Your Money Book

A recent survey reported that almost 60% of us would like to receive a gift card this year. OK, but hands up if you’re also fine with receiving cash.

Last year we bought around $27 billion of gift cards in North America and 95% of people bought at least one of them. But this year, we’re in a new economic reality and I want to make sure you’re really careful and think twice before buying them.

When you buy a gift card you’re paying the merchant real Canadian money. What you get in return is a piece of plastic or paper that’s nothing more than an I.O.U. That’s all it is, and you gotta hope they’re still in business when you, or the person you gave it to, want to use it.

When the retailer or restaurant goes bankrupt, your gift card is worthless. That’s a huge risk you’re taking. A year ago, who would every have predicted the Bombay Company would go bankrupt, or Circuit City, the parent company of Radio Shack, or Linens ‘N Things, to name just a few really big ones?

Sure, you’re safe with a bunch of retailers from Tim Horton to Wal Mart but better safe than sorry. This year, give them some real Canadian cash. It doesn’t go bad, has no fees or expiry date and it’s not impersonal – merchants have marketed that and it isn’t true at all. It’s safe and the same thing as a piece of plastic. But the cash is good forever. If you want, put a note in there that your financial adviser recommended staying away from gift cards in case the retailer goes under and that you care enough to do that.

If you’ve got a store credit or some gift cards around – use them up. Besides, more than 20% of gift cards, or around $8 billion, are never used! That’s a huge amount of wasted money!

And one more thing: If your church or non-profit group wants a cool fundraising idea to re-claim these unused gift cards, send me a quick note and I’ll give you a great idea.

Finally, credit card issuers are coming out with technology that isn’t from the 1960s and hasn’t changed since the invention of the cards.

They’re changing from the current swipe card with a magnetic stripe to a pin number and chip-type card. For the transition it’ll still have that old magnetic stripe, but also an embedded microchip.

These new cards are already being issued. The Royal is putting them out and remember I told you about a super cool Capital One 6.9 fixed card? I got it with the microchip today. As merchants get new point-of-sale terminals you’ll insert it and use a PIN number just like your debit card. So no more slip to sign because your PIN number is your identification.

What it’ll do is to drastically reduce the $300 million in credit card fraud. Now most of the time when merchants haven’t taken the basic steps, they’re liable for the fraud charges. The rest of the time, the card issuers eat the loss. Until now, that loss hasn’t been as expensive as converting the cards.

No, they’re not doing the conversion because they have much interest in identity theft or helping you. On fraud, you’re also not liable for any of the phony charges. Never have been. They’re doing the conversion because it’s going to be cheaper for them to convert to the new cards instead of seeing the fraud amounts increasing each year.

It’s been in use in Europe for a very long time but the conversion and rollout in Canada will be slow. If you get the new cool card it’ll work exactly like your old one did until all merchants have the new point-of-sale machines where you insert the card, not swipe it. It’s just that this new card has a little chip in it.

This year, about 4.5 million of these will be in your hands. By October 2010 it’ll be fully implemented, because about 90% of all cards will have expired and replaced.

What this’ll also start is a huge wave of contact-less cards that are NFC enabled. For tech people, that’s Near Field Communication. Nokia will have it in their cell phones next year and by next summer, Rodgers will be doing their trial a trial. It’ll let you just wave it past a merchants’ scanner and pay for something. It’ll be exactly like the Esso and Shell payfast keyfobs but it’ll be your Visa or MasterCard.

In all this, you still have to remember why they’re doing it. It’s never to help you but to get you to use your card a whole lot more. And especially in the small-ticket purchases that add up to tens of billions of dollars that card issuers really want a huge piece of!

After all, we spend almost 20% more when we use a credit card instead of cash. Mark my words: Two or three years from now the percentage of small-ticket purchases on credit card will be way up. Card issuers will get richer and you’ll go further in debt so this is not a win-win arrangement, trust me.

Last week I had to pay a $900 bill to repair my 99 Chrysler with almost 300,000 km on it. Ouch is right – but once the shock wore off and I wrote the cheque, I was actually quite happy about it. Let me explain:

I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I’ve spent $2,500 on repairs and the car’s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today’s $3,000 value, the car has cost me $9,500, or $113 a month.

One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she’s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.

Compared to her $38,000 versus my $9,500 spent, I’m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I’d rather have the $28,000 in savings.

Another friend takes some of what I’ve been teaching and won’t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it’s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.

Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I’m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I’d rather have the money.

And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it’s gonna cost you a lot of money. After all, there isn’t a car around that’s worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you’ll never ever recover?

Oh, and two more things: The GM and Chrysler merger appears to be off the rails this week. I don’t see how two on-the-edge companies in big financial trouble will make one strong company anyway, but get ready for massive layoffs – merger or not. It doesn’t take a finance degree to see that GM can’t keep losing over $1 billion a month.

The holdup right now is U.S. government approval and support. (Make that, more bailout money in addition to the $25 billion the auto industry received from Congress.) There’s also the issue of the $7 billion loans Cerberus has for buying Chrysler from Daimler last year. You see, the banks, including JP Morgan, Goldman Sachs, Citigroup and Morgan Stanley have been selling off large pieces of their loans to raise cash. But it’s next to impossible to get all these pieces back together as now there’s dozens and dozens of lenders who have a piece of this. It’ll make it likely Cerberus will have to pay off this total and start with new loans that are easier to trace – but now much harder to obtain….stay tuned!

And with GM only having enough cash for this quarter, you can bet there’ll be another wave of bailout money. Will it solve much of anything? No, sorry. A bailout changes nothing structurally. It only helps the companies to tread water a while longer. It’s kind of like making your minimum payments for a while. When the money runs out, nothing has really changed.