Tuesday, October 29, 2013

The Effects of Math-based Buying Decisions on our Personal Finances

According to an article on MSN Money entitled, “How ‘math anxiety’ costs us money”, “The average consumer's "math anxiety" often means taking the easy option (i.e., dollar-formatted) even if the person is capable of doing the math, according to research led by Rajneesh Suri of Drexel University.”  It goes on to say, “Math-based marketing favors retailers because consumers "make decisions based on clues and half-thinking that amount to innumeracy," notes Derek Thompson of The Atlantic in an article called "The 11 ways that consumers are hopeless at math."”

While I wouldn’t term it math “anxiety” exactly, from time to time we all suffer from those mental brain farts when it comes to money.  Sometimes such faux pas only costs us $1 or so when we flub our fast food order.  Sometimes they cost us much more. 

Over time, our own family has experienced several situations in which this so-called “math anxiety” or math-based buying decisions have hurt us financially, but we’ve learned a few things from these experiences along the way.

Bi-weekly mortgage payments
When I got the letter from our bank regarding a bi-weekly mortgage payment plan, it sounded like a great option.  The letter explained that such a payment plan could cut our mortgage rate by something like .75 percent and save thousands of dollars over the course of the loan…or something to that effect. 

While essentially this was true, making extra payments toward our mortgage was something we easily could have done ourselves.  Rather than paying a $300 application fee and then $1 for each extra bi-weekly payment deducted from our account ($26 a year), I could easily have made an additional payment (since that’s what the program essentially equated to) once a year myself for free.  Their fuzzy description of the program and my failure to read up more on the program before signing up for it left us paying money for something that I could do (and eventually did do) myself for free whenever we wanted to make an extra payment toward our mortgage.

Buying our first home
Buying our first home was a learning process in itself.  However, in that process, I realized one very important thing over all others.  This realization was that when we were dealing with large numbers -- numbers that reached into the hundreds of thousands -- for the sale price of our homes, smaller number that we would typically have found big, didn’t seem that big anymore.

After the fact, I realized that we had ignored or brushed aside with ease certain costs that normally we would have raised an eyebrow or two at.  $300 here and $500 there are amounts we typically cringe at when they hit; however, such amounts didn’t really seem like a lot when buying a home for nearly $300,000.  Plus, there were so many other things to deal with in the home-buying process that it was just such a whirlwind.  Therefore, when we bought our next home, I made sure that we carefully gauged, considered, and negotiated each cost whether it was the smaller fees for the real estate lawyer and home inspector, or much higher cost of the home itself.

Swimsuit issues
The other day I was helping my wife pick out a new bathing suit.  This is one of the few clothes shopping experiences that I don’t really mind, except this time it was with the kids so it wasn’t as appealing as usual.  We’d gone through multiple suits in our search, eventually finding one that fit and looked great.  Amazingly, it was on a “$10” rack, which for ladies swimsuits is super-duper cheap.  The sales associate casually mentioned that this rack was currently half off...so the suit would be just $5!  But my wife had already found a suit she liked for $60, had tried it one, and like it.

Having already made multiple laps around the store with a fussy baby, I wasn’t about to argue.  But I knew that if she hadn’t found the most expensive suit first, she would have been completely content with the much cheaper and better fitting suit.  My only comment to dissuade her was, “You know, even if the second suit doesn’t last as long, you could buy 11 more for the same price as the other one.”

She smiled and agreed, and then bought both, proving that sometimes when we make an initial decision, we often tend to lock it in as a “done and done” in our brains.  However, this can lead to a sort of brain lockdown in which we stop considering other options, which can cost us money or lead to bad decision making in the process.

So sometimes it pays to take a moment and consider just what the numbers mean and why they are being presented in the way they are.  Taking a minute to settle down and do the math could end up saving some big money in the process.

 

Disclaimer:

The author is not a licensed financial, mortgage or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

Wednesday, October 23, 2013

Responsible Spending when Every Day is a Saturday

The other day I read something likening every day in retirement to a Saturday, which is the day when most people tend to do most of their discretionary spending.  It was a warning about the potential for overspending in retirement, a time when many of us may find ourselves with more time on our hands than money.  And that time can prove potentially dangerous to our finances when we’re looking to fill it with things that cost money like shopping, traveling, and home or yard improvement projects.  Therefore, it can be important to the health of your retirement fund to find ways to restrain your spending when every day seems like a Saturday. 

As a self-employed individual who works from home, I often feel like the days blend together.  And with plenty of extra time on my hands around the house for potential spending, I have created a few rules to restrain myself from blowing extra cash and that I plan to take with me into retirement.

Find cheap hobbies or even ones that make money
Hobbies can be great time fillers and killers.  And sometimes hobbies can even be great money makers too.  From gardening and farming, to painting, writing, and online reselling, not only can certain retirement hobbies keep you pleasantly occupied but from spending money too.

As you might guess, I enjoy writing not only for a living, but as a hobby as well.  It’s a great way to express creativity and keep myself busy and from spending cash doing other things.  I also like doing home repairs, growing our own food, having garage sales, doing a little Dumpster diving, and partaking in other projects that either save money -- or as with garage sales -- sometimes even make us a little extra cash.  And these are all things that I can carry with me into retirement to keep me affordably entertained.

Downsize transportation
Over the years of being a work-at-home parent, I’ve realized that if I don’t have a convenient form of transportation, I’m much less likely to go out and spend money.  After we downsized by one vehicle when I started working from home, my wife used our other vehicle to get to work each weekday.  This meant that not only do we save an extra $1,000 or so each year on not maintaining and insuring a second vehicle, but without that easy form of transportation available, I’m not as likely to go out from sheer boredom and spend money shopping or doing whatever. 

A similar situation could help cut costs in retirement when the opportunity to spend is limited through vehicle downsizing.  If the hubby or wife is out with the car, it can reduce that inclination to head out and spend just because you’re bored.

Budget carefully
For many of us, retirement could be the most important time to budget.  With possibly limited income and plenty of time on our hands to do with as we please, knowing where our money is going and in what amounts can be critical to successful personal financial management.

But even more than just laying out budget numbers to hit, you might find that tracking costs and incomes related to various hobbies could be extremely useful as well.  Knowing how much is spent on certain hobbies, how much income a hobby might bring in, and similar data can provide a better breakdown of what your activities are costing you.  Not only this, but tracking such costs could be helpful when it comes tax time as certain business expenses relating to the earning of income might be tax deductible.  Just as writing is a hobby for me, it’s also my prime source of income, and certain expenses related to the business side of this activity can reduce my tax liability.

Therefore, paying attention to your hobbies in retirement could help you financially in a number of ways.  Not only can they keep you busy and from spending money out of sheer boredom, but they could help you make back some of your costs (from things like resale activities) or even make a little cash in your golden years.

 


Disclaimer:
The author is not a licensed financial professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

Tuesday, October 15, 2013

Making the Bank Fun for Our Five-year-old

I rarely see people with small children at the bank these days.  I know it’s easier to just pop by the ATM or hit the drive thru teller, but personally, I feel that going to the bank should be a somewhat special experience for kids.  I remember going to the bank with my mother and the impression it made upon me.  The big walk-in safe, all the tellers, the counting and transacting of money, the sound of the coin counter -- they were all unique and interesting experiences to me as a kid.  Therefore, I want my kids to grow up appreciating, understanding and looking forward to going to the bank, and I try to do certain things when we go to make it a fun experience, especially for our five-year-old.

Checking the Coin Sorter
My son and I have made it a game when we go for walks around town to see who can find the most loose change on the sidewalks.  Therefore, he has learned the value of a nickel or even a penny.  So when we go to the bank, where there is an automated coin sorter that customers can use, whether or not we’re changing in any coins, he heads over to check the coin sorter return bin.  Here he has found pennies, nickels, dimes, Canadian coins, and even Euro coins.  It’s not only a fun way for him to find money for his piggy bank but to learn about the coins of other countries as well.

Sorting Coins
But then there are the times when we actually get to sort our spare change at the bank’s coin machine.  It’s really neat…even for an adult.  We get to dump our change into the coin sorting area.  It goes up this cool conveyor belt and into the machine where it gets processed.  We then get to watch our total amount add up on a computer screen while we wait, and finally we get a printout receipt that we take to the bank teller to receive our cash.  The whole process is an event and one that both my son and I look forward to doing together. 

Interesting Coins and Paper Money
I find more than just foreign coins and loose change at the bank to interest my son though.  When we conduct our transactions, I often look for ways to make the exchange memorable and interesting for him.  This may involve a simple, yet cool for a five-year-old, purchase of a 50 cent piece, Eisenhower dollar coin, Susan B. Anthony coin, presidential dollar coin, or a $2 bill.  While these items might not sound like much to an adult, they can be super cool to a kid and something that adds to his appreciation for and interest in money.

Candy of Course
And then of course there is the candy…a long-time tradition of going to the bank.  As a kid, I used to get a piece of gum.  Now they put little baskets of multi-colored suckers on the counter for kids.  While it might not sound like much, it’s just one more enticement to get our young one to the bank and help formulate his interest in money and his personal finances.


Disclaimer:

The author is not a licensed financial or parenting professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

Thursday, October 10, 2013

Even in a "Recovering" Market, Staying in a Home Doesn’t Necessarily Lead to Recouped Equity

There’s been a lot of talk in the media lately about a supposed housing recovery lately.  Since I’ve written freely about the money we lost on the sale of our first home (nearly $100,000), I’ve been questioned by many as to why we didn’t just stay put in an effort to recoup some of this value.  And believe me, it was a consideration; especially with the real estate market appearing to level off. 

However, I’m not one to just hope that we’ll come out the other side of such an investment for the better; therefore I ran the numbers that we’d be looking at if we stayed put, as well as considering several non-monetary factors as well.  Once done, this gave us a clearer picture of why staying in our previous home wouldn’t be the financial answer, and would likely have cost us even more money.

Our initial plan was to stay in our home for 10 years, since by that point our son would be high school age, and the area high school was very poor.  But even if we had waited it out that long instead of selling after three years, from my calculations, we would have been out even more money than we actually lost.  Here’s why.

Continued Market Decline
Just because a market has come down significantly, it doesn’t necessarily mean there isn’t more room to fall even if the rest of the country seems to be in a recovery.  In our case, and in our area of Chicagoland, we sold our home for 25 percent below what we purchased it, but since that time values in that area have continued to fall.

We purchased our home for just under $300,000.  We ended up selling for $230,000 in 2011.  That home is currently valued at just under $170,000 by Zillow.com and closer to $160,000 by Trulia.com, and the area’s median home sale price has continued to fall even as many area prices rise, dropping by a further 15 percent from 2011 to 2012.  There is little indication of things picking up, and even if they do over the next six years, it’s hard to imagine us selling our home for anything above what we sold it for in 2011. 

Property Tax Increases
While the market in our previous area continues to decline, the property taxes are going up.  In fact, they had increased by about 40 percent in the last two years we lived there.  We were paying almost $5,000 a year in property taxes to live in an area with poor high schools, aging infrastructure, not much in the way of entertainment, and where property values were continuing to fall.  In our new location our taxes are about $3,000 a year, and in a much better area.

Mortgage Costs
The cost of carrying a mortgage can add up significantly.  Even with the mortgage interest deduction, the interest alone can add tens of thousands of dollars to home ownership costs.

We chose a 15-year fixed rate mortgage at 5.375 percent when we purchased our home.  At the time, this rate was actually pretty low, but we still worked toward paying our mortgage off early.  Even with moving to a bi-weekly mortgage program, and making extra payments along the way, we were looking at about $65,000 in interest paid over the course of 10 years.

Upkeep, Repairs, and Utilities
Those big ticket fixes on a home can hit hard when they come along.  And even the little ones that come in a constant trickle can soon amount to a flood of money out of our accounts.

During the time we were in our home, we averaged about $2,000 a year in maintenance and repair costs.  However, with aging appliances, a 20-year-old hot water heater and 15-year-old HVAC system, it was likely we would have had to replace all those items in the upcoming years.  Therefore, our maintenance and repair costs would likely have averaged closer to $3,000 over time, compared to our new condo where they average closer to about $600 a year.  In addition, we have to factor in that our utilities were also higher in our previous home compared to where we live now by about $1,200 a year.

Better Options Elsewhere
So when we sold our home, we bought in a better neighborhood with top-tier schools and plenty of entertainment and where home prices are rebounding instead of continuing to fall.  We live in a condo where our utilities are $100 a month less than in our home, we have no mortgage, taxes are about 40 percent less, and our only regular monthly cost is for our $300 association fee.

By my calculations, had we stayed put, rather than it costing us $160,000 to live in our home for three years it would have cost us about $220,000 over ten years, and that’s if we could have sold in 2017 for what we sold for in 2011.  And while the numbers look better spread over a monthly basis, it’s important to bear in mind that not only would we have lost an additional $60,000 over time, but in the meantime -- and in our new location -- we’ve cut our housing costs by about $1,200 a month, we own a home outright, our kids can attend great schools, and we live in an area where our median home value is better protected.

So it’s important to note that even though riding out a bad situation might be the first and easiest thought that comes to mind, it might not always be the right thought for everyone.

 

Disclaimer:
The author is not a licensed financial or real estate professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Calculations have not been verified by a professional.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.

Wednesday, October 2, 2013

Ensuring that a Child is Financially Aware

It seems that in our high-tech, easy-spend world of immediate gratification and excessive debt, children are being brought into this world with lesser and lesser chance of getting a good financial upbringing.  This is why I’m making it a point with my own children not only to try to educate them regarding financial values but to ensure that those around them are attempting to do the same.

With a five-year-old and a newborn, my work is ongoing, but I feel as though I’ve been reasonably successful with my attempts from my progress thus far.

Financial errands
I’ve found that when a child is still willing to look at the fun side of running errands, this can be a great time to start slipping in some financial education on the side.  Taking our five-year-old along with us on trips to the bank, coin ship, garage sales, grocery store, and similar excursions are interesting to him and are activities that we can use to point things out and teach him more about personal finance.  He really looks forward to our trips to these places now, which tells me we’ve been successful in making him more financially aware.

Here are just a few examples of how we have furthered his financial education with these tasks: 

  • Grocery store – Pointing out prices of the foods we buy each week
  • Grocery store – Price comparing among similar products
  • Grocery store – Showing him how to pay at the checkout
  • Garage sales – Buying/selling unused or unwanted items for pennies on the dollar
  • Garage sales – Negotiating tactics to get better deals
  • Bank – Explaining how the banking system works
  • Bank – Starting a bank account
  • Bank/Coin shop – Buying him various coins and bills to further an interest in money
Such tasks are often commonplace to us as adults but they can serve as valuable learning experience to young kids.

Gifts from others
I’ve found it more difficult to get others involved in helping me with our kids’ financial educations.  Family members often want to give toys and trinkets in place of financial gifts when it comes to holidays or birthdays.  However, over time, and through our own efforts, we’ve made our son financially aware enough that he illustrates his value of money when around family members.  Seeing this, our family realizes that he appreciates and likes money and has therefore started giving him gifts related to money.  European coins when they come back from a trip abroad, a bag of change cleaned out from a vehicle, an 1888 Morgan Dollar for his birthday, and similar gifts have started to roll in as he gets older, telling me that others have taken note of our son’s financial awareness.

The value of penny
Many people just don’t value a penny anymore.  We find these coins all over the ground around town and people just walk right past them.  This is fine with me since our son picks them up, a key indicator that he still values a penny.

We find this an important aspect of ensuring that he is financially aware, since it is a building block to his future.  Since we know he values the lowest denomination coin, he will value higher denominations as well.  This has led to interest in wheat pennies and other coins, furthering his appreciation and value for all money in the process.  If we started him off only valuing dollar bills, he might waste a lot of money in coin form along the way, possibly adding up to hundreds or even thousands of dollars throughout the course of his lifetime.

Coupons
Many adults don’t really value coupons anymore, so it can be hard to expect kids to appreciate their worth.  And the true value of coupons might not hit home until they are applied to something important to child or adult alike. 

We have found that our son is quickly learning the importance of coupons though by way of the local go-karting track, a favorite stop of his.  We take a “buy 2 rides, get 1 free” coupon with us when we go.  So our son understands that we get more for our money this way and he is now on the lookout for such coupons and super-excited when we find them.

We make no secret of using coupons in front of him so that we continue to build upon his understanding us such financial tools.  And in this way we know that he is financially aware and we keep furthering his personal finance education.

 


Disclaimer:

The author is not a licensed financial or parenting professional.  The information provided in this article is for informational purposes only and does not constitute advice of any kind.  Any action taken by the reader due to the information provided in this article is solely at the reader’s discretion.