Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email email@example.com.
Nimiipuu Community Development is happy to share this column as partner with Native Financial Learning Network funded by Northwest Area Foundation.
Dr. Per Cap will also be printed monthly in the Ta'c Tito'oqan tribal paper.
Dear Dr. Per Cap: I live in Idaho and the other day I got a call from someone who told me the United States Treasury is offering special grants to Native Americans. When I asked how to apply the caller told me I needed to pay a fee. And get this: He wanted payment in the form of iTunes cards! It sounded really shady so I hung up. What gives?
Signed, Suspicious Native Lady
Dear Suspicious Native Lady,
You were smart to hang up! The phone call you received is a new scam targeted to Indian Country and I’ve personally spoken to folks in both South Dakota and Idaho who’ve gotten the same call. It’s malicious, it’s shameful, it’s an invasion of privacy, and it’s SO not cool. What’s even scarier is that whoever is perpetrating this outrageous fraud has somehow gotten ahold of contact info for Native people just like you. And yeah, iTunes cards, really?
One person I talked to was instructed to purchase $1,600 worth of iTunes credits online and then give the caller the confirmation numbers. Poor guy did just that and never heard from the caller again or received his so-called “grant.” Truth is, the federal government never randomly calls individual Native Americans, or anyone for that matter, and offers them a grant. Don’t we all wish that were true! Another reason this scam can be convincing is that the call comes from a Washington DC area code. But creating a fake area code that registers on your caller ID is known as “spoofing” and it’s quite common with scams coming from overseas.
As for the contact info - we live in the digital age now and the privacy we once knew has pretty much gone the way of standard transmissions and steel coke cans. It doesn’t take much effort for a scammer to snoop around on Facebook or some other social media channel to find out your hometown, employer, tribal affiliation, names and photos of friends and relatives, or the name of that awesome frybread stand at last week’s rodeo. So please, please be careful with what you post online about yourself and others.
And if you get another sketchy call from someone offering easy money, a free trip, or anything else that sounds too good to be true, tell ‘em you make money the old fashioned way - at a 50-50 fundraiser where your cousin’s in charge of the raffle tickets!
Dear Dr. Per Cap: I just bought a new war pony. It’s a nice vehicle but last week when I traded in my old ride the car dealer told me that I was “upside down” on my loan and would need a new loan for more than the cost of the new car. That seemed ridiculous but I really needed a new ride. So, what gives? And what does it mean to be “upside down” on a car loan? ~ Signed, Confused and Frustrated
Dear Confused and Frustrated:
Ok, your dilemma is pretty common these days, and unfortunately it all goes back to when you bought that war pony you just traded in. Here’s an example to put things in perspective. Let’s say a person wants to buy a vehicle that costs $31,000 (the average price for a new car in the U.S. according to TrueCar.com…….yikes!). However, he only has $5,000 to put down so he needs a $26,000 loan to make up the difference. Now let’s say the buyer is in his early twenties, carries high credit card balances, or has other issues that hurt his credit. The dealer, or whoever it is that he’s applying to for a loan, considers him a riskier borrower and the best interest rate he can offer is 13%. Now, for most folks a sensible car loan should have an interest rate of 8% or less. And it shouldn’t be for much longer than 3 years or 36 months. But this guy is stuck with a 13% interest rate and with a 3-year mortgage, that would mean a Godzilla-sized monthly payment of $876, which is more than most people are willing to pay each month. So the easiest way to lower that payment without buying a cheaper car is to extend the life of the loan, to, let’s say, six years or 72 months. This now spreads the payments over more years and lowers the monthly payment to a more affordable $521 per month. The buyer can now afford the car, and everyone goes home happy, right?
Wrong! The problem is that the buyer is now paying a lot more for the loan because even though his monthly payment is less, he’s making twice as many payments. In fact, as the chart below shows, the cost of credit (the amount paid for interest in addition to the original $26,000 borrowed) after 6 years is more than $11,500! Hey, that’s enough to buy a good used car…..hint, hint.
3 years or 36 months Loan Term
13% Interest Rate
$876 Monthly Payment
TOTAL COST OF LOAN $31,536
TOTAL COST OF INTEREST ON LOAN $5,536
6 years or 72 months Loan Term
$521 Monthly Payment
TOTAL COST OF LOAN $37,512
TOTAL COST OF INTEREST ON LOAN $11,512
Now think about how much a car will depreciate, or lose value over the length of the loan. Miles driven, every day wear and tear, and other factors cause most new vehicles to lose about half of their value in the first five years. In fact, it’s not uncommon when a borrower makes a small down payment (less than 25% of the purchase price) on a high interest, long-term auto loan that the car can actually depreciate faster than you can pay it off. So the car can lose value faster than you can pay down the loan – and this is especially true if you put a lot of miles on the car each year. So that is what it means to be “upside down” on a loan: You owe more on the car than it’s worth.
And in your case, because your old war pony was worth less than the amount you owed on it, the dealer simply tacked that outstanding loan balance onto your new loan, leaving you with an even bigger loan. It also meant that you had no equity, or value, left in the old vehicle so when you traded it in, you didn’t get any extra money for the down payment on the new purchase. A tough break, one that makes you miss simpler days when war ponies ran on hay instead of gasoline.
So how can you avoid being “upside down” on your next car loan? Here are some tips:
Pay at least 25% of the purchase price of the vehicle up front when you buy it.
Try to avoid car loans any longer than 3 years or 36 months (but up to 5 years is ok).
Push for the lowest interest rate possible - 8% or less is ideal. And shop around to find the best deal!
Don’t let your monthly car payment and cost of insurance exceed 25% of your total monthly income.
Take good care of your vehicle – try to drive fewer than 12,000 miles a year and keep up with scheduled maintenance and repairs.
Follow these five simple steps and I guarantee you’ll never be “upside down” on a loan again. I understand this might mean you’ll have to purchase a more modest war pony than you had hoped for, but who cares? It’s the person driving the car that counts, not the other way around!
Dear Dr. Per Cap: Last month, after 30 long years, my husband and I finally made the final mortgage payment on our home. We’re thrilled to no longer have a monthly mortgage payment and look forward to saving some extra money for a much needed vacation. But now my husband thinks that because we are no longer required to have homeowner’s insurance, we can save even more money by dropping the coverage. Is this a smart move?
~ Signed, a Proud Homeowner
Dear Proud Homeowner:
That’s great news about paying off your mortgage! So happy to hear you and your husband finally own your home free and clear. I’m also glad you will be able to save some extra money now that the burden of a monthly mortgage payment is gone. But dropping your homeowners insurance is not, I repeat not, a smart move. Here’s why.
Regardless of who owns your home, you or the bank, the risk of losing your home due to fire, vandalism, or certain acts of nature is always present. So in the unfortunate event that your house burns down, a good homeowner’s policy will pay out the value of your home so you can rebuild or purchase a new home. A mortgage company will always require a borrower to have homeowner’s insurance because it has a vested interest in the property. But that motivation is to protect its interest, not yours. When a homeowner finally pays the mortgage off, the company could care less whether or not the home is insured, because it no longer has a financial interest in the property. But you and your husband sure do. And it would be a shame to lose the home you’ve worked so hard for and not have it insured. Sadly, I’ve seen uninsured homes on the rez destroyed by fire, especially some of the older tribal homes that have long since been paid off, or even homes that people have built themselves without ever having a mortgage. Believe me, it’s not a pretty sight.
I think sometimes people also just don’t understand how important insurance is because it’s not something we think about every day. Whether we’re talking auto, homeowner’s, life, or health insurance - you name it – it often gets forgotten. But it’s another financial product just like a credit card or a bank account, and it protects individuals and families against various risks they face throughout their lives. Moreover, homeowner’s insurance is really cheap compared to other types of insurance, such as auto insurance. It’s also easy to purchase regardless of whether you live in the city or on tribal land, and is readily available from a wide range of insurance companies. So do yourself and your family a big favor and keep your homeowner’s insurance policy. And, oh yeah, enjoy that well-deserved vacation!
A Wild Ride
Dear Dr. Per Cap: I am turning 18 next week and will be getting my Minor's Trust payment. I am psyched! I am thinking of getting a Cadillac Escalade or may just a Land Rover. I was wondering what color do you think I should get it in - black or gunmetal grey?
Signed, Built For Speed
Dear Built for Speed,
Whoa there! Let’s take a step back here and take a deep breath. You have a lot more to think about than the color of your car. You’re about to receive a large amount of cash, and you want to make sure that money lasts longer than the new car smell. Otherwise it is just “easy come, easy go.”
This is a once in a lifetime opportunity, and you should make a plan for what you are going to do with your money before spending one dime. The plan doesn’t have to be complicated either. Maybe write a paragraph describing how you intend to spend your money over the next few years; or draw a pie chart with wedges that represent expenses and savings. A good rule of thumb for a young person is to save at least 50%, but don’t be afraid to sock away more. Then put your plan somewhere where you’ll see it every day; like your refrigerator door, bathroom mirror, or even the inside of your locker at school.
Now let’s talk about car buying. But I’m gonna have to apply the brakes here, too. Getting a new car can be fun, and a car is also a necessity for many people. But keep a few things in mind. First: a car is not an investment because it actually loses value, or depreciates, over time. In fact, some brand new cars can depreciate by as much as $2,000 the moment you drive them off the dealer’s lot! So don’t assume your car will hold its value if you ever need to sell it.
Next, remember the words a wise man once told me: “You start paying for a car after you buy it.” (Would you believe the wise man was actually my high school wrestling coach? Yep!) And my coach was right because as soon as the ink dries on your sales contract, and you’ll be spending more money on stuff like insurance, gas and maintenance.
The third thing to think about is that those car dealers are smart, and know how to separate people from their money – they are good at their job. So be a savvy shopper and maybe take an experienced friend or family member with you when you are looking around for the perfect car, to make sure the car salesman doesn’t take you for a ride.
Ok, so now that you have the road map in front of you, and you have your plan, think about what car best suits your needs – do you need good gas mileage, a big truck bed, or is reliability the most important thing? Next, if your budget can afford it, you can think about your wants too – a kickin’ stereo, rims, sunroof, tint, etc. Then shop around, and take your time. And before you know it, you’ll be zooming around town in your dream car – and still have money in the bank for later. So sit back, relax, and enjoy the ride!
PS: Oh, yeah, and I vote for the color red.
Stock Market Jitters
Dear Dr. Per Cap: Last summer I opted into my tribe’s 401-K plan. Everything was going great until February when the stock market started freaking out. One day the market is up and the next it feels like stocks are going to come crashing down. My account balance is down for the year and I’m worried it’s going to keep dropping. What should I do?
Signed, Stressed in Lapwai, ID
First off step back, take a deep breath, and relax. I know it’s hard to watch your money rise and fall like a Tilt-A-Whirl at the state fair but remember unless you suddenly decide to sell or liquidate the investments in your 401-K you’re only looking at unrealized paper losses. You didn’t mention your age but I’m guessing you’re still a few years away from retirement. Meaning you’re a long term investor who won’t need to start withdrawals any time soon – more reason to relax.
The volatile market we’re in has a lot of investors worried right now and everyone has an opinion about what’s going on – rising interest rates, fears of a global trade war, overvalued stocks coming back to earth - take your pick. As of early April 2018 all major U.S. stock indexes are down for the year with technology stocks taking an especially hard beating. That’s a wake up call considering high flying tech stocks like Facebook, Apple, and Google parent company Alphabet, driving forces in last year’s strong overall market gains, have collectively lost over $300 billion of market value since mid-March. How do they protect that data!
Another concern is that bonds, often a shelter in times of stock market turbulenace, aren’t performing any better than stocks these days. So where should an investor put her money?
I’ll respectfully dodge that question by recommending that an investor first come up with a view of where you think the bull market is heading. A bull market can be described as a prolonged period in which stocks or other investments increase in value. And the current bull market in stocks just celebrated its tenth birthday having officially begun in March of 2009. To put things in perspective they were still putting cassette players in new cars when this thing started, making it the second longest bull market since the end of World War II.
So the real question is how much longer can it last? If you think this year’s volatility is just a speed bump on the road to higher stock market gains you’ll probably want to stay the course, maybe even increase your monthly retirement contributions to buy on the dips.
On the other hand if you think the bull market is riding into the sunset like a cowboy in a George Strait ballad it might be time to rebalance. So if you’re less than ten years from retirement consider shifting your 401 K holdings away from stocks and into U.S. Treasuries, high quality low risk securities issued by the federal government, or a cash equivalent money market fund. Bear in mind you won’t earn much return with a money market but you also won’t lose any principal – your original investment.
If you’re not sure which way the market is heading understand that most folks currently fall into the second camp. In fact according to the American Association of Individual Investors, only 31% of individuals expect stocks to go up over the next six months. Yikes! And remember what a wise person once said: “Life is like a roller coaster. It has its ups and downs. But it’s your choice to scream or enjoy the ride.”
Welcome to Ask Dr. Per Cap, a financial advice column to help you travel on the winding roads toward financial independence. I will draw upon my experiences – some good, some bad! – to help you learn skills, tricks and strategies to take control of your financial future. And if we succeed, well, hopefully you won’t make the same mistakes I did because you’ll know better.
I’ve had a handful of great teachers in my life, and not all were school teachers. I met one of my best when I was 19 – Pete, the boyfriend of my older sister. Pete taught me many valuable lessons, but perhaps the most important was his unique view of the world that he called the long line and the short line.
“Some people see colors. I see lines.” This was Pete’s reply when I once told him I was tired of always struggling to make my monthly rent and asked how was it that he never seemed to worry about money.
“At first glance, I don’t notice a person’s race or skin color. I also don’t pay attention to what type of job they have, whether they have a college degree, or the car they drive. I could care less about any of that stuff,” Pete continued. “What I see instead are two types of people standing in two different lines. The first line is dreadfully long. It stretches for miles, twisting and turning, packed with people. For whatever reason, most people are standing in this line and many are frustrated, unfulfilled, or bored because they are stuck waiting. They’re waiting for a paycheck, waiting for a job interview, waiting for a break, or just waiting for a change. You name it and they’re waiting for it. This long line barely moves because of all the people, many of whom will never get what they’re waiting for or, if so, not for a very, very long time.
“But the other line I see is much shorter and without so many people. It moves quickly with a lot fewer hassles and delays. The people are more relaxed and at ease than the long liners. They’re smiling and in good moods, and some are even laughing. It’s almost as if they are breezing through life. The reason is that these people know how to manage their money better than the people in the long line. They also have a knack for getting around hurdles and avoiding setbacks. Some are born with this knowledge; others develop it over time. But whatever their backgrounds, short liners have the ability to overcome financial challenges. And whether it’s getting a good deal on a car, handling an insurance claim, paying off a loan, or even starting a business, these folks have figured out how to come out on top financially.”
So let me ask you the same question Pete asked me that day: Which line are you in? If you’re like I was, you’re probably waiting in the long line. If so, don’t feel discouraged because my goal is to get you into that short line. It doesn’t matter how much money you have at this moment, what your credit score is, what kind of job you have, or how old you are. It doesn’t matter, because more than anything else, getting ahead financially is about creating an attitude, a mindset that allows you to see opportunities when others see obstacles. I haven’t always been in the short line, but I changed my attitude and learned some skills to get out of the long line, and so can you. In the coming months I’ll answer your questions on a wide range of financial topics and related issues that I think will make you look at the world in a whole new way and get you started on the path to financial wellness.
So ask yourself: Are you ready for the short line?
It's YOUR Money!!
Dear Dr. Per Cap: It’s tax time and I have a lot of money coming to me. I was thinking of taking out a loan against my tax refund because why should I wait if I don’t have to? ~ Signed, Tired of Waiting
Dear Waiting: How you would feel if you loaned someone $2,000 and they waited a year to pay you back? Then, to make matters worse, they only gave you $1,700?
Sound ridiculous? Most of us would probably think so, but if you’re like millions of Americans who pay to have their taxes prepared every year, this might be what is happening to you. Here’s how.
The refund you receive after filing your tax return often comes from having more money withheld from your paychecks throughout the year than you actually owe in taxes. And for many, this overpayment of tax amounts to thousands of dollars. Now you might prefer overpaying to avoid owing the IRS additional money at the end of the year. That’s fine as long as you understand that your refund is not free money or a bonus, as some mistakenly believe. But rather, money (that belongs to you) that the government “holds” during the year and then pays back the following year. It’s really like giving a loan to the U.S. government … but Uncle Sam does NOT pay interest on it.
I made the mistake one year of taking out a loan against my tax refund so I could my money sooner. When all the dust settled, I figured out I had paid $400 to someone just to get my money one week faster. Those tax preparation fees and loan fees really add up!
So watch out for those high fees that many tax preparation businesses charge to complete fairly simple returns (close to $300 in some cases). If you choose a high-interest refund anticipation loan that promises a faster refund than direct deposit, then you’ll pay even more.
Does this sound like free money to you?
If you don’t like people getting a cut of your free money, consider consumer friendly tax-preparation options such as Volunteer Income Tax Assistance (VITA). VITA sites serve many Native communities and will prepare your taxes for free if you meet certain income requirements. And finally, stay clear of those loans against your tax refund. With direct deposit or the IRS debit card, you’ll get your money quickly in 5-7 days anyways. You shouldn’t have to pay extra to get at your free money!
Avoiding Payday Loans
Dear Dr. Per Cap,
I have a “payday loan” and now I can’t seem to get my head above water. What can I do to get outta this mess? ~ Signed, Nothing Left
Dear Nothing Left,
At first glance, those payday loan stores appear to offer easy money. I could tell you the story about my aunt Sue who took out a payday loan one month so she could have money to go play Bingo. Well, you probably know how that turned out. Three months and a couple hundred dollars in fees later, I paid it off for her for her birthday. She agrees that was not the best use of our money!
Payday loans are rarely a solution to financial problems. These loans are designed to trap you in a cycle of debt – it’s true. The fees are so high that while the loan might help you make it to payday, by the time you get there you will probably find yourself short on money and need to take out a new loan. And then they got ya. And once they got ya, they look forward to seeing you every two weeks to collect those loan fees, which can really add up.
Everyone experiences financial emergencies at some point or another and a payday loan might look like a good option. And usually those people at the payday loan store are happy to help. But remember there are a lot of more affordable options available to you – ones that don’t come with high interest rates and high fees. Consider these:
Use your credit card, if you have one. Even for a cash advance, it will be less expensive than a payday loan.
Ask family or close friends for a loan to float you to the next payday.
Go to a local credit union, small bank or Community Development Financial Institution (CDFI) and borrow money at a more reasonable cost.
Practice saving and budgeting your money if you can - it helps to have savings to get you through a tough time.
Just keep in mind that if you taking out a payday loan it probably indicates a bigger problem – getting your expenses to match your income. You probably signed up for one of these loans to make ends meet for regular day-to-day expenses or to pay for a sudden “crisis” expense. In any case, it now has you in its grip, and it’s not a pretty sight.
So if you have a payday loan, pay it off as soon as possible. And while you are doing that, let’s look at the bigger picture to get your expenses in line with your income. That will help you avoid the need to borrow money in the future and, hopefully, keep you out of the grip of high-interest payday loans.
You need to create a budget – I covered that in one of my previous columns. Budgets are the best way to see and understand 1) how much money you have coming in and, 2) how much is going out each month. It also helps you see just what you are spending your money on. If you have more coming in than going out, that’s good! Start saving and investing that extra money (and pay down any debt you owe first, such as that payday loan).
But my guess is the opposite is true – you have more going out than coming in each month. That means you’ll have to find ways to cut back expenses in order to live within your means. By tracking where you spend your money, it will give you some good ideas where you can cut back or eliminate altogether. These can be very hard choices: Can you take your lunch to work instead of eating out? Can you watch DVDs instead of going to the movies? How can you reduce or eliminate bills for phone, cable TV, electricity, water or natural gas? Do you really need more expensive “name brands” or will generics or less-costly alternatives be acceptable? Can you cut back on “impulse” purchases? To improve the income side of your budget, can you get a part-time or second job?
If there is just no way you can get ahead of your expenses, it might be time to seek the help of an accredited nonprofit credit counselor or counseling agency. To learn more about payday loans and lenders, the Corporation for Enterprise Development has some great consumer information at http://cfed.org/. As well, First Nations Development Institute has several publications on payday lenders and a Financial Skills Workbook to learn more about taking care of your money at http://www.firstnations.org/knowledgecentre.
A Good Habit
Dear Dr. Per Cap: I can’t save money! No matter how much I think about it and really want to do it, I just can’t seem to put anything aside out of my paycheck. What’s up with that? ~ Signed, Buffalo Nickel
Dear Buffalo Nickel:
Living paycheck to paycheck and not saving a dime is a habit – a bad one! You need to replace it with a good one.
How about the habit of paying yourself first?
On your paycheck stub, there are always deductions made before you get your “net” pay or take-home pay. They are things like federal and state taxes, insurance premiums, charity donations you chose to make through your company’s payroll deduction, and perhaps other things. All of these items are getting “paid first” before you ever collect your take-home pay.
So make yourself first, too, by way of setting aside money for YOUR savings.
You can do that in a few ways, or use a combination of them.
If you signed up for direct deposit into your checking account, you can probably arrange with your bank to automatically divert a portion of it into a savings account each time a paycheck deposit is made. You can choose the amount, and the bank will help you set up a savings account if you don’t already have one.
If your company has a retirement plan, sign up to funnel some of your pay into that plan each paycheck. These are usually invested for you in some way so your money may even grow over time. At some companies, your funds might be matched at a certain level with “free money” provided by your employer. Take advantage of that. It truly is free and should not be left on the table.
If neither of those options is available, then make a conscious effort to do it yourself. If you actually cash a paper check every payday, then take some of it and put it into a savings account right away, or at least stash it in the cookie jar or mattress at home. If you have direct deposit, take the time to actually transfer a consistent amount into your savings account each and every paycheck.
The key is to just get used to doing it. By repeatedly doing this, you’ll get into the habit of regularly setting aside some savings and paying yourself first. You don’t have to start with a big amount. You can make it nearly painless by starting with a small amount that you won’t even notice, then increase that amount as you get more used to saving money while finding other ways to save on expenses.
Finally, if you don’t think you can spare even a small amount into your savings each paycheck, here’s an exercise that will help you find out that you CAN spare it. For a week or even a month, carry a notepad with you and write down each and every expenditure you make and what it’s for, whether it’s paying the rent or buying a cup of coffee, paying on your credit card bill or plugging a parking meter. After a week or a month, look at where you are spending your money and how much of it you are spending. No doubt you’ll see places where you can easily save a few bucks, or even a lot more, without much effort. Stop spending on those things you decide are unnecessary and begin putting that amount into savings each pay period. Remember: pay yourself first, and make savings a habit!
Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email firstname.lastname@example.org.