The Amateur Financier

More than one year ago (on February 6, 2009, just in case it ever comes up on Jeopardy), I started the Amateur Financier.  367 days, 335 posts, over four hundred comments (with probably one third of those being mine), and I’m still going strong!   Now that the Financial Samurai has caused me to start thinking about things like Alexa rankings and improving the visibility of my blog, I’m also glad to see that I’m the 582,563th most popular website there is (and look forward to reaching the number one spot soon! )  Thanks for watching, and here’s to many, many more years of great personal finance writing!

This being a Weekly Thoughts column, though, it’s probably time to get to some of the good posts from the past week.  Starting this week, though, I’m going to be making a few changes to the general format and method of doing these entries.  First, rather than picking five to ten good articles and writing a paragraph or so about what I thought while reading them, I’m going to choose more and write less.  I’m not going to go into a full list format, providing only the names of some of the articles that I liked with accompanying links as some bloggers do (I like to talk, or rather write, about my opinions too much for that), but a sentence or less with each article will probably be the extent of it.

I’m also going to be shifting my focus to my fellow Yakezie wannabes (at least the ones who are shooting for a 200,000 Alexa ranking; I’m not sure how much help the ones with significantly higher Alexa rankings already will benefit from my support), though I’ll still read, comment on, and share other bloggers’ achievements.  Anyway, onto the real fun: other peoples’ quality blogs:

Quality Yakezie Posts:

Sunday Morning Musing: On Money, Elitism, and Olympics – Just when did being elite get to be such a bad thing, anyway?

Job Hunting: Finding that Thirty Point Buck – A guide to job hunting that’s easier than finding that mythical monster buck.

Do “C” Students Deserve “A” Lifestyles? -  If they put other skills (sports ability, acting, or simply leadership) to work, sure.

Tried and Tested: Pay Yourself First – Compound Interest Rocks!

Rich Dad, Poor Dad Seminars a Scam? – Apparently so; Caveat Emptor (Buyer Beware)

Money Saving Tips that Happen to Be Green – Save the Earth AND your money!

Don ‘t Hire Until You See the Whites of Their Eyes – Leading and Lagging Indicators, and why I’m still unemployed when the market is rising.

The Millionaire’s Club – Always good to see another future member!

Why You Probably Shouldn’t Hire Outside Help – A good counter-argument to an often stated axiom: that we should hire out tasks when we could make more money in the time needed to complete the task.

Other Worth While Blog Entries:

How to Smell a Money Scam from a Mile Away – Just sniff for the stink!

The REAL Reason the US Should Wait Generations Before Oil Drilling – More Proof that Darwin is a Criminal Mastermind

Make Your Own Toothpaste – Exactly like it sounds, a recipe for making your own toothpaste, complete with pictures.

A US Debt That’s Unlimited? – How much of a problem is the US’s ever rising debt ceiling?

Public Storage: Problem Ignored – If the problem is too much stuff (or stuff that one half of a couple wants to get rid of) the answer is a yard sale (or compromise), not public storage, in spite of what the commercials would have you believe.

Where the Amateur Financier has been Featured:

A blog known as Ingathered (which seems rather new, from its Alexa rating) wrote an article about Teaching Game Theory to Children that referenced my blog entry on Irrational Escalation of Commitment.  That’s right, I’m starting to train a new generation!

That’s all for now; if I referenced your blog and you got a trackback, please drop a comment and let me know.  I’m try to tweak my trackback system, and the only way I can do so is if I know that it works.  Have a great Monday, everyone!

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The one year anniversary of when I started the Amateur Financier is coming up rapidly.  (It’s this Sunday, in fact; has a year really gone by this fast already?)  As I look back on my blogging career, short though it might seem, I can’t help feeling that I could be doing much better in my blogging career.

So, it was with great interest that I read about the Financial Samaurai’s Alexa Ranking Challenge.  (For those who don’t really get into blogging and the intricacies thereof, Alexa is a site owned by Amazon that analyzes websites and ranks them according to their impact; the smaller the number, the higher the ranking, and the more influence and impact the blog has.  Google, for example, has a rank of one, while my own humble blog has a rank around 580,000; check the badge to right to see the most up to the date number.)  FS’s challenge is simple: improve your ranking, improve your blog, and work to promote and support others as they attempt to do the same.

This sounds like a simply wonderful idea; it’s something I’ve been trying to do now for quite a while, but with more support, a ring of friends to help (and from whom to receive help), and tangible goals to meet (for me and my blog, that means getting my ranking under 200,000 by July 4th), I feel even more energized and motivated than ever before.  Plus, as an added bonus, he’s attempting to form a group called the Yakezie from everyone who can meet their goal, and that just plain sounds cool.  Look at their symbol:

The Yakezie Symbol

So, just how am I, Roger the Amateur Financier, going to break into the top 200,000 in Alexa rankings and become a master blogger?  I have a few thoughts on that issue already:

-Post 4-5 Good Entries Each Week: Too often, I’ve been in a big rush or otherwise unmotivated, and didn’t put quite as much time and effort into my blogging as I wanted.  No more; if I can’t come up with something worth writing, I’m simply not going to post anything. If I’m not forcing myself to come up with an entry each day, the ones that I do post should be of even higher quality.  And speaking of not posting each day…

-Take at least one day each week off from posting on my blog: Besides allowing me some time to enjoy life rather spending it in front of a computer, I’ll have a chance to catch up on blog reading, build up a buffer of ready to be published blog entries, and otherwise make things easier for me down the road.  Currently, I’m thinking of taking Saturdays off and moving my weekly collection of other personal links to Sunday, leaving the weekdays for ‘real’ blog entries and possibly guest posts.

-Try to write at least two entries each day: Why two?  That will allow me to publish one here on the Amateur Financier while having one in reserve for a buffer, for guest posts, for submitting to freelance writing sites, or any number of other purposes.  Plus, if I only achieve half of my goal, I’ve still written one post for that day, which isn’t too shabby.

-Write more guest posts, and accept more on this site: I’ve been reluctant to let anyone else post here, mainly for personal reasons.  From this point on, I’m going to try to accept one guest post each week (if anyone is wants to bask in the Amateur Financier’s glory) as well as submitting AT LEAST one guest post per week to other blogs.  I think my main targets are going to be the fellow would-be Yakezie members; after all, one of FS’s conditions for getting in is supporting each other, so why not start here?

-Read and comment on others’ blogs: I’ve been bad about this lately, and getting worse.  Besides building up some comment karma (that is, I comment on others’ blogs and I get comments in return), it’s not a bad way to put myself out there, get the name Amateur Financier on a variety of blogs, and maybe get a little traffic as a result.  Plus, I first got into financial blogs by reading, and I kind of miss being able to spend a whole afternoon just going through back posts on some of my favorite blogs.  Now that I’m not trying to write blog entries on Saturday, that will be a perfect day to go out and read some good blog entries.

There, that’s a pretty solid set of rules to follow; if I can do all that, I should be in very good shape, and will be a member of the Yakezie by mid-July.  Luckily, the Financial Samurai has assured us that nobody is going to remove any joints from our fingers; that would take a lot of the fun out of it.

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Last year, Pennsylvania had a rather nasty budget impasse.  It made national news, and generally annoyed every Pennsylvanian who would rather be famous for our delightful groundhogs than the intractability of our leaders’ political fights.  One way the politicians finally were able to work out a solution that appeased everyone (or at least shut them up long enough to get the budget passed) was to increase the state tax on cigarettes.  Various commentators, from the papers to NPR, referred to the cigarette tax as a ’sin tax’, which brings us to the obvious question: what is a sin tax?

Taxing Sin Done Right

Put simply, a sin tax is a tax on sin.  You probably guessed that, though, so let’s look a bit deeper.  The idea behind a sin tax is that there are some activities that we, as a society, consider undesirable.  Cigarette smoking is a common example, although things like using alcohol or even sugary foods and drinks have also been included or considered as possible subjects of a sin tax.  We could ban them outright, the way we with illegal drugs, but that costs a great deal of money to enforce and restricts people’s right to smoke, drink alcohol, or eat a Twinkie if they so desire (lump those rights all under ‘pursuit of happiness’).

What if there were an alternative, a way to keep something legal but discourage people from using it?  One way might be to make it more expensive; if the cost of a package of cigarettes goes up, a smoker is going to be less likely to purchase as many packs.  Adding a tax to cigarettes makes them more expensive, decreasing how many cigarettes get purchased and smoked (and generating income for the government, as well).

Sin, in convenient stick form

There are several advantages to sin taxes, particularly from the government’s standpoint:

-Politically Easy: Creating a (balanced) budget is hard, particularly when government spending is up and tax revenue is down (just look at the legislators in Pennsylvania).  No politician wants to be responsible for cutting a popular program, but no politician wants to raise taxes either, because raising taxes on a broad swath of the voting public is a good way to get unelected.  Sin taxes, which by nature only target a certain group of individuals, are a good way to raise taxes and keep your office, too.

-Profitable: Taxes do serve a purpose, of course; without them government wouldn’t be able to do everything that we ask of it.  (We can have a discussion of governmental effectiveness even with tax money to fuel it another day; today, let’s just focus on the sinning and the taxes.)  Sin taxes, as with any taxes, are able to provide the government with money, which of course means the government likes to have them as an option.

-Steer People Toward Good Behaviors: The difference between sin taxes and most other types of taxes is that sin taxes encourage better behavior from people.  By making the ’sins’ more expensive, people should logically choose to avoid them, opting for something less expensive and more sin-free.  If the government imposes a sin tax on bowling, for example, miniature golf could see a rise in participants; in the same way, the government can ‘nudge’ people away from whatever activities are considered improper.

All this sounds pretty good; why not get rid of those pesky income and sales taxes and simply tax sins to meet all our governmental spending needs?  Well, there are some drawbacks, as well:

-Makes the Government Dependent on Sinners: One problem with making a sin tax a major (or even minor) source of income is that the government then has a perverse incentive to keep people sinning.  As mentioned, Pennsylvania only managed to solve its budget crisis in part due to more revenue from smokers and cigarette taxes; if all the smokers in PA suddenly quit (or started bumming cigs from out-of-state friends), we’d be facing another budget shortfall next year.  Whether they admit it or not, this means that PA lawmakers need smokers to keep smoking (and paying taxes on) cigarettes; with that in the back of their mind, how hard are they really going to try to stamp out smoking?

-Can be Regressive: Since the taxes are the same on each pack of cigarettes regardless of the income level of those purchasing the pack, lower income people will end up spending a higher percentage of their money on the taxes than higher income people.  Two different pack-a-day smokers will spend the same amount in taxes (let’s say $1000, just so we have a number), but that represents a much larger portion of a $20,000 a year income compared to earning $100,000 each year.  (That’s before we even get into the argument that poorer people are more likely to smoke, drink or otherwise ’sin’ than richer people, making them more likely targets of this tax already.)

-Involves Government Regulation of Personal Behavior: Even ignoring the economic effects of the tax itself, there’s still the little matter that sin taxes involve the government deciding which behaviors are good and which are bad, and attempting to punish the bad ones.  Since these behaviors are personal and affect only the individual*, why should the government be able to dictate its preferences of how to act?  (*Alright, this is an oversimplification; something like smoking can impact people other than the smoker, through second hand smoke and the effects of smokers in health care plans, among other things.  There are alternatives that address those issues (rules about where smoking is permitted and higher premiums for smokers) without the need to resort to taxing all cigarettes sold, though.)

The Final Word on Sin (Taxes)

So where does all this leave us when it comes to sin taxes?  They’re probably here to stay.  Remember that first ‘pro’ point, ‘Politically Easy’?  That alone will ensure that some form of sin taxes stay around in some form for the foreseeable future.  Also, compared to some of the alternative methods of dealing with unwanted behaviors, such as banning them the way we do with illicit drugs, legalizing, taxing, and generating profit from ’sinful’ activities seems downright sensible.  Compare cigarette use to marijuana use, for example; which generates more profit for the government in the form of taxes, and costs less to regulate and control?

If I had just one wish when it came to sin taxes, it would be that governments wouldn’t depend so highly on them for income.  If the behavior is so sinful that we need to stop it, why should the government be in a position of depending on it for revenue?  I’d like to see politicians opt instead for the politically harder but less moral-twisting approach of getting rid of sin taxes and relying on other taxes to generate income.  If they do opt to continue the taxes, though, I’d love to see the money be funneled back into programs designed to truly eliminate the sin; not only do you get the sin tax money out of the general public coffers, but you deliver a one-two punch to whatever behavior you’re attempting to eradicate.

I’ll bet you a carton of cigarettes that that never happens, though.

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If you’ve been unemployed for an extended period of time, had frequent periods of unemployment, or simply held jobs that didn’t meet your needs or desires, you’ve probably spent a lot of your time job hunting.  I know that in the time since I graduated from college, that’s been a major part of my daily schedule.

If you’re like me, though, you’ve probably had periods where you just got tired of the constant searching for a job.  After all, job hunting can be just as hard as many jobs, without the perks of health care or being paid.  So, how do you move past these periods of no motivation and keep up the task of job hunting until you find new employment?  Here are a few suggestions to help you keep or regain that job hunting fire:

Just like job hunting, only with more shooting

1) Be sure to take breaks: You might be tempted to spend every waking hour looking for a new job, using as much time  as you can to find somewhere new to work.  Unfortunately, this sort of approach is counterproductive; while you might be able to keep up this pace for a short time, you’re likely to burn out if you don’t get a job in a few weeks, leaving you frazzled and unmotivated.  Rather than risk this sort of fatigue, limit how much time you spend job hunting each week.  Only do your job hunting during certain hours of the day (between nine and five perhaps, just as if you were working), take regular breaks from your computer to rest your eyes, and try taking a few days off each week.  As long as you are still putting in plenty of job hunting time, a short reprieve every now and then won’t have much impact on your prospects.

2) Try a different search method: A common source of job hunting fatigue is the repetition of doing the same job hunting technique over and over again.  If your job hunting methods are few, it’s going to be much harder to keep motivated over the weeks (or even months) that it can finally find a decent source of employment.  Rather than becoming a one-trick pony, try a variety of job hunting methods; break up emailing resumes with making follow up phone calls, or spend some time talking with other unemployed individuals to learn the latest job hunting techniques.  While we’re on the subject of other people…

3) Join professional groups: Joining professional groups can give you several advantages on the job hunting front.  You’ll have something more to add to your resume, you might have access to additional job hunting resources like group specific job hunting websites, and of course, the ability to connect with other people in your field to share ideas and job hunting advice.  If nothing else, it can give your people with whom you can vent when the job hunting gets tough.

4) Keep your job qualifications up to date: It’s hard enough to find a job in a slow job market when your skills are up-to-date and you are at the peak of your employ-ability, but try to do so when your skills are out of date, and it could be impossible.  Your best hope is to keep training regularly, going back to school for more education or attempting to boost your skills during your spare time.  Besides giving you new things to add to your resume, it’ll help you to expand your mind (a good goal in itself) and provide you with something to do while hunting for another job.

5) Look into other job possibilities: If you’ve ever wanted to do something different with your life,a period of unemployment provides you with the opportunity to retrain and turn your career path around.  You’ll have the time to take classes, study up on new technology, and get any other training you will need for your desired profession.  It’s an opportunity to remake your life if you don’t like the current direction in which it is going.  If you don’t want to completely change your life, unemployment is still a good time to try some new things:

6) Take up a new hobby or part-time job: Having free time during unemployment gives you the opportunity to explore your other interests.  You could take up a new hobby (I like blogging, as you can probably tell, but to each their own), spend more time working on your current hobbies, or try to find a way to turn your hobby into a source of money.  Goodness knows, there are enough freelancing and craft selling sites that it can prove pretty easy to monetize a variety of hobbies.

If you can’t monetize your hobby, there are alternate sources of money in the short term; you can get a part time job.  (Note: if you are currently receiving unemployment benefits, you need to be careful with part time work; be sure you know whether working will disrupt your ability to receive unemployment, and if so, be sure you take only jobs that pay more than you are currently getting in benefits.)  Admittedly, it might be hard to get a job in your preferred field; but you aren’t (necessarily) trying for a whole new career, just getting a part time job to help make ends meet.  You can get some money, and perhaps even remind you of why you like your previous job.

There you go, several ways to break up the boredom of job hunting.   Good luck in your job hunt, and hopefully, you find something soon.

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Happy Grundsow Day, everyone!  For those of you who aren’t Pennsylvania Dutch, that’s Happy Groundhog Day!  Apparently Punxsutawney Phil saw his shadow today, which in theory means six more weeks of winter.  Since it’s been snowing today, I’m willing to give the little fellow the benefit of the doubt; it does seem like plenty more winter is still to come this year.

I have a theory about Groundhog Day I’d like my readers to help me test.  I am a big Groundhog Day fan, and every February, I’ve heard quite a bit about the groundhog from friends, family, and the media.  My fiancée Sondra, who is a transplant from California, has absolutely no interest in the whole holiday, and has said that only Pennsylvanians care about Groundhog Day.  There seems to be some truth to this; the Pennsylvania lottery, for example, has Gus, the second most famous groundhog in Pennsylvania, as its spokes-mammal (with the implication being understood by everyone in state that the most famous one is Phil).  So my question is, did anyone from other parts of the country even realize that today is Groundhog’s Day, and actually care?

Alright, enough of my crazed existential quandaries; it’s time to cover the good posts from last week!

My Favorite Posts From this Past Week:

Getting Mad About Getting Paid – This is a completely foreign concept to me; getting mad because you got your paycheck early just seems silly.  However, as Lulu points out, if you’re living paycheck to paycheck and spending money as soon as it comes in, Getting your money that far in advance could be a problem, since it’ll be gone when your rent and other bills become due.  My advice: create a checking account to use as a buffer, so that you don’t have to cut things so close; living paycheck to paycheck is no way to live.

Someone Always Farts in a Crowd – I knew that I had to include this article from the Financial Samurai when I read the title in my feed reader; luckily for me (and also for you), it’s also a good, insightful piece.  FS discusses the concept of moral hazard, giving examples of how our financial (and health) systems are set up so that nobody is punished for their own bad decisions.  It’s kind of sobering to think about just how much passing of the buck there is nowadays.

Why 20-Somethings Hate Personal Finance – An interesting question, one that I (being a twenty-seven year old who (a) cares about personal finance and (b) writes about it for fun and profit) have a vested interest in figuring out.  MD of Studenomics raises several good reasons, but I think that he misses a big one: many of the traditional sources of financial advice, such as books and magazines, are aimed at people middle aged and over.  I can’t tell you how often I’ve read an article in Money or Kiplinger’s that gave advice for people at different ages, and the lowest age they start at is 35 or 40.  Maybe young people would care more if we didn’t keep acting like everyone under 30 can’t be trusted to properly manage their own funds.

How to Apply for a Peer To Peer Loan – I’ve had some experience with peer to peer lending through my Lending Club Account, but that’s been entirely as a lender.  The Silicon Valley Blogger shows how to approach things from the other side of the table, that is, how to get a loan.  It’s an interesting process, and while I hope that I’ll never need to get such a loan, it’s good to know how to get one.

Is Being Frugal Always Being Different? – I’m not that aggressively frugal (actually, Sondra and I were discussing earlier this week how we need to curtail our spending more), so when I read about fellow personal finance bloggers like Mrs. Money and the lengths they go to save money, I definitely sense a gap between us.  Apparently, she feels the same way, that she is different from the rest of the crowd; perhaps this gap will close eventually, though it could be a long time, I fear.

6 Questions to Financially Get to Know Each Other – An interesting little list of question designed to share some of the basics of your financial views, courtesy of J. Money.  It’s a pretty good introduction to you view and manage money; I’ll have to fill it out and share it with you all soon.  (And perhaps get Sondra to fill one out as well; it’s not a bad idea to know as much as you can about your future spouse’s spending/savings habits)

Real Hourly Wage, Visualization, and Your Finances – Finally, Mrs. Micah discusses how to calculate your real hourly wage (your take home pay divided by the number of hours that you worked) in order to put your spending into perspective.  It’s one thing to spend $20 on something, but a whole different situation when you stop and consider that the $20 represents two hours of work at the job you hate.  It helps to get a handle on what spending is and is not worth the effort you need to expend in order get the needed money.

That’s all for today; I hope everyone had a very merry and happy Groundhog Day (hopefully the little bugger is wrong and it’ll warm up soon, though).

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I know you’ve probably tried to put it out of your mind, but tax season is just about on us.  Yes, you don’t HAVE to file until April 15th, but why put it off until the last minute?  (Besides tradition, of course.)  Most of your tax documents should have been sent to you by January 31st, or more likely nowadays, are available online when you check your investments or savings.

Even though we’re just getting into the 2010 tax season, it’s not too early to get ready for 2011’s taxes.  In fact, now is probably the best time to begin your preparation for next year; changes you make now to the amount of withholding you ask your employer to take out of your paycheck will have a great effect on how much you owe next year.  But the question is, should you aim to make your refund as small as possible (thus getting more money with each pay check) or try for the largest refund possible (cutting down your take home pay throughout the year in order to do so)?

The amount of money you get back depends on you

The most common advice I’ve heard is try to minimize your potential refund.  It makes sense; after all, every dollar you get in your refund is a dollar that you (over)paid in taxes initially.  On the other hand, as Green Panda Treehouse and the Financial Samurai note, there are advantages to getting a sizable refund, as well.  Let’s look at both sides of this issue:

Small Refund Pros

-More Money Throughout the Year: The biggest advantage of aiming for a small refund (by putting as many allowances as possible on your W-4) is that you’ll get more money with each paycheck (as less will be withheld for taxes).  This means more for spending, more for investing, more for saving.  If you aren’t giving the money to the government, that means more for you in each paycheck.  Speaking of the government…

-No Interest-Free Loan to the Government: Whether you want to avoid giving the government more money than needed or just want to do your part to keep the national budget under control, minimizing how much you have taken by the government can be a goal in itself.  A small refund is proof that you succeeded in that goal.

-No Temptation to Treat the Refund like ‘Found Money’: Every year around this time, you start to see advertisements for companies offering sales, specials, and other inducements for people to spend their tax refunds.  You even hear about ‘refund anticipation’ loans where companies will offer to let you buy things with the money you’ll get from the government, before you even file your taxes.  This trend of treating a tax refund like money from heaven (rather than a refund of your own money to you) is one reason to consider increasing your allowances and minimizing your refund.

The Advantages of a Large Refund

-Lump Sums are Easier to Utilize: If you have financial goals you’re working to meet, a lump sum is easier to put to work for you.  If you want to build an emergency fund (always a good idea), it’s simple to take a $1200 refund and say, ‘Well, that’s a pretty decent bare bones fund’.  If you got that same $1200 throughout the year (in the form of slightly larger paychecks), you would need the discipline to put it away a little bit at a time, $25 or so every two weeks.  Many people just don’t have that discipline.

-Less Temptation to Spend Throughout the Year: Here’s a simple fact: if you don’t have money, you can’t spend it.  (Well, you can if you use credit cards and carry a balance, but none of my readers would do anything that foolish, right?)  If you are getting less money in each paycheck because you are paying more in taxes, there will be that much less available for you to spend, (hopefully) helping you to rein in your finances.  (This is also a major reason financial advisers will tell you to increase the amount you contribute to your 401(k); less money taken home means less temptation to go crazy with spending.)

-No Risk of Owing Taxes: Sometimes forgotten in the argument over whether to shoot for a small tax refund is the fact that you can overshoot and wind up owing the government money.  Much as getting a few thousand dollars can allow you to easily complete one or more of your financial goals, finding out that you owe the government hundreds or thousands of dollars can empty your emergency fund and possibly derail some of your plan.  If you ensure that you overpay throughout the year, you’ll never find yourself in that situation.

My Suggestion

This is a tough one; either option could be good, depending on how you utilize money.  The biggest question is, what would you do with a sizable refund?  If your answer is something financially responsible, like bulking up your emergency fund, investing it, or paying down credit card debt (hopefully not credit card debt you’ve accumulated since paying down your balance last year with a tax refund), then giving the government an ‘interest-free loan’ is not going to hurt you.  You’ll get the money back next year, anyway, and it probably won’t be bad to get used to living on a smaller paycheck in the meantime.

On the other hand, if you look at a tax refund check as an excuse for prolific spending for a short period of time, then taking steps to minimize the amount you’ll receive is probably the best course of action.   Assuming you have decent spending and savings habits (which is admittedly a big assumption), a slightly larger paycheck each week could prove less of a temptation than a single lump sum.  You should also shoot for a small refund (or even owing money) if you vehemently oppose giving the government any more money than you absolutely must AND you’re  willing and prepared to owe money when you file your taxes.

For myself, I’m reconsidering my previous belief that minimizing your refund is best, and I’m leaning a bit toward claiming fewer allowances on my W-4 when I am next hired.  Besides helping to discipline my monthly spending, I think I have enough discipline to put most of the refund money towards good financial goals (like rebuilding my emergency fund).  But you have to do what you think is right for your own personality.

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Well, it’s the end of January  already.  Funny, I’m still having trouble remembering to put ‘2010′ on my checks rather than ‘2009′, and already the new year is more than 1/12th over.  Is there anyway we can, as a society, call a redo and turn the clocks back to January 1st?  I can’t be the only one who could use a whole new January just to get their act together.

Well, I suppose getting a replay on the year is very unlikely.  I’ll just have to keep moving ahead, trying to get my finances in shape as best I can as I travel forward in time.  While this year certainly gotten off to the best start, I have faith that things will improve in the near future.  Call it optimism, call it faith, call it pure hope, but I have the feeling that February’s going to be a good month.  If not, I’ll have to redouble my efforts into my time machine project.

Alright, enough of my optimism; it’s time to look at my finances:

So, not one of my best weeks; with the end of the month coming up, I’ve been spending quite a bit to cover various bills, which did not make the American Express happy.  Add in investments falling (in spite of adding over four hundred dollars to my Roth IRA, my account showed a net loss this week), and it’s been a rough week.  Still, my optimism remains intact.  Come on February; I’m ready for a new month to come!

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Well, this weekend is turning out to be much more exciting than I was expecting.  My post on the Ten Commandments of Credit Cards is up on Free Money Finance’s March Madness post that’s active as we speak.  Feel free to pop over and check it out.

Of course, I find myself wishing I knew more about self promotion and advising, so I knew better ways to get the word out and promote myself.  I’m hoping that if there are any readers who haven’t yet voted, this post could spur some action; ideally, you’ll want to vote for my article, but I’m honestly happy just to be included.  All I can do is continue to write the best articles I can and hope they continue to impress others.

Speaking of articles that impressed others, here’s the list of the posts I really liked from last week:

Good Articles From Last Week

Would You Do Three Years in Prison for $20 Million? – An interesting question about an extreme version of the trade we all make, exchanging our time for money.  Darwin summarizes the situation of a UBS banker who is serving a jail sentence for his role in fraud, but is likely eligible for a whistleblower reward in the tens of millions of dolars.  I doubt I will ever be in a similar situation, but I’d be very, very tempted to make this kind of deal; it’s an amount of money that could easily change my life.

I Went on a Cash Diet…and It Worked! – I like to report good news; there’s too much bad news in the world already.  Luckily, there is still some good news in the world: Mrs. Money decided to not use cash for the past few weeks, and has noticed a major improvement in her spending habits.  I might have to try the same sort of thing with my credit cards; try as I might, it’s hard to keep my spending in check when I’m spending with credit cards.

A History of Investment Bubbles – A great look at some of the many (it’s amazing how many) investments bubbles that have occurred through history.  My Life ROI does a great job of showing not only the where, when, and how of every bubble from tulips to real estate, but also provides some of the take home lessons from each.  Remember, if you don’t learn from history, you’re doomed to repeat it.  (Although, you can say much the same about most of your classes, really ).

Tax Refunds Are Good For Most People – In what seems to be an ongoing quest to argue against every piece of popular investment wisdom, the Financial Samurai argues that getting a tax refund is a good thing for most people, as many people are better at using a lump sum of money properly (investing or paying off debt) rather than small amounts distributed over time.  It’s an interesting argument, although I would make the counterargument that if you’re spending your time reading personal finance blogs, you probably have the discipline to save and invest throughout the year (or at least, set up an automatic saving/investment plan to do the heavy lifting for you).

Cutting Down On My Electric Bill – One of the pains of living in the snow belt is needing to have the heater on near constantly, just to keep your blood from freezing.  Lulu gives some recommendations on how she cut her down on her electric bill, all good ideas for those of us who are freezing to death.  If you are in the Southern Hemisphere and need to know how to cut down on your air conditioning bills, you’ll need to look elsewhere, though.

Seven Things You Must Do To Prepare for an Emergency – Lazy Man and Money provides a very solid list of things to have on hand in the event of an emergency.  There’s not much more I can really add; hopefully, you’ll never find yourself in a situation where you need to use your emergency kit, but it’s excellent to have all this on hand, just in case.

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It’s the end of the week, and that means the last in the series of mental mistakes we make with our money.  If you’ve been reading all week (good for you if you have!), you’ve probably noticed that many of these mental flaws seem to stem from the same basic problem: your brain is bad at predicting the future.  You save everything in the hope that it will go up in value or make unrealistic assumptions about future odds.  Well, buckle up, because we’ve got one more irrationality to deal with:

Irrational Escalation of Commitment

You escalate your commitment when you continue to devote time and money to a course of action as a result of previous commitments.  If you’ve ever tried to climb a mountain (or attempted to reach some other physical or mental peak) and pushed yourself to go a bit further ‘because I’ve already come all this way’, you’ve escalated your commitment to a goal.  Such escalation becomes irrational when the rewards from completing your goal would come nowhere near to covering the expenses you’ve paid to complete the goal.  A business plan that’s already cost more than it could possibly recuperate but is continued anyway is an example of irrational escalation of commitment.

Escalator, Escalating... Get it?

If all of these sounds rather similar to the sunk cost fallacy, you’re onto something; irrational escalation of commitment frequently results when people (or organizations of people like businesses and governments) refuse to see or acknowledge that the money they’ve spent already is sunk, and the insistence that increased expenditures are needed to justify the initial spending.  It becomes an endless spiral of spending more and more to justify previous, sunken costs.  Speaking of which…

Irrational Escalation of Commitment Examples

-The most commonly cited example of irrational escalation of commitment is the dollar auction. The short version is this: a professor offers to give the highest bidder in the class one dollar.  There’s a catch, though: not only will the highest bidder have to pay out his bid to get the dollar, but the second highest bidder will have to pay his bid as well, without receiving anything.  The bidding starts low, at one cent, and quickly increases, until someone bids one dollar.  That should be the end; after that, people are paying more than the dollar is actually worth with each bid, so the bidding should end.

But, because of the rules of auction, the second highest bidder also has to pay, and so he has the incentive to bid even higher; if he wins with a bid of $1.01 rather than losing with a bid of $0.99, he’ll only have to pay one cent rather than ninety-nine.  The dollar bidder has the same motivation; if she wins the auction, she’ll have to pay less than if she comes in second place.  With this seemingly logical thought behind them, they can (assuming the professor allows them to continue) bid the price of the dollar up to many, many multiples of its actual value, only stopping when one bidder runs out of money to make progressively higher bids or the professor calls the auction off.  With each bid, the bidders were doing what would optimize their financial interest, but the overall process could, assuming the professor forces them to pay up, end up costing each of them far more than the value of the prize they’re seeking.

-As mentioned already, anytime a manager opts to continue a project after spending more money than it could possibly recuperate, it’s an example of irrational escalation of commitment.  It might be done to save face or even the manager’s job, but for the company as a whole the process is wasteful and counterproductive.

-Many forms of ‘Keeping Up with the Jones’ can be considered a type of irrational escalation of commitment; as with the dollar auction, even if you ‘win’ and have a more impressive car, lawn, or house, you have still ended up spending more than you could possibly hope to recuperate by selling (assuming there’s even a market for your improvements; last I checked, there’s not too much demand for used lawn ornaments).

Beating Irrational Escalation of Commitment

Well, if you ever find yourself in an economics class and the professor wants you to bid on a dollar bill, just don’t do it!  For the more real-life examples, always keep the potential goal in mind, and aim to keep your costs well under the potential rewards.  If you’re trying to compete in a costume contest to win a $100 grand prize, the cost of your costume(s) should be less than $90 or so; otherwise, even if you do win, you won’t have much to show for it.

Also, be sure to recognize when your costs are sunk, and have the willingness to walk away.  Yes, maybe devoting just a little bit more money to your so-far failed project will enable it to be a success, but it still won’t bring back the money you’ve already spent.  More likely, any attempts to justify that spending will just lead to increased spending in the future, with no increase in rewards.

The key to stopping irrational escalation of commitment is to attempt to be as rational as possible, and look forward to the potential rewards rather than behind to the (sunk) costs you’ve already paid.  Remember, you can’t change the past, but you can do things differently in the future!

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By this point in our little exploration of your inner mind, you might be getting a little upset.  After all, we’ve seen that you (or at least, your unconscious mind) base decisions on money that’s already gone, overestimate how quickly statistical deviations will be corrected, and over-discount future money; with all of that to contend with, how much more can your brain possibly mess up your financial plans?  Well…

Disposition Effect

You know that relative who saves just about everything, keeping not only the normal mementos of friends and family (things like old report cards and artwork from children), but hangs on to everything, no matter how useless it seems to everyone else?  That’s the disposition effect at work; the nature of people to hold onto something rather selling and acknowledging how little it is actually worth. Regardless of how likely it is that we will ever use a particular item again, our minds are more at ease if we hold onto it forever, just in case.

A sunny disposition is helpful, but completely unrelated to the disposition effect

It’s the same with investments; people have a tendency to hold onto investments that have fallen in price, regardless of how unlikely it is that they will ever recover in value, rather than selling and acknowledging the loss.  Of course, the inverse is true, and can be just as damaging: we’re more eager to sell when our investments are up, regardless of how much further up they might go.  Combine the two effects, and you have the recipe for sub-par investment results regardless of how the market actually performs.

Disposition Effect Examples

-The pile/filing cabinet/room that many people have, filled with instruction manuals for objects that have long since been replaced, tax returns spanning the last several decades, and every receipt we’ve ever received.  If we were really honest (and yes, I’m as bad as anyone about this), we’d come right out and admit that we could throw most of this stuff out and never even know it was gone, but part of our mind finds comfort in knowing that it is there.

-Self-Storage places, where you can pay by the month to stow some of your excess stuff.  The entire business model is designed on the assumption that you are willing to pay each month so that you can get stuff out of your house, but still want to be able to retrieve it at any time.  The convenience is almost certainly not worth the expense.

-As mentioned before, the willingness of investors to hold onto their losers and cut their winners short is also an example of the disposition effect at work.  While doing so may make you feel better (you can crow about the stocks you had that shot up while pretending the ones that declined can still increase), you’re doing the exact opposite of what you should be, investment-wise; holding the stocks that rise and getting rid of those that fall.

Beating the Disposition Effect

Beating the disposition effect is basically an issue of mind over matter.  You should know, in the rational part of your mind, that the chance of benefiting by holding onto many of your possessions is very low; unless your attic is filled with rare artwork or your basement holds pristine baseball cards from the thirties, most of your stuff is only as valuable as the use you can get out of it.  If you aren’t using it, particularly if it’s just taking up space in your house, dorm room, or apartment, you’ll likely be better off selling it for money with which you can purchase something you WILL use.  (Or better yet, why not invest the sales proceeds so you’ll have more money in the future?)

The simplest solution is to go through your possessions on a regular basis, figure out which you need and don’t need, and get rid of what you don’t need (selling it, throwing it away, trading it with someone else, whatever strikes your fancy, as long as it gets the item out of your living area).  If you’re a pack rat like me, it’s going to be tough, but it’ll be worth it to make your living space more, well, livable.

I’m not going to try to set out a precise definition of what exactly falls into the category of ‘needed’; you are going to have to give some thought as to what you consider necessary and unnecessary in your life and work from there.  For me, I would include regular use items (like my clothes and computer), seasonal items (holiday decorations and the like), mementos (things like report cards or art work I did as a child), and collectibles (so I have a category for my manga, really) as my ‘needed’ items, and everything else would be fair game to sell or trash, from books I haven’t read in years (which have no emotional value attached) to most of the DVDs I’ve accumulated in the past.

For investments, that same type of discipline will pay off.  Know when you make the initial purchase how you’re going to respond if the price goes down (Sell it when it drops a certain percentage?  Buy more when it dips lower?) and if the price goes up (Sell it when it gains a certain amount?  Wait to see how high it goes, selling when it starts to dip from its peak?).  Even the best laid investment plan won’t always increase in value, but if you make a plan for what to do in any event (and more importantly, you STICK to your plan), you’ll be much better in the long run.

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