The Financial Student » Psychology

Perception of Income

Ryan — Tue, 03 May 2011 09:00:11 +0000

A couple of days ago at work, a customer completed a credit card application. Gotta save that 20%, right?!? The first question on the app asked the woman to enter her annual household income. This is almost always a touchy situation because most people are really sensitive about how much money they earn. This woman though was definitely not! She had an open discussion with her daughter right in front of me about what number she should put down.

Customer: “Hmm…well I’m not 100% sure.”

Customer’s Daughter: “I’d say around $18,000“.

The customer hesitated for a second, but then entered $18,000 on the keypad. I told her to hit the next button whenever she was ready.

Then she said something that caught me off guard. She said “I’m just not really sure, $18,000 dollars seems like a lot of money.” I let her know that it was only an estimate and didn’t need to be 100% correct. She said OK and hit next and I finished up her app.

I can’t remember if she was approved or not – income actually isn’t a part of your credit score, so it’s def possible. But I kept thinking “How is $18,000 a lot of money?” The way she said it gave me the impression that $18,000 is a lot of money for anyone, not like she was just overestimating her own income.

I could be completely off base, but I’m assuming I’ll start at $40,000 or higher after graduation. $50,000 or $60,000 is possible from what I’ve read about the accounting industry. Right now I honestly feel like I could make 6 figures at some point in my life. At that point, $18,000 kind of seems like a drop in the bucket.

To my customer though, it was everything. She wasn’t bitter or anything, just stating a fact. The whole situation made me wonder about people’s perceptions of wealth and income. To me, $18,000 is really low, even if it is almost twice the federal poverty level for an individual.

I don’t know what all this means or if there’s a point, but I think it’s an interesting discussion to have. Maybe I’m just super motivated to get as much as I can? Or maybe my expectations are unrealistic?

Home Prices Are Down. Good

Ryan — Wed, 30 Mar 2011 09:00:15 +0000

Although the economy is improving slightly, housing prices continue to fall. No one seems sure of how low they’ll go. One thing everybody does seem sure of is that this is a horrible thing.

Maybe I’m the only one, but is this such a bad thing? Every headline you read about the housing market assumes that homes going down in value is the worst thing that could happen. I disagree. Housing prices were pushed to laughable levels during the bubble. Easy credit and low interest rates caused prices to rise, not any actual increase in value. The decline that’s going on right now isn’t a disaster.

Any other time a product goes down in price, most people are happy. The 1st iPod cost $499. Today you can get a better one for $200. When the headline “Consumer Electronics’ Prices Fall” appears, that’s assumed to be a good thing. But when it’s housing, it’s a problem that needs solved. Cue all the “recovery” talk.

When housing prices decrease, it’s good for 1st time home buyers. It’s good for young people who aren’t far enough into their careers to have a huge down payment. It’s only bad if you’re using real estate as an investment. But that’s the chance you take with any investment. It’s why it’s called an investment – there’s a chance that money will be lost.

Don’t get me wrong, it sucks for homeowners who have mortgages larger than their home’s value. But if they can still make their payment, it’s not the end of the world. They still have a place to live. That counts for something.

For the regular person who views housing as a place to live and not an investment though, lower prices are good! Any young person looking to start a family and buy a house should be thrilled with the housing market.

Home prices may continue to fall, but that doesn’t mean the sky is going with them.

Oh, I’m Actually Suppose to Use the Stuff I Buy?

Ryan — Wed, 20 Oct 2010 12:00:55 +0000

A week or so before school started (so we’re talking over a month here), I went to Walmart and bought a bunch of school supplies. Pens, pencils, highlighters, a white board for my room, half a dozen notebooks, and a few other things.

I’ve barely used any of it. Sure, the pens and pencils get used daily. But the whiteboard? It’s still sitting in the corner of my room, wrapped in plastic, waiting for me to hang it up. I have yet to highlight…anything. I use 1 of the 6 notebooks I bought. I even bought a laptop carrying case that I was sureI would take to school everyday. Instead, I just put my trusty Macbook inside the laptop sleeve in my book bag. The laptop bag has left my room precisely 0 times, according to my back-of-an-envelope calculation.

I thought I needed all of this stuff to succeed in college. Otherwise, I’d fail out in no time. Of course, it’s been a month and I’m not failing any of my classes. Things are going fine – and the highlighters are still sitting in the bottom of my desk drawer.

I thought I needed all of that stuff to be productive. I definitely felt productive as I was buying it. “Look! A whiteboard, I can use this to keep track of my schedule and other important…things? Yeah, that sounds good.” *I didn’t actually say this. I obviously made the mistake of spending money on things that I never use though.

But there’s more to it than that. I got hung up on the thought of being productive. Those thoughts translated into buying Stuff. Similarly, it’s crazy easy to get hung up on the thought of making a good financial decision. I spent months telling myself I was going to open a Roth IRA. Anytime I read a blog article about them, I left my computer feeling better. Like I had actually done something.

The truth is that thinking about something and actually doing something are very different. Kind of obvious when it’s written out like that, but I definitely didn’t really “get it” until recently. Buying school supplies won’t make you an A student. Reading personal finance blogs doesn’t make you richer (although you should definitely keep reading The Financial Student…and tell all your friends!). Remember to actually follow through and act!

Where Do Your Ethical Boundaries Lie?

Ryan — Fri, 06 Aug 2010 12:00:32 +0000

stealing on Flickr! by lovelypetal

One of my favorite things about personal finance is that it’s not all about numbers. When people and emotions are involved, there’s not usually a black and white answer. Ethics are also Everybody has their own rules and inner thought police that tell them what’s OK and what’s not. Below, I’ve listed some possible ethical gray lines along with my own thoughts.

1. Sneaking food into movie theaters – Yeah, I know the sign says not to. But I do it anyway. I’m sorry, but there’s no way I’m paying $10 for a small popcorn and Coke.

2. Being given free stuff – You have a friend who works at a local resturant. When you come in, she gives you free drinks and dessert. None of this is authorized by a manager. Is she stealing or are you? Does it matter? Should you make her charge you?

3. Ordering water, but getting pop – This one drives me crazy! I have a friend who always says “just water” when we’re at a fast food place. Then he proceeds to the pop dispenser and gets Mountain Dew or lemonade. To me, this is 100% stealing. He doesn’t get it.

4. Using company resources (ink, fax) for personal business – Some companies don’t have a problem with this while others specifically forbid it. I’m somewhere in the middle. A few printed pages here and there or sending a fax every now and then? No problem. Photocopying hundreds of posters of your lost dog? Abusing company property.

What are your thoughts? When have you crossed an ethical boundary?

How I Try To Make Personal Finance Less Boring

Ryan — Mon, 07 Jun 2010 16:00:20 +0000

It’s no secret that personal finance isn’t the most fascinating subject in the world. I try to do my part and change that with this blog, but I know logging into Mint.com isn’t exactly a roller coaster ride of excitement (unless it’s payday). With that said, there are a few ways to keep things fun and interesting. And most of all: less serious! Money (specifically, the lack of) can cause a lot of stress, so anything to reduce that is a good thing in my book.

First, I give my bank accounts cool names.

OK, maybe not cool, but they at least make me laugh when I look at them. Take a peak:

I Do What I Want Checking is, obviously, my main checking account. I call it that because it allows me to buy what I want when I want it. I’d have a “I Do What I Want (within reason)” credit card, but no bank will approve me. It’s a conspiracy against people with little income I tell you!
When Shit Hits the Fan is my emergency fund. I feel that it has an appropriate name and reminds me of its true purpose
New Ride is clearly for a new vehicle at some point far in the future. For some inexplicable reason, the account has fifty cents in it
Blogging Hustle is money I make from this blog
Christmas Materialism lets me poke fun at the fact that as much as we say Christmas is about people and memories, we all buy each other mountains of Stuff
Graduation Gifts doesn’t have a cool name, but it’s cash I’ve received from family and friends. Thanks everybody!
Apple Kool-Aid is for my Macbook Pro or some other Apple product I convince myself I need
I’m On a Boat is for travel: random trips, vacations, study abroad someday, etc. Does not mean I’ll actually be on a boat. The name comes from this video

Second, I use Mint.

I could just login to my bank’s website when I want to check things out, but Mint creates cool charts and graphs that let me see what I’m spending money on and if I’m staying on budget.

Finally, I don’t let myself worry (much) about money.

I equate stressing to boring. I realize that this is extremely easy for me to do since I’m just out of high school and have no real responsibilities. But still, finding a way to relax will make finance more interesting. You can start working out goals and stuff you want to do instead of freaking out over credit card debt and student loans. Here’s how I do it:

I have automatic transfers setup to my savings accounts so I don’t have to worry about whether or not I’m saving anything from this week’s paycheck
I read interesting personal finance blogs. Punch Debt in the Face and Budgets Are Sexy are both funny and have commonsense advice. The Financial Student is also a great blog to visit.
I buy stuff with money. Simple, I know. But a lot of people get their finances in order and start saving like crazy. Then they forget that the point of money is to improve your life. Don’t be one of those people.

Do you have any ways to make finance more exciting? Share ‘em in the comments.

5 Methods to Fight Your Latte Factor

Ryan — Mon, 17 May 2010 12:00:55 +0000

As I mentioned last week, I’ve increased my spending on things I don’t really value – mainly food from Speedway and Tim Horton’s. These types of purchases show the latte factor in action. The latte factor is the effect that small, insignificant purchases have on your finances. They don’t actually have to be lattes, but that’s a term many people can identify with.

These small expenses of course add up over time. $3 for coffee every day during the work week is $15. Every month, that’s $60 down the drain – or more accurately, the throat. This isn’t to say that you shouldn’t spend money on coffee (or whatever your “latte” is), but you have to ask yourself if you’re really getting the value out of it that you think you are. You might find that you honestly do want to keep that expense in your life because you vaelue it. For me, I decided that I’d rather work on getting my emergency fund where I want it and saving up for something I really want to do – travel. Below are some ways you can “fight” your latte factor if you decide it’s not an expense you want in your life.

1 – Simple Self Control

As you drive past the coffee house or wherever, don’t pull in. This is painfully obvious, but it’s clearly not easy to follow. Otherwise, people wouldn’t be pissing away large amounts of money when they have huge credit card balances and student loan payments. You have to fight the urge of “I can afford it, so I should buy it”.

2 – Change the Route

Consider taking a different way to work or school every day. Try to avoid driving near your latte factor’s location. Don’t drive too far out of your way of course – you may end up spending more in gas (and frustration) than you would by just buying your latte!

3 – Reduce, Don’t Eliminate

If the thought of never (or rarely) making your purchase seems a bit too much like deprivation, consider reducing your spending. Instead of everyday, maybe you get coffee once a week. You’ll save money, but still have a special day every week.

4 – Give Every Cent a Purpose

Make a monthly budget and account for every cent that will be spent. Don’t allocate any money for your latte. Perhaps you increase your Roth IRA contribution or save up for that killer vacation you’ve always wanted to take. If you do this, then you won’t feel like you’re missing out on anything. You’re simply spending your money the way you said you would.

5 – Take Advantage of What You Already Have

Most of you reading this own a coffee maker. Make sure it gets used. Homemade coffee will be cheaper than Starbucks. Way cheaper. Bring your own snack, like a bag of chips, to work instead of hitting the vending machine for that mid-afternoon candy bar.

Final note: I’m really not against buying something if you really want it and value it. Everyone spends money differently and there’s no single “right way” to control spending.

The Beginnings Of Lifestyle Inflation

Ryan — Wed, 05 May 2010 12:00:13 +0000

I’ve been working for the U.S. Census Bureau for about two and a half weeks now. The job is great. The pay is almost too good to be true for a high school senior (around $300-$400 a week). My supervisor is flexible and my co-workers are all nice people. The worst part is that the office isn’t located within walking distance!

Financially, however, I’ve noticed my finances are suffering. Kind of.

I know that statement sounds like a contradiction. Here I am making more money than I ever have in my life and I have the nerve to think I’m worse off? There are some countries that don’t even have a census bureau! The nerve!

In all seriousness though, my spending has gone up. Almost every day, I stop by Tim Horton’s for an ice cappuccino. Or Wendy’s for a Frosty. It’s only a few bucks here and there, but I’m still spending more money than I was just a few weeks ago.

This, in its own small way, is called lifestyle inflation.

Lifestyle inflation is when the amount you spend rises in relation to your increase in income. You start bringing home more cash, so you start spending more cash. This is exactly what I’ve done. I even think “I have a job now. I can spend money.” when I pull into the drive-thru lane. It’s amazing how this line of thinking has allowed me to seamlessly justify my purchases. And quick too – I started my daily coffee purchase just 3 days after I began work.

So far, the amount I’m spending isn’t much. About $2-4 per day. But that’s still $10-20 per week. $80 per month could pay for a trip to an amusement park – and I like amusement parks more than I like coffee.

This kind of spending reminds of how just because you can do something, doesn’t mean you should. I could smoke a pack of cigarettes everyday or I could go and protest funerals of fallen soldiers . But just because I can, doesn’t mean I should. I can afford to buy coffee every day. But that doesn’t mean I should.

What Kind of Relationship Do You Have With Money?

Ryan — Tue, 04 May 2010 12:00:51 +0000

Money is a powerful force in all of our lives. This force can be positive or a negative, depending upon your relationship with money.

Everyone’s relationship is going to be unique, but there are a few types that probably describe many people.

Materialistic – money buys Stuff. High priced electronics, cars, vacations, etc. Money exists to purchase things.

Security - money’s purpose is to provide a safe-haven, like the security blanket children carry around everywhere.

Miser - security has long ago been reached, but you can’t stand the thought of spending (or giving) money.

These three categories aren’t nearly specific to sum up one’s entire money relationship, but I think we all know of a person or two who’s remarkably similar to one of these.

For me, my relationship has definitely changed over the years:

Childhood - money can buy me toys and should be spent as soon as possible.

Teenage - money makes the world go round. Some needs to be saved, but I can worry about that later when I’m an adult.

Now - money gives me options. Freedom. The ability to do what I want.

I think my relationship now is much healthier than it ever was before. I’ve come to think of money as a mostly neutral tool that can be used to either enhance or hinder my life.

What’s your relationship with money look like? Good? Bad?

I’m Not Talkin ‘Bout Rich, I’m Talkin ‘Bout Wealth

Ryan — Wed, 31 Mar 2010 12:00:34 +0000

This video from Chris Rock does a pretty damn fine job of showcasing the difference between rich and wealth. Warning: Extremely explicit language. Plug in head-phones or bookmark this post for a later date if you’re located in an office or school.

Obviously, Rock is using the example of the super wealthy (see: Bill Gates) and the super-rich (see: celebrities that could lose their money in a summer with a drug habit).

But the general concept is the same for “middle-class” citizens.

Usually, we use the words “wealth” and “rich” interchangeably. Someone who has a really nice home, car, and job is said to be rich. Likewise, we assume they are wealthy.

But realistically, the two terms don’t mean the same thing. At least, I don’t think they should.

Rich is subjective. My definition of rich might differ from yours. Plus, you can appear to be rich when you’re actually broke. Rich can be taken away or lost in the blink of an eye. This is because the rich are often controlled by other entities like banks and corporations. Or, they squander away their new-found richness (see: lottery winners).

The financial crisis going on over the past few years is proof of this. Tons of people in the U.S. borrowed to “buy” private school educations, fancy cars, and huge homes. They whipped out a credit card to fuel exotic vacations and a nicer day-to-day life.

Then, banks tightened up credit. Credit card interest rates went through the roof. Companies downsized and rightsized. People suddenly found themselves in a big mess.

These individuals may have been rich (by living off credit cards and using their decent income to secure financing) in appearance, but they certainly were not wealthy.

Wealth can’t be faked. Wealth can’t be taken away because of the decisions other people make. Wealth, in its simplest form, is a set of behaviors that lead to financial success.

Some of these factors include:

Saving a certain amount or percentage from every paycheck
Refusing to take on debt except when necessary (like a home mortgage)
Spending less than you earn

These factors aren’t new or exciting. They’re honestly just common sense. If the entire working population (including teens) were to just simply start saving 10% of their pay, millions of people would be better off. And that’s just one small behavioral modification

At the end of the day, remember that you have the power to make wealth happen. Being rich though, is often just a fad.

Do Not Buy Stuff You Cannot Afford

Ryan — Mon, 29 Mar 2010 12:00:06 +0000

The following is a clip from Saturday Night Live that explains how to spend less than you earn.

This video is simply awesome. If I was in the business of comedy, this is the type of stuff I’d do. Common sense, yet surprisingly uncommon.

Hilarious and true.

Just remember that you save up money before you buy something. You do not buy something because you think you can pay for it later. You pay for it now, if you can. If you cannot, you don’t buy it.

I just prevented you (and myself!) from ever incurring credit card debt.

You’re welcome.