Simple Finance questions

[El_Machinae]

Ask your easy questions here!

2 rules:

1) if you're answering someone's question with a novel insight, quote the actual question. That way the person who's interested in the answer easily finds it.

2) if your answer starts to become complicated or it differs from previous answers significantly, state your relative confidence in your answer. Dunning Kruger is the bane of everyone here, but sometimes people know more than others and they know it.

 

[El_Machinae]

My first question. In Canada, credit cards charge about 1% net that goes straight to the bank shareholders. If you fail to pay off your credit card, the interest rate is about 20% annualized. Is there anyway to annualize that 1% off the top? I'm trying to compare apples to crabapples, money taken by the bank from the retailer and the customer.

 

[Farm Boy]

Would you just compound the rake and compare against investment return the retailer could have realistically gotten? Or the customer assuming the costs are all passed along. Or more on the macro scale of cost to the people as a whole, assuming it reduces consumer spending/smallhold saving by approximately 1%? Trying to understand for when somebody better swoops in.

 

[Timsup2nothin]

My first question. In Canada, credit cards charge about 1% net that goes straight to the bank shareholders. If you fail to pay off your credit card, the interest rate is about 20% annualized. Is there anyway to annualize that 1% off the top? I'm trying to compare apples to crabapples, money taken by the bank from the retailer and the customer.

I think the answer here is really simple, because it is just 'no.' That is a spot cost on the transaction, not relatable to interest rates. The only way to compare these apples and crabapples is going to be aggregating them over a period of time and comparing the totals as a percentage of the gross sales.

As illustration, if you can get the data for a given year:

Total of all sales paid by credit card = S
Cost to vendors = V = 0.01 S nominally
Total of all interest paid on credit cards plus annual fees = C

You can convert C/V to a percentage to compare to the 1% charged to vendors.

Argument against the validity of the data will be that interest paid this year will not all stem from purchases made this year, and interest paid on purchases made this year may be paid in subsequent years, and there is no grounds for assuming that balances out. However, the reality of credit card use is that the vendor is paying now for the opportunity to make a sale now that the credit card company is providing, and to great extent the interest being paid by the consumer now is being paid for the same reason. There is no isolation of "this is interest paid on purchases made in this or that timeframe."

End of the day you get "in year ______ the card service facilitated _______ in sales. Cost for this service was __________, with ________ borne by the vendors and _______ borne by the cardholders" and can convert to percentages from there.

 

[MaryKB]

My first question. In Canada, credit cards charge about 1% net that goes straight to the bank shareholders. If you fail to pay off your credit card, the interest rate is about 20% annualized. Is there anyway to annualize that 1% off the top? I'm trying to compare apples to crabapples, money taken by the bank from the retailer and the customer.

Tim's answer is correct, but I'd like to point out my umbrage with your quoted part. The bank is providing a service to facilitate business, by providing the merchant with a safe and guaranteed form of payment, and with safe an accessible funds to the customer. Businesses have lots of operating costs that impact net income versus revenue, and this is simply one of them: accepting credit card payments increases their total revenue, it's not a different concept than say spending money on advertising. As a customer, you only pay interest if you don't fully pay back your borrowed amount by the end of your next statement cycle, so if you're paying interest that means you've used your bank's money to get something you needed or wanted but couldn't afford, and why wouldn't you pay them for that? Really, you can make interest off of using a credit card: say you need to make a $1000 purchase, and you do so on your credit card. If you leave it in your savings account (let's say at a 1.2% interest rate for simplicity's sake), well you'd earn $1 interest for keeping it and then paying later.

And remember, bank's assume the risk. If your card ended up being stolen or counterfeited, then your bank is responsible for the transactions, as you won't be liable to pay. And if you default on your loan, your bank also could easily lose the entire balance they loaned to you.

 

[uppi]

My first question. In Canada, credit cards charge about 1% net that goes straight to the bank shareholders. If you fail to pay off your credit card, the interest rate is about 20% annualized. Is there anyway to annualize that 1% off the top? I'm trying to compare apples to crabapples, money taken by the bank from the retailer and the customer.

If you really want to make the comparison of apples to pineapples, you could argue that any purchase made by credit card is a short-term loan until the end of the month (or whenever else you pay off your card). Then you could view the 1% as interest rate. If you make purchases randomly over the month, the average duration of the loan would be half a month, which you could annualize to 24%.

However, I think the argument is quite misleading, since most of that is a service fee and not interest, as the others have pointed out. To get a less misleading number, you would need to know how much the bank pays for payment processing, refund insurance, and other related services, deduct that from the 1% and then try to annualize it.

 

[El_Machinae]

No need for umbrage Mary. It works differently in Canada.

I think uppi has it. My rounding to 1% was done to after-the-fact analysis, in order to account for processing costs, Etc.

But viewing it as a one month loan really finds the number. The retailer could be getting $99 today but $100 next month. I'm going to short form that to 12% annualized when I'm explaining it

 

[Ajidica]

I have quite a bit of cash sitting in my checking account earning basically no money (can PM you amount if it would help your answers). I think my last interest payment from the bank was less than $20. What sort of super-safe and relatively liquid vehicles are there for me to put it into? I know the market is going through the floor right now, so I'm not looking at investing it in the stock market or anything like that, merely put a chunk of it in a place where it earns more than barebones interest.

Also, does anyone know of any good "Idiot's Guide to Where to Put Their Money" articles/sites?

 

[Zardnaar]

I have quite a bit of cash sitting in my checking account earning basically no money (can PM you amount if it would help your answers). I think my last interest payment from the bank was less than $20. What sort of super-safe and relatively liquid vehicles are there for me to put it into? I know the market is going through the floor right now, so I'm not looking at investing it in the stock market or anything like that, merely put a chunk of it in a place where it earns more than barebones interest.

Also, does anyone know of any good "Idiot's Guide to Where to Put Their Money" articles/sites?

Everything's gonna take a hit. Banks safe as anywhere.

Sharemarket drug companies and hand sanitizer type companies if you're willing to invest in shares.

I've advised my friends with shares to hold unless they can't afford to not sell. Depends what they've invested in.

 

[Birdjaguar]

I have quite a bit of cash sitting in my checking account earning basically no money (can PM you amount if it would help your answers). I think my last interest payment from the bank was less than $20. What sort of super-safe and relatively liquid vehicles are there for me to put it into? I know the market is going through the floor right now, so I'm not looking at investing it in the stock market or anything like that, merely put a chunk of it in a place where it earns more than barebones interest.

Also, does anyone know of any good "Idiot's Guide to Where to Put Their Money" articles/sites?

Money market funds (like Vanguard Prime Reserve fund) typically pay much more. They are safe and are not stock or bond investments. Right now its SEC 7 day yield is 1.46%.

Share price is always $1.00

 

[Cutlass]

I have quite a bit of cash sitting in my checking account earning basically no money (can PM you amount if it would help your answers). I think my last interest payment from the bank was less than $20. What sort of super-safe and relatively liquid vehicles are there for me to put it into? I know the market is going through the floor right now, so I'm not looking at investing it in the stock market or anything like that, merely put a chunk of it in a place where it earns more than barebones interest.

Also, does anyone know of any good "Idiot's Guide to Where to Put Their Money" articles/sites?

Assuming that you know that you won't need the cash any time soon, and that if you're wrong, then you can still withdraw with some penalty, than short term certificate of deposit (CD). For my bank, the 18month ones pay about the best rate.

 

[innonimatu]

Also, does anyone know of any good "Idiot's Guide to Where to Put Their Money" articles/sites?

The mattress?

I'm half serious. I don't do financial gambling anyway, but one of the "rules" of financial gambling is stay liquid (cash) when "markets" are collapsing. However I don't think we're in kansas anymore. I do not think that central banks will be able to keep the stock market gamblers going unless they start buying shares outright in massive quantities. Which, ironically, will be in practice bringing in soviet-style communism (the state owns the large enterprises) though desperate expedients to "save" capitalism. The political danger for the ruling classes is very high, they'll probably avoid this move. The japanese are doing it, but they were never ideologically wedded to "free-enterprise capitalism".

These markets are full of zombie companies, companies that never turned a profit, and whose stock and bonds are held speculatively by numerous investment funds, which themselves issued stock and bonds... it's a house of cards for the exclusive benefit of the managers of it all, a comparatively few sitting on top of the hierarchies of management.
It only endures because there's millions of "investors" who think they benefit from it, only because they are so used to it, so caught up on its rules, that they can't imagine a different system which could benefit them more. But what happens to the beliefs of these "investors" when the rulebook is torn apart? That is what we're abort to see. Can the few people who really benefit from this system put in another that will both preserve them on top (as managers skimming a a big share of the wealth) and be accepted? Their only viable move currently seems to be buying through central banks, while obfuscating the implications of that (their social uselessness and parasitism as a group). Very dangerous.... for them.

We live in interesting - and I dare say hopeful - times.

Sorry I know that this isn't really what you were asking. But anyone giving you financial advice now should be honest and admit that times are extremely uncertain.

 

[EnglishEdward]

And it certainly looks like a good number of corporates are going bust in the UK varying from major airlines to the largest
shopping centre landlords, for which there is little good reason for the central banks to buy their near worthless shares.
Central banks cutting interest rates are irrelevant to the particulars of many of Zombie companies borrowing arrangements.

There is also a problem with credit cards with high monthly interest rates. The usual policy is to put rates up as the risk of
default raises, but now that may of course trigger more defaults. Afterall if people stop earning, they can not service their debt
and for those without net assets e.g. generation rent in many jurisdictions the best course of action may be to become bankrupt.

A moratoriun on interest may be required, but the greedy financiers in the USA and UK may resist that until it is too late.

 

[Birdjaguar]

The mattress?

I'm half serious. I don't do financial gambling anyway, but one of the "rules" of financial gambling is stay liquid (cash) when "markets" are collapsing. However I don't think we're in kansas anymore. I do not think that central banks will be able to keep the stock market gamblers going unless they start buying shares outright in massive quantities. Which, ironically, will be in practice bringing in soviet-style communism (the state owns the large enterprises) though desperate expedients to "save" capitalism. The political danger for the ruling classes is very high, they'll probably avoid this move. The japanese are doing it, but they were never ideologically wedded to "free-enterprise capitalism".

These markets are full of zombie companies, companies that never turned a profit, and whose stock and bonds are held speculatively by numerous investment funds, which themselves issued stock and bonds... it's a house of cards for the exclusive benefit of the managers of it all, a comparatively few sitting on top of the hierarchies of management.
It only endures because there's millions of "investors" who think they benefit from it, only because they are so used to it, so caught up on its rules, that they can't imagine a different system which could benefit them more. But what happens to the beliefs of these "investors" when the rulebook is torn apart? That is what we're abort to see. Can the few people who really benefit from this system put in another that will both preserve them on top (as managers skimming a a big share of the wealth) and be accepted? Their only viable move currently seems to be buying through central banks, while obfuscating the implications of that (their social uselessness and parasitism as a group). Very dangerous.... for them.

We live in interesting - and I dare say hopeful - times.

Sorry I know that this isn't really what you were asking. But anyone giving you financial advice now should be honest and admit that times are extremely uncertain.

Well it is pretty clear that you don't really understand the stock market, but are good at cherry picking headlines. The "mattress" option certainly isn't gambling; it is a known loss with no upside at all. And yes, those who don't understand stock markets and investing shouldn't participate. I would count you in that group.

 

[innonimatu]

Well it is pretty clear that you don't really understand the stock market, but are good at cherry picking headlines. The "mattress" option certainly isn't gambling; it is a known loss with no upside at all. And yes, those who don't understand stock markets and investing shouldn't participate. I would count you in that group.

We'll agree to disagree for the time being. I'm concerned with other things and can't spend the time to argue how economic systems function right now.

 

[Synobun]

The sports channel here has a lot of financial investment commercials. Companies who handle your investments, or online services that help you avoid using companies who handle your investments.

This isn't likely to be a problem for me for at least another half decade, but I hope there'll come a time when it becomes relevant.

What options are there, really, for people who don't want to bother with learning the intricacies of the financial system, investments or bonds or otherwise? Is using a company to handle this stuff truly so terrible? Should people who are unwilling to learn simply make due with a savings account and call it a day there?

And more: how much money is needed to make an investment, bond, or partnership with a company worth it? Can someone with, say, $2000 do anything reasonable, or is there only significant payoff once you start reaching five-digit figures?

 

[Birdjaguar]

The sports channel here has a lot of financial investment commercials. Companies who handle your investments, or online services that help you avoid using companies who handle your investments.

This isn't likely to be a problem for me for at least another half decade, but I hope there'll come a time when it becomes relevant.

What options are there, really, for people who don't want to bother with learning the intricacies of the financial system, investments or bonds or otherwise? Is using a company to handle this stuff truly so terrible? Should people who are unwilling to learn simply make due with a savings account and call it a day there?

And more: how much money is needed to make an investment, bond, or partnership with a company worth it? Can someone with, say, $2000 do anything reasonable, or is there only significant payoff once you start reaching five-digit figures?

Typically, you can begin making investments in the US with $1500 to $3000. IRAs and Money market accounts are open to those smaller investments. There are two parts to investing. One is choosing a "place" for your investments. That is the institution which will actually hold the funds: Brokerage house, mutual funds house, etc. I use Vanguard. Having everything in one place is nice so when I retired, I moved my 401k accounts from the company selected institution to Vanguard.

The second choice is who will help you: Stock broker, financial advisor, newsletter, etc. All cost money. Or you can make all your own decisions. I'm not that smart. Usually, if you are young, investing in stocks has a bigger payoff than investing in bonds because you get stock price growth and dividends. Bonds generally have a pretty fixed value and pay out interest which is tied to Fed rates. As I said earlier, a money market will pay much more than a savings account and is safe. there is no change in its share price.

 

[Synobun]

Typically, you can begin making investments in the US with $1500 to $3000. IRAs and Money market accounts are open to those smaller investments. There are two parts to investing. One is choosing a "place" for your investments. That is the institution which will actually hold the funds: Brokerage house, mutual funds house, etc. I use Vanguard. Having everything in one place is nice so when I retired, I moved my 401k accounts from the company selected institution to Vanguard.

The second choice is who will help you: Stock broker, financial advisor, newsletter, etc. All cost money. Or you can make all your own decisions. I'm not that smart. Usually, if you are young, investing in stocks has a bigger payoff than investing in bonds because you get stock price growth and dividends. Bonds generally have a pretty fixed value and pay out interest which is tied to Fed rates. As I said earlier, a money market will pay much more than a savings account and is safe. there is no change in its share price.

Thanks for your PM, although I have to say I'm not jazzed with the suggestion to learn about this stuff.

This post is more up my alley.

RE: your second paragraph and having a company manage your wealth (and this costing money), is there a general amount where the payoff outweighs the costs? Do they take a % or a lump sum?

Money market = mutual fund, right?

 

[Birdjaguar]

Thanks for your PM, although I have to say I'm not jazzed with the suggestion to learn about this stuff.

This post is more up my alley.

RE: your second paragraph and having a company manage your wealth (and this costing money), is there a general amount where the payoff outweighs the costs? Do they take a % or a lump sum?

Money market = mutual fund, right?

Everybody collects money differently. Brokers get theirs from fees and charges. Financial advisers typically take a percent of your total investments (1-3%) and won't take you unless you have at least $50,000 to invest. Newsletters cost $150 to 250 per year. If and adviser costs you 3% a year then you start each year down 3%. That means that if the market return is 5%, you only get 2%. If the market return is 15%, you get 12%. Mutual funds also charge fees for owning them. High priced ones range from 1-4% that comes off the top of their return. Low cost ones can be as low as .10 -.25 basis points (one tenth to one quarter of a percent. Big difference.

What Is a Money Market Fund?
A money market fund is a kind of mutual fund that invests only in highly liquid instruments such as cash, cash equivalent securities, and high credit rating debt-based securities with a short-term, maturity—less than 13 months. As a result, these funds offer high liquidity with a very low level of risk.

The NAV Standard
All the features of a standard mutual fund apply to a money market fund, with one key difference. A money market fund aims to maintain a net asset value (NAV) of $1 per share. Any excess earnings that get generated through interest on the portfolio holdings are distributed to the investors in the form of dividend payments. Investors can purchase or redeem shares of money market funds through investment fund companies, brokerage firms, and banks.

One of the primary reasons for the popularity of money market funds is their maintenance of the $1 NAV. This requirement forces the fund managers to make regular payments to investors, providing a regular flow of income for them. It also allows easy calculations and tracking of the net gains the fund generates.

 

[Synobun]

Thank you. That gives me something to start with should the day come that I'm not quite as destitute.