money

Since reading some comments on my last post, I had been thinking about what this whole deal with “personal finance” is about; is it about making the most amount of money? or is it about saving the most amount of money? or is it about spending the least amount of money? or is it about reducing stress due to money matters? or is it about this obscure concept called “financial freedom”?

The more I think about it, the less specific I get about possible “correct” answers to that question. In fact, looking back at my life, it seems that at different times, a different answer suited me depending on my financial and personal situation at that time.

What came out of this thought process was the realization that personal finance is not just about “maximizing money” - as I used to think earlier - and like most people probably think about it.

It’s not about maximizing. It’s about optimizing.

Given a financial situation, personal finance is about making the best of that situation. Sometimes it means trying to make as much money as you can, and at other times it means trying to make your money work to make you more efficient by reducing your stress, and at some other times it means that you save every penny to make sure that your children don’t inherit your burden of debt.

There is nothing wrong in trying to “maximize money”, but it is important to realize that, depending on your personal situation, there are costs (in terms of stress and time) associated with trying to do that.

Examples are numerous (but vague and difficult to explain) in this area, but a simple one would be to think of a job in which you are paid overtime. Every extra hour you work might mean that you will become richer than the previous hour, but it does not mean that you would be stress-free - or that you would be able to devote enough time to your family. If you overdo it, it wouldn’t be too hard to make yourself and your family feel miserable even with the extra money you earn.

Working your ass off for a few extra bucks might be a good idea when you are a bachelor with hardly any cares in the world, but if you are a family man, then you might be better off by working a little less in lieu of spending a little more time with your family. Now, just because you gave up that little extra money to spend time with your family or to reduce your stress, it does not mean that you are careless or frivolous with your personal finances. In other words, just because you chase every penny, it does not mean that you are an epitome of financially astute people.

In general, for the sake of the betterment of the whole universe and your own self, try optimizing your money instead of maximizing it. It also helps to reevaluate our understanding of “personal finance” in perspective of our changing personal situation and revise our money-chasing efforts accordingly.

Duh!

This question comes up when the authors of The Millionaire Next Door discuss the concept of “Economic Outpatient Care“. Simply put, Economic Outpatient Care, is the *help* parents tend to give, in the form of economic gifts, to their children - in the hopes that such gifts will help the children accumulate more wealth and make them financially independent.

The authors then report that small children who are helped by cash gifts from their parents early on, grow into adults who are financially less responsible than those who do not receive cash gifts. Moreover, when they grow up, these children (the ones who received cash gifts) usually display a lack of initiative, low productivity, high consumption, and typically tend to develop a dependency on the cash gifts from their parents.

When it comes to adult children (although you can extend it to children of any age), this is what The Millionaire Next Door says:

The more dollars adult children receive, the fewer dollars they accumulate, while those who are given fewer dollars accumulate more.

This is a statistically proven relationship. Yet many parents still think that their wealth can automatically transform their children into economically productive adults. They are wrong. Discipline and initiative can’t be purchased like automobiles or clothing off a rack.

It may seem counterintuitive at first, but it becomes clearer if you think in terms of motivation. Once you start getting money without doing anything, where would be the motivation to work hard for it? If your depleting savings are immediately replenished by a healthy donations, where would be the motivation for the development of frugality and sensible spending habits?

This reminds me of a dog story that happened a few years ago. A family we knew had this particularly vicious dog that had a habit of barking nonstop at people who knocked on their door. One day, when we visited them, the dog started barking like crazy - so, the dog’s owners asked me to feed some biscuits to the dog to make it stop barking!! To me that didn’t make any sense at all - it was like rewarding the dog for barking. Once the dog realizes that it gets a treat for bad behavior, where is the motivation to stop barking? Needless to say, the dog still barks at people who knock.

Anyways, enough digression. The point is that undue financial gifts may reduce the motivation for your children to be economically productive. It makes them think that they are financially fit - which in turn makes them spend more. So, giving them more free money may in fact make your children poorer in the long run.

The book points out four specific characteristics of children who receive economic subsidies from their parents:

• Economic gifts lead to greater consumption and less savings.

• Children who receive gifts tend to view their parents’ wealth as their own.

• Usage of credit is greater among children who receive economic gifts.

• Those who receive financial gifts tend to invest much less than those who don’t .

Think about this the next time you pull out your wallet to bail your children out of financial difficulties. This doesn’t mean that you should never help your children at all - it means that you should make sure that you challenge/encourage your children enough to think/work towards finding their own solutions to their financial problems. Don’t let the smell of free money divert them into a complacent attitude towards managing their money wisely.

Towards ensuring that you raise your children into economically successful adults, here are ten things that the book recommends:

1. Never tell children that their parents are wealthy.
2. No matter how wealth you are, teach your children discipline and frugality.
3. Assure that your children won’t realize you are affluent until after they have established a mature, disciplined, and adult lifestyle and profession.
4. Minimize discussions of the items that each child and grandchild will inherit or receive as gifts.
5. Never give cash or other significant gifts to your adult children as a part of a negotiation strategy.
6. Stay out of your adult children’s family matters.
7. Don’t try to compete with your children.
8. Always remember that your children are individuals.
9. Emphasize your children’s achievements, no matter how small, their or your symbols of sucess
10. Tell your children that their are a lot of things more valuable than money.

We do try to save money on a lot of things in life and generally tweak stuff here and there a bit to get some extra juice out of our financial resources. However, there are rare occasions when we ignore the dollars and just focus on maximizing our experience. Here are two such examples.

1. Eating at an expensive restaurant: JD @ Get Rich Slowly recently posted an article about how to eat at an expensive restaurant without destroying your food budget. Although the article makes some valid points on how to reduce your bill, it’s really not for people like us. Yes, we do try to reduce our expenses on eating outside, but that doesn’t happen when we head out for a dinner at an upscale restaurant (the term “upscale” is relative - for us, $50+ for a dinner for two is upscale).

If we decide to go to an expensive restaurant, it’s mostly because we want to eat enjoy certain specific items on the menu, in a generally pleasing and relaxed atmosphere. The food and the experience are the driving factors - not the money. It’s the mildly intoxicating, cozy feeling of a *hearty* meal that measures the level of our satisfaction from a given restaurant.

If, on a given day, we have chosen the most expensive restaurant in town for that kind of a feeling - then that’s that, we would be eating there irrespective of how much it’s going to cost us (within reasonable limits, of course). On such occasions, there is no micromanagement about how we can save bucks by using tricks like sharing a single dish, eating a snack at home beforehand, eating just the appetizers, etc. Generally this happens when we are in a “live to eat” mode; when we are in a “eat to live” mode (courtesy: exams, report deadlines, etc.), we don’t care about what we are stuffing ourselves with - we just try to get the most out of as little money as possible.

2. Vacations: Earlier this year, we went on a quick vacation to Philadelphia/New York. Although, before we embarked on the trip, I had planned on keeping detailed records of our expenses, I quickly gave up that idea. On vacations, things are driven by enjoyment, convenience, and the overall experience - money takes a back seat (again, within reasonable limits).

On this particular vacation that I mentioned, we had a general large number in our mind - set as the *budget*. But, we didn’t have any specific plan on how to stay within that budget. Of course, it wasn’t a frugal thing to do - in the conventional sense; but, that wasn’t the intention anyways. We had fun, and that’s what mattered.

These are just two examples at the top of my head right now, but I am sure there are other such occasions… and I am sure some readers will have something similar to share along these lines

All in all, I guess it boils down to saying that there are two types of functions that can be maximized (this type of language is called “engineering jargon”) - sometimes independently of each other: frugality and fun.

Frugality is no doubt a good thing to be maximized for the betterment of you and the universe, but sometimes you got to stop worrying about the pennies and enjoy the fun part.

Image credits: www.massas.com, www.internationalliving.com

Sometimes, I wonder what will happen if everyone chose jobs that gave the best returns on investment - the world would have been filled with disproportionately large numbers of lawyers, doctors, software engineers, people who own popular websites, etc. I am not quite sure if our life would have been happier (because everyone is rich) or more miserable (because everyone is rich) in that case.

I am not talking about people who can’t choose better jobs due to various handicaps: lack of opportunities, poverty, discrimination, etc. and are forced to take up low paying jobs that require a lot of hard work [that's a whole different can of worms]; I am talking about people who probably have all the resources available and yet proceed to choose careers that yield disproportionately low outputs for their inputs (in terms of money and efforts). Here is a list of some of such careers from CNN Money that were piled under the label of “jobs: worst pay for investments” [median salaries are shown].

[Read with emphasis on "Likes" ; original image: CNN Money]

I don’t think the list is complete by any means; there must be hundreds of other such jobs that don’t pay well and yet there are people who choose such jobs out of their own volition. Most of these people are probably doing what they like doing most without worrying much about whether they are going to earn feasible returns on their investment. For them, jobs probably aren’t just about getting money in return for the amount of time they spend working - for them, such jobs are more about following their passions and inspirations.They may not be making big bucks, but they are probably getting paid for doing something they would have loved to do anyways. They may never rub elbows with the wealthiest people in the town, but it is very likely that these people have a clearer vision of what they want out of their life than those who are merely guided by million dollar goals and thoughts of happy retirement (or the strongly money oriented like me ).

By the way, I wouldn’t extend these feelings towards *all* the people who are working in the above areas - there will always be some who remain perpetually dissatisfied with everything. But, in general, given that none of the careers in the above list are “glamorous” enough to attract every Tom, Dick, and Harry, it is less likely that some random people will be suckered in to these jobs if they don’t have some kind of a strong liking. Plus, I don’t think people with only money on their minds would consciously choose one of these careers after realizing the enormous resources it will take on their part.

Anyways, once in a while, it is inspiring to know that life is not always just about earning a lot of money… sometimes it’s about doing what you like… doing what you are good at. And, it’s inspiring to know that there are people who walk on this path [at least, it's *inspiring* for me because I often get distracted by the money aspect easily].

And yes, this is not about *neglecting* money totally [there are bills to pay and mouths to feed], it’s about not making money your primary obsession.

[Note: I am conveniently ignoring issues about absurdly huge student loans to avoid complicating the discussion]

Milk seems to be the next hot thing after gasoline.

Yesterday, at our local SAM’s club, milk was priced at $3.49 a gallon … and gasoline was at $2.55.

Anyways, did you know that milk prices are rising globally because affluent people in emerging economies are drinking more milk? Here is what the NY Times has to say about it:

But the biggest force driving up milk prices is the same one that has driven up prices for conventional commodities like iron ore and copper: a roaring global economy. Rising incomes in emerging economies from China and India to Latin America and the Middle East are lifting millions of people out of poverty and into the middle class.

It turns out that, along with zippy cars and flat-panel TVs, milk is the mark of new money, a significant source of protein that factors into much of any affluent person’s diet.

Great, earlier I thought only olive oil is a mark of economic prosperity.

The article goes on to say that:

… The average person in China now consumes more than six gallons of milk a year, up from more than two gallons in 2000.

[OK, that gives me some kind of a complex - our annual milk consumption, for a family of two, is about 30 gallons! - well, holy cow!]

As an aside on the emerging economies issue, are we getting into an habit of attributing every market phenomenon to how much people consume in emerging economies? Sometimes, it makes sense, but often, it seems as if people are dying to make a connection to China, India, Brazil, Argentina, etc… in order to explain domestic market effects in the US [with no regards to how the consumers in US are using up resources].

By the way, some smart people are already making hay of the milk situation by stealing cows.

Driven by a combination of climate change, trade policies and competition for cattle feed from biofuel producers, global milk prices have doubled over the last two years. In parts of the United States, milk is more expensive than gasoline. There are reports of cows being stolen from Wisconsin dairy farms.

Ironically, just yesterday, we were discussing about how burglars are not smart people. So, stealing a cow might go against the grain - that would mean a burglar with a lot of foresight.

A whole new meaning to the term “cash cow”, eh?

For serious people with an economic inclination, here is a great writeup [pdf file] on how milk is priced in the US.

Yesterday, I was reading this article about a personal finance blogger’s conversation with a burglar, on where to hide money in the house. Although, the article probably written in a serious frame of mind, I couldn’t suppress a few chuckles (I don’t know why) before I finished reading it.

According to the article, basically, to make your house burglar-proof, you first need to make it burglar-friendly - not in the sense of encouraging burglars, but in the sense of making some things easy for them if they enter your house in the first place. Below are a few *priceless* excerpts from the article that were responsible for my chuckles.

Tip on letting the burglar “discover” some easy money if you care for your house.

Your best strategy, then, is to actually leave some money in obvious places for the burglar to quickly find (the same applies if you keep all your money in the bank). This can not only save your other stash of money, but may actually keep the burglar from destroying your place as he looks for where you have hidden your money. If they believe they may have found the cash that you have in the house, they are much less likely to keep looking (remember, they want to get out asap).

And here is one for making things user-friendly for the burglar:

When it comes to hiding valuables, his [the burglar's] suggestion is to mark an envelope in an easily accessible drawer or with files by your computer with “Bank Safe Deposit Box” on the outside and a list of items on the inside. This will tip off the burglar that your most valuable items are stored at the bank and will discourage him from tearing up your house looking for them.

How many of you think a burglar is going to take that bait seriously? Doesn’t that sound a little too “burglar-friendly”?

Here is another piece of advice on “token money” for burglar - as if to convince him to not tear apart the rest of the house.

If you leave some token money for the burglar to find in the places they normally look for money, then anyplace you wouldn’t normally consider a place to hide valuables will usually keep those valuables safe.

But, if one burglar thinks that way, wouldn’t there be others in his trade who know about this little trick all too well?

Now, if I were to change my profession and become a burglar (not a very likely proposition, but humor me for a while), wouldn’t some of the things above be a part of my basic training - I mean, if I find “token money” around the house, it’s going to tip me off about other valuables hidden elsewhere in the house at unlikely places. Also, if you leave an envelope prominently marked “Bank Safe Deposit Box”, I will instantly know that you are trying to fool me and I will tear up your house on reading such user-friendly *instructions*. Moreover, a burglar who comes prepared to tear your house to find valuables, will probably do it anyways - whether he finds the token money or not.

I don’t mean to ridicule the article - it does offer some valuable insight into the burglar psyche; it’s just that I found some of it rather amusing. It almost felt like hanging this sign on your window:

Sometimes I wonder about all the popular tips to trick burglars - wouldn’t most (competent) burglars be aware of them before you are? In that case, wouldn’t it make sense to do something random that does not appear on such lists? I am just thinking aloud here.

In our case, the burglars probably will have better houses/apartments than our apartment. Between our close friends, we often joke that if a burglar enters our house, he will probably leave some items for us in sympathy, instead of taking something from our house. If it’s a weekday, he will probably think we have already been burglarized a few hours ago. On a serious note, I have never thought along the lines suggested by the article (probably because we don’t really have anything valuable in our house ~ the most cash we ever have at home is probably a few quarters). I should probably do it sooner than later.

For those who have made their houses/apartments burglar-proof (or burglar-friendly), feel free to share your experiences. Experienced burglars are especially encouraged - although, we would only take your suggestions with a grain of salt.

Earlier on this blog, I have actively supported the concept of assigning higher priorities to bigger expenses in your life to improve your financial situation. However, every now and then, it helps to look at the smaller things that might be steadily leaking money from your wallet.

Occasional indulgences are perfectly fine, but if you are habitually spending money on certain items, then some financial plumbing might be in order. The point is to either seal the leaks completely, or to keep them in check so that, eventually, they don’t grow into massive drains on your resources.

Some typical popular sources of money leaks are as follows:

• Paying for cable - in spite of the fact that you don’t regularly watch more than a few channels and don’t even have enough time to watch TV.
• *Addiction* to certain foods/drinks.
• The habit of not shutting off electronic equipment after use.
• Making only the minimum payments on credit card balances (other than 0% APR balances).
• Making payments on small low interest loans first, instead of large high interest loans (yes, it may be psychologically satisfying - Dave Ramsey style - but it’s still a money leak).

And so on… you get the idea by now.

Fortunately, because of our lifestyle, serious money leaks like expensive cable and debt do not exist. However, there are other small spending irritants that I am dealing with. Here is a list of some of them (that I have identified as of yet):

1. Books: Yes, we have a massive library available to us on campus, but we still head down to book stores (usually Half Price Books) every once in a while and browse through a lot of books. Most of the times we end up purchasing a few books we like. They are usually cheap enough so that we can afford them (or at least that is our perception), but they are really not *necessary*. Usually, it ends up like this: “Wow, this book is awesome, I want it” - and the thoughts of checking it up in the library, or trying to see if I can get it cheaper online just vanish.

Current fix: Avoid visiting book stores.

2. Diecast vehicles: This issue has been existing since more than 20 years - I think it’s been hard-wired in me by now. I just can’t take my eyes off good quality diecast vehicles. Cars, motorcycles, tractors, aircrafts - you name it and I have bought it. Usually, they are not very expensive, but at times, good ones cost more than a few decent dinners.

Current fix: Avoid stepping into shops that sell diecast vehicles. The other indirect fix I am working on is to get my wife to shorten her shopping time for clothes (too much time in a clothing shop makes my mind wander in the direction of diecast vehicles).

3. Chocolates: These are evil - especially the miniature ones. I devour them like some people eat peanuts. Generally, they never make it to our shopping lists but, in spite of that, I often find myself in front of the chocolate aisle, drooling over the “rich dark” variety of chocolates.

Current fix: Again, avoidance rules. Another great idea that’s working right now is to keep the chocolates out of sight after we buy them. We store them in a drawer at the bottom of our refrigerator. The extra work of opening the refrigerator and then opening and closing the drawer has reduced my consumption rate, so now they last longer - discourages additional purchases.

4. Library fines: Great, I spend on books … and I also spend on library late fees on borrowed books! The real culprit here is procrastination, but I prefer to blame it on the geographical positioning of our school library - it takes me a good 20~30 minutes of walking time to just return a book (I haven’t given a lamer excuse in a long time). Also, our library charges fines by the minute on certain issues and that doesn’t help me much. Here is a screenshot of the late fee schedule:

Current fix: I will try and stop procrastinating… in a few days.. or months.. sometime.

5. DSL + Landline Phone: This is a bit mindless. We need high speed internet access (else, I cannot really work on this blog from home) and the cheapest option is DSL. The problem is we need to carry a useless landline to get DSL connection and that really raises the cost by almost 100%. The only other option is a cable+high-speed-internet connection, but that turns out to be more expensive than DSL+landline (in fact, just the high speed internet itself is expensive when it is offered by a cable company) ~ so we are sticking with the DSL for now, even though that means wasting about $20 every month on landline.

Current fix: Don’t have one yet. Will someone please provide high speed internet for cheap?

So, there… these are the little holes in my pocket. It looks like temptation and procrastination are the roots causes these money leaks (duh!). So far, practicing avoidance has been working very well against temptations, but the procrastination part is a bit tricky to handle. Working on it.

Have you recognized your money leaks? how do you handle them?

I was just having some fun at work creating images of a penny to demonstrate a certain technology to some new students. Here is an example image:

Can you guess how this image was created? Hint - think out of the box; except for the size, it has not been edited in any way.

Interestingly, not many of the students knew how the penny looks up-close. They have probably *seen* it for years, but never *observed* it closely. Some of them knew what “E Pluribus Unum” means, but none of them knew what “FG” stands for.

The letters “FG” are not clearly visible in the above image, but you can check this detailed photograph of the penny for that.

For those who are not aware about the significance of those letters - they are the initials of the designer Frank Gasparro.

By the way, the other side (Lincoln side) of the penny was designed by Victor Brenner. But, check out this detailed photograph of the Lincoln side of the penny - here only the letter “D” appears below the year, instead of the initials. Now, what is that for? Well, that’s a mint mark of the US Mint at Denver, Colorado.

So, the other side doesn’t have Victor Brenner’s initials? If you ask that question, then you haven’t yet *observed* the Lincoln side of the coin closely enough.

Did I say “academic success”? Sorry, I meant “shoving consumerist lifestyles down the already-choked-by-debt throats of Americans.”

I was visiting a local Best Buy store to pick up some blank CDs, when I saw this “Back to School Tech List” displayed near the customer service desk. It starts with a nice Lifehacker-style title: “Top 15 must-haves for this year’s college students“, but the rest of it is essentially a big load of crap.

Here are the first eight essential tips for academic success:

And here are the remaining seven essentials for college life:

They probably missed #16 - apply for a Best Buy credit card with 32424531% APR, and then keep making minimum payments. Now, that’s also an essential aspect of academic success and college life.

A more appropriate title would be “Top 15 must-haves to start school with credit card debt“.

All these years I was under the impression that academic success depended on how hard you study, how well you understand, and how diligent you are with your homeworks and assignments. Things have probably changed now.

I am just picking on Best Buy because I happened to have their ridiculous list in my possession; however, these type of lists are fairly common in many retail shops around this time of the year. The back-to-school shopping business is really bloating up into a Thanksgiving/Christmas style shopping mania. Sharon @ The Frugal Duchess has some interesting thoughts and numbers on the subject. She also refers to an interesting report by National Retail Federation (NRF) which says that back-to-school spending will exceed $18 billion this year. It’s probably a coincidence, but this is what I found in the report:

“Electronics have evolved from luxuries to necessities, not only for college students but also for their younger siblings,” said NRF President and CEO Tracy Mullin. “While some students may be pleading with mom and dad for an iPod or a cell phone, parents are also investing in desktop or laptop computers, educational software and printers to support their children’s learning.”

I guess that’s where Best Buy picked up it’s *essential* tips from.

Many months ago, I wrote this post “Students, Laptops, Digital Cameras, Huge Cars, and Debt“. Some of you will find it interesting in light of the above discussion.

[Quick note: I mentioned "porn" near the Geek Squad logo in the first image above; read this article and this article on The Consumerist to know more about it.]