Pondering Money

Have a wonderful holiday!

If you want to spend less shop for the cheapest items first!  I found this advice from Robert B. Cialdini, Ph.D. in Influence: The Psychology of Persuasion (Collins Business Essentials) surprising, why should the order matter?  It turns out our perceptions are colored by recent experiences.   If you start shopping for an expensive item first like a $1000 suit then paying $100 for a sweater seems very reasonable in comparison.  Therefore you are more willing to pay full price for the sweater.  However, if you start looking at the sweaters first you will negotiate or bargain hunt saving money on the sweater and when you shop for the suit it will seem even more expensive motivating you to really watch your money.  So do yourself a favor and shop for the cheapest things first!

Would you believe people are much more likely to agree to your requests if they contain the word because?   This was one of the many interesting findings from Influence: The Psychology of Persuasion (Collins Business Essentials) by Robert B. Cialdini, Ph.D.  Even more interesting is that the reason given doesn’t have to be valid.  People are more compliant when given ANY reason.   The example used in the book was a person asking to cut in line for copies.  Using the reason “because I need to make copies” was good enough to increase the chances people would agree!  It’s not even a reason since if you want to use a copier it is always to make copies!I really enjoyed this book and will be periodically sharing some of the influence tips and suggestions to counter them as many sales people will know the strategies that can separate you from your money.

When reading an article on get rich slowly about frugality it struck me that most of the comments assume that the only option for frugality is deprivation.   You can stick to your budget by denying your desires but aren’t there any better options?

Creativity

In stead of closing the door with a statement like “I can’t afford it.” What if you ask a question like: “How can I afford it?” that opens up a whole new world of possibilities.  I heard a wonderful example from a podcast: A caller into the show told the story of how he loved sailing and was able to sail for free!   What he did was to provide his labor as a crewman for sailboat races.  This is a great example of a win-win situation- the captains have the boats and need sailors, the sailors want to sail but need boats to sail.  This is a very specific example, but there is a general principle.  Ask how could my desires also serve others?  Could this service fund my desires?

Finding the Core

The other key is to understand exactly what you love to do.  Say you love going out to dinner with friends.   Is it eating out or the interaction with friends that you really love?  If it is interacting with friends – you could substitute having friends over for a pot luck dinner.  The critical part, interacting with friends, is the same, but the bill is LOT less!  

Your Thoughts

Do you have any stories where you used creativity to make frugality work for you? Leave a comment to share them!

If you don’t see an item then you won’t be tempted to buy it.  Instead of browsing through all the deals at online retailers like Amazon.com ONLY browse your wish lists.  This strategy insures you can see deals on items you want and will ignore the rest.  It will also save you a lot of browsing time too.  Just be sure to limit your wish lists to things you really want.

Happy Thanksgiving, I hope you have a lot to be thankful for today!  I’m going to take some time to try to appreciate all of the the people and things I have.-Rick

Save Money.  Live Better.   Good advice, right? Normally I would agree, but I bet the last time you read that was on a Walmart advertisement that all about you SPENDING not SAVING!   I’m sure you have seen dozens of adds proclaiming SAVE! in anticipation of Black Friday.  The truth is that making purchases at lower prices will only become savings when:

• You can sell the item for more then you paid for it.
• You were ready to buy at a higher price with cash.

The first case is extremely rare because most used items lose 50% of their value, still there are sometimes opportunities- just don’t forget to factor in the cost of your time to buy and sell the item!  If you fall into the second case- you decided on your own to make a  purchase, saved the cash needed for it, and just happened to find a better price.  Then you have real savings go for it!   Just be wary of the lure of the bigger/better version that will eat up all your savings!  In any other case don’t fool yourself you are really just spending more.   Before you part with your hard earned cash, ask yourself: Couldn’t I live better by keeping my old TV/DVD player/iPod and REALLY saving that money?

A truly wise person learns from other people’s mistakes, so I’m going to share another of my mistakes so that you don’t have to experience it yourself.My wife and I bought a new home in 2002 with a 6.75% 30 year mortgage. That was a good rate at that time and we never had trouble affording the payments.  We love our home, but I never loved having a mortgage!  Over the next couple of years I made some additional payments toward the principle to try to get rid of the mortgage quicker but I completely ignored interest rates.  That was a pretty big mistake because I missed not one but two great opportunities!  In 2003 and again in 2004 I could have refinanced to a 15 year loan in the mid 4% range.  My monthly payments would have been about the same, but refinancing would have helped me in two ways:

• I could have saved over $10,000 in interest.
• I could have been mortgage free 4 years earlier!

I did eventually correct my mistake and refinance down to a 5% 15 year loan in 2007.  Today rates are really low again- according to Bankrate.com a 15 year fixed mortgage is at 4.56%!   If you have a mortgage at a higher rate shouldn’t see if refinancing could save you thousands?   Don’t make the same mistake I did and ignore the opportunity from low rates!

Are you interest in investing, but feel overwhelmed with information? You might want to delay starting until you figure it all out, however that would be a mistake! Let’s consider two investors Motivated Moe and Cautious Carl that want to start investing. Both will invest $1000 a year once they start. Moe does not know what to do but wants to start right now. Cautious Carl decides he will wait and figure out the best investment path before starting. Carl studies and after a year decides to invest in a portfolio of bond and stock index funds which returns 8% each years of investing. Moe starts out with a very conservative fixed investment and decides he will find better alternatives later. Moe has two years where he only earns 2% then he adds some bonds and has two years of 4% returns. Next Moe adds some stocks and ups his returns to 6%/year for another two years. Finally Moe discovers Carl’s portfolio and sticks with it. Who does better?

• Moe (blue) is always ahead for starting earlier!

Remember that time is money so even though it took Moe 6 years to find the right solution, starting one year earlier still puts him ahead of the game.  So, how much did Moe miss out from his 6 years of experimenting?  Only 4.5%, Carl’s caution cost him about 8%.   Time is your most precious ingredient for investing, so it’s better to start conservatively today than it is to wait until you have the perfect plan.

Tired of increasing credit card debt, or overdraw your checking account?  Would you like to be the one to fix your family’s finances?  Here is a simple system that can help you do it!

Eliminate the Invisi-bill

It’s easy to overspend if you don’t have any idea that you are doing it!   Do you know how much money you can spend today without getting into trouble this month?  I’m going to share the system I used in college to really know exactly how much I could spend:

• I always carried my checkbook.
• I immediately recorded any expenses.
  • Not just checks or ATM transactions but also credit card charges.
• If I ever wanted to spend I could check the balance to see if I could afford it!

Yes, I realize some of these expenses won’t clear immediately, but if you assume that they do then you never risk overdraft fees!  Also, when that credit card bill comes in the mail you will have the money available to pay it off.

But My Finances are too Complex!

I bet you are thinking that this could work for a college kid but your finances are too complex you have lots monthly bills, and some of them you don’t know the amount ahead of time.  Well there is good news; it isn’t hard to extend my simple system to work by:

• Recording any fixed monthly expenses at the start of the month
• Building up a reserve for variable monthly expenses

If you always enter the fixed monthly expenses at the start of the month they will never be a nasty surprise at the end of the month.   As for variable expenses- you probably already have a good guess of the range a bill could be.  For example your electric bill may be 2-3 times more in the summer when running the AC, but you know it isn’t 20-30 times more.  If you put aside some amount of cash reserve you can cover the variable part of your variable expenses.  Also, once you know how much you really have to spend you will want to have some reserve cash anyway…  Otherwise you can’t take advantage of life’s opportunities because you are broke!

But I Hate All that Math

Do you like trying to manage credit card interest payments and overdraft fees better then tracking your expenses?  I certainly don’t!  However, there is some good new because once you increase your reserves enough and have the  habit of not overspending then you don’t have to watch your balance as closely.  I haven’t kept an exact total for years and haven’t overspent in years either!  These days I just keep a large enough reserve that I know I’m not going to over draw it in a month.  Then if I see my reserves dropping I spend less the next month(s), until my reserves increase enough so that I feel free to spend a bit more.