/ Finance

Daily Links: Kids, Debt, and Renting to Own

Strange weather here in Oregon’s Willamette Valley. We had a nice mid-August hot spell, which is to be expected, but ever since, it’s looked very much like autumn: rain, wind, and clouds. Coupled with our late spring, this is wreaking havoc on our tomatoes, as Saturday’s garden update will reveal. But we’re still harvesting blueberries! The mind boggles.

Speaking of mind-boggling, here are some great money stories from around the web:

First, ABC News has a short piece explaining why you shouldn’t “rent-to-own”. This sort of scheme can be convenient for those with poor credit, but “in the long run it is a lousy way to buy something,” says consumer correspondent Elisabeth Leamy.

Several people sent me the story of two California girls who are trying to fight city hall. Katie and Sabrina Lewis have been selling surplus produce from the family’s garden at a roadside stand, which is a violation of local laws. I have mixed feelings about this. I applaud the kids’ initiative, and I love to see people taking steps to make extra cash. But I also can see why the city feels it needs to stand its ground. Interesting stuff.

SHP pointed me to an article from MP Dunleavey at MSN Money. Dunleavey wonders if debt is your destiny. She says that credit changes the way we think, and that if you’re broke already, chances are you’ll remain broke.

Numerous studies have demonstrated that when a purchase and the payment for it are closely linked — as when you spend cash — you are more aware of how much you spend and tend to spend less, says Dilip Soman, an economist and professor of marketing at the University of Toronto.

Dunleavy recommends using cash, tracking your spending, and not playing games with your money as the best ways to fight against a mental addiction to debt.

Finally, Free Money Finance offers his advice on the best way to get a raise. It’s not the typical recommendations, but it’s what he founds works for him.

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How to Win the Lottery

Ray Otero cannot buy a break. For the past three years, he’s spent $500 to $700 a week playing the lottery, but he’s only won big a few times: $1,000 once and $2,000 twice. Still he keeps playing. He’s sure his luck is bound to change.

Otero’s story, told in a recent New York Times article, is simultaneously funny, poignant, and exasperating. This New York City building superintendent simply wants the “easy life” for his family. He wants to find the money to move back home to Puerto Rico.

So why doesn’t he save the money from working? Because working is for suckers:

Working is for poor uneducated men — a sucker’s game, [Otero] said, where one must run increasingly fast to keep one’s place in line. “You’re making money on the one side and spending it on the other,” he said. “If all you’re doing is working, you’re never going to win.”

And so he’s poured his money into the lottery, looking for his chance to get rich quickly. So far it hasn’t worked. To make matters worse, his friend and neighbor, a doorman named Richie Randazzo, won five million dollars after only spending $30 a week on tickets. “It really isn’t fair,” Mr. Otero said. But what Mr. Otero doesn’t realize is that winning the lottery has nothing to do with luck.

Against all odds
My youngest brother, Tony, used to play the lottery. One day I had to get something out of his car, and I was shocked at the hundreds of scratch-off tickets tucked into every nook and cranny.

“Tony,” I’d said. “Why do you do this? You’re wasting your money.”

“No, I’m not,” he said. “I’ve pretty much broken even on the lottery. I’ve made as much as I’ve spent.”

I knew that this was highly improbable, but didn’t see any sense in arguing. Sure, a newcomer to playing the lottery might be able to claim she’s broken even because she’s only spent about $30 total on it, but has won fifty bucks. But the longer anyone plays, the more likely they are to be a net loser. The longer a person plays, the bigger loser they become.

Just for kicks, I looked through the New York state lottery web site. There are a variety of games offered. None of them have encouraging odds.

• The $1 scratch-off games offer odds of one in five. On average, you’d have to spend $5 to win anything, and even then you’re far more likely to win a buck or two than anything else.
• The more expensive scratch-off games ($5, $10, $20) have better odds (up to one winner in every 3.5 tickets), but more gradual payoffs. That is, it’s more difficult to win a big prize.
• The lottery drawings have even worse odds. The daily Take Five game, for example, has odds of about one in ten. But the base prize is just a free lottery ticket. The odds of winning money are one in 100!

There’s no question: playing the lottery as a strategy to gain money is a fool’s game. Play the lottery for fun if you want, but don’t do it because you think it’s going to help your financial situation. The easiest way to win the lottery is not to play.

A sure thing
If you really want to improve your finances, do something boring with your money. Put it in a savings account. Invest it in the stock market. (Hell, loan it to your brother-in-law. You’re less likely to lose the money with him than with the lottery.)

If you really want to win with your money, take advantage of the extraordinary power of compound interest. If you don’t have a Roth IRA, start one. Use it to buy indexed mutual funds. If that sounds too complicated for you, then open a savings account. Any of these banks are a fine choice:

• Washington Mutual currently offers 3.75% APY.
• HSBC Direct and FNBO Direct currently offer 3.50% APY.
• ING Direct currently offers 3.00% APY.

While it’s true that 3% isn’t a huge return on your money, it’s far more than the 80% loss you can expect every time you buy a lottery ticket. (See the comments for a more rigorous mathematical explanation of the actual expected returns.) If Mr. Otero would put $30,000 a year into into a savings account, he’d have about $164,000 after five years. He’d have over $350,000 after ten years. I suspect that’s plenty of money for him to fulfill his dream of moving back to Puerto Rico.

[The New York Times: Thousands later, he sees lottery's cruelty close up, via My Open Wallet — image by midweekpost]

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Building a Better Budget: Think Yearly, Not Monthly

If you struggle with keeping a budget, it may be because you’re trying to predict your spending in time chunks that are just too small. A new study published in the Journal of Consumer Research found that people who made annual budgets were better able to predict their spending than those who made monthly budgets. From the University of Chicago press release:

[Researchers] found that, contrary to popular advice, people were more accurate when constructing an annual rather than a monthly budget, even when they were logging their expenses weekly.

“Consumers’ default tendency is to underestimate their budgets, for both next month and next year frames,” write the authors. “However budgets for the next year are closer to recorded expenses because consumers feel less confident when estimating these budgets, and therefore, adjust them upward.”

One reason yearly budgets are more accurate is that consumers consider a greater number of expense categories when they construct them. If you construct your monthly budget in April, will you remember to include a category for Christmas gifts?

Yearly budgets aren’t very useful, however, for planning your day-to-day spending. The obvious solution is to take the best of both worlds:

• Since people generally do a better job of estimating yearly expenses rather than monthly expenses, create an annual budget.
• Once you’ve arrived at your annual budget, divide your estimated expenses in each category by 12. This will give you a monthly number to work with.

The results of this study reiterate that over-confidence is an enormous drag on the average person’s finances. We believe we’re immune to advertising, that we can handle credit responsibly, that we can pick winning stocks. Yet study after study demonstrates that this just is not the case. In fact, those who lack confidence often make the best financial decisions.

This is also true with budgeting. In this study, subjects who were told that budgeting was difficult made more accurate estimates regarding their expenses than those who were told that budgeting was easy.

[Journal of Consumer Research, August 2008: The effect of ease of estimation and confidence on budget estimates]

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Free Debt Snowball Spreadsheet

Vertex42, a site devoted to Microsoft Excel templates, spreadsheets, and calendars, has posted a free debt snowball calculator. From the description:

This spreadsheet allows you to choose different debt reduction strategies, including the debt snowball effect (paying the lowest balance first) and highest interest first. Just choose the strategy from a dropdown box after you enter your creditor information into the worksheet.

This file contains two worksheets:

1. A debt reduction calculator, which allows you to list your debts, their balances, interest rates, and monthly payments.
2. A payment schedule telling you which bills to pay when.

The brilliant thing about this spreadsheet — other than the fact it does all the math for you — is that it allows you to choose from a variety of snowball methods. You can use the Dave Ramsey-esque “low balance first” debt snowball, the mathematically superior “high interest first” method, opt for no snowball at all, or — and this is the best part — enter your own payoff order. Got a loan from your brother-in-law that drives you nuts? Prioritize it and this spreadsheet will make sure it’s finished first.

I wish I had access to a tool like this when I was first starting to dig out of debt…

[Vertex42: Debt reduction snowball calculator, via the redoubtable Ben Popken at The Consumerist]

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The Inner Workings of a Car Dealership (and How To Use Them to Your Advantage)

Yesterday a reader named Dave Black left a long comment on an old article about how to buy a new car without getting screwed. This is his glimpse into the inner workings of a car dealership. I’ve edited Black’s comment to make it a little more readable, but the advice is all his.

I sell cars, and believe me, there are lots of opportunities for a car dealership to make money.  

Front of the house profit is derived from the MSRP less the invoice price (the price the dealer actually pays for the car). Each deal has a “pack charge” or “lot fee” of $200-600 or more that goes in as part of the dealer cost, so when a dealer tells you for example, our invoice is $22145, you can subtract $200 to $600 for the lot fee. There are also dealer rebates and consumer rebates to factor in.

On the sales contract there is always a “doc fee” of again several hundred, and a fee for title processing and sales tax. All but the sales tax can be negotiated.

Never trade your car in unless it has major problems and you just need to dump it. You don’t really know how much you are getting off the new car for the value of your trade. Most dealers I have worked for use “rough black book”, which is a number that they can start with before they do an appraisal on your car.  

The back of the house profit comes from the finance office. Let’s say you have great credit. They could qualify you for 5.5% loan or less, but the finance manager may hit you at 7.5% and tell you that’s the best he could get. This can be negotiated, too. There is a lot of money being made on raising your interest a couple of points.

Do not buy any add-on service contracts and warranties. The profit on those is 50-100%, and the finance manager is a commissioned salesman. Remember that!

Do not try to bluff or BS anyone in the dealership — they are a lot better at it than you are, and they do it far more often.

Most salespeople do not make a lot of money. I have made as little as $300 a week and as much as $3500 in a week. My average is around $40,000 a year working five days and 55 hours a week. It’s a difficult job. The salesman is trying to negotiate between you and his sales manager. He is more on your side than you might think. He wants referrals, and he will work you hard after the sale, so he wants you to understand that he is going to get you the best deal he can and still make a profit.  

Most deals on new cars pay minimum commission — $100 to $150 — because the profit margin on new cars is lower and the competition is higher. You can easily compare prices on new cars because every dealer sells the same car. Used cars have more profit built in, and there is no simple way to price shop because condition and mileage on each car varies so much.

Do not offer a price that is way too low. Be realistic. We are there to make a profit, and we must not sell cars at a loss. Give us a break. Don’t lie or steal from us, and we will treat you right.

The best time to buy a car is end of the month and before the new model year comes out. Monthly bonuses for volume can be very good, so they might be more willing to do a loser sometimes and make up for it on bonus.

Most dealers and salespeople are good honest hard-working people with families and lives like yours. Treat them with respect — they deserve it.

Driving through a lot drives us crazy. If you are really interested in looking at cars, stop and get out and let one of us open the car up and give you a demonstration. If you aren’t really ready to buy, go to the lot after hours so you’re not wasting anyone’s time but your own.

Once I had a customer came in and tell that me he and his wife would like to check out a couple of cars. He said he would give me $20 to work with them for a while even if they did not buy. I liked this. Now the salesman is motivated to work for the customer as well as the dealer — he can’t lose either way.

J.D.’s note: Black’s comments about financing made something clear for me. The last time I bought a car, I thought I got a good deal — $500 over invoice. But I was surprised at the relatively high interest rate. “Are interest rates really that high?” I asked. “Yes,” the salesman said. I didn’t know enough then to argue the point. I just took the high interest rate. Now I know it was a way for the dealership to make back the money they’d given up on the sales price. Chevy sign photo by rjs1322. Negotiation photo by Tony Lanciabeta.

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The Psychology of Happiness: 13 Steps to a Better Life

We think we know what will make us happy, but we don’t. Many of us believe that money will make us happy, but it won’t. Except for the very poor, money cannot buy happiness. Instead of dreaming of vast wealth, we should dream of close friends and healthy bodies and meaningful work.

The psychology of happiness
Several years ago, James Montier, a “global equity strategist”, took a break from investing in order to publish a brief overview of existing research into the psychology of happiness [PDF]. Montier learned that happiness comprises three components:

• About 50% of individual happiness comes from a genetic set point. That is, we’re each predisposed to a certain level of happiness. Some of us are just naturally more inclined to be cheery than others.
• About 10% of our happiness is due to our circumstances. Our age, race, gender, personal history, and, yes, wealth, only make up about one-tenth of our happiness.
• The remaining 40% of an individual’s happiness seems to be derived from intentional activity, from “discrete actions or practices that people can choose to do”.

If we have no control over our genetic “happy point”, and if we have little control over our circumstances, then it makes sense to focus on those things that we can do to make ourselves happy. According to Montier’s paper, these activities include sex, exercise, sleep, and close relationships.

What does not bring happiness? Money, and the pursuit of happiness for its own sake. “A vast array of individuals seriously over-rate the importance of money in making themselves, and others, happy,” Montier writes. “Study after study from psychology shows that money doesn’t equal happiness.”

The happiness paradox
Writing in The Washington Post last June, Shankar Vedantam described recent research into this subject. If the United States is generally wealthier than it was thirty or forty years ago, then why aren’t people happier? Economist Richard Easterlin of the University of Southern California believes that part of the problem is the hedonic treadmill: once we reach a certain level of wealth, we want more. We’re never satisfied. From Vedantam’s article:

Easterlin attributes the phenomenon of happiness levels not keeping pace with economic gains to the fact that people’s desires and expectations change along with their material fortunes. Where an American in 1970 may have once dreamed about owning a house, he or she might now dream of owning two. Where people once dreamed of buying a new car, they now dream of buying a luxury model.

“People are wedded to the idea that more money will bring them more happiness,” Easterlin said. “When they think of the effects of more money, they are failing to factor in the fact that when they get more money they are going to want even more money. When they get more money, they are going to want a bigger house. They never have enough money, but what they do is sacrifice their family life and health to get more money.”

The irony is that health and the quality of personal relationships are among the most potent predictors of whether people report they are happy — and they are often the two things people sacrifice in their pursuit of greater wealth.

Why aren’t rich people happier? Perhaps it’s because many of them are workaholics, because they’re more focused on money than on the things that would bring them joy. A brief companion piece to The Washington Post story notes that researchers have found that “being wealthy is often a powerful predictor that people spend less time doing pleasurable things, and more time doing compulsory things and feeling stressed.”

In general, rich people aren’t much happier than those of us in the middle class. Yes, money can buy happiness if it elevates you from poverty, but beyond that the benefits are minimal. So why do so many people believe that money will make things better?

Stumbling on happiness
In 2006, Harvard psychology professor Daniel Gilbert published Stumbling on Happiness, a book about our inability to predict what will really make us happy. The following is a 22-minute video of a presentation Gilbert made at TED 2004, in which he compresses his ideas into bite-sized chunks:

Gilbert says that because humans can plan for the future, we naturally want to structure our lives in such a way that we are happy, both now and later. But how do we know what will make us happy? We don’t. In fact, we’re surprisingly bad at predicting what will bring us joy. Gilbert asks:

Which future would you prefer? One in which you win the lottery? Or one in which you become paraplegic? Which would make you happier? [...] A year after losing their legs, and a year after winning the lotto, lottery winners and paraplegics are equally happy with their lives.

The problem is impact bias, the tendency to overestimate the “hedonic impact” of future events. Put another way, the things that we think will make us happy usually don’t make us as happy as we think they will. Winning the lottery isn’t a panacea. Having an affair with your hot new co-worker won’t be as thrilling as you imagine. And losing a leg isn’t the end of the world.

It turns out that humans are able to synthesize happiness. Many people look outside themselves for fulfillment; they expect to find it in things, or in relationships, or in large bank accounts. But true happiness comes from within. True happiness comes when we learn to be content with what we have.

13 steps to a better life
What does all this mean to you? If money won’t bring you happiness, what will? How can you stop making yourself miserable and start learning to love life? According to my research, these are the thirteen actions most likely to encourage happiness:

1. Don’t compare yourself to others. Financially, physically, and socially, comparing yourself to others is a trap. You will always have friends who have more money than you do, who can run faster than you can, who are more successful in their careers. Focus on your own life, on your own goals.
2. Foster close relationships. People with five or more close friends are more apt to describe themselves as happy than those with fewer.
3. Have sex. Sex, especially with someone you love, is consistently ranked as a top source of happiness. A long-term loving partnership goes hand-in-hand with this.
4. Get regular exercise. There’s a strong tie between physical health and happiness. Anyone who has experienced a prolonged injury or illness knows just how emotionally devastating it can be. Eat right, exercise, and take care of our body. (And read Get Fit Slowly!)
5. Obtain adequate sleep. Good sleep is an essential component of good health. When you’re not well-rested, your body and your mind do not operate at peak capacity. Your mood suffers. (Read more in my brief guide to better sleep.)
6. Set and pursue goals. I believe that the road to wealth is paved with goals. More than that, the road to happiness is paved with goals. Continued self-improvement makes life more fulfilling.
7. Find meaningful work. There are some who argue a job is just a job. I believe that fulfilling work is more than that — it’s a vocation. It can take decades to find the work you were meant to do. But when you find it, it can bring added meaning to your life.
8. Join a group. Those who are members of a group, like a church congregation, experience greater happiness. But the group doesn’t have to be religious. Join a book group. Meet others for a Saturday morning bike ride. Sit in at the knitting circle down at the yarn shop.
9. Don’t dwell on the past. I know a guy who beats himself up over mistakes he’s made before. Rather than concentrate on the present (or, better yet, on the future), he lets the past eat away at his happiness. Focus on the now.
10. Embrace routine. Research shows that although we believe we want variety and choice, we’re actually happier with limited options. It’s not that we want no choice at all, just that we don’t want to be overwhelmed. Routines help limit choices. They’re comfortable and familiar and, used judiciously, they can make us happy.
11. Practice moderation. Too much of a good thing is a bad thing. It’s okay to indulge yourself on occasion — just don’t let it get out of control. Addictions and compulsions can ruin lives.
12. Be grateful. It’s no accident that so many self-help books encourage readers to practice gratitude. When we regularly take time to be thankful for the things we have, we appreciate them more. We’re less likely to take them for granted, and less likely to become jealous of others.
13. Help others. Over and over again, studies have shown that altruism is one of the best ways to boost your happiness. Sure, volunteering at the local homeless shelter helps, but so too does just being nice in daily life.

Remember: True wealth is not about money. True wealth is about relationships, about good health, and about continued self-improvement.

Further reading
Here are some additional happiness resources:

• The Happiness Project is a blog (and forthcoming book) exploring the subject from my colleague, Gretchen Rubin
• New York Magazine: Some dark thoughts on happiness
• The Happy Planet Index is “the first ever index to combine environmental impact with well-being to measure the environmental efficiency with which country by country, people live long and happy lives.”
• Brazen Careerist: New research reveals some new ways to buy happiness — sort of
• Newsweek: Why money doesn’t buy happiness

Last month, we discussed whether it was more important to be rich or to be happy. “Money and happiness are not mutually exclusive,” many of you noted, and it’s true. You can have both. Or neither. It’s important to realize, however, that money is a less reliable source of happiness than what’s inside you.

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Fix Your Own Printer and Save Money

Farhad Manjoo at Slate says your computer printer may be lying to you. He bought a cheap laser printer a couple years ago. When the machine decided it was out of toner, it stopped working. But the last page it had printed looked just fine. Manjoo was puzzled:

I’m a toner miser: For as long as I’ve been using laser printers, it’s been my policy to switch to a new cartridge at the last possible moment, when my printouts get as faint as archival copies of the Declaration of Independence. But my printer’s pages hadn’t been fading at all. Did it really need new toner — or was my printer lying to me?

By using the power of Google, he stumbled upon Fix Your Own Printer, and found a dead simple hack that has allowed him to use the same toner cartridge for another eight months and hundreds of pages.

Manjoo’s article includes tips for circumventing the “smart” sensors in these devices, which attempt to predict how much ink and toner remains. Manjoo notes that tricking your laser printer is fine, but that running an inkjet printer out of ink can actually ruin it.

Here’s a Get Rich Slowly discussion forum thread on how to save on printer ink. My own method is to stock up on ink or toner when I see a sale. I bought several ink cartridges last year when a local store was having a clearance, for example. The big risk there is that I’ll switch printers before I use my stockpile of ink!

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Marvelous Magazine Ads from 1904

This post contains many scanned images. Click on any detail to see a larger version.

I believe that one of the best ways to reduce spending is to limit your exposure to advertising. Marketers employ powerful persuasive techniques to circumvent our rational minds, encouraging us to spend our hard-earned money on things we don’t really need.

This isn’t anything new. Advertising has been a pervasive part of American culture for more than a century. I recently picked up some 100-year-old magazines for cheap at a garage sale.

• One is the May 1904 issue of Women’s Home Journal.
• The other is the October 1909 issue of Collier’s.

While it’s fun to read the articles — the Wright brothers fly a plane over Manhattan! Admiral Dewey at home! — it’s even more fun to look at the ads. They provide a fascinating glimpse of the rise of U.S. consumerism.

A few advertisements show products that are still familiar today:

 

Some of the ads demonstrate new technology that now, 100 years later, we take for granted:

 

 

And, of course, certain ads seem quaint or dated:

 

 

Of course, there were questionable financial schemes being advertised even back then. People have always been lured by the promise of quick riches. Some of these ads offer guarantees of “perfectly safe” returns of 12-18% a year, while others offer sure ways to make a couple hundred dollars in just a few days while working from home.

 

Some of the “make money” ads offered legitimate opportunities. This one from the October 1909 issue of Collier’s seems to give a peek into the origins of the now familiar bowling alley.

There are two interesting differences between the ads in the 1904 Women’s Journal and the 1909 Collier’s. In the former, there are several advertisements for carriages:

 

But five years later, there are no ads for carriages at all. Instead, there are several full-page ads for automobiles! (Unfortunately, the magazine was way too big for my scanner, so I can only get about half of this ad.)

It’s also interesting to see the rise of credit. Though consumer credit has been used for centuries, the sort of credit we think of (using installment payments) is a more recent development. For a long time, it carried a social stigma, but that eased during the first part of the twentieth century.

The 1904 Women’s Home Journal contains one ad (for pianos) that offers installment purchases. The 1909 Collier’s promotes several companies with “easy terms”.

I loved reading these old magazines, and intend to keep my eye out for similar bargains in the future. Actually, Kris and I are stopping at an antique store later this afternoon. I should set myself a $10 budget and then see if I can’t find a couple of magazines to take home.

 

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Ads Are NOT the New Online Tip Jar

Seth Godin wrote today that ads are the new online tip jar. “If you like what you’re reading, click an ad to say thanks,” he says. On the surface, this seems like a nice gesture. Underneath, however, it’s a bad idea.

When people ask me how they can support Get Rich Slowly, I intentionally steer them clear of clicking on ads. Sure, I get a nickel or a dime or a quarter every time somebody does, but there are long-term ramifications to empty clicks. If an advertiser spends money on a campaign that doesn’t work, it’s not going to renew it. In the long run, “false” ad clicks don’t help me — they hurt me.

Here are four ways you can help web sites, including this one:

• Participate in the discussion. If you have something to say, say it. Much of this site’s success is due to the active, intelligent community. You folks share ideas and offer suggestions. Any site with active readers is going to grow stronger.
• Tell friends. If you like what you read, share it. Send stories along via e-mail. Mention the site (if appropriate) in conversations.
• Click on ads that interest you. There’s nothing wrong with clicking on ads for topics that interest you. If I’m at a photography site, I might click on an ad for cheap memory cards, for example. But don’t just click an ad because you think it’s a good way to leave a tip.
• Link to the stories you like. This is the number one way to support your favorite web sites. At the root of everything — traffic, revenue, subscribers — are links from other sites. If you enjoy a site, or if you find a particular article you like, then link to it.

If you used my list of savings accounts to find a good rate, link to it. If my guide to the Roth IRA helped you, link to it. If you like the ongoing series about our garden, link to it. If you find something of value at a site, link to it. If you can’t link because you don’t have a site, then tell your friends.

The best way to support a site is not to click on the ads, but to spread the word. Trust me: if new readers come, revenue will follow.

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Ask the Readers: The Psychology of Credit Cards?

Cory is a young man who wants to do the right thing. He’s been making smart financial choices, and he wants to continue to do so. But he’s worried that using his credit card is too easy. He’s come to ask GRS readers for help:

I’m 21. For three years, I’ve had a debit card and loved it. No more borrowing my parents’ credit card to make purchases! I can use it anywhere, just like a credit card. I have a pretty good memory, and almost always know exactly how much money is in my checking account, usually within a dollar. If I make a purchase, I automatically update my account total in my head, and whenever I actually check my account balance, I’m never shocked at what I see.

A couple of months ago, I decided to get a credit card and start building good credit. I’ve paid the bill diligently each month, but since I’m using credit, and not taking money out of an account, I just can’t seem to keep track of how much money I have vs. how much I’ve charged on the card. Each time I make a payment, it feels like I’m giving up more money than I should be, because all month long I’ve been thinking that the money I actually have is the money that’s in my account, not considering what I’ve charged on the card.

I know this is just a psychological thing, but I was wondering if your readers had any tips on how to help? I feel like I’m spending somebody else’s money until that bill comes, and I’d rather feel like I’m spending my own.

This actually causes me problems, too. One reason I got into trouble when I was younger was the lack of immediate feedback about how much had been charged to my credit cards. The spending was invisible and painless. It felt like free money. (Financial guru Dave Ramsey likes to say that when you pay cash, you can “feel” the money leaving you.)

Since I returned to the world of credit last year, I’ve been diligent about practicing good spending habits. I do everything a responsible credit card user should. All the same, I don’t always know my current balance, which was something I did know when I only used a debit card.

If Cory wants to feel more in control of his credit spending, he might consider the following:

• Check your balances often. Almost daily, I visit my accounts online. This not only helps me keep tabs on my spending (and earning), but it also helps me stay vigilant for possible fraud and identity theft.
• Use money management software. Last year, I shared a simple trick for tracking credit card expenses in Quicken. When I process my receipts every weekend, I create a placeholder transaction that shows I’ve already paid my credit card expenses. (Click that link for more info.) This helps me with my mental accounting.
• Set cash aside immediately. Both ING Direct and my credit union allow me to have multiple subaccounts. If I didn’t already do the Quicken trick, I might consider moving cash from my checking account to a designated savings account whenever I used the credit card. This would prevent me from spending money I didn’t have and get it ready for me to pay the bill.
• Pay for large expenses with the credit card, but use the debit card for everything else. It’s easier to remember a few big expenses than a bunch of small ones. If your want to keep the numbers straight in your head, only use your credit card for major purchases.

What about you? Does spending with a debit card feel different to you than spending with a credit card? Do you ever worry that you spend more than when you use cash? Do you have any tricks for keeping track of how much you’ve spent? What advice can you offer to Cory?

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Related Articles at Get Rich Slowly:

• Credit Card Index
• links for 2006-11-17
• I Do Not Use Credit Cards
• Ask the Readers: What if You Have No Credit History?
• links for 2006-10-09

Daily Links: Frugal Tips Edition

Most of my on-line financial reading lately has been about frugality and saving money. I think I’m subconsciously avoiding investment articles because I know I have to make some big decisions regarding my 2008 retirement savings by the middle of next month. Of course, that means a few weeks from now, all the links I share will be about investing! In the meantime, here are some stories I’ve liked lately:

Scott Burns says you can save money just by paying attention. Though I really dislike articles that claim readers can save X amount of money by doing Y things (come on, get real — everyone’s situation is different), I like Burns’ central idea here: The power of attentive spending can be a great way to save money.

Dawn at Frugal for Life posted an important reminder: free things must have value. Just because something’s free doesn’t mean it’s a good deal. I mention this point from time-to-time because it’s important. (And because I have trouble remembering it.) If it’s not something you’ll use or appreciate, it’s just clutter. And clutter is never “free”.

Have you ever wondered how much it costs to keep an extra chest freezer in the garage? Jonathan at My Money Blog has, and he recently ran the numbers. He estimates the cost at $5-$10 per month (depending on the size), which he figures should be easy to make up through frugal choices.

Finally, Five Cent Nickel offers advice on how to find a good auto mechanic. As with many such choices, getting a referral from someone you trust is the best way to go. Nickel notes, however, that it’s important to ask somebody who can give a knowledgeable recommendation.

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Related Articles at Get Rich Slowly:

• Daily Roundup: Bringing Home the Bacon Edition
• My Frugal Life
• links for 2006-11-23
• Daily Links: Podcast Interview Edition
• links for 2007-05-08

The Myth of Multitasking: How Doing It All Gets Nothing Done

Multitasking has killed my productivity. At this moment, on this computer, I have:

• Five open browser windows with a total of 59 open tabs (in Safari)
• 79 open text documents (in BBEdit) — I am not joking

• 14 open images (in Photoshop)
• 55 unread messages in my mailbox (and 48 additional unread Get Rich Slowly comments)
• Three open chat sessions
• Seven open word processing documents (in Microsoft Word)
• And ten other open applications

That’s 227 discrete tasks awaiting my attention. That doesn’t count the dozen or so books submitted for review, the eight unread personal finance magazines, and the pile of papers spilling onto the floor.

Do you know how many tasks I can focus on at a time? Only one.

And do you know how productive I am because I try to do so much at once? Not very. By trying to do it all at once, I get very little done. According to author David Crenshaw, I have bought into The Myth of Multitasking.

The Myth of Multitasking
Multitasking is a misnomer, Crenshaw argues in his new book. In fact, he says, multitasking is a lie. No — multitasking is worse than a lie. Crenshaw writes:

When most people refer to multitasking, they are really talking about switchtasking. No matter how they do it, switching rapidly between two things is just not very efficient or effective.

His book contains a marvelous exercise with which readers can prove to themselves that this is actually the case, that “switchtasking” takes longer than actually doing one thing at a time. In “The Autumn of the Multitaskers” (from the November 2007 issue of The Atlantic), Walter Kirn also wrote about this phenomenon:

The great irony of multitasking [is] that its overall goal, getting more done in less time, turns out to be chimerical. In reality, multitasking slows our thinking…A brain attempting to perform two tasks simultaneously will, because of all the back-and-forth stress, exhibit a substantial lag in information processing.

Multitasking — or switchtasking — makes us less productive, costs us time, and generally leads to the feeling that we’ll never catch up.

In search of lost time
Crenshaw’s book suggests some tips for overcoming multitasking in the workplace. In addition, his website offers three “beginning steps” to help slow down switchtasking in your life:

• Take control of technology. Make space for yourself. Turn off your cell phone. Close your e-mail and chat programs. Shut the door to your office. Or, if you’re like me, learn to deal with one browser tab or one document at a time.
• Schedule what can be scheduled. To minimize interruptions and mindless switchtasking, schedule whatever you can. Learn to use a calendar to schedule meetings with people so that you can give them your full attention. Set aside specific times each day to check your voicemail and email. (This is a technique that Tim Ferriss preaches in The 4-Hour Workweek.)
• Focus on the person. When you deal with other people, be in the moment. Do not divide your attention between the conversation and another task. Be an active part of the conversation. Listen. Take care of everything before moving on.

The Myth of Multitasking is a short book that conveys a single, critical idea: to do two things at once is to do neither. While I think this book is excellent, and while it was exactly what I needed to read at this point in my life, I would not be willing to purchase it for the $20 cover price. It’s well worth a trip to the library, though. (And it might make a good gift for a boss or spouse or a co-worker.)

On the other hand, if Crenshaw’s book really can make me more productive, then it’s worth $20 and much, much more.

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Related Articles at Get Rich Slowly:

• Weekend Update: English Majors Rule! Edition
• Salary Secrets and Myths
• The Best of Get Rich Slowly: May 2007 Edition
• Ten Financial Urban Myths
• Walking the Talk: Saying “No” to Temptation

Technical Glitch: Feed is Down

The Get Rich Slowly RSS feed is down. I apologize. Believe me, I want it repaired, too.

I’ve submitted the problem to Google/FeedBurner, but don’t expect to hear anything until morning. I suspect the problem is on their end, though it’s certainly possible that I’ve broken something somehow. (Which seems unlikely, as I haven’t monkeyed with anything this week.)

If anyone has any expertise they can share, I’m open to advice about fixing this.

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Related Articles at Get Rich Slowly:

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• Survey: Best Location for Links?
• links for 2006-09-13
• 360 Degrees of Financial Literacy

8 Tips for Saving Money on Hobbies and Pastimes

Lee wrote with an innocent question about photography equipment yesterday. Little did she realize I’d already been thinking about the broader issues of her dilemma. Here’s an abridged version of her message:

A friend asked me about cameras. He went shopping last weekend and saw lenses that ranged from $200 to $700. He felt that the lower-end lenses would not work for him, but he wasn’t prepared to spend $700, so he went home. Now he’s reconsidering.  Of course the one he liked was $700. He thinks he should go to a camera store for some professional advice. What do you think?

Ah, the lure of photography. About five years ago, I spent a couple thousand dollars on camera equipment. Before I started Get Rich Slowly, I seriously considered trying to become a professional photographer. (A dream perhaps best left unpursued.) I believed that by throwing money at the hobby, I could improve my results.

This year, I’ve discovered the joy of running. On the surface, it’s a sport you can pick up with no equipment at all — you can just run in a pair of sneakers. As with anything else, I’ve discovered there are tons of things to buy: running shoes, special socks, water bottles, logbooks, and high-tech heart-rate monitors.

Which expenses are worth it and which are not?

When you begin pursuing any sport or hobby, it can be difficult to decide where to spend your money. The initial temptation is to buy the best gear now. But I’ve learned from experience that the best gear is worthless if I’m not skilled enough to use it. Before you spend money on a new pastime, consider the following:

• Know your goals. What is your aim? What kinds of photographs do you wish to make? Or, if you’re looking to purchase a bike, what is your objective? Do you want to commute five miles back-and-forth to work? Do you want to train to ride one-hundred miles? Are you just looking for something to putter around on with the kids? Be realistic. Be honest. Use your answers to help guide your decision.
• Educate yourself. When I was starting out, I didn’t like the quality of my photographs, so I did what many people do: I threw money at the problem. I bought expensive filters and lenses. I bought Photoshop. None of these things helped. My images still looked lousy. What did help was spending $150 on a community college photography course. An amateur photographer is going to get a much better return for her money by taking a photography class (or three) than by purchasing a new lens.
• Practice, practice, practice. Too often people believe that the equipment is going to increase their skill at something — golf, photography, whatever — when actually it’s practice that will help them improve. There’s no sense buying an expensive driver if you can’t hit the ball straight off the tee. Once you’ve hit a few thousand balls (or snapped a few thousand photos), then you might begin thinking about how new equipment might further improve your strengths.
• Don’t take advice from a salesperson. Yes, she knows a lot about the subject, but in general, her primary goal is to sell things. She wants you to buy more. Instead, find a friend who can give you advice on the equipment you’re researching. Use Google. If you need advice, get it from somebody who doesn’t have a vested interest in your purchase. Once you’ve done your research, then ask for a salesperson’s help.
• Borrow from a friend. Kris’ sister thought she might want to learn how to knit. Rather than buying a bunch of equipment, Tiffany borrowed a few of Kris’ knitting needles to give it a try. She did take up the hobby, but by borrowing Kris’ stuff first, she was able to learn the ropes before shelling out her own money.
• Consider used equipment. Check Craigslist or eBay. Find a dealer of used equipment in your town. You can often find high-quality items for cheap if you’re patient and know what you’re looking for. A friend of mine recently saved 33% off a fancy heart-rate monitor simply because he was patient and willing to buy used.
• Rent! For many sports and hobbies, renting is a great way to get a taste of the high-end. How often do you scuba dive? Ski? Instead of buying equipment that will mostly sit unused, consider renting when you need it. This not only will save you space, but can actually be less expensive in the long run. Renting is also a good way to try before you buy.
• Beware a hobby or sport that is driven by purchasing more stuff. Some hobbies are simply sales pitches in disguise. I’ve written before about my own obsession with the card game Magic: The Gathering, a game specifically designed to get suckers people to spend more money. Kris was once into scrapbooking. She loved it, but she came to realize it was more about buying new Stuff than actually creating memories. Like many scrapbookers, her supplies now sit in the closet, unused.

Fancy equipment is not a panacea. In most hobbies and sports, skill is more important. Don’t get me wrong — good equipment can make your pastimes more pleasurable. But it’s difficult to know which equipment is worth the expense until you’ve gained some experience.

My photography instructor used to tell us, “A professional photographer can produce amazing shots from a crappy disposable camera. But a $5,000 camera won’t help a beginner make better photos.” This idea isn’t just true with photography — it’s true with knitting and biking, and even with running, too.

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Related Articles at Get Rich Slowly:

• Daily Links: Question Kiyosaki Edition
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• Money-Making Hobbies: Binding Books and Printing Buttons
• Best of September
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Daily Links: GRS Forums Edition

The Get Rich Slowly discussion forums generate a lot of great conversations in which readers do their best to help each other. Alas, I don’t get a chance to stop by as much as I’d like. Fortunately, forum administrator Jericho Hill has agreed to highlight interesting discussions now-and-then. This week, he recommends:

• Amyrobynne has both debt to pay down and a goal to renovate her home.  She asks, with those competing goals, how do you budget for a home improvements?
• Jarvis wants to invest in mutual funds but doesn’t quite feel comfortable.  His cousins say to invest in real estate.  The GRS community chimes in, mostly in favor of index funds for this new investor.
• Shaun wonders what to do when there’s nothing left to talk about. How do you deal with communication trouble with a spouse?  How can you communicate with someone who doesn’t have many opinions?

Meanwhile, I’ve enjoyed the following articles from around the web:

Lazy Man recently asked, “Should you put a price on your health?” He does a great job of breaking down the components of this question. What is healthy? How much health is worth how much money? What about the law of diminishing returns? Like Lazy Man, I’ve recently realized that I am willing to spend money on health, but it’s often difficult to know where to draw the line. Improved nutrition is good. But is spending $300 on a heart-rate monitor a justifiable expense?

Bloomberg reports that one-third of U.S. homeowners who bought in the past five years now owe more on their mortgages than their properties are worth. It’s easy to get down on people for getting greedy during the housing bubble, but the truth is many average folks were just shopping for a place to live. Now a large number of these folks find themselves in trouble.

Finally, Flexo at Consumerism Commentary polled his readers: Is finding $6,000 in saved expenses better than a raise? I’d take the $6,000 in savings because that money comes after taxes. As Flexo notes, you’d need a raise of about $10,000 to equal $6,000 in saved expenses. This is why frugality is so powerful. Roughly speaking, every dollar you save in spending is like two dollars you’ve earned. (Or at least $1.50.)

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Related Articles at Get Rich Slowly:

• Daily Links: Car Talk Edition
• Daily Roundup: Extreme Debt Edition
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• links for 2006-09-12