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Your Ego and Your Wallet

This article was written by Marc Pearlman in Featured, Psychology. 8 comments.

This is an article by Marc Pearlman. Marc is a money management professional who has been in the finance industry over 20 years, and he is the author of The Positive Money Mindset and host of the radio show, Your Money Matters.

I watched as these two were duking it out — at the poker table, that is. Fortunately for me, I was out of the hand with my lousy cards safely in the muck pile. I watched with no attachment to the outcome, but I had a prediction of who would come out the victor in this poker showdown. This young kid, probably mid to late twenties with a black hat pulled half way down his head had been quiet most of my time at the table, was squaring off with a middle aged guy. If appearances mean anything, this middle age guy was somebody of means given the designer clothes he was sporting.

Anyway, this kid makes a modest bet and the middle aged guy is quick to match it. Not only does he match the bet, he raised him with a smirk as though daring this kid to come at him again. So, the kid comes back at him with a bigger bet, and again this guy matches him. When all was said and done, both guys had all their chips in the middle and our middle aged poker wannabe had absolutely nothing for a hand. He tried to save face and belted out, “I didn’t have anything, but I couldn’t sit there and watch you walk away with it.”

Poker chips Egos can be expensive that way.

All too often people make financial decisions out of emotion, which can be an expensive trap for those who have their ego firmly married to their net worth. If we look around, we can see examples of this all across the spectrum of income classes.

Years ago, I worked with a doctor who shall we say did not suffer from a fragile ego. He was interested in putting money with an institutional money manager who had a large minimum investment requirement and a lousy recent track record. I had suggested a manager who demonstrated better performance numbers and who utilized a strategy with less risk. “What is the minimum investment?” the doctor inquired. The minimum was about half of the other managers requirement, I answered. The doctor quickly rebuffed the notion.

It came out in conversation that his peers had money invested with this manager who had the higher minimum. I understood that it was important for him to be part of what he believed to be a prestigious group of investors. Making money was not his motivation, satisfying his ego is what dictated his investment choice.

Another story comes to mind. I once had the opportunity to work with a professional commodities trader. I was hired to help him with his trading deficiencies. This guy had strong opinions on whatever subject was being discussed. He could not possibly fathom that his thought process could be flawed. I introduced him to the concept that being right to him was more important than making money. He scoffed at the idea. In the end, he learned his lesson in a painful way. This trader would hold onto losing positions until he was forced to sell. He vigorously defended his position that he was right only to watch his once several hundred thousand dollar trading account dwindle to less than $20,000.

Ultimately, the ego he was trying to protect was humbled.

Here is yet another example of how our egos can hurt us financially: about a decade ago I had a wonderful client who has since passed away. Great guy, but wow, what a terrible stock picker! Honestly, someone could have made a fortune by simply doing the opposite of what this guy did. He held fifteen stocks in his portfolio, ten of which I had selected for him.Out of the five he picked, every single one was a dog. When I say dog, I mean dog with fleas. They were all down 70 to 80% within a year. I am not suggesting that every selection I made was a homerun, but we were profitable on average with my ten selections.

He would call in on a regular basis to discuss the market. He never wanted to discuss his losing stock picks. Furthermore, I knew it was taboo to mention my winning stock picks. The only subject that was not off limits was the couple of picks I made that were not working out.

When he passed, he still held those losing positions. His refusal to acknowledge his mistakes cost him well over five figures in losses, not to mention the opportunity costs associated with redeploying the money elsewhere.

Big egos often mix with money with the same cohesiveness that oil and water mix. Having an inflated ego is not necessarily the issue, but when your financial decisions are borne from ego, you are in dangerous territory.

Strong and sound financial decisions require letting go of your ego. Often, we need to admit our analysis was wrong and we need to cut losses in order to preserve our hard earned capital. Sometimes the simple truth is that keeping up with the Joneses is going to bring financial ruin.

Many times, laying down your cards is the best thing you can do for your wallet.

Photo: Ross Elliott

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Are You Concerned About the Very Poor?

This article was written by Flexo in Society. 72 comments.

Whether you agree with it or not, the reason this country has supported programs like welfare, Social Security, the GI Bill, food stamps, Medicare, government-backed mortgages, FEMA insurance, and other social programs is because a modern society benefits when as many citizens as possible have opportunities to succeed financially. Social programs aren’t perfect and don’t always provide what they promise, and there’s always a small percentage who take advantage of the system.

The push-and-pull between the focus on the society and the focus on the individual existed even before the founding of the nation, and this particular Weeble that wobbles between left and right without falling down (yet) has allowed the United States to become the biggest economy in the world in a relatively short period of time, and that’s a good thing.

From an individual perspective, it might not be that intuitive that one needs to be concerned about the “very poor.” After all, with social safety nets, one might think that the “very poor” have little to worry about. Regardless of the existence of programs — both public and private — poverty is still an issue in this country, even if you don’t see it in your daily life as you shuffle in an office building from meeting to meeting or shuttle from city to city on business trips. It’s hard to be concerned about something if you aren’t faced with it every day.

If, however, you are concerned about the “very poor,” there are ways to help, even if you don’t believe that handouts are effective. The most popular rationalization for not caring about poverty is the idea that helping another individual teaches complacency rather than responsibility, interdependence rather than independence. The incorrect assumption is that families in destitute situations have no desire to work for their money like those who have built wealth for themselves and have earned the right to let their money do the work for them and receive income from dividends and interest rather than working in the middle-class and working-middle-class sense of the word.

The real problem is tied into that psychology 101 concept I turn to repeatedly, Maslow’s hierarchy of needs. If most waking minutes in your day are spent worrying about your shelter, your food, and having a safe place to sleep, “income mobility” is a fantasy. You’re a victim of “class warfare,” but in your reality, you don’t have time or energy for political arguments about class warfare.

If you are concerned about the very poor, there are options. Helping bring attention to poverty can form provide opportunities to those without them without much sacrifice from those with opportunities.

Give money directly to organizations that run programs focusing on providing opportunities. The top-rated charities focusing on poverty according to Charity Navigator are Direct Relief International (although International is in the name, they also work to eliminate domestic poverty, particularly in disaster-stricken areas), SOME (So Others Might Eat, focusing on the D.C. area), and the People’s Resource Center (based in Chicago). If you prefer to give a hand-up rather than a hand-out, focus on organizations that provide job training and placement, programs that expand the reach of educational opportunities, and programs that present positive financial role models.
Volunteer with the organizations that run these programs. Build houses. Build schools. Help at a food bank. When you are actively involved, you get to experience the results of your work much more closely than if you were to send a check every month. No, you won’t get a tax deduction for volunteer work, but that’s not the point.
Become a community leader. When people from poor communities manage to succeed financially, they often don’t return to be the role model their community needs. This is the reason financial illiteracy is a problem that will continue from generation to generation, keeping low socio-economic status communities from thriving.

Are you concerned about the very poor? Does paying your taxes and being satisfied with existing social safety nets relieve you from any other possible responsibilities for how the country fares as a whole? Do we even have any responsibilities to anyone other than ourselves and our families?

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Improve Your Child’s Cognitive Ability for Income Potential

This article was written by Flexo in Career and Work. 18 comments.

There’s a chance you could become a multi-millionaire after repeatedly slamming your head into other people and suffering through the resulting mini-concussions and minor brain damage, but not everyone can be a professional football player in the NFL. There’s a safer and less harmful path toward financial independence.

Cognitive ability is an important part of your human capital, and your human capital measures, among other things, how likely you’ll be able to support yourself financially, particularly through difficult economic times. Cognitive ability is important because many jobs requiring intricate skills and the best careers that offer opportunities for advancement require the ability to learn and adapt, and that’s the core of cognition.

The ability for the brain to process information changes throughout one’s lifetime, and without stimulation, cognitive ability can decline. When companies like Google or SAS ask puzzling interview questions, they’re testing, among other things, cognitive ability. To be hired as a software engineer, you would need to show that you have a strong command of whatever primary programming language is popular at the time, but in an industry that changes so quickly, strong cognitive ability will show that you can learn and adapt to the changing environment.

Rubik's Cube The key is instilling cognitive ability in children at an early enough age. As we get older, we can continue to refine cognitive ability, but only to a small extent. These tactics may no longer work for me; the best adults can generally do to keep cognitive skills sharp is to get enough sleep and exercise, and eat nutritious food.

If you’re interested in helping your child prepare for a life full of challenges, there are some tactics you can employ.

Learning a new language

As a child, I enjoyed learning languages. I never became fluent in anything other than English, but I enjoyed the process of learning the rules. As a kid, I was fascinated by languages, and spent time learning a little bit of as many as possible. Like many kids, I learned a little Spanish from Sesame Street. I learned Hebrew and tried to teach myself Yiddish. I studied Latin in middle school, was taken out of usual classes to study Greek independently, and took five years of German. I learned programming languages like BASIC, Pascal, lisp, and C. And as a younger kid, I dabbled with creating my own languages and codes.

Music and mathematics have features in common with languages, as well. Music, particularly learning to play an instrument instead of just listening to Mozart, has been shown to improve cognitive ability.

As an adult, learning a new language or a musical instrument is a time-consuming task. There are programs that help frequent travelers learn languages quickly, but you could get a bigger cognitive benefit by learning a language through a more academic curriculum or through immersion. Rather than focusing on key phrases that help you get by in a foreign land, incorporating a new language into the way you think can help keep your brain active. On the other hand, young children, even those learning their first language or languages, can often learn multiple languages concurrently without being confused. Language skills not only improve cognitive ability, but they can make someone a more marketable employee around the world or increase the chance of international success in their own businesses.

Completing puzzles

Elementary school is a great time to focus on solving puzzles whose solutions require thinking “outside the box.” I seem to remember this being called “lateral thinking” when I was younger, but I don’t know if that term is widely used today. These are the types of puzzles that stymie job applicants at companies like Google. But puzzle solving as an adult won’t have the same impact as puzzle solving when the brain is at its most impressionable.

Logic puzzles are kind of like the game Clue. You often have two or more dimensions to work with, and the goal is to pair each of the dimensions together based on a limited number of clues. A grid helps eliminate incorrect pairings to discover what’s correct. The more dimensions included in the puzzle, the more brain power necessary to solve the puzzle.
For a child, a Rubik’s Cube can be an engaging puzzle. While the answer now comes packaged with the toy, and there are numerous Youtube videos describing how to solve the puzzle in about twenty moves, the cognitive challenge is in working to find patterns of movement that move closer to the result.
Text adventure games open up a child’s mind to being able to control their environment. Video games have changed since I was a kid, but I enjoyed the early text adventure computer games like Scott Adams’ Adventureland. (Classic game lovers can play Adventureland here.)

Reading and writing

Reading and writing help develop important cognitive skills focused on processing information the same way they’ll need to make sense of problems as adults. Writing, particularly creative writing, improves the command of language and can help children find clarity when expressing their ideas. Writing is a skill that will easily set someone apart from the competition, as might be necessary in tough job markets. I’ve personally seen atrocious written communication among co-workers throughout the many jobs I’ve had. I will never say I’m a great writer, but these skills are lacking in my former non-profit and corporate environments.

When I compose a well-worded communication, the supervisors shouldn’t be surprised. Every employee with a college education should be able to express himself or herself somewhat eloquently.

These cognitive skills nurtured at an early age can help prepare children for financial success in life. The best careers need smart and flexible employees to take on unforeseen challenges. People often predict what the hottest careers may be one generation from now, but the specific opportunities are irrelevant if children are prepared today to handle any problem that presents itself.

What did you do as a child to improve your cognitive ability? If you have children, how are you helping them prepare for the future?

Photo: Don Wright

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How Is Your Budget Doing These Days?

This article was written by Phil Cioppa in Planning. 21 comments.

This is a guest article by Phil Cioppa of Arbol Financial Strategies, LLC. Phil has over 10 years of financial service experience and specializes in asset management strategies, insurance planning and taxation issues. A budget is an important part of any financial plan, and right now is the best time to take another look at yours.

Do you feel like your dollars don’t stretch as far as they used to? No, it is not your imagination. They don’t, because we are experiencing some of the most difficult economic times since the gas lines of the 1970s and the Great Depression in the late 1920s and early 1930s.

What does this mean for you? It means that it’s time to revisit your household budget to make sure that you are living within your means, that you are not wasting your hard-earned dollars on items you don’t need, and that you are setting money aside for what is really important.

What is really important? No, it’s not having the latest high tech gadget, a flashy new car, or more clothes to hang in your closet. It’s building and maintaining an adequate financial safety net for yourself so that you have the money you need to pay for setbacks and emergencies. For example, you lose your job, your employer decides not to continue paying for your health insurance, your car dies and you need to replace it, your child has an unexpected medical problem, your home needs an expensive repair, and so on. Without an adequate safety net, you may have to use credit cards to fund the unexpected, which could be devastating to your finances.

Saving for retirement is also really important. No matter how far away you are from retirement, if you don’t begin planning for it now, your inaction will come back to haunt you. No matter what –- put money aside for the future! When that future becomes “now,” you will be glad you did.

I know that doing all of this may sound like a tall order, but it’s non-negotiable. To start, re-evaluate your financial priorities, study your budget to figure out how your spending and your priorities line up, and then reduce your spending as necessary so that you can begin building a financial safety net as well as a retirement fund. And yes, doing this may require some sacrifice on your part.

If you have to spend less, examine your essential expenses, like food and other day-to-day costs of living. What can you reduce? Also look at the fat in your budget –- the stuff that you enjoy or think is nice to have, but that you really don’t need. What are you willing to give up?

Here are just a few of the kinds of questions you should ask yourself as you rework your budget:

Is your current cell phone plan truly the best deal for you?
Can you save money by bundling your phone, Internet and cable service? You’ll usually find that new account holders get the best deals so you may want to change providers.
Have you explored whether you could purchase your electricity or gas from a less expensive source, assuming those services are deregulated in your state?
Do you really need all of the TV channels you are paying for? If you changed to a cheaper package, would you miss the channels you eliminated?
Are you paying too much for your insurance? Ask your insurance broker to evaluate your insurance needs and explore whether you could save by consolidating all of your insurance with one company.
What about your vehicles? Can you get rid of one or them? And, how often do you use the motorcycle or boat you pay to insure?
How much are you spending each week on restaurant meals, happy hours, and coffee drinks? If you take the time to add up those expenses, you may be surprised at your final total. Take the money you are spending on such nonessentials and use it to pay off your debt faster, or to increase the amount that you save each month.
If you’ve been dropping thousands on vacations away, take vacations closer to home or even consider a vacation at home. Given rising airfares, you could save a bundle.
Refinance your home. With interest rates at all time lows, you could realize a substantial savings by getting a new mortgage loan and paying off your current one.

Nobody likes to change their lifestyle, but nobody likes to be broke either or to come up short when it’s time to retire! The key to surviving and even flourishing in a down economy is to be realistic about your spending, to decide what your financial priorities and needs really are, to give up some of your creature comforts if necessary, and to save, save, save. It’s essential if you want more money in your pocket for today and for tomorrow.

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The Worst Celebrity Tax Problems

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Good Debt and Bad Debt

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Year End Reminder: Fund Your IRA Now

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Construction Revolutionized My Finances

by Flexo

This is a guest article by Jon the Saver, a personal finance blogger at Free Money Wisdom. His mission is to spread financial wisdom and help people get their financial lives under control. In his down time he loves a mean game of Scrabble and spending quality time with his fiancee. I’m probably the only ... Continue reading this article…

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