Don’t Feed the Alligators

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

Archive for February, 2009

Spinning Top

Creative Commons License photo figure credit: chefranden

We are all probably familiar, to one degree or another, with the concept of inertia:

“an object will always continue moving at its current speed and in its current direction until some force causes its speed or direction to change. This would include an object that is not in motion (speed = zero), which will remain at rest until some force causes it to move.”

A similar concept is frequently observed in human behavior: It is often difficult to start doing something that you should or want to do, and it is often difficult to stop doing things that you shouldn’t or don’t want to do.  Many people, for example, are not enrolled in their company retirement plans, or are under invested in them, simply because they never filled out the paperwork to do anything different.

Many businesses try to take advantage of this “behavioral inertia”.  Most people have been asked to sign up for a free 30 day trial of something — which still requires a credit card — and after 30 days have forgotten to cancel, as well as 60, 90 and 180 days later.  Many of us have also fallen victim to the gym membership where the cost is automatically deducted from your checking account even though you never go.

It is with this concept in mind that I recently had the opportunity to break my behavioral inertia, if warranted, by reassessing how much I pay for various services.

Two weeks ago I received my auto insurance renewal and was surprised to see that the cost for another year was similar to that of the previous year.  Last year my state changed the way that it oversees the setting of auto insurance rates.  This was supposed to make insurance cheaper for the lowest risk drivers and more expensive for the highest risk drivers.  Since ScrapperMom and I both have the best driver ratings, I expected to see a big drop in our premiums, but this was not the case.

I immediately went to a few websites of competing insurance companies and filled in the information needed to obtain a quote for insurance.  The first site quoted me a price than was 65% that of the quote I got from my current insurer.  The other sites indicated that someone would get back to me, but no one ever did.  I also called my current insurer to find out if the quote was correct and if there weren’t any other discounts that might apply.  The customer service representative said that the quote was correct, and that it was $200 less than the year before.  She was right, I had incorrectly remembered the cost of insurance from the year before.  She also cautioned me about the other quote that I had received.

The new quote that I had received was just for 6 months, and had simply doubled it to get the annual price.  It turns out, however, that a lot of “budget” insurers will quote a low price for the first 6 months and then raise the price in the next 6 months — banking on your behavioral inertia — so that it ends up being equal to or more than an annual quote from another insurer.  I could not get a full year quote from the new insurance company, which made me suspect something was not as it should be.

In the end, I decided to stay with our current insurer, who I have been with for many years.  But I feel good that I at least shopped around to make sure that I was getting the best price, and I also put them on notice, to a certain degree anyway, that I’m not just going to take whatever price they give me without doing my due diligence on the matter.

I performed this same exercise to determine if I’m paying as little as necessary for our TV and internet service.  After looking around, all of the other options were within a few percent, plus or minus, of what we pay now for the same service.  It doesn’t make sense in this case to change providers, but at least I know that I’m not overpaying for the equivalent service.

There are a number of other services that I use that I can reassess as well. I plan to reassess the cost of my cell phone and rental movie service, among others. I’m also going to look to be sure that I’m getting the best deal I can on the interest that gets paid to me on cash investments such as our money market account and CDs — one of which matures in the next month.

Have you been the victim of behavioral inertia or do you have an example of overcoming it?  Share your story in the comments section below.

Money Market Accounts

Author: ScrapperMom
02.25.2009
Money Markets

Creative Commons License photo figure credit: pfala

A reader asks, “MITBeta often talks about money market accounts, can you tell me more?”

The simple answer is that a money market account offers you the flexibility to be able to write checks or make transfers, while having the benefit of earning interest like a savings account. All banks are different, but some things that make all money market accounts similar are as follows:

  • There is usually a limit to the amount of checks and/or transfers you can make. MITBeta pointed out that, with our accounts, you can only write three checks per month, but can make six transactions. So three of those can be checks, but you can also have all six be electronic if need be. Depending on the bank, this transaction limit can range from 3-6 per month.
  • The account is interest bearing, usually a higher yield than a regular savings account.
  • It typically has a higher balance requirement (typically $1000-$2500). 
  • Depending on your typical balance, your interest rate may increase.

Money market accounts are not for everyone, but if you typically have $1000+ in your checking account you might want to consider having a money market account. Our money market account is the main catchall for all our income. All monies get deposited into the money market (direct deposit of pay checks, our rental income, etc) and then MITBeta makes a couple of transfers per month to fund our regular checking account, which pays all the bills.

Money market accounts seem to be, in my opinion, a good stepping stone before opening a CD. The difference is, with a certificate of deposit (CD) your money is tied up for a certain term (6mos - 5 yrs typically) and the rate is based on the length of the term. Longer term = Higher rates.  There is also a penalty for early withdrawal. In order to make good use of the high rates available with a CD you can start a CD ladder.

Money market accounts can generate more interest for you, if you feel up to the challenge of limiting the transactions that come out of the account and also if you can carry a high enough balance. Take a look at what your current bank offers for rates and let us know. Do you think it would be a good idea to open a money market account and take advantage of higher interest rates? For more information on money market accounts you can visit “How Stuff Works.”

Loose Ends

Creative Commons License photo figure credit: Andres Rueda

After last week’s post about Falling Back into Old Habits, I jumped right in and made a bunch of small, but important changes or updates to our automated finances:

  • I made our initial contributions to Roth IRAs for 2009.  As I said last time, it’s already February and we hadn’t contributed anything to our retirement accounts for the year.  I logged into our Vanguard accounts and contributed for January and February on both of our accounts in one shot.
  • I also set up automatic deposits for Roth IRAs for the rest of the year.  Now I won’t have to worry that I missed a payment or scramble at the end of the year to come up with enough money to fully fund the IRAs.  This is an example of one of the basic tenets of personal finance: Pay Yourself First.
  • I finally got around to rolling over my old 401k from the company I left over 4 years ago to a traditional IRA.  I wrote about how to do this back in October, but somewhat ironically had not gotten around to doing it myself.  Do as I say, not as I do?
  • I set up a low balance banking alert for my checking account.  I logged into my account last week and saw that I had a negative balance.  A series of bills got paid and I had not yet transferred the money from our Money Market account.  Luckily, the bills were in process and the balance was not “real” yet.  So I immediately transferred enough to cover the bills and then some to bring the account back into the black.  It didn’t occur to me at the time, but several days later I thought there must be a way to avoid this situation in the future.  A few minutes of poking around at the options on the website led me to the Alerts setup page.  Here I could set up all kinds of different alerts.  I chose to be notified by email whenever my balance drops below $1,000.
  • I adjusted the automatic transfers that occur a couple of times a month between our Money Market and Checking accounts to be sure that a situation, like the one described above, does not happen again.
  • I have been managing an escrow account of sorts for all of our annual expenses, such as life insurance, car insurance, umbrella insurance, our Christmas fund, etc.  So far, this money has been mixed in with our general slush fund — by which I mean money that sits in our bank account, but is otherwise presently unallocated — and tracked using a spreadsheet.  This has become cumbersome, and I have decide instead to stash the money that we put aside each month for all of these annual expenses into a new ING Direct account.  So I opened a “sub” account at ING, and then set up an automatic withdrawal from our checking account to occur once per month for 1/12 of the total amount that we have committed to each of these spending plan categories.
  • Lastly, but certainly not least, I created a new spending plan, as discussed in my last post.  This was not nearly as painful as I expected it to be.  My last spending plan, back in November, took a worst case scenario.  This scenario, fortunately, never developed, and we actually have a lot more money coming in right now than I thought.  Because I had buried my head in the sand on this, I have been worrying too much over something that wasn’t as much of a problem as I made it out to be in my head.  I hope I have learned my lesson.

So that’s it.  Each of the above items took only a few minutes, and I took care of most of them in one night.  I like that I am still able to accomplish so many personal finance improvements in one shot like this.  ”Installing” “hacks” like this in our personal finances is very satisfying, and should lead us to financial independence one of these days.

Nail Biting

Nail Biting: A Bad Habit Creative Commons License photo figure credit: coxy

We’ve had a busy few months:

During this time, we have not paid very much attention to our finances.  Most of our finances are automated, so our bills still got paid on time, and I know that we’re generally doing okay.  However, I really can’t say whether we’re still saving enough, or even whether we have anything to save.  

Our busyness is really no excuse for taking our proverbial eyes off the ball here.  The truth of the matter is that I’ve had my head in the sand since shortly after ScrapperMom lost her job.  I really did not want to have to acknowledge the drop in income and figure out how to live without it.  As a result, I haven’t looked out our Spending Plan in months, I have no idea whether we’re spending more than we earn.  I do know that we have not yet made any retirement contributions for 2009 even though we are already 13% of the way through the year, and that’s starting to bug me.

Good personal finance is a habit like any other.  Breaking bad personal finance habits takes time, dedication, and work.  We’re all susceptible to falling back into our old habits, especially during times of stress, inattention, etc.  I gained a few pounds over the holidays (no excuse again…), and I’ve been working to take the excess off again.  Similarly, it’s time to get serious with our finances again.

Tomorrow I will draw up a new Spending Plan.  I will find money to contribute to our Roth IRAs, even if I have to take it out of our savings.  I will forget about our spending over the last month or two and focus on the future.  I will get back into the habit of good personal finance.

Do you fall back into old habits?  How do you get yourself back on track when you do?  Share your story in the Comments section below.

02.10.2009
Piggy Bank

Creative Commons License photo figure credit: ken +

Reader Jenn asks:

Are you planning to open a second 529 Plan for the new baby or maintain one account for both kids? We opened a 529 when we had kid #1 but when kid #2 came the financial planner we consult with said we can use the same plan for both kids?

Hi, Jenn, thanks for the great question.  Prior to your question I had not ever considered this and had plans to set up separate 529 accounts for each of our little dears.  I did some research on this and found a number of pluses, minuses, and rules that have swayed my ultimate decision:

Rules that seem to apply to this question:

  • “Each beneficiary must have his/her own account. Siblings or cousins can’t share an account. You can, however, roll any remaining portion of an account over to another child once the account’s beneficiary has completed college.” (source)
  • “If the child doesn’t want to go to college, you can roll the account over to another family member.” (source) You can also split the account into multiple beneficiaries.
  • “There are no restrictions on who can open an account for whom. You can open an account for your child, a friend’s child, a relative, the paper boy, or even yourself.” (source)

Advantages of saving separately for each child:

  • In our case, all of the money contributed to the plans, at least for the foreseeable future, will be money that has been given to the kids as birthday, Christmas, and other presents, so it’s more equitable to keep the accounts separate.
  • Individual accounts can be better tailored to the time horizon for each child — different investment choices can be made depending on age.
  • If it applies, you can contribute more in total before incurring the federal gift tax.
  • If you should die, the childrens’ guardian will know exactly what you intended.
  • Some states allow you to take a bigger tax deduction if you save in multiple accounts.

Advantages of saving jointly for more than one child:

  • You can start saving before you ever have kids, reducing the overall amount of saving that you have to do. (See The Beneficiary Loophole.)
  • Some plans charge a maintenance fee for each account.  A $25 annual fee per child would really ding our child’s account.
  • It’s simpler to deal with a single account than many.

One thing that doesn’t seem to matter at all is the amount of interest and compounding.  For the same investment choices, it does not matter whether you have a certain amount of money in one account or 100 accounts. J.D. at Get Rich Slowly demonstrated this recently.

For me, the only genuinely compelling reason to have just one account seems to be the idea that you can save before you have kids, but since we missed that boat already, it doesn’t apply.  So the bottom line is that I will be opening a new account for our new daughter.

I’d like to hear our readers’ thought and comments on this topic!