ve driven just a few times. Total cost? Well over $2000, not including gas, any car payments, or depreciation (the fact that the car becomes less valuable over time). Nerd
Ouch.
The car has some sentimental value to me, of course. It was the first car that I purchased with my own money, and it carried many stories of my young adult life. Nonetheless, this sentiment was not worth $300 or more per month for an object that I wasn’t using and could someday replace. It was time to sell the old Mazda.
I’d never sold a car privately before. There are many options ranging from a private sale, a quick buying service like CarMax, or a car dealership. A private sale will almost always be the best deal for both the seller and the buyer if done properly. A service like CarMax might be “easier” or “less scary” but you will lose hundreds or even thousands of dollars on your trade-in by using a middleman. And do I even need to get into the problems with involving a car dealership? Didn’t think so.
Don’t trust used car dealers, especially those without a face!
Many people might think a private sale is sketchy or troublesome, but that wasn’t my experience at all. Despite never having sold a car before, I sold mine on Craigslist in 5 days with less than 2 hours of work total for the full Kelly Blue Book value. No joke. Here’s how I did it:
(1) Locate The Title And Make Sure It’s “Clean”
A title is the legal document stating the car’s ownership. If you lease the car or still have an outstanding loan on it, you won’t be in possession of the title and won’t legally be able to sell it. Before selling your car, locate the title, and verify that it’s in your name. You’ll also want to make sure that the title is “clean,” which just means that the car has never been declared a total loss by an insurance company. If you can’t find your title but are sure you own the vehicle outright, you may need to order a new one from your local DMV for a fee.
(2) Fix Any Major Malfunctions
You’ll want to ensure all critical functions in your car are in working order, such as the engine, breaks, electrical, exhaust, steering, and mirrors. If the car wouldn’t pass inspection, you’re going to have a very difficult time selling it, and it’s worth your time and money to get the important stuff fixed. That said, you generally don’t need to fix cosmetic flaws, since those generally cost more to fix than the added resell value you’d get by fixing them. For example, if the car has dings and scratches, you could easily spend a thousand dollars or more at a body shop but add only a few hundred to the car’s value. The seller doesn’t expect cosmetic perfection, so don’t waste list of money.
(3) Clean The Car Thoroughly
One area where you do want to spend a little time and a few bucks, however, is in cleaning the car. Take it through the car wash, vacuum the interior, and wash all the hard-to-reach areas like the inside door panels and dash with a cloth. Spending $10 on a car wash and 30 minutes of labor will make the car substantially more attractive to buyers, potentially adding to your asking price or quickening the sale.
(4) Set A Fair Price
Set emotions aside and set the price based on what your car is actually worth. No more, no less. Use a site like Kelly Blue Book to get and approximation, and be honest about the car’s mileage and condition. KBB said “good” condition my car was worth $4,600 – $5,400, so I asked for $4,950 despite having just spent $700 on brakes and a batter. Expect to negotiate down by 5-10%. Don’t hold out forever waiting for someone to overpay; it’s not going to happen. Remember: Each month you fail to sell it will cost you hundreds.
(5) Take At Least Ten High-Quality Pictures
Front, back, both side, front seats, back seats, trunk interior, dash, radio/panel, and any luxury aspects that make your car stand out. Use photo software to block out your license plate number.
(6) Gather Maintenance Records
A buyer may ask for these and you should have them in a single place ready to present. Be thorough in your explanations of exactly how often you completed routine items like oil changes and tune-ups, and be prepared to give specific dates on when you last perform major repairs like brakes, tires, timing belts, transmission, battery, alternator, and so forth. Make a cheat sheet. Don’t lie or exaggerate.
(7) Create A Craigslist Account
Signing up for Craigslist takes two minutes and a minimal amount of personal information. Here is a quick guide on the basic functions like making, editing, deleting, and renewing a post.
(8) Craft Your Craigslist Ad With Excellent Detail
Let your creative and artistic side shine by creating a post (advertisement) that makes your car stand out. Highlight the attractive features but be upfront about any defects that a seller would want to know about.
Do post the year, make, and model in your title. Do include your photos, asking price, car type, mileage, a broad description of where you would like to meet up, and how you would like to be paid.
Don’t post your phone number or street address in the ad (Craigslist has an option for them to contact you through a message that goes to your e-mail address without the need to display your personal info online).
Here’s the actual ad I used, with maps and a few personal details removed:
(9) Submit The Ad
Double check your work and submit the ad. Craigslist charges a $5 fee for an automotive ad that lasts for 30 days. It’s worth it and is a much better deal than a newspaper or other websites. Consider lowering the price if you don’t get many hits for a week. You can repost the ad after 30 days if it isn’t sold.
*Note that Craigslist may not be the best option in your area. Autotrader (affiliated with Kelley Blue Book) and eBay Motors are alternatives that might work out a bit better, though they can be more expensive and require more effort. I haven’t used either so can’t say either way.
(10) Post A “For Sale” Sign
Setting your car up with a For Sale sign is another way to market your car with little time or upfront cost. Buy a professional-looking sign for a few dollars on Amazon and maybe you’ll get some interest, especially if the car can be parked on a street with decent traffic.
(11) Respond To Questions Quickly And Honestly
Buyers will likely have some questions about your car, so respond to them promptly to show you are serious.
If the seller asks for the VIN or more questions than you want to answer over e-mail, encourage them to meet up in person so they can see for themselves. A willingness to meet in person also helps ensure they are not wasting your time. Feel free to ask questions of your own, such as whether the buyer is local and when they were planning on making the purchase. The onus is on the seller, not you, to order a Carfax report if they are interested.
Please be on the lookout for fraudsters at this point.
— Only deal with people willing to meet locally and face-to-face.
— Don’t give out personal information beyond your first name to someone you don’t know.
— Be on the lookout for someone with an offer that is too good to be true (ex. twice your asking price).
— Under no circumstances should you offer to ship the car or try to conduct payment with someone you have not met in person!
(12) Meet With Prospective Buyers For A Test Drive
Offer to meet up with the buyer during the day in a well-lit public place that is convenient for both of you and could be witnessed by others. If you’re not comfortable alone, bring a friend with you and offer that the buyer bring a friend too. Don’t be outnumbered. Take any valuables out of the car in advance.
When it comes to a test drive, the first step is to exchange pictures of licenses, quickly checking to make sure that the person is who they say they are and are legally allowed to drive. Only allow one driver at a time, and enter the car with them if you feel comfortable doing so. Limit the amount of time they can drive the car. Agree on next steps and timeframe if the sale won’t be finalized that day.
From a safety perspective, think of it like a first date. Always make sure a loved one knows where you will be. Turn on your geolocation option on your phone, like FindMyPhone for Apple, so you are easily found. Always conduct business in broad daylight in a safe area. Trust your gut – if you sense the buyer is up to no good, take your keys and leave without giving it a second thought.
(13) Print And Sign A Purchase And Sale Agreement
A purchase and sale agreement isn’t required in all jurisdictions, but I recommend printing one out in advance and requiring that it be signed to formalize the purchase. Here’s a quality sample that I used for mine that works in my state, but find one that works for you. It doesn’t need to be fancy; just include the date, purchase price, the statement of purchase (“The seller grants, sells, conveys, transfers and delivers to buyer the following to the buyer… [followed by vehicle description],” details of the car including VIN, and the signatures of the buyer and seller . You can get this notarized at your local UPS store, though it’s not legally required to make the sale valid.
(14) Secure The Payment
This part can be a little awkward, so it’s important that you protect your interests.
— If the seller offers you cash, come prepared with a pen to confirm whether its counterfeit and maybe a little cash of your own to try to detect it. Cash transactions are harder for both parties to prove, but that isn’t a reason not to accept it.
— If the seller offers you a personal check, offer to go to the seller’s bank to cash it right away. This is the best option for most people and protects you both. If the seller’s bank is out of town, I’d recommend waiting until the check clears before handing over the keys and title. You want to protect yourself from a bouncing check.
— If the seller offers you a cashier’s check, again offer to go to the seller’s bank to cash it. The bank will let you verify that the cashier’s check is legitimate.
— If the seller offers you Venmo or another app, be warned that the transfer could take a day or two to finalize, so this may affect when you feel comfortable parting with the car.
— If the seller offers you Western Union, RUN AWAY!
Regardless of payment type, you’ll want to confirm that the payment is coming from the person actually buying the car. If the name on the check or payment method is different or if something else feels fishy, do not proceed. The seller could be trying to pay using someone else’s money.
Deposit your payment as soon as possible.
(15) Prepare the Title for Transfer.
The exact procedure for transferring or “signing over” the title vary by jurisdiction. Complete the “seller” portion of the title on the reverse side, and only sign when your payment has been received, not before. Once again, make sure the “buyer” portion matches the license and payment details of the person you’re doing business with.
If you’re uncomfortable with doing this on your own, your local Motor Vehicle Registry (also called DMV, RMV, etc) can assist with this.
Remember, once the title is signed, the buyer now legally owns the car. You don’t want this to fall into the wrong hands. Make sure everything is in order, and wave goodbye to your old car!
(16) Inform the Appropriate Motor Vehicle Registry And/Or State Authorities.
Go to the Motor Vehicle Registry or visit their website if your jurisdiction allows. Check with them to see the exact steps required on your end. Generally, you will report the sale to them and confirm that you no longer own the vehicle in question. You may need the VIN, registration number, and your license number. Check with your local motor vehicle registry or secretary of state to learn what’s required of buyers and sellers in your area. You may need to inform more than one government entity, such as your state’s RMV as well as you local town/city government, so double check.
You may also qualify to get some of your registration or excise tax money back. Check the rules!
(19) Notify Your Insurance Carrier
Don’t forget this last critical step, since you certainly don’t want to insure a car that you don’t own! Call or go online to remove the car from your insurance. You may need to cite the reason (“sold the vehicle”) but more carriers make this painless and should rebate you a portion of your premium if you paid in advance. Lady Centsei saved $500 per year by going from two cars to one… and no, this is not even a GEICO commercial!
(20*) Remove The Craigslist Ad
You don’t want people e-mailing you about a car that isn’t yours, and you don’t want to waste anyone’s time.
Truth be told, I spent more time writing this article that I did selling my car start to finish. 20 minutes taking it to and from the shop for repairs, 20 minutes cleaning it, 20 minutes taking pictures and authoring the post, and maybe just over 60 minutes dealing with the buyer. I got my asking price for the car, saved hundreds on my insurance, and expect a refund on my registration and excise tax any day. No more repairs, no more gas, no more shoveling out snow, no more fees and taxes. The feeling is liberating, and I really do recommend this process to anyone looking to sell vehicle – or almost any possession for that matter – on Craigslist.
It will be a surprise to nobody reading this blog that I tend to be just a little obsessed with managing my personal finances. And by “a little bit,” I really mean “a lot.” There are no shortcuts to growing one’s wealth, and taking the time to budget, increase income, and decrease spending – all while living as well as possible – requires careful thought and planning on a regular basis.
The average person makes about $2,700,000 in his or her lifetime and the average working couple makes about $5,000,000. At first glance, this sum seems staggering so the thought of $5 per day on coffee and $100 per month on cable television seems insignificant. However, when you consider that $2.7 million represents $45,000 per year (as an adult), or $3,700 per month, or about $100 per day with which to support yourself and your family, the scarcity of that amount feels very real. After all, essentials like taxes, housing, and food will likely comprise over 50% of your income, so it’s incredibly important to ensure that you know where the rest of your money is going.
Anyway, one of my credit cards has a very useful feature of alerting me when there are notable changes to my credit score. Most of the time, the news is good and pretty trivial (“no change to your score this month”), but I still recommend paying attention to these alerts on the off chance that something has gone awry, as today’s article will demonstrate.
In early June, I received one such alert stating that there was a change to my score, which was strange because I didn’t have any recollection of any change to the major factors that affect your credit score. Imagine my shock when I saw this:
Over the last ten years, as Lady Centsei and I bought property or acquired debt, my credit score fluctuated by approximately 10 points in either direction each year. But this drop from 760 to 695 was completely unexpected.
I began investigating and quickly discovered that one of my accounts had been reported as 30 days past due by the lender. This mistake can really hurt your score! A little more research revealed that it was, of all things, my mortgage! I have my mortgage set to auto-pay and hadn’t received a single alert as to a non-payment or failed payment. How could this have happened?
I checked my account balance used to pay the mortgage, and it did seem a bit high. However, even more unusual was a tiny alert that I had a message in their portal. I opened the message and saw this, to my horror:
I had attempted to make an automatic payment on April 28th for my May 1st mortgage payment, and it failed, as well as a May 28th payment for my June 1st payment, and it, too, failed. I hadn’t noticed anything too strange in my monthly budget (aside from some expenses like gas being quite low these days during quarantine) and couldn’t understand how this failed transfer could have happened.
I called the credit union that holds my mortgage (we’ll call them “The Credit Union”). A representative picked up the phone and reiterated my worst fear – I had missed two payments and was now more than 30 days past due, so they had reported me to all three credit bureaus for a being late on my mortgage payment.
My heart sank. My legs bucked. My throat swelled up.
I began asking for more details. Why hadn’t they called me? Why had the automatic payments failed to go through? Why hadn’t they notified me in writing? How could The Credit Union be so poor at handling this process? Surely a simple call or letter would have solved this entire thing with weeks to spare.
The core issue of the failed transfers is that my mortgage had gone up in April by about $25 per month due to changes in local property taxes The Credit Union withholds for me. Basically, in April and May, I had attempted to pay the old amount rather than the new amount, so The Credit Union rejected the entire payment. And before you ask, no, they did not notify me of the increase until I called in May.
They also explained a few critical details:
(1) They interpreted the government’s guidance for banks in April regarding the virus as stating that they were not allowed to contact customers for past due amounts or collections.
Therefore, when my account was late, they believe they were legally not allowed to tell me. Obviously, if I had received any kind of communication, even a friendly reminder, I would have paid! However, the bank’s interpretation of the governmental guidance made that impossible.
Let me also state that this is dead wrong. Federal law in the U.S. suspended collections calls related to student loans and state law in my area halted the foreclosure process during the pandemic, but there were no laws or regulations against bank calling to remind borrowers of a possible past due payment on an installment loan.
A mail or phone reminder would have prompted immediate action from me and would have been 100% legal. If they had done so, this entire situation could have been avoided.
(2) They claimed that they had provided me notification of the increase in my mortgage amount in January. I did not receive this notice, and they admitted they did not send it via certified mail.
Banks and credit unions are supposed to notify their customers in writing when their mortgage is set to increase. Mine did not do this. I keep all financial documents for seven years, and I checked for the notification several times.
(3) Their policy does not allow for partial payments. I was never informed of this.
My automatic payments had both attempted to go through on March 28th and April 28th, both just $25 shy of the required amount. If they had accepted them as partial payments, I would have been current for April as of 28th and never been past due by 30 days.
(4) The burden was entirely on me to uncover the issue.
No phone calls. No mail. No e-mails. No text messages. No smoke signals. The only notification was that small message on the bank’s internal e-mail system to me, which of course is antiquated and cannot connect to my other preferred forms of communication. This issue could have continued for months if I hadn’t been monitoring my accounts regularly and my credit damaged irreparably.
(5) The initial rounds of customer service were abysmal. I had to fight tooth and nail to correct the issue.
After this initial phone call with The Credit Union, I began the arduous process of correction the payments going forward. I’ll admit that this took several of “those” 5-minute phone calls, but they were well worth it. Unfortunately, even after the payment issue itself was rectified, the incident was still reflected in my credit score. I had to correct this if I ever wanted to borrow money at a reasonable rate again.
The next three calls were to The Credit Union’s lending department to get them to correct the ding to my credit. This process could warrant its own post. Long story short, I remained calm, polite, persistent, and confident. I explained to them it was a genuine mistake under strange circumstances that caused me to miss the payment to begin with, and the fact that my record with them had been excellent for many years. It took speaking to three people (one with an attitude “you should have known better”; one with some empathy but no authority “I understand your perspective but I can’t help you”; one with the director of lending “OK, you’ve shown your point and I don’t feel like dealing with you”), but they finally removed the ding on my credit report.
(Not actually me. No Gandolf-sized beard. No flying piggy bank sidekick.)
What a relief!
My credit score had recovered by early June, though not without drama and stress. I confirmed the credit reporting agencies that the previous delinquency had indeed been removed. All was well with my financial world again.
Why does this even matter?
The difference between a score in the high 600’s and the high 700’s (over 100 points) could be the difference between getting the best loans with the best interest rates. Sometime in the next five years or so, it’s very likely that Lady Centsei and I will buy our “forever home” in an area of the country where the median home price in the area is just shy of $600,000.
If we were to buy median home via a 30-year mortgage, the lender often takes the lower of the two applicants’ credit scores for use in their interest rate decision. According to Bankrate.com and MyFICO.com, here is the interest rate one should expect at various credit scores.
FICO SCORE
ANNUAL PERCENTAGE RATE (APR)
MONTHLY PAYMENT
TOTAL INTEREST PAID
760-850
2.73%
$2,442
$279,171
700-759
2.95%
$2,514
$304,734
680-699
3.13%
$2,571
$325,410
660-679
3.34%
$2,640
$350,748
640-659
3.77%
$2,787
$402,783
620-639
4.32%
$2,976
$470,952
Each 20-point interval in your credit score will cost you an average of 0.20% on your mortgage for 30 years. My 100-point drop could have increased my rate by 0.50% to 1.00% depending on the lender. On a $600,000 home in our area, equates to almost $100,000 over the life of the loan.
Penny can help us reiterate this math in very simple terms.
I’m glad I worked with my bank promptly to correct this issue. Nonetheless, it’s impossible to ignore “what could have been.” One late payment without notice easily could have become two or three. Three late payments could have hurt my credit score by even more than 100 points for up to 7 years (at which point late payments are removed). This damaged credit could have caused banks to increase my next mortgage interest rate by 1% or more. I could have paid $100,000 more in interest over the next 30 years.
I blame myself a little, as I could have been more diligent. I blame The Credit Union a little more, as they could have communicated better at many points. I blame the pandemic the most, since it caused this chain of unfortunate events in the first place!
Lesson learned. Hopefully the same thing never happens to you and this story serves as a good lesson in the importance of not only managing your credit, but also handling these issues quickly when they do come up, so the outcome is to your advantage.
Now more than ever, be sure to check your account regularly and don’t postpone resolving problems.
In the fallout of the coronavirus, banks have begun tightening their lending standards to the point where even the Federal Reserve had to report on the potential impact to lower-credit individuals. Thus, it’s more important than ever to be informed on how to improve your credit score. The good news is that this topic is not as complex as it seems.
To help gain some insight into whether it’s a good idea to lend someone money, let’s consider an imaginary story about two friends from my 3rd grade class, Andrea and Adam, both of whom would occasionally ask me for money to buy snacks during lunch from time to time.
As you’ll see, children and adults think about most concepts in life the same way
Andrea always paid her money back the very next day. She had a long reputation (the whole school year!) in the class, regardless of whether the person was a friend or not. She didn’t ask for money all the time, and she didn’t have a reputation of owning every single person in the class money.
Adam, well, was a different story. He’d just recently starting borrowing money from the classmates, and took week to pay them back, if ever. It felt like he owed a lot of money to everyone, and he asked for money every single day. The was well known for targeting only certain people for money that he felt he could take advantage of, and when one person said “no,” he went to another person. In no time, he had a well-known reputation of the person you avoid during lunchtime.
Oh yeah, definitely “imaginary,” rightAdam!?
This story is not too far off from real life, just with banks and loans rather than classmates and milk money.
Credit Scores receive a lot of coverage in the media, with many outlets implying that the score is a measure of one’s financial acumen. Sadly, when news stories cover personal finance they often rely (heavily!) on sensationalist headlines and anecdotal stories.
Hey, isn’t that why we have bloggers?!?!?!
Anyway, just what is your credit score and why does it matter?
In the United States, a credit score is a number based on an analysis of a person’s payment history and credit usage that (in theory) statistically predicts how likely a person is to pay their bills and financial obligations on time. The U.S. relies on three private companies, Experian, TransUnion, and Equifax, to collect this data and produce a score. Originally, banks and other lenders used this credit score to help them determine whether to lend you money. Nowadays, your landlord, insurance company, cable/phone provider, and employer are usually allowed to use some aspects of your credit score in their decisions of whether to do business with you. Furthermore, even certain overdue non-loans like parking tickets, traffic fines, medical bills, child support payments can affect your score negatively. Both good (on time payments) and bad (late or non-payments) marks could stay in your credit history for up to seven years. It’s easy to see that your credit score has an impact on your financial life, whether you borrow money or not!
Other countries have slightly different regulations surrounding what affects your score and how it may be used, but in general, this concept of a score is accepted worldwide.
Interestingly, your income and employment history are not factors that directly affect your credit score. It is very possible for an unemployed person living on $20,000 per year to have a better score than the executive living on $100,000. However, there may be an indirectly relationship between your income and your credit score, since higher earners should have the ability to pay their debts on time.
In the U.S., most of the credit bureaus use a variation of the FICO method to create and adjust your score overtime, though there are some more modern approaches being tested. Each bureau is a little different, but your score can range from 300 – 850, with 850 being outstanding and 300 being extremely poor. According to fool.com, the average score is 700 with 20% of people having a score over 800, 20% under 550, and the rest in the 550-799 range.
Individuals with higher (better) credit scores can qualify for better types of loans, such as those with lower interest rates and higher amounts of dollars lent. For example, people with scores below 620 usually can’t obtain a home mortgage at all. Those with barely acceptable scores might pay an interest rates up to 5.00% APR in today’s market, those with 660 might pay 4.00%, and those with 740+ might pay as little as 3.00%. Over a 30-year mortgage, this adds up to tens of thousands of dollars in interest alone!
The reason for this disparity is that the lender sees those with a lower score as more likely to default on the loan and cost the lender money. The lower the risk, the lower the interest rate the lender can offer.
So what affects your credit score? There are five main factors:
1) Payment History (35% of your total score)
How often you pay your bills on time, including credit cards, student loans, mortgages, and car loans.
Being 30 or more days late on a loan payment can cause a negative mark on your payment history. Making at least the minimum payment is essential to keep this part of your score strong, though try to pay off all your loans as quickly as you can. Being 60+ days late or affects your score even more, and being 180+ days late is usually a “write-off” where the lender sends your loan to a collection agency and a major blemish appears on your report for years. Payment history is the most important part of your credit score, so do your best to pay your existing bills on time. If you can’t, contact your lender immediately to work something out and avoid being considered late. Many banks and companies are willing to be flexible given the circumstances of COVID, but you’ve got to call first.
2) Debt Utilization (30% of total)
How much debt you have outstanding compared to how much credit you have available.
Most experts agree it’s best to use 10- 20% of any lines of credit that you have available. Lenders want to make sure that you’re not maxed out or otherwise in over your head. For example, if you have a $5,000 line of credit on your credit card, it’s good to use the card a little bit each month to prove you can make payments, but try not to use more than $1,000.
3) Length of Your Credit History (15%)
How many years you have had your credit products or accounts.
Creditors want to see a long history of your ability to manage your debts. Someone who has never had credit products before, such as a loan or credit card, is higher risk than someone who is experienced with them. There are two factors that matter here, (1) the age of your oldest account and (2) the average age of all your accounts collectively. If you open a low-limit credit card when you’re very young (18 years old in many parts of the world) and keep it open for a long time, the first portion of this category will be good. If you keep all your oldest accounts open for a long time, the second portion will be good, even if you only use the old ones occasionally (don’t let the banks close them). Just make sure don’t fall into the credit card trap while you’re young!
4) Types of Credit (10%)
How many types of credit products or accounts you’ve used successfully.
There are two main types of credit accounts that go into that mix. The first type is revolving debt, such as credit cards, where the amount you owe “revolves” or varies each month. The second type is installment debt, such as car loans or mortgages, where you borrow a fixed amount and repay it in even “installments” each month. Again, you should not go into debt for the sake of trying to boost this part of your score, but your credit score will be a bit stronger when there is a good mix of both revolving credit and installment debt.
5) Number of Recent Inquiries to The Credit Bureaus (10%)
How many times in the recent past you have had your credit report pulled for a loan.
Lenders assume that desperate borrows are more likely to default, and they measure this by how many times you’ve applies for loans in the last two years, with heavier wait being put on the most recent six months. Keep in mind there is a difference between a “soft pull” (when you pull your own credit or an employer does so for verification purposes) and a “hard pull” (when a lender pulls credit to make a decision on a loan). Luckily, only hard pulls count towards this part of your score. Try not to apply for more than one credit product per year.
What can we conclude from all this?
Having a good credit score is important for qualifying for credit with good lenders on good terms when you need it. Understanding your credit score and managing your debts accordingly is the key to improving it over time.
Let’s looks back at our friend Adam again. He’d just recently starting borrowing money from the classmates (#3: Length of Credit History), and took week to pay them back, if ever (#1: Payment History). It felt like he owed a lot of money to everyone (#2: High Debt Utilization), and he asked for money every single day (#5: Numerous Inquiries). The was well known for targeting only certain people for money that he felt he could take advantage of (#4: Types Of Credit), and when one person said “no,” he went to another person. In no time, he had a well-known reputation of the person you avoid during lunchtime (Poor Credit Score).
Lenders compete to get the “Andreas” and only do business with the “Adams” on the most arduous terms.
One parting thought: I want to emphasize that your credit score does not define who you are, nor how good you are with money, nor how successful you will be in life. Rather, it is just a statistic; a number assigned to you by someone you don’t know that tries to predict whether to risk lending money to you. While you should learn to manage your finances wisely, you should not obsess over your score continuously. Learn from the past, appreciate the present, and prepare for the future. You are more than your score!
NOTE: The old saying is as true today as ever: ‘If it sounds like it’s too good to be true, it probably is.’ Multi-level marketing companies involve soul-crushing work that could cause you financial ruin. Stay away.
“I would love to talk to you about an exciting opportunity that could change your life. Do you feel trapped in the corporate hamster wheel? Did you know that you can make a six-figure income from home while only working a few hours per week? Are you ready to take control of your destiny? If so, click here, and start to change your life for the better today”
Worth all 30 minutes.
The start of today’s article brings us back to the summer of 2006. I’d just finished another semester of school and was hoping to make some money. Online job recruitment and Facebook (more on that later) barely existed, and the restaurant I’d worked at the previous summer was closed. Feeling a bit desperate for prospects, I picked up the classified section of our local newspaper to see what was available. One like this one caught my eye:
Ok, mystery job, you’ve got my attention: At a time when minimum wage was $5.25, the idea of flexible hours for triple the hour salary I was hoping for sounded like the perfect summer gig. I called the number and reached a generic voicemail box saying “Hi, you’ve reached the affiliate recruitment office. Please leave your name and number, and we’ll get back to you right away.”
“Strange,” I said to myself. “Affiliate recruitment office. That’s an odd way to classify your human resources department. Did I even called the right company?”
When I returned to my phone a few hours later, I had five missed calls and countless voicemails from two or three different numbers. “Very strange,” I thought.
After a fleeting moment of excitement that they’d called me back, I came back to my senses and realized that something was a bit off. ‘Barry’ sounded friendly enough but left very little information about himself or the job in his message. Each voicemail sounded like he was more and more desperate to get in touch with me. The final message mentioned something about maybe being from CutCo, but he still wouldn’t say anything other than how urgent it was that I call him back. “Way too strange,” I concluded,
Yeah, this ‘opportunity’ was not normal, and I was not calling him back.
An acquaintance of mine, who was also looking for a summer job, did interview with them. Apparently, this ‘interview’ involved seven other people sitting in front of an overly friendly recruiter who eventually disclosed that the job was selling knives door-to-door to people you know. There was no application, no background check, no employment agreement, and no weekly paychecks. Rather, you, the salesperson, had to buy knives from the company and sell them to your network for profit. The only piece of paper you had to fill out were the names, addresses, and phone numbers of every person you know. If that weren’t enough, part of your commission compensation was based not only on your own sales figures, but also the sales figures of other people that you managed to recruit. Whether through cold calling, social media, word of mouth, door-to-door sales, or ‘parties’ with your friends, the company wanted you to both sell outrageously priced knives and convince your network to join them. They twisted the concept further by saying that you were ‘starting your own business’ and could be in ‘charge of your own earnings,’ though the actual compensation structure was confusing enough to make your head hurt.
In reality, however, the advertised hourly salary was just an average commission from people who had worked at the company for over a year and did not including their costs. The base pay was nothing. Instead, you were expected to buy your first few sets of knives for $500 per set and sell them for a profit to your friends and family. You certainly did not own the business (they did), and in fact, you weren’t even an official employee, just an independent contractor with no salary, no benefits, and no protections.
In short, this company wanted you, the employee contractor, to pay for their products, hold onto the inventory at your home, and then become that person who tries to guilt their loved ones into buying the product to support your ‘business.’
Uh, no thanks!
The model being described here is called multi-level marking (or what I’ll call “MLM” for the remainder of this article), though it’s known or branded under a number of euphemisms including pyramid selling, affiliate marketing, home-based business franchising, network marketing, social retail, and referral marketing.”
The basic premise is that the sales of products or services sold by the MLM is derived from a non-salaried workforce. Each MLM has its own compensation structure, but it generally involves financial incentives to both sell (direct compensation) and recruit (indirect compensation – you may earn money when people whom you recruit make a sale). The affiliates (you) are generally encouraged to buy products from the MLM, store them in your home, and sell them to your family and friends. However, you are strong encouraged – even pressured – to sign up your loved one to be affiliates under you. When they make a sale or recruit additional affiliates, you make a portion of everyone’s commission.
Multi-level Marketing (MLM) business… or pyramid scheme?
MLM model is alluring and not inherently unethical. There is nothing wrong with incentivizing a workforce to sell or attempting to recruit others to sell on your behalf.
However, reality is that MLM’s almost never fulfill their promises and often lead to financial misery for those who join them. There’s a fine line (or none at all) between an MLM’s and illegal pyramid scheme. Let’s see why.
Problems with MLM’s Companies:
1) The model is unsustainable.
Anyone who has ever tried to start or participate in a chain letter knows that there are only so many times that an individual can connect to ten acquaintances before, well, the world runs out of acquaintances. The MLM recruiter will try to convince you that it’s easy to be at the top and maintain a constant ‘downstream’ of people working under you, but the reality is that it’s nearly impossible to sustain that kind of network, especially in sales. The market is not infinite, nor is it free from competition. The only people getting rich are the executives are the very top, not you.
2) The failure rate is astronomical
The Federal Trade Commission in the U.S. found that approximately 99% of participants in the MLM’s they studied lost money. That’s right; you will not only fail earn the ‘$17/hr’ that they promised, but also lose money 99 times out of 100. The odds of achieving a sustainable living wage was approximate 1 in 3,900. In one area, the average person lost $900 before giving up. There is evidence that gambling is a better financial bet than MLM’s. Starting a regular business is hard enough (39% success rate) but starting an “MLM business” is impossible (<1% success rate). It’s not you; it’s them.
3) Their schemes target society’s most vulnerable.
MLM’s advertising generally includes claims that appeal to those who are desperate for work, have a limited ability to leave the home, or are in severe financial hardship. This is no accident. These individuals are more likely to be drawn into the MLM’s cult-like claims of ‘becoming rich from your living room through our company’s exclusive offering,’ only to later realize that the MLM has taken their time, money, and pride in exchange for little to nothing. The primary target? Those where are underemployed, desperate, stay-at-home parents, financially uneducated, immigrants, or some combination of these characteristics.
4) Theyoverpromise and underdeliver
The dream of ‘owning your own business,’ in the context of joining an MLM’s, is a hoax. The claim of ‘a six figure income from your living room’ is a farce. And the products themselves can be downright dangerous. The only folks that come out on top are the executives and owners of the MLM organization itself, who tend to be very wealthy and politically powerful. Ultimately, you ‘own’ nothing when you join an MLM, other than products bought with your own money.
5) They damage your social circle
We’ve all seen those cringy social media posts, received those awkward calls/texts, or answered those uncomfortable knocks on the door from people we know are trying to sell us something we don’t need. MLM’s companies are behind each of these. Rather than bringing people together, the MLM affiliates drive away family and friends who feel pressured to buy overpriced products that they don’t need or can’t afford. I’ve personally seen friendships driven apart by these companies. It’s devastating.
6) Their product benefits are best on testimonials, not science
In most parts of the world, medicine is required to go through rigorous scientific testing and government. In return, medicine can be marketed in ways that discuss their medical benefits. However, supplements (like those often sold by MLM’s) are not required to go through any testing, and they therefore cannot make medical claims. Nonetheless, supplements can (to an extent) include so-called “testimonials” from customers that are supposed speak to that one customer’s experience. Unsurprisingly, MLM’s often take advantage of this loophole and use testimonials to imply that their products have benefits, when in reality, their products likely have no benefits and may even harm you.
7) Their compensation structure is confusing and deceptive
In a simple world, an affiliate would easily understand what he or she could expect in income – say, a 25% commission on each product sold. In the real world of MLM’s, affiliates are faced with an overwhelming number of factors that affect their compensation: their amount and value of direct sales, what ‘rank’ they are, number of individuals they’ve recruiting, the amount and value of the sales of their recruits, number of consecutive months with certain sales goals, types of products sold, etc. These factors are masked further using confusing company-specific language like base, front-end, mid-level, high-end, leadership, bonus, downstream, upstream, and pools. Affiliates are told that they more they sell and recruit, they higher their level within the company will be (ex. bronze, silver, gold, platinum), but data shows almost nobody makes it past the lowest rank on the hierarchy.
8) Affiliates may be tricked into over buying low-quality products that are nearly impossible to return
In connection with #7, affiliates are told that if they don’t meet certain quotas each month, they risk being demoted a rank and earning smaller commissions. The MLM’s encourages the affiliates to buy in bulk so they can ‘earn a higher markup’ and ‘keep your status,’ but as you now probably expect, most merchandise goes unsold. Some products even have an expiration date. There are countless reports of products arriving damaged or too low quality to sell. On the surface, the MLM may allow returns and refunds, but these refunds generally have strict terms like prohibitions on expired goods. Also, returning product may cause the affiliate to lose commission or rank. Out of fear, affiliates get caught in a vicious cycle or purchasing far more product than they can realistically sell. The result? $1,000’s of unpurchased goods and crippling credit card debt. Here’s just one of many stories like this.
9) They dodge regulatory oversight
MLM groups that are the worst offenders and have all the red flags of a pyramid scheme and all the signs of being a scam, rare is the day where the owners face any real consequences. Despite the billions of dollars that affiliates and consumers lose each year, only a handful or MLM’s have been fined or sanctioned. Those that do usually settle with the government without acknowledging they did anything wrong. Here in the U.S., several members of congress are former executives of these companies or have received campaign contributions from them. The MLM lobby is very real and very powerful. They also move their operations around the world at a faster pace than regulators can keep up with them to take advantage of less experienced consumers and politicians. Like I said, these organizations are run by extremely wealthy and powerful people!
So, who are the major MLM brands?
Here’s a list of some of the largest ones in the world, with products and services such as skin care, healthy shakes, weight loss, candles, clothing, supplements, knives, life coaching, and even cannabis.
This article isn’t to say MLM organizations are evil. Some aren’t. Nor is it to say that a small percentage of participants won’t make money or be successful. Some will. Nor is it to say that you shouldn’t pursue an opportunity that genuinely brings you joy. You should.
However, in trying times, a growing number of people are becoming increasingly desperate for stay-at-home work that pays the bills. The MLM’s corporate executives are targeting vulnerable people stuck at home (due to the coronavirus or otherwise), and they are fervently recruiting, with promises to make all your problems go away. Don’t fall into the trap.
Do you research, consider the products, understand the costs, analyze what it would truly take to become successful, and ask an independent source to give you an honest review. It’s okay to accept that you’re probably going to be part of the 99% who earn less than $10 per week before costs. And sorry, but ‘your’ particular MLM organization is not different. I wouldn’t roll those dice with my time or livelihood, and neither should you.
Are there side hustles that are more profitable and less soul-crushing than joining an MLM? Why yes, there sure are. Tune into the next article to find out all about them!
In the meantime, watch the John Oliver video at the beginning of the article. Who knows? It might actually change your life.
Despite having a list of over 50 topics that I’d like to cover in this blog (ranging from “the 4% rule of retirement” to “love and friendship”), I feel drawn these days to talk about just one. As I sit here, not having left my home for three weeks for much beyond a walk and a grocery store visit, it’s impossible to ignore the impact that this coronavirus has had on the day-to-day routine. After all, when was the last time it was so difficult to buy Purell, toilet paper, or even rice (perhaps the most plentiful food in existence). Let’s not even talk about the hour-long lines at the grocery stores that wrap around the isles.
The impact of COVID-19 is very real and the future remains uncertain. We should be as prepared for this to end in 12 days, as we are prepared 12 weeks, or even 12 months.
I won’t attempt to provide health or social guidance (you can find the latest from the CDC here). Rather, let’s take a moment to ensure we’re as prepared as we possibly can be for the financial impact of the virus.
Here’s TheCentsei’s 10-step financial survival guide during a pandemic:
1) Do Not Panic – Take Control
A sudden risk of loss of income, coupled with increasing economic uncertainty for the future can be very traumatic. These factors – intensified by the news cycle – can often give way to fear, panic, or dismay. Society will indeed change in some ways, and that uncertainty is scary.
First and foremost, know that none of this is your fault and that you do have the strength to improve your situation. Stress is a natural feeling, but you can mitigate it by taking actions to manage things that are in your control. Revisiting your budget, applying for a job, calling a lender, eliminating a recurring expense, planning a meal, getting some exercise, or finishing an overdue task are all ways you can exert some control over your financial situation. If you’re feeling a moment of stress, consider reacting by taking just 5 minutes to do something productive to counteract it.
As for everything we can’t control, we can find ways to manager our reaction. There is an abundance of research indicating that mindfulness can a helpful way to cope. There are several free podcasts and apps to help. To get started, Headspace is a mindfulness and meditation app that has free content during the outbreak. The sessions are brief and the approach is relatable.
As a society, we will heal. As individuals, we will remain in control of our destiny.
2) Review Your Possible Government Benefits
Here in the United States, the federal government recently announced the CARES Act, a plan to give most people and businesses some much-needed relief during the onset of the virus. The core of the bill from an individual’s perspective is a one-time $1,200 payment to help every adult making less than $75,000, with an additional $500 per child. Also, unemployment benefits are boosted by $600 per week. The bill also offers small businesses the opportunity for a forgivable “loan” to be used to keep employees on payroll. Finally, all payments of principal and interest for certain federal student loans are suspended, and federally backed mortgages (most are this way) must grant loan modifications, without penalty, if the borrower has a request for financial hardship. Many states are offering additional programs, as are other countries outside the U.S. Take advantage of these!
The government certainly wants you to spend your stimulus check, and if you have absolute essentials that aren’t going to get paid, of course you should devote money to that first. However, I strongly encourage you to build up your emergency fund as soon as possible, whether you receive a government payment or not. Even if your job currently feels safe, the truth is that you never know when you’ll need it.
3) Revise Your Budget
If you don’t have a budget, what better time to create one than when you’re stuck at home. If you do have a budget, consider creating a version that fit your expectations during stay-at-home recommendations or quarantine. For example, our budget is going to have changes like (a) Gasoline down 80% since we aren’t driving, (b) groceries up 50% because we are eating three meals a day at home, (c) restaurants down 75% since we aren’t eating out, (d) utilities up 33% since we are at home Mon-Fri during the day now, (e) gym expense down 100%, and (f) toilet paper usage up 200% – just kidding… or am I?! Your budget should have similar adjustments, maybe for childcare, healthcare, or entertainment, depending on your situation. Knowing where all your money is going can offer a huge sense of relief for those who might normally get a feeling of dread thinking about the future.
4) Update Your Resume And References
At least 3% of Americans have already lost their jobs, and some estimates say that another 10-15% more could lose their jobs in a worse-case scenario. Get a leg up on your next job search by updating your resume and calling your references today. Having everything in order could save you a day or even a week if you were to lose your job and be the difference between landing the next job that much sooner. Even if you keep your job, you might be able to leverage the updated resume for future opportunities. On a similar note, consider how you might generate some alternative sources of income as well.
5) Maintain Your Physical Health
Sheltering at home for extended periods of time will require changes to your health habits. Shopping with a grocery list, scheduling meals (and snacks), taking a daily walk/run, building a new exercise routing, drinking plenty of water, and washing your hands are all new routines that you will have to incorporate into your day to maintain your health. Make sure you and your children’s vaccinations are up to date as well.
6) Contact Your Creditors
If the virus is having a significant impact on your ability to pay your loans, you may be entitled to assistance. Your debt probably won’t be forgiven, but you may be entitled to waived late fees, “interest only” payments for one or more months, a loan extension, or a similar offering from your lender. Your financial institution probably won’t give this to you automatically, so take the time to give them a call. NerdWallet recently posted an article outlining what to do with many national banks, and smaller locals banks often have similar programs. In the U.S., federal student loans will automatically receive a six month forbearance starting March 13th and ending September 30th, meaning no payments are due and no interest will accrue (part of the CARES Act). Log into your student loan account to make sure they didn’t make a mistake. These programs generally do not affect your credit history, though confirm with the lender to be sure. Finally, your landlord, utility companies, medical billers, and other “creditors” may be willing to work with you and come up with a plan.
7) Stay Remotely Connected To Loved Ones
With little more than an internet connection, you can stay in touch with your family and friends. Services like Zoom, GoToMeeting, FaceTime, Skype, WhatsApp, Houseparty, and Discord all offer video calls with other people using the app, and all are available on either a laptop, tablet, or smartphone. Virtually all are free to use, though some offer a premium version for a fee. I’ve used all seven over the last three weeks and would recommend any. If you want to have some fun while you’re at it, you can play a board game, enjoy some appetizers and wine, or even watch Netflix with your friends remotely.
8) Limit Media Consumption; Disconnect From Social Media
Limit your daily media consumption and stick to reputable sources only. No Wonkette. No InfoWars. No talking heads. NPR’s “Up First” podcast is the best in this regard that I could find: factual and not emotional. I also recommend disconnecting from social media entirely, as I did five months ago without a single regret. You will never improve your life as a result of social media use. As a quick side story, we had a relative recently call us in a panic because they read… on Facebook… that China created the virus to start a biological world war. We then reminded them that the virus started in China, killing hundreds of Chinese citizens before spreading to other countries, so it made no sense that China would be trying to use it as a weapon. It is critical to avoid this misinformation.
9) Stay Properly Insured
Now, more than ever, it’s important to verify you are properly insured against possible losses. Review your exact coverage limits and terms to confirm they are in line with your needs. Avoid being overinsured or underinsured. My rule of thumb is that you should always have insurance on important things that you could not afford to pay for or replace in cash. Health insurance? Absolutely. Home insurance? Yes! Auto liability insurance? Always. Auto collision? Only if your car is still worth more than one month’s gross pay. Renter’s insurance? Maybe, if you own legitimately expensive things that would be costly to replace. Term life insurance? Let’s talk about this one in another article, but generally yes if you have young children or a non-working spouse. Whole life insurance? Generally, no. Cell phone insurance? No. Insurance on your $30 gadget? Heck no!
10) Don’t Overreact To Changes In The Market
We all know the maxim for investing: buy low, sell high. Yet, when we see our investments in free fall, human instinct tells us to sell. Don’t fall into this trap and try to remember a few things.
– First: “Time in the market always beats timing the market,” so stick to your weekly or monthly retirement contributions if you can. It remains true that the longer your investments stay in the market, the more value they will gain over time, on average.
– Second: The stock market reflects far more irrational emotions than it does actual economic productivity, such as fear (when stock prices go down) and excitement (when stock prices go up).
– Third: You can’t lose money unless you bought at the peak a few weeks ago and sold at the bottom. Especially if you’re retired or close to retirement, do not panic and sell off everything now, after it’s lost so much value. Trust that your long-term strategy will work.
Invest steadily and consistently, in line with your risk tolerance. A bad year should not alter your behavior. You should always invest for the long-term, with an emphasis on low-cost mutual funds and EFT’s rather than individual stocks. There has never been a 20-year period in our lifetimes where the market has lost value.
Please consider commenting below (I will write back!) and sharing this or any article with your loved ones. Stay healthy and stay safe!
