What Would You Do With An Extra Paycheck?

What would you do with an extra paycheck?  My wife finished her teaching job in May and we thought her last paycheck would come at the end of July.  We were thrilled to discover recently that she would actually be in paid August as well!  My first reaction was to plan another impromptu vacation this summer with the extra money.  Of course then reality set in and we decided to just save it since we’re going down to one income.

Decisions like that are hard to make.  When what you’d like to do isn’t what you know you should do it’s tough to suck it up and make the smart choice.  I guess in this case its short term thinking vs. long term. If we spend it on a vacation we’ll have a fun trip this summer.  If we save the money it will come in handy down the line as we’re adjusting to a big drop in income.

The fear of not having enough money won out over the desire to take another vacation.  We’ve decided to save the money for rainy day.  Of course, just because we’re not taking the vacation now, doesn’t mean we can’t take it at some point in the future.  It may turn out we’re just fine without the extra paycheck and can afford to spend it on some fun.  Only time will tell but for now we’ll sleep a little better knowing we have some extra money tucked away.

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Money Mistakes To Avoid – Misunderstanding Risk

Fear and past experience are too often what drive our perception and preparation for risk. 

Past Experience
The article “Seven Money Mistakes to Avoid” in Smart Money magazine talks about “availability basis”, a term psychologists use to describe how people measure risk mentally.  We rely on images and emotions that come easily to mind when gauging how to prepare for this risk.  For example, if someone called to sell you flood insurance and you had just watched television footage of the New Orleans flood you may be likely to buy flood.  If on the other hand, it was the middle of August and hadn’t rained a drop in a month and a half you might turn them down.

Fear
While past experiences can cause us to underestimate risk, fear often causes us to overestimate the likelihood of an event.  The article uses the example of extended warranties to get the point across.  The likelihood of your electronics purchase failing in the near future is low but the fear of an $800 piece of equipment failing a year down the road is enough to cause many people to shell out for an extended warranty.

Probability
The article suggests we often ask ourselves what’s the best or worst that could happen, when in fact we should ask what’s likely to happen.  For example, the average person from 35 – 64 years old is six times more likely to miss an extended amount of work due to a bad  injury than they are to die.  However, more than two thirds of Americans have life insurance but fewer than one third have disability insurance. We’re spending all this money insuring our family against death when in fact we’re more likely to be without work because of injury.

How to Prepare for Risk?
There are people who spend years studying for advanced degrees on managing risk so we can’t expect ourselves to understand all the probability theory and statistical concepts associated with measuring risk. What we can do is not let fear get the better of us and not discount risks just based on our personal experience.

One good way to accomplish this is to ask friends, family, and co-workers questions about your concerns. This gives you a way to talk through the risks you’re trying to protect yourself against and will broaden your perspective on what the actual risks are and different ways to handle them. How do you manage financial risk in your life?

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Money Mistakes To Avoid – Loss Aversion

We covered the first money mistake yesterday and learned not to save with the right hand and spend with the left.  The next mistake the Smart Money magazine article covers is a psychological effect that affects many of us, loss aversion. 

Loss Aversion
I like the way that Wikipedia explains the concept.  Ask yourself this question, “would you rather get a 5% discount, or avoid a 5% surcharge?”  Numerically the end result is the same but people feeling loss aversion are more afraid of a loss than they are motivated by a gain so they choose avoiding the 5% surcharge.  The Wikipedia article mentions some studies that suggest losses are twice as psychologically powerful as gains.

Financial Effects
So what’s an example of loss aversion?  Smart Money uses the case of a penny-pincher who is so fixated on reducing the “loss” of paying too much for gasoline that they’ll drive halfway across town for cheaper gas, burning extra gas and putting more miles on their car.  Loss aversion often creates such irrational behavior where people actually end up spending more money in an effort to avoid  a loss.

Another negative financial effect of loss aversion is the tendency to play it too safe when it comes to investing. Keeping all our money in conservative investments in an effort to avoid loss will erode our net worth in the long run thanks to ever present inflation.  More conservative investments such as bonds are less likely to have huge drops in price like stocks but after their lower returns are gobbled up by inflation the purchasing power of money accumulated over a long time frame is greatly reduced.

Overcoming Loss Aversion
The article suggests that the best way to overcome loss aversion in investing is to take a broad view.  Don’t focus on the immediate effect of your investment but rather look at its long term implications.  Your investments will go down every now and then but it’s okay. You won’t lose any money unless you sell, over time the investments value should have an upward trend. This is easier to do if you put together an investment plan that will help smooth out the highs and lows. The article suggests:

“A well-diversified portfolio should limit the volatility, and some mutual funds, such as asset-allocation and balanced funds, can help keep the ups and downs in check.”

Does loss aversion effect you? Have you ever made an irrational decision to avoid a loss that ended up costing you more money in the long run?

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Money Mistakes to Avoid – Not Seeing the Big Picture

Do you ever make a money mistake that seemed really dumb in hindsight?  Well, you’re not alone. Our minds can trick many of us into misusing our money in ways that seemed perfectly justifiable at the time. The field of behavioral economics studies how our financial behavior is affected by psychology.

Smart Money magazine has a great article in their July issue entitled 7 Money Mistakes to avoid.  The piece covers some of the work done by two behavioral economics industry experts, Daniel Kahneman and Amos Tversky, and gives some examples of mistakes that sound all too familiar.

Money Mistake #1
The first mistake listed is “saving with the right hand and spending with the left”. By thinking of each part of your finances in individual terms and not seeing the whole picture you could be taking one step forward and two steps back. 

The article gives the case of withholding too much in taxes so that you’ll get a refund come tax time.  While getting a tax refund in April sounds nice, you’re actually missing out on potential interest you could be earning during the year while the government has your money.

Another example would be having enough money in your savings to cover credit card debt but not paying it off for fear of not having savings.   It is wise to have rainy day savings built up but if you’re also carrying credit card debt at the same time, any financial security you build is being eroded by the high monthly interest payments.

The suggestion the article makes for overcoming this mistake is to use a software package that aggregates all your financial data and gives you an overview of where you are financially.  Software such as Microsoft Money or Quicken can help you identify cases where you’re “saving with the left hand and spending with the right”.

My Money Mistakes
My failures and successes with personal finance have come mainly as a result of building habits and changing behaviors, both good and bad.  Understanding behavorial economics and how it affects our decisions is an important part of getting ahead financially so I’ll cover the remaining money mistakes in the days to come.

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eBay Advice Edition – Personal Finance Review

As you may already know I sell on eBay to make extra money so I always perk up when I read eBay related items.  Here are several eBay references I ran across this week:

– Blueprint for Financial Prosperity gives a primer on how to sell gadgets on eBay, think iPhone.

– Flexo’s eBay account was hacked, learn from his experience.

– Lazy Man is looking for additional alternative income sources.  He critiques a list of possibilities, I say go with eBay.

– Mighty Bargain Hunter suggests an alternative strategy to profiting from the iPhone. You can always sell it on eBay!

– I share my thoughts on a new program that brings network marketing to eBay. 

Personal Finance
What can people do with the money they make on eBay?  Here are some personal finance articles to help you keep more of what you make.

– Generation X Finance suggests that mid-year is a good time to evaluate your investments and start saving for Christmas presents.

– The Sun is making progress generating passive income with his portfolio.

– Money, Matter, & More writes about an issue that is of growing concern to the majority of people, health insurance.  

– Five Cent Nickel warns us if we use the bill me later option from online retailers we’re opening a credit line

– Free Money Finance gives us signs to look for when housing market has hit the bottom and is on the way back up.

– Save youreslf some money, don’t get a pet.  Don’t believe me, check out The Digerati Life’s disccusion of the money spent on pets.

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How to Save Money on Services By Spying on Business Owners

Business owners are always looking to maximize the amount of money they can earn from the services they provide.  Get inside their heads and you can save money on your next trip to their establishment.  Here is a quick example case study on how to save money on haircuts.

Hair Cut Savings
At the top of my last receipt from Sports Clips they offered $3 off my next haircut if I called an 800 number and answered some questions about the service I received.  At the end of the call they give you a four digit code you can redeem for a discount on your next visit.  The $3 off will be nice but what I learned from their questions was even more valuable.

Hair Cut Espionage
Below are some of the paraphrased questions the survey asked and what I took away from each one.

Did the stylist greet you? Rate their friendliness 1 – 5.
I called a local Sports Clips to find about more this one. It turns out if your stylist doesn’t smile and shake your hand during your haircut then you get your cut for free. 

Did the stylist offer you our Triple Play?
The standard men’s “Varsity” haircut runs $15.  If they can talk you into getting a “Triple Play” cut they can raise the amount they earn by 20% ($18).

Did the stylist offer you our MVP?
The MVP is a step up from the Triple Play. If the stylist convinces you to shell out for an “MVP” cut their earnings go up 33% ($20).

Did the stylist recommend any products you could use?
Another Sports Clips I called quoted me $10 – $25 for American Crew and Paul Mitchell shampoos they sell in the store.  They also offer a variety of styling gel, hairsprays, and mousse which I imagine aren’t cheap.

Bottom Line
The phone survey wanted to see how many things the stylists tried to upsell.  They know that if the stylist is persuasive enough to sell an MVP cut and two hair products they can raise their income from the basic $15 to approximately $55 ($20 cut + $20 product + $15 product). A huge increase in income for them, a big dent in your wallet.

Understand before you go for any type service what it is you need and what you’re willing to pay for it.  Know that the business will likely try to sell you additional products and services and be prepared to keep your hard earned money by just saying NO!

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When Do Undiscovered Stocks Become Mainstream?

I had to laugh when I read the top of the cover of the latest edition of Kiplinger’s Personal Finance magazine, 7 UNDISCOVERED STOCKS.  If they’re advertised on the front page of Kiplinger’s are they really undiscovered?

Undiscovered No More
Of course the reason this headline sounds so appealing is that everyone wants to uncover a hidden gem in order to buy shares at a low price before other people discover the company’s profit potential and drive up the stock price.  I don’t know how many other people subscribe to Kiplinger’s and don’t know how many of them have already received their magazine in the mail but I think it’s safe to say these companies are no longer undiscovered.

Ignored by Brokerages
The article reasons there are good returns to be made by finding stocks that are “under the radar”.  They define these as companies followed by two or fewer Wall Street analysts.  Since they’re not covered by Wall Street the investing public may not be aware of the company’s profit potential and the fact there may be a bargain lurking in the stock. The author then goes on to list seven undiscovered stocks that fit this criteria and cite examples of why they could be poised for growth in the next several years.

Stock Analysts Cheat Sheet
In many industries, reading trade publications is a good way to keep up on the latest and greatest.  I wonder how many stock analysts screen magazines like Kiplinger’s, Smart Money, or Money as a cheat sheet for stock research.  Maybe not many of them do but I would think at least a few analysts would pick up on stories like these.

General Investor Effect
Even if articles like “7 Undiscovered Stocks” don’t have any effect on stock analysts I would imagine that they do have an impact on the investing public.  After reading about undiscovered stocks, how many people will go out and place buy orders for these companies?  All these questions leave me wondering if stories like these are a good place to find investing ideas or whether people are better off just doing research themselves and finding their own “undiscovered stocks”?

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Exponent Trading Company Brings Network Marketing to eBay

I was reading Jim Cockrum’s blog last night when I ran across mention of a network marketing approach to helping people get started on eBay. A company named Exponent Trading Company has built a system that is supposed to offer personal mentorship in addition to training material for people wanting to learn how to make money on eBay.

Network Marketing Hype
I listened to a conference call where Jim Cockrum and Skip McGrath talked with some of the leaders of Exponent Trading and came away with mixed feelings.  One thing I’ve never liked about network marketing is the hype that goes along with it.  Everyone is always talking about “the opportunity” instead of the product or service that’s actually being sold and wants to share stories of wildly successful people.  In many cases the product itself is not so great.  It may be different in the case of Exponent Trading since it seems to provide a legitimate service of mentoring people on eBay selling, time will tell.

Costs of a Mentor
I do understand the point Jim makes on the call.  It does take time to mentor someone through getting started on eBay and time is money.  A multi-level marketing approach would make it more worth someone’s while to help someone else get setup and running a successful business.  However, I’m not entirely clear on all the fees required to join and participate and those costs are what I’m wary of. 

A Different Approach?
Another aspect about network marketing I’m not to fond of is the emphasis on selling your product or service to your friends & neighbors.  It does seem from what I’ve heard so far that the Exponent model would be a little different. There are many people interested in learning how to make money on eBay.  I have people asking me how selling on eBay works, they might benefit from the service. 

Instead of pushing expensive lotions or soaps that people don’t want or need as is the case with many network marketing programs, people could be referred to the program after approaching eBay sellers asking for help.  Of course, if they just want to sell their antique collection or clean out their garage would they really want to pay the signup fee and ongoing costs just to sell a few hundred dollars worth of stuff?

Marketplace Effect
One thing I wonder about is the impact the marketing of the Exponent system will have on the eBay marketplace.  If the number of sellers increases dramatically but the number of buyers remains the same the flood of products may be good for consumers but bad for sellers.  As a buyer this sounds good, as a seller it’s not as appealing.

Opposing Views
The fact that Jim Cockrum and Skip McGrath, two well known eBay entrepreneurs, are serving as advisors to the program does carry some weight.  However, there are others, such as Terry Gibbs and Gary Hendrickson who advise against the Exponent Trading Company.

One thing to keep in mind is that Jim and Skip do stand to gain a lot of money from signing others up underneath them so there could potentially be some bias there. You could also argue that Terry might downplay Exponent since potential customers of his information products might go with the Exponent solution instead.  All these guys have proved themselves on eBay and have a good track record of helping others do the same so deciding who to listen to is a tricky thing.

Time Will Tell
I’m sure there will be a lot of discussion on the web about network marketing coming to eBay over the next few weeks, it will be interesting to hear the reaction of people that sign up for Exponent and to learn more about the details of who actually benefits from the program.  I’ll give updates on how it progresses, if you’re interested you can sign up for the updates in your feed reader or your email inbox.  I’m also working on a resource about selling on eBay, if you have any questions I could address in the eBook just let me know and I’ll send you a copy when it’s ready.

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Are Employers Doing Enough to Promote Retirement Plans?

Does your employer encourage you to participate in a retirement plan?  It took my wife’s employer 6 years to actively promote their retirement plan.

A Tale of Two Retirement Plans
Today’s young workers won’t be able to rely on company pensions or Social Security when they’re old and gray so starting to invest right away in a retirement plan is vitally important.  Unfortunately not all employers are doing their part to get this point across.

The human resources department at my company does a good job informing employees of the features and importance of our 401k plan via email, postal mail, and seminars.  My wife’s employer on the other hand has done a horrible job. 

After working for a local school district for 6 years, my wife just received her first promotional item, touting the benefits of the 403b plan available to her.  They do mention it during district meetings at the beginning of every school year but until now that’s all the coverage the plan received.

Promoting Retirement Plans
The letter she received today shows her contributions for the last year and contains a hypothetical scenario of how much she could save for retirement with the 403b.  It also answers generic questions such as:

– When a person can begin participating in the plan.

– How much someone can contribute.

– The available investment options.

– Where to call for more information.

I’m glad her school district finally decided to get the word out about the 403b plan and encourage teachers to participate, I just don’t think its right they waited 6 years to do it.

Employer Effectiveness
I’ve attended several seminars on our 401k options over the 7 years I’ve worked for my company.  Everyone knows what a 401k plan is and most people are contributing.

In contrast my wife has discovered through numerous conversations that many of her co-workers don’t know what a 403b plan is and only a few of them are participating in it.

To be fair, her plan doesn’t offer an employer match while mine does.  In addition, corporate jobs in my industry tend to pay better than school teachers so her co-workers may not have as much money to work with.  However, I imagine that if you compared two corporations, one that promoted its 401k plan and another that did not you would find a higher participation rate in the company that encourages its employees to save for retirement.

With the days of pensions in the past and shrinking employer health benefits on the way it seems irresponsible for employers not to promote their retirement plans to their workers.  How does your human resources department rate?  Do they do a good job getting the word out or are they retirement plan slackers?

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Credit Card Strategies For A Stress Free Vacation

How can you enjoy your vacation when you have no money to spend?  It’s kind of hard to do since most trips involve spending money on food, lodging, travel, gifts, etc.  On most vacations, no money means no fun!

Credit Instead of Cash
On the second day of our recent trip I had a panic attack when I couldn’t find my wallet. Luckily, I wasn’t carrying much cash because I had brought along credit cards to cover our expenses.  If you lose cash its money down the drain but if you lose your credit card you’re not out any money.  Even if someone else finds your card goes on a spending spree the credit card company won’t hold you responsible for the charges if you report the card lost or stolen.

One thing to keep in mind for an international trip is that some credit card companies charge extra fees if you use your credit card in a country outside of the US.  For example American Express charges a 2% fee of the purchase price of anything you buy internationally.

Carry a Backup Card
If you do lose your credit card you’ll feel much better if you have a backup.  Don’t keep both cards in the same place, I gave our Chase Visa to my wife and kept the American Express Blue Cash in my wallet so if one of us lost our bag we’d still have the other card as backup.

Another reason to carry a backup is in case one of your cards reaches its limit. On our honeymoon, the hotel put a hold for almost $1000 on our primary card as a deposit, even though we’d already paid for the room. I didn’t know about the charge until one night at dinner when my card was declined because the dinner bill would put us over our credit limit.  Luckily we had a backup card otherwise we’d have been washing dishes to pay for dinner, not very romantic.

Use a Rewards Card
Why not earn cash back, airline miles, or hotel points for your next vacation while you’re enjoying this one?  There are specific hotel cards for Hilton & Marriott and airline cards for United, Delta, American Airlines, and US Airways.  Or there are more generic cards such as American Express Blue Sky, Chase Travel Plus Platinum, and Citi Premier Pass whose rewards points you can use on a variety of hotels, airlines, and car rentals.  Using a rewards card can help you prepare financially for your next trip while you’re relaxing on the current one.

Be Card Smart
Of course credit cards do bring the temptation to spend more on your trip because it’s easy to charge it now and worry about the payments later.  If you can avoid this mental trap then using these credit card strategies can help you spend less time worrying about paying for your fun and more time enjoying it!

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