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April 30, 2006

Help Spending More?

By way of FMF I read a Money Magazine advice column written for a person who wanted help spending more:

I'm 26 and I'm a compulsive saver. For the past five years I've saved over 70 percent of my net income, and I don't make that much. I track all my spending and have tried to budget "minimum" monthly spending levels, but I can't seem to meet them. I don't consider myself cheap, just frugal. And all my hobbies - music, games, sports - tend to be low-cost. Do you have any suggestions on how I can spend more money?

This threw the columnist off balance, who noted:

I've gotten loads of people asking me to help them save more money. But I can't recall another plea from someone asking them how to spend. With most people, the spending comes naturally, too naturally.

Are compulsive savers really so rare? I've self-identified as one of these people, and my progress has been very slow. I've come to realize that a large portion of my "problem" is that I don't enjoy shopping.

For example, I still have a virtually empty room in my house. It holds my digital piano and some music books and that's it. I can imagine turning that into an entertainment room: big television, entertainment PC, comfy seating, video game consoles, board/card game table, and probably more.

But it would be a lot of work to buy all that stuff. It would take many hours, probably over several weekends, and I wouldn't enjoy that time. I suspect I would dislike it quite a bit. I'd rather spend my leisure time doing things I enjoy. And since shopping isn't one of those things, I don't spend much money.

I think what I need is someone to go shopping for me, and to set up the things that they buy. A sort of general contractor who buys things I don't want to shop for. I realize that in some circles these people are called "wives" but I've got a bootstrapping problem there: I'm not very keen on that sort of "shopping" either.

Part of the popular imagery of being wealthy is having personal servants. I don't know how to hire one. Especially as it would only be a part-time job.

April 29, 2006

Net Worth Report - End of 04/06

As I mentioned last month, I haven't been valuing my home accurately. I've been using the estimated market value from my property tax assessment, which I knew was undervaluing my home based on recent transactions among similar homes in my neighborhood. I originally decided to use my tax assessment because it was the only objective number that I easily knew how to find. I've decided to change this because I believe Zillow's figures are reasonably accurate in my neighborhood. (I don't think the numbers are great, but they're better than my tax assessment.) This caused a giant leap in my home equity and is the main reason why this month's figures are so much higher than last month's.

There are a few other adjustments to be aware of. (Sigh — I wish there wasn't so much noise in my figures…) Kelley Blue Book now provides used car values for 2006 vehicles, so I can properly estimate my car's value as a 2006 instead of as a 2005. Another thing to note is that this month's report reflects some stock options and restricted stock I got as part of this year's raise (but these are not included in my "adjusted" net worth.) I've also changed how I'm modeling the appreciation of my home, reducing the rate from 4% to 2%.

One-time adjustments aside, it was also an excellent month for my investments.

Net Worth Figures
Category03/0604/06
Total$359,910.20$441,735.11
Short-term$19,153.33$15,933.36
Medium-term$76,238.67$100,702.26
Retirement$152,016.97$155,021.45
Property$112,501.23$170,078.04

Recall that I'm defining "Adjusted Net Worth" as net worth excluding the value of autos and unvested stock. The "Estimated Contribution" is how much money I believe I'll need to invest in order to meet the following month's ANW target. A declining EC indicates that I'm ahead of plan, and an increasing EC indicates that I need to save more in order to reach my long-term goal.

Due to this month's large one-time adjustments, month-over-month comparisons aren't useful. But I'm reporting the numbers anyway.

Goal-Tracking Figures
Item03/0604/06
Adjusted Net Worth$335,018.70$404,754.46
Next Month's Target$337,620.57$407,039.38
Estimated Contribution$711.52$331.06

My credit card balances are 100% backed by time deposits and/or savings accounts earning interest at a higher rate than I'm being charged by the credit card companies. The monthly payment is estimated as 2% of the balance. (Most credit cards are now using a 2% minimum payment, and due to this it is important to have a strong cash flow and/or pay with funds from your credit card arbitrage savings account.)

Credit Card Arbitrage Figures
Balances @ 0% APR$31,444.72
Balances @ 1.9% APR$14,165.77
Total Balances$45,610.49
Monthly Payment$912.21

You can keep track of other personal finance bloggers at NetWorthIQ. I've updated my entry there.

Sorry for the Absence...

Yeah, I haven't posted anything in the past two weeks. I'm back now. The absence is explained by a business trip I took last week. I misconfigured my firewall before I left, so I didn't have access to my home computer while I was away. And during the week before the trip, I was working extra hours and generally tired when I got home so didn't have any strong motivation to blog.

I spent four days in Santa Clara, California, running amok (in a friendly way) with a cluster of my co-workers who traveled from around the globe to be there for a frank exchange of ideas (in a friendly way). We spent our last day meeting in the Robert Noyce Building, Intel's headquarters. The lobby is very nice.

Santa Clara is a funny place to drive. People will pull out onto a six-lane divided road and stop perpendicular to traffic, blocking two lanes, before reversing course and backing off the road. You'll have to slam on the brakes to avoid hitting them. Also, wherever it looks like a lot of people might want to turn somewhere, that turn will be prohibited and it won't be obvious how to get where you want to go. Also, every time you put your car into reverse to leave a parking lot, a car or pedestrian will appear behind you. And they might be in a super hurry, honking at you as you start to back out and bounding over the curb because they have better things to do than drive within the lines. I studiously avoided being the driver.

Also, if I'm drunk and I play poker I get a lot of straights.

April 17, 2006

Management Matters

One of the shortcomings of a typical education in America is that the schools do not discuss the role of management in business. I presume that business schools at the college level do this, but it happens nowhere else. To the extent management is discussed at all, little if anything positive is said, and most students (and I count myself in this group) are given vague intimations that management is something unproductive and possibly sinister.

Hogwash. Management is both productive and important. For obvious reasons I have no interest in blogging about the management chain at my employer, so instead I'd like to share an example from my experience as a consumer.

I enjoy pizza. During my stay in college it became a regular part of my diet (common for a college student, I'm sure!) and — creature of habit that I am — I continued eating it after graduating.

My preferred vendor is Pizza Hut. They make a mighty tasty pan pizza, and they're consistent and ubiquitous. They're definitely not the least expensive, but the quality is more than worth it.

Pizza Hut and I go way back. Through their long-running Book It! program promoting youth reading, I was exposed to the food and the brand many times, setting me up to become a serial consumer in college. I have great respect for this program and, critically for our purposes here, the management decision to create and to continue it despite the number of free pizzas it has cost them over the past twenty years.

I have been a very loyal Pizza Hut patron, usually buying pizza there about twice a week. The employees at my local store know me very well. I get perks: discounted pizza, news about how business is going, and some other things that I'll leave as mysteries. They really like me. :)

For the past two and a half months, I've been boycotting Pizza Hut. Why? Every few months my team at work gets together to watch a movie. And we eat pizza. These are large orders, feeding about twenty people. I decided to boycott Pizza Hut because three of the last four times we placed a group order, they somehow screwed it up. The last time they both charged me the wrong price and forgot to deliver plates — so we had twenty people eating pizza on paper towels. They were able to correct the price the same day, but I was extremely upset about not having plates.

(I've told some people that they screwed up the last three orders. Reviewing my records, that's not right. The most recent two were wrong, the one prior to that was right, and the one prior to that was wrong. Sorry for any confusion.)

When I placed the order, I had written everything down in detail, and left the information with them. I was assured that everything would be right. What actually happened is that the person who was working on the morning of our delivery was not told about the written instructions. Those were folded up and shoved somewhere out of sight. He only saw what was in the computer, which was incorrect.

When someone places a "future order" at a Pizza Hut in my area, it's always sent to the metropolitan call center, because for some dumb reason the computer systems at the individual stores are only able to process same-day orders. When my order was sent to the call center, they didn't mention plates … so I didn't get plates. And they didn't mention the price … so I got the wrong price.

There was a change in management around the end of last year, and I noticed a gradual deterioration that culminated in my badly botched group order. (I think that both of the most recent errors were under this new management, but I'm not sure. My memory isn't that good.)

My team is coming up on another movie day, and they still want pizza, so I finally went back to Pizza Hut to talk to the management and see if they could get it right.

The old manager had returned! ("Meet the new boss, same as the old boss?") And yes, he was happy to see me. He realized that I had gone missing and learned from the other employees about the botched group order. Notice that they knew correctly why I was gone even though I hadn't said anything — I just stopped showing up and they figured it out. They were paying attention.

The waitress who was there at the time was also happy to see me. She started walking by, stopped to do a double-take, smiled, and asked "how have you been?" I'm not sure when I became a celebrity but it's good to be appreciated.

I didn't get the full story from the manager about why he's back, but I did get the impression he's working to rebuild business volume that had recently been lost. Lest you think that sounds unlikely, over the years I have definitely noticed a correlation between management quality and the busyness of the store. I'm in a good position to notice these things because there have been many changes in management over the past several years. And after talking with the manager, I'm completely confident that our next group order will be handled with the utmost care and that it will be completely correct.

Management that cares about customers gives those customers confidence in the business and a reason to do business there again. Good management knows that there are only two kinds of people: repeat customers, and people who could become repeat customers. I'm happy to report that good management has returned, so my boycott is over.

And I got a half-price pizza to welcome me back.

April 12, 2006

The Solution to Illegal Immigration

The country is abuzz with debate over the issue of illegal immigration. And I agree that it's a serious problem in need of a serious solution. Here's my modest proposal:

  1. Think of "illegal immigration"
  2. Strike out one word, like this: "illegal immigration"
  3. Problem solved

I consider illegal immigration to present two basic problems. First, we can't check the backgrounds of illegal immigrants. It is proper to exclude, for example, violent criminals and people who are anti-American. Second, the good people who illegally immigrate are — to twist a phrase :) -- second-class citizens. No good person should live in constant fear of a government bent on making their lives more difficult.

If we take the "illegal" out of illegal immigration — that is, if we make legal immigration easy and streamlined — both of these problems subside. The first problem is eased because the number of people sneaking across the border would decline substantially, making apprehension and processing easier. The second problem is eased because immigrants will be operating fully within the law and therefore have nothing to fear.

Notice that I don't object to illegal immigration for economic reasons. I believe illegal immigration has hugely benefited the economy — they want to work here, we want to employ them, it's win-win and just another instance of the benefits of globalization. Restricted immigration is inherently protectionist and ipso facto harmful to the economy.

(Two warnings: I've mentioned the benefit to the economy; the effect on the government's finances is not obvious. Also, be careful to avoid Simpson's paradox when you look at economic statistics. We can all be better off even if the average wage falls&hellip)

When we change to an open borders policy, we should also offer amnesty to those already here — but out of fairness we should give priority to those still outside the country who have been following the previously more strict process. Amnesty is a practical reality in any case; it would be totally infeasible and an egregious economic harm and an outrageous squandering of money and resources to deport millions of people.

If people want to come to America to work, we should generally let them. (Especially if they're highly educated!) If they want to become citizens too, that's great. We should extend citizenship to people who believe in the principles underlying the Constitution.

Say "no" to violent criminals and the anti-American. To the rest, lift the lamp beside the golden door.

April 11, 2006

Gold and Silver Prices

Spot gold has finally topped US$600/toz, and spot silver is at US$12.85/toz. Gold reached $400/toz in 11/2003 and $500/toz in 11/2005.

The recent rise in silver has been phenomenal — up 50% in six months — and is at least partly attributable to the expected launch of a silver ETF.

Gold breaking US$600/toz

Silver at US$12.85/toz

Although I'm pleased with gold's performance, I naturally wish I had bought more silver instead, and I'm conflicted over whether or not to buy more at these prices.

The real star of the precious metals has been palladium — up 75% in six months.

April 03, 2006

How I Learned to Stop Worrying and Love the Future

UPDATE 2006-05-08 05:38:24 UTC: This post has been edited and extended to an essay here. I'd prefer that you read and link the essay rather than the post below.

Shit happens. And it happens to good people. Will it happen to you? How worried are you, and how worried should you be? How can you adjust an inappropriate level of worry?

I'll begin with a couple soothing words: Don't Panic. You have the enormous good fortune to be alive today, at what is (so far) the absolute pinnacle of human civilization. There has never been a time in history when the future looked so good to so many people.

Let's get the big things out of the way first. There will be no cataclysms. The greatest threat of the last sixty years, general nuclear war, has subsided due to the collapse of the Soviet Union and the integration of China into the world economy. And the odds of a world-altering natural disaster — such as an eruption at the Yellowstone caldera or a substantial asteroid impact — are extremely remote. The threat of famine has been definitively ended by the green revolution, which has been so successful that obesity, not hunger, is the larger problem. We can similarly discount the threat of plague, at least in the Western world, because today we have both the knowledge and the wealth to prevent widespread damage. (Witness how SARS fizzled when it spread to the West.) So let's not worry about the world as a whole. Let's worry about you.

The leading causes of death are heart disease and cancer, with stroke a distand 3rd place, and accidents in 5th. When you think about dying, you should think most about heart disease and cancer. But I expect that advances in medical technology will largely eliminate these threats. In fact, research into strategies for engineered negligible senescence holds out the potential of biological immortality — people would die of accidents and infections, but not due to age-related degeneration. I believe that realistic therapies will emerge over the next few decades and that today's young and even middle-aged people will be able to benefit.

You don't have to "not get heart disease" or "not get cancer". You just have to not get them soon. And even if you do, traditional medical research has and will continue to lower the mortality of these conditions, hopefully so that you will survive long enough to reach "escape velocity" where science can improve lifespans by at least a year, every year. (We don't have to solve the problem of immortality before you can become immortal. If you get a mere extra decade of life, that same decade will also be a decade for further medical research … to extend your lifespan even more, and so on.)

When it comes to death, the young don't have much to worry about. Avoid dangerous situations that could get you into a fatal accident, and you'll be fine. So enough talk about death. What about quality of life?

Once again, this is a fantastic time to be alive. Life is easier than it's ever been! We live in a technological utopia almost unimaginable to our grandparents. We have more and better labor-saving devices, easier communication and travel, and an almost bewildering array of exciting things all competing for our leisure time. The primary concern here is whether you can afford the type of lifestyle you'd like to have.

Basic living is cheaper than you think. I'll illustrate this with some figures that are reasonably close to my actual situation: if you pay $1,000/month for housing, $3,000/year for transportation (a $30K vehicle amortized over 15 years plus $1K/yr for insurance), and pay $1,000/month in miscellaneous expenses (utilities, gasoline, food, …), you're spending less than $30,000/year. Even assuming that you pay a third of your income in taxes, you'd only need to make $45,000/year to enjoy a very comfortable lifestyle. It's not a lifestyle that will impress the neighbors, but it's still very comfortable!

$45,000/year looking too large? Take a roommate (or get married…) for an easy way to reduce the income requirement and have only a modest increase in cost. Your costs may increase to $35,000/year, but with two incomes and a lower required tax bracket, you'd each have to earn only about $25,000/year to enjoy a very comfortable (albeit non-impressive) lifestyle. But think twice about having children; they're expensive.

You may have noticed that we haven't even tried to shrink the budget, yet. A 15-year mortgage like mine is too aggressive on a lower income; monthly payments could be several hundred dollars lower. Also find a cheaper vehicle and don't subscribe to expensive services. These simple trims could easily take $5,000/year off the budget without a substantial quality-of-life impact. Does life look affordable, yet? If you have a college degree in anything mildly useful, it should be easy to make $25,000/year even fresh out of school. And saving for retirement shouldn't frighten you because you'll get raises as you become more experienced and more productive. In time you can move into a more expensive lifestyle; don't rush it. (Stress the "don't rush it". If you're interested in life extension therapy, it's going to be expensive. Plan to save for it.)

A notable alternative to working for a living is to find someone who is wealthy enough to support you in a manner to which you would like to become accustomed. These people do exist; I would know. This strategy is significantly riskier than having your own career, but it used to be common. The idea of a single-income household has a large measure of nostalgic charm, especially if you want to raise children.

The remarkable thing about being alive today is that you don't need very many things to get bootstrapped into a comfortable life. If you live in a generally capitalist country and have a good education, all you need to do is to be a good employee. If you're productive and thoughtful you'll be noticed and rewarded for it. You don't need a huge income in order to live comfortably, as long as you're committed to living within your means — and there are lots of personal finance bloggers illustrating that point and writing the how-to guide every day.

So why are you still worried? You're unlikely to die and it's not that hard to earn a comfortable living. Of course there's more to it than that. It's one thing to believe that success is possible, and quite another to know in detail how you'll achieve it.

Children are often advised that they can "do anything they put their mind to." This may be a fine way to encourage people to set lofty goals, but it omits the next step. To achieve any substantial goal you must develop a plan that involves sub-goals. For example, if your goal is "an exciting and lucrative career" you need to think about the specific steps you'll need to take to get there. Studying your field of choice, getting your foot in the door (at possibly an entry-level position), and developing the skills that will advance your career. And each of those sub-goals can be further divided.

You need to develop a plan to achieve your goals. Because substantial goals are met over long periods of time, the divide-and-conquer approach is a natural fit. It is important to continue subdividing your goal until each step in your plan is reasonably detailed. Items in the short term need to be very specific, while items farther in the future may be more general as they'll be influenced by events as you pursue shorter-term items.

Your sub-goals must be connected in a logical progression from the present to your ultimate goal. If any step along the way is too vague, as evaluated by your subconscious, the result will be worrying. Worrying is a valuable signal — you don't want it to "go away". If it simply vanished, your plan would still be broken, and you would likely fail to achieve your goal. The proper outcome is for you to think about your plan, improve it, and then for your worry to subside as your subconscious becomes satisfied with the new plan.

My three-step program for changing worry to contentment is:

  1. Accept that shit happens, but realize that it probably won't happen to you. Take common-sense steps to reduce risks. There's no benefit in obsessing about things outside your control.
  2. Understand that in this era a comfortable life is well within your reach. You're not worried about survival — you're worried about happiness.
  3. Introspect about your goals and your plans to achieve them. Worry is the emotional signal that your plans are unrealistic or need more detail.

(I don't have any advice to give at this time regarding goal-setting itself. One of the issues I personally struggle with is making my goals important enough to trigger a worrying response in the first place. It's very easy for me to leave goals in a "nice-to-have" status that doesn't motivate me to achieve them. I welcome advice on that matter.)

— for S.

April 01, 2006

Net Worth Report - End of 03/06

The most significant thing to report this month is that I've finished funding my retirement accounts for the year: $15,000 to my 401(k) and $4,000 to my Roth IRA. I've mentioned a few times in recent months that I'm studying finance so that I can become a better investor. For my retirement accounts I get advice from a financial advisor, but for my non-retirement accounts I'm on my own. It made sense to fund retirement accounts first because of that advice, and wait until I'm done studying to contribute to non-retirement investments.

My heavy focus on funding my retirement accounts has been depleting my short-term holdings, as it was intended to. I've decided to make $10,000 a permanent floor for my short-term holdings, both because it's useful to have an emergency fund and also because liquidity is very useful when transfers from one account to another usually take several days. For liquidity's sake, I plan to keep a baseline of $5,000 from my short-term holdings in my checking account. The remainder of my short-term holdings can move around to chase yields.

Without further ado, here are the numbers:

Net Worth Figures
Category02/0603/06
Total$356,167.72$359,910.20
Short-term$24,171.59$19,153.33
Medium-term$75,247.76$76,238.67
Retirement$144,417.22$152,016.97
Property$112,331.15$112,501.23

My property figure didn't rise very much because I recently took an 800-mile road trip that. According to KBB, that extra mileage reduced the value of my car by a few hundred dollars. (It only had 1300 miles on it before the trip.)

I'm a little uncertain what to do about the appreciation of my home. When I started tracking numbers, I decided to use my home's market value as stated on my property tax assessment — about $200,000 — which I already knew was below its actual market value. Zillow estimates it's worth about $250,000 and a very similar home nearby recently sold for $275,000. The bottom line is that I believe I'm undervaluing my home by $50,000-$75,000 but I haven't decided what to do about the accounting for this, yet.

Recall that I'm defining "Adjusted Net Worth" as net worth excluding the value of autos and unvested stock. The "Estimated Contribution" is how much money I believe I'll need to invest in order to meet the following month's ANW target. A declining EC indicates that I'm ahead of plan, and an increasing EC indicates that I need to save more in order to reach my long-term goal.

Goal-Tracking Figures
Item02/0603/06
Adjusted Net Worth$329,440.10$335,018.70
Next Month's Target$333,251.45$337,620.57
Estimated Contribution$739.74$711.52

My credit card balances are 100% backed by time deposits and/or savings accounts earning interest at a higher rate than I'm being charged by the credit card companies. The monthly payment is estimated as 2% of the balance. (Most credit cards are now using a 2% minimum payment, and due to this it is important to have a strong cash flow and/or pay with funds from your credit card arbitrage savings account.)

Credit Card Arbitrage Figures
Balances @ 0% APR$31,570.44
Balances @ 1.9% APR$14,431.52
Total Balances$46,001.96
Monthly Payment$920.04

You can keep track of other personal finance bloggers at NetWorthIQ. I've updated my entry there.

Tiny Island