Sunday, August 31, 2008

The Customary Weekly Round-Up

Bloomberg taught us an important lesson in contingencies this past week. Bloomberg mistakenly reported the death of Apple chairman Steve Jobs and quickly published a 17 page summation of Steve Jobs’ life work.

All self-respecting newspapers and media companies have pre-written articles to quickly respond to expected and un-expected events. World leader biographies are all constantly updated should there be a need to quickly publish them.

Contingencies are extremely important in everyday life as well. We buy insurance, save money and have emergency funds but we also need to have a plan b and c ready for tougher or better times. Think about it…

Interesting articles from past week’s papers include:

From the Carnivals:

Carnival of Twenty Something Finances @ Living Almost Large:

Carnival of Personal Finance #167 @ Broke Grad Student:

More from fellow personal finance bloggers:

Friday, August 29, 2008

Outsourcing Our Chores - Do We Overvalue Our Spare Time?

Outsourcing chores to free up more spare time is a good idea but more often than not laziness is the real reason while the spare time just generates more expenses

I just finished cleaning my house. I try my best to thoroughly clean it at least once a week. There’s something about starting the weekend with a fresh, clean home which I greatly enjoy.
Having started working over 50 hours a week, as of late, I find the weekend to be the only time left for tending my personal affairs. Sometimes I wonder whether I should be “spending” the time cleaning by myself.

Many of my friends pay for housekeeping services which mostly include cleaning and maintenance. Cleaning takes, on average, 3-4 hours for a small apartment (like ours) and it’s needed 3-4 times a week. A quick multiplication amounts to paying hired help for 9-16 hours each month.

Outsourcing Chores is an Industry

It doesn’t end there though. Apparently many of the people I know value their spare time so much they’ve found paying for other such services worthwhile. Chores take up a significant amount of our spare time and it’s truly a delight handing them away.

  • Eating out - Many of us have already outsourced food, at least a couple of lunches every week. Buying groceries and cooking takes some time and it much easier eating out. The time saved adds-up quickly, think of the time saved on grocery shopping, cooking, cleaning the dishes, packing a lunch and getting up 10 minutes earlier every morning…

  • Laundry – A relatively new initiative, at least in our neighborhood. Pack up your dirty clothes and send them away. They return fresh, scented and folded. Again, the time saved is very significant.

  • Ironing – A whole other successful initiative is outsourcing ironing. This back-aching and frustrating endeavor which I never get done right. For a decent amount of money you can have your shirts and pants ironed to perfection and delivered to you as well.

  • Shopping for groceries online – I’ve recently wrote a post on the many merits of shopping for groceries online. We obviously pay for them extra.

The Subjective Math

Still, my wife and I are set in our old ways and refuse to “outsource” our chores. We both try our best to limit eating out to twice a week at most (including lunches and dinners). We do our own laundry and ironing. We’ve tried shopping online but the produce wasn’t satisfactory and we clean our apartment on our own.

I can attribute our behavior to the education we got at home according to which no one should clean our mess. There’s something intimate, in my opinion, in chores but that’s not the reason we’re haven’t outsourced them. I believe many of us overvalue our spare time.

Many of us do a simple math trick. We calculate how much our working hours are worth and boldly make the claim our spare time is too precious to waste on chores. A very wrong conclusion, naturally, as the alternative “cost” to the time we spend on our chores is not work or income but spare time and leisure.

Valuating spare time is subjective and difficult but I do have the feeling we often overvalue it. As I’ve already mentioned I’ve recently started working for a different, private corporation. I’ve went from 40 hours a week (which was quite dull but enabled me to invest more time writing here, at The Personal Financier) to 50-60 hours work weeks. The difference is astounding as my spare time dramatically reduced.

Naturally, a scarce resource is worth more and I’ve considered the thought of outsourcing my chores to create more spare time. I must say I’m pretty convinced chores are a good use of my time, as paradoxically as it may sound.

Working 12 hours a day leaves me at least 3-4 hours to myself (Riding my scooter from work to my home takes about 10 minutes – Consider this as a great alternative to create more spare time).

It’s more than enough to get two posts done a week, spend time with my family, catch up on news, exercise and read. The chores themselves take up 3-6 hours every weekend which I usually try to get over with when the weekend starts.

The financial comparison is pretty much straightforward and tilts the balance in the direction of performing our chores ourselves. The monthly expense required to outsource all our chores (a couple) is surely greater than $500, an under estimation I believe (without the cost of eating out).

  • Ironing – $2 per business shirt and $3.5 per pants – At least $60-$80 a month and frees up 10 hours a month.

  • Laundry – $0.75 per pound – At least $100-$150 a month and frees up 15 hours a month.

  • Cleaning - $20 an hour – At least $300-$350 a month and frees up 15 hours a month.

  • Eating out – A whole different game – anywhere from $500-$1,000 a month and frees up 25 hours a month.
The average cost of each spare hour is approximately $20 an hour.

End up shopping in your spare time?

There is another element to the comparison which is I believe is rarely considered. What do people do with so much spare time? My answer (and that of the western civilization as a whole): Shopping! Spare time? Let’s go to the mall, go to the movies, drive somewhere or just sit and watch TV. We need new ______ (choose: furniture, clothes, gadgets, games, etc… ). Spare time incurs more costs.

We’re not only paying to get more spare time but we spend more during our spare time. I truly believe our spare time is overvalued.

I also believe very few people really plan out their spare time rather than wasting it away idling somewhere. The main motivator behind outsourcing chores is probably laziness. It is important to note that I believe having a big family, with two kids and more, changes the basic premises. The time required to properly tend to several children is obviously much greater and changes considerations.

Still, I would carefully consider and balance everything before I go outsourcing my chores.

Related Posts:

Images by: Jana Christy

Tuesday, August 26, 2008

The Trend Isn’t Always Your Friend – Improbable Scenarios Present Rare Investment Opportunities

The probable probably won’t happen

It is a common belief among investors and financial planners that patient long-term, diversified investments will eventually yield a nice solid return on investment. A common advice is to avoid trying to time the market and just join in and wait the long-haul. I am among the supporters of this strategy although I’m still finding my own balance in the stock market as holding on for the long-term isn’t as easy as it may sound.

With all do respect to long-term investments many investors find it very difficult to wait out the long years necessary to yield truly fantastic returns. These individuals hope to achieve double-digit returns in a few months and truly capitalizing on their investments.

This kind of ambition obviously requires taking a tremendous risk and might definitely constitute a gamble but this time I’m not here to judge. Today I wish to offer a more philosophical approach with an interesting twist to high risk-return investments.

Looking back to the past couple of years we can definitely say the unexpected happened while the expected most certainly didn’t. One of my favorite quotes is that the probable probably won’t happen. I wish I could credit whoever said it first but I can’t remember.

Sky rocketing oil and commodity prices, the credit crunch and the sub-prime crisis, housing price slumps, the emerging markets boom all had a tremendous effect on the markets and neither of these was foreseen, to its full affect, in advance.

Naturally, all these “surprises” generated phantasmal returns to those who got it right. Analysts, Institutional investors (pension funds, insurance companies, mutual funds and more), investment banks and most investors invest with the trend. “The trend is your friend” has certainly proved itself more than once and it is most definitely right for long-term investors but in the short terms having the guts to go against the trend can really cash-in.

If you truly understand the perfect market hypothesis you surely understand all the known data is already represented in stock prices. The most common and probable scenario is already factored in stock prices and you, as an investor, can not really out-perform the market with available market information.

Betting on the less likely scenario is much similar to betting against the odds. However, unlike pure gambling some analysis could prove useful in such a case. Taking an in-depth look at the core assumptions behind the probable scenario can help us, as investors, to constantly question their truthfulness and reasonability. Questioning the generally accepted scenario and constantly stressing it and the assumption at its core can lead to real insights into the markets.

I’m sure employing this investment tactic requires skill, expertise, practice and experience. I’m pretty sure many high-rolling investors and investment banks employ teams to do just that. Simply betting on the edges can also work but it will fail more often that it might succeed.

Related Posts:

Image by: Dan04

Saturday, August 23, 2008

Extreme Risk Aversion Paradoxically Leads to Another Huge Risk

Afraid to take investment risks? Be aware, you’re taking a huge risk of another kind.

Lately I’ve been giving serious thinking to my asset allocation. It’s been a rough year in the markets and only a selected few managed to escape the storm. One question, how ever, is always on the table – How should we allocate the savings we have?

When asked about their asset allocation and the share of stocks and bonds in their portfolio many investors and savers often reply the same: “Too risky for my taste”, “I can’t sleep straight when I know my money isn’t safe” or “my savings account is enough for me”.

There are other, more creative, versions of these answers out there. These answers are obviously all about a person expressing his or hers risk aversion. Stock and bonds investments are often thought of as risky investments only rich people can succeed in, usually at the expense of household investors.

This risk aversion is not to be trifled with. Some people may say ignorance plays a role in the decision making. While this could be part true I do believe financial “street smart” plays a key role as well. Many people subconsciously know, or learned through painful lessons, how cruel stock gambling can be and how tough it is to build and maintain a disciplined portfolio for the long-term.

After learning they might lack the discipline, financial education or funds many choose to save their money in different, low yield, savings accounts while banks cash-in on their deposits.

This alternative is obviously preferable to losing on investments but there is something else here. Paradoxically enough the most risk adverse people are taking on what might be considered an even bigger risk – The risk of not being in the market.

When you think about it the risk of saving for years on year in basic savings accounts is enormous. These investors actually give up on money they could have earned on their hard earned capital.

Much has been written on the benefits of long-term stock investments. While I’ve written, in length, in the past on why you definitely shouldn’t count on so called “average” yearly returns of 8% good diversification and a sound portfolio has incredible chances of performing much better than any 3.3% APY savings account.

I’ve found this nifty little retirement gadget on e-trade’s site. It gives an excellent demonstration of the importance of a good portfolio. The differences are overwhelming and they speak for themselves.

Avoiding investment risk generates another equal or greater risk: The risk of not meeting your retirement or life goals. It’s not about letting the bank cash-in on our savings it’s about letting our money grow as it should.

As I’ve mentioned, paradoxically enough, risk adverse individuals are unknowingly taking on another huge risk. Financial literacy and education can greatly enhance our overall quality of life and help us achieve our goals. Moving the slider a bit more to the aggressive side might do wonder. I certainly don’t encourage rash and irrational decisions, just a bit more spice in the portfolio.

Image by: JD

Wednesday, August 20, 2008

How much is a World Record at 100 Meters Worth?

Usain Bolt and Michael Phelps face a tremendous challenge capitalizing on their recent Olympic success

Economy teaches us rare resources are highly prized as demand greatly exceeds supply. If that is indeed the case the fastest man alive should be able to capitalize on his ability to cover 100 meters in 9.69 seconds.

Technically, 200 meter sprinters achieve a higher average speed throughout the race. However, since Usain Bolt just shattered what was considered an unbreakable record set by Michael Johnson 12 years ago we are freed from such technicalities.

Puma is definitely going to capitalize on Bolt’s aggressive display of his lucky golden shoes. What’s in it for Bolt?

Well, suffice to quote the moment’s conspiracy theory according to which Bolt actually slowed down during the end of the 100 meter race to cash-out bigger when he snaps his own current record the next time around.

I wasn’t able to find how much Bolt’s Puma deal went for but the company definitely made a wise bet achieving imaginary exposure to billions of people.

Olympic sports such as swimming, athletics, gymnastics and other are often compared to start-up companies. A very risky initial investment can turn into millions of dollars should the athlete prove to win medals and championships.

Michael Phelps’ recently acquired 8 gold medals are estimated to cash in $50 million in the next 4 years alone. Apparently Phelps has earned “only” $5 million this year. Larger estimates speak of imaginary amounts of hundreds of millions of dollars.

Winning a gold medal as a member of team USA is worth around $100,000 on average but super athletes are in a league of their own. My bet is that Usain Bolt won’t be far behind Michael Phelps in the upcoming 4 years.

Top earning athletes usually come from major sports and Olympic athletes don’t easily find their way into the list. Among the best paid athletes are Andre Agassi, Lance Armstrong, David Beckham, Kobe Bryant, Tiger woods and other all earning amounts of $25-$80 million a year. Phelps and Bolt are still far away from the A-list of top paid athletes.

Images by: Anton Hazewinkel, guano, Richard Carter, Simplistic Design

Monday, August 18, 2008

Another Look at Establishing Your Investment Goals

Establishing your investment goals in terms of risk, return, volatility, liquidity needs and investment term is crucial for succeeding in your investments and meeting your goals.

Before investing your money it is wise to determine the goals of your investment. We are usually quite good at setting the primary goal of investment – Better retirement, college fund, buying a house and more.

These end goals should be carefully examined and analyzed in order to adopt the most suitable investment strategy available. Therefore goals should be formalized and examined using the proper tools.

Setting goals for your investments should be based on two major parameters (excluding the initial sum of the investment which should be known by now):
  1. Risk and return (which always go hand in hand); and

  2. Term of investment

In setting long term investment goals planners usually have these two key parameters to toy with. The options are endless as the array of financial assets is never-ending and always growing but the basic sense and basic assumptions of financial planning stay the same:

  1. The higher the risk the higher the potential return on investment;

  2. Less known but very important – higher risk is assumed to yield a higher return in much better odds than 1:1 – each additional unit of risk is assumed to yield 1.x unites of return until a certain point where you need to take a lot more risk for each marginal return.

  3. The longer the investment term the more risk you can afford.

I’ve criticised these conventional rules of thumb in the past since each of us, as investors, face a certain specific scenario and not the average scenario where stocks yield 8% yearly, on average. It might well be the scenario we face won’t be so attractive. We, as investors, must take this possibility into account.

In setting investment goals you should ask yourself the following questions, after setting your goal:

#1 How much of my initial investment am I willing to lose and what is the return I expect on the risk taken?

Risk, simplified, is the chance of losing some or all of your initial investment or not gaining the required return on your investment. Risk and return go hand in hand. As the level of risk on the investment grows so does the expected return. This is obvious and intuitive. The higher the risk you are willing to take the bigger the stock component of your portfolio should be over bonds and deposits.

Risk is usually measured in volatility (standard deviation and variability). Higher volatility means a riskier asset with a much higher chance of losing some of the initial capital invested.

It is important to note that sometimes investing in a less risky portfolio doesn’t make much since. If the term of investment is long enough and we’re very far away from our goal it sometimes makes since to increase risk in order to increase the chances of actually meeting our goal at the end of the period. This ofcourse relies on the conventional financial planning wisdom where at the starting point of a very solid portfolio adding a bit more risk increases the chances of generating higher returns as per assumption 2 mentioned above.

#2 What is my investment term?

This question is of an utmost importance. Longer terms of investment allow for higher risk levels. Long investment terms have been empirically shown to smooth volatility over. I do recommend reading my post on why Long Term Investments are not Risk Free for my criticism on the matter. Diversification plays a key role here.

Are you a young student investing for over 10 years or are you approaching retirement with a shorter investment horizon? This should directly affect the risk levels you are willing to expose yourself to. The longer the term of investment the bigger the stock component of your portfolio should be over bonds and deposits. Long term investment in stocks is considered to be over 10 years.

#3 How much volatility can I tolerate? What is the level of liquidity I require?

As I’ve already mentioned, risk and return are often affected by volatility. High volatility is often the source of potential high returns. Your ability to tolerate volatility is mostly affected by your term of investment which is discussed above but is also affected by the chances of a financial surprise which will leave you wanting for cash. This is directly linked to the level of liquidity you require. Higher level of volatility tolerance and lower liquidity requirements allow for higher risk levels (Investing in stocks over bonds and deposits and vice versa as levels of volatility tolerance decrease).

Risk and volatility are highly connected. Conservative investors (which should allocate most of the investments to bonds and deposits) usually expose themselves to price deviations of up to 6%, more risky investors expose investments to price deviations of up to 10% and the riskiest go up to 15% and more.

After answering the questions above you can begin building a portfolio suitable for you.

Related posts:

Images by: yuan2003

Saturday, August 16, 2008

No Salvation from Productivity Improvements: The Failed 35 Hour Work Week Experiment and Work-Life Balance Examined

Wouldn’t it be reasonable to expect improvements in productivity to result in shorter work hours? The quick answer: No. It’s up to us.

The famous French 35 hour work week has recently received yet another blow leaving only a shadow of the once grandiose attempt at social policy.

The rational behind the 35 hour work week was to take advantage of the vast improvements in productivity of the 20th and 21st century to increase the workers’ overall quality of life leaving more time for leisure while also reducing unemployment by yielding a better division of labor.

The French policy failed, De facto, leaving France with a relatively high rate of unemployment and poor competitiveness.

The Paradox of Improvements in Productivity

It might be my social conditioning but I must admit I’m a fan of working quite hard myself. I do enjoy my leisure time but it just doesn’t feel right having too much time off. I can’t help but recall the famous paradox from the movie “The Matrix” where the architect explains to Neo why his perfect first version of the Matrix was a monumental failure due to the imperfections inherent in every human being.

We all seem to want more free time, more time with our families and to ourselves. Why, then, would we, as humans, “refuse” to take advantage of the improvements in productivity to do the same amount of work in less time thus enhancing our quality of life?

There are a lot of answers but I’ve chosen to focus on two which I find more interesting.

The Game Theory Answer

Many of us have heard of the prisoner’s dilemma where two prisoners have the dominant strategy of cooperating with the police, telling on one another thus condemning both of them to time in jail (had the two prisoners kept silent they could have walked free but since each prisoners sees “telling” as a dominant strategy when confronted with the other prisoner’s options a rational prisoner would “tell”).

I believe the case of the 35 hour work week is much similar. Had everyone worked 35 hours a week we could have all “walked free” and enjoy our relatively high quality of life earned by the vast improvements in productivity of the last couple of centuries.

However, since each of us faces the strategy of working 36 hours a week and becoming more competitive relative to the others it is a dominant strategy of each and every one of us. Thus 35 becomes 36, 36 becomes 37 and quickly enough we find ourselves working the better parts of our lives away.

The relative indifference and the negligible impact each of us assumes as to our own part in things leads to the never-ending competition. The economic incentive to “break” the 35 hour work week model is enormous.

It is human nature and as such can not be judged as good or bad. I believe we owe much of our achievements to this nature and attitude. The question is whether we get to enjoy these achievements or just watch them from out tiny office window.

The Lump of Labour Fallacy

Naturally, had improvements in productivity reduce the overall “work” needed in a certain market we could have completed this “work” in less time and enjoy more time off as there would be no more “work” to do. This, unfortunately or not, is not the case.

We are all familiar with never-ending back to back assignments. The illusion of our ability to complete our entire to-do list is a strong one. There’s always something else. The available amount of work is not fixed or static but rather flexible enabling us to work as much as we want.

If we only had a fixed amount of work we wouldn’t have a choice and we would have leisure enforced on us.

There are Alternatives

A quick anecdote: A 13th century adult male peasant in the UK worked 1,620 hours a year. A modern US employee works 1,777 hours a year.

We spent a week in Barcelona two years ago and had a very nice time. I distinctly remember how surprised I was to find out shops close during 14:00-16:00 for a famous siesta or just plain time off. Apparently the vast majority of shops close down during these hours and are content enough with their current revenues to appreciate the value of two hours off during the day.

I have often wrote highly on the ability to balance things. Working 16 hours a day maybe profitable but is it economic? Is the utility we derive the highest possible or are we slaves to our cultures?

To put things in perspective here’s a table summarizing the average yearly work hours by country:

If long work hours are not enough minimum employment leave is another good indicator for the ability to balance work and life in different countries. For instance, the French are famous for their 8 week (!) Vacance during summer months. In the Scandinavian countries (remember my earlier post on social equality?) the minimum employment leave, by law, is 25 days a year. In Spain, Russia, Brazil, Switzerland and many other countries the minimum is set at 28-30 days. The less generous employment laws mandate 7-10 days leave in countries like Taiwan, Vietnam and South Korea.

What about the USA? You guessed it – 0 (!). US law does not require employers to grant any vacation or holiday and about 25% of employees receive no vacation time or holidays. For employees that do receive a vacation, 10 working days with 8 national holidays is fairly standard.

So, who has it right? It is subjective but I believe the rising stress levels and stress related illnesses combined with poor diets, low quality of life and relative un-happiness in hard working nations can serve as good indicators.

Related posts:

Image by: Keith Bacongco

Tuesday, August 12, 2008

The Money Hacks Carnival #25 – The Olympic Edition

There can really be no other theme for this edition of the Carnival hosted here, at The Personal Financier, other than the Olympics. This edition will focus on the economic and financial aspects of these glorious games. If we drop the mask of cynicism that many of us usually wear as a protective measure a beautiful gathering is revealed, both of the world’s top athletes and the world itself. I believe the Olympic Games truly serve as a small ray of sunshine to our usually torn world. I sincerely hope you will find this edition of the Money Hacks Carnival insightful and resourceful.

If this is your first time here, at The Personal Financier, welcome! Please check out my Top Posts and consider subscribing to RSS Updates.

The Olympic Games at Beijing have cost over $44 Billion setting yet another record expenditure. The Brits have their work cut out for them. The total cost of the games is expected to run as high as $46 Billion. That’s more than the totaled expenditure on the past 5 Olympic Games together! With the bar set so high only a handful of countries in the world will be able to host the Olympic Games.

The following are my editor’s picks. As we had a lot of quality submissions I’ve taken the liberty to add a (*) by other posts I’ve personally found more interesting:

Editor’s Picks

Money Blue Book discusses in great detail the painful topic of How To Kill Roaches And Get Rid Of A Home Cockroach Infestation – I read through the post with one eye shut as the mere sight of them in the posts’ photos is too much for me. This post is very informative and deserves a place in the editor’s picks. I usually call a professional once a year and buy my peace and quiet.

The Digerati Life examines Your Free Credit Score: (and asks) Is There Such A Thing? In this in-length and informative analysis The Digerati Life looks at the credit score and offers tips on getting your credit profile and credit scores.

The Financial Blogger continues his discussion of the Basics of Estate Planning. This is a very important series of articles in which The Financial Blogger discusses, in length, the basics of estate planning. In this part he discusses how to assess if you have enough money to cover your last wishes. I recommend reading the entire series.

Free Money Finance discusses The Best Way to Get a Raise – I agree with the point made wholeheartedly. I myself am practicing it though it does get a bit harder as you grow older.

Save and Conquer discusses Sniping on eBay using auction snipers, a very interesting approach to eBay bidding. I’ve done some shopping on eBay (mostly stamps) and I would have welcomed a tool like this. The problem is that eBay acts much like an efficient market. With common knowledge of auction snipers their advantage disappears. When I bid on eBay I decide on the maximum price I’m willing to pay and let eBay do the work. I still believe this would work if you have the patience as many people don’t trust automatic bidding and enjoy the manual process.

The Chinese have spent these $46 Billion relatively wisely. 75% of the expenditures were made in the last seven years mostly in infrastructure that will serve Beijing for years to come. When speaking in relative terms the expenditure on the Olympic Games amounts to only 0.5% of The Chinese public expenditures during those years.


(*) Greener Pastures presents The Psychology of Money: Competing with Sociopaths and deals with a less pleasant aspect of our careers. Fortunately, I’ve yet to encounter one but I certainly expect their numbers will grow should I succeed.

(*) Ready to be Rich offers to Use The Theory Of Multiple Intelligence To Know The Right Freelance Job For You – An interesting theory which contests the consensus around I.Q tests and the “standard” concept of intelligence and offers an array of different types of intelligence. Ready to be Rich gives advice on how to choose a freelance job according to our niche intelligence.

Tip Diva offers Top Ten Tips for Preparing Yourself For A Job Search – A short and to the point list. A good list to skim through to make sure you haven’t forgotten anything.

Revenues are expected to set records as well but will come no where near expenditures. TV broadcasting rights sold for approximately $1.8 Billion and advertising revenues are expected to reach another Billion. Tourism is expected to generate additional revenues of $4.5 Billion.

Frugality and Saving Money

(*) Erica Douglass @ asks Is Extreme Frugality A Waste of Time? And wonders whether frugal activities like making your own laundry detergent worth it for entrepreneurs? I’ve already answered this question in one of my previous posts. I believe extreme frugality is not a long-term solution. Investing the time in personal finance and economic knowledge and know-how pays much higher dividends in my opinion.

(*) Lazy Man and Money explores the ultimate frugal question: Can I Pay Less for Something of Similar Value? My intuitive answer is most definitely as some of the links offered do indicate.

(*) Sound Money Matters tells us how to Eat Well for Less: In-Store Deals and the Grocery Price Book – A good post though I have my doubts as to cost/efficiency.

(*) Budgets are Sexy asks whether there is a best place to pick up your college books from in The, Amazon, Overstock, College bookstore challenge – Interesting results.

(*) Art of the Coupon presents How to Save Energy (and impress your friends!) Using X10 Home Automation. Looks like it’s even cost effective!

(*) Christian PF continues the discussion on Getting out of Debt (Part 5) and offers 15 ways to cut your expenses. A good overall roundup of saving tips to implement in all aspects of life.

(*) The Happy Rock offers A Guideline For Your Budget And Spending Plan and links to a nice tool which helps in checking how reasonable your expanses are compared to the average.

(*) Frugal Dad gives very sound advice in Easy Way to Save Money and Calories: Eat Before You Play. Eating out is one of our major budget busters.

(*) Cathy Stucker presents Save Money without Feeling Deprived adopting an interesting point of view of savings techniques which doesn’t involve giving up on things.

(*) KCLau presents an interesting discussion of why Frugal living doesn’t mean cheap. Why is that that frugal individual often feel the need to explain the difference from cheap?

Penny Jobs advises to Trick Yourself into Saving Money – Surprisingly it has worked for me at my earlier stages of saving.

Bargain Briana offers 7 Ways to Save on Prescription Costs – Apparently prescription costs are on the rise.

Mind your Decisions presents How My Friend Outsmarted a Car Salesman with an interesting argument for an additional 0.25% discount. You need a certain character to pull this off.

With more on pharmaceuticals Passive Family Income tells us How he made money Shopping at Pharmacy’s and quotes some numbers for our convenience.

Shop Little Gifts presents How To Manage Your Gift Budget: 3 Easy Tips. Gifts bite a hefty chunk of our monthly budget. Personally I try to avoid being frugal when it comes to gifts but that doesn’t mean you can’t shop smart.

No Debt Anymore offers Tips on How to Teach Your Kids to Save Money – She claims the concept of buying something tomorrow instead of today is a difficult concept for kids to master. I personally think kids don’t master it but we can ease their frustration. I’m pretty grown-up and I’ve yet to master it myself.

Harvesting Dollars created an interesting game in this short post on Inflation Iron-Man (Finance Game #5) – Not a bad idea to try and offset inflation in our budgets.

Personal Finance Analyst tells us of AT&T Wireless Coupons & Promotions.

How I Save Money discusses Mint’s Three Principles Of Personal Finance.

Chow Spice offers 4 Simple Ways to Save Money on Food.

Penny Pinching presents How To Save Money On Cars.

Effortless Abundance (No such thing in my opinion) offers The Idiot’s Guide to Saving – 4 basic tips for new aspiring savers.

Real Estate

(*) Really Better Real Estate presents 3 Bogus Real Estate Statistics - Know Them Or Be Burned By Them – Some figures just get stuck in our heads. Refuting them makes room to innovative thinking and a better understanding.

Surfer Sam claims All Interest Rate Quotes Are Not Alike – A pretty basic introduction to mortgages with a good detailed list of closing costs (very important to get familiarized with or you’ll have a surprise in store for you).

Tammy Powell discusses How to get your Security Deposit for your rental home.

The Chinese stock market has flourished in the past 5 years generated next to imaginative returns of hundreds of percents. This past year, however, the market has cooled down and lost approximately 50% of its gains. Last Friday the market lost another 4.5% while the opening ceremony was held.


(*) Dividend Growth Investor gives us The ultimate passive investment strategy – A very promising title indeed. The research discussed is quite interesting. You can’t really beat buy and hold.

(*) Roth IRA Explained suggests Keeping Non-Deductible Traditional IRAs Separate to avoid unnecessary headaches.

Trees Full of Money (Where!?) discusses why Contributing More to Your 401k Is Not as Difficult as You May Think due to certain incentives.

Savings Tool Box reviews IGO Banking’s Online Savings Account.

The Olympic Games served China as a gateway to the west. In the past 4 years China’s exposure to the West has increased dramatically. Many choose to send their kids to learn Chinese as they expect the awakening Chinese dragon to quickly become a formidable world economy. China still has many challenges to face but so far they are overcoming them in an aspiring manner.

Debt and Credit

(*) Fire Finance warns us of Sneaky Credit Card Trick #10 - Beware of Disability Coverage & Card Theft Insurance – Useful and straight to the point.

Two Pennies Earned presents Credit Card Signup Bonuses and My Credit Score.

Blueprint for Financial Prosperity reviews FNBO Direct High Yield Savings Account.

Daily Money Hack rounds-up August 2008 High Yield Savings Account Rates with rates moving up approximately +0.1% on average.

Best Interest Rate Banks asks whether CD’s are worth it.

Cash Money Life supports his favourite card in 200+ Reasons Why I Love My Chase Freedom Rewards Card.

The Post Olympic Games China is not expected to feel any significant slowdown. The Chinese economic growth is a force to powerful to be countered by any measure. Urban development and the switch to an advanced economy will most likely continue and in full blast.


(*) Can I Get Rich on a Salary displays a half full attitude in Personal Finance Lemonade.

(*) Living Almost Large tells us more of their Family Financial History and giving back to community.

(*) Praveen @ My Simple Trading System discusses Making Money Online Through CPA Offers – For those of us looking to further diversify online income and explore other revenue channels.

(*) The Shark Investors presents an idea at Alternative Income: Selling Illustrations, Photos or Videos. Like blogging I believe you should go there onlyu if you enjoy it. Good Luck.

(*) Prosper Australia presents The Great Capital-Gains-Tax Hoax, an interesting analysis and discussion of capital gain taxes.

Think your Way to Wealth presents Are Gas Guzzlers and the Suburbs Equally to Blame for America’s Current Fuel Crisis? Which discusses the trade-off between travel distance and gas-guzzlers. I ask: who actually needs an SUV? It is comfortable but is it worth the price?

My Dollar Plan presents Cashbaq $5 Signup Bonus.

I've had a lot of fun (and hard work) hosting this edition of the carnival. I do hope you found it enjoyable and educational.

Images by: Tama Leaver, kk,

Monday, August 11, 2008

A Green Solar Initiative in Israel: Install Solar Panels on your Rooftop and Sell Back the Electricity to the Network

Israelis are offered to install solar panels and sell electricity back to the network

The Israeli government, through its wholly owned electric company, offers to buy back surplus electricity produced by solar panels installed independently by citizens on rooftops.

Israel enjoys sunny days in over 70% of the year. Solar energy suits Israel greatly and even today, many water heaters and boilers are heated through solar panels installed on rooftops producing clean energy.

The problem is that solar energy produced either by photovoltaic or other experimental technology is still very costly (or inefficient) compared to other fuels. Coal, for example, is 90%- 97% cheaper. There are assessments and forecasts that speak of much cheaper technology in the future. We can only hope these will eventually come true.

Source: Wikipedia

Recently oil tycoon T. Bone Pickens has announced an initiative of his own promoting the building of massive solar farms in deserts. Israel is also looking into such initiatives as its relatively big (in Israeli terms) Negev desert is the perfect place for such a solar farm.

Meanwhile, however, the Israeli initiative is more “green” than economic due to the relatively low efficiency of solar technologies. The installation and set up costs of adequate solar panels on a typical rooftop are estimated at $10,000 and annual income from selling electricity back to the network is estimated at $800-$1,000. The estimated return on investment ranges from 2%-4% a year at best.

While it’s relatively weak on the investment side it’s still a great personal contribution to the environment at the household level.

Image by: Powerhouse Museum

Sunday, August 10, 2008

Upselling & Cross-selling, Sneaky Credit Card Tricks and More @ The RoundUp

The customary weekly roundup

With some busy times ahead I certainly hope I can keep up my writing schedule. I’ll obviously do my best but I apologize in advance should I drop to two posts Monday through Friday. Hopefully It won’t come to it.

Good news, I’ll be hosting the Money Hacks Carnival #25 here at The Personal Financier this Wednesday. I’ve gone through many good posts and I think you’ll find this edition very informative and interesting.

In accordance with my new initiative I’ll be linking to articles published this past week in leading news and magazines. I hope you find these articles interesting:

On to carnivals:

The Carnival of Personal Finance: City Slickers Edition was hosted by Squawkfox. This time my two recommended posts are retirement related:

The Festival of Frugality #137 was hosted by Frugal Homemaker Plus. Here are my favourite posts:

The Money Hacks Carnival #24 was hosted by Greener Pastures. I especially enjoyed the following posts:

More from fellow personal finance bloggers:

Friday, August 8, 2008

The Guardian: “Toxic Debt Can Damage Your Wealth”

The Guardian: “A panel of top Wall Street bankers has recommended cigarette-style health warnings on complex financial instruments and suggests that ill-considered bonus packages may be encouraging financiers to take excessive risks”.

How didn’t I think of this before? In my opinion this is truly ingenious idea which is long overdue. The risk return equation is truly one of the most basic yet most misunderstood concepts in finance.

No return without risk is simple enough. But understanding risk is a whole other matter. What is investment risk, anyways? Is it the “value at risk” of an investment? Is it the volatility? Is risk lowered in long-term investments? All these questions have very complicated answers in finance and they are all correct in their own way. Some of these questions have been discussed in The Personal Financier and others will be discussed in the future.

The fact is that very few of us know what lurks behind complicated financial instruments. Even the professionals failed miserably in the last credit crisis surprised by the sub-prime lenders behind seemingly secure AAA bonds.

Are bonds truly less risky than stock? What about corporate bonds which have recently proved themselves ever so risky? Any sort of risk ladder, heads up or recommended investment term is blessed.

The Guardian reports that behind this initiative is an industry-wide group of senior Wall-Street executives chaired by Goldman Sachs managing director Gerald Corrigan. The panel was also critical of how pay deals are put together, saying incentives had "inadvertently produced patterns of behavior and allocations of resources" that were inconsistent with "the basic goal of financial stability". A very diplomatic way of saying risks didn’t really interest decisions makers.

Here are some ideas for possible warnings:

  • MBS (Mortgage Based Securities) could cause severe loss of capital.

  • ARS (Auction Rate Securities) may contain hazardous debt.

  • Short term stock investments offer worse chances than roulette tables.

  • Derivative investmetns have been proven to induce divorce.

  • Quitting day trading greatly reduces serious risks to your portfolio.

I’d be very interested in some of your ideas for more warnings… I think I haven’t explored all the possibilities.

Image by: Dylan Boroczi

Wednesday, August 6, 2008

How to Invest Wisely In a Bear Market?

Bear markets present a challenge for any investor with the end never in sight. How do we invest wisely in a bear market?

Stocks are often hailed as the winning financial asset to invest in for the long term. While stocks offer great potential in return they also hold an equal level of risk. Bear markets serve as a good reminder of the risk-return tradeoff.

During the first half of 2008 stock markets worldwide have taken a relatively severe proverbial beating with major indices dropping %15-%25.

Still, a bear market is by no means a cause to give up on stock investments. It’s just another natural phase in the life-cycle of stock investments which are invested for the long-term.

Amongst my favorite investment methods is an investment technique which enables us to:

  1. Gradually increase our exposure to the stock market.
  2. Invest in a timely fashion which usually suits our monthly savings.
  3. Enjoy stock returns while relatively limiting the risk we take.

  4. Invest in bear markets as well without dwelling on timing the market.

Dollar cost averaging is a well known investment method which perfectly suits bear markets. Most of us are dollar cost averagers investing timely in retirement plans and other long-term savings.

Dollar cost averaging is basically buying a financial asset or a certain portfolio of financial assets in a fixed timely manner regardless of share price. When prices are low dollar cost averaging results in buying more shares of a certain financial asset or portfolio and while prices are high fewer shares are purchased. With Dollar cost averaging the average “initial” cost of the portfolio is updating either upwards or downwards with each purchase thus diversifying risk over time.

Naturally there’s a price to dollar cost averaging. Since the investment risk is reduced so is the potential return. Had we invested a lump sum instead the portfolio risk would be higher but so would be the potential return.

There is a lot of criticism directed at dollar cost averaging. Academic research has disproven this investment technique as preferable to lump sum investing. I believe that for a household investor, much like me, who manages to save some money here and there dollar cost averaging helps ease fears of sharp portfolio drops by easing into the stock market when times are rough.

Poor Long Term Performance Poses a Risk Even To Long Term Investors

The most common hypothesis is that the stock markets will eventually return to growth patterns and will break previous price records. This has yet to be the case with the Nikkei 225 and the S&P500 since the 1990’s and 2000’s respectively. Dollar cost averaging has helped small investor take part in the stock market while not risking their sole savings, other than retirement.

If we examine the two stock market indices I mentioned we’ll see that since January 2000 the S&P500 has generated a negative return of 11.2% (-11.2%) without inflation! The Nikkei225 performed much worse over the past two decades with a negative return of 66% (-66%!!), again without inflation, since January 1990.

The S&P500 since 1999:

The Nikkei225 since 1989:

Dollar Cost Averaging Help Reduce The Risk

Let’s examine what would have happened had we started dollar cost averaging in the worst of times for these two indices. Let’s assume a monthly investment of 1,000$ up to today. Out two portfolios would look something like this:

Even with the current crisis and with the S&P500 and Nikkei 225 losing approximately 15% since January 2008 the two portfolios significantly outweigh any lump-sum counterpart. The S&P500 portfolio actually manages to yield a positive return. Remember, we started dollar cost averaging in the worst possible time to begin investing (right before a big crash).

My goal in this post was to suggest what I believe to be a sound, less risky technique to start investing in the stock market, even if it is bearish. I’ve recently started buying a monthly share of the MSCI world index using dollar cost averaging. Naturally, I encourage each and everyone to regard everything with the appropriate reserve and carefully examine whether a stock investment is right for you. As always, consulting with a professional is recommended.

Related Posts:

Monday, August 4, 2008

How Many Olympic Medals Will Each Country Win in Beijing 2008? An Economic Approach

An economic research provides a simple yet powerful model for forecasting who will win the Olympic Games and why.

The Olympic Games are much more than a simple sports event. The international consensus around this multi-sport event is one of the rarest in our small yet divided world. I believe the Olympic Games are the only event in which more than 200 countries take place, proudly presenting themselves to the world competing equally under the same rules with matches and fights limited to the different events and with the Olympic spirit prevailing everywhere. I believe the most common question in everyone’s mind during this magnificent event is: Why can’t we all just get along?

I’m far from na├»ve. Politics have always and will always play a major part in such events but there is value to be had nevertheless. The cynics have their criticism of the Olympic Games and we will certainly get a decent dose of it in the upcoming days but hopefully nothing will ruin the festival that awaits us in Beijing this August.

Since this is a personal finance and economics blog I thought about presenting a very interesting economic aspect of the Olympic Games. Who wins the Olympic Games and why?

Economics has much more to contribute to this question than what might meet the eye. Researchers Andrew B. Bernard and Meghan R. Busse (of the National Bureau of Economic Research and Berkeley University) published a very interesting article in 2002 which tries to answer this question using an economic model.

In their research these economists examined the determinants of Olympic success at the country level. Not surprisingly a vast population as well as high per capita GDP were suspected as the main determinants of Olympic success.

The benefits of any economic model are its ability to generalize and produce quality results and conclusions from simplistic assumptions and behavior. The model the researches offered is no different. Through generalization the researches offered an answer to the question of how many Olympic medals countries should be expected to win.

Naturally, the researches assumed the following will serve as good determinants to the number of Olympic medals each country would win:

  1. Population – Larger countries would have a deeper talent pool of athletes and greater chances of fielding medal winners and extraordinary talents.

  2. Resources per person – Naturally population is not enough or China and India would rule supreme. The population model is adjusted with the parameter of per capita GDP. Wealthier countries have more resources, research and facilities required to develop top level athletes. Wealthier countries are also able to support more full-time professional athletes.

Two additional and more interesting parameters were:

  1. Forced mobilization of resources by the government – Clearly the Soviet Union, at its time, and the Eastern Bloc countries had a share of medals 3% higher than average.

  2. Hosting - Interestingly enough host counties were seen to win an additional 1.8% of medals beyond the average predictions. Hosting countries have the home advantage and they spend less on each participating athlete.

Another interesting anecdote examined by the researchers was the affect of large scale boycotts on the Olympic Games. The numbers were corrected for two large scale boycotts of the Olympic Games in 1980 and 1984 (These games where held in Moscow and Los-Angeles).

The researchers examined data from the years 1960-1996. The model for 1996 produced the following graph: It’s pretty amazing what a relatively simple economic model can achieve. Forecasts for Sydney 2000 were also pretty accurate. The following table shows the estimated vs. actual medals won by leading countries:

Medal predictions for Beijing 2008 keep the USA far ahead with approximately 50 gold medals (11 more than China) and with 100 medals overall. China is next with around 40 gold medals and 90 overall. Russia, Britain and Germany are all in the top five with Australia at the sixth place.

It would be very interesting to see what the model would forecast for 2008. Unfortunately I don’t have the data currently available to run it. Still, as the major determinants haven’t changed (even though their distribution has, greatly) I do believe the major results are still relevant. One distinct exception is in fact China which has certainly mobilized its resources towards winning an astounding number of medals (currently estimated at 90).

Sunday, August 3, 2008

Small Cities and Net Worth, Misconceptions, and Hanging on to Gas Guzzlers? @ The RoundUp

The customary weekly roundup

I hope you have found my new initiative helpful and interesting. The following are some of the more interesting reads from top business papers:

On to carnivals:

The Money Hacks Carnival #23 was hosted by Can I get Rich on a Salary. My favorite posts from this edition include:

The Carnival of Personal Finance #163 was hosted by You Need a Budget. Here are my carnival picks:

The Festival of Frugality #136 - Summer School Edition was hosted by Student Scrooge. I’ve found these the most interesting:

  • Get 100+ MPG with scooters @ Gather Little By Little – I’ve only recently written a post on the matter myself and I’m glad to see scooters are really kicking in.

  • Consider Dumping Your Newspaper In Favor of Your Iphone @ EnviroHumanImpact – I actually canceled my newspaper subscription two weeks ago in an effort to reduce the amounts of paper lying around the house and to save some money. I’m having trouble getting used to paperless mornings. I don’t think I’ll last long but rationally speaking this is a sound advice.

More from fellow personal finance bloggers:

Friday, August 1, 2008

More than a Third of British Citizens are Only 11 Days Away from Financial Ruin: On The Importance of Good Financial Planning

How long could you last on $1,100?

A recent survey by the Yorkshire Building Society reported by the Daily Mail indicates 36% of British citizens could survive financially for only 11 days should a personal crisis occur such as losing a job or getting too ill to work.

Researchers examined income and expenditure patterns among British citizens and come to alarming conclusions. The survey indicates 36% of British citizens have less than 500 Pounds in savings to use as an emergency (Approx $1,100).

The current economic climate apparently leaves people with little choice regarding their financial conduct. More and more people are living on a “financial tightrope” as the Daily Mail puts it due to rising commodity levels and inflation and the growing impact of the current economic slowdown or recession.

The typical person, according to the survey, has 52 days before running out of financial resources. The average monthly expenditure of the average British citizen amounts to 1,445 pounds which are approx. $3,300.

Source: The Daily Mail

Many of the people surveyed indicated they will sell their home should a crisis occur. Relying on selling your home as a last resort is a very poor option as we’ve witnessed only recently. In a crisis real-estate prices tend to respond rather quickly plummeting down due to lack of demand.

In another recent survey by the ASEC Americans reported they saving habits and progress. According to the survey more than two-thirds (71%) report that they "have sufficient emergency savings to pay for unexpected expenses like car repairs or a doctor visit."

Good financial planning is about smoothing both consumption and living standards over one’s life

Solid financial planning aims to smooth consumption over a life time. As crisis come out of nowhere, annoyingly unannounced, good financial planning should utilize precautions to smooth out such a crisis as losing one’s job or becoming too ill to work. There are several tools which help smooth out such a crisis:

#1 Budget for the unexpected

Unexpected expenditures are a fact of life. Budgeting for these unforeseen expenditures each month is a great way of tackling them. Set aside 2%-3% of your entire budget for unexpected expenditures (aside from savings). 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 Set up an Emergency Fund

Much has been said and 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.

I believe an emergency fund should last for at least a couple of months of debt and mortgage payments as well as solid living. Everyone knows that decisions made under a lot of stress are usually bad decisions (I already addressed the faulty logic of selling your home as a last resort).Great articles on emergency funds can be found at The Digerati Life, The Simple Dollar and Get Rich Slowly.

#3 Get Insurance

Accidents, disability, mortality and longevity (surprising but true) all significantly or totally hinder 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.

All of the precautions and preemptive measures mentioned naturally cost money. That is what good financial planning is all about. Save when you’re able to finance possible hardships. Too many people live on a much higher level than they can actually afford. With an upcoming economic slowdown in Great Britain as well many people will unfortunately learn this lesson the hard way.

I believe its much easier compromising for 15% of your monthly income (that’s how much you need to put aside totally) than to face financial ruin.

Related Posts:

Images by: Phil Moore