Gen Y - Retire Rich!

Post #92 - More Ways to Save Money!

Post #92

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

More Ways to Save Money!
Drive slower and use cruise control.  Here’s a good link. Take it easy and get 30 percent better mpg.  Of course, if you do this on the LA Freeway or the DC Beltway, you may get punched or your car may get forced off the road by the absolutely insane people who use those roads.  So factor in the cost of a few medical bills and getting towed from a couple of ditches as you are calculating your potential savings.

Going slower saves lives, also.  That is an absolute, indisputable fact.  More than 40,000 people are killed in traffic accidents each year.  A large percentage of these accidents are speeding related.  So go slower!

Lower your house thermostat in the winter and keep the AC warmer in the summer.  You can deal with an indoor temperature of 75 in the summer and 65 in the winter.  Here are some other AC tips: Save Money on Air Conditioning Costs.

And here are some heating tips: Heat Your House for Less.

I note of caution.  I am typing these words with cold, stiff fingers because my spouse has taken the “Heat Your House for Less” ideas to an extreme.  It’s a brisk November day (yes I write a lot of posts in advance) and the thermostat is set lower than a salamander’s navel.  She doesn’t have a problem with this, because her hot flashes keep her perpetually warm.  But unless I am sitting nearby, catching the excess heat her body throws off, I am shivering.  So if your spouse is a zealot about saving money, you may need to wear sweaters, warm socks and gloves in your living room during the winter. 

Sometimes this works to your advantage.  My mother and my mother-in-law don’t like visiting in the winter because they can see their breath when they sit in our family room, eating dinner off snack tables while watching Jeopardy.  Or maybe they don’t like eating off snack tables.  Ours tend to wobble a bit, especially when the dog runs by.

During the really hot days of summer, when the AC is still not turned on, I have a refuge.  I retreat to our dark and dreary unfinished basement (where large spiders and other nasty things lurk among the flotsam and jetsam we have collected all these years).  It’s cooler down there.  Despite the fact that I have to battle radon fumes and nasty critters while I am down there, my basement oasis is always a comfort on the really hot and sticky days.

Don’t use as much electricity.  Here are some ideas: How to Save Money on Electricity.

Post #91 - Save More Tomorrow – More Excellent Advice

Post #91

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

Save More Tomorrow – More Excellent Advice
Here’s a good link for you to ponder. Why Generation Y is broke - MSN Money

Now you know why it’s important to read this blog and act on my advice. 

I just read a book written by Richard Thaler and Cass Sunstein.  It’s called “Nudge”.  For those of you who know Yiddish, this is not “noodge”.  Noodge means to bother or be annoying.  It’s what my wife says when I keep trying to disrobe her while she’s cooking.  “Don’t be a noodge, the dinner will burn!”  There’s something about the smell of sautéed zucchini that turns me on.  What can I say?

Anyway, back to “Nudge”.  The authors studied 401K enrollments and found that 30% of eligible employees did not sign up.  Most of these people were younger employees, or poorer employees, or less well educated.

They came up with a few good solutions to the problem.  Simplify the enrollment process by giving the employees a box to check for 2% contributions, another box to check for higher contributions, and a last box to say “NO”.  Make the employees fill out the form before they get paid for the first time.  No form, no pay.  This forces people to make a decision.  In companies that tried this trick, most employees decided to join.

The next step was to try to force people to contribute more money to the 401K.  People tend to stick with the “default contribution rate” of their 401K, which is usually low.  They need to save more so they will have a big pile of money when they retire.  The Save More Tomorrow program, offered by Vanguard and other 401K administrators, is designed to overcome this inertia.

The way it works:

• Employees are encouraged to increase their savings rate today by increasing the percentage of their contributions.
• If they don’t want to increase the percentage today (because this would amount to a cut in pay for them), they are given the option to increase their contribution by 3% every time they get a pay raise (until they reach the max).

It turns out that 78% of those who were unwilling to increase their current contributions decided to go with the second option.  Apparently, from a psychological viewpoint, it is easier to get people to commit to some form of self control if it occurs in the future.  And since this particular option won’t result in a decrease in take home pay (assuming the people get raises that are 3% or higher) the second option seems to be a no-brainer for them.

So, if you are having trouble saving the maximum in your 401K, ask your employer to institute a Save More Tomorrow program.  You sign up for it once, and it goes on auto pilot.  If your employer can’t offer this option, maybe you can get the human resources people to automatically increase your contributions every pay raise by sending them an authorization letter ahead of time.  This is still better than forcing you to remember to change your contribution rate each time you get a raise.  Because let’s face it, you probably won’t up your contribution when you get a raise.  Your mind will already be spending the extra money.  Save More Tomorrow works because the program puts you on auto-pilot.  Auto-pilot is good, when it comes to making hard decisions.

Post #90 - A Great Way to Save Money – Good Advice from Dan Ariely

Post #90

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

A Great Way to Save Money – Good Advice from Dan Ariely
I’ve been reading books and articles about how and why humans make silly (often dumb) decisions.  One book, “Predictably Irrational”, written by Dan Ariely, had lots of interesting ideas that can be applied to your own struggles to save money and invest.  Professor Ariely taught at MIT when he wrote this book.  He’s now at Duke.  He has done a lot of thinking about The Hidden Forces That Shape Our Decisions (which is the subtitle of his book).

In one experiment, Professor Ariely told a class that they had three papers due for the semester.  One paper had to be submitted in four weeks, the next in eight weeks and the last in 12 weeks.  No flexibility with these schedules.  He told another class that they could submit the papers whenever they wanted.  The class that had the strictly enforced guidelines got a better average grade than the class with no guidelines.  These were MIT students, by the way, so we can assume they weren’t slackers.  But some of the kids in the “no guidelines” class could not enforce enough discipline to space their writing over the course of the semester.  Because they rushed everything at the end of semester, their work was inferior.  Their grades were lower, and thus the average grade of their class was lower than the class that had been forced to write a paper every four weeks.

This has a great application for saving and investing.  It tells you that forced savings will work better than voluntary savings.

This is why so many advisers recommend that you PAY YOURSELF FIRST when you are paying your monthly bills.  Check this link: Pay Yourself First.

An even better way to save is to automate your savings.  Ask your employer to deposit your paycheck directly into a bank account or a money market fund.  If you are participating in a 401K, make sure your employer automatically deducts the 401K contribution before he even deposits the check.  Tell your bank, or money market fund, to automatically take X% of that money and move it into your IRA and put another Y% into your taxable investment account.  This will make it impossible for you to spend the money, since it has already been saved for you.

I’m sure you’ve heard all this before, and I hope most of you are following these suggestions. 

I really enjoyed reading about Professor Ariely’s experiment.  I always had a problem spacing out my work in college.  Things came up that seemed to be more important than that term paper I was supposed to be creating.  And when I was working, I had a tough time saving money.  Something always came up (usually the need for beer) that seemed to require the money more than the savings account.  I feel better knowing that I’m not a slug.  There really are hidden forces that shape our lives, so I’ll blame those forces for my past problems.

Luckily, I married someone who saved me from a life of spending.  My wife is a big saver.  We adopted the really good trick of writing down everything we spent, every day.  We did this before we went to sleep each night.  This isn’t too great for your sex life (unless you are really into accounting).  But it does keep you aware of your spending habits.  At the end of the month we had a big ledger of our expenses.  This was before personal computers and spreadsheets and software to automate your finances.  You could do it much quicker nowadays.  The act of writing down our expenses made us acutely aware of how much money was leaving our pockets, and this helped us save more.

We are still frugal (cheap).  Sometimes I get wistful and think how nice it would be to have a second computer for the family room, and a big flat screen TV with cable!  I never got to see “Deadwood” or “The Sopranos”.  How am I ever going to see “Dexter”?  But the bottom line is that we really don’t need that stuff.  So we save our money for the things we love, like vacations and eating at nice restaurants.  You know, the ones where you don’t have to bring your tray back to the counter when you leave.

Post #89 - George Soros Versus Warren Buffett

Post #89

Part 4:  Good Advice, Bad Advice, and News About Investment People (continued)

George Soros Versus Warren Buffett
Here’s an interesting article about Value Investors.  

The Buffett Way: Time for a Rethink?

Since Buffett is the most famous value investor, his name gets into the title of the article.  

To get the gist of the article, all you have to do is read the last paragraph.  The author says that Value investors, just like Growth investors, will get hurt in a declining market.  And both will benefit in a rising market.  Well D’uh!!

I haven’t talked too much about Value versus Growth styles of investing.  This blog focuses on owning a number of asset classes, using index funds to keep costs down, and rebalancing yearly.  In theory we are selling asset classes that have been going up and buying asset classes that haven’t.  This is a buy low, sell high philosophy, more than a value investing philosophy.  I’m not sure value investing even applies to what we do, since we are buying and selling asset classes rather than individual stocks.  Growth investing doesn’t apply either.

This article shows you a lot that is wrong about financial reporting today.  The guy focuses on the fact that Buffett, and other value investors have lost a ton of money in the last year or two.  Does this mean value investing is bad?  Does it mean that over the long term value investing is not as good a strategy as growth investing?  Does it mean that Buffett has lost his edge?  Who knows.  Two years is too short a time frame.

But the author has to write something, so here’s your article.
I offer another article about Buffett.

Warren Buffett Tells Shareholders He Did "Some Dumb Things" In 2008

Please read this article in detail to get a feel for how Buffett thinks.  As you can see, Buffett makes mistakes.  He lost money too.  But he’s a long term investor, so he’s not panicking.  Unlike just about everyone else, he sees the current problems as an opportunity to buy stuff at cut rate prices.  I want all of you to be long term investors.  Which means you have to look beyond this year.  Invest for a future that’s forty years away.

Let’s switch gears.  Here’s an interesting article about George Soros.

Soros: The Recession Will Last Forever

How much should we believe this guy?  He earns his money by trading.  Does he make these comments to purposely try to move the market in one direction or another?  We’ll never know.  

And what about his explanation about when he knew the market was going to turn.  Because he had back pain.

Is he kidding?

OK.  Soros has a lot of money.  So he must be doing something right.  But I don’t think he’s made all that money by relying on how his back feels.  

The moral.  If you have to listen to someone, listen to Buffett.