by Laura Rowley
For consumers, it's a jungle out there, says Bob Sullivan, author of the new book "Stop Getting Ripped Off: Why Consumers Get Screwed and How You Can Always Get a Fair Deal."
The book is a manifesto for the uneducated, the gullible, the greedy, the pathological optimists and the math-impaired. Sullivan, who writes The Red Tape Chronicles for MSNBC.com and is the author of "Gotcha Capitalism," talks about why consumers got shafted so badly in the last decade, and what they can do to protect themselves.
"American consumers have become bad at being consumers," says Sullivan, due to their own innumeracy, magical thinking and greed, combined with political corruption and lack of regulation that allowed predators from mortgage lenders to Bernie Madoff to act with impunity. The book is like a GPS through the curves of home and auto buying, cell phones, pay TV, student loans, insurance and more. Here are a few of Sullivan's unorthodox personal finance tips for consumers:
1) Assume any salesperson may be a sociopath. Research by psychiatrist Martha Stout suggests an estimated one in 20 adults is a Bernie Madoff -- a shameless, often charismatic liar.
"We imagine we're pretty good at knowing someone is lying because they are nervous or sweating, but sociopaths exhibit none of those traits," says Sullivan. "Know what someone's financial bias is. There is a continuum between bald-faced liars and financial planners giving advice they want you to have because it makes them more money." Look for service providers -- such as fee-only financial planners -- who don't have a commission incentive to steer you into particular products.
2) When negotiating, be prepared to lie. Obviously you don't want to fib about things like your credit score or income, which can be easily verified. But instead of revealing a planned down payment to an auto salesperson, say "I only have X in my bank account."
If you find yourself in a high-pressure situation where you have to say no twice, consider yourself in the danger zone, Sullivan says. Three times and you should hightail it out of there. Walk into a sales situation with an escape plan, i.e., "I'm expecting a call from work, and may have to leave at any time."
3) Never buy a car when you need one. "People let their cars go until it's absolutely time to buy new one -- and urgency is the one thing you can't overcome when you're at a car dealership," says Sullivan. "You have to be able to wait them out. Walk out, come back next week." No one can plan around a breakdown, but it's not a bad idea to do some casual car shopping before your vehicle hits the end of its warranty.
4) Never use friends for major transactions. "That sounds harsh, but it's the truth," says Sullivan. "When I talked to investigators at the Securities and Exchange Commission, almost every sad story begins with 'I thought he was my friend.' When someone is making money off you in a business transaction, at that moment he is not really your friend. Call three professionals, get a price, and never see them again when the deal is done. That's the best way to do business."
5) Be engaged with your finances on a daily basis. "It's human nature to put off the bad news -- nobody wants to look at a credit card bill that arrives after Christmas," Sullivan says. "But when you do that, you detach from day-to-day notions of where the money is."
Take a cue from baseball managers, he says, who rouse benchwarmers by asking, "What's the count?" Keep your financial head in the game with questions like: How much cash is in my primary checking account right now? How much did I spend last month? What's the rate on my credit cards? For consumers who may have trouble paying off the plastic in full that month, just knowing which card has the lowest rate is an easy way to save money. "It just takes a little thought and focus," says Sullivan.
6) Spend as much time shopping for your mortgage as you spend shopping for your house. "People will spend months looking for perfect front porch and a half hour working on their mortgage," says Sullivan. "If you end up with a home you hate it's a lot easier to get out of that than the mortgage, because you can move. But you can't come up with few hundred thousand overnight."
He advises homebuyers to go to at least two banks and one mortgage broker and get written quotes on the same day for a 30-year mortgage with no points, to make comparisons easy. "When you start dealing with points and exchanging closing costs among the parties it can become very muddy," he adds.
7) Never maintain a single checking account for all your transactions. "You should never make ticky-tacky purchases or weekly cash withdrawals from the main staging place for your money," writes Sullivan. "Eventually you're going to trip up, screw up and be hit with (an overdraft) fee."
Sullivan argues that it's easier to set up two accounts -- a "staging" account where your paycheck is deposited, and a "workaday" account for all those little debits and ATM withdrawals. Then shift a pre-determined amount of cash -- say $500 -- into the second account for the dozens of minor transactions. Use your staging account for the regular monthly stuff -- rent or mortgage, utilities, auto loan and cell phone.
If you're paid every two weeks, call service providers and try to group expenses evenly into the first and second halves of the month. Choose a free account with no minimums and no overdraft protection. (An alternative to opening two checking accounts is PNC Bank's Virtual Wallet, which offers spending and savings components in one account.)
Finally, Sullivan says, every consumer should be able to answer the question: How much would I need to survive if I lost my income for three months? It's an old saw, but one that's taken on more urgency in the last two years.
"If you don't have that somewhere in cash, you're living a high-wire act," says Sullivan. "I'm convinced so many people lose sleep and have stress in their marriages and don't feel liberated at work to complain because they know they're only a few paychecks away from being in real trouble."