The Amateur Financier

As you may know (from reading Tuesday’s post), I’ve recently taken the GRE.  I did rather well, at least on the portions that were instantly graded (the Quantitative (Math) and Verbal sections; there are two Analytical Writing segments that need to be graded yet).  I received a 610 in the Verbal Section and a whopping 750 in the Quantitative section; since the GRE, like the SAT, is on a 200-800 scale, both scores are better than average, and the 750 is near the top.  Needless to say (although I’m about to say it anyway), I’m pretty happy with my score.

While I’m on the subject of good news, here’s another positive development: my fiancee Sondra had a gallery opening last night to display some of her wood working, and it went over very well.  Granted, the gallery was at her school, and she had to share it with the other people in her wood working class, and a good number of the people at the gallery opening were more interested in the food than the wood working, but still, it was nice to pieces she had worked so hard to complete on display as part of a gallery.

So, as I’m in a very happy mood and also filled with GRE related knowledge, I thought I would take a moment to share some of the tips and lessons I’ve learned about how to do well on standardized tests, like the GRE, the SAT, PCAT, assorted AP tests, etc.  This is hardly a be all, end all list to getting a perfect score, but should hopefully help you to boost up your score at least a bit if you ever find yourself forced to take one or more of these tests in the future.  Let’s begin:

1) Know the format of the test: One of the biggest advantages of standardized tests is that they are well, standardized.  This makes them easier for test makers to grade; feed them into a computer or hand the answer key to a grad student and before you know it, the grading is done.  It also means that you, the test taker, can familiarize yourself with the format of the test and the questions, so that the actual test seems similar to what you’ve already done.  You won’t know the questions ahead of time, but at least you’ll know what they should look like.

2) Use the Process of Elimination: Another advantage of the standardized test format to test takers is that most of the questions are multiple choice; the answer is listed right there on the test, you just have to determine which one is correct.  Even if you can’t come up with the right answer immediately, take a moment to eliminate ones you can obviously identify as wrong, and pick one of the remaining answers.  If you can eliminate three of the five choices on most GRE questions, for example, you can more than double your change of guessing correctly (from 1 in 5 to 1 in 2).

3) Pace yourself…: It’s easy on a timed standardized test to try to rush through the questions, moving as fast as you can to get everything answered.  Don’t.  You’ll do much better (and leave the test much less stressed) if you try to pace yourself, taking the time you have available to give yourself the time to think about the questions.   (This is especially true at the beginning of computer adaptive tests like the GRE; the early questions affect your final score more than the last ones, and the difficulty of the final questions depends on how you did on previous questions.)

4)…But don’t go too slow: If you’re a perfectionist (as I tend to be on tests), you might spend more time than you have available trying to answer a single question.  It can be hard, but sometimes the wisest course of action is just to take a guess, especially if you can easily eliminate a few of the answers to boost your odds.  You’ll score higher by finishing all the questions than by spending five minutes to get one right and either not answering or making completely random guesses on the last five questions.

5) Use the preparation material available to you: ETS, the company that does most of the standardized tests in the US (including all the ones I have listed above) has a pretty snazzy website that includes prep material, practice tests, and other resources to help you, the test taker, prepare for your exam, all provided for free.  In addition, there are any number of for profit test centers that put out guide books, practice tests, flash cards, and a wealth of other material to help you prepare.  (I’ve had good luck with the material from Princeton Review, but there are other groups as well.)  The more you practice, the better prepared you’ll be when the actually test comes around.

6) Relax: One of the most important, but hardest things to do when it comes to standardized tests.  Just take a deep breath, exhale, and remember that even if you don’t do as well as you’d like (knock on wood), you can retake the test at a later date.  It’s not the end of the world.

That’s enough advice to get you through most standardized tests; if you’re taking a test like this in the future, please drop a comment to let me know.  If there are any tips or tricks that I’ve missed that have worked especially well for you on these types of tests, please share them with me and my readers so we can learn from your experience.

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I like many things about economics, including the tendency to explain complicated issues through the use of metaphors and other stories.  One of my favorite economic stories is the ‘Tragedy of the Commons’.  For those of you who haven’t taken Economics 101 (or decided it would be a better use of your time to sleep through the class), here’s the nutshell version:

Imagine a small town, where one of the primary activities is raising sheep for wool.  In order to feed the sheep, the owners take them to a field in the center of town filled with grass.  For a while, everything goes well: the land more than supplies the sheep with grass, and everyone can graze their flocks as much as they would like without cost.

However, soon the individual farmers realize that they can increase their sheep herd to increase their profits while limiting their costs (as they don’t pay to feed the sheep).  A few families start to increase the size of their flocks, causing their income to rise and increasing the strain on the field to provide for all the sheep.  Their neighbors notice this, and start to increase their sheep populations as well, which inspires the first farmers to further raise the size of their flocks.  Before long, all the farmers are attempting to feed as many sheep as possible, the land starts to be overgrazed, and eventually, the field is unable to support grass or other plant life at all.  Without a ready source of arable land, nobody is able to feed their sheep at all, and the town soon suffers economically as a result of the over grazing.

The result is what is known as the Tragedy of the Commons; the benefits of increasing the number of sheep you grazed are privatized, while the costs to the town, the declining quality of the field, were public.  Each individual family was directly compensated for increasing the size of their flocks, while the costs of such increases were borne by the village as a whole.  As a result, even though each of the families may have known that increasing the number of sheep grazing on the field would lead to a loss of the field, there was still enough incentive for them to do so, and hope that their neighbors wouldn’t follow their lead.

In the real world, one of the most prevalent examples of a common good is the environment.  The air, wild animals, and natural settings we all enjoy aren’t directly owned by anyone, but are still considered valuable.  Unfortunately, because they aren’t owned by anyone, there isn’t any incentive to avoid overusing them; if a company can make more profit by pouring soot into the air or overfishing, the logical move for them is to do so.  There are a few possible solutions to the problem of common goods, most of which involve changing the incentives for the individuals who would otherwise overuse the resources:

1. It might be possible to get all the interested parties to cooperate, and act for the good of the group rather than the individual.  In our story of the shepherds and the field, if all the neighbors would agree to limit the number of sheep they kept, the tragedy could have been averted.  The problem is, a single neighbor who did not agree and increased the number of sheep he held could spoil the whole plan; with one of their neighbors benefiting from a larger flock, the rest of the group would likely increase their flocks in turn, thus causing tragedy again.  Similarly, attempting to get all the parties who fish in a river or add pollutants to the air to voluntarily cut back are frequently doomed to failure, if for no other reason than the difficulty in getting unanimous agreement (and then enforcing it).
2. Another solution is privatization; by converting a common good into a privately held one, the financial rationale will change, as well.  In our story, if each farmer had owned a portion of the field, they would have the incentive to keep it healthy and well cared for; the short term advantage of having more sheep would be off set by the long term disadvantage of having to buy extra food or pay to graze their flock on a neighbor’s section of field.  While this tack has possibilities, there are also limitations: it’s only really effective for resources that are fixed in place, like land or trees.  If you allow a company to pollute the air above its factory as much as it wants, you’ll soon find the air in the town downwind has gotten incredibly polluted.
3. In cases where private solutions are likely to fail, we can turn to government involvement.  If the town government charged a fee on each sheep that was grazed in the field, the economic logic would be changed, and there would be fewer farmers taking on huge flocks of sheep.  Similarly, a tax on pollution, such as a carbon tax (or a cap and trade program, for that matter), would make it less profitable to engage in activities that produce a great deal of carbon dioxide.  The downside, of course, is that governments cost money, and lead to less efficient outcomes than a purely capitalist system.

All three solutions have their place, and a combination of the three used properly can help to resolve the problem of the Tragedy of the Commons.  A good environmentalist, and a good economist, will realize the possible solutions, and attempt to use a combination of the three in order to protect the environment; convincing people and businesses to voluntarily restrict their emissions, allowing private businesses to regulate the wildlife on their own property, and having the government intervene when needed makes a pretty solid environmental policy.

(Sheep picture copyright www.copyright-free-pictures.org.uk; all rights reserved)

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One thing I’ve been considering doing is going back to school, especially now that my temporary position is coming to an end.  I’ve been told for much of my life about the benefits of higher education, and the biggest advantage to doing so is pretty simple: I could increase my earning potential dramatically.  According to the data compiled by the US Census Beaurau, by going back to school and earning an advanced degree, I could increase my average annual earnings throughout my adult life from an average of $43,000 to $55,000, a more than a 25% bump in salary.

The question then becomes, why not go back to school?  Because it might not help, and could actually hurt, my financial future; as noted by authors like Penelope Trunk of the Brazen Careerist, post bachelor education leaves much to be desired.  It is expensive, time consuming, is frequently looked at as an escape hatch from real life, and did I mention the expense?  The problem is that I will greatly increase my student debt (and likely at a higher interest rate than my current 2.875%) and will greatly decrease my earnings while I am taking classes.

Which option is preferred could become simply a matter of crunching the numbers, running various scenarios to see which conditions yield the greatest return for my time and money.  But I’m not going to do that.  While I do like crunching numbers, my professional life to this point has taught me nothing if not that the future is unpredictable.  When I made the decision as an undergraduate to switch out of the pharmacy track program and into the biochemistry major, I was expecting to hold a full-time, permanent job by now.  Alas, a string of bad luck, for myself and the broader economy made sure that was not the case.  So, instead, I’m going to put aside the issue of money, and simply focus on asking the following questions:

1) What do I want to do? I sometimes feel like I’m still a kid, juggling so many possibilities for my future in my head: researcher, pharmacist, technician, and yes, perhaps even a full-time blogger, if the Fates smile upon me.  Before I can decide how to reach my destination, I must first decide in which direction it lies; this will require some deep soul searching and thinking about my life, likes, and dislikes.

2) Do I need school to get there? One idea I stumbled upon while gathering resources for this entry was a post by Marty Nemko, suggesting that getting training in the real world (by offering to take unpaid internships, for example) could be just as helpful in getting a job as obtaining a college degree.  Depending on what I decide to pursue, an advanced degree might be necessary (if I want to become a pharmacist) or simply optional (as a researcher, for example).  Once I know where I want to go, I’ll need to carefully consider all the ways to get there, and see which are the most plausible to me.

3) Do the opportunities exist? A final issue I’ll need to confront: no matter how much I prepare or how ready I feel, I might not be able to enact my ideal plan.  Jobs dry up, pharmacy schools have limits on admissions, and blogging is a blog eat blog world (it’s a bad pun; so sue me), all of which could derail my plans and force me to go with Plan B, or Plan C, or…well, you get the point.  As a result, I’ll need to do plenty of research, prepare for all possibilities, and have a few back up plans ready to go, just in case.

I honestly don’t know if this time next year I will working another full-time job, preparing to go back to school, or running a hugely successful blogging empire (although, that last one sounds pretty nice).  But, I will keep up my efforts and always make sure to have something in the works to better myself.

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Sometimes, I wish that I had a broader high school education.  I appreciate everything that I’ve learned, but I’ve noticed holes in my education that a more complete curriculum might have filled.  There are some steps being made to ensure that all students in the US get a complete education, such as the No Child Left Behind law, but even that is rather limited in scope, covering only math and English.

It’s a good start, and math and English are definitely skills that everyone needs.  But I can think of plenty of skills that students should have before they graduate:

1) Personal Finance – Pretty obvious for a PF blog, but let’s be honest: the average level of knowledge about money management in the USA is crummy, and the lack of any financial information being presented in the schools doesn’t help.  I don’t expect every high school graduate to be qualified as a CFO, but being able to balance a check book, evaluate investments, and create a basic asset allocation are the sort of things that everyone needs to do, but most people can’t.  That should change.

2) Basic Organic and Bio-Chemistry – I’ll admit, I’m biased on this one; being a biochemist myself, I think that people should know more about my professional area.  But I do have some logical to back up my opinion: we are all biological entities.  If you ever take any drugs, being able to read through the chemical structure and have some understanding of the effects of the medication will make it that much easier to make informed decisions about your health.

3) Civics – Let’s be honest, most Americans are far too uninformed about how our system of government works.  While most high schools offer civics or social studies, it often gets pushed off to the side, not emphasized in any way.  (And in the case of my high school, taught by the football coach, who very clearly would rather be coaching.)  Adding a civics section to the required graduation tests would help to make sure more people have an understanding of the US government.

4) Foreign Languages – Most Americans can only speak English (and sometimes just barely at that).  But with the ever-increasing pace of globalization, a good way for us to stay competitive is to expand the number of students who graduate being able to understand at least one foreign language.  (Possibly more than one, but let’s take this a step at a time).

While we’re considering foreign languages, we should also look into expanding the selection of languages available for study in our high schools.  A short list of languages that could be tested:

- Spanish (Given that most of the Western Hemisphere speaks Spanish, this one is practically a no-brainer)

-German, French, Italian (The Big Three European languages after Spanish, these would make fine additions to the testing material)

-Russian (The Cold War may be over, but they are still a major world power.)

-Japanese (A major trading partner, plus bonus points for the otaku love!  Sorry, little bit of geek humor.  (Bonus points to anyone who gets the reference.))

-Mandarin, Hindi and Portuguese (The official languages of China, India and Brazil, respectively, these languages are helpful for understanding some of the biggest emerging market countries.)

-Arabic (The main language of many Middle Eastern countries, it could be very helpful given the current geopolitical environment.)

These are just some of the suggestions I would make to have our schools test useful, real-world skills.  How do you think we should test our graduating seniors?

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Yesterday, I wrote about all the things my mother taught me about money. She laid a good foundation for my financial success up to now, and her support and encouragement will no doubt serve me well in the future. The more I learn about financial issues, though, the more I wish I had received a broader exposure to money and investing while I was growing up. I sometimes feel like I’m trying to catch up to other people my age when it comes to financial knowledge and money management skills. (Although, as I’ve been hanging out on PF blogs a great deal lately, I might have a somewhat skewed view as to just how much the average twenty-six year old knows about good money traits.)

There are several points I particularly regret not learning sooner in my short life:

1) Invest early, invest often – When I started to look into managing my money more actively last year, one of the avenues I considered was investing. My mother, though, expressed numerous concerns with my plans. If I had been encouraged to start investing earlier, I could have a greater investment currently in place (although, given the latest market movements, perhaps it was good that I didn’t have more ’skin in the game’).

When I have kids of my own, I’m going to do what I can in order to spark an interest about money and investing in them. One specific plan I have is to match their Roth IRA contributions while they’re in high school (and possibly college), in a sort of make shift 401(k). This will pass along several important lessons: start saving for retirement as soon as possible, using tax-advantaged accounts allows your money to grow, and when someone offers you free money, you should take it.

2) Network, Network, Network – One of my biggest problems finding a new job has been the lack of a network to utilize as I search. It’s tough to find something when you can barely get your foot in the door. I’m hoping my luck will change soon, but at the moment, I wish I had built up a network of contacts before I left school.

I’m working to build up my network now, including planning to go to a few conventions and putting myself out in front of placement agents. I am trying to make friends and contacts in my field (and for that matter, in the world of PF bloggers). It’s slow going, especially as I’m normally a shy, withdrawn person, but it’s important that I have more contacts, in case I find myself in this situation again.

3) Take advantage of the Internet – Alright, this one is hardly my mother’s fault; the web wasn’t even invented until 1993, when I was already eleven years old. The idea of setting up a blog, putting up a few ads, and using that as a source of revenue is new enough that I’m not too surprised I’m only now getting started with it.

By the time I have kids, though, the internet revolution will have been in effect for more than a generation; while I won’t claim to know what the future of computers will hold, I do know that my kids will need to understand them. I’m going to do my best to spur them to get online and figure out ways of making money, from blogging to producing static websites and other online ’side hacks’. Chances are, they’ll be even more proficient at using the computer than me, so perhaps they’ll end up showing old Dad a few new ways to make money online.

This is hardly a complete list of what I hope to pass onto my kids (and what I regret I didn’t learn about sooner), but it’s a decent start, and should inspire me to help my children grow and learn.

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I give my mother a great deal of credit; she raised me and my two sisters essentially by herself, all the while working full time. She never let us feel deprived, alone or unloved. I’m proud of all her accomplishments and everything she has done.

Some of the most important lessons she taught me involved money. Between her actions in her personal life and what she explicitly told me, I learned a great deal about how to get a handle on my finances and keep my life in balance.

1) Control your spending – One of the first lessons I learned from my mother, I picked up simply by watching her in her daily life. She did spend money, but not on extravagances. She would buy food, resisting temptations of candy and sweets. She took us to the library, encouraging us to borrow books rather than buy them. She enrolled us in low cost after school activities, such as Scout programs, allowing us to socialize, learn, and grow.

All of these experiences that I observed helped to establish the idea of frugality in me. I still tend to keep my spending low, without even making much effort. Many of the tips I encounter about saving money, such as packing your lunches and resisting daily treats (like a Starbucks coffee) come naturally to me, all because of my mother’s influence.

2) Save up for what you desire – When I was sixteen, I wanted to get a car. (Well, actually, my mom wanted me to get the car more than I did, so I could take my sisters to school and our other activities, but I still wanted it, as well.) Rather than simply buying me a car, my mother encouraged me to get a job, earn and save the money, and buy the car on my own. Thus began my employment at McDonald’s, lasting long past when I actually bought my first car (a 1988 Aries, if I remember correctly; a pretty solid car, especially since I only paid $1000 for it).

From this, I learned that if you are going to make a big, expensive purchase, the best way to do so is NOT to charge it and slowly pay it off while accumulating interest; but rather, to work, spend less than you earn, save the difference, and eventually purchase the item outright. It has been a valuable, meaningful lesson for me, and I am glad I learned it without having to get overwhelmed by debt (as so many other people seem to have done, sadly).

3) Study hard and get good grades – My mother always stressed education. She encouraged us to work hard in our classes and take some of the harder courses. She pushed my sisters and I into the gifted program at our school and motivated us to stand out academically as much as possible.

This might not seem related to my finances, but it’s had at least two important monetary impacts on me. First, my good grades and high SAT scores allowed me to start college without having to pay for my tuition, and by keeping my grades high allowed me to continue in the same fashion. I still had room and board expenses, but the savings enabled me to graduate with a relatively small amount of student loan debt, avoiding one of the major pitfalls of the recently graduated college student.

Secondly, that push to learn and study has stayed with me up to this date. As a result, I tend to be cautious, carefully, certain to learn as much as I can about something before jumping in. It is a good approach for many things in life, particularly when it comes to money and investing.

Almost all of my good money management traits are a direct result of my mother’s influence.

This is not to say that my mother taught me everything I now know about money; in fact, there are some areas where I wish she had done more. I will cover those tomorrow.

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