Don’t Feed the Alligators

A Personal Finance Blog from a Small-Scale Landlord’s Perspective

Archive for March, 2008

03.28.2008

I’ve done a lot of blog reading this week and I’d like to point out some of the other articles that have caught my attention:

  • Madison at My Dollar Plan is giving away a $50 Smarty Pig card. I always enjoy a chance at free money.
  • Nickel at Five Cent Nickel had a nice article on why trying to time the market is a bad idea. My mantra is: Past performance is not an indicator of future performance…
  • Along these lines, Madison also published the results of her investment club returns. Looks like things are looking up for the club, but see my mantra above.
  • J.D. posted an article at Get Rich Slowly by Katrina Ramser about the pros and cons of buying cars new vs. used. I’m in the “buy slightly used” camp myself. We have a 7 year old car that we bought new and intend to drive until it won’t go anymore. We also have a van that we bought with just 8,000 miles on it for more than $10,000 less than the new price.
  • Joshua at Game Theorist had a post about an economics lesson for his daughter. I hope my daughter catches on that quick…

I hope you enjoy reading some of these articles.

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There was a time when I believed the old axiom:

“The lottery is a tax on people who are bad at math.”

I understand the math, and I have for quite some time. But a few years ago, I started watching poker on TV. I especially enjoyed The World Poker Tour. I’ve never played poker, but certainly learned a lot about the game by watching.

Two interesting concepts that caught my attention are:

pot odds — the ratio of the current size of the pot to the cost of a contemplated call.

and

equity or expected value — the product of the expected odds of winning the pot and the amount of money in the pot.

Looking at these terms with respect to the local jackpot game yields the following:

Probability Top Prize Pot Odds Equity
1 in 75 $2 1 in 95 million $0.03
1 in 141 $3 1 in 95 million $0.02
1 in 306 $7 1 in 95 million $0.02
1 in 844 $10 1 in 95 million $0.01
1 in 13,781 $150 1 in 95 million $0.01
1 in 15,313 $150 1 in 95 million $0.01
1 in 689,605 $10,000 1 in 95 million $0.01
1 in 3,904,701 $250,000 1 in 95 million $0.06
1 in 175,711,536 $95,000,000 1 in 95 million $0.54

Another way to analyze this is by looking at the history of the pot:

Probability Top Prize Pot Odds Equity
1 in 175 million $12 million 1 in 12 million $0.07
1 in 175 million $16 million 1 in 16 million $0.09
1 in 175 million $26 million 1 in 26 million $0.15
1 in 175 million $37 million 1 in 37 million $0.21
1 in 175 million $47 million 1 in 47 million $0.27
1 in 175 million $59 million 1 in 59 million $0.34
1 in 175 million $69 million 1 in 69 million $0.39
1 in 175 million $83 million 1 in 83 million $0.47
1 in 175 million $95 million 1 in 95 million $0.54

So you can see that as the prize goes up, both the equity goes up but the pot odds go down. The bottom line here is that betting $1 can net you a very large sum of money. How can I afford not to play even though the odds of winning are still very clearly astronomical.

So why do I play? In a word: Hope. It is unlikely that I will ever get to a point in my life where I won’t have to worry what anything costs just by using my head and working hard. It could happen, but it’s probably no more likely than winning the lottery. But all of us still like to dream about what life would be like if we could get up every morning and have our own agenda, rather than carrying out some else’s.

So to balance the mathematician in me who knows that this is a sucker’s bet with the child in me who still hopes that life could change in the blink of an eye, I have a simple set of rules that I follow for playing:

  1. I don’t play until the prize reaches at least $50 million. I figure that the actual lump sum cash payout of $50M is about $30M. After taxes this is probably only worth something like $20M, and then in order to make this money last I can spend somewhere between $500,000 and $1M per year.
  2. I play $1 for the first $50M and then $1 for each $50M (or fraction) for any amount over $50M. So Tuesday’s jackpot is $95M, so I bought 2 tickets.

That’s it.

What would I do if I won? First, I’d photocopy the ticket. Then I’d carefully drive to my local bank, open a safe deposit box account, and deposit the ticket inside. Then I’d find a REALLY good lawyer who could advise me on the best way to collect my prize while revealing as little as possible about myself. I have considered waiting something like 3 to 6 months so that any media hype over the drawing dies down.

After collecting the prize, I would ask my closest friends and family what I could do for them that would be fair and make them happy. Then I would try to accommodate their requests to the best of my ability and prudence. I would put the balance of the money into various investments. Next, I would look for a nice home, and finally I would look to start or buy a business.

How about you? Do you play the lottery? What would you do first if you won?

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I don’t have a diaper service and I am still cloth diapering our 15 month old. If you are now wondering if I am crazy, read on. Here is the tale of how I came to use cloth diapers:

Let me preface this by saying that we often have to explain things that are outside the norm to people… driving diesel cars, owning not one, but two great danes… You get the point! It all started a long time ago. I always remember my mom talking about using cloth diapers on my sister and me (she did have a service), but the idea always resonated with me. I decide then that I would love to try it when my time came. Almost 10 years ago I remember going with a friend to start her baby registry. This was her first baby and I was fresh out of college and between the two of us we knew nothing about what you needed for a baby. We wandered through the store armed with the price scanner. She talked about wanting to use cloth and she registered for diapers and pins. We have been out of touch and I don’t really know how she faired with cloth diapers, but even in 10 years they have come a long way from cloth and pins.

SnappiWhen I became pregnant I began looking into cloth and discovered there was an endless myriad of choices and styles and most people typically washed their own these days. There are no longer any diaper services in the Boston area, so that was not an option for me. But as I discovered, the new cloth diaper isn’t just diapers and pins, but a collection of different types and styles for different uses. There are still diapers that you need to fold like origami to fit on a baby, but the other choices are both daddy and babysitter friendly! Even the ones that require pins can be used with a Snappi (a nifty ace bandage type clip that replaces the scary diaper pins). My favorite type of diaper now (I don’t have to change them as frequently and with a squirmy toddler) is a pocket diaper (BumGenius and FuzziBunz are my brands of choice) that can be stuffed with as much filling as you need depending on the absorbency needed. These diaper’s are as easy to change as a disposable diaper. The pocket diapers also come in one-size types that can be used for a baby as small as 7 lbs and as big as 35 lbs! There are so many online stores that sell a variety of different diapers. A woman who is gracious enough to offer diaper seminars to the bewildered local Moms, owns a shop based in Massachusetts. She was able to describe all the types and styles to me when I was a novice and help me get off to a great start. Check out her store Zannadu.

One Size DiaperIsn’t it a lot of work and laundry? Well I do a diaper load every two days and you need to stuff the pockets so they are ready to go when you need them, which I can do sitting in front of the TV. If you are using diapers and covers (diaper origami, see reference above) you don’t need to do anything with the clean diapers aside from putting them next to the changing table, which is nice when you are busy with a newborn. I don’t find it takes much longer than all the other loads of laundry I do. I also use a very gentle soap called Allen’s Naturally. Bleach is not recommended and to remove any stains you simply put the diapers out to dry in the sun. You only need to use a small amount to wash the diapers and with a front loader the energy savings offsets a few extra loads of laundry a week. You can find a bunch of diaper cost analysis commentary online. Here are a couple I found in a quick google search. VeryBaby and DiaperDecisions

CoverSo to sum up, we don’t need to run out to the store for diapers. I do have to throw in a load of laundry in a pinch. At this point I have it almost down to a science and can get down to 1 diaper then do the laundry after she is in bed for the night. I believe we spent about $500 on our diaper stash, which includes diapers and covers and pockets for a newborn (6lbs) and should last through potty training. Now that she is eating solids I do also buy flushable liners to help with clean up. From what I have found it costs about $2000 to diaper a child through potty training. Yikes!! With our cloth investment we will be able to diaper a few more children as well!

Where do the dirty diapers go? This is a popular question. When a baby is not eating solids and is breastfed (that will be covered in Frugal Baby II: Cheap feeding options) you can just throw the diapers in a pail and wash when you need to. Once the baby starts to eat solids you need to shake off the solids into the toilet. The liners make this very easy. Then you put the rest in the pail and proceed in the same way. I bet you were not aware Baseball Diaperof this but many cloth diaper folks claim that in the directions for using disposable diapers it tells you to shake the solids into the toilet. I’ve never verified this, but it makes sense.

Plus they are just really cute!

Well I hope you enjoyed my story. If that kind of frugal is not for you stay tuned for the next installment of Frugal Baby.

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03.24.2008

Two nights ago ScrapperMom and I watched Maxed Out, a 2006 documentary about the US lending business. This movie was very good in showing how deceptive and underhanded most of the common lenders are nowadays.

A number of pathetic stories were told: people who committed suicide because of seemingly insurmountable debt, people whose low interest government subsidized loans were replaced by subprime mortgages, a number of people who filed for bankruptcy — including a soldier who fought in Iraq beside modern day mercenaries earning many times his salary.

It was hard not to feel bad for most of the people portrayed, yet at the same time, all of the people in film were adults who made their own, albeit bad, decisions. Sure, it can be argued that they didn’t know what they were getting into, but at the same time, each of us is ultimately responsible for our own actions in life. Always read what you sign, and don’t ever let anyone pressure you into signing something that you haven’t had a chance to read AND understand.

The only person in the film for whom I really felt bad was a 57 year old widow who could not continue to make the mortgage payments on the house in which she and her husband had lived for 25 years. She fell behind on the payments and started using cash advances from credit cards to pay the mortgage. This, of course, only worsened the situation. All I have to say about this is: Shame on her husband for not leaving her with a life insurance policy that would have taken care of her needs after his death. Sure, wives everywhere bear some responsibility for making sure that their Family is properly covered, but this was the only person in the movie who was really screwed over through no fault of her own.

The other side of the story was shown as well: collections agencies that buy “written off” debts from the credit card companies for pennies on the dollar and then hound the debtors, even going so far as to call their neighbors, family, etc. to guilt them into paying up. Executives from a number of credit card companies appear in front of a Congressional committee to tell their side of the story. The credit card industry is a very profitable business, and issuers are betting on the hope that you won’t pay on time. A quote from the film:

“If you cut out the people least like to be able to pay, you cut out all the profit.”

All in all this was a good film that reinforces the following ideas:

  1. If you are in trouble with creditors, get help quickly. Most of the money owed by debtors in the movie was in the form of fees and interest, not principle.
  2. Avoid consumer credit as much as possible.
  3. Know what you are signing.
  4. Get life insurance.

I’ll rate this film 4 out of 5 stars at Netflix, and it’s well worth seeing.

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Last week, Morning Edition aired an interesting story about how dieters who bet on their own weight loss were more successful, on average, than those who didn’t. This apparently also worked for quitting other vices too, like smoking. The idea is that people are so adverse to losing money that they will do whatever it takes to make sure that that doesn’t happen.

This is a really interesting idea. The story even talks about an odds maker in New York City who will allow you to bet on your own weight loss (in case you can’t find a friend or coworker to keep you honest…). An economics professor even started a website that let’s people bet against an “anti-charity” that they will lose weight. This guy is auctioning his smoking habit to the highest bidder.

It seems that as much as people like to get money, they HATE losing it. I wish I could find a reference, but I recently heard about a studied that showed that people would rather be the 1,000th customer at the movie theater and win $1,000 than be the 1,000,001 customer and win $1,500 — right behind the guy that won $1,000,000. [Editor's note: I don't actually know of any movie theater's giving away $1,000,000, but if I hear of any, you'll be the first to know...] Also, apparently the return has to be better than 2-1 for most people to bet on something: people will risk $5 for a $10 possible reward, but not for a $7.50 reward, even if the odds are better than 5-7.5.

So now we know that good health, self-esteem, good looks, good breath, etc. are not sufficient motivators, but the prospect of actually losing money is.

These stories got me to wondering: Could this approach also work for Personal Finance? For many of us, poor spending habits can be as habit forming and eventually detrimental to our wellbeing as many of the other vices listed above. So why not bet $500 on an anti-charity that you’ll save $500 this month? Would this be as effective as for weight loss? Do the odds need to be 1-1, 2-1, 1-2? [Editor's note: Apparently the link to the Freakonimics blog above that links to StickK has already thought of this and offers "contracts" for Personal Finance goals...]

What do you think? Are you motivated by the risk of losing money? I can think of some cases in my life where laziness definitely cost me money. For example: basements all over the country are full of exercise equipment that cost good money, but sits idle. Isn’t that lost money? Why isn’t the fact that you paid for these products as motivating as the idea that you might lose the same amount for the same reason? Isn’t Social Psychology fascinating?

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