Saturday, May 31, 2008

Psychology tricks and increased spending – The Case of Expensive Wines

Our psychology is terribly easy to trick. We’re actually pretty good at it ourselves

In each and every day of our lives we are bombarded with psychological tricks and quirks which have one goal: Make us spend more.

Advertisements take many forms and influence us both at a conscious and a subconscious level. However, every now and then a consumer research appears. It’s always rare, small and hard to find due to certain conflicting interests of the media but they always teach us valuable lessons.

This time the NY Times (Arik Asimov) gets the credit for giving a stage to a new research on the American wine consumer which I find fascinating.

Wine connoisseurs and the image of the Nuevo rich

Wine is probably the drink most associated with good living, refined palate and the upper classes (we’ll discuss associations in advertising in the near future). There are reasons why wine is portrayed and marketed as such a complicated product with infinite grape types, vineyards, years of aging, complicated ceremonies and concepts such as astringency.

These reasons include:
1. Differentiating the product
2. Differentiating its consumers
3. and above all Money

The more complicated, intricate and socially differentiating the higher it can be priced.

That’s why I was fascinated by Arik Asimov’s article for the NY Times. Apparently the intuitive and logical approach to wine and other “fine” or gourmet foods is not without merit. I’ve always wondered what would happen if I was presented with a blind taste test of anything of the sort. Now we’ve got an answer.

It seems self proclaimed wine connoisseurs have been laid bare by two recent blind taste tests. 500 volunteers rated 540 bottles of wine ranging up to $150 a bottle. Now for the fun part: A $10 bottle of wine made in Washington outscored a $150 bottle of Dom Perignon Champagne and a $2 cheap California wine outscored a $55 bottle of Napa valley Cabernet. It is important to note true wine experts actually preferred the pricier wines. We can learn quite a bit from this research:

#1 If it doesn’t taste better we must buy it for another reason

Asimov mentions a study performed in Caltech and Stanford business school were the price of wine was showed to highly influence its taste in the eyes of the test subjects.

It seems our consciousness is easily fooled by cheap psychological tricks. This phenomenon directly relates to the psychological concept of Cognitive Dissonance. A state of cognitive dissonance is actually a gap created between belief and behavior which the mind closes either through changing behavior or changing believes. Believes are easier to change then behavior.

Now think of a $50 dollar bottle of wine you just bought. It must taste better than a $5 bottle of wine otherwise you wouldn’t have paid so much for it. Your mind has to convince itself it taste much better as well so the cognitive dissonance is resolved.

#2 If we’re not fooled there must be another reason why we still buy expensive wines

Even after reading the research and writing this post I’ll probably continue buying the more expensive wines and avoid the cheaper ones even though they may taste the same. Why is that? There must be another thing of value in a pricey wine bottle.

Surely enough there is: Image. When we buy a $50 bottle of wine we buy the image that goes along with it. Having friends over and presenting a decent bottle of wine is a means of communicating as well as any. We need not be fooled but we sometimes have to get along with the program.

Even though we’re not about to drastically change our behavior it’s still good to know the forces at work and how susceptive our psychology really is. Reinforcing and sharpening our skeptic instinct is always recommended.

Image by: emurray

Wednesday, May 28, 2008

Become an Invaluable Employee by Adopting a Solution Oriented Mind Set

Invaluable and desired employees are a very rare resource. I believe a solution oriented mind set is a prerequisite to becoming one

Anyone should be able to quickly recognize the following scenario either as a manager or as an employee: Deadlines are closing, uncertainties are abundant and a certain employee, you had handed down an assignment a week ago to, keeps coming back with questions that make you wish you had done it yourself and saved that precious time.

Another relevant scenario is the perfectionist employee trying to find a perfect solution to a practical problem unable to accept time and money constraints.

Usually these scenarios end in conflict, shouts and frustrations for both sides. Expectations where no met for neither of them. The employee had expected guidance and tutoring and the manager expected results.

I feel many employees don’t fully understand how powerful a solution oriented mind set can be or how much frustration an unsecure or perfectionist employee might generate. The purpose of this post is to convey my perception of what is maybe the most important trait an employee can have: a solution oriented mind set.

Let me try and make things a bit more clear before I break down this trait to its components. When I speak of a solution oriented mind set I think of an employee capable of handling complicated assignments with:

1. Many Uncertainties
2. Gaps in knowledge
3. Unclear results
4. Surprises along the way
5. Adaptive nature
6. Producing results

This dream employee will be an asset to any organization. It’s really much simpler than it sounds. I believe the basic guideline to becoming solution oriented is to come back with results, not only more questions.

How do we make this miracle happen?

#1 Accept less than perfect solutions

One of the first things you understand when you become a manager is to accept trade-offs. You can’t have everything, you can’t eat a cake and leave it whole, you can’t light a candle on both ends, and you get the point.

Perfectionists don’t understand tradeoffs or are willing to make sacrifices their managers won’t. The golden rule of 80%/20% applies here as well. You’ll usually get 80% done in 20% of the time. The remaining 20% will usually take 80% of the time.

Accepting less than perfect solutions is an important first step in being able to produce viable practical solutions in shorter times.

#2 Simplify rather than complicate

For some reason we have a natural tendency to complicate things. Every single problem can be further complicated with each further complication messing things up even more.

For example consider building an excel sheet which is supposed to be used for budgetary planning. You could choose to look at an ordinary or average family and quickly build a rough sketch and have something to present quickly enough. You could also start researching every expense that was ever made trying to cover every option instead of just adding “Other Expenses”. This might not be perfect but it’s simplified and more importantly: it’s ready.

Instead of thinking of a complicated assignment as a whole trying to decipher and treat everything at once it is advisable to break it down and simplify it. Ask yourself:

1. What is the higher purpose of this assignment?
2. How do I get it done without losing myself in the process?

Nothing is as complicated as it seems. Everything can be simplified and taken from there. Even presenting your perception of the problem or a very rough and initial solution shows you are solution oriented and your manager will thank you for doing some thinking and sparing him that precious time.

#3 Get something done - Small steps are valuable

A very important part of a solution oriented approach is to get something done. Try to resist the urge to return empty handed with more questions and get something done either on a piece of paper, an excel sheet or an assembly line.

Managers like to see results but they appreciate effort as well. If you’re trying you’ve got it half made. No one can ignore a tangible effort.

An initial solution is better than nothing. It’s something to work and improve on. It’s much easier for a manager to guide and tutor with something tangible. Asking questions or clarifications with nothing to talk about but the general concept of the problem is not helpful and is perceived as time consuming and sometimes as lazy.

#4 Everything is doable – It’s an attitude

Be optimistic. Believe in solutions. I’m not trying to sell “success in 21 days” books but there’s a certain attitude required to becoming solution oriented. You’ve got to believe there is a solution.

It might be weak or partial but it’s better than nothing. You’ll be surprised how a change of attitudes or behavior can influence your believes (through cognitive dissonance for example).

#5 Managers like to decide – Give them alternatives and recommendations

The best thing you can do is come up with several solution outlines you’re not sure about and presenting them for your manager to decide. You’re not only on the right way to solving the problem and completing the assignment you’re also giving your manager exactly what he expects: Decisions to make.

These rough solution outlines, together with an initial sound recommendation are priceless and so are the employees that can put them together.

Related Posts:

1. How to Fortify Your Job: 10 valuable (and challenging) Tips
2. 6 Tips on How to Make yourself a Desired Employee

image by: alexander drachman

Monday, May 26, 2008

Sell In May and Go Away? Historical Research and Surprising Results

Seasonal indicators are always a tempting and counter-intuitive notion. Sell in May and go away?

Second in reputation only to the January effect “Sell in may and go away” is a common and well known seasonal indicator. I imagine the papers will soon fill with articles on this indicator. I think it’s a good time to examine the historical evidence.

“Sell in May and go away” refers to the abnormal returns of months November-April compared to May-October. This seasonal indicator is believed to exist due to the following reasons:

1. The summer months are usually dedicated to vacationing and time off in the capital markets as well.
2. Patterns in bonuses
3. Taxes and patterns in saving vehicles

A quick research – Should we really sell in May?

I’ve decided to take a quick look at some historical data. I’ve checked the S&P500 back from 1950’s up to today. The results of my research are displayed in the following charts. The bars represent the difference, in percentages, between the returns of November to April and May to October of a certain year:

The results as always are not definitive. Judge for yourselves:

1. In only 56% of the cases the months between November and April generated higher returns than the months between May and October.

2. However, on average, the months between November and April generated a return of 1.3% compared to just 0.2% for the months between May and October.

Adding a linear trend line suggests the spread is slowly disappearing but then again trend line don’t work well in a variable such as this (explains only 5% of the trend in this case). This could be attributed to more perfect markets with increased capital and information flow but it’s a reaching a bit.

What about 2008?

As always, the case before us is a special one. The months between November and April of 2007-2008 were the months of the sub-prime and credit crisis. Hopefully the months to come will be months of revived growth for the capital markets although skepticism is still wide spread.

One recommendation that has proved itself so far is to avoid timing the market and just hanging on if you’re investing for the long term (as you should). You never know what you might miss. We would all fail trying to time ourselves back in.

Image by: Steve took it

Sunday, May 25, 2008

Financial Philosophy, Leaving the Office Earlier and Work Lunch Ideas @ The Roundup

Sunday Roundup as Customary

As some of you may have noticed I've switched to my own custom domain @ Hopefully everything will work smoothly as it always has. As always your suggestions, thoughts, questions and comments are always welcomed.

The Money Hackers Carnivals #13 was hosted by Moolanomy. I made editor’s choice with Higher Gas Prices: A Blessing in Disguise or an American Wakeup Call. I also enjoyed:

The Carnival of Personal Finance #153 was hosted by Money and Values. The following posts caught my eye:

The Festival of Frugality #126 was hosted by The Financial Blogger. Here are my picks:

More from fellow personal finance bloggers:

Friday, May 23, 2008

Budgeting for Unexpected Expenses

Unexpected expenses are just an expense with uncertainty attached

Unexpected expenses can really hinder your saving or debt repayment efforts. You have your budget carefully planned and meticulously detailed and thought out. Then, out of the blue, pops an annoying significant and unexpected expense and re-shuffles everything.

I’ll be arguing further along this post that all unexpected expenses are really expected costs with an attached element of uncertainty. This is a powerful claim which I believe to be true. Hopefully by the end of this post you will agree.

Not all unexpected expenses were created equal. I like to think of a hierarchy of unexpected expenses and in the following I will present my hierarchy of costs and how I budget and plan for these.

#1 “Is it Christmas already?” – Seasonal recurring expenses

When it comes to the first type of unexpected expenses, such as holiday presents for example, the case is clear. These are obviously expected costs which were not planned for. This usually happens in budgets that are planned as averages while ignoring seasonality, or peaks and lows in certain months.

Holidays are a good example since they usually happen, and even more surprisingly, they arrive at the same time every year. Humor aside, an occurrence with a probability of 100% cannot be titled “unexpected”.

Adjusting you budget to seasonal variability is a good idea which will help avoid sudden expenses which should have been planned for. Among seasonal expenses are:

  • Holidays

  • Annual or semiannual subscriptions of all sorts (magazines, health clubs etc.)

  • Taxes, tolls and fees

  • Insurance

  • Travel and vacations

  • Tuition

  • Etc.

All of these should by no means surprise you as they are bound to happen and are easily incorporated in an annual adjusted budget. Average is a good tool but it should be used appropriately.

#2 “The neighbor’s son is getting married”, “The car’s broken again” or “The walls are leaking” – Surprises

Moving on we find some of the most annoying expenses of them all: a car malfunction, plumbing problems, dental care and more. These expenses will occur, the question is how often will these occur and how much will they cost?

Referring back to probability these expenses will occur at a certain probability, smaller than 100%. The probability of these unexpected expenses differs from person to person or family to family. Research shows the average annual spending on this sort of expenses is approximately $2,000 per family.Source:

There’s no sure way of estimating these costs. Only you know your own personal circumstances and your family. However, there are a couple of pre-emptive steps to take in order to expect the unexpected:

1. Budget for the unexpected – Since we foresee these expenses will eventually occur at a certain frequency and volume we can and should budget for them on a timely basis (I do it on monthly basis).This method has two distinct advantages: You won’t be surprised and hard pressed when you suddenly need a new car battery and more importantly should frequency and volume be surprisingly low you’ll be able to save that amount, increasing your emergency fund (step 2).

The temptation to consume these funds is great. However, keep in mind that on average these expenses will occur eventually.

2. Emergency Fund – There have been a lot of words written on emergency funds and their importance should be clear by now. It’s a method of expecting the unexpected and a very important pre-emptive measure towards more pressing times. Should nothing surprising happen you’ll have a healthy saving generating solid interest.Two great articles on emergency funds can be found at The Digerati Life and The Simple Dollar.

#3 “Can’t we postpone the birth for a couple of months?” – Life events

Life events tend to surprise us with their financial impact. Whether it is buying a house or having a baby we are often caught unaware and unprepared to handle the financial aspects of these life events.

The events themselves are usually planned and thought out but their meaning and significance hasn’t been all that clear while making the initial decisions.

Home buyers are always surprised by the deal costs. New parents are often awed when facing the harsh reality of how costly another family member is (wait till you have to get him or her through college and maybe help out with an apartment). This post by Moolanomy demonstrates this point beautifully (10 ways new parents overspend on their newborns).

These unexpected expenses are usually a result of relative ignorance and lack of proper research. There is a wealth of information available on line for all of us to research and use for our financial and life planning.

Taking the time to properly plan an annual and multi-year budget is crucial. This multi-year budget should take into account our life plans and events and should be used as an integral tool in our decisions making.

#4 Accidents, disability, mortality or longevity

The broadest and maybe most important type of unexpected expenses are the ones that impact our ability to generate income and support the ones depending on us.

Accidents, disability, mortality and longevity (surprising but true) all significantly or totally lower our ability to maintain the level of comfort we have been used to. These events are unexpected in nature but have a certain probability of occurrence. Accidents and disability significantly change our lives, mortality is self-explaining and longevity has the risk of turning us into a liability on our children’s lives.

There is no real way to budget for these occurrences. What do we have left in our arsenal of pre-emptive measures? Insurance.

Insurance is basically transferring our specific risks to the community for a premium. For a certain premium which is carefully calculated according to the risk of a certain occurrence we can assure ourselves and our families a steady and good life even should the unfortunate happen.
Disability Insurance, life insurance and retirement planning are all integral parts of planning for unexpected expenses in the “life” level.

Hopefully I was successful in my mission of explaining my view of unexpected costs. I’d be very happy to read your point of view and thoughts on the matter.

Image by: Pulpolux

Wednesday, May 21, 2008

Is There an Oil Price Bubble Evolving?

The fears (or hopes) of another bubble in oil and commodity prices is gathering followers

With oil prices easily crossing $130 a barrel and with no end in sight the fears, or hopes, of an oil price and commodity price bubbles are gathering a crowd.

The case for the existence of an oil price bubbles and the case against the possibility of such a bubble are both convincing and interesting to observe.

For the sport of it I’ll wager that the chances of a bubble evolving in oil and commodity prices is much bigger than the possibility of these price levels holding on for the long term. I base my intuition on my firm belief in the rational of market irrationality.

The case for the existence of an oil price bubble

Oil prices have a history of price speculations with little regards to the fundamentals. The nature of the oil market is responsible. Lately, more and more signs have started to show that a bubble might have evolved in oil prices.

The US stock of crude oil has risen 12% from the beginning of 2008 to 326 million barrels. This rise in stock is accompanied by a decline in demand in the US as a result of increasing gas prices. All around the world the sub-prime and credit crisis have caused a significant slowdown in economic activity resulting in reduced growth and reduced consumption. All of these trends point to lower demand levels that should lead to lower prices.

We’ve all witnessed how capital investments seem to eventually take a life of their own raising prices simply because they keep flowing in one direction. Many speculative investments are racking in enormous profits and it could be just a matter of time before everything comes crashing down (yet again).

The case against the existence of and oil price bubble

The most common argument is that such warnings have been made for almost 4 years now. Eventually they will be right and oil prices will collapse, the question remains – when?

Another argument, made by NY Times Paul Krugman in “The Oil Nonbubble” is that “inventories have remained at more or less normal levels. This tells us that the rise in oil prices isn’t the result of runaway speculation; it’s the result of fundamental factors, mainly the growing difficulty of finding oil and the rapid growth of emerging economies like China. The rise in oil prices these past few years had to happen to keep demand growth from exceeding supply growth”.

The recent 4 years have indeed proven a significant percent of the 400% rise in oil prices since 2004 is due to the economic explosion of developing markets’ growth. The question only question left is: How big a percent?”

Bubble or no bubble, the increase in oil prices has some very good side-effects in my opinion (as I’ve written in a previous post last week). I personally believe that every time financial assets’ prices are discussed in such enthusiasm something is bound to happen.

John D. Rockefeller’s is often quoted for saying every time a shoe-shine boy hands out stock tips it’s time to exit the market. Index funds and ETF’s have provided household investors the tools to invest in complicated financial assets such as commodity futures. With capital pouring into these investment vehicles by aspiring household I think it’s time to contemplate an exit.

Related Posts:

Monday, May 19, 2008

The Relation between Age and Portfolio Risk – Counter Intuitive Results

Should young investors really hold riskier portfolios?

There is a common financial thumb rule when it comes to an investor’s age and the risk level of his portfolio. Most financial planners recommend a higher level of portfolio risk to younger investor and a lower level of portfolio risk to older investors.

This thumb rule is rooted in what seems to be common sense financial logic. A younger investor has more time left to save thus allowing his portfolio to adjust and compensate for possible loss due to the high risk level taken. And older investor should, by the same logic, avoid portfolio risk and concentrate his investment efforts on preserving his hard earned and saved capital.

Academic research is not supportive

Surprisingly enough this practical thumb rule has little in the way of academic support. I’ve been trying to find an academic justification for this professional habit and I’ve failed. Furthermore, I’ve found articles dating as early as 1970’s doubting this very logic application of finance.

Noble winning economist Paul Samuelson published an article on the subject in 1963 which is still referred to by almost any article ever since. The article was titled “Risk and Uncertainty: A Fallacy of Large Numbers”. In this article Samuelson demonstrated how having multiple draws (much like multiple years of saving) has nothing to do with risk preference.

This is understood more intuitively by thinking of the slim chance of a 20 year financial drought which might happen during all of your early years of investing in stocks.

Surprising results of a new published research

“Adding insult to injury” a relatively new research by Harold J. Schleef and Robert M. Eisinger titled “hitting or missing the retirement target: comparing contribution and asset allocation schemes of simulated portfolios" found some surprising results.

The researches simulated hypothetical portfolios for different investors and investment periods for ages 35-65. The researchers studied two strategies:

1.Strategy A - Portfolio risk declines with age – the share of stocks is reduced from 78% at age 35 to 40% at age 65.

2. Strategy B - Portfolio risk increases with age - the share of stocks is increased from 40% at age 35 to 78% at age 65.

In both strategies the methodology included an annual contribution of $11,000.

Results were indeed surprising. Strategy B where risk was not reduced with age but was actually increased with age 45% of the portfolios reached a net worth of $1,000,000 or more. Strategy A managed far worse with 29% of the portfolios reaching a net worth of $1,000,000 or more.

These results are a great way of demonstrating what Samuelson understood back at 1963. Variability is everything. Long term investments are not risk free. If they were risk free there’d be no premium on investing in stocks for the long term.

A third option that was not simulated was keeping a fixed share of stock in the portfolio for the term of investment. I assure you, a research can be put together to prove this strategy as the better one under specific conditions.

The bottom line, be reasonable. There is no guarantee in long term stock investments and they are just as risky. Don’t miss out on stock returns but don’t be blinded by them either.

Related Posts:
Long Term Investments are not Risk Free
2. How to Avoid Crippling Your Retirement Funds

Sunday, May 18, 2008

An oil bubble, Gas prices and a higher salary for the same work @ The Roundup

I didn’t have enough time today to carefully review my favorite carnivals and recommend my picks so I settled for the editor’s picks instead. I’m sure they did a great job as usual.

As always, my favorite posts from around the finance blogosphere are also listed. Without further a due I present this week’s roundup:

The Carnival of Personal Finance #152 was hosted by Money Under 30. The following are the editor’s picks for the carnival:

The Festival of Frugality #125 was hosted by Quest for Four Pillars. Here are some of the editor’s picks for the carnival:

The Money Hacks Carnival #12 was hosted by Can I Get Rich on a Salary? The following posts caught my eye:

More carnivals from around the web:
American Economics Blog Carnival, May 15, 2008

More posts by fellow blogger from the past week:

Saturday, May 17, 2008

Higher Gas Prices: A Blessing in Disguise or America's Wakeup Call

Higher gas prices have got Americans driving less and public transport has never been this busy - A blessing in disguise?

Gas prices have been too low for too long. The American public demanded and received cheap gas and is slowly undergoing an adjustment process as the result of dramatically increasing gas prices which can no longer be held at bay by any means.

With oil prices climbing to $130 a barrel, and with no end in sight, the economy suffers as higher gas prices take their toll in the form of higher transportation, manufacturing and energy costs.

Gas prices at $4. $5 and maybe $6 a gallon are now very significant to any household’s budget and considerations.

However, I can help but notice the many blessings and advantages higher, or more real, gas prices will have both in the long and short term.

Higher gas prices carry significant advantages

#1 Reduced Waste

The NY Times reports more and more drivers are abandoning their cars in favor of public transportation or mass transit. Apparently buses are getting crowded and so are the parking lots near railway stations and bus stops.

In cities like New York and Boston where the mass transit systems are developed there has been a registered increase of over 5% in passengers. In South and west cities an even more dramatic increase has occurred (the NY Times reports an increase of 8% in passengers in Denver with increases registered also in Minneapolis, Seattle, San Francisco and Dallas).

Furthermore, February was the fourth month in a row that Americans registered a decrease in car travel distance according to the Federal Highway Administration. Apparently 60% of Americans are intent on lowering their gas consumption.

Gas prices in the USA are amongst the lowest in the world. The following chart lists gas prices from around the world:

$4 a gallon seems less expensive now, doesn’t it?

#2 Reduced pollution

The immediate result of increased use of mass transit and fewer distances traveled by car will be a reduction in pollution. It might not be significant but I believe it will surely be felt in the bigger cities and urban centers.

Hopefully, higher gas prices will also result in a new trend encouraging American drivers to switch their cars to more efficient, and regrettably smaller, cars.

US vehicles have ranked bottom in world fuel efficiency for years now. According to Reuters: “U.S. fuel-efficiency requirements for passenger cars have been stuck at 27.5 miles per gallon since 1985, while the standard for pickups, minivans and other light trucks will increase from 20.7 mpg in 2004 to 24 mpg in 2011. That puts the United States behind Canada, South Korea, Australia, China, Europe Union and Japan in vehicle fuel economy. The Senate earlier this year passed a bill raising America's car and light truck requirements to 35 mpg by 2020.”

There are more pickup trucks and SUV’s to be held in the US than anywhere I’ve ever been. I haven’t been able to find any of the smaller cars anywhere in the US.

#3 Increased economic feasibility of alternative energy sources

The biggest problem with alternative energy sources is their price. Solar, wind, geo-thermal and bio-diesel are costly and require massive investments in research and development. With increasing gas prices the economic feasibility of alternative energy projects has risen dramatically.

We have only our government to blame for the lack of alternative energy sources today as only a government truly sees the real economic value or cost of oil usage its alternatives. It seems the market forces are demonstrating their powers yet again with higher gas prices an excellent motivator for both governments and private investors to act on alternative energy projects.
These projects, in turn, will hopefully result in lower pollution levels, higher efficiency, less waste and a more balanced approach towards our planet.

#4 Reducing dependence on oil producing states and reducing the power of dictators in those countries

It’s no secret oil producing countries usually have corrupt regimes with many characteristics of dictatorships. These regimes evolved using the immense power oil offers as the single most valuable energy resource available to us today.

This dependence has caused many counties to make painful compromises and dubious decisions when it comes to oil and the counties that produce it.

Hopefully, higher gas prices and the alternative energy resources to come will help lower our dependence on these countries significantly. Another desired affect maybe the weakening of these regimes as their one source of power will slowly diminish.

Image by: Greg Woodhouse

Thursday, May 15, 2008

Saving Hundreds of Dollars Easily with Well Placed Outlook Reminders

Timely reminders can help save you a lot of money avoiding automatic renewals and getting better deals

Ever since I started blogging I’ve adopted a positive outlook on the expensive and costly mistakes I make from time to time. I simply view them as tuition paid and a good story earned for The Personal Financier which just might save money for my readers.

We got a really good packaged deal with all out telecommunications needs included (Phone line, Internet, Cable etc.). This deal saved us at least 400$ for the year. We signed up for a one year deal knowing we should expect some tough negotiations the following year.

Time passes by so fast a year has gone by and we didn’t even notice. You can imagine our surprise when we were billed significantly higher for the first month of this year cutting deep into our earlier saving. We had expected it of course but we were sure we’d catch it on time and avoid the automatic and pricy renewal.

This is a prevailing tactic and sales technique of many companies ranging from telecommunications providers to insurance agencies.

Come to think about it, it doesn’t need to be a special promotion, deal or anything of that sort. Many of our automatic renewal deals become costly over time taking advantage of our customer loyalty and lack of diligence.

Which of our payments are usually auto renewed?

My generic list looks something like that:
1. Telecommunications – Cable, Phone, Internet, Cellular etc.
2. Subscriptions – Papers, Magazines, Health Clubs etc.
3. Insurance – All kinds of insurance
4. Utilities
5. Hobbies and Pastimes

I’m sure there are a lot more similar expenses which I’ve missed but the point should be clear. We can save on all these expenses by examining them on an annual basis (at the least).

Saving on these payments is very simple

My advice on how to save on these types of payments is pretty straight forward and is made up of two basic steps:
1. Add a reminder to your calendar of any expiring deals, obligations or engagements.
2. When the reminder pops up take an hour to shop and compare prices.

Saving has never been that easy. Companies are literally counting on us, as consumers, to fall asleep, or to get comfortably numb and just keep on paying for eternity. Our payments slowly, yet steadily, increase and we never notice.

There are always good explanations to price increases that the sales representative would gladly offer once you make the call and demand to know why you’re paying so much. Take advantage of the minute you’re free to choose again and suddenly you’ll get a special discount for being such a loyal customer all these years.

All it takes to save those dollars is to update the calendar near you of these precious moments and take advantage of them.

Tuesday, May 13, 2008

Know your Portfolio - Three Simple Charts Can Make a World of Difference

Portfolios change as investments change – make sure it still fits your goals and risk tolerance

A friend of mine used to manage his own investments. He was a good investor and had enough experience to avoid the common mistakes novice investors often make (more on common mistakes). Time progressed and his investments grew nicely.

After a long period of independently managing his portfolio he decided to consult with an investment broker to explore new options and other financial assets. A few moments after the broker reviewed his portfolio my friend was very surprised. He was amazed to find out his once solid portfolio now had over 60% invested in stocks.

Needless to say he learned a very valuable lesson that day. Managing our portfolio requires more than properly understanding risk, selecting the right assets to match our goals and term of investment and avoiding common mistakes. It requires constant and routine review. Even if our portfolio is managed by a trusted investment broker it’s always recommended to review it ourselves.

In order to properly review and monitor our portfolio we require a set of tools which can be easily developed but require some understanding. As always, I recommend consulting with a professional.

The tools, or charts, I will discuss here are all informative tools which enable us, as investors, to get a quick glance at our portfolio and make sure it’s built the way we want it to be. These are very basic and will generate the biggest immediate benefit. In future posts I will discuss more advanced tools, should you find these helpful.

The allocations of your portfolio

Whether we manage our portfolio on our own or simply want to make sure it’s being managed properly we must regularly update and review the allocations of our portfolio. There are three basic and important allocations to monitor and they are: Assets, geographies and currencies.

#1 Asset allocation

Sounds terribly intuitive indeed but when was the last time you reviewed the asset allocation of your IRA, for example?

I can assure you your portfolio today is different from the asset allocation you set out with some time ago. The variation depends greatly on how risky your portfolio was at that time (naturally, since variance is at the basis of the definition of risk). If it’s been a strong bull market the share stocks take up in your portfolio will grow significantly and with it the risk you’re taking.

Assume you’re portfolio was made up of 50% stock and 50% bonds with stocks rising 20% and bonds rising 5%. Your portfolio is now comprised of 54% stock and 46% bonds. The longer the length of time that passed between the initial set up of the portfolio and the review the bigger the difference.

Keeping track of your asset allocation has two main purposes:
1. Making sure you are taking the level of risk that suits you.
2. Making sure you are investing in right financial assets for you.

The asset allocation is best displayed using a pie chart easily constructed with any spreadsheet. I recommend reviewing it monthly as it also helps motivate you towards saving.

The pie chart should be composed of at least the following asset classes, depending on risk:
1. Stocks
2. Bonds
3. Liquidity

More sophisticated assets need to be dealt with differently or divided according to their “ingredients”. Don’t buy what you don’t understand is usually a good advice.

#2 Geography allocation

Another important display of your portfolio is the geographical diversification of your portfolio. The same thing that happens in your asset allocation happens to your geographical diversification. It changes according to market developments.

Assume the share of emerging markets in your portfolio should not pass 10%. Some of these markets have generated returns of over 200% over the last years. Imagine what happened to the share of your portfolio invested in emerging markets, and with it to the level of risk you’re taking.

Building a pie chart to display how you investments are spread over various geographies is easy and should include the main countries in which you are invested.

#3 Currency allocation

Everything I’ve written up to this point applies to currency as well. Invested in USD, Euro, Pounds? Monitor your exposure to foreign or domestic currency carefully. Usually it is smart to diversify investments over currencies as well (notice it is a common and correct practice, in my opinion, to keep the majority of your investments in your domestic currency, if you live in a developed country).

Each Financial asset can have a different parameter for each of these variables. For example we might own a stock of a European company which is priced in Euros. We could also own a bond of a Japanese company priced in Yens.

Each parameter carries with it specific risks and specific exposures. We must be able to control and review these risks and exposures in order to keep our portfolio in shape.

Sunday, May 11, 2008

Home Maintenance, The Sucker Factor and more @ The Roundup

It’s Sunday again and as customary I’ll bring my selection of some of the best personal finance articles of the past week.

Starting with my picks from The Carnival of Personal Finance which was hosted by Alpha Consumer:

The Festival of Frugality was hosted by Frugal for Life. I enjoyed:

From The Carnival of Money Stories @ Free from Broke and the Money Hacks Carnival @ Save and Conquer I chose the following posts:

More from fellow personal finance bloggers:

Saturday, May 10, 2008

Israel Celebrates 60 Years of Independence – An Economic Review

Israel at 60 is as prosperous as it has ever been, but not without challenges

This weekend Israel celebrates its 60th year of independence. Since 14.5.1948 this small country in the heart of the Middle East has turned from an agricultural based economy into a full blown economic wonder and success story.

I chose to review Israel economic success through this list of little known facts and figures which, unfortunately, hardly ever make it to the news. The list will be divided in to Geography and Government, Economic Review, High-Tech Industry, Education, the Stock Market and Challenges.

Geography and Government

1. Israel has a very small land area of approximately 8,500 sq. miles (vs. 3,794,100 sq. miles of the US).

2. Israel is a representative democracy with a parliamentary system.

3. Israel’s labor force is comprised of 2.85 million employees.

Economic Review

4. Israel’s economy is constantly transforming. Once characterized by a substantial public sector and a socialistic point of view the country’s economy has become much more liberal and competitive.

5. Israel is poor in natural resources (with the exception of potash) and depends on imports of petroleum, coal, grains and beef.

6. Israel’s coin is the NIS or New Israeli Shekel which has strengthened dramatically over the last years from a level of 4.6-4.8 NIS/Dollar to a level of 3.4 NIS/Dollar today.

7. In 2007, Israel had the 44th-highest gross domestic product and 22nd-highest gross domestic product per capita (at purchasing power parity) at US$232.7 billion and US$33,299, respectively.

8. The country’s GDP by sectors is similar to that of developed countries with a leading services sector at around 67%, the industrial sector follows with 31% and agriculture is responsible for the remaining 3%.

9. Israel’s major industrial sectors include a leading high tech industry, electronic and bio medical equipment, chemicals, metal products.

10. The country’s diamond industry is one of the world’s centers for cutting and polishing diamonds with a growing emphasize on trade.

11. The country is a member of the World Trade Organization and a trial member of the Organization for Economic Co-operation and Development (OECD).
12. The GDP growth of 2007 was 5.1%.

13. Israel has to thank its greatest ally, the USA, for a significant part of its economic success. For years the USA has provided Israel with military and economic aid and debt assurances helping the young economy blossom.

High-Tech Industry

14. Israel is a world leader of software development. In 1998, Tel Aviv was named by Newsweek as one of the ten most technologically influential cities in the world.

15. Israel was the destination for the first R&D centers outside the USA for Intel and Microsoft and also hosts R&D centers for Google and in the future for Yahoo!.

16. Foreign investments in Israel’s economy are increasingly growing with prominent investors showing increased interest. Examples include HP purchase of Mercury for 4.5 Billion dollars (cash), Berkshire Hathaway’s first investment out of the US of ISCAR Metalworking for 4 billion dollars, SanDisk’s purchase of M-systems for 1.5 Billion dollars and more.

17. Dominant Israeli companies include: Generic pharmaceuticals giant TEVA, Cutting tools leader ISCAR, software and information security leader Checkpoint, defense industry’s IAI and many more.

18. Israel has the second-largest number of startup companies in the world (after the United States) and the largest number of NASDAQ-listed companies outside North America.


19. Israel has the highest school life expectancy in Southwest Asia and is tied with Japan for second highest in Asia.

20. Israel ranks third in the world in the number of citizens who hold university degrees (20% of the population).

21. Israel has produced four Nobel Prize-winning scientists and publishes among the most scientific papers per capita of any country in the world.

Stock Market

22. Israel’s stock market is called The Tel Aviv Stock exchange and features two prominent stock indices called the Tel Aviv 25 and Tel Aviv 100 made of the 25 and 100 companies with the highest market value.

23. The TA25 and TA100 generated an average yearly return of 12.4% and 12.6% since the early 1990’s with the last 5 years generating over 175% in total.

24. The Israeli stock market is always evolving with increased transparency and regulatory requirements and more complex financial products, new ETF’s and mutual funds, derivatives and more.

25. Israel has decided on a gradual, yet swift, adoption of IFRS accounting principles increasing the uniformity with global accounting standards and the level of transparency of financial reports.


26. The Israeli - Palestinian issue and the efforts to resolve it will be occupying Israel for the foreseeable future.

27. On the Syrian front the challenge of peace remains with voices from Jerusalem and Damascus speaking peace and preparing for confrontation.

28. Iran’s nuclear arms race threatens both the stability in the Middle East and also the world’s. It seems the Iranians are very determined to reach nuclear weapons capability and are taking advantage of the world’s leniency and conflicting interests of the west and east (US, Europe, China and Russia).

29. As the economy evolves into a more liberal, capitalistic and competitive one social inequalities rise. The country faces the challenge of increasing equality for the benefit of the entire society.

30. Keeping the competitive edge in high technology research and application will be occupying the country in the years to come with both India’s and China’s increased prominence.

31. Other challenges include the relationship with Israeli Arabs, the diversity of Israel’s citizens and co-existence and the future of Zionism.

Hopefully this post will help bring out more sides of Israel than the ones featured daily in the news.

More on the economy of Israel is available in Wikipedia, or in this special report by researching Israel’s economy after 60 years (achievements and challenges).

Image by: odedgal

Thursday, May 8, 2008

The Problem of Accounting and Budgeting For Cash Expenses

Where did all that cash go ?

I’ve recently written two posts on payment methods or credit cards vs. cash. I argued that while cash payments help us avoid overspending credit card payments provide us with valuable and timely information for budget planning and review (Credit Cards or Cash: A Costly Tradeoff).

I also provided my tips and insights on how we can make credit card payments more tangible and real to help save us money (How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips).

There is, however, one remaining question which I’ve yet to find a successful solution to. How do we account, and budget in turn, for routine cash expenses?

We can’t avoid paying cash as part of our daily routines. The problem arises at the end of the month when I take a look at all my cash withdrawals and start scratching my head trying to remember where I spent all that money. These cash withdrawals, when summed up on a monthly basis can really amount to significant sums of money.

Aside from having spent those sums of money in the first place there’s the problem of accounting and budgeting for it. How will I be able to answer these questions?
1. How do I figure out my budget busters?
2. How much did I actually spend on eating out this month?
3. How will I know what my actual budget looks like?

The deviation in your budget’s numbers depends greatly on the percent of cash expenses out of your total expenses each month. The bigger the percent of cash spending the less the budget represents what is actually going on.

Our options for accounting and budgeting for cash expenses

What are our options and what are the possible solutions? I’ve narrowed the list down to the following:

#1 Lower your cash expenses

Naturally, the first solution would be to lower cash expenses and pay more with credit cards. A word of caution – paying with credit cards requires a much higher sense of awareness to spending and the realization credit cards are money as well (as I’ve discussed in detail here).

#2 Limit cash expenses to routine, specific expenses

Since cash payments are unavoidable narrowing and focusing them might work better. Most of my cash expenses pay for eating out and usually to buy small trinkets. This way, at the end of the month, I usually take all my cash expenses and assign them to “eating out” budget.

The extra cash spending makes eating out a bit bigger then in reality and helps me pressure myself into saving more on this particular budget item.

#3 Treat cash like it’s another expense

I’ve read about this method somewhere. The author recommended adding another budget item called, very conveniently, “cash expenses”.

There is a basic logic to this method. Adding cash expenses as a budget item makes into an expense which should be minimized. Since assigning cash expenses is often done in accurately we might as well plan and budget for it as just another expense.

#4 Keep tabs – My least favorite

I don’t know how but some people are able to keep tabs on cash expenses. If you’re able to do that, either with a pen and paper or an electronic wallet, you’ve got it made. Forget about credit cards and use cash only. You’ll both save and be able to track your expenses. I think it’s impossible to get it right, though.

Image by: marirs

Tuesday, May 6, 2008

Procrastinating Just Cost Me Money

They're counting on us to be lazy

I’m a very organized person. I keep my records in order, my desk is clean and everything is filed and sorted into place. I’ve even wrote a post about how it can save you money.

Unfortunately, my orderly behavior is sometimes a mask and means of procrastination. I tend to postpone dealing with the things I find least interesting and they often find themselves sitting, very neatly, in the incoming mail tray waiting to be opened, reviewed, dealt with and scanned for posterity.

I’m constantly fighting the urge to procrastinate. I know it’s costly. But every now and then I fail.

This is exactly what happened to me a couple of week ago. I got an envelope from one of my insurance agencies. Now as every novice personal finance enthusiast knows you should always, always immediately read and respond to any financial letter and when discussing insurance companies all the more relevant.

The lesson I re-learned: Always deal with finance related mail as soon as possible

Financial notices and letters are usually sent to us, not because these financial giants are nice and would like to keep us informed, but because it is a part of regulatory and mandatory requirements and they are obliged to do. Furthermore, these letters and notices usually have a given time frame in which we, as consumers, can respond and comment on their content, whatever it may be. I assume you understand, by now, the implications of my procrastination.

That letter from that particular insurance agency contained a small insurance policy and a notice which states my policy was automatically renewed, naturally at a much higher rate. Insurance policies are costly and canceling them costs even more since you’re charged all sorts of costs in addition to the premiums you’d already paid.

Had I just opened that letter in time I would have saved at least 100$ just by reading and replying in a timely fashion. It could have been worse though. Ignoring bills and notices can stack up huge interest and fines. I learned my lesson. Hopefully I’ve just spared you the need to learn from your own experience as well.

Image by: ChicagoSage

Sunday, May 4, 2008

Buying cars, Diet Foods, Down payments, Disability Insurance and More @ the Weekly RoundUp

This RoundUp includes what are, in my opinion, some of the best personal finance articles from the past week.

The carnival of perosnal finance was hosted by Lazy Man Money. Here are my picks from the carnival:

The Festival of Frugality was hosted by Sound Money Matters. These are the articles I've found most valuable:

The Money Hacks Carnival was hosted by Money Hacks. My picks are:

More great posts from fellow bloggers:

This concludes this roundup. I hope you've found my picks insightful and productive.

Saturday, May 3, 2008

How to Save by Making Credit Card Payments More Real and Tangible: 5 Practical Tips

A higher tangibly of credit card payments will ensure spending less

Making credit card payments more tangible is very important as the tangibility of the payment determines how easy (or hard) it would be to make it.

Credit card payments, which are easier and less tangible then cash payments, will often result in higher spending as they are simply easier to make. Paying cash will reduce expenses since parting with your bills and coins is harder.

However, credit card payments are very convenient and as described in a previous post provide us with a lot of data for later analysis and for budget planning and review as discussed in this previous post about the tradeoff between cash and credit cards.

Making credit card payments more tangible would allow us to benefit from both worlds: spending less and enjoying the convenience of credit card payments and the data they provide.

How do we make credit card payments more tangible?

#1 Take regular peeks at your on line statement

Back when I first started planning and reviewing my family’s budget I was very eager to stick with it and to achieve my goals. I noticed that by taking daily peeks at my credit card statement on line and reviewing my spending for the last couple of days I developed a very keen sensitivity to credit card spending.

The information is readily available on line to each of us and access to our statements is easier then ever.

Watching your statement slowly filling up with lines of expenses can be frustrating, especially if you’re on a very tight budget. Taking regular peeks at your statement online will prevent just that.

#2 Avoid paying on installments

Paying on installments or using credit to finance big purchases distorts your perception of payments and in turn your budgetary status. Furthermore, it makes big expenses, which might be out of your reach in a given budget, suddenly appear possible.

Acting and treating credit card payments as actual cash payments will greatly enhance their tangibility and is bound to lower your expenses.

#3 Lower the number of credit cards to a minimum

Rebates, discounts, promotions and what ever else comes to mind all pale in comparison to the real costs of having more than one credit card. Temptation, combined with readily available credit lines are a financial disaster.

Saving 5% on a dinner somewhere pales in comparison to paying 11.5% yearly interest on an express loan of 5,000$.

Furthermore, more than one credit card means more statement and more complicated budget management. You’ll quickly lose control over your expenses and finances.

#4 Use the data in your statement to budget and plan

Your routine budget planning should include a detailed review of credit card statements. These statements present all the information required in order to plan and review budgets including the obvious sum, purchase itself, dates and also suppliers, interest paid and more.

By depending on your credit card statements for budget planning you’ll create the sought after state of mind where credit cards equals expenses.

#5 Put a little sticker on your card to remind you it’s money

When all else fails a small red light in the right moment just might save the day. Put a little sticker on your card to serve as a red light, a reminder this is actual money.

It could be just a small red circle, a little string of text or whatever you think works best.

I believe that behavior can change believes. Acting as though credit cards are real money will create that necessary state of mind for you and hopefully save you money.

Image by: eliazar

Thursday, May 1, 2008

How to Fortify Your Job: 10 valuable (and challenging) Tips

10 invaluable skills which are even more crucial today

With each month bringing more news on additional job cuts it seems more focus should be placed on fortifying our careers and jobs in this economic slowdown, recession or whatever you'd like to call it.

Fortifying our jobs, careers and place in an organization is necessary and just might make the difference between successfully navigating the current slowdown or struggling through it. Taking the right steps is a wise pre-emptive step which just might save us significant trouble and potential hardships in times to come.

I believe there are some invaluable skills and characteristics every employee should adopt which will make him virtually indispensible. These are true for prosperity as well but play a more crucial role in a recession.

I must say I doubt each person has the ability or capacity required to adopt all of these but we must to our best with what we've got. We all have at least one or two strengths where we can really stand out in.

#1 Solve problems - Be solution oriented

In my experience there's nothing as valuable as having an employee which is solution oriented. The majority of times we just don't have all the data, options, decisions and guiding available. Sometimes we just have a task to complete.

As a manager an employee which does his best with what he has and produces a solution, no matter how weak, is more valuable than an employee who just keeps returning with more and more questions. A solution can always be corrected and advice can always be handed out. An independent employee with the ability to figure out complicated tasks and missions and provide solutions is invaluable.

Adopting a solution oriented state of mind isn't easy. It's especially hard for perfectionists who'd like to see everything completed perfectly and by the book.

Adopting a solution oriented state of mind requires understanding that sometimes all we have to go on is what we have in hand and to make the best out of it.

It's important to understand it's easier for a manager to correct a path or a solution than to draw a new one from scratch. Most managers don't have the time required to do so and rely on their top employees to do that for them. These are the same employees which are considered valuable to the organization.

#2 Adopt an organizational point of view

Not everyone is cut out for working in the confines of an organization. However, if that's what you do, and you don't have anything else lined up adopting an organizational point of view is a very smart move.

Sometimes organizations as a whole, or managers as individuals, make decisions which seem odd at best and downright not rational. Protesting and making your voice heard is always good but it should be done within the organizational ball park and in accordance with the organization's accepted behavior and culture.

Identifying with decisions we don't agree with is regrettably (or not) a required character trait of managers and valued employees. The time or inclination to explain decisions is not always available. Keep in mind there's usually a good reason, in the organization or manager's eyes, to that decision.

Managers, as human beings, naturally value employees which see eye to eye with them and feel safe around them. Keep that in mind.

#3 Arrive early, leave late

An oldie but goldie. We'd like to think that if we get our job done it doesn't matter when we arrive and when we leave. Well, it does. We can't really control the basic cause and affect our minds draw automatically. If someone arrives earlier than us and leaves later he must be working harder and therefore must be more valued by management.

Managers will also be aware, whether in a conscious or unconscious manner, to the time you put in. The same goes for arriving late and leaving early. Even if you get your job done, and more, you will always have to apologize, even if it is done with humor, for your hours.

#4 Get involved

If you haven't shown interest, now it's time. Detached employees don't do themselves any good. In times of prosperity doing your job is enough. In a recession it isn't.

Getting involved is a very basic advice and is key to creating added value for you as an employee. A general good tip is to put yourself in your manager's seat. What would you like to see in your employees?

An involved employee is much more valuable as he has a better understanding of the goings-on in the organization, understands it better and represents it better.

#5 Strengthen and protect your niche

Have you carved yourself a niche in your organization? That's an excellent start. It's time to deepen it and protect it. A good niche expert is virtually irreplaceable in the short term. Developing your own niche is an entirely different story which would make a great post.

Don’t be afraid to let other people in you niche as any refusal to do so will not be welcomed. Instead, share some of the less relevant experience and create synergies with new and potential partners.

Another good idea is to constantly keep in the mind of the organization your valuable experience and expertise.

#6 Be a team player

Unless you're a genius or a great salesman this is definitely not the time to be a lone wolf. Team players empower an organization through synergy and mutual enrichment. If you're colleagues favor you chances are your manager have noticed it as well.

Lone wolves naturally threaten the rest of the pack and draw attention and fire. As I've written, unless you can compensate for it in some other fashion it is recommended to join the pack (and maybe lead it).

#7 Stand out

Marketing has a lot to do with success. Standing out has everything to do with marketing. They say there's no such thing as bad publicity. We don't need to test this saying but it does hold a certain truth. Be noticed and heard. Bring a new voice to staff meetings, new ideas and new initiatives.

Remind yourself and others of your recent success and of your current undertakings. Don't brag as it doesn't do any good instead just point out the facts in relevance of your current undertakings.

#8 Generate Business

This one's intuitive and goes without saying: increase your productivity. Manufacture more, write more and sell more. Meet and surpass your goals.

Naturally this should be done gradually and at level you can keep for a while but with some effort anyone should be able to work harder.

#9 Show increased initiative

Highly appraised by managers, employee initiative is a sort of an added bonus for an organization. Employees usually get paid to do their jobs be good at it. If an employee successfully initiates more business, research or anything of value to the organization his own value increases significantly.

#10 Have a plan B

Starting your search for alternatives in a recession is not wise. Keeping your options open at all times means higher bargaining power, more self confidence and will keep you cool and relaxed.

Keep in touch with friends, colleagues and business partners. They may be very important if all else fails.

Have your alternatives planned and mapped out at all times.

Image by: Texas lan