FINANCIAL IGNORANCE

It is quite fascinating to read the financial messes that people get themselves into even when they are conscientious in trying to do the right things. One thing that is never taught in the public school system is basic finance. I never learned how to balance a checkbook in school. Finance is essential for our lives outside of school and yet its importance is not even registered in the curriculum of the government school system.

Most people do not understand how financial products work. They do not understand basic budgeting. They were never taught and then when they get into a financial bind, they expect the government to bail them out. Instead of learning basic finance, they go through life making the same mistakes and never correct them. This is the reason why cash advance and title loan businesses are thriving and opening up new stores.

The Frugal Accountant dislikes financial ignorance with a passion. The the purpose of these essays is to inform others about finance from a biblical perspective. Finance is not hard to understand. The basis of finance is the budget. The key to having a solid financial base is not to spend more than you earn. This means that you know how much you have coming in (revenues) and much is going out (expenditures). The net of the two (revenue - expenditures) is discretionary income. Discretionary income is available to be used for what an individual desires.

If you spend more than you earn, then you are forced to have to borrow money (go in debt) to make up the shortfall (difference). Most people do this by way of credit cards. When purchasing something on a credit card, it is considered an unsecured loan. The credit card company is requiring no collateral be put up to secure the loan. This arrangement is open ended. It cannot be amortized. The balance of your account is not fixed and therefore varies depending upon usage.

Since the credit card company is loaning you money without any collateral, they are going to charge you a higher interest rate than you would usually pay on a secured loan. It is imperative to know what the interest rate of your credit card is. The way that credit card interest is calculated is on a daily periodic rate. For instance, if the interest rate for a credit card is 18%, the daily periodic rate is calculated as follows, 18%/365 = .049315. To figure the interest rate of a $1,000 credit card balance will be as follows: $1,000 x .049315% x 31 (days in billing cycle) = $15.29. This means that what is owed to the credit card company is $1,015.29.

It is no mystery how much interest will be charged on a monthly basis. You can figure it for yourselves and then see if it is the same as the credit card company. Just knowing this much about the way credit cards work puts you in the 1% bracket. Most people do not know how credit cards work and they are not interested in finding out either. They desire to take the hard way by remaining ignorant. They think the less they know, the better it will be for them.

The worst feature of credit cards are cash advances. If you have to have a cash balance from a credit card, you are in financial trouble. Most people taking out cash advances are not aware of the interest rate. On a credit card that I have that has a fixed rate of 7.9% fixed, the cash advance rate is 24.24%. This means that for a $100 cash advance, you will owe $24.24 in interest. Say you borrowed $1,000, the interest would be $242.40. The total amount borrowed in the first example is $124.24 and in the second $1,242.40. Interest money is dead money. It is not deductible for tax purposes and just enriches the credit card companies.

People taking out cash advances could care less about the interest rate. They are short term in their thinking and all that matters is that they got the cash. They ignore the interest being charged. There are consequences to our actions. Interest is a consequence of borrowing money and it adds to the amount that has to be repaid. This never enters into the equation for cash advance borrowers. They never consider it.

An example of someone not understanding credit cards was reported by the Associated Press in an article titled Credit card interest rate changes hurt on-time payers. The Hard family of Freeland, Michigan is used as an example in this article. The credit card company in this article is Discover. The Hard’s interest rate on this card is 18%. The first question that needs to be asked is why are they using a credit card with that high of an interest rate? I would never use a credit card that had that high of an interest rate. The worse thing that you could do would be to carry a balance with that interest rate. Do they not know this?

The credit card company upped the interest rate to 24.24% because of a credit report on the Hard family. The credit card company penalized them because of the family being a risk for defaulting on their payments. This means that this family will end up spending more money on interest. Instead of disciplining themselves and paying off their credit card balances each month, they have gotten themselves into a situation whereby they may never extract themselves.

Of course, this family blames the credit card company for their financial mess. The credit card company did not hold a gun to their head and force them to get a credit card and then use it and not pay it off monthly. The increase in the interest rate is irrelevant. What is relevant is that this family has not learned the basics of finance and especially credit cards. I do not have any sympathy for them. Their ignorance has caused their plight. They have no one to blame but themselves.

Instead of taking responsibility, the mother Janet Hard testified before the Senate Permanent Subcommittee on Investigations. She said, "My husband and I feel as though we have been robbed." Robbed by who? No one was robbed. She and her husband willingly received the credit card and charged it up. They received something of value in the exchange. They would have been robbed had they not received something of value. They received an unsecured loan every time they used the card. Their ignorance is no excuse. They refused to learn how credit cards work and they have gotten what they deserve.

Of course, this article and example is all a setup. Senator Carl Levin, Democrat-Michigan, who is the chairman of this committee is sponsoring legislation to protect the Hard family from their decisions. What happens is that financially ignorant people like the Hard family go out and make poor decisions, do not like the results and look to the government to try and get even with the big bad credit card companies. They consider these companies to be loan sharks just trying to get rich off poor working families like the Hard family. This absolves them of any responsibility for their actions. Their financial ignorance then gives a reason for the government to seek to regulate the market system to a greater degree.

What is needed is less people like the Hard family. While they may be a hard working and nice family, their financial ignorance ends up costing all our freedom. Their ignorance ensures that the government will put more regulations on the market. This will end up driving up the cost of doing business and each of us end up paying for that. This could have been avoided if the Hard family were financially responsible. They need to learn a lesson but they refuse.