Don’t Feed the Alligators

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

Archive for the 'Planning' Category

Ecto-2

Creative Commons License photo figure credit: AdamL212

When I was a kid my family had a Commodore 128 computer.  The vast majority of the time spent on this computer was in playing video games.  We had a game called Ghostbusters which, of course, was modeled after the hit movie of the same name.

The object of the game was to respond to calls of high paranormal activity in buildings all around New York City.  At the start of the game you are given an allowance of funds with which you can buy gear for catching ghosts.  The amount of money that you start with is enough to buy the cheapest car and a minimum of ghost catching gear — just 1 Slimer trap, and not even enough money to buy an Ecto-1.  When the trap is full, you have to return to Headquarters to empty the trap.  You get paid for each ghost that you catch.

As the game progresses, the Keymaster and the Gatekeeper arrive on the scene.  These two wander rather aimlessly around the city until they finally arrive at Zuul.  When they arrive at Zuul, if you have caught enough ghosts (it was never clear to me what metric was used to determine whether you had caught enough), you are given the opportunity to sneak through the legs of a dancing Stay Puft Marshmallow Man, take a trip to the roof of Spook Central, cross the streams and win the game.  If you manage to do all this, you get a code that you can use the next time that you play so that you can enter the game with more money.

What does all this have to do with personal finance and avoiding lifestyle inflation?  Well, it was my experience that no matter how much money I earned in the game, it never did me any good to buy more and better equipment.  Some of the options available were 4 different cars, each faster than the next, as well as the ability to buy several traps.  Having more than one trap allowed you to catch more than one ghost before having to return to headquarters to empty it, and having a better car allowed you to get from ghost call to ghost call and back to headquarters much faster.  It seemed, however, that the more money that you spent up front, the harder and faster you had to work to catch enough ghosts before the Keymaster and the Gatekeeper got together at Zuul. In fact, it was so hard to catch enough ghosts, that I was never able to beat the game by using anything more than the most minimal gear available.

I’ve been thinking of the parallels between this game and personal finance for a long time, and more lately as I read the popular personal finance book Your Money or Your Life by Vicki Robin and Joe Dominguez (more on that later…).  I’m finding it less and less useful to want to make more and more money if one of the big problems that it’s going to create for me is to need to keep making more and more money to support our lifestyle.  I would much rather be happy with what we’ve got and use any money that we happen to make above and beyond what we need to boost our retirement savings and lower our retirement age.  Coming to realize that we don’t need more stuff or a bigger house to make us happy has been a very freeing realization, and one that will allow us to maintain our lifestyle more easily over time.

Irrational Bins

Creative Commons License photo figure credit: “Irrational Bins” by MousyBoyWithGlasses

I finished up the preparation of our tax return today, and as you know, we are getting a sizable return.  In fact, I can’t ever remember having to write a check to cover any unpaid taxes for the year.  What bothers me, though, is that the government has been getting free use of my money all year.

I like to preach that people should strive to break even at the end of the year, or even owe a little bit rather than getting a refund.  In this way you’re not leaving your own money on the table in the form of bank interest or investment returns that you could be seeing — or better yet, having free use of some of the government’s money all year long.  This advice tends to fall on many deaf ears.  It seems, shockingly, that people like to get tax refunds and hate having to write a check to the government.

Many people have told me that a tax refund at the beginning of the year is a form of forced savings for them.  I tell them that they should adjust their withholding and then set up an automatic monthly or semi-monthly deposit to their high interest savings account of choice.  They tell me that they fear they just don’t have the discipline to keep up with something like this and will simply squander the money over the course of the year and have little or nothing to show for it.

Up until recently I thought this line of reasoning showed some kind of character weakness on the part of the tax-refund-as-forced-savings-plan (TRAFSP) crowd.  But as I get the same answer from so many people, I’m starting to re-think my judgement.  We’re all human, and we need all the help we can get when it comes to doing what’s best for ourselves the better part of the time.  I read the other day that when Warren Buffet wanted to lose weight, he bet his children that he could by giving them each an unsigned check for $10,000.  Buffett is “someone who understands his irrationality and builds systems to cope with it.”

So while TRAFSPs may be choosing the default option rather than building a system, they still understand this aspect of their irrationality and continue to choose a system that seems to work for them.  Personal finance is the confluence of a rational philosophy and irrational participants.  If it were all about math, most of us would be rich by now.  Instead, we all do irrational things when it comes to money at some point or another.  Those of us who understand our own irrationalities and build systems to overcome or circumvent them are the ones who will ultimately be successful at this game.  This might mean that we don’t always make decisions based on math, but rather on which option is more likely to be successful for us. TRAFSPs are one example.  Another recent example that comes to mind is J.D. Roth at Get Rich Slowly’s decision to go with a longer term mortgage than he could afford.  Lastly, a classic example of this is Dave Ramsey’s debt snowball.  These are all cases where the math says to do something different, but the math doesn’t mean a thing if the concept doesn’t ever succeed.

With all this being said, I’ve put off taking my own advice for many years.  The main reason for this is that we’ve had major lifestyle changes in each of the last 5+ years that have made our tax situation rather uncertain: we’ve changed jobs several times between us, sold a house, bought a house, started renting out a portion of our house, had kids, etc.  But 2008 and 2009 look like they will eventually shape up to be very similar from a tax perspective, so I have gone ahead and changed my withholding amounts with my payroll department.  I took home almost 10% more in my first paycheck because of this change.  I already have set up a monthly automatic transfer to sweep this extra 10% into a medium term savings account for one of our financial goals.

Shaw's Cards

photo figure credit: ScrapperMom

This past Sunday morning ScrapperMom was perusing the grocery store circular when this offer caught her eye (my emphasis added):

Choose your tax refund reward. Customers can purchase gift cards with their Shaw’s Rewards Card (for carded markets) at their local store’s Customer Service center.  No tax form or refund check is necessary.  Customers may purchase a grocery store gift card at $250 or $300.  Each gift card will be loaded with an additional $20 for a $250 purchase or $30 for a $300 purchase.  There is no limit for the amount of cards a customer can purchase. The additional bonus amount cannot be used for the purchase of alcohol, fuel, tobacco, lottery tickets, dairy products, prescription drugs or additional gift cards.  Offer is available March 13, 2009 through April 15, 2009.

Shaw’s is one of our local grocery stores (same company as Star Market), and it ran a similar 10% bonus during last year’s Economic Stimulus check mailings.  Apparently the response from customers and reward for Shaw’s was so great that they’ve decided to run this offer during tax season this year as well.  The limit before was whatever the size of your stimulus check was, and we took full advantage.  But I’m really psyched that there’s no limit on this offer.

Clearly this is a great deal no matter how you slice it.  The offer is for a store that we visit at least once per week, where we spend at least $250 per month, and that sells necessities, namely food.  The only real question is how much advantage we can take.  There are a few factors that limit how many of these cards we should buy:

  • How much cash we have available.
  • What the cost is to tie up this cash for whatever time it will take to use up all of the cards that we buy.
  • Whether this is really a no limit offer.

Because we don’t live paycheck to paycheck, we actually have somewhere between $10,000 and $15,000 available on hand in cash that we could use for this “investment” that is not technically part of our emergency fund.  It turns out that we also gave the government too big of an interest free loan last year, so we’re going to be getting a healthy refund which we can also roll into purchasing discount gift cards.

I ran some quick math to see how soon I would have to spend the gift card before we would have just been better off sticking the money in a CD.  I figured out that if I could earn 3.5%, tax free,  on a $300 investment today, it would take 34 months to earn 10% on the initial investment.  That means that as long as I can spend the gift card within the next 3 years (because with taxes it will take longer than 34 months to accrue 10%) I will be getting a better return by buying the gift card.

I asked myself if there were any down sides to this offer as well.  One that pops to mind is that we’ll be tying up lots of cash that we may need for other things.  The nice thing about these gift cards, however, is that we can easily trade them for cash, and if things ever get that bad, we’ll still have to eat, so having grocery cards is not such a bad thing.  Another thing we’ll need to be careful about is where and how we store the cards.  Having the equivalent of thousands of dollars in cash laying around has risks: fire, theft, loss, etc.  We’ll have to figure out a way to deal with that.  Lastly, what if the store goes out of business?  This is certainly something about which to be concerned, but this is a chain that has been around as long as I can remember, stores don’t usually just all of a sudden stop honoring gift cards, and as above we should be able to liquidate them quickly if it comes to that.

We still haven’t decided exactly how many of these cards we’ll buy in total.  We spent about $5,400 on groceries in 2008, so we can buy a lot of these cards and still come out ahead.  Yesterday ScrapperMom went to the Customer Service desk to buy 6 of them and was told that you can only buy 5 per customer per day.  So there is, apparently, a limit, but I still don’t think it should affect how many we want to buy (though if it did I would argue that the ad does say “no limit”).

What do you think?  Should we stock up on $10,000 worth of these cards (or the closest multiple of $300) and get an instant $1,000 back?  Is this a deal that interests you?  How many will you buy or would you buy if you could?  Are there downsides or risks that we’ve yet to consider? Leave a comment below!

If you liked this article, you may be interested in seeing some related articles:


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.

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.