Latte Geography Factor

Things with work have been insane for the last week, so it's unlikely I'll get to tackle any big topics for a few more days. But I have been pondering conscious spending and my own personal "latte" factor today, so I thought I would post it. The basic issue is this: I love chai lattes, but feel pretty strongly that they're overpriced in general, which offends my sensibilities. I try to limit my consumption of them at all venues, but every once in awhile I splurge on one from Starbucks (I can't help it - they're so tasty!). When I was in college I used to have one after I took a final, and these days I do it if I'm having a really bad day at work (maybe 6 times a year). But the thing is that I get so concerned about whether it's "wrong" for me to spend money on it, that although I really enjoy the sensory experience, I don't have the same amount of stress reduction I should. (Today in my head I kept hearing "latte factor, latte factor" over and over in a pretend blogger's voice.) One of the things that makes me more likely to splurge is being away from home - if I'm traveling, I am more likely to indulge myself, probably because my habits are pretty good when I'm in my regular life mode. So my question is: does it justify the not-completely-stress-abating splurge if the tasty chai is cheaper where I'm buying it than when I'm at home? Just in general, is it more okay to splurge if you're away from home? I tend to do this, and on some level I think it's okay. But I'm also starting to question whether I'm frugal, or just someone who is habitually non-consumptive and comforted by the familiar status quo.

Compromise Achieved!

Well, at least initiated. The new idea is this: rather than take out a big chunk of money from every paycheck for the 401k, we instead start a Roth IRA for my husband (I'm thinking at Vanguard, because I like their index funds) to double the amount of money we can contribute to IRAs each year. The benefits of this include the fact that a) we can get our contributions back if we really need to, b) we will probably contribute to the Roths annually rather than monthly, so we will have more flexibility in the short term with higher paychecks, since we just have to find the $4000 per account at the end of the year within our total savings, c) we will have more control and variety in our investment options. The only downside is that we don't get to deduct most of it this way, but we will be diversified in terms of tax structure since we will still be doing what we need to for matching employer funds in the 401k, plus the Roths and regular taxable investments. I think this will fit our personalities better, since my husband is not one to fall for "if you don't see it you won't miss it." I'll get into why our "pay yourself last" approach works well for us in a future post.

Hardcore Retirement Savings: Help Me Convince the Hubby!

So we've been talking a lot recently about our priority list for savings. I feel very strongly that we need to prioritize retirement savings over other kinds of savings, even to the point of squeezing the present a little bit. My thinking goes like this:

We already have a downpayment on a house ready to go, and are just trying to decide whether it makes good investing sense to buy rather than keep renting and invest our downpayment in equities. Therefore we have the freedom to do what we want using just the savings we already have. I want to put our savings in the next few years, before we have kids, into retirement savings. There are other ways that we could save, and decide later what to use it for, but I think retirement savings has several distinct advantages. a) It's easier to not feel the pinch of aggressive savings if it comes out before you ever see your paycheck. b) The money will grow a lot more if we do it now rather than in 10 years; a corollary to this is that money for other more short term things won't grow nearly as much if the same savings are contributed to those "bins" instead. c) By the time we make enough money to max out our accounts without feeling the pinch (it's not even a possibility to max them out now), there won't be enough years with maximum contributions to let us reach even a modest retirement goal. Therefore we should be aiming as high as we can now, when we have no other pressing responsibilities. Besides utilities and rent, we have no other fixed financial responsibilities, and if there were a financial downturn (job loss etc) we can change our lifestyle in a hurry to lessen those burdens. When we have a mortgage and additional mouths to feed, we're not going to be able to downsize our life very easily. I feel like Ramit pretty much hit the nail on the head when he wrote a post titled It Never Gets Easier Than Now. I think now should be focused on retirement savings, even to the point where we make it a tight squeeze in the short term, and then basically allow raises and inflation to lower the burden of our monthly contribution over time so that the most painful period is the next couple of years. By then we'll be so used to saving that we will end up saving more without really meaning to, which can then start to cover other, more short term expenses. However, it's hard to convince my husband that voluntary sacrifice for this goal is going to be a good thing. He hasn't really caught the PF bug the way I have. Future posts may get more into relationship dynamics around money, since that's a big interest of mine, but for now we'll leave it that I'm having a hard time getting him to be as enthusiastic as I am.... But maybe we'll find a middle ground. As long as it's higher than our current contributions, I'll be pleased.

Strategies for being bold

As I discussed in my previous post, our current allocation is far far too conservative given our ages and the fact that we want our money to grow. However, my husband and I are still pretty new at this, and it takes a lot of thought to get from being pleased with "wow! we make more than $100 each month from interest on our savings accounts, CDs and other conservative positions" all the way to "we're losing money by being so conservative - we could be making so much more than 5% on our savings." We've already taken several really good concrete steps, including opening a Roth IRA, and taking a more proactive approach to the investments we have. However, since more than 50% of our non-retirement money is pretty liquid, I still think we're being too conservative. So, I've been trying to brainstorm ways to help both of us feel bolder. Here are some of the things I've come up with so far, and am going to try. I would also really appreciate any comments or thoughts you all might have.

1) Sell an investment (specifically this crappy bond fund we're in). This will hopefully make us feel more in control of our current investments, so that putting money into a stock or mutual fund doesn't feel like we can never get our money back. Seeing how quickly it shows up as cash in our account will hopefully overcome the out-of-control feeling once our money is "out there" in the market.

2) Discuss and decide on the appropriate amount of emergency/buffer money to keep in cash. Then we will have to be bold about putting the rest of it to work. If we can actually do that, I think we'll be okay about moving future surpluses out of our cash accounts.

3) Create a prioritized hierarchy of accounts. This goes along with #2, since I think we will be much more likely to actually follow through if there's a very simple pattern to follow. If we set specific targets for how much we want to fund each account, then we can just keep moving up the hierarchy as we fulfill each goal.

4) Go index-heavy. This was already the core of our plans for asset allocation, but by knowing that our volatility isn’t higher than the market (looking at the beta figure), and that we’re well diversified among our equities, I think we’ll be better able to avoid checking our balances too often, which we might do if we felt like we needed to check the performances of our fund managers.

Visa and Mastercard Discounts!

I can't explain how excited this post (or more accurately, the following links from it) make me. Looking through the companies that you can get discounts with just by using a particular card and having the right code, I have found at least 5 companies from whom I have made a major purchase in the past 6 months or so. I will definitely be checking these discounts regularly from now on. Some favorites include Blue Nile and Netflix. I can't wait to check them all out. Thanks, Jim!

• MasterCard Discounts
• Visa Discounts
• American Express Discounts

The conservative fatal flaw (gasp!) of this liberal couple

As I am spending more and more time thinking about our finances, and plotting how to best plan for the future, I have come to the inescapable conclusion that the major barrier between us and financial success is the fact that we're total 'fraidy cats. Or, in the parlance of economics, we are extremely "loss averse."

My husband and I have many positive qualities when it comes to financial decisions: we are happy to live below our means, and have never had problems with overspending; we are relatively similar in our approach to money, which has saved us so far from polarizing around saver/spender roles; we are both strongly swayed by rational arguments, so we are usually able to agree on a course of action once we've discussed an issue; and we are good at talking to each other about the emotional and logical components of money stuff.

However, we are also similar in being naturally very loss averse. As I have been reading more and more on the subject, I recognize and (I think) am internalizing that the fundamental basis of financial growth is taking an acceptable amount of risk to reap larger benefits. However, even as I slowly convince my emotions that we are taking unbearable "losses" by keeping so much of our money liquid instead of allowing it to grow, we as a couple have much more inertia to overcome on this front, since my husband is even more naturally loss-averse than I am.

In my next post I am going to brainstorm ideas to help us get more comfortable with risk. This blog is already a great tool, because it will force me to be accountable month by month for how fast our net worth is increasing, and hopefully face the consequences of our conservative strategy. I would really appreciate any advice or ideas that you might have to help us get into a better mindset so that we can make good financial decisions. Help me blogosphere.... You're my only hope!

: )

New Prius vs Used Prius

This post by Jim from Blueprint for Financial Prosperity is interesting - I love his devil's advocate series, but I have to say that in general leasing can't possibly be a good option for me, since I believe in driving a car into the ground. However, we may end up having to sell the car when we have kids so we can get a bigger one.

What this really made me think about was how much money we lose on buying a new car as opposed to a used one. My experience with my first car (a 10 year old Honda) was spectacular, but my husband has had some significant bad experiences sinking lots of money into repairs almost every month. When he bought his first new car a few years ago, I think he decided never to go back. Right now we don't own a car, so we'll have to agree on whatever we buy in the next 6 months or so. I wanted some real information on how much cars depreciate in the first couple of years, so I went to Kelly Blue Book and here are the numbers for the basic Toyota Prius, the car we're considering buying:

new Prius 22,339
2006 Prius 20,720
2005 Prius 19,360
2004 Prius 18,000

All of these are for the basic version of the car, despite the fact that if we buy it new or used we will be looking to add a few options. But I was too lazy to figure out and fill in the exact things we might want. I am therefore assuming that a better options car won't lose all of its added value as soon as it's driven off the lot. Generally I would think that a better stereo or whatever is good for the resale value. So the breakdown is:

Year 1 -1,619
Year 2 -1,360
Year 3 -1,360

This suggests that the loss the moment you drive it off the lot is $260, which seems like a totally reasonable amount to pay for the extra year you get before you have to start paying major repairs. The way that I think of this is that since we're planning to drive this car into the ground, we are paying for the car's whole aging process over the years that it needs more and more repair work. If we buy one that's a couple of years old instead of a brand new one, we will still have it for years 3-10 or whatever. You're paying the premium for the early years when hopefully everything works right. With most cars, the first day or so "costs" the most, because that's when the biggest depreciation happens, so if you find a fairly young used car, you save a lot of money skipping the "expensive" first year. However, it seems like the Prius is different, because its "new car premium" seems to be only $260. This could easily be a good price to pay for the relative lack of hassle of being able to buy quickly and without the uncertainty of finding the right car in the right color with the right options in the right area when we want to buy it. Not to mention the value of getting all of those things just right, so we don't have to make tradeoffs between mileage, color, distance from us, etc when deciding which car to buy. Instead, we can put (hopefully less) energy towards finding the best deal from the dealerships in the area where we want to buy it.

The question of whether a $22,000 car is really worth it when we could buy a used Honda Civic (or even a new one for $16,000) is a completely different one that I'll cover in another post.

Do any of you have any opinions on this question of buying used or new? Do you have any thoughts or experience with the Prius specifically?

Retirement savings and behavioral economics

This article on behavioral economics and the pension reform act talks about the behavioral economics perspective that went into the 2006 pension reform law. The key points relating to retirement savings are that behavioral economists apply the following concepts to the act of saving for the future:

Status Quo Bias - basically the fact that we have a lot of inertia in our actions, which means we're less likely to sign up for a retirement plan, even though we know it's a good idea. The upside of this is that we're also more likely to stay enrolled in a retirement plan and continue our contributions if we are automatically signed up by our employers and have to opt out to stop. This is definitely true for me, since I took multiple years after I decided that it was a good idea to actually start my Roth IRA. And it still probably wouldn't be done if it had required mailing anything. However, the new law allows employers to automatically enroll employees (who can opt out, so it's not forced saving), but it doesn't require the employers to set things up this way. Am I just cynical, or does it seem like the incentive will be against employers setting up these automatic enrollment schemes? I mean, most employers contribute to your 401(k) only if you make contributions as well, right? Which means that by making enrollment automatic, they set themselves up to have to contribute far more if the plan works to get people to save for retirement who weren't doing so before.

Loss Aversion - the idea that loss is felt more acutely than gain, leading us to be more pained by a loss than we would be pleased by an equal gain. For a lot of people that's why automatic contributions before they ever see their money is preferable to manually shifting a portion of your paycheck into savings. It's also one of the reasons why automatic enrollment will hopefully help people to save more for retirement: if you start out getting your whole paycheck, you will notice and be pained by the change when you start getting less each month to spend. However, if you never see the original paycheck amount, you never feel the loss.

Endowment Effect - the idea that we value things that are more immediate (the dollar in the hand) more than we do equal things that are less immediate (the dollar in the future). This means that we feel the gains that compound interest and growth will act on our retirement dollar are discounted due to the money's lack of immediacy to us. This is a way that we act "irrational" as economic beings, but I would argue (as would the recent NY Times article on saving less for retirement) that there is good reason why in this instance we value a dollar more now than we do for our future selves. We have no guarantees that we will live long enough to enjoy the money we have invested for retirement. This doesn't mean we shouldn't save, but I think that it's in some ways accurate that enjoyment that you get from spending money in the present is valued at a higher level than enjoyment that your future self will get. Otherwise, we should all be following the example of my 20-something friend who makes <$30,000 per year, but saves much more than half of it for future nonspecific plans, while refusing to buy basic necessities or travel to visit family. He is right that money he saves now will buy more 40 years down the line when it has (hopefully) grown, but most people would agree that it's crazy to give up too much of your present happiness to feel secure in a future you may not get to.

Decision Paralysis - the concept that when faced with too many choices (particularly complex ones) we are paralyzed by indecision. This also leads us to make overly conservative choices when forced to choose between paralyzing arrays of options. I see this clearly in our approach to investing thus far, since the $5,000 in my Roth IRA is the only money that we have purposely made the decision to invest, and chosen where. Due to status quo bias, all of our other money is currently in whatever form it came to us - savings in a savings account (albeit a high yield account or CD), mutual funds and stocks in an investment account almost exactly as they were given to us. But even though we know that we are being way too conservative with so much of our money in cash, the number of investment options makes it seem like there are almost an infinite number of "wrong" ways to invest it. So it continues to sit in our ING account, as we discuss ways to force ourselves to move it into more aggressive positions.

Hyperbolic Discounting - this is related to the endowment effect, but is more specific to the "lack of immediacy" brought about by time. It describes the diminishing valuation of things as they get farther away, so that an impulse buy today seems so much more satisfying than the goal of buying a vacation home in retirement.

All in all, the article makes me like the pension reform law, since it seems like the approaches it allows will actually get more people saving for retirement. I also find myself liking this approach to economics. On the whole, I'm not a fan of economics, since it seems like a field where little is demonstrated empirically (ie not a real science), but a ton of weight is given to its results in deciding policy. I find myself much more hopeful about the results of economic analysis when they take into account data on how people actually behave. I was also pleased by the critique of unregulated markets as a way to solve social policy problems. Does anyone have any other opinions on this article?

To Buy or To Rent, Part II

I've been giving more consideration to whether to buy or rent, since I talked to my mom about how much you can expect a house to appreciate in a few years. She was of the opinion that a single family house is a better investment than a condo, which I think is right. However, in the market that we are planning to move to, we probably can't afford a house in a good location. We could do it with less traditional financing, but I hesitate to put down less than 20% as a downpayment. I also came across this article from US News and World Report, which suggests that buying for only the next few years may not be a good idea:

"No matter what your situation, housing experts say that almost everyone needs to dial back expectations for appreciation in the future. Most say real estate should remain the solid investment it has been over the past 30 years, with values rising just a bit above inflation--hardly the get-rich-quick formula many have recently followed.

'We're entering a period where people need to follow the sort of old-fashioned rules their grandparents lived by,' says Christopher Cagan, research director at information provider First American Real Estate Solutions. 'Buy a house when you plan to settle down for a while, and don't think of it so much as a financial investment as a place to invest in your life.'"

My major concern with this is that because of my career (which will take me unpredictable places every few years for the next 10 years or so), we may be having kids before we're settled geographically. Somehow the idea of renting with kids seems much less appealing than renting while it's just the two of us. But then again, having an "investment" property that we have to deal with from afar while we wait for it to appreciate, while also having kids, seems like an absurd idea too. So I will continue to mull it over. Comments extremely welcome!

Goals for 2007 and overall

Having discussed our goals with my husband, I think I'm finally ready to put them down on paper (data).

And in the end, it seems best to start simple (if a little high in the aim).

1) 1% growth per month, with the goal being 12% growth this year.

That's it. It's going to be a challenge given how much of our money is conservatively held in high yield savings accounts or CDs, but I think a challenge is just what we need to clarify our goals and help us push our conservative boundaries.

More calculations to come on what it will take to make it happen. Onwards and upwards!

Charles Schwab customer service rocks my socks!

So, this story doesn't reflect very well on me, but it definitely makes me happy that my Roth IRA is at Schwab.

The backstory is that I have a regular investment account with them and recently started my Roth IRA there (after years of telling anyone who would listen that they should get one). Today I moved some money from my checking account into my Roth IRA and was planning to buy some stock. (My first stock purchase, but that's also another story.) Unfortunately, the way that their online setup works, it's very easy to toggle back and forth between your accounts. Normally I love this, but today it caused me to make a HUGE mistake. I bought the stock in the WRONG ACCOUNT, which meant that I unintentionally borrowed money from Schwab since there was no cash in the other account. Ay de mi! I was freaking out, because when I checked, it turns out that the interest rate for borrowing to buy stock this way is more than 10%. I was having a minor freak out, when my husband suggested I call them to "take it back." Of course I scoffed at the suggestion that you can "take back" stock trades. But I called them anyway, mostly to find out if anything bad would happen tax-wise if I sold the stock again immediately. The nice man they connected me to not only fixed the problem (who knew they could do that? He switched the stock into my other account, with no evidence that I ever made the mistake in the first place), but he also told me to take a deep breath and assured me that everything was going to be fine. Two lessons learned: 1) be careful about which account I'm in, and 2) don't make a move before calling them, and actually trust customer service when I screw up. This is not a conclusion I would ever have drawn before today.

To buy or to rent?

As I mentioned earlier, we are planning to move to a new city in about 6 months. We have been saving hard for a downpayment on a condo (can't afford a house yet in this area), but now that we are in a position to put down 20%, I am questioning whether it's a good idea. I found some of the points in this post by Jim from Blueprint for Financial Prosperity to be really helpful in thinking about whether it's the right thing right now, and I'm leaning towards continuing to rent. My reasons include these:

1) We will be moving again in 2-6 years, and it's more likely to be on the 2-3 side. It seems unlikely to me that a condo will appreciate much in the next 2 years given the housing market.

2) This means that we won't make much on the investment, since the money we save on lower payments as opposed to rent will be cancelled by closing costs, selling costs, condo fees, etc.

3) The same downpayment money could make a better return if we invested it, or even if we stuck it in a CD or our ING account, if we assume that the money we lose on rent is the same money we would lose on interest, closing costs, selling costs and condo fees. This is the major point that makes me want to rent instead.

4) We are in a low tax bracket, so the deduction on the interest won't make a huge difference.

5) It would be a huge pain if we had a lot of trouble selling when we leave the area, since both of our schedules would be pretty tight in terms of needing to be moved into a new city on time.

6) On the other hand, the area that we will be living will continue to be popular, and we expect the housing market there to increase over the long term. Maybe renting it out even though we would be moving out of state could be a good investment, given that it's a condo, so the upkeep shouldn't be as difficult from afar.

7) The next place that we move has a 50% chance of being more permanent, but could also be a 4 year move or so, so investing in our first city wouldn't necessarily interfere with any near future plans to buy a primary residence somewhere else.

8) We would be buying the condo at the low point of this particular market, and although I don't know how to predict how fast prices will rebound, I expect that if we have 6+ years to hold on to it (2+ living and 4+ renting it) that it might appreciate by then.

What do you think? Any and all advice would be appreciated. For us there are no major emotional issues associated with this decision, instead we're just looking to do the most fiscally responsible thing. Taxes vs. landlord vs. mortgage company - it doesn't matter to us who we're paying, as long as we're optimizing our financial position.

Net Worth February 2007

Okay, so some actual figures. (This is before the financial goals list - seems a little out of order, but whatever).
I only calculate combined net worth for us as a couple, because all of our money is "ours" at this point. We have separate credit cards, which is nice because we don't see one another's individual purchases, but that's it.

Figures as of Feb 2nd:

Husband's 401k ------------------------------------------------ 29,887.59
My Roth IRA ---------------------------------------------------- 2,058.16
Nontaxadvantaged investment account ------------- 32,793.81
Exxon stock ---------------------------------------------------- 7,554.00

CD --------------------------------------------------------------- 25,000.00
ING Direct savings account ------------------------------ 14,243.71
Regular checking account -------------------------------- 5,452.31

No debt! : )

Net Worth ================================= $116,989.58



I can't believe this is actually true, but it looks pretty good sitting there. Upcoming expenditures will definitely cut into it a lot, but it's a good position to be in, I think.

Being a good person

Just wanted to post an article by Peter Singer in a recent NYTimes Magazine. His argument that we have a responsibility for those less fortunate than us fits pretty well with my personal ideas. Although a lot of his other work (on animal rights) is complete crap in my opinion, this article is definitely worth reading. I was also interested in his response to reader questions, where he pretty much said that it's okay not to contribute as much to charity if, as a result of taking a job that helps others, you don't make much money. I wonder sometimes if that's just a rationalization I use, or whether it's really okay to think that way.

I can't figure out how to link to the article, since it's only available to TimesSelect members. Since I can't find the equivalent of LJ-cut (something my sisters use a lot) or make sense of the complex CSS and HTML code that appears to be necessary to hide the text of the article until you click on it, I'm going to go with a lower-tech version and link to a different page. If people who have more experience than I do with the technical side of this have any advice on how to hide text behind a link, I would be very grateful. I got lost at "finding your style sheet" in the help pages for this.

Career Thoughts

It also occurs to me that if you're reading this blog it's important to understand the values that my husband and I base our lives on. Not in some cosmic sense, but our careers have a direct impact on our earnings power. We both have advanced degrees, but have chosen careers that are a) personally satisfying, and b) somewhat good for humanity. The combination of these things means that our salaries are low, and we expect that this will be true for at least the next 10 years. We won't be retiring in our 40s (or 50s!), but because we find our careers satisfying, I think that we will be happy working for most of our lives. We also plan to have children someday (not within the next couple of years), and that almost automatically means that we'll be lucky to retire in our mid 60s. However, we're starting to save for retirement relatively early, so hopefully it will happen at some point.

First Post!

Hello to no one : ) I just made my husband promise not to tell anyone we know that I started this blog, so there is literally no one to read this. My reasons for starting this personal finance blog are:

1) To make my financial goals explicit, on the theory that this will help me achieve them.

2) To learn more about personal finance, and get advice on my specific circumstances.

3) To have a place to discuss financial matters so that I don't talk my husband's ear off about this new obsession of mine.

So that's the idea. I'm hoping to keep this blog anonymous since it's about our financial life, but it seems like I should say a little about myself. I'm 24, and my husband is in his early 30s. Our financial position will be fleshed out in a future post, but overall we're just starting out. No house, no car, no kids, and at the moment we don't make much money. In about 6 months our situation will change a lot, since we will be moving to a new city - this will involve a new place to live, at least one car, and a new job for my husband with more money. Okay, that seems like plenty for a first post. All that's left to do now is "publish."