Your Money Book

Last week I found a $20 bill in the glove box of my car. It was an emergency $20 and had been there for over a year. Because it’s been out of circulation a year, should I send this back to the Bank of Canada and get them to shred it? Are you nuts? Of course not!

Yet, that’s exactly what happens when almost every pre-paid credit card, also called stored-value cards, and gift cards, which don’t get used for a year. They’re either void, deduct a ton of inactivity fees each month, or simply wipe out the whole balance left. Not to mention, around 10% are never redeemed.

When we purchase, or give someone, a pre-paid credit card or gift card, we are parting with real cash and only get an I.O.U. That doesn’t make sense in the first place. To add insult to (financial) injury, we also have to pay a fee up front, which is deducted from the value. So a $50 card really turns out to be around $40 to $46. If most cards are not used within six months, the next wave of fees starts to come off the balance: monthly inactivity fees, expiry fee, and the likes. Oh, and if the pre-paid credit card is lost, there’s also a $15 to $25 replacement fee, to add insult to injury.

In the coming months, millions of people will purchase gift cards and pre-paid credit cards for Christmas presents. But did cash somehow become a problem? Cash doesn’t have an expiry date, you won’t be charged an inactivity fee, and fifty bucks really is fifty bucks, without a purchase fee to get that $50 bill!

Banks love marketing pre-paid credit cards. They make the same fees and profits as they do on credit cards, but without any of the credit risks. Retailers love them, because they’ve got all your money up front, and you, or the recipient, have no choice but to deal with their business. But you had better hope the retailer is still in business when you want to use the gift card! In this economy, that isn’t guaranteed. How many examples would you like of retailers who are out of business, or went bankrupt, leaving behind millions of dollars of worthless gift cards that can’t be redeemed?

This year, care enough about the person you are shopping for, to give them cash. What you give is really what they get. They’ll have totally flexibility of when and how to spend it, and won’t have any fees. When it comes to purchasing gift cards, the newest trend, and spreading very quickly, is buying gift cards at a discount. It was started by Costco where you can purchase a $100 gift card for $80.

And because you care enough about them – print a copy of this story and enclose it with the cash. They’ll thank you for it, and will understand why you care enough to do what previous generations did for decades, before retailers and financial institutions stepped into the middle to make a bunch of money for doing nothing.

Last week we discussed some real on-the-ground stories from Phoenix. Here are a few more insights worth sharing:

First and foremost, something very critical that separates us from the current U.S. policy. We spoke briefly last week about Prime Minister Harper traveling the country stating how well we are doing as Canadians in this economy. And he’s right. This isn’t about politics, although in the interest of full-disclosure, I’m a fiscal conservative. I believe that much of the intervention in the U.S. economy by the government is doing nothing more than creating a phony and temporary sugar high. Cash for clunkers was $3 billion of tax money to sell 700,000 cars – the car market is now dead again.

There’s an $8,000 tax credit for first time home purchasers. I guarantee you, when that expires in November, the housing market will die off again. Foreclosures are still increasing, and there are more than 17 million people out of work – and that’s still rising. The only way to get the economy back to health is to create jobs, and to reduce the killer debt load the average American is under.

If you believe the government programs are a blessing and not a temporary fix – just wait a year for them to expire, and you’ll see the results. Until then, you might not like Prime Minister Harper’s policies, but as a former economist, he knows that governments can’t be the solution to everything.

General Motors has now begun to sell new vehicles on the giant auction site e-bay. The trial with their California dealers was last month, but you can bet it’ll be back nation-wide. And GM is now working on a $4,000 vehicle. Tata Motors is selling their inexpensive one in India right now for $2,000, and they already have European certification, so you know they’re coming to North America at around $5,000 or so. Yes, GM is behind again – but not as far as usual.

Anyone who travels a fair bit will love this story: For some time now, there has been an on-going, multi-country investigation into illegal price fixing by airlines into their fuel surcharges. The CEO of Virgin Atlantic has already admitted to it. But it’s sad that any company that’s convicted will only have to pay a fine. And that fine will be way less than they made in profits from the fuel surcharges. Some of these executives should spend some jail time!

There really is a big difference between reading or watching TV and being in the U.S. to see the pain and experience a recession first hand. From retail sales to foreclosures, job losses and the likes, it’s bad and there isn’t much sign of improvement.

If you’re someone considering purchasing a home for retirement or investment in Arizona, Nevada, or California – wait. Last year I thought it’d be worth waiting another year. If you did, the dollar came up another 7% or so, and prices dropped about another 15%. This year I’m here to tell you to…wait ANOTHER year for the same reasons. Foreclosures in those three states are still increasing, and the jobs aren’t coming back anytime soon. Low end houses are getting sold because of an $8,000 government tax credit until November, and by investors for cash. Right now, here in Phoenix you’re looking at about one-third of the price from the top of the market in 2006. Mid to high-priced homes have almost no market at all, even now.

Here’s an even more attractive, or desperate, story from Mississippi. Remember that the state hasn’t fully recovered from Hurricane Katrina AND now has the foreclosure and unemployment hits as well. The state has a development program that pays investors up to $70,000 to build rental homes. Buy a $20,000 lot, build an $80,000 home, and over the next four years the state will literally refund up to $70,000. If the house never increases in value, that’s still a potential 50% return per year, over five years. I’ve done the math, but not the due diligence, and have posted the link here: State of Mississippi Small Rental Assistance Program: http://www.gozonegateway.com/srap/

Two days ago, I was mystery shopping Lund Cadillac in Phoenix for an article I’m writing. Lund is one of the largest Cadillac dealers in the U.S. But imagine my surprise when I saw a very cool motorcycle in the showroom. It was a custom-made red Harley Davidson motorcycle that belonged to boxer Mike Tyson, who lives in Phoenix. Tyson earned more than $300 million in his boxing career, but he’s totally broke, and on the verge of bankruptcy. How sad, and totally unnecessary.

We’ll discuss more of the pain from south of the border next week.