Ask the grumpies: How to best use credit card rewards?

CPP asks:

What is best to do with accumulated credit card reward points? The fact that AmEx keeps nudging me to use them to pay my bill makes me think that is the worst thing I could do with them.

That’s probably a better question for Holly at Club Thrifty.

I’m seriously lame with my CC points and don’t try to maximize them in any way.  I just take the cash back option, and not even the “correct” cash back option since I’d get more cash back if I switched to a card for “high spenders” rather than the citicard I have that limits to $300 cash back/year.  I like our citicards because they don’t have the ridiculous points system, they just give 1% cash back.  It’s easy with the lowest mental load.  Because really, my time is worth more doing real work than it is chasing the optimal credit rewards (which always eventually disapparate and then you have to chase the newest optimal system).

I have heard that the best use of points is usually for travel, but that’s going to depend a lot on your card’s specific situation.  You’ll need to sit down and see how much of a return they give you for points for each of the different options they provide you.  Cash back should be your baseline and then you should see if there’s an amount of travel that you prefer to same number of points for cash back, or whatever your other options are (do you get a bonus for applying the cash back to your bill rather than to them cutting a check?).

So, that’s really a non answer from us.  However, we know that some our readers must know better than we do.

What should CPP do with his AmEx CC rewards?

Ask the grumpies: Class size research

Fiona McQuarrie asks:

Just curious whether you have any opinion on the Hoxby class size research (in Connecticut) that Gladwell discusses.

Here’s an interesting summary of class size research from Brookings.  It is worth reading if you’re interested in the topic.

There’s a lot of stuff going on with class size research (it is, in fact, the topic going through the Stock and Watson undergraduate econometrics textbook because it has been attacked through most standard econometrics methods).

A couple of important things to note about external validity for these studies:

1.  Natural experiments (and, indeed, standard experiments) are only as externally valid as the experiment itself.  That means that a study that finds an effect on kindergarteners is not going to necessarily say much about high school students.  We know a lot about class size and K-3, we don’t know so much about middle grades or higher.  This particular experiment is on 4th and 6th grade.  It argues that it gets cumulative effects of class size by cohort size, but when a cohort is expected to be a certain size, districts may plan differently by moving bad teachers to small cohorts and good teachers to larger cohorts etc.  They may do the same with aides when deciding where to make a class-size split, or they may make specific decisions about where to put the problem kids or whether to do tracking or clustering.  That kind of planning would completely wash out the effect in a way that you would not see if all classes were restricted to a certain size because of a policy change.  That kind of planning is more likely to be going on in the type of natural experiment that Hoxby examines in this study.

2.  Class size decisions are not made in isolation.  A policy asking for extra money from the federal government to reduce class size is going to provide different results than a policy that is forced to take that extra money out of another budget.  Generally, research suggests that, believe it or not, most schools are doing the best that they can with the budgets that they have.  When you give them an unfunded mandate, outcomes are hurt in ways that they wouldn’t be if you gave them a funded mandate.  Hiring more new teachers and buying portables while taking money away from other programs may end up having a negative effect even if smaller class-sizes are beneficial.  The type of natural experiment Hoxby is looking at is one of these situations– the budget isn’t changing based on class-sizes, they get the same $/kid whether they’re in a large cohort or a small cohort.  The only thing that changes is the expense from economies of scale (whether they need one teacher/classroom or two).  That’s a different situation than one in which expenses for everything else stays the same but the district gets extra money to hire more teachers and buy portables.

So, do Hoxby’s results mean that class size is unimportant?  No.  They just show that it seems to be unimportant in the type of situation that she’s studying, one in which variations in elementary school class-size are caused by variations in cohort size.  That’s why there’s a large literature on this topic– the answer is different in different situations.  We need a lot of experiments and natural experiments to get the full picture.

Side note:  Caroline Hoxby is one of my personal heroes.  If I ever decide to give up this academia thing, I’m totally going to beg her for an RA job.  She is an amazing economist.  Also, rumor has it (aka multiple of her coauthors has mentioned) that she is one of those people who sleeps 4 hours/night every night because of low sleep need.

Ask the grumpies: Do I stay or do I go now, and if I go… then what?

Tired of being grumpy all the time asks:

I’m an assistant professor.  I found your blog when looking for advice on dealing with horrible departments.  I don’t like my job and have become a big ball of stress and unhappiness.  I had been looking forward to escaping during my unpaid summer months, but have been given a pile of service and administrative deadlines to deal with (still unpaid).  I’ve tried to find another job without any luck.  I may or may not get tenure.

When I read the post on one of the Grumpies quitting, I, quite literally, had the breath knocked out of me.  It had never occurred to me that quitting without a new job was something that people actually did. My husband is on board with my quitting; he even suggested it earlier this year.

I am hesitant to discuss this with anyone I know– if my department hears, I fear they will choose not to renew my contract.  I’d rather choose to leave than be forced to.  Do you have any advice, thoughts, questions I should consider as I contemplate this new plan?

We both actually have experience with this.  Not only did #1 quit recently, but #2’s husband quit a year ago (pre-tenure) without having any other employment lined up.

Neither quit happened overnight.  It’s hard to quit something that allows a lot of freedom and can’t fire you on only two weeks’ notice.  It’s even harder to give up the potential for complete job security.  Add to that the weird culture of academia where, at least when you’re new, leaving the academic track seems like failure (it isn’t!), and you get people sticking around probably longer than they should.

Sometimes sticking around works out– you can change things or go on to other jobs.  Sometimes you just need a year of leave (and you can often get a year of unpaid leave off the tenure clock to try things out– #2’s DH did that just by asking).  Sometimes it’s just delaying the inevitable.

We both know many other people who have made the jump.  All are happier for it.  We know people who were considering making the jump but with one thing or another they decided they could make it work where they were or they got a job offer at a different place and everything worked out.  They’re happier than they were too.  And we know people who are still working on making the decision.

#1’s experience of quitting was that, somewhat thankfully, it got bad enough that I felt good about leaving.  If it had been less bad, I might still be there.  Perhaps that’s where you are.  It took me a year to decide to quit.  Other people in my department also have exit plans (and every year we’ve been hiring to replace recent exits), which tells you how bad it is there.  My experience has been that quitting my job makes me feel amazingly good, but I don’t think I would have felt that way if I’d left pre-tenure.  I also have financial luxury to faff about until I figure out a new career.  And I might hate my next job, too!  (But at least it will PAY MORE.)

Also, consider this:  it’s likely you can outlast administrators.  However, consider the direction your school as a whole is going in (your department, college, university as a whole).  That was one among many clues that I didn’t belong in that particular place.  It was hard, hard, hard for me to give up an academic career– that is, until I was ready to do it.  Everyone has a different breaking point.  While you’re finding yours, save money like a fiend.  Try to stay sane.  Maybe start consulting on the side if you want to turn that into a new career.  This could be an opportunity to move to where you really want to be!  (Better work environment for husband, closer to family or the beach, lower cost of living, whatever.)

There must be something you love about academia to even go into it.  There are also things you hate.  Are they things you hate about the career, or this particular job, or some of both?  If you can figure out the particular *aspects* that are turning you into a ball of stress, you can look at adjusting them within this job or in a new job.

Things to consider:

Academia is just a job

Pre-tenure angst *read this book*.  If you feel trapped, this book will help you feel untrapped and will give you the tools you need to get to freedom, whether that includes staying where you are with an exit plan or making a big jump.  It will help you turn the risk of losing/leaving your job into a calculated risk, increasing the upside and decreasing the downside.

For the past three years or so, #2 has been talking about getting ready financially for her DH to quit, dealing with him being out of work, and adjusting to his new income, off and on in her monthly mortgage posts.   Savings and lowering monthly expenses create the luxury of being able to make a measured risk.

Are you a scanner?  As #1 says, think about what aspects of work make you happy and read up on what kinds of jobs fit those aspects.  For example, like Cloud, my husband is a scanner, so he likes shorter projects.  He likes working in groups.  He likes figuring out problems.  He needs mental stimulation.  He needs regular validation.  He’s currently getting all of these things in his current job, but wasn’t getting them in academia.

From a practical standpoint, it took #2’s husband several months to get consulting contracts and job interviews, but they all kind of hit at once, probably because of the way hiring cycles and budgets work.  He started lazily networking in May, then more seriously in September, and by November he was working in his new job.  (He did get an unsolicited offer to continue teaching off the tenure track at the university, but had no problem turning that down.)

If you quit, you’re not alone.  If you decide to stick it out, you’re not alone there either.  If you decide to stay for a while and work on a gradual exit plan, that actually seems pretty common.  You can make any choice into the right one, if you can find what fits well for you and your life.

Does that help?

And now, check the comments for thoughts from the Grumpy Nation.

Ask the grumpies: Aftershock

Linda asks:

The book description of Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown notes: “From the authors who accurately predicted the bursting of the global bubble economy comes the definitive look at what lies ahead in 2013 and beyond.”

My reading of this book is summarized thusly: there are still more economic bubbles yet to burst and the global economy is “evolving” and not just “cycling” up and down. The authors acknowledge that it is very hard to accurately predict when this big “afterschock” will hit us. They recommend some employment and investing strategies that they say will help one better ride out the “aftershock,” although they note that one could lose some big returns if one shifts assets too early. The principal author is an economist, but he sounds very critical of economists in general.

The book was an easy read (maybe because there was so much repetition) and it appeals to the part of me that is always concerned that in my lifetime our society will become increasingly dystopian. (Could it be that I’ve read too much Margaret Atwood and Octavia Butler?) I’m wondering if true academics such as yourselves have a different opinion or general guidance on what to read to balance out the hype of this Aftershock idea.

Somewhat related: if one had a chunk of cash (such as from the sale of a home), what are the better options for saving or investing it for a short term (2 to 5 years)? I’m starting to think about what to do with the equity I’ll get when I sell my house later this year for my big move to the Bay Area, hence my unusual interest in investing and PF books. I will also be meeting with my (fee-based) financial adviser, but I like to have some ideas to discuss with him first.

 

Lots of economists were talking about the market crashing before it crashed.  I don’t think anybody really understood the *extent* of the housing crisis, but we all knew it was unsustainable and going to crash.  Ditto the earlier tech crash.  We’re actually pretty good at seeing bubbles but nobody knows when exactly they’re going to pop, probably because there’s an element of chaos theory there.  The bubbles in my lifetime have seemed to grow bigger than possible before inevitably popping.

With the current lack of regulation, of course there are going to be more bubbles.  The system is still set up for bubbles.  Government has to interfere for there to be no bubbles (as it did after the depression and again after the S&L crisis in the 1980s), but there’s a lot of money to be made in bubbles and the people with money are the people in power these days.

And yes, the US is growing increasingly dystopian.  This depresses me because I grew up thinking it would get better.  Two steps forward and half a step back.  But income inequality has been broadening and things have been getting worse for the poor.  There’s a lot of bad stuff that happens when income inequality gets bigger.  Very depressing.  (I voted for Al Gore, and I like to think in some parallel universe things are better.  More likely though there’s a backlash in that universe and the inevitable was just delayed a couple of decades.  *sigh*)  One of my (libertarian) colleagues is always saying, “Bread and circuses” and forecasting the downfall of civilization.  I hope he’s not right.  I still have the little fairy of Hope in my heart.

So, what to do?  Well, the standard advice *still applies*.  Bubbles mean you need money in stocks.  Bubbles popping mean you need money in bonds.  We can’t predict when a bubble is going to pop or how big it’s going to get.  So we diversify.

Investing for the short term is the same standard boring advice as well– if you’re going to need the money, put it someplace safe (with lower returns).  Bonds, laddered CDs, etc.  If you feel like gambling, put it in the stock market.  (Because houses in SF are so very expensive, and it’s generally a seller’s market, plenty of folks keep that “short term” money in the stock market rather than pulling it out.  When tech bubbles burst, so do housing prices in the SF bay area, so it isn’t quite as big a risk for them, but that’s a very unique market.)

Even if we go into hyperinflation, you’ll need money in stocks for the long-term.  If society collapses, then probably you’ll need bullets and bottled water more than anything else.  But it’s hard to say.  We’re not prepared for a zombie apocalypse.

Ask the grumpies: What to do with a lump sum?

Susan asks:

I’ve just finally unloaded my own slice of the housing crisis (PHEW), a condo in another place, and have been wired the proceeds, which are between $50 and $100k. What’s the best thing to do with that lump?

My only remaining mortgage (PHEW) is the house I live in. It’s for 80% of that house’s value, at 3.4%, and the monthly nut is reasonable, at ~30% of take-home. I have decent? retirement savings between IRA, investment and TIAA-cref accounts, about $70k (I’m 41). My car is paid off, and I have no CC debt or student loans. There are some upcoming expenses for the house that are within our planned budget. We do not have children and do not plan to.

I feel burned from the housing crisis (yet I know it wasn’t as bad for me as others). The proceeds represent my initial investment, so I came out about flat, although that money was locked up (or, circa 2009, nonexistent) for almost 10 years. Because of that, I’m hesitant to pay down principal on my current mortgage, more than the 20% we already have in there. But 2008 wasn’t so kind to investments, either. I know I don’t want to leave this money in checking or my 0.5% savings, so – where does it go?

Standard grumpy disclaimers apply:  We are not financial advisers.  Talk to a fee-based financial planner and/or do your own research before making any life-changing decisions.

You have a few good options.  Three of them jump to mind immediately.

1.  Put more money into retirement
2.  Pre-pay your current mortgage
3.  Put the money in taxable stocks

I do have a quibble with the last paragraph if your question.  Pre-paying the mortgage *can* provide cash-flow liquidity.  If you’re willing to reamortize (aka re-cast) the mortgage, then you can lower your monthly mortgage payments by re-extending the length of your mortgage if you have prepaid a significant amount.  You can do this even if you’ve lost your job, generally for the cost of ~$250.  Only if you’re willing/planning on foreclosing on your house would it make sense to never pre-pay under any circumstances, but since you didn’t foreclose on the condo, it’s unlikely that you’re in that situation.   The *debt* is what you should be focusing on, not the value of your house.  You will have the debt no matter what the value of your house is (absent willingness to foreclose, of course).  Pre-paying here is the safest option– the low risk, low return option.

Your interest rate on your house is pretty small, so it’s not obvious you should pre-pay the mortgage.  With a higher interest rate, it might tip your decision to the mortgage if doing so meant you could refinance, for example, and it would be a safe investment (assuming no plans to foreclose) and would allow you to decrease your monthly nut by reamortizing in the case of an emergency.  In this case, the return is pretty low and this is something you’d only think about doing if you wanted a safer option.  The return is higher than CDs or savings accounts, but you wouldn’t necessarily be able to get all your savings out in case of an emergency (because home equity loans tend to dry up when you actually need them), just enough to give you a somewhat lower monthly payment with re-casting discussed above.  [Note, too, that the earlier you pre-pay the bigger the benefit of prepayment-- you can play with the numbers using the GRS amortization calculator.]

You should think about how quickly you will want this money.  It sounds like you don’t have any major plans for expenditures that you can’t handle.  However, how are you feeling about job risks over the next 15 years or so?  Is there a chance that you or a spouse could lose income?  Is there a chance that you’ll want to move to a more expensive locale?  If you feel pretty secure on that, then putting the money away in a tax-advantaged retirement fund is going to be better than just putting it into the stock market because you will save money on taxes.  However if you see a chance for needing more liquidity, then you would want to tilt towards regular stock investing (keeping in mind that IRA Roth contributions can be taken out tax-free even if their earnings cannot, so they have added liquidity).

You should also think about whether or not $70K in retirement accounts at age 41 is putting you on track for retirement or not.  My druthers is that you could add more to that, but I also don’t know about your lifestyle and your planned expenses, your work situation, etc.  There are a lot of retirement calculators out there with various inputs that you can play with to get a better picture of how much you think you’ll need going forward.  It is unlikely that you have saved too much at this point.  (And if you have, you can always cut down on the retirement savings later.)

If you choose one of the two investing options, what stocks to put it in?  Broad-based low-fee Vanguard index funds if possible.  VTSMX is a good one if you just want diversification, but there are other combinations you can make with VFINX, VGTSX and so on.  You may want to throw in some bond fund, such as VBMFX.  And ask about their admiral fund shares if you invest with Vanguard directly.  With TIAA-CREF you’ll want to talk to an adviser to get numbers on fees for their broad-based indexes vs. their target-date funds.  We can go more into detail on these if you want to add more information about your options.

Personally I like having a secondary emergency fund in taxable stocks (and/or in IRA Roths) that I feel like I could tap by selling off stocks.  So far we have left ours untouched but the fact that it’s there (even when it dropped down to its lowest point in the recession– it has since more than doubled!) always made me feel more secure.

What I would do in your scenario would be to max out all the retirement accounts that I could (and given the sale, you may want to check with a tax accountant or other expert before putting money in the IRA), and put the rest into taxable stocks or (less likely given your situation) mortgage prepayment.  For the retirement accounts, I would either pick some broad-based indexes with low fees from TIAA-CREF, or I’d pay a little bit more in fees to get their target-based fund.  (Their target-based fund isn’t a no-brainer like Vanguard’s is, but if I didn’t want to sit down and create my own diversified sets of funds, I’d go for it.)

But again, you’ll have to think about what your short- and long- term goals and uncertainties are.  The best thing to do will vary based on your needs.  For shorter-term safety but low return:  prepay the mortgage (knowing your can re-cast for a lower monthly payment later, should you need to).  For longer term safety and the highest rewards:  max out your retirement options.  For a secondary emergency fund and somewhat risky growth (which will be correlated with the economy, as you note, but not necessarily your personal situation):  put it in Roths first and the stock market second.

Grumpy Nation:  What advice would you give Susan?  Are there other things she should be considering in this decision?  Bonus points if nobody mentions landlording as an option.  Unless Susan *really* wants to landlord.  Which we doubt.

Ask the grumpies: Retirement vs. debt

Rented life asks:

If you have credit card debt should you pay that off completely before setting up and contributing to retirement? (And does your advice change is the employer doesn’t offer a plan and your retirement is just whatever you set up?) My friend thinks you should pay off credit card first, no matter what and then when that is gone you can start saving for retirement. I feel that can do more harm than good, waiting to set up retirement until your debts are gone might have you setting up really late or possibly always having to push it off. Who is “right?”

If you get an employer match that is anywhere decent you should absolutely save for retirement up to the match before paying off the credit card.  In fact, depending on the match rate, your credit card interest rate, and penalties, there can be situations in which you would put money in, get the match, then take your original money out minus the penalty and you would still be ahead.

If you’re young (with a lot of earning years left), have high interest debt, and have lousy options for saving for retirement at work (no match, high cost plans at work, etc.) and can (and will) knock out that debt really quickly, and will definitely start putting money away for retirement as soon as you’re done with the debt, then go ahead and pay off the debt first!  This is, in fact, what DH and I did when we got married.  We paid off his (relatively high interest rate) student loans first and were still able to max out our IRAs the next fiscal year.  We benefited more from those 6K getting rid of the debt than we would have putting them in an IRA (especially since it would have been a market peak!  But we didn’t know the tech bubble was going to burst, so that was just luck.)

After those two easy scenarios, there’s a lot more grey area.  And it’s going to depend on your personality and your options what you do.  You will have to sit down and run the numbers, think about the risk, the benefits, and your own personality.  The goal is not necessarily to make the most money on paper, but to get rid of your debt and have enough saved for retirement.  It is far better to make a little less money on paper if it means you’re going to make more money in reality because you actually stick to your goals instead of giving up.

If you’re really bad at doing multiple goals at the same time and you would have to save for your retirement manually (and you don’t get a nice match), then go ahead and focus on the debt.  However, even if you’re bad at doing multiple goals at the same time, if you have retirement through work, you can usually have it auto-deducted so you don’t even think about it.

Similarly, if you know deep down that as soon as your credit card debt is gone or down, you’re just going to spend again until you’re back in the same situation you were in before, put money away for retirement so you can’t touch it.  We don’t understand people who can’t keep from maxing out their credit cards no matter how much they make (and we try really hard not to read their blogs because they’re so depressing), but if that’s you, then you need to contribute the max to your retirement accounts in a way that it’s auto-deducted without you even realizing it’s happening.  That way you can continue to pay off your debt in your 60s, 70s, and 80s, or at least still have something to live on when you’re old after declaring bankruptcy multiple times (as retirement money is protected).

Speaking of which, if you have plans to file hard-core bankruptcy, max out that retirement.  I’m not sure what you should do if you’re planning on doing the lighter kind of bankruptcy… you should probably talk to a lawyer about that.

If your work offers good plans, that’s more attractive than if it offers bad plans.  But, as you note, even if your work only has bad plans, you can still invest up to the IRA or Roth IRA limit with Vanguard.  However it’s more difficult to set up auto-deduction before you see the money than it would be with work, which may interact with your personality type and how many goals you can focus on at the same time.

If you aren’t going to remember to set up auto-deduction for retirement just as soon as you get out of debt, then do it right away when you’re thinking of it instead of paying off debt.

If you are going to be in debt for a long time, then it might also be worth investing in the stock market just to add a little bit of risk to your portfolio, or, as mentioned before, to protect your future self in case of bankruptcy.

There’s probably even more scenarios that I’m not thinking about.  But no, I don’t agree that you should always pay off high interest debt first while ignoring retirement (*especially* if you’ve got a 100% match at work!), nor is it always the best idea to contribute the max to retirement while you’re still paying off high interest debt.  (Heck, if you work for the government, the max you can contribute to tax-advantaged retirement savings might be a lot more than 20% of your income!)

What say you, grumpy nation?  High interest debt?  Retirement savings?  Both?  Neither?  Is it always clear-cut what you should do?

Ask the grumpies: Kindergarten skillz

Becky asks:

I wanted to ask – what is the “minimum” I am supposed to do to prepare my four year-old for kindergarten? He has all the basics, I think (can count to 20, does some simple addition in his head, knows the alphabet, recognizes letters, their sounds, and associated words). I have taught him some French words, and he knows a lot of Spanish from daycare. He just started printing practice, but he is not that fond of it! I have the starfall apps and we’ve started looking at them, but I often feel like a slacker Mom in this department. Thoughts? He is currently in the uni childcare, no preschool, so the teaching falls to us.

What do you really need for kindergarten?

1. potty training (some accidents ok)
2. self-feeding (hands ok)

Unless you’re going to a fancy highly competitive coastal k, your kid is already ahead and would be ready for 1st grade in much of the country, skills-wise. If it is half day k, you might be able to get away with no self feeding, but that would be a little odd.

Ideally your child will also be able to sit still for reasonable periods of time, will listen to the teacher, takes instruction, and plays relatively nicely with others.  Mostly being able to put shoes and jacket on are also good things, and to pull pants etc. back up after going potty.  These are skills that most children who went to almost any kind of daycare have.  But there’s still kids who stayed at home who aren’t used to not being the center of attention, and they learn those skills in kindergarten rather than coming in with them.

It doesn’t hurt to know numbers, colors, letters, scissors, patterns, printing, etc. but those should happen in kindergarten or first grade if your child doesn’t get them before that time.

Competitive kindergartens with tests and so on, have a lot more requirements, but they only exist in NYC and a few other places.  There’s an entire industry that exists just to fake these exams out, so a little Googling and maybe a book purchase or two can help for those in that situation.  But for the majority of us, it’s ok to just make sure the kid is out of diapers.

Grumpy Nation parents, what did your children need to know/already know before kindergarten?

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