Wednesday, July 30, 2008

Saving Money and Time (while Reducing Pollution): Americans in Big Cities Discover Scooters

Scooters present a rare opportunity to save both money and time and also go green in the process

Apparently more and more Americans are switching to scooters and light motorcycles these days. In the bigger cities scooter riders can be easily spotted making their way through traffic both cheaper and faster.

I’ve been riding a scooter for half a year now and I must say I feel reborn. I can’t even fathom how I didn’t make the switch to one of these vehicles sooner. I’ve experienced something similar to a religious epiphany and I’m intent on promoting my recent new revelation to the masses.

No more traffic, no more wasted time and no more frustration from spending a couple of hours on a distance that should be covered in 20 minutes. If scooters and motorcycles didn’t have enough going for them already high gasoline prices definitely gave these vehicles another attractiveness boost which quickly translated to sales which hopefully results in more eye opening experiences happy new scooter riders.

According to Reuters, “Piaggio” scooter sales went up 105% in May and 147% in June. “Piago” executive points out American city dwellers are definitely embracing this clean, fuel and time efficient means of transportation. Reuters also reports total scooter sales are up by 65% for the first half of 2008.

The US has traditionally lagged behind Europe and certainly behind Asia when it comes to scooters. The enormous distances and motorcycling tradition in the USA have certainly played a key role in the relative weakness of the scooter market. However, it seems increasing gasoline prices have tipped the equation in favor of the urban scooter which has everything going for it.
Scooter prices are a laugh compared to the average car ranging from $1,800 to $7,000. The old traditional image of the scooter, a faltering and noisy little motorized bicycle couldn’t be further from the truth. Leading scooter manufacturers have created new super-scooters which at times easily overshadow motorcycles.

The distinct advantages of scooters

  • Cheap and reliable means of transportation that helps avoid yet another pricey car loan saving thousands of dollars easily.

  • Very efficient mpg ratio at 70-90 mpg quickly translates to $10 for a week of city riding saving hundreds of dollars a month.

  • Environmentally friendly due to very high fuel efficiency contributing some more to the global effort.

  • Parking is a breeze translating to hundreds of dollars saved on a yearly basis.
  • Traffic and gridlock are foreign to scooters easily cruising between jammed packed roads.

The distinct disadvantages of scooters

  • Usually limited to the urban environment easily solved by keeping one car for long distance travels only.

  • Far riskier than driving a car obviously and requires attention, skill and maturity.

  • Insurance premiums are accordingly high but are nowhere near your total saving potential.

From my short experience I believe replacing a car with a scooter results in saving literally thousands of dollars with a much higher potential depending on the car you drive and the mpg you get.

If you’re looking to make a serious change in both lifestyle and personal finance considering the switch to a scooter is one of the best opportunities you have available.

Images by: maisonbisson, Presspix Photography, WorldWideMotorcycles

Monday, July 28, 2008

Would You Be Willing To Pay 60% Tax For a Higher Level of Social Equality?

The Scandinavian countries are well known for their high living standards, equal opportunities and overall well being. It comes with a hefty personal financial price which I believe is well worth the investment.

The Naeroyfjord, Norway

The Scandinavian nations: Sweden, Norway, Finland, Denmark and Iceland are well known for their citizens’ well being, overall quality of life and high living standards. These countries have been constantly rated at the top of various top ten lists such as best countries to live in, best education, most content nation and more. The UN has rationally rated Scandinavian counties as some of the “best place(s) to live in” next to Canada, the US and other European countries.

The secret of the Scandinavian model has long been sought after by various countries jealously eyeing the Nordic success stories. I believe the secret is pretty straight forward. The question is, are we willing to pay the “price” and adopt similar values as a society?

The Secret to the Scandinavian Success Story

The Nordic success story is, in my opinion, a combination of several key factors:

1. Correct priorities - A correct set of priorities set by the government which in turn is properly translated to budget allocation.

2. Convenient Geopolitics – The gods of geopolitics seem to favor the Scandinavian states offering them little in the way of geopolitical challenges. Since the Second World War I believe no major conflict has taken place on Scandinavian soil. I’ve heard of occasional arm wrestling with the Russians over North Pole territories but not much more. I believe these countries do face challenges in the future, mostly domestic due to increased immigration but still they have it easy (compared to the USA for example, really without going into politics).

3. A more social and less self centered state of mind – from the occasional online chat or acquaintance I’ve received this important impression. I truly believe Scandinavian citizens hold the sacred capitalistic values some of us may hold less dear. I believe they have adopted and are educated to a more thoughtful and social state of mind which creates a better understanding of living in and as a part of society.

The Importance of Social Equality

Each value system holds certain values very dear. More capitalistic countries stress entrepreneurship, ones right to ones properties, monetary success while more social societies stress equality, equal opportunities and a more solid welfare system.

As Aristotle wrote the golden path usually lies in the middle. The question is where does this middle lie?

The morality of both capitalism and socialism has been debated upon greatly. Each system has its philosophers justifying the principles and values at its core. My personal preference is that all my fellow citizens will be entitled to what have become the basic human rights in modern societies. Among these are healthcare, a home, food, education and most importantly equal opportunities.

Inequality is often measured by distribution of income as a proxy. The latter is measured using the Gini Coefficient which measures statistical dispersion of income in different percentiles of the population. The following is a map showing the value of the Gini coefficient for different countries. The lower the coefficient the better:

Source: Wikipedia

A lower Gini coefficient indicates more equal income or wealth distribution, while a high Gini coefficient indicates more unequal distribution. I must add that having a low coefficient is obviously not enough as it might simply state most of a certain country’s citizens are poor (China, for example). The combination of a low coefficient and high GDP per capita is more prominent in Scandinavia and Europe.

The Scandinavian Welfare System

The Scandinavian welfare system would be constituted as a wonder in most modern countries. The welfare system is made to take care of the inhabitants of the country “from the cradle to the grave”. Such a strong welfare system guarantees higher social equality and more equal opportunities.

Key benefits the Scandinavian social security offers are:
  • Free and full healthcare, hospitalization and immunization as well as old age nursing.
    Free education and higher education.

  • Long maternity leaves (42 weeks in Norway) with a 100% wage paid for by social security. Additionally the other spouse is entitled to several weeks of leave as well.

  • Generous unemployment compensation and re-training programs.

  • A minimum pension at retirement.

  • Child allowance from the first child.

These social security benefits might invite parasitic individuals to live on the country’s expense. This is where active employment policies and education as well as good old shame come into play. If something is unacceptable in a society than certain individual will be outcast for their behavior.

Naturally such an extensive social security safety net required high government expenditure. Here are some figures, for example, courtesy of Wikipedia: Sweden and Denmark were in 2004 the countries of the European union where the expenses of the public administrations were the highest, with respectively 57.2% and 56.3%, Finland being a little on this side with 50.7%. The Nordic countries are quite near France (53.8%), a country with an extensive public sector, and very distant from the British model, where taxes and public expenditure in general are much lower, but where people are generally expected to manage more of their own affairs for themselves.

The Price: High Taxes

Naturally, these expenses must be funded somehow. Norway is relatively rich in oil but generally speaking Scandinavian countries rely on high tax rates for funding the aforementioned social security and public expenditure.

Individual tax rates can reach as high as 63% in Denmark, 60% in Sweden and 50% in Norway. VAT is also unusually high at 25% for the aforementioned countries. Ranking countries by tax revenues as a percent of the GDP gives even stronger findings: 5 of the first 7 countries are Scandinavian countries with Sweden in first place with 51.3% and Finland closing the list with 42.4%. The UK is in the 16th place with 37% and the US at the 36th place with 27.3%.

Not everyone is willing to make this apparent sacrifice for a higher level of social equality. I’d personally hate to live in a place where my neighbors have a hard time getting the medicine they need. I believe thinking a bit less about ourselves as individuals and investing more in our societies will do all of us a world of good.

The Scandinavian states have done so well because of the unique society they have managed to create where social equality is valued while not taken advantage of. This is a delicate balance hard to find and harder to maintain.

I'd love to hear your thoughts and comments on this post. I’ve felt especially envious while writing it.

Images by: today is a good day

Sunday, July 27, 2008

No Free Bubble, Value-Packed Cars, 25 Ways to Improve Your Finances & More @ The RoundUp

The customary weekly roundup

Newspapers and magazines hold a wealth of information. Each roundup I’ll do my best to present some of the more enlightening, educating and at times practical articles I’ve read during the past week. My picks for this week are:
  • No Free Bubble @ NY Times - Simple logic dictates the same people and corporations that reaped fantastic and legendary profits should also be held accountable for the current crisis? A wide and generous federal safety net says otherwise. The question of whether the government should bail out these individuals and corporations is a deep one in a capitalistic society which holds entrepreneurship so dear.

  • Unhappy America @ The Economist - With the statue of liberty contemplating as a front page cover The Economist calls for an American soul search and self examination. A very interesting read.

  • Ten Most Value-Packed Cars @ Forbes - Very practical and very current even with slightly declining oil prices (please don’t forget where we were two weeks ago).

On to carnivals:

The Festival of Frugality #135 - The Frugal All Over Edition was hosted by Antishay Ventenne. My favorite posts from this edition are:

The Money Hacks Carnival #21 was hosted by HelpMyCashGrow.Com. I recommend the following posts:

The 162nd Carnival of Personal Finance: Baseball edition was hosted by Taking Charge. I enjoyed the following posts:

  • Goals Are Great Motivators @ Free From Broke – A good reminder of the importance of goals.

  • Backlash @ Save and Conquer –Deals with the painful results of a weak regulatory environment.

If this wasn’t enough, here’s more from fellow personal finance bloggers:

Saturday, July 26, 2008

The Big Mac Index – Applying Simple Economic Common Sense

Simple ”quick and dirty” economic modeling can give powerful insight

The Economist’s Big Mac Index has traditionally been thought of as an interesting yet dubious proxy for currency valuations and purchasing power.

Mcdonald’s has a vast array of branches worldwide. Next to the Cola companies Mcdonald’s has, what might be, the most widely distributed common product worldwide: The Big Mac. The Economist thus ingeniously constructed the Big Mac Index which is a simplified model of purchasing power and currency value.

The most beautiful economic models are very simple yet generate very interesting insights. I believe the Big Mac Index is one of those. The Big Mac Index is often referred to in economic and business papers. Mostly with a light humor but always seeking buried truths.

The economic sense behind the Big Mac Index - Purchasing Power Parity

Purchasing power parity, also known as PPP is a broadly used economic concept. According to purchasing power parity currency rates, in the long run, will move towards en equilibrium in which the cost of goods and services will be equal in different countries (adjusting for shipping costs, taxes etc.).

The Big Mac is an ideal example for a sold good which should be priced the same in the many different countries it is sold in. In the long run currencies will fluctuate to create such equilibrium.

Purchasing power parity is most commonly used in comparing living standards in different countries. While salaries in New York may be higher so are prices of common goods such as homes. As such, in terms of purchasing power parity one does not necessarily have a higher living standard simply because one earns more.

The following map, by Wikipedia, illustrates the purchasing power parity of the gross domestic product for the countries of the world (2003). The US is the base country, so it is 100. The highest index value, for Bermuda, is 154, so the same goods are 54% more expensive in Bermuda than in the United States:

Source: Wikipedia

Which currencies are overvalued and which are undervalued according to the Big Mac Index?

According to The Economist more currencies seem “out of whack” this July compared to last year. The Big Mac Index shows only a handful of currencies are close to their Big Mac purchasing power parity. According to the Big Mac Index:

  • The Australian dollar is within 10% of its fair value

  • The Euro is overvalued by 50%
  • Other European currencies such as the British Pound, Swedish Krona, Swiess Franc and even the Canadian dollar are all overvalued compared to their Big Mac purchase power parity.

  • Only the Japanese Yen is undervalued by 27%.

For the complete data and worldwide prices of Big Macs and their implied Dollar value please visit The Economist.

These results are far from surprising. The US Dollar has weakened greatly these past couple of years and an overshooting downwards is very probable. The following graph shows the US Dollar vs. the Euro:

While almost any other major currency strengthened significantly vs. the US dollar low interest rates in Japan are giving the Yen a hard time.

I believe The Big Mac Index reflects the major macro trends in world currencies, even if a bit roughly. It is a lovely example of a very simple extrapolation with good economic common sense at its basis.

Related Posts:

Image by: bee-side(s)

Wednesday, July 23, 2008

On the Psychological Effects of Ownership and Overpricing

Sellers tend to overprice their assets to include the pain of having to let go

During the last couple of weeks I’ve been browsing around for an apartment for my parents. They’re thinking about moving closer to the city to spare the precious time lost in traffic. I’ve seen 7 apartments up until now and I was constantly surprised by the gap between the state of the apartment and the asking price. Homeowners were very consistent in overpricing their assets, almost in complete disregard to the apartment and the market’s condition.

This phenomenon was so consistent I began wondering whether my perspective was at its source. Maybe I was under pricing these apartments? I was pretty sure I was willing to pay an honest price so I sat at my computer and started researching why owners overprice their assets.
Soon enough I had more examples than I could handle. In investments one usually attributes higher values to stocks one owns while a potential buyer would often attribute a lesser value. Even common trinkets such as pens or cups were considered of higher value than others in research done with students.

Essentially, in every situation where a buyer and seller are involved a value gap will emerge stemming from a subjective attribution of value that depends on whether you’re buying or selling.

Research shows ownership has a strong psychological effect on us

In a relatively early research by Knetsch & Sinden (Knetsch & Sinden, 1984) participants were given either a raffle ticket worth two dollar or simply two dollars. Very few participants showed any willingness to trade and were very content with what they got.

In another research (Loewenstein & Kahneman, 1991) half the students of a certain class received pens while the other half received a token exchangeable for an unspecified gift. The students were then asked to rate 6 possible gifts for future experiments. In the end the students had two options: either a pen or two chocolate bars. 56% (!) of the students that originally received pens preferred to keep the pen while only 24% of the rest of the students chose the pen. Furthermore, while rating the 6 possible gifts pens didn’t register any significant preference. This led researches to believe the main effect of ownership is not in enhancing the value of a thing but rather in enhancing the pain of having to give it up.

Ownership clearly has a psychological effect on us resulting in the aforementioned symptom: Overpricing of assets we own. The pain involved in having to part with an object takes form in a higher pricing of it. Furthermore, people unaware of this phenomenon are surprised when they realize others don’t share their perspective. Further research done by noble winning Prof. Daniel Kahnman shows even veteran brokers have a hard time letting go of the ownership effect usually attributing it to a sort of margin for negotiations.

The problem with the ownership effect

Overpricing an asset isn’t a bad thing in itself. Many home owners tend to overprice, even knowingly, thinking the right person will arrive and be willing to pay the price they ask for. That’s an understandable approach but it should be done with extreme care.

While searching for an apartment I quickly learned to ignore these over pricings deeming them not serious enough. As a potential buyer one is always looking for a potential seller to close a deal with. I believe over pricing signals lack of seriousness and disrespect on the part of the seller.

With an abundance of information getting away with overpricing isn’t really possible. Market surveys are easier than ever, even in the traditionally less transparent markets like real estate. The internet has a wealth of knowledge and one only needs to search very roughly to get good information quickly.

How can we counteract the ownership effect?

The obvious and only solution is to put ourselves in either the sellers’ or the buyers’ shoes. Would I be willing to pay the price I’m asking? What would be my asking price? Answering these questions objectively will help counteract the effects of ownership and help bridge the gap between buyer and seller.

Expect the buyer to ask for higher prices and expect the seller to negotiate. Part of it’s a game but a part of it is true value assign to the price. The frustration of having to pay more or to receive less is not easily dealt with and it may make or break a deal.

Related Posts:

Image by: ccgd

Monday, July 21, 2008

Is the US On Sale, With Very Attractive Prices?

Sovereign wealth funds are buying in bulk

Sovereign wealth funds owned by foreign governments apparently see potential in the beaten US real estate and financial sectors. Sovereign wealth funds are buying in bulk investing billions of dollars in banks and buildings.

Only recently the Abu-Dhabi Investment Company (ADIC) acquired the Chrysler building, one of the most famous of Manhattan skyline’s monuments. Located in the heart of Manhattan the Chrysler building is well known for its brimming terrace crown and its classic Art-Deco design.

The Abu-Dhabi Investment Company paid, according to some reports, approximately 800 million dollars for the building to Prudential Real Estate Investors, a subsidiary of the Insurance giant Prudential.

Is the US on sale, with very attractive prices?

According to the NY Times, last year foreign investors poured a record $414 billion into securing stakes in American companies and properties.

There are three main reasons for the increased attractiveness of US companies and properties:

  1. The Dollar is relatively weak, especially compared to the EURO.

  2. Many countries hold huge Dollar reserves, from China to the Gulf States.

  3. Both the stock and real estate markets have suffered severe losses creating many investment opportunities.

Foreign investments in real estate and investment banks stood out in the headlines but there have been other significant foreign investments.

In the steel industry according to the NY Times The German Company ThyssenKrupp Stainless broke ground in November on what is to be a $3.7 billion stainless steel plant in Calvert, Ala. Furthermore, foreign giants like Toyota Motor and Sony have increased investments in their American subsidiaries with $43.3 billion invested last year from $39.2 billion the previous year.

The weak dollar significantly increases the effectiveness of manufacturing in the US. This, in turn, will draw more and more foreign investments and plants creating more jobs and giving the US a significant push out of the current jam.

According to the Boston Globe, Sovereign wealth funds, which are found mostly in the Middle East and Asia but also in European countries such as Russia and Norway, control an estimated $2.5 trillion in assets. Some experts predict their holdings could reach $12 trillion by 2015. Similar numbers are reported by Morgan Stanley for the Economist.

Notable deals

Citigroup announced earlier this year that it had sold a 7.8% stake in the company worth $14.5 billion to a group of investors, including the government of Singapore and Saudi Prince Alwaleed bin Talal, as it revealed a colossal $10 billion loss for the fourth quarter of 2007.

Merrill Lynch, which also suffered massive losses, sold a special class of stock worth $6.6 billion to funds managed by South Korea and Kuwait.

In NYC The General Motors building was purchased for $2.8 Billion by the government of Dubai and The Flatiron building was sold to an Italian real estate investor.

There have been fears of increased foreign involvement in US leading investment banks and companies but it seems these fears are unjustified.

As visibile on the chart to the right sovereign wealth funds have relatively few assets under management compared to pension funds and mutual funds.

Sovereign wealth funds have traditionally concentrated on buying less than 10% of stocks usually with no board seats or any real influence on the company.

Naturally, a 10% share gives you all the influence you need but it seems fears of a hostile takeover on the US economy are, to say the least, over exaggerated.

Similar fears have been expressed in the 1980's with increased Japanese involvement in US corporations and capital markets. I think it only did the economy good.

Images by: wallyg, paphio

Sunday, July 20, 2008

Deeper into Debt, Day Trading Secrets and the Psychology of Money @ The Roundup

The customary weekly roundup

I had time for two posts only this past week. Hopefully I’ll fare better the week to come. I always aim for at least three quality posts each week, on Mondays, Wednesdays and Fridays.

The following are very interesting articles I was fortunate enough to read this past week:

Last Wednesday I recommended an excellent buy or rent calculator from the NY Times. Today I’ve stumbled across this nifty emergency fund calculator @ Yahoo! Finance. I recommend giving it a go.

On to carnivals:

The Money Hackers Carnival #20, Chicago style was hosted by This Writer’s Wallet. I enjoyed the following posts:

The Carnival of Money Stories #68 was hosted by Funny about Money. I recommend reading the following posts:

The Carnival of Personal Finance #161 was hosted by The Budgeting Babe. The following posts caught my eye:

More recommended readings from fellow personal finance bloggers:

Wednesday, July 16, 2008

Is It Better to Buy or Rent?

Another look at this timeless question. Now better explained with a great tool by NY Times.

The NY Times has one of a few calculators that actually get the comparison between rent or buy right. I strongly recommend visiting Is it Better to Buy or Rent @ NY Times to get a feel of it.

This post is essentially an improved older post in which I've explained my approach to the buy or rent question, the same approach taken by this simulator.

There are many psychological aspects to the question of rent or buy. While these may be debated in length it is important to get the financial part of the question right (A deeper look into the psychological aspects is available related posts further down the page).

In this article I will examine the financial aspects of the decisions in the form of the alternative 'loss' in each option (Rent Vs. Buy). We are not always aware of the entire financial picture.

When addressing a financial question we should isolate those variables which can be measured and compared. We should regard a house as every other asset and ask ourselves which way to purchase the asset is most desirable financially.

In order to compare the two options we must first have a common basis for comparison. Evaluating rent or buy, financially can only be made by considering the same asset, of course. Thus, we shall look at two alternative paths to own a house in a certain period of time:

Option A: Buy the house today and live in it for that period: The Buy Option.

Option B: Rent the house today and buy it in the end of the period: The Rent Option.

Option A: The Buy Option

Let's assume our future home owner buys a house with the common combination of equity and mortgage. His 'losses' would include:

  1. Interest paid on mortgage - The most obvious would be the interest paid monthly as a part of the mortgage payment. This is essentially 'throwing' money away much like rent.
  2. ROI on equity - A bit less obvious would be the optional return on investment on his equity. Our home owner would have invested his money instead of using it as a down payment for the house. This alternative investment could have potentially yielded significant return which is lost when invested in a house (to be gained, possibly, by a rise in house prices)
  3. Deal costs - The costs of deal itself that include taxes, real estate agent's commission, lawyers etc.
  4. Home maintenance and improvement costs - House ownership often means maintenance and home improvements otherwise avoided.

What about potential gain? In the buy option our home owner has a great potential gain as his investment in the house is a leveraged investment (An investment made with a combination of equity and debt).

The possible gain extends to funds he didn't have in the first place. Here's an example: Our home owner has invested his equity of 100K US$ in a portfolio which yielded a 5% return of 5,000$. Assuming his house has yielded the same return (5%) but was purchased with the same combination of equity and mortgage (say another 100K US$) his return on investment is now 10,000 US$ (with some paid as mortgage interest but with a relatively low interest rate).

Notice the return on his house is gained also on the debt or mortgage part of it (Higher absolute return).It is important to note that this potential gain is also a source for potentially greater loss since in the case of loss on his investment our home owner is left with mortgage payments unaffected by the devaluation of his property.

Option B: The Rent Option

Let us now examine the 'losses' in the rent option:

  1. The monthly rent - Self explanatory.
  2. The potential gain on the house as an asset - While renting housing prices may rise significantly without any benefit for the one renting (the renter will eventually have to pay more).

The potential gains for the rent option are

  1. Return on equity - Return on equity not invested in a house but alternatively invested in a portfolio.
  2. Return on monthly savings - Not having to pay a mortgage leaves the renter with the ability and duty of saving the principal part of the monthly payment so that he or she may buy the house at the end of the period. These funds generate return on investment as well.

When comparing the two alternatives we should always compare them for the same asset and for a set period of time in order to achieve a true comparison.

After getting the financial part out of the way we must make room for the psychological aspects of house ownership vs. periodical rent. I'd like to dwell on one unique psychological aspect: The motivation to save. In the buy option our home owner is forced to save in the form of timely mortgage payments. In the rent option our home owner needs some discipline in order to save the money for future house ownership. As available money always has its uses the mandatory part of the mortgage is an excellent motivator for the less disciplined savers.

Related Posts:

Monday, July 14, 2008

A Look at Global Stocks Markets 6 Months into 2008 – 4 Important Lessons Learned Yet Again

Some things never change

It’s been a painful 6 months for stock markets worldwide. We’ve all felt the impact of the current crisis and the ripples it sent throughout global economies.

Ominous news is all around and waves of hacks and slashes in many corporations are clouding the sky. However, if I were to ask the average Joe just by how much exactly did global stock markets drop what would be the average response? I believe it would paint a much darker picture than things really are (I certainly hope so).

I felt I needed the following chart to clear things up a bit. It describes how well (or how badly) stock markets did the in the last 6 months:

We’re still in a crisis but I believe it could have been much worse. Hopefully I’m not wrong. We can learn quite a few things from this graph.

#1 The media thrives on an atmosphere of crisis and intimidation

There have been crisis before and there will be again. Every time the crisis we face at the present seems to be the hardest. No wonder, it’s happening right now. It’s important to keep everything together and not get overly excited. This is the nature of stock markets and humans.

#2 There is a direct link between risk and return

Emerging markets may generate high returns but they also come crashing down first. About half a year ago the prevailing truth was that China and neighboring stocks markets, mostly emerging markets, are now relatively independent and may not suffer from the US crisis. We all got a pretty good lesson in globalization.

Russia lost only 5% this year. This could lead to mistaken conclusions on the nature of risk and return. Russia is one of the more risky stock markets of the bunch and has done so well due to skyrocketing oil and commodity prices and the many natural resources which are abound in Russia. Should oil prices drop (as I’m quite positive they will, in the near future, half a year or a year from now) Russia will suffer as well.

#3 When it’s raining everybody gets wet

Diversification will only get you so far. We cannot diversify the market risk only specific risks. If the market, as a whole, takes a dive, we all follow. Defensive industries often thought as safe havens in turbulent times. They are indeed, but don’t expect brilliant or even positive returns.

#4 Opportunities aplenty

It’s not possible each and every single company is now worth 20% less. Therefore, there are opportunities and they are plentiful. It’s getting the right ones that’s the tricky part. We have two options:
  1. Either try to locate the more attractive stocks using analysis, analyst recommendations and Wigi boards. Or;

  2. Take small timely dips into the market buying a bit every week or month slowly accumulating a nice investment with a very attractive average buy price. By using dollar cost averaging on an index you won’t get rich or get phenomenal returns (risk and return again) but you will be able to capitalize on low prices. I’ll write about this technique in detail later this week.

Happy hunting.

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Sunday, July 13, 2008

Make Things Last Longer, Survive a Down Economy and My 200th Post @ The Round Up

The customary weekly roundup

I only just noticed my previous post on 10 Tips on More Efficient and Economic Use of Air-Conditioners was my 200th post at The Personal Financier!

I remember starting this blog after writing 30 articles at about 8 months ago. I remember staring at my archive trying to think how to come up with three writing topics a week. I wish I had more time since my head is exploding with ideas and thoughts.

I’d like to thank all my readers and fellow personal finance bloggers for their support. I’m looking forward to writing 200 new posts.

Without further a due, this week’s roundup:

The Festival of Frugality #133 was hosted by Squawkfox. My post on My View of Frugal Thinking was chosen as an Editor’s Pick! I enjoyed the following posts:

The Money Hacks Carnival #19 was hosted by Money Hackers Network. Here are my favorite posts from this edition:

More from fellow personal finance bloggers:

Friday, July 11, 2008

10 Tips on More Efficient and Economic Use of Air-Conditioners

Air condition your home more cheaply and more efficiently

Surging oil and gas prices have generated a high increase in electricity costs as well. With the summer approaching rapidly I decided on taking a look at some options of cooling our homes cheaper and in a more energy efficient manner.

The air-conditioner is the most common way of cooling our homes and as such I’ve decided to focus on it this time. Here are the tips I’ve been able to gather through some research. As always, I’d appreciate any ideas you might have:

#1 Set the air-conditioner to no less than 77F or 25C

Apparently each couple of degrees less will cost about 5% more in increased electricity consumption. Setting the air-conditioner to lower levels will force it to constantly operate trying to reach lower temperature it can’t possibly reach.

#2 Use a thermometer to better adjust the temperature in the room

My air-conditioner comes with a built in thermometer in the remote control. This way I know what would be a realistic temperature to set the air-conditioner to in order for it to operate economically.

#3 Properly shade your home

Shading dramatically lowers the green house effect created from sun radiation heating your glass windows and, in turn, your house. Experts claim proper shading can reduce air-conditioning costs by up to 30%.

#4 In the summer vents should be directed up-wards

Cold air travels down towards the floor as it is heavier than air. Adjusting the vents up-wards would enable the cold air to travel better to the entire room.

#5 Clear any objects directly obstructing the flow of air

The space close to the air-conditioner’s vents should be clear of any objects obstructing the air-flow. A close sofa, for example, might significantly hinder cooling efforts. If a particular object gets really cold it’s in the way.

#6 Keep the air-conditioner’s filters clean

Over time dust accumulates on the filters and can significantly reduce the efficiency of the air-conditioner. Clean filters at least once a month for optimal results.

#7 Make sure the area conditioned is sealed

There’s really no point in air-conditioning the living room with all the doors open.

#8 Make sure the unit is properly installed and is not located next to heating sources

Many different parameters need to be considered when installing an air-conditioner. Among these is its location, its physical installment and its exposure to external heating sources (the sun, an oven, etc.).

#9 Install fluorescent lights

Fluorescent lights are much cheaper in the long run and also give out no heat. If you’ve ever stood under a regular bulb for more than a couple of seconds you know how much heat they generate.

#10 Relatively new Inverter technology

A relatively new air-conditioning technology called “inverter” increases the efficiency of air-conditioning units. Air-conditioners with an “inverter” tag essentially have the ability to continuously regulate their thermal power flow. While regular air-conditioners either turn their compressors on or off inverter air-conditioners can vary the speed of the compressor thus saving power and also keeping the temperature more leveled and comfortable.

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Data source: US Department of Energy
Image by: humanoide

Wednesday, July 9, 2008

How Shopping for Groceries Online can save you Money As well As Time

The advantages of shopping for groceries online significantly outweigh the disadvantages – 9 distinct money and time saving consideration

I personally dislike shopping for groceries. I usually have much better uses for my time than combing the length and breadth of a supermarket and standing in endless lines. I think every spare moment in my home is precious and shouldn’t be spent standing in line waiting for someone to decide whether she really wants that candy bar or why she was charged an additional 5c for something that used to cost a bit less.

Unfortunately shopping for groceries is a basic and essential need and activity which can’t be overlooked or neglected.

Although I truly try to avoid grocery shopping I do enjoy fresh fruit and vegetables, meats and cheese. I’ve been aware of the option of shopping for groceries online for some time now but I’ve also been worried about the quality of the products I’ll receive without choosing them myself. Obviously since I’m already shopping for those groceries there’s no point in paying higher prices online for boxed and stored goods and I buy those as well.

Recently I’ve been more and more interested in online grocery shopping as I’ve had enough of these endless journeys. I’ve decided on trying an online order a couple of times with high hopes of ridding myself of this annoyance without having to settle for stale and day old products.

Delivery days for my area are scheduled for Thursday, Friday and Monday and I’m very eager to give it a try. In the mean time, much like I always do, I sat down and tried to look at this experience from an economic and financial viewpoint. Online grocery prices are considered to be relatively higher and can amount to 15%-20% more than shopping at the supermarket itself. I came up with interesting results which just might justify paying higher prices for online grocery shopping.

The following are the main points I’ve given thought to regarding online grocery shopping. I’d love to hear more from your experiences with shopping online for groceries:

#1 See the total price of your shopping cart at any given moment

I think the number one advantage of shopping online is the ability to view the total cost of our purchase at any given moment. Think about how many times the total amount surprised you. “I just bought eggs, milk and a couple of more things… How did I get to $100!?” Sounds familiar?
With a total amount available at any given time you can really examine what you’re about to buy and maybe decide on settling for a cheaper brand this time.

#2 Really stick to your shopping list

Another distinct advantage is the ability to really stick to your original shopping list. You avoid the instant craving and sudden impulse and just pick what’s on your list.
In future purchases you’ve got your list all ready and you only need to make minor adjustments. What are the chances you’ll deviate from it and spend wildly on an attractive bottle of wine that just smiled to you from one of the isles?

#3 Check if you actually ran out of something

How many times have you asked yourself “did we run out of this and that?” and couldn’t remember. All you have to do is get up and take a peek at your refrigerator or pantry and find out. Avoiding unnecessary shopping might save significant amounts of money in the long term.

#4 Dramatically lower your exposure to supermarket marketing tricks

Much has been written on the cheap yet effective tricks supermarkets employ on us susceptive shoppers. I’ve written a post on cheap marketing tricks supermarkets employ and how to avoid overspending by being aware myself.

When you’re shopping from home you’re in a controlled environment unsusceptible to those tricks. I believe that save money. If those tricks hadn’t worked on us supermarkets wouldn’t employ them.

#5 Compare prices easily

No longer having to duck all the way down to the bottom shelf you can easily compare prices for similar products and save a bundle on good cheaper products.
In each session you can choose another niche to dig in to and buy cheaper products of the same quality thus lowering you grocery expenses on fixed basis.

#6 Add or remove items quickly and without hassle

Looking at the bottom line you suddenly decide to get rid of a certain product. Maybe you forgot something and you’re already in line. It’s very easy to add and more importantly remove products from your shopping cart when shopping on line.

#7 Get shopping done very quickly

By the third or fourth time I guess everyone has their own list of groceries to buy on a weekly basis. Log in, load the list, make minor adjustments and get exactly what you need. I’m guessing 30 minutes ought to be enough for the complete process.

#8 Choose the delivery time

Buy from work and have everything arrive 10 minutes after you get home, or maybe late at night if you’re insomniac. I believe this might also limit you a bit as you have to wait for the delivery sometimes but wouldn’t you have spent that time in the supermarket in the first place?

#9 Save on gas

With gas prices so high each 15 trip to the store is a waste of money. Shopping online helps us save on gas and car related expenses easily.

I’ll report back with my couple of first experiences and tell you how it’s been. I’m most worried about product quality and packaging. I do believe 15% higher prices just might be economically and financially sound as the advantages seem to outweigh the disadvantages significantly.

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Images by: desiitaly, miss_jen

Monday, July 7, 2008

Budgeting As a Family Activity

Encouraging your family to take part in the budgeting process is crucial to its success

After a very short while budgeting actually becomes fun. You simply can’t wait to add up the numbers and see how you’re meeting your goal, how much money have you been able to save and how much debt you’ve been able to repay.

After another short period of time you begin visualizing you’re budget at every spending crossroad. You become dedicated and determined on meeting your goals at the price of postponing satisfactions and avoiding certain luxuries.

When the month ends you eagerly sum up expenses only to find your efforts have been foiled by seemingly uncooperative family members. “Don’t they know how hard I’ve been working to better our finances?” you ask yourself. Well, the most simple answer here, and the one I’ve obviously been aiming at, is no.

When we really take interest in something suddenly is seems the whole world revolves around that same thing. It’s a natural phenomenon as we now divert our attention to that specific issue. We, ourselves, are often surprised by the wealth of information and occurrences we hadn’t noticed before. Still, try to remember how it was before you read your first personal finance article. You were probably oblivious to this entire world. So will your family member be should you not include them in the process taking place.

Since our families play an integral part in our “family budget” the process of setting goals and budgeting must take place at a family level. Cooperation and mutual understanding are required for this process and way of life to succeed.

What are the necessary elements of any successful family process?

No change and no process can succeed in any organizational unit without the people that make up that unit. The same goes for families. Families are social structures made up of people.

Change in a family requires the same elements as any organizational unit to succeed. I believe the following draw a good outline of the required elements and atmosphere:

1. Cooperation – Without cooperation even the most gifted manager can’t succeed. We are always co-dependent on other people and on their cooperation.

2. Mutual Understanding – There’d be no cooperation with our mutual understanding. Each person has to understand the process and its general goals in order to identify with it and take part in it wholeheartedly.

3. Thoughtfulness – Especially true in families, thoughtfulness is most important and required for success. We must try our best to understand the need of the other members of the family without casting aside what might seem trivial to us. Lack of thoughtfulness will eventually cause the other members of the family to abandon the process and disregard it.

4. Compromise – An integral part of any process between more than one people is compromise. Conflicting needs and wishes need to be settled by mutual compromises. Compromise is a direct result of the points discussed above.

5. Positive Feedback – Often overlooked positive feedback is the one mean in which we acknowledge the other family members’ efforts and cooperation. Positive feedback is probably the best mean of education and reaffirmation and is so important I can’t stress it enough.

How to construct a family budget and goal setting process?

Having in mind the aforementioned elements we now incorporate them into a process of setting goals and creating a family budget. The process itself should include the following steps:

1. Laying the ground and creating the framework – The first step should include constructing a general budget outline and general ideas and goals. These will serve as a framework for the first family gathering in which the process will be initiated.

2. Discussing the process and the general mission – Acknowledging the importance of our family members, the second phase should include a detailed discussion of the process and a general, clear mission statement.

Explaining the process and its goals will create the required atmosphere for change. There’s always a place for allowing each family member to make suggestions and remark on what’s happening. Being heard is very important to us all. A process we can influence is usually process we’d like to be a part of more.

3. Discussing specific numbers and constraints – After the ground has been set it’s time to dive into the details. This will probably be one of the more difficult stages where each family member will try to protect their own as they might believe they are being criticized and scrutinized.

It is very important to keep an open and relaxed atmosphere and try to keep judgmental arguments to a minimum. It is also important to stress and point out our own little cost drivers and luxuries.

Another important part of this stage is to agree money has a limit. This is a powerful constraint that cannot be argued with. Use this as an anchor for the rest of the discussion.

Each expenditure will have to be analyzed in order to agree on a conclusion and a path towards goals.

4. Setting specific goals for the entire household and each family member – After agreeing on select expenditure and future plans and wishes goals need to be set.

Again, it is very important each family member has at least a couple of personal goals in order to become an integral part of the process.

Goals should be measureable and obtainable even if a bit ambitious.

5. Creating timely family meetings to review budget and goals – Timely reviews, such as monthly meeting to analyze the past month’s budget and performance have a key role in the entire process.

They serve both as course correction and as a constant reminder we’re not there yet. Positive feedback is encouraged throughout these meetings. These are also a place to constantly review the budget and maybe shift focus should sufficient progress has been made in a certain expenditure item.

6. Celebrating success and milestones – Often overlooked, celebrating milestones is encouraged in project management literature and in life as a whole. The process itself is never ending and it is very important to celebrate success in order to instill a sense of capability and reward.

I believe that every member of the household needs to be aware, in some level, of the financial planning of the family and contribute to achieving the family’s goals.

Image by: Chris Gin

Friday, July 4, 2008

Privatization Is Not a Miracle Drug (Sometimes it’s Just a Drug)

Privatization does not automatically equal higher efficiency and better service despite common belief

The private sector is hailed for its efficiency and effectiveness. The bottom line is one of the best drives for a corporation to become just that: effective and efficient. The public sector is often thought to portray the exact opposite and is usually thought of as slow, inefficient and lacking proper motivation.

As a result privatization has taken hold worldwide. Public services were entrusted in the hands of corporations with the hope and reason their efficiency and effectiveness will translate to better public services. Wouldn’t we all like to wait less, get better service from more experienced people at lower costs?

However, privatization is not a miracle drug. Public and government organizations face no bottom line. Even if layers of bureaucracy and thick-headedness may obscure it, these organization genuinely aspire to give us the best service possible under a given budget. Private corporations have only one objective: Profit.

The debate whether profit should be the only bottom line for corporations is long and was held at many other occasions. My argument is that without proper regulation and crafty contracts that tightly bind the service with the corporations reward outsourcing to private organizations might quickly become more expensive and much less favorable for us citizens.

De-Privatization of water services in Paris

A very recent example motivated me to write this post. After 100 years the city of Paris decided on a de-privatization of water services due to what seems to be poor and costly service. This could be a part of creative negotiations on the side of Paris city hall but I doubt it.

Apparently during the 1990’s a handful of private corporations and the International Monetary Fund led an effort to privatize water services throughout the world. During the last couple of years the number of cities to de-privatize the water service back their control has grown with Buenos Aires in Argentina, Hamilton in Canada and Uruguay as a state as examples.

Worldwide experience tells of corporations cutting back on personnel in the areas of water testing and maintenance. More extreme voices suggest companies cooked books to collect higher government incentives.

California’s troubled electric industry

The power industry in California was privatized back in 1996. Five years later citizens faced burnouts and skyrocketing rates. Every case of failed privatization is different and this specific crisis had reasons of its own.

First, regulation was faulty forcing suppliers to ration their electricity instead of manufacture more. Complicated relationships with the electricity market and rising demand literally left no incentive for the private corporations to produce more electricity. Remember how incentive looks like? Bottom line and profit.

The pros and cons of privatization are summed up in the following table (for deeper analysis see Wikipedia):

  1. Performance - Higher Efficiency seen trough the bottom line only. What doesn’t generate profit gets cut off.
  2. Improvements - Lack of financial incentive will guarantee no improvements.
  3. Corruption - Less political corruption, higher corporate corruption.
  4. Accountability - Financial reports or elections.
  5. Goals - Economic vs. political or service vs. profit.
  6. Natural monopolies - A natural monopoly is a dangerous thing to privatize. It is possible however.
  7. Concentration of wealth - In the hands of the government or in the hands of private people.
  8. Profits - The Bottom Line

It doesn’t matter whose fault it was California was left in the dark or Paris water quality deteriorated and became more expansive. The complicated relationship between public services, a regulator and private corporation is bound to guarantee problems.

Even an ultra-sophisticated regulatory environment cannot guarantee successful privatization efforts. Only a corporate environment that acknowledges it’s a part of a society will generate successful privatization efforts.

Modern forms of privatization

Increased problems in privatization efforts have created more creative privatization methods:

BOT or Build-Operate-Transfer Contracts

BOT contracts are a form of privatization where a government or public organization may grant a private organization a concession to finance, design, construct, and operate a facility for a specified period, often as long as 20 or 30 years. After the concession period ends, ownership is transferred back to the granting entity.

This is actually a form of project financing where the government takes advantage of the private organization’s effectiveness and efficiency in building and operating granting that organization profits to cover his investment and its return. At the end of the period the government has a new highway, water treatment center or anything else that comes to mind.


Even though a municipality is a public organization it is smaller and should be more efficient that the government itself. Municipalities see higher incentives for local services and are expected to maximize service and efficiency.

Partial Ownership

This form of privatization enables the government to “keep an eye” on the privatized organization by holding a certain “golden” or blocking share of stock. Countries often make use of partial ownerships in Telecom companies and defense companies whose business is highly sensitive for every government.

Privatization is here to stay whether we like it or not. The questions are: will the regulators learn from experience and will corporations finally develop a social conscience?

Thursday, July 3, 2008

Teach Your Kids Basic Finance and Economics with Monopoly - 11 Valuable Lessons

11 lessons to teach our kids drawn from a monopoly game I just finished

I remember monopoly being one of my favorite games. I remember getting filled with anxiety before the first throw of dice hoping no one gets to my rail-roads before I do. I used to love winning and really hate losing in monopoly. There’s something really eternal about this game.

Looking back at it I can’t say I remember monopoly creating or changing my perception of money as a child. Then again, money has always been a personal favorite of mine and maybe monopoly had something to do with it. Anyway, I do think parents can leverage monopoly for some fun education and basic finance and money teaching to kids.

I’ve just finished a round of computer monopoly (I actually won with my secret rail-road orange property technique!). During the game I’ve written down 11 important lessons the game teaches and imbeds as intuitive in the player’s mind (I believe that the younger the player the more powerful the influence of the game is). I thought It would be fun writing a post about it:

#1 Money doesn’t grow on trees

The most powerful lesson, in my opinion, is of the value of money. You have to think carefully and constantly evaluate how much money you have and how long it will take you to pass go and collect a bit more.

You simply can’t buy everything you desire and you must accept the tradeoffs that go hand in hand with limited funds.

#2 You need luck

You can’t escape it. Luck has a key role in success. It may seem unfair but that’s the way it is. You might have had the best of strategies, your properties lined with bright and shiny hotels but no landed on them for three rounds. Then, after your friend just finished building his first couple of houses you decide to visit them every turn.

Learning to live in peace with the random factor in life is essential to reduce frustrations (you can never really avoid them).

#3 You need other people

With good monopoly players you’re chances of landing three properties or four railroads is slim to none. Often times the game leads to a sort of stale-mate in which the first two to strike a deal will surely cause the downfall of the rest of the players.

Learning to cooperate with other people and learning that where ever you go you need other people is a valuable lesson for life.

#4 There are win-win situations

Learning to think of deals as a sort of win-win situation is essential for good business understanding. Some people think of deals as closed system where one gains at the others expense. Seldom is that the case (even though in stocks that’s usually the case).
Almost any deal can be put in terms of win-win situations and can be marketed as such. This view is necessary for progress and deal closure.

Teaching our kids to create win-win situations and to be able to express a certain value to other people is priceless.

#5 Shortcuts can lead to jail

I’ve never really understood why three double rolls in a row result in jail. After I’ve written it down as a lesson it suddenly hit me this might be the reason. No such things as shortcuts in life (or very few of them anyway). Shortcuts will usually result in getting thrown back and held for some time.

Hard work and good planning is always a sound lesson.

#6 Life holds good and nasty surprises

I love the little drawings on chance and community chest cards. I take pride in the creativity of this lesson. There are both good and bad surprises in life and we must accept them as they are.

Taking each surprise as an experience and learning to live with uncertainties is an integral part of life.

#7 Even small things can influence the greater scheme

I love J.R.R Tolkien’s ‘Hobbit’ and ‘Lord of the Rings’. I always enjoy the lessons of the massive impact small things can have. I’ve won my share of monopoly games by buying Baltic and Mediterranean Avenue and laying two $450 traps for innocent players. $2 rent properties should not be trifled with.

Teaching our children to respect what appears as small and weak is very important.

#8 Patience is a virtue

Someone will eventually hit that certain square. Patience is all that’s needed. They mass pas it 5 rounds in a row but eventually they’ll land on it. I always enjoy the long wait before someone is tackled by 4 menacing green houses.
Patience is not something kinds excel in. Monopoly is another opportunity to strengthen this trait.

#9 Investing early pays higher dividends

My favorite players to play against are the ones that hog their money afraid to spend it on the less valuable properties. They’re usually the first to go having been left with no real chance of leveraging their properties into winnings. Money can only be enough to land on Baltic 3-4 times. Bankruptcy follows.
Parents should really take this lesson to heart and invest early for their children’s financial sake.

#10 Loans only go so far

We all know mortgaging our assets will only take us a couple of more rounds at best. Why do we insist on rolling debt in life?

#11 Economies of scale

For the more advanced kids the lesson on economies of scale is a powerful one. You own all the rail-roads? Now you can really start charging those fees. Own both utilities? Start multiplying by ten.

I love this game! I’d love to hear your monopoly experience and ideas on more lessons to draw.

Images by: izzie_whizzie, d0bb0, coffeegeek