Money Listens

Many of you know what a big fan I am of Redbox.  One movie, one day, one dollar.  OK, $1.08 with tax.

Each Wednesday in March, 2009, you can go to their blog at http://blog.redbox.com/ and find a code for a free one night rental.  You can get it anytime on Wednesday.  If you return it by 9:00pm Thursday it doesn’t cost anything.  FYI, today’s code is JBG123

One great thing about Redbox is that you can return your movie to any location.  So, if you’re going out of town you can watch it on your laptop and return it in another city.  Many Walgreens and McDonalds have them.  To find a Redbox near you go to http://www.redbox.com/Locations/KioskSearch.aspx.  You can’t miss it.  It’s red and shaped like a box.

Would you know what to do if a bank called and said someone was attempting to open an account in your name?  Have you thought about buying credit card protection?  Are you worried about identity theft?

There’s a good article in today’s Wall Street Journal about credit monitoring services:  Cardholders Buy Peace of Mind, if Not Security. You can read about some consumers’ experiences with the four largest companies and get some tips for securing your information.  The companies mentioned are CardCops, LifeLock Inc., Debix Inc. and TrustedID Inc.  A service can’t protect you from everything, but it is good for people who don’t have the time or computer savy to do it themselves.

There’s also a non-profit agency, Identity Theft Resource Center, that helps victims.  The center has an excellent website loaded with resources and “Fact Sheets.”  You can get step by step instructions on everything from what to do if your wallet or PDA is stolen to how to get a credit report for a child.  It has a Fact Sheet on how to understand your credit report that is one of the best I’ve read.  Regularly reviewing your credit report is the most important way to detect identity theft.

Would you know what to do if a bank called and said someone was attempting to open an account in your name?  I would go to the Identity Theft Resource Center’s website and follow their advice.

“…there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know.”—Donald Rumsfeld

Doesn’t this characterize how we view finances?  There are things we know. We know we should be following a budget and spending less than we earn. There are things we don’t know. We don’t know as much as we should about investing, insurance, and how to back up a hard drive. And we are fearful there are things we haven’t even thought about that will reach out and bite us. Those unknown unknowns will get you every time.

Now for the good news.  We’re going to follow along with Dave Ramsey’s plan for financial peace for the next 13 weeks.  You still might have some known unknowns, but you’ll have a plan for figuring those out.  Confused?  Don’t be.  After 13 weeks you will know all you need to know.  At least in the area of managing your money.

Here’s one known unknown:  Do you know how much money you need each month to survive?  If not, then the Basic Quickie Budget can come to your rescue.  Go to www.DaveRamsey.com and download the Quickie Budget form.  It’s a simple one page form (with large print) that lists the bare necessities.  It’s a great starting point.  It’s simple and it’s quick.  Don’t agonize about specific amounts, just estimate the numbers.

Why are you doing this?  Think about it.  If you know how much money you need each month to pay for your necessities, and if you know how much money you bring home, then you’ll know how much money you can save.  (You know you need to be saving, right?)  Have you read the newspaper this year?  YOU MUST SAVE!  For buying a car, summer camp, a home, airfare to Paris, college tuition, retirement, granite countertops, Christmas gifts, diamond rings, golf clubs, and, of course, an iPhone.

Saving is one of those known knowns.  You know.

a:  A dividend reinvestment plan

b:  The West Virginia Smart529 college plan

c:  ING Direct Online Savings Account

d:  The grocery store

All of these are good choices, but the grocery store might provide the greatest return on your investment.  Every time I go grocery shopping the prices are higher.  We’ve all read the newspaper– with energy and corn prices skyrocketing, producers are passing on these costs in the form of higher prices.  Bread, eggs, milk, and chicken are some of the items I’ve noticed.  Wal-mart and other retailers have been absorbing some of the increases, but that won’t last long.  Stocking up on non perishables, especially if you can find a sale, will pay off as prices rise.

Last week I found canned tomato sauce on sale for 25% off.  You won’t get that return out of the stock market this year!  Whenever you find a good buy on stuff you regularly use, buy about a 3 month supply.  Think of the items you like to have in your pantry.  Tuna, peanut butter, rice, chicken broth, flour, pasta.  Oreos.  (Ok, I don’t have space for a 3 month supply of those).  And don’t forget paper goods and trash bags.

If you don’t have a good idea of prices, start jotting them down on your shopping list.  After you go shopping a few times, you’ll have a list of the majority of items you use.  I bet you’ll see some price increases over the course of a month.  Then you can get out your shopping list with prices and compare the sale flyers.  You’ll know if something is a good buy or not.

But don’t overbuy; just because it’s non perishable doesn’t mean it lasts forever.  And it should be an item you use regularly.  Don’t buy only because it’s on sale.  It has to be something you will use.  Big Lots has Ocean Spray Cranberry Sauce on sale for 33 cents a can this week.  2 cans is a 3 month supply for me, so even though it’s a great sale price, I’m not going to get a whole case.

Dollar stores and other “non-grocery” stores sometimes have good sales on food items.  Check the expiration dates; they don’t seem to do as good a job on stock rotating as the grocery stores.

I’m a fan of Big Lots.  There’s one about a mile from my house, and it can get dangerous sometimes.  It’s a great place for pet food, cleaning products, shampoo, toothpaste, and the occasional can of Cranberry Sauce.  I’m a member of their Buzz Club.  You can join online and get email specials and coupons.  Every few months they have a 20% off everything in the store for Buzz Club members.

You probably don’t think of tomato sauce and paper towels as an investment.  But if you’re getting a good sale price, it beats the stock market.  Pull the grocery store ads out of the newspaper today and see what your investment choices are this week.

I usually have 3 or 4 books around the house that I’m reading. I pick up whatever I feel like at the time. It works best if the books aren’t too similar. Otherwise, I get confused. Last week I read 2 books that seemed about as far apart as 2 books could be, even though they were both “personal finance” books.

Amazon.com has a “Better Together” section. When you’re looking at a book, they offer you a deal on another book along with it.  Sure, it’s a marketing ploy to get you to buy more books, but usually the books work well with one another.  It’s a case of “if you like this book, you’ll also want to read. . .”  I happened to get both these books from the New Books section of the library.  I went to Amazon to read a bit more about one, because I was actually thinking about buying it.  I was surprised to find the two together.

Better Together

It’s not about the money by Brent Kessel

Buy this book with Living Rich by Spending Smart: How to Get More of What You Really Want
by Gregory Karp
today!

Buy Together Today: $28.70

It’s not about the money uses eastern spiritual teachings to explain financial freedom.  (the Dalai Lama meets Dave Ramsey).  The author, Brent Kessel, looks at the relationship between the Buddhist concept of a “wanting mind” and the 61% of Americans who are always thinking about something to buy.  It’s human nature to want, and to want more.  We think “If only I had X, then I would be happy.”  But we don’t use our money on what is really important to us.  We don’t have a plan for how to use our money, so we spend impulsively, and make quick decisions.  Kessel explains the tremendous costs of unconscious financial behaviors and what to do about them.  (Although he’s not too practical on the what-to-do-to-change).

Here’s one example of how costly our spending can be:

You’re saving for college for your kids.  Say your spending is now $3,000 per month and you increase that spending by 3 percent per year (the historical rate of inflation).  But your neighbor, who is more caught by wanting “enough,” upscales her lifestyle to the tune of a 6 percent annual increase in spending.  You will have $457,000 more in 18 years to put toward your child’s education than your neighbor will (assuming you can earn 7 percent in your college savings account).

He warns against making sweeping changes in your finances.  Most people either do too much all at once, or feel paralyzed and do too little.  Balance is important.  Now, here’s the Buddhist part:  Realize that you are, at your deepest core, just fine, even if you never change.

You might be fine, but you’ll still be broke.

The second book is Living Rich by Spending Smart.  When I first picked it up at the library it seemed like a hodgepodge of tips on stretching your dollars.  The first chapter is “Whacking the Worst Offenders,” saving on food, insurance, and telecommunications.  Greg Karp writes a newspaper column, and it shows.  The book reads like his columns on saving money on everything from pets to prescriptions.  But the subtitle is How to Get More of What You Really Want.  Intertwined with clothing and credit cards is his Allentown, Pennsylvania philosophy that you should spend less money on things you don’t care about so you can spend more on what you do care about.  If you get your spending under control, you might find money for something you really want, that you didn’t think you could ever afford.

Each book pleads with you to get the most from your spending.

Each book explains the various “money personalities” and how attitudes and behavior impact spending.

Each book challenges you to answer the question “How can I  use my money on what is really important to me?”

Each book is worth reading on its own, but they really are “Better Together.”

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Have you heard of the 80/20 Principle?  It’s a great, quick, down and dirty way to live.  You can use it in absolutely any situation.  It works 80% of the time, and the 20% of the time it doesn’t work, it doesn’t really matter whether it works or not.  Here are some situations where I find it incredibly useful in my daily life:

1.   Meal Planning.  Kids like 80% of the food available in the world, but only 20% of what you cook.

2.  Time Management.  80% of your time is spent avoiding what you could do with the other 20%.

3.  Cleaning.  It takes 80% of your time to clean it, but only 20% of your time to mess it up.

4.   Cell Phones.  80% of your time is spent talking to the 20% of the people you don’t want to talk to.

5.   Stuff.  You use 20% of your stuff 80% of the time.  (This is actually a valid example of the 80/20 principle).

6.  Cable/Satellite.  You watch 20% of the channels 80% of the time.  (I’m guessing at this one, because I don’t have cable or satellite).

7.  Food.  80% of your calories come from 20% of the food you eat, mostly Frosted Flakes and chocolate.

8.  Starbucks.   80% of your drink is 20% froth.

9.   Babies.  80% of all girl babies are named Emily.  The other 20% have names that are spelled funny.

10.  Money.  Save 20% and spend 80%.

Don’t know much about history

Don’t know much biology

Don’t know much about a science book

Don’t know much about the French I took

Sam Cooke wrote the song “Wonderful World” in 1960.  Go ahead, take a minute and hum along.  I’ll wait.

How much do you remember about your history or biology classes?  Maybe it doesn’t make much difference.  Did you even have a class in finance or money management?  I never did.  Does it really matter if we know much about finance?

Last week I wrote that we’re basically on our own when it comes to managing our money. How do we know if we’re OK on our own?  How much do we really need to know?  A Dartmouth economics professor, Annamaria Lusardi,  has developed a simple test to determine if you’re financially literate.  Don’t worry, it’s only 3 questions and nobody has to know your score.

Here are the questions:

1) Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow?
a) More than $102
b) Exactly $102
c) Less than $102
d) Do not know

2) Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, would you be able to buy more than, exactly the same as, or less than today with the money in this account?
a) More than today
b) Exactly the same as today
c) Less than today
d) Do not know

3) Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.”
a) True
b) False
c) Do not know

If you answered all 3 questions correctly, congratulations, you are financially literate.  If you missed 1 or more, or didn’t know, you need some more financial education.  Even if you answered all 3 correctly, you need to keep learning to stay one step ahead of all the traps the banks and credit card companies are setting up for you.  Just keep reading this blog.

The answers?  A) More than $102,   C) Less than today, and   B)False

Read more about financial illiteracy at the Freakonomics blog from the New York Times.

The stark truth about managing our money these days is that we are mostly on our own.

This was the first line of a column in the New York Times a few months ago and it has stuck with me.

In our parents’ days, managing money was easy.  My mom and dad had  one checking account and one savings account.  Later in life they had a credit card, but used it mainly for traveling.  If they wanted to buy something and didn’t have enough in the checking account, they saved up for it.  My mom put clothes on “lay away,” and even had a “Christmas Club.”  That’s a savings account for Christmas.  My mom would put in $25 a month.  Usually, she would get a calendar or some small promo item in January.  You couldn’t touch the money until November.  At that time you got your shopping money, with interest, and a Christmas tree ornament.

When my mom got a credit card, that took the place of the Christmas Club.  Unfortunately, it was backwards.  She would charge the presents, then spend the next few months paying them off.  Instead of earning interest, she had to pay interest to the credit card company.  Which way sounds like the better deal?

Mom and dad never got into debt or had trouble managing money.  At that time there were no sub-prime or zero down mortgages.  The banks made sure people didn’t buy more house than they could afford.  Everyone had a down payment and a fixed rate on their mortgage.  If you didn’t have the cash, you didn’t buy it.  And nobody had a house over 2,000 sq. ft.

Retirement was also simple.  My dad worked for the U.S. Dept. of Agriculture his entire career.  Who does that anymore?  He got a pension when he retired, and my mom got survivor benefits when he died.  Plus, he got health insurance during retirement.  And social security.  Retirement planning?  There was no such thing.  Maybe for rich people that owned their own business, but not for ordinary people.

College planning?  If your parents couldn’t pay, you worked your way through.  Maybe you took out a $1,000 loan.  No college student had a new car.  Or a credit card.  I was 27 years old before I got my first credit card.

Those were the good old days.  At least when it came to managing money.  Today we are on our own.  I heard someone say it’s as if you’re sick and go to the doctor and your doctor hands you the x-rays, blood work, and lab results, and says “here you go, you’re pretty smart, I’m sure you’ll figure out what to do.“  We feel lost and out of our league.  It’s all so complicated, this money stuff.

So, what do we do?  Even if your doctor prescribes treatment, it’s up to you to follow  through.  To stay healthy you have to monitor what you eat and how much you exercise, take your medicine, and listen to your body.  You have to develop good habits and give up bad habits.  You’ll probably read up on whatever area you need help on, and ask friends for advice.

Money-wise, it’s pretty much the same thing.  Even if you have a financial planner, you still have to implement the plan, work on a budget, check the fine print on your IRA, and read up on the various types of checking and savings accounts.   But a multitude of resources are available to you that weren’t available to your parents.  Take advantage of the internet, the library, and your own bank. Take a class and read some books.  Talk with your friends.  Maybe you’ve gotten into debt or made some less than stellar investment choices.  There are so many resources to help you turn things around– to develop  good saving habits.  Though you’re on your own, you’re not alone.

When I took Dave Ramsey’s Financial Peace Class he had one lesson on investments.  He was careful to explain that he was not an investment expert.  Most of his advice concerned saving regularly and putting money away in IRAs and 401(k)s.  But several times he said that his investments in “good quality growth mutual funds” were returning 15% annually, and you, too, should expect that.  Probably at the time he wrote that lesson, which was during a very good stock market run, he was getting those returns.

Today, he might admit to being a victim of what’s called recency bias.  That means you look into your crystal ball and see recent events continuing into the future.  The most recent events carry more weight than those in the more distant past.

This happened to me in one of my first jobs.  I had a very good month; a difficult project finally came together, and my numbers were really high.  My annual performance review was the next week and I was expecting a great review.  But my manager didn’t just focus on the last month.  The 11 months before that weren’t so good, and the one good month probably kept me from being fired.  Recency bias caused me to be overconfident.  The next year I learned about another force called reversion to the mean.  An extreme event is temporary and the next event is likely to be closer to the average performance.  My extremely good month was followed by several more mediocre ones.  I didn’t last much longer in that job.

Reversion to the mean also explains why Manu Ginobili can have a very poor performance in one game and his teammates are confident he will have a very good game the next day.  If his average is 19 points per game, and he only scores 6 one night, he likely will revert to the mean and score 19 the next night.

What does this have to do with your investments?  It means that you can use the long-term averages for different types of investments to forecast the return of your particular portfolio.  If you have a diversified portfolio of  U.S. stocks, international stocks, and bonds, you can estimate the return for each category. You won’t be susceptible to recency bias and assume that a particular investment will always be going up (or going down.)  You won’t sell your bonds and buy foreign stocks if the internationals have an up year. And you’ll realize that if one part of your portfolio has done extremely poorly, it will probably revert to the mean and perform as expected the next few years.   And after what we’ve experienced so far this year, any reversion to the mean will be welcome.