money

The other day, I came across some interesting data on spending habits of millionaires from the book “The Millionaire Next Door” by Stanley and Danko. It was about how much money millionaires spend on items like suit clothing, shoes, watches, and cars. I am presenting this data in a tabular form below - “typical” values are highlighted in green; for example, a typical millionaire spends about $140 on a pair of shoes.

It’s a pity that the authors do not explicitly mention the time frame of the survey (although, there is some generic information about their surveys towards the end of the book), the number of millionaire participants, or the age distribution of the participants included in the survey - but what is presented should be enough to make (some) people think about their spending habits. Of course, all surveys have their limitations, so a bit of skepticism won’t be out of order (keep in mind that the book was first published in 1996 and the surveys were conducted around that time, so there will be some inflationary effect on the numbers by now).

Anyways, assuming that the survey satisfactorily reflects the millionaire population in the US (around 8.9 million households), if you find yourself placed in a higher percentile group (more than 10%) in the above tables, then there are probably hundreds of thousands of millionaires who have less expensive tastes than you. Try to visualize this whenever you feel like contemplating on your spending habits.

I (fortunately, so far) fall in the lowest spending percentile on all four counts. Here are some specific numbers for my case:

• Most expensive suit clothing: $99 (plus tax) suit jacket from a JC Penny sale; bought 3 years ago.

• Most expensive shoes: $70 leather shoes; bought 6 years ago.

• Most expensive wristwatch: $9 + change (don’t laugh); bought more than 6 years ago.

• Most expensive car: $12,200; bought a couple of weeks ago.

What about you? have you been spending more than the typical millionaires on the items mentioned above?

Recently, Brian Clark at Copyblogger posted a simple, yet profound list of 10 steps to becoming a better writer. In the same spirit, I would like to propose 10 simple steps to becoming wealthy.

1. Save money.

2. Save more money.

3. Save even more money.

4. Save even more than that.

5. Save when you don’t want to.

6. Save when you do.

7. Save for a purpose.

8. Save even if you don’t have one yet.

9. Save every day.

10. Keep saving.

Bonus tip: You can save only when you spend less than you earn.

Simple to understand? Absolutely.

Easy to implement? Definitely not.

Worth trying? Absolutely.

Implementation is difficult, but it becomes easier with practice. So, keep trying and keep saving. Rain or shine, don’t let anything discourage you - just keep saving.

Here, I will invoke the principle of profound transcendental redundancy - good things will happen when you keep repeating the right things.

Some food for thought; just in time before the iPhone takes control of your senses.

Old wisdom says:

Money is the root of all evil.

George Bernard Shaw says:

Lack of money is the root of all evil.

St. Paul says:

The love of money is the root of all evil.

I say:

The want of easy money is the root of all evil.

There are two key words here: “want” and “easy” signifying greed and laziness, respectively. Money is just a medium that makes these undesirable qualities more visible - you could probably replace the word “money” with a lot of other things (love, sex, respect, power, oil, material possessions, etc.) and yet that statement would be valid.

The “want” or desire or love for money, in fact, can be a great motivational factor that sometimes makes people work harder (and/or more efficiently). When people are no longer in control of this desire, it takes the form of greed.

Again, greed alone is not much of a problem (a greedy man can only harm himself); however, evil takes roots when the greed joins forces with the tendency to take shortcuts.

Also, for the sake of countering George Bernard Shaw’s statement, evil can take root irrespective of whether you are lacking money or have tons of it. In fact, in my opinion, the evil perpetrated by those who have it all is more malicious than the evil forced out of deprivation.

What is your take on this?

So you suddenly won/received $50,000 through some source (lottery, inheritance, etc.); how would you invest it? You have the following constraints:

You don’t need the money for at least 10 years, you’ve already maxed out 401k and Roth IRAs. Pretend that the windfall (lottery, inheritance, etc.) came under a couple conditions: 1) You can only invest it in one area. 2) If your investment doesn’t make 6% a year you lose it all.

Lazy @ Lazy Man and Money asked this question last week and invited some answers.

I mulled over it for a while - and mulled over it some more - and finally realized the predicament that lottery winners must be facing. Seriously, I had trouble trying to think what I would do with the money. Finally, I provided this answer (with which I am not very happy now):

Option 1: I would love to use that money to start a *good* restaurant on campus (or very near to campus). A few semesters ago, we (me and some of my classmates) did some ground work (for a class) on what would be required to open a restaurant in our town ~ I would like to see some realization of those ideas. With the kind of numbers we played at the time, we estimated that we would break-even (with respect to the initial capital) in about 3 years ~ and the earning rate will increase more with increasing popularity (and increasing enrollment of new students). Plus, it’s a university town - students are busy - they tend to eat out a lot and that works in our favor.

Option 2: Invest it in energy in a sort of “hedging” manner - gasoline, sun, wind, hydrogen, and nuclear. The demand for energy is never going to head down - gasoline may be replaced by hydrogen in the time to come - but you will need something to keep those millions of cars running. I don’t know what kind of a returns this will give me…but since it’s an unexpected windfall, I would be willing to take risks with it.

Going from 50K to 100K would definitely make me think more - although I don’t think it will affect my choice much (if it were $1 million, that would certainly make me change my choices). The time factor will also matter a lot - technologies become old and new ones attract more attention - accordingly, I wouldn’t want to stay rigid on the energy investment options. I would stay in the broad “energy” field, but my options would depend on what’s hot at the time. With the restaurant, it doesn’t matter if the time frame is 10 years or 50 years - if it’s a good restaurant, it will be etched on people stomachs for ever.

I noticed two (potentially harmful) tendencies here:

1. My perception of risk changed due to the source of my windfall (even though faced with the consequence of loosing all the money if it doesn’t earn 6%, I was still willing to take chances - which otherwise I would not have dreamed of).

2. The extra money may have made me overly optimistic - I later came to a conclusion that the restaurant idea was too optimistic with no real experience (lack historical performance perspectives - “statistics” for some people).

To make it clearer, let me say that if it was my own hard-earned money, opening a restaurant would have been the last thought on my mind - I would have perceived it as being too risky an endeavor. I might have gone for investing it in stocks - which would have easily earned more than 6% (after-taxes); even S&P 500 would beat that in the long run. Plus, with stocks, you have a historical perspective - so some amount of future prediction can be made [although, estimating future performance (extrapolating) based on past performance involves risks - it's less risky than trying to invest in something which has no past performance numbers (like the restaurant idea)]

Do you think there is a general tendency to take “more risks” with unexpected monetary gain? Would your choices be different about investing $50,000 if it were your own hard-earned money rather than an unexpected windfall?

Your net worth to the world is usually determined by what remains after your bad habits are subtracted from your good ones. ~ Benjamin Franklin.

Beyond such philosophical implications, I have been thinking about the issue of usability of net worth since the last Sunday Review - in which I mentioned it with reference to Super Saver’s article on spendable net worth.

I am not just thinking liquidity when I say “usable”, I am also thinking *replacement-needs*.

Consider you own a quarter-million dollar house, a decent car, and thousands of dollars in a retirement account (say something like 401K - on which there is a penalty if you withdraw earlier than certain age limits). With these assets, assume that your conventional “net worth” is around half a million dollars. Next, suppose you lose your job (or fall into some other financial trouble) - how much of that half-million dollars net worth will come to your rescue?

Even if you downgrade your lifestyle, you will still need to replace a few things from your earlier lifestyle - you will still need a place to stay (owned or rented), a car, some furniture in your house (or apartment), and some other basic needs (may be this includes retirement accounts too) to sustain yourself and your family. So, although your net worth was half a million dollars, you will be able to liquidate only a part of it to support you through your financial troubles. The rest of it will go towards replacement-needs and you will never be able to use it.

On these lines, I am more inclined to think like this:

• Usable net worth of a home = [Current equity in your home] minus [Cost of replacement home/apartment]

• Usable net worth of a car = [Current value of a car - assuming you own it completely] minus [Cost of a replacement car]

• Usable net worth a retirement account = [Current savings] minus [Penalty/taxes for withdrawal]

Obviously, for certain retirement accounts, the penalty and taxes will be zero after you are of a certain age - at that time you will be able to realize the full worth of the savings - till such time, penalty and taxes should be considered.

In addition, there are other *liquidity* issues that sort of eat into the conventional net worth. For example, the current value of your car as defined by KBB may be $15,000, but when you actually put the car out for sale, it’s very less likely that you will get the full $15,000 for it. Such differences, between the theoretical values and what the market offers, further reduces the usability of net worth.

Sometimes, I wonder if there are “net worth rich” people who are in fact *poor* for all practical purposes after considering the usability of their worth.

Do you address this issue of usability of net worth? If YES, we would be interested in knowing how; and if NO, then we would be interested in knowing “WHY”.

Here are some other interesting discussions on related issues:

• Net Worth Is NOT Wealth: How to Determine Your Total Measure of Wealth by Nick @ Punny Money.

• A Tricky Net Worth Problem; Who Is The Richest Of Them All? on this blog.

• What is Real Net Worth? @ Broke Now Rich Later.

• The Confusing Process Of Measuring Net Worth & Financial Progress by Teri @ Personal Finance Advice.

Sometime back, Henry @ Binary Dollar asked this money question: “What do you look for in an online bank account”? and invited responses from a few bloggers. Here is what I had to say about my views in choosing an online bank account.

1. High Interest Rates - This is the juicy part of online savings account; without the high interest rates, there is nothing attractive about them. Higher the better.

2. Easy of synchronization with other bank accounts - the online account should easily (without any hassle) communicate with my brick- and-mortar banks and also with other online savings accounts. In my experience, HSBC Direct is the best in this matter. Also transferring funds from the online bank to other banks must be a zero fee activity.

3. Absolutely zero fees - I don’t have any tolerance for “low” fees so I would look for one that has absolutely no fees at all. I *hate* banks that have $X fees if you balance falls below $Y. All banks we use (HSBC, ING Direct and Emigrant Direct) don’t have any such fees.

4. No minimums - This sort of ties in with “zero fees”. The account shouldn’t have any kind of a minimum balance requirement. Sometimes there is a “minimum account opening amount”. Ideally this should be $1, but anything below $250 is bearable.

5. A good *feel* for online security - Ok, I have to agree that the *feeling* is a bit vague, but if you visit the login page of an online bank account, it should feel solidly designed with sufficient security features. In my experience, ING Direct *feels* the safest followed by HSBC Direct and Emigrant Direct.

6. Goes without saying that any online savings account should be FDIC insured.

Those six points sort of summarized my thoughts, although I do have more things to add to them - important things, but not crucial.

7. Funds transfer times - I need to get a good feel for the time it takes to transfer funds to and from the online bank. Too much time is a bit of a discouragement. Of the three online accounts I have, HSBC tends to be the slowest. In fact if you straddle your HSBC funds transfer over a weekend, it might take as much as 5~6 days to get the funds where you want them. Fortunately, most banks tend to be consistent with these transfer delays - so you can plan your transfers accordingly. For those who keep track of their interest to the pennies, you must understand that the time lost in funds transfer delay is basically translating into lost interest income. Jonathan @ My Money Blog has an interesting experiment on this subject.

8. Recurring/Automatic Transfer facility - This wasn’t on my list in the past, but recently, I have been regularly using HSBC’s recurring transfer facility - it has sort of helped me save some money. If I open an account in future, I would definitely want such a facility.

9. ATM/Debit Card - Again, this is not crucial, but it helps to have this facility available so that you can access your funds in an emergency. Before HSBC offered it’s high yield savings account, we had our money in ING Direct - and ING didn’t have a ATM Card (or a debit card) with it’s online savings account. As a result, I used to transfer funds to our ING account with caution - after accounting for sufficient liquid cash in the brick and mortar bank for emergencies. However, once we got set up with HSBC Direct, and had access to it’s ATM card, our need for the liquid cash in the local bank has decreased - as a result we transfer more per month to our online savings account.

Now-a-days, ING issues debit cards with it’s online checking account - Electric Orange; and you can link Electric Orange to ING’s savings account - so basically you can have instant access to your savings account money through the debit card. That’s good.

As far as I know, Emigrant Direct doesn’t have any such facility. May be there is, but I don’t know about it.

10. Reviews - It’s a good idea to look for online reviews about certain unheard banks. Sometimes, the interest rates may be very good, but the whole process of opening an account and then operating it might be a big PITA. Probably, a bank with slightly lower interest rate might be a better choice in that case. The best way to find out about these things is to look for reviews from current customers and the easiest way to get reviews is to search for them on Google.

Before I let you go, here is something important.

If you are in the market for an online savings account, always read the find print carefully for hidden fees and charges. For example, look out for things like these:

• $3,000 minimum deposit to open account
• Minimum balances: $3,000 minimum daily balance or $5,000 average daily balance in account. $15 monthly service charge if balance requirements are not met

Those are the conditions for an online account (money market account) at New Dominion Bank which is boasting an interest rate of 5.07% (APY).

Updated: Click here for the current list of banks offering high interest savings accounts.

Btw, just to be clear, all links in this post are for information only - there are NO referral links in this post.

Feel free to share your thoughts on what you would look for in an online bank account.

Recently, Ben @ Money Smart Life ran a series of posts on “Can You Save Too Much In An Emergency Fund“. The purpose of the series was to answer this question posed by a reader:

“Is there such thing as saving too much money in an emergency fund? What’s the best place to keep the money you do save so it still earns you something while just sitting there?”

I contributed a quick response to the question and it looked like this:

Let me start with the basic idea of an “emergency fund”. According to my definition of the concept, it’s a pool of money to account for *unexpected* circumstances and must adhere to the following three requirements:

1. It should easily available in an emergency (must be liquid and easily accessible through common instruments like cash or checks).
2. There should be a sufficient margin of safety built into it (a part of my answer to the question lies here).
3. It should be held as risk free as possible (you don’t want a devalued pool of investments right at the time of an emergency).

So is there such a thing as too much emergency fund?
I look at emergency funds as a sort of foolproof “hedge” against unforeseen circumstances. For example, it is like a cushion to break your fall and allow your survival if you lose a job (unexpectedly), or if the stock market crashes and you lose a major chunk of your net worth, your house catches fire and your insurance company messes with you and delays payments….things like that. Agreed that these things don’t happen on a regular basis…but they need to happen only once in your lifetime to make you realize the importance of a cushion. So ideally, your emergency fund should be able to cushion the worst possible scenario (specific to your personal situation) that you can imagine (update: “end of the world” is not a valid scenario). Add a 20% margin of error to that estimate (roughly) and aim for that emergency amount. The right amount will be something that makes you feel “safe” after considering the worst case scenario. More than that is probably “too much”. Of course, the measure of “too much” will vary greatly depending on your lifestyle.

Where to park the money for maximum returns?
Since I view emergency funds as ‘hedge’ ..returns on these funds are not a major concern. I would first satisfy the above three requirements and then maximize my returns from the available choices. Online savings accounts with ATM and/or check facilities are one of the potential places to such park funds. If you park your funds in such a place where the funds are not easily accessible, make sure you have an instrument of equivalent value available for use (for example, you could use a credit card at the time of an emergency…and then repay it as soon as you get your funds at a later time).

I understand that I have a more conservative (almost a bit paranoid) approach towards this issue. However, due to the “unforeseen” nature of emergencies, it does merit some consideration.

Do you think it’s an overly conservative approach towards emergency funds? What would have been your response to the question? I encourage you to visit this post @ Money Smart Life to leave a comment on the issue.

I thought a bit more on this issue after leaving my response and came up with some additional stuff.

Technically, with increasing emergency funds, you are opting for greater security and lesser returns - sometimes this makes me think that there really isn’t any “too much” when saving for emergency funds; what you lose in returns you will gain in stability/assurance/security. I sketched a quick schematic to illustrate my point:

Note that the term “Increasing Returns” in the above graph is only valid under the following assumptions:

• Emergency fund is assumed to be highly liquid with low returns.
• If you choose to keep a small emergency fund, you are diverting a large portion of your money into high yield investments.
• If you choose to keep a large emergency fund, you are diverting a smaller portion of your money towards high yield investments.

Hope that makes sense.

Another thought is that I don’t consider insurance as an *emergency* fund..however, some people tend to think that way. Insurance is very situation specific (it’s not economically feasible to insure every aspect of your life) and there can be incredible procedural delays in getting your money through a claim. In fact - like I said before - your emergency fund should fill in that gap caused due to a procedural delay (and/or eventual dismissal) of your insurance claims.

I have some more observations on this issue, but I don’t want to clutter the post with too many lines of thoughts, so everything else will have to wait.

Welcome to the 71^st edition of the Festival of Frugality. Before we start with the festival submissions, here are some thoughts. Sometimes, when we are engrossed in squeezing out every ounce of worth from a penny, it is easy to lose sight of reason and rationality. Hence, every once in a while, to put our actions into perspective, it is beneficial to take a step back and look at the bigger picture. In this spirit, let’s first review *frugality* before we jump to the articles.

What is Being Frugal? by Dawn @ Frugal for Life.

Because I live frugally, doesn’t mean I don’t spend money and don’t find enjoyment. I become more thoughtful about my decisions and how it will impact me in the future. I decide if this item is something I need or can use multiple times. Frugality is about restraint, discipline, finding the best value and using the item up till it can’t be used anymore.

Frugality as defined by Wikipedia.

Frugality (also known as thrift or thriftiness), often confused with cheapness or miserliness, is a traditional value, life style, or belief system, in which individuals practice both restraint in the acquiring of and resourceful use of economic goods and services in order to achieve lasting and more fulfilling goals. In a money-based economy, frugality emphasizes economical use of money in meeting long term personal, familial, and communal desires.

What is frugal living? @ eSSORTMENT.com

Frugal living isn’t about giving up the good life; it’s cutting out unnecessary expenditures. Most families who practice frugal living do so, not because they’re in a financial bind, but because they’ve made a conscious decision to take control of their spending and that means not keeping up with the Joneses or maxing out credit cards.

Now, let’s head over to the festival’s entries. 29 articles were accepted for publications.

Frugality Food for Thought

Frugal vs. Cheap by Andy @ Money Walks. In this post, Andy expresses his thoughts on defining frugality. This blends in very well with the theme of this edition. Here is one of his thoughts: “Living well for less money is frugality. Leeching off of people to get by is cheap.”

Sometimes, You Should Indulge by ISPF @ Grad Money Matters. ISPF thinks outside the conventional frugality box and recommends indulgence once in a while. If you are truly frugal, you could probably find frugal ways of indulging

Frugal Entertainment

Being A Big Kid - Frugal Entertainment by Super Saver @ My Wealth Builder. This is frugal entertainment plus quality time with the kids in one package. Seriously, kids don’t distinguish between “expensive” and “cheap” entertainment…all they care is about getting *entertained*.

Fifteen Free Things To Do During A Money-Free Weekend by Trent @ The Simple Dollar. Got a lot of free time on weekends and not in a mood to spend a dime? Trent has the perfect solutions for you. Here is one of them:

Blow bubbles. This is a great one if you have kids. Get a gallon of water, then slowly stir in some liquid dishwashing detergent (a cup or two), slow enough not to make suds. Bend an old coat hanger into loops, dip it into the stuff, and blow through the loops. Experiment with different quantities to get the kind of bubbles you want - there is no “perfect” recipe.

I want to quickly mention here that by adding sugar to the soap solution (and after some practice) you could actually make larger bubbles. Try it out and see if that works.

Frugal Vacations

Vacation: Need or Want @ Living Almost Large. How do you discern whether a vacation is a need or a want? Do you feel that sometimes people have this overrated sense of *entitlement* for vacations or certain indulgences? It’s one thing to take a frugal break to vacate your mind of daily routines, and it’s other thing to go on unaffordable trips to justify a *break*.

Vacation on a Budget by Stephanie @ Stop the Ride!. Stephanie shares how she planned her frugal vacation to the beach.

Automotive Frugality

Do You Really Know How Much It Costs To Own Your Car? by Silicon Valley Blogger @ The Digerati Life. Always think in future terms when you look for a car. Cars that seem cheap now may turn out to be expensive in the long run due to horrible repair and maintainance costs. SVB explains this with a neat breakdown of numbers and types of costs.

How I Saved 37% on My Car Repair Bill by FMF @ Free Money Finance. FMF shares how he used coupons and credit cards to cut down the repair bill on his Subaru Forester.

What You Should Know About Your Local Auto Body Shops by David @ My Two Dollars. A commentary on a Kiplinger’s article about things to consider before visit an auto body shop.

Frugal Meals

Cheap Work Lunches @ Cents You Asked. Some ideas to save money on lunch. Hmm…I see Healthy Choice frozen dinners in the list…some people will find that debatable.

Tuesday’s Lunch by Viriatha @ Cordova Creations. In this post, the author visits “lunch factor” (on the lines of latte factor) and encourages homemade lunches to cut down on cost and calories.

Last Minute Spring Cleaning? Don?t Forget the Cupboards by John @ Queercents. John characterizes his cooking as a race against expiration dates and shelf lives. Throwing out food is one of the most painful money wasters out there, so he dishes out some frugal advice to make the best of such situations.

Creative Frugality

How I Decorated My Son’s Room for Under $60 Tricia @ Blogging Away Debt. Tricia tells us how she decorated her son’s room for $59.96 (yeah!…not $60) This post is a fine example of frugality in practice.

Instead of buying expensive border, I used some printable sticker paper to print out construction trucks to cut out and stick on the wall for a border. I also used some stickers to decorate the light switch plate and his bed. Total cost: Probably around $2.00.

What to Do When You Forgot to Read Directions by Frugal Babe @ Frugal Babe. The author had a minor bummer situation that turned into a great example of a creative and a frugal solution to a problem. A $1.50 remedy to hold a storm door glass steady is not bad at all.

Groceries and Shopping Frugality

Cutting Grocery Costs (without clipping coupons) by Amy L. Fontinelle @ Personal Finance Advice. Amy presents six simple tips to save money on groceries without clipping coupons.

How To Pick Perfect Fruit by Baselle @ Baselle’s Financial Diary. Must read tips on choosing good produce…must read because Baselle is a PhD in Botany. I am sure there are things in this article that you have never heard about before.

Do You Get What You Pay For? by TFM @ Tight Fisted Miser. High price does not equate to high quality. TFM gives examples to make his point:

The recalls of pet food and peanut butter showed that the same manufacturers were making both the store brands and the higher-priced brands. Often the only difference between a store brand and a name brand is the label. In that case when you buy the name brand you are paying for advertising and packaging, not for higher quality.

How To Save Money On Shipping When Shopping Online by Ben @ Money Smart Life. Ben shares some useful tips on lowering your shipping costs when shopping online. Ah…those love-hate feelings about items worth about $2 that require about $8 of shipping.

Bargain Hunting at Outlet Stores @ Ask Mr Credit Card’s Blog. Mrs. Credit Card tells us how she got a good deal on a piece of furniture by buying it through a scratch ‘n dent sale at Pottery Barn.

General Frugality

Free Money – Small Money Adds Up Big by Steve Faber @ Debt Free. Steve pulls up some numerical examples, again along the “latte-factor” approach, to show how small things can turn in big piles of cash in future. He also considers a couple of big ticket items like HDTV and cruise vacations.

Ask the readers: cheap wedding ideas by Sara Goldstein @ The Bargain Queen blog. Look for frugal wedding suggestions from readers’ comments in this post. Here is an example:

I used wildflowers for the flowers, and the florist was a friend’s mom, so for her labor and the trimmings it was $35. We got married in a little church, and our friend took the photos. Our reception was potluck and Dad provided the bar on his own dime. Another friend played ukelele and sang vaudeville songs on the porch for entertainment.

101 ways to save a dollar by Colleen Caldwell @ Simple Kind Of Life. Colleen points towards a list of ways to save money and shares a few personal thoughts on they are practicing frugality.

…like all families, we’re always looking for a way to save a few bucks. In the past year, we’ve decided to eat out less, shop sales more, and try not to spend money just for the sake of spending money. Sometimes, it’s easier said than done.

Recycling Batteries by Phil @ Phil for Humanity. Did you know that non-rechargeable batteries are not recyclable? Phil encourages us to use rechargeable batteries and do our bit towards the environment.

20 tips to keep from spending money by Beth Dargis @ My Simpler Life. Some practical money saving tips from Beth. Here is one in particular that caught my fancy:

Remember, the thrill is in the hunt of finding the “perfect” thing. Once you buy it, the thrill is gone.

Frugal Art

Works for Me Wednesday: Framing Free Art @ The Family CEO. The authors tell us how he decorates his walls by framing free and meaningful prints - like his son’s art class drawing and such.

Recycling Crayons by Melanie Rimmer @ Bean Sprouts. A fun easy way to recycle broken wax drawing crayons into chubby multicolored crayons.

Implied Financial Frugality

Irregular Income And Unplanned For Expenses by NCN @ No Credit Needed. NCN describes how he accounts for unplanned expenses. I have a somewhat similar system in place, except that I don’t budget to the penny.

How to Make Your Finances Automagical by Leo @ Zen Habits. Leo has a few tips on putting our financial management on an auto-pilot. Suggestions include automatic fund transfers to an online savings account and automatic bill payment.

Investing Is a Luxury by Peter Maclennan @ Peter Pays Paul. This article is really about investing, but there are some good, generally applicable thoughts towards a financially sound life.

That’s all for this edition of the Festival of Frugality. Click here to submit your article to the 72nd edition to be hosted at Frugal for Life.

Image sources: Think: ed-thelen.org; Soap bubbles: www.lunararchives.com; Vacations: www.ontariosailing.com; Automotive: www.supershuttle.com; Groceries: www.dorsetforyou.com; Bread-jelly: spacebar.blogsome.com; Money: www.bloggingblog.net; Art: www.britishcouncil.org; Creative: www.thehypnosiscds.com; Saving Money: www.mandlers.com

First, some general thoughts about buying airline tickets. It’s like buying company shares in the stock market. The first time you see a fare, it raises some “stock market-like”questions; for example: is it going to rise or fall in time to come? should I wait for a better time or buy immediately? what will happen if the price falls suddenly after I make the purchase? and other similar questions. So, to make a long story short, buying “good deal” airline tickets has the same kind of anxiety attached to it as buying a “good” stock.

A few days ago, I booked two tickets to Philadelphia as a part of our short vacation plans over the Memorial Day weekend. To avoid spending a ton of money on airline tickets later, I decided to book them right away (for once, didn’t really procrastinate). Searched on major websites: Expedia, Orbitz, Farecast, etc., and as usual….found cheaper deals on airline websites directly. Both Continental and Southwest were offering low fares, but went ahead with Southwest (flight schedule suited us better) and finalized the purchase. Here is a summary.

Today, I was just tinkering around travel websites, trying to check the ticket prices again (I am into this habit of checking prices of things *after* I have already purchased them…may be to reassure myself that I was not ripped off…or something like that), and found out that the fares had dropped significantly over the weekend! It felt like all those times when I bought something on “sale” just to find out that the “regular” price dropped below the “sale” price on the next day (which happens almost every time).

Fortunately, thanks to Southwest, it took me less than 2 minutes, about 8~10 clicks, and no human intervention to avail the new reduced fares (all you need to do is “change” your current itinerary…and book the same flights again and new fares are applied like magic).

That saved us $100 in all. The new prices are pretty cool considering it takes more than 3.5 hours to fly nonstop from where we live to Philadelphia (and for some weird reason this price is even less than the current “sale” prices advertised on Southwest). It’s a pity they don’t refund the amount to your credit card…but the credit for future travel is good enough for us. Will apply that towards a Las Vegas trip later in the year.
Experience with Farecast.com

The first time I booked tickets on Southwest, I sort of relied on Farecast.com’s price “forecast”. At that time, it was telling me that fares will hold constant over the next 7 days. However, that forecast didn’t really come true…fares dropped within 4 days. So personally, as a forecasting tool, it wasn’t of much help to me.

However, although Farecast did not correctly predict the fall, it did follow the rise and fall in airline fares faithfully (may be it adjusted the graph *after* the prices changed…who knows). It’s prediction capability was pretty much useless, but the graph showing the price history was handy. It showed me that ticket prices are at rock bottom at about $160 and average price is around $220. So, the moment I saw something selling at $167, I knew it had to be a good deal.

I wanted to mention this to make a point that don’t rely too much on price forecast. Remember it’s like the stock market….the best predictions can go way off target. By the way, I am curious to know what kind of algorithm Farecast uses. Please enlighten me if you know more about this.

Some quick lessons

• Expedia, Orbitz, or other travel portals may not be the cheapest options (at times)…sometimes it’s cheaper to book tickets directly on airline websites.
• Don’t rely too much on price comparison and/or price forecast websites. I have found that, many times, there is a disconnect between the prices on these websites and the prices offered on airline websites. It pays to do your own homework in this matter.
• Your work is not done once you buy your tickets (especially if you booked very early and suspect that you have paid more than the average price). Look out for dropping fares.
• Click here for a comparison of price refund policies for different airlines. Southwest and JetBlue are the best ones out there.
• If the price of your stock falls, no one gives you a refund. So I guess things are not as bad with the airline ticket booking.