Readers Use Plastic (Debit/Credit) For Most Purchases

You may have heard the phrase “Cash is King” before, but it doesn’t refer to paper or coin currency:

The belief that money (cash) is more valuable than any other form of investment tool. The “cash is king” phrase is typically used when prices in the securities market are high and investors decide to save their cash for when prices are cheaper. It can also refer to the balance sheet or cash flow of a business; a lot of cash on hand is normally a positive sign, while strong cash flow allows a company more flexibility in regards to business decisions and potential investments. (Investopedia)

Currency is being replaced with plastic and digital money, just in time too:

In 2013, the cost of making pennies and nickels exceeded their face value for the eighth year in a row. The cost of minting a penny stood at 1.8 cents, nearly twice its face value. Nickels cost twice as much as dimes – 9.4 cents vs. 4.6 cents – despite being worth only half as much. (The Washington Post)

How does this compare to paper currency?

Each year, the Federal Reserve Board projects the likely demand for new currency, and places an order with the Department of the Treasury’s Bureau of Engraving and Printing, which produces U.S. currency and charges the Board for the cost of production. The new-currency budget for 2014 is $826.7 million, and reflects the following costs per denomination: 

• $1 and $2 = 5.4 cents per note
• $5 = 10.1 cents per note
• $10 = 9.2 cents per note
• $20 and $50 = 10.2 cents per note
• $100 = 13.1 cents per note (source: Federal Reserve)

A nickel costs more to make than a dollar and ten dollar notes? Over $800 million per year to create the physical currency some use?

As of July 2013, currency in circulation—that is, U.S. coins and paper currency in the hands of the public—totaled about $1.2 trillion dollars. The amount of cash in circulation has risen rapidly in recent decades and much of the increase has been caused by demand from abroad. The Federal Reserve estimates that the majority of the cash in circulation today is outside the United States. (Source: Federal Reserve)

Many still use cash, but the numbers are shrinking:

The national telephone survey of 983 adult U.S. credit card holders found that 1 in 3 usually uses a credit card or a debit card for in-person purchases of less than $5. The breakdown: 11 percent prefer credit cards, 22 percent debit cards, 65 percent cash.

But the generational divide is striking. A slight majority (51 percent) of consumers 18-29 prefer plastic to cash, the only age group to do so. A preference for cash becomes stronger in each advancing age bracket, until at age 65-plus, 82 percent prefer cash. (CreditCards.com)

Here’s another look:

While credit and debit cards represent more than half of the purchases made for retail goods and services in the U.S., cash continues to dominate in small transactions. A recent consumer survey conducted by the Federal Reserve found that cash represented 66% of transactions under $10 and 58% of transactions under $25. When the transaction was more than $50, cash was used in less than 20% of the payments. (Wall Street Journal) 

It was the above statistics on cash use that prompted the poll last week, here are the results:

Q: What size purchase would you use cash versus plastic (debit/credit)?

1. No amount, I use plastic for most purchases 49 [55.06%]
2. Cash for $20 or less 13 [14.61%]
3. Cash for $5 or less 11 [12.36%]
4. Cash for $10 or less 9 [10.11%]
5. Any amount, I use cash for most purchases 6 [6.74%]
6. Unsure/No Answer 1 [1.12%]
7. Cash for $15 or less 0 [0%]

The results make me wonder if location (urban vs suburban vs rural) has a role in cash vs plastic use? Income & education level? Include me among the 55% that use plastic for nearly every purchase, regardless of amount. I just know I rarely have more than $5 in cash on me, only for emergency stations or the occasional retailer that doesn’t take plastic for sales under some limit.

Despite the shift away from cash, using plastic is far from perfect. Last year many of us got new card numbers after the data breach at Schnucks grocery stores. Since then we’ve seen data breaches from nationwide retailers like Target, Neiman Marcus, and recently Home Depot.

That’s the risk of using debit & credit cards, right? For the moment:

Beginning later next year, you will stop swiping the credit card. Instead, you will insert your card into a slot, just like people do in much of the rest of the world, where the machine will read a microchip, not a magnetic stripe. You’ll still be signing for the time being, but the new system also enables the use of PIN numbers, if card issuers decide to add them to their cards.

The U.S. is the last major market to still use the old-fashioned swipe-and-sign system, and it’s a big reason why almost half the world’s credit card fraud happens in America, despite the country being home to about a quarter of all credit card transactions. (Wall Street Journal) 

Yes, we’re the last to use swipe-and-sign. I remember the 80s well when we used carbon slips to get impression of the face of cards, before the back magnetic strip was common.

But this type still isn’t the latest. Soon cards will have a chip imbedded allowing customers to just tap the card at retail stores with appropriate POS (Point of Sale) systems, my Ventra card for Chicago’s transit system has a chip and can be used as a prepaid debit card as well.

Alternatively your physical cards won’t be used, your phone will store the information and use NFC (Near Field Communication) to communicate with the store’s POS. Interesting times ahead.

— Steve Patterson

Training St. Louis Youth

Getting a job isn’t easy, this is especially true for many from low income neighborhoods:

Millions of young adults in this country are facing social and economic injustice. Despite talent and motivation, they lack access to higher education and careers that provide them with a living wage. At the same time, our economy needs help. U.S. businesses are calling for more and better-trained talent to compete on the global stage, but there will not be enough skilled workers to meet that demand. (Year Up)

Year Up is an interesting program I learned about watching 60 Minutes, see Jobs Program Aids Fortune 500 and Underprivileged Youth. Year Up started in NYC, but now operates in 11 regions throughout the US, the closest is Chicago. Someone needs to bring this program to St. Louis.

Closer to home:

Gov. Jay Nixon today applauded Centene Corporation’s plans to build a new claims processing center and create up to 200 jobs in Ferguson, Missouri. To facilitate the company’s expansion, Gov. Nixon’s administration is partnering with St. Louis Community College to provide targeted job training resources through the Missouri Works Training program. (Gov Nixon)

I too applaud Centene’s decision, but as a region we need to be proactive, not reactive. The Year Up program is one program that might make a huge difference in the St. Louis region. It wouldn’t be immediate, it would take a generation. Our people & our companies could do better.

— Steve Patterson

Readers: Stocks & Mutual Funds Better Long-Term Investments Than Real Estate

Readers who voted in the non-scientific poll last week differ from  those who took a recent Gallop poll, their summary:

This year, the housing market has been improving across the U.S., and home prices have recently been rising after a steep drop in 2007 during the subprime mortgage crisis. This current improvement in prices may be why more Americans now consider real estate the best option for long-term investments. In 2002, during the real estate boom that preceded the mortgage crisis and before gold was offered as an option in the question, half of Americans said real estate was the best investment choice.

Stock values have also been improving in recent years, aided particularly by the bull market in 2013. The 24% of Americans who regard stocks as the best long-term investment is also higher now, up from 19% in 2012. Still, Americans are modestly more likely to say real estate is the better investment today, perhaps because of the recent volatility in the stock market.

So right now Americans think real estate in the best long-term investment.  Here are the results from readers:.

Q: Which of the following do you think is the best long-term investment?

1. Stocks 27 [35.06%]
2. Mutual funds 26 [33.77%]
3. Real estate 15 [19.48%]
4. Savings accounts/CDs 4 [5.19%]
5. Gold 3 [3.9%]
6. Bonds 2 [2.6%]

Real estate trailed in third.  History isn’t on the side of home ownership as a means of long-term investing:

From 1890 — just three decades after the Civil War — through 2012, home prices adjusted for inflation literally went nowhere. Not a single dime of real growth. For comparison, the S&P 500 increased more than 2,000-fold during that period, adjusted for inflation. And from 1890 to through 1980, real home prices actually declined by about 10%. (USA Today: Why your home is not a good investment)

There are plenty of reasons to buy a home, but a long-term investment isn’t one of them, especially if you’re black:

Home ownership has been an important vehicle in creating a solid white middle class, but it has not done the same for most black homeowners, because blacks and whites buy homes in very different neighborhoods. Research shows that homes in majority black neighborhoods do not appreciate as much as homes in overwhelmingly white neighborhoods. This appreciation gap begins whenever a neighborhood is more than 10% black, and it increases right along with the percentage of black homeowners. Yet most blacks decide to live in majority minority neighborhoods, while most whites live in overwhelmingly white neighborhoods. (Forbes: How Home Ownership Keeps Blacks Poorer Than Whites)

The young are cautious about buying:

Young people have delayed life decisions, including moving for jobs, forming households, getting married and having children, said Peter Francese, an independent demographer and consultant in Exeter, New Hampshire.

“There is a lack of belief that there is something better in another state,” he said.

Slower household formation is lowering home ownership. Just 36.2% of Americans under 35 owned a home in the first quarter, compared with 41.3% in 2008’s first quarter, the Census Bureau reported April 29. (Financial Post: Young and unwilling to relocate: How Millennials may be holding back the U.S. labour and housing recovery)

Many in St. Louis still push for owner-occupied redevelopment, even though rental housing appears to be in greater demand for the foreseeable future.  Besides the young, Baby Boomers entering retirement are faced with being home owners or renters:

• US News & World Report: 10 Reasons to Become a Renter in Retirement
• MarketWatch: When it’s better to rent a home in retirement
• Forbes: Should You Rent Or Buy A Home In Retirement?

Hopefully in the coming years those who rent housing won’t have the negative stigma expressed by home owners. I know many renters who are active in their neighborhoods.

— Steve Patterson

A Possible Strategy for the North Grand Corridor

This is the fourth post on the North Grand corridor, prompted by the announcement Schnucks would close a store. Here are the first three posts:

1. Some Possible Reasons Why the North Grand Schnucks Didn’t Make a Profit
2. Rethinking the North Grand Corridor for Jobs, Economic Opportunity
3. Institutions & Businesses That Might Help Plan Rejuvenation of North Grand Blvd

The store is now closed. I’ve been reviewing materials on revitalizing low-income areas and one theme is repeated: JOBS! Critics would correctly point out it would take a lot to convince an employer to move their business to a depressed low-income area, that’s why the business and jobs must be created from within.

Anchor institutions—hospitals, colleges, and other institutions deeply rooted in their communities—are a form of commons that is viewed as crucial to revitalizing low-income neighborhoods. Besides being major employers and big customers for local businesses, they have an intrinsic stake in making sure their neighborhoods thrive. Your local hospital, for instance, is not going to pack up its beds and move to Mexico. 

<snip>

An initiative in Cleveland aims to help local residents become owners of new businesses that serve a cluster of hospitals, universities and cultural institutions on the city’s struggling East Side, including the famed Cleveland Clinic and Case Western Reserve University. The Cleveland Foundation teamed up with Ted Howard of the Democracy Collaborative at the University of Maryland to launch the Evergreen Cooperatives: 1) Evergreen Cooperative Laundry, an environmentally conscious employee-owned firm with a contract to clean linens and scrubs for local hospitals; 2) Green City Grower Cooperatives, an employee-owned 3.25 acre greenhouse that produces greens year-round for hospitals and the university; and 3) Evergreen Energy Solutions, where worker-owners install photovoltaic panels and make weatherization improvements for anchor institutions and local residents. (source)

Let’s take a closer look at the Cleveland Example, Evergreen Cooperatives:

The Evergreen Cooperatives of Cleveland, Ohio are pioneering innovative models of job creation, wealth building, and sustainability. Evergreen’s employee-owned, for-profit companies are based locally and hire locally. They create meaningful green jobs and keep precious financial resources within the Greater University Circle neighborhoods. Worker-owners at Evergreen earn a living wage and build equity in the firms as owners of the business.

From their Vision & Goals page:

The strategic pillars on which the Initiative is built are: (1) leveraging a portion of the multi-billion dollar annual business expenditures of anchor institutions into the surrounding neighborhoods; (2) establishing a robust network of Evergreen Cooperative enterprises based on community wealth building and ownership models designed to service these institutional needs; (3) building on the growing momentum to create environmentally sustainable energy and green collar jobs (and, concurrently, support area anchor institutions in achieving their own environmental goals to shrink their carbon footprints); (4) linking the entire effort to expanding sectors of the economy (e.g., health care, our aging population, local food, and sustainable energy), many of which are recipients of large-scale public investment; and (5) developing the financing and management capacities that can take this effort to scale (that is, to move beyond a few boutique projects or models to have significant municipal impact).

In the 2nd post, above, I listed the major institutions in the area. Between them they hire out for many goods & services. It’ll take a lot of effort to do what Cleveland has done, but I don’t think we have a choice in the matter.  There’s no guarantee this will work, it certainly isn’t a magic bullet to solve all the ills. If you’ve got another idea I’d love to hear it.

— Steve Patterson

Readers Not Among The Unbanked

The number of unbanked citizens in St. Louis is high, but according to the unscientific poll last week readers of this blog aren’t among them:

Q: Not everyone uses all available financial tools, which of the following do you use? (check all that apply)

1. Debit card(s) 56 [14.58%]
2. Retirement account through employer 43 [11.2%]
3. Credit card(s) paid each month 43 [11.2%]
4. Checking account at brick & mortar bank 42 [10.94%]
5. Investment portfolio 39 [10.16%]
6. Checking account online 38 [9.9%]
7. Savings account online 35 [9.11%]
8. Savings account at brick & mortar bank 28 [7.29%]
9. Savings account at brick & mortar credit union 20 [5.21%]
10. Credit card(s) with a balance each month 20 [5.21%]
11. Checking account at brick & mortar credit union 18 [4.69%]
12. Other: 2 [0.52%]
    • dwolla (for online payments)
    • checking with interest at credit union
13. None: no checking, savings, debit, credit, portfolio 0 [0%]

I was a little surprised to see online checking/saving ranked higher than credit unions. However, we just recently opened an online savings account separate from our credit union checking & savings accounts, it’s very user friendly. We both had bank accounts for years but a few years ago I switched to a credit union. I never ordered physical checks since bills can be paid online, with debit card, or via bill pay online. I never liked paper checks — all that processing:

On a normal day, about $6 billion was literally up in the air as checks flew to their destination. That amount grew to $47 billion after the FAA grounded planes in the wake of the 9/11 terrorist attacks.

That spurred passage of the Check 21 Act, which allowed banks to use electronic images of checks instead of paper. (Business Insider)

But to the unbanked out there financial life isn’t as easy.  Apparently many have their income, often social security, sent to check cashing places. They go in monthly to get their money in cash, less enormous fees. Then they end up buying money orders to pay bills. Meager incomes made even worse by the costs of being unbanked.  Prior experience with bank overdraft fees and closed bank accounts have left many thinking cash is their only option. Businesses like check cashing places, tax refund lenders, title lenders, etc prey on the less financially literate in our community.

Here’s more on who is unbanked:

Among common demographics (income, education, age, race and family structure), several vulnerable groups emerged:

• Households with incomes less than $15,000 were unbanked at a rate of 31.4 percent.
• African-Americans were unbanked at a rate of 26.5 percent.
• Households headed by single mothers had unbanked rates of approximately 23.5 percent.
• Individuals with no high school degree lacked transactions accounts at a rate of 24.5 percent.

A comparison of the at-risk groups with the District average (9.5 percent) is stark: They were two to three times more likely to be unbanked. (Federal Reserve of St. Louis) 

This problem is a community problem. I don’t know the solution for reducing the number of unbanked in St. Louis, but organizations like Justin PETERSEN are working on the problem.

— Steve Patterson