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Podcast 45: Gary Belsky, Behavioral Economics

by Flexo on February 28, 2010. Podcast 3 comments.

Today’s guest on the Consumerism Commentary Podcast is Gary Belsky, author of the book Why Smart People Make Big Money Mistakes and How to Correct Them: Lessons from the Life-Changing Science of Behavioral Economics and Editor-In-Chief of ESPN the Magazine.

Gary and Tom Dziubek discuss behavioral economics and how understanding how we make decisions involving money can help us make better decisions.

If you like this podcast, please vote for us in the First Annual Plutus Awards for “Best Personal Finance Podcast.” Thanks!

Consumerism Commentary Podcast #45
Production Number: S02E19
Segment Number: 62

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Table of contents

[00:00] Introduction from Flexo
[00:32] Interview with Gary Belsky
– [00:47] Gary’s background
– [03:44] Behavioral economics
– [04:36] “Bonuses” vs. “Rebates”
– [06:00] Mental accounting
– [09:42] Understanding and combating your weaknesses
– [12:12] The sunk cost fallacy
– [14:06] Maximizers and satisficers
– [16:24] Ignoring the base rate
– [17:50] Self-insuring yourself through savings
– [18:24] Understanding anchoring
– [19:37] Fighting overconfidence in personal finance
[22:10] End

We always welcome feedback from listeners. If you have any comments for this episode or for any other, or if you have suggestions for future episodes, please leave us comments here or email us at podcast at this domain name.

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Raise, Bonus, and Weekend Reading

by Flexo on February 27, 2010. Career and Work 18 comments.

Along with tracking my finances on Consumerism Commentary, I also mention when the situation at my day job changes. For example, two years ago I successfully posted for a higher-level vacancy in my department (as expected). Last year I mentioned when I received a lower annual bonus and raise than I would have liked.

I’ve known the amount of this year’s raise and bonus for a few weeks, and I received the bonus this past Friday. Of course, I am thankful to have a job with good benefits during this period of near 10% unemployment, but I am still disappointed in the low level of compensation. I’m not letting this bother me; knowing that I have more control of my finance regardless of what happens in the office helps me not worry about what happens there.

Are your employers still keeping raises and bonuses low, knowing that employees don’t have many options in this economic environment?

In my photography class today, we worked on panoramas. Thanks to Adobe Photoshop for making the stitching so easy. This isn’t one of mine, but here’s a good example from Flickr.

Here are some articles I’ve enjoyed recently and a reminder about the Plutus Awards.

How U.S. Olympians pay the rent. Not every Olympic athlete, even gold medalists, get multimillion dollar sponsorships. The cost of training, competing, and traveling is tremendous, and not every athlete comes from a wealthy family.

How to get your super-motivated boyfriend to marry you. Interesting article in which Sam, the author, describes five observations of men focused on careers or other goals and how the women who love them might need to adjust their expectations. Let me know what you think of this article. I think there’s an assumption here that the woman must adapt to the man, but in a perfect world the best course would involve some compromise.

Do you have to give up convenience in order to save money? I believe there are several stages to becoming financially secure or independent. There may be a time where it makes sense to save every cent possible. I went through a phase like that several years ago. I had to survive without a car (relying on friends and public transportation), eliminate cable television, and share an apartment with three roommates. Now that I’m earning more than what I need for basic expenses and long-term saving and investing, I don’t have to be as tight. I willingly give up some income in order to buy myself more convenience.

Vote for the 2009 Plutus Awards. Consumerism Commentary is up for a few Pluties. Be sure to vote for your favorite finance products (savings account, brokerage, etc.) and blogs before the ballot closes on March 16.

Photo: Richard0

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Smithee Debt Update, February 26, 2010

by Smithee on February 26, 2010. Debt Reduction 7 comments.

It’s been a couple of weeks since I shared details of my push to get rid of the credit card debt. I’ve been diligently taking out exactly $100 from the ATM to spend from Saturday morning through Friday night. That’s just for daily, personal purchases that don’t contribute to the house as a whole, though. As I suspected, it hasn’t left me with many opportunities to do something nice for my wife, and this past fortnight has forced me to keep mentally reminding myself of a few things.

It can’t all be tasty

It’s still not second nature for me to think of my weekly $100 as partially being spent on boring and annoying things like gasoline and haircuts, to say nothing of clothing. I tend wrongly to assume on a Wednesday that, “oh, I still have $50 for lunch this week,” when it’s really closer to $20.

I also really want to be the kind of husband who frequently brings home flowers, but it just doesn’t seem practical, yet.

No month is going to be normal

It seems like there’s always something abnormal showing up to make the budget be a little off. Earlier in February I paid another $200 for Level 3 Improv classes, so I had to remember to make a credit card payment of $450 for March 1st instead of $650. (I’m making payments on the higher, newer debt at a rate of $1,300 a month, but doing it twice a month to help bring the interest down more.)

It’s also sort of vacation season. We did a fantastic job this past weekend in San Antonio not going hog wild with the spending, but it’s still a tendency of mine to want to whip out the plastic when confronted with temptation, especially if I’m drinking. There’s another mini-vacation coming up in Austin during SxSW, where we have a tradition of meeting our old-school nerdy blogger friends.

Stop cheating!

Okay, so even though I used my debit card recently at Starbucks, it was because it was after the time I was supposed to go to the ATM, but I hadn’t made it there, yet. When I did find an ATM, I managed to find one that would give me $90 instead of $100.

But here are the things that got added to the newer card since February 13:

  • MyFax – $10 – I almost never use this online fax service, but it seems like a really handy thing to have. I’ll make a to-do to decide one way or the other
  • Mozy.com – $9.95
  • Toll roads – $40
  • Web hosting – $22.89 – this number fluctuates a lot, primarily because I have more domains than I know what to do with, and I can’t ever bring myself to cancel them.
  • FedEx Kinkos – $8.29 – this was actually for work, so I should get it reimbursed. I almost never pay for things on behalf of my employer, so I’m not even sure what form to use, if form there be. New to-do.
  • Cinematic Titanic – The Alien Factor – $9.99 – there it is. I spent $10 that I shouldn’t have on a goofy, fun movie. I’ll have to remember to find the $90 ATM again tomorrow.
  • iTunes – $1.09 – Ack, I did it again! I couldn’t resist buying the Metallica song “Wherever I May Roam.”
  • Mobile phone bill – $95.36 – this is $10 more than usual because of the Haiti thing.

So, I had two moments of weakness, but I have a way to make it up to myself. The particularly annoying thing about this past fortnight is that I had to get another haircut after just 10 days, because the first time I sought out a proper manly barber, he did a terrible job, and two days ago my head looked like a dirty blond helmet. I don’t know, I think his eyesight is going, because the straight razor performance was abysmal, too.

What about the legacy debt?

For paying down the legacy credit card, I’ve only been using “extra” money: the cash that comes in from jobs like writing here. This year I switched payments from my name to our little corporation, and the corporation just got paid for the first time. What I’m supposed to do now is have the corporation pay me a “reasonable salary” and then use that money to pay down the credit card.

Does anybody have advice for figuring out what a “reasonable salary” looks like?

Credit Card Debt TotalsChange
Legacy Debt$944.95+10.28
Newer Debt$4,657.71-247.61

You can cheer me on and/or witness my money minutiae on Twitter if you want to.

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Quicken Essentials for Mac Released Today

by Flexo on February 25, 2010. Software 2 comments.

Today, Intuit officially launched the first new version of Quicken for Mac in years. I do not own an Apple computer, so I have not seen this software for myself. I do know from reading many reviews that the Mac versions of Quicken in the past have lagged in quality behind the equivalent Windows-based software.

As the name “Quicken Essentials for Mac” (QEM) implies, there are not as many features in this updated version for Mac users as there are in the current Windows versions.

Here are some of the features that are included.

Easier set up; faster to use: QEM offers the unique Mac look-and-feel, easy navigation, and all the keyboard shortcuts users expect on Mac. Setup only takes 10 minutes. Users simply search for their bank, and synch using their online credentials.

Broad banking support; no data entry: QEM currently imports data from 12,000 financial institutions, with support from 18,000 expected by year end. This is nearly quadruple the previous support of banks, credit unions, credit card companies, brokerage houses and lending institutions. All of that means less data entry.

Improved categorization; better understanding: QEM “learns” the most popular categories from users, improving categorization over time. This means users spend less time organizing transactions, and more time understanding where their money goes, and how to save and do more with their money.

Easy conversion: The converter feature easily transfers historical data from past Quicken for Mac (2005, 2006 and 2007), Quicken for Windows (2007, 2008 and 2009), and Microsoft Money.

As I mentioned, I do not own an Apple computer and I have no immediate plans to purchase one. I would love to hear impressions, reviews, and other comments from readers who have purchased Quicken Essentials for Mac.

Current price for download or CD-ROM: $69.99.

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Needs Versus Wants: The Great Spending Debate

by Kelly Whalen on February 25, 2010. Consumer 7 comments.

This article is presented by Kelly Whalen, Consumerism Commentary staff writer.

It’s fairly straightforward to figure out the difference between a need and a want. Needs are basic: food, shelter, clothing, water, warmth. We can also add to that our emotional needs: love, friendship, and care.

Wants seem easy to define. Wants are all the extras, the things that are not necessities. No one “needs” the latest gadget, the most expensive pair of running shoes in the store, or the biggest house on the block.

When it comes to actual purchases though the waters seem to get murky. Is a new pair of shoes a necessity or a want? The answer to this question depends on many factors. You would probably want to know what kind of shoes are being considered, how many pairs of shoes the person already has, whether they’re replacing another pair of shoes, and the answers to a dozen more questions. This evaluation of needs versus wants takes time.

We may go through days without having to make spending decisions, but throughout our lives we make tens of thousands of these decisions. Whether they are small purchases like a pack of gum or large ones such as our homes, we are faced over and over again with the question, “Do I really need this?”

If you are asking that question, you are already practicing smart spending habits. “Do I really need that?,” is only the tip of the iceberg though. We can build on that question to make a checklist that will help keep more money in your pocket.

shopping cartsThe situation where this often becomes useful is when you are shopping for something, perhaps groceries or a birthday gift, and you see a widget you have been thinking about buying. You look at the widget in passing or may even stop and pick up the widget off the shelf while you make a decision. Here are the questions you need to ask yourself before you put that widget in your shopping cart.

  • Is this widget on my list? If it isn’t, put it down and write it on your list for future purchases. If you aren’t shopping with a list, start! Lists are a great way to keep track of all the things you need and want. If it’s on your list you can continue.
  • Do I need this widget? No justifications here. Is it an absolute have-to-have-it item? If you said yes, buy it. If you said no, continue to the next question.
  • Can I afford this widget? If you answered no, put the credit card back in your wallet and back slowly away. If you answered yes, continue to the next question.
  • Do I want to spend my money on this widget? Are there better things you could be spending your money on? Is there a goal you have in mind? For me the idea of being debt-free is much more appealing than the widget I am considering. You may have a goal in mind such as a new home or a vacation with your family, so while the question might be easy to answer, it will depend on what your individual goals are.

Taking a few moments to evaluate our purchases while making them is crucial to maintaining a healthy balance of spending and saving. Using this checklist will only take a few seconds, but it could be the difference between a decent net worth and a fantastic one.

As a mom, I am faced with purchasing decisions not just for myself but for my family and household as well. Using this checklist has stopped me from overbuying, overspending, and buying things I don’t need.

How do you keep yourself in check when you are spending money? Do you use a checklist or evaluation process?

Photo: robholland

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Take a New Inventory of Your Credit Cards or Pay New Fees

by Flexo on February 25, 2010. Credit Featured 15 comments.

I’m growing more concerned about my relationship with credit card issuers. We’ve been getting along mostly well for several years. I charge many of my expenses, pay my bills on time, collect some rewards, and they don’t levy any additional fees. These companies are certainly making money off of me through the interchange fees they charge the merchants with whom I do business, but my bank accounts still mostly benefit from the use of credit cards.

The environment is changing. The Credit CARD Act has added a number of protections for consumers but the industry has been using the opportunity to find more ways to make money.

One such method is through annual fees. Until recently, annual credit card fees were reserved for cards with concierge benefits and sub-prime borrowers. Now, if issuers feel you aren’t using your credit card enough, you may be required to pay a fee. Back in November, Bank of America announced the addition of annual fees for some customers. Citi has recently sent communication to many of its credit card customers to provide the option of opting out of a new $60 fee.

I’ve been using credit cards for at least sixteen years, and I’m certain I wouldn’t know how many accounts I have unless I pull a recent credit report. I have three cards in my wallet, two for personal use and one for business. For several other accounts, I get new cards in the mail every so often. I file them away without activating them. Other issuers may not have my current address, so it is possible there are other inactive accounts I don’t know about.

My credit report should list all of these accounts. As I don’t have a recent credit report, I visited AnnualCreditReport.com the other day to get an update.

I found three open credit card accounts on the report not accounted for.

  • a Capital One card opened in September 1998, last reported in October 2006
  • a Citi card opened in June 2006, last reported in July 2008 — I believe this was a card whose number changed
  • a Best Buy/HSBC card opened in October 2001, last reported in November 2002

I am most concerned about the Best Buy/HSBC card. I used this card to take advantage of a 0% APR offer for purchases. I have not heard of inactive HSBC cards receiving a new annual fee, but I don’t recall receiving any mail pertaining to this account in years. I do not want to miss a notification, particularly if HSBC wants to change the terms.

The credit report lists the phone number, so I plan to call and either update my information or cancel the account. Canceling this credit card would affect my credit score negatively because the account has been open longer than my current average age of credit lines. I may cancel regardless just to be comfortable that I won’t find any surprises.

If you have credit card accounts that may be open but inactive, I suggest checking your credit report and collecting information for the unfamiliar accounts listed. Call the companies’ phone numbers listed on the report, update your account information, and cancel the accounts if you want more peace of mind.

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Vote for Your Favorite Financial Products and Blogs

by Flexo on February 24, 2010. Administration 3 comments.

Earlier this year, the personal finance blogging community nominated their favorite products, services, and blogs to be considered for a new annual awards ceremony, The Plutus Awards. (The name comes from the relatively unknown ancient Greek god of wealth, Plutus.) These awards are designed to celebrate the best in personal finance.

I’ve been working on establishing the Plutus Awards for a while. I originally intended to launch this at the end of 2008, but like many projects that simply get away from me, this was postponed one year. Like the Academy Awards, the year’s best are awarded during the beginning of the following year, so we are now looking for the best of 2009.

Consumerism Commentary is a finalist in several of the blogging-related categories. There are a number of excellent options in each category, so I don’t expect to win any vote of popularity. If Consumerism Commentary does prevail I’ll pass the winnings forward to the next-placed site in the category in order to avoid any question of a conflict of interest.

The categories are split between two sections: products/services and blogs. Some of the finalists among the products and services include ING Direct and Ally Bank for Best Overall Bank, TaxCut and TurboTax for Best Tax Filing Software, and many others. You’ll find many of your favorite blogs included in the “Plutus 2.0 Awards” section.

Please take a moment or two and vote for those you would like to see win.

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How To Handle Requests For Financial Advice

by Flexo on February 23, 2010. Featured Financial Advice and Advisers 10 comments.

I don’t have to remind myself that I’m not an expert when it comes to money. While my choices have improved over the past few years, I still make mistakes at about the same rate I always have. Even recently, I thought I could outsmart the public and take advantage of Toyota’s recent bad news. I bought shares of Toyota Motors (TM) on January 28 with the impression that temporary bad news wouldn’t stick to a strong brand. That purchase hasn’t worked out well so far; the bad news keeps coming.

So I am taken aback when friends and family ask me for financial advice. I am not an expert. The concept of “expertise” is meaningless when it is possible for people to self-brand themselves as experts. Real experts don’t write dust cover autobiographical snippets calling themselves experts. They don’t solicit endorsements from authors they admire or recommendations from their friends on LinkedIn. Expertise can only be observed from the outside.

What if Carl Jung were alive today? Would he be a recurring guest on Oprah with a series of books and seminars to sell? Would Adam Smith, if creating his best work in the early 21st century rather than the 18th century, focus on building an email distribution list for marketing a series of products to his customers?

Since I am not an expert, I don’t offer financial advice to my friends. Even though most do not read Consumerism Commentary on a regular basis, they all know I write about money every day. They may not realize that I do this not because I have all the answers and I need to share my knowledge with the world, but because I always have questions and I use Consumerism Commentary as a resource and sounding board.

Every once in a while, a friend has a question about which they believe I can help. I’ve been asked questions such as whether a Roth IRA is a good investment vehicle, whether I would recommend a bank’s forced savings program, and even asked to analyze someone’s complete retirement portfolio. Some questions are easier for a non-expert to handle than others.

I try to avoid even the easier questions. I want to help, but it’s not my place to tell my friends how to spend their money or how to invest. In the worst case scenario, I might offer suggestions that end up being detrimental down the road, and advice that turns out bad has the potential to disturb the relationship. Another way to lose friends is simply to present ideas someone just doesn’t want to hear.

Regular readers of Consumerism Commentary might be in a similar situation. An interest in smart money management is occasionally seen by outsiders as expertise. So here are some tips for handling friends who turn to you for financial advice.

1. Determine your friend’s true intent. Is he looking for someone only to listen to a complaint or is he willing to accept specific suggestions? This is one key to communication that would be difficult to interpret if you are not speaking in person. Sometimes, a concerned friend is looking for only confirmation that a purchase won’t have a long-term negative effect on their finances and not a detailed spending plan.

A friend’s willingness to talk about money is not an invitation for you to offer your suggestions. Look for specific questions directed to you and try to determine if the friend asking the questions wants truthful answers or just a friendly ear.

2. Redirect your friend’s attention to experts. If the question is simple, feel free to offer a few opinions. When a friend is looking for a quick recommendation for a new savings account, I usually start with ING Direct due to the bank’s simplicity, popularity, and level of service, but I might offer a few options that offer higher interest rates if I feel that my friend is open to more than just the basics. You don’t have to be an expert to handle this kind of request; opinions based on personal experience are generally welcome.

But when it comes to questions whose answers depend more on an individual’s full financial picture, like whether to invest in a Roth or traditional IRA, I stay away from making specific decisions on her behalf. I may offer some generalizations and examples, remind her that I’m not an expert, and suggest some resources that might help or a financial adviser who will take the time to analyze all the relevant numbers.

3. Don’t offer unsolicited advice. If you see a friend in financial trouble, it might be tempting to offer your help. It pains me to see a friend making poor choices and setting himself up for financial failure in the future. It is none of my business, however, so I won’t get involved unless he asks me for thoughts. Even when he does ask, I am very careful to stay as uninvolved as possible. There may be a point at which intervention is necessary, for example, if his financial choices hurt others in addition to himself. That should be saved for extreme circumstances.

I admit that I find it very hard staying silent when I overhear co-workers offer each other bad financial advice — but I stay out of the discussions.

4. Don’t lend money to solve your friend’s financial problems. Adding another obligation is usually a Band-Aid, not a solution. Your friendship will turn sour if your friend cannot pay you back, and you will be bitter when you see her spending money on anything other than repayment. Once you lend money, you don’t want to see your friend taking vacations rather than accelerating his credit card debt payment.

In the rare situation I’ve been approached by a friend needing a loan for any reason, I direct them to peer-to-peer lending services.

5. Remind your friend that your thoughts are only opinions. No one knows for certain what will happen in the future, and even when considering only the present there are few absolute truths. My financial opinions come mostly from my own experiences and somewhat from research. That should be similar to most non-professionals or even someone who considers himself an expert. Any one person’s experience might not fit the model of the mythical “average investor” or “typical American,” and I’m always careful to point this out.

It’s not worth the potential of ruining a relationship with a friend or relative by bringing attention to money-related issues. The best answer for anything other than a simple question is, “That question would be better answered by a financial adviser who can analyze your full financial picture.” Don’t play the part of an expert, just be available as a friend.

Photo: alancleaver_2000

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