Ok, so for my first (and possibly only) post of 2010, a net worth update. It's worth trying to figure out how we've been doing on this net worth thing since I started paying attention. So, without further ado, my net worth at the beginning of 2010 compared to February 2007. Not up in total, despite getting lots of money for our wedding, but mostly because of the stock market and buying our car. However, I am proud of how much we have contributed to retirement accounts in the last 3 years (retirement savings is up more than $25,000!). Although some of that money has disappeared into lower stock prices, we have maxed out our Roth IRAs for the last few years, and do have something to show for it. Yay!
Husband's 401k (no contributions) --- 27,579.44 (down from 29,887.59)
My Roth IRA -----------------------------------16,421.69 (up from 2,058.16)
Husband's Roth IRA---------------------------14,047.12 (up from zero)
Investment account -------------------27,000 (down from 32,793.81)
Exxon stock -------------------------------------6819.00 (down from 7,554.00)
CD ---------------------------------------------------0 (down from $25,000)
ING Direct savings account -------------------15,300 (up from 14,243.71)
Regular checking account -------------------1,755.00 (down from 5,452.31)
No debt! : )
Car (bought used). Since we're not planning to sell the car at any point, I don't count it towards our net worth. But technically if we needed to, we could sell it and buy something cheaper/older.
Net Worth =================== 108,922.25 (down from $116,989.58)
Tuesday, January 12, 2010
Monday, September 8, 2008
Long time no see
Now that I finally live in the US again, I'm happy to be restarting this blog. Our jaunt abroad (and especially the process of moving back) definitely depleted our savings, but my husband and I are excited to get back into saving mode. I plan to discuss our current finances, but will also throw in posts about financial life for Americans living abroad. If you have specific questions please email me.
Wednesday, February 28, 2007
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.
Friday, February 23, 2007
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.
Thursday, February 22, 2007
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.
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.
Monday, February 19, 2007
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.
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.
Sunday, February 18, 2007
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!
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!
: )
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!
: )
Friday, February 16, 2007
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?
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?
Thursday, February 15, 2007
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?
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?
Subscribe to:
Posts (Atom)