Mental Accounting, Part 2 - Some Solutions

I've learned a blogging lesson from this post: don't promise what your next post is going to be about. I've been busy, but I kept putting off writing this post because I found other interesting things I wanted to write about. Basically what I'm saying is that I have the attention span of a caffeinated squirrel.

Last time I talked about mental accounting and the problems that come up with our brains and money. Now I'm going to talk about some solutions for shoddy mental math. The first "strategy" is to just be aware of the problem. Hopefully my last post helped with that. The rest of the strategies that I use basically center around re-framing in your mind how much things actually cost.

One-time purchases
For one-time purchases, I like to treat them as if they are yearly things. For instance, if I decide to buy a new rice-cooker, I probably won't need a new one next year, but I might need a new crock pot. By just assuming that I'll have to make similar purchases each year so that it evens out, it gives me a powerful tool to think about how much these things actually cost.

What I do is imagine how much I would need in investments to cover making this purchase once a year. The best research that currently exists suggests that withdrawing 4% of your portfolio each year offers very good odds of it not running out in a "typical" 30-year period. If you assume that the listed price of the item you want is only 4% of the needed investments, you would multiply the price by 25 to get the amount of investments needed to make that purchase yearly. In the case of my rice-cooker, If I buy a $30 rice cooker every year, I need $750 in investments to reliably cover that purchase every year. All of a sudden, I start to think that my current rice cooker can last for a while longer, instead of needing a fancy new $750 rice cooker.

Monthly Subscriptions
With monthly subscriptions (cell phones, gym memberships, etc.), we seem to love buying them, and companies love selling them. They are a great deal for companies because they offer a nice reliable revenue stream. However, most people would be better off paying a higher price only for the times they use these things than "saving" money buy subscribing. When we use a little mental math, you can see how expensive they get very quickly. Again I try to imagine them in terms of the investments that a person would need to fund them indefinitely. For a monthly expense, you take monthly price and times it by a whopping 300 (25*12) to get a number for investment income. That $30 gym membership? You need $9000 to fund that each year. Your $50 cell phone plan? You need $15000 to keep that each year. Now that stuff starts to look more expensive.

Purchases With Debt
Debt can get you into all sorts of trouble. I don't like using it. That deserves its own post, but let me just say that you need to be extremely careful when you're using debt. Companies that lend money tend to show you three important numbers: your monthly payment, the interest rate, and the total amount of money that they'll lend you. Most people take on debt thinking about how much the monthly payment will be. Based on the number of bankruptcies and credit defaults in this country, this thinking gets people into trouble. Let me suggest a fourth number that you should look at: total payoff amount. You might need an online calculator like this one, but a few minutes with that can save you lots of money. I put in a hypothetical car loan of $10000, with a 5% interest rate and a minimum payment of $195. The total amount of interest paid was $1256, meaning that you payed in total $11256 for that car. Just by saving your money and paying in cash you essentially pocket an extra $1250.

There are lots of other strategies, but these are some of my favorites. The particular strategies that you use don't matter so much. What is important is that you find some mental tricks that work for you to curb your ridiculous spending impulses. (Don't feel too bad though, we all have them.)

Mental Accounting Part 1 - The Problem

Has anyone ever noticed that brains look a bit like intestines in drawing like this? I guess folding is efficient no matter where it occurs.

As human beings, we're subject to the limitations of the brain. While our minds are amazing and wonderful tools, they also have a tendency to get tripped up and bogged down when presented with particular situations. However, if we can understand some of what makes our minds tick, we can create situations where our brains will perform to the best advantage, while minimizing the times where our impulses get us into trouble. Psychologically, you could call these tendencies "mental models," and while there is some debate about whether that's how the brain actually works, the concept offers a useful approach to counteracting some of our innate weaknesses.

Many of these mental models affect how we deal with money. I was listening to the Freakonomics podcast this morning and they were discussing a potentially dangerous-to-your-wealth mental model called "mental accounting." Here's what happens: people tend to treat money differently depending on the form that it's in. For instance, if you're at a diner and a soda is two dollars, most people would likely be okay paying that if it was with a credit or debit card. On the other hand, if you've only got ten dollars in cash to buy lunch, many people would skip the drink and just have water. The amount that it costs you is the same in both cases, but because the method of payment is different, people treat the money differently.

A similar mindset afflicts most of us when we see something for sale. We look at how much we're "saving" and forget the fact that in order to buy something we have to spend money. We also tend to buy things by looking at how much the monthly payment is, and not how much money in total the actual item is going to cost. Not all of these would strictly be called "mental accounting" to a psychologist or an economist, but they all represent ways in which our skewed perceptions of price, value, and money can potentially cause us problems.

So what to do about it? Next post I'll talk about some strategies to help out our silly brains.

OFtM Principle #3

Guess what's inside! You're going to love it.

One for the Money returns today for principle #3: Learn self-discipline and self-restraint in money matters. There are tons of quotes in here that are worth your time. Let's start with, "Young couples should recognize that they cannot immediately maintain the same spending patterns and life-style as that to which they were accustomed as part of their parents’ family."¹ Every young married couple needs to hear this over and over again until it sinks in. I should start giving framed versions of this as gifts at weddings. It would make me really popular.

I feel very strongly about this quote because I see it ignored so often. People who are still in college buy big screen tvs with their student loan refunds. If you have to buy a tv with money that you borrowed, then you can't afford it. In fact, if you have to buy any depreciating asset (more on this term in another post) on credit then you can't afford it. Consumer debt is bad. That statement needs no qualification.

Young couples (and singles for that matter) need to embrace being poor for a while. There are tons of options for getting what you need for cheap. Thrift stores have much better clothes than they once did. You can get nice things that are essentially new for a huge markdown. Online sources like craigslist and freecycle offer more ways to get things that you need (and even things you just want) for a reasonable price. The tradeoff is that you have to spend time finding good deals. But when you're poor, time is much easier to come by than money. Use your time to save yourself some money.

In our "self-indulgent, me-oriented, materialistic society,"² we ought to be a group of people who stand out as being different. Let me tell you a secret: stuff doesn't make you any happier. It's a poor substitute for happiness. Helping others makes you happier. Living within your means makes you happier. Gratitude makes you happier. "Gratitude is a Spirit-filled principle. It opens our minds to a universe permeated with the richness of a living God. Through it, we become spiritually aware of the wonder of the smallest things, which gladden our hearts with their messages of God’s love."³ Rather than striving to buy on credit the largest things we can, perhaps we should strive to be grateful for all of the small blessings in our lives. There's no glamour or happiness in paying off consumer debt, only pain and misery. However, a grateful attitude will pay dividends for years after that big screen has stopped working.

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1 "One for the Money" pamphlet, pg. 6^↩
2 Ibid^↩
3 Bonnie D. Parkin "Gratitude: A Path to Happiness" April 2007 General Conference^↩

I Try to Avoid Silly Consumerist Things, but I Still Have my own Kryptonite

I was thinking the other day about how easy it is to get sucked in by the marketing that we see thrown at us. As far as I'm concerned, the typical "American Middle Class Lifestyle" is built on top of a mountain of waste and cheap junk. I don't really watch network tv (Netflix is basically all you "need"), and I don't have cable. I try not to allow the marketing machine to have a lot of access to my brain, because a lot of people who are smarter than me have bet a lot of money that I'll buy their junk if they show it to me enough times. If you don't think commercials and marketing have an effect on you, you're fooling yourself.

There is one silly consumerist thing that I still love though: "The Price is Right." I know it's basically just a thinly veiled ad for a bunch of companies. And I know that winning is mostly luck and not skill. I know that the prizes are mostly ridiculous and wasteful. I know that people probably pay obscene taxes on anything they win, so it's not even that great anyway. But regardless of all that, I totally love the show. Score a point for the evil consumerist marketing machine.

The First $100,000 is a Benford

Image taken from Wikipedia, thus the labeling in a foreign language...

Warning: This post uses math. If that is a problem for you, just skip this one. No hard feelings.

Charlie Munger famously said "the first $100,000 is a [naughty word that starts with B]." With apologies to Mr. Benford for conflating his name in an unfavorable way, there's a perfectly good mathematical reason why things work this way: Benford's Law.

Benford's Law basically states that if you take a large group of numbers spanning several orders of magnitude, the probably that any number will begin with a one is close to 33%. If this seems counterintuitive, here is a video explaining it in more detail. It's nine minutes long, which is an eternity in internet time, but I found it fascinating.

Near the end of the video, the guy mentions stocks as an example of Benford's Law. Let me instead use your net worth. Every time you add another digit onto your net worth, you'll be stuck near that number for a while. Think of it in terms of doubling your money. Imagine that it takes five years (I wish) to double your money. You start with $10,000. To get that first $100,000, it will take you something like seventeen years. Then to get your next $100,000 it would only take five years. Then less and less as your money picks up momentum. However, to go from $100,000 to $1,000,000 would take seventeen years again.

So what do we do with this information? Well, first, start saving and investing early, so you have many years of compounding ahead of you. Second, don't get discouraged with small efforts. Money attracts more money. As your investments get larger and larger, they'll earn more and more money on their own without any work from you. "Now ye may suppose that this is foolishness in me; but behold I say unto you, that by small and simple things are great things brought to pass; and small means in many instances doth confound the wise."1

Just remember, there's mathematical proof that the first $100,000 is, in fact, a Benford.

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1 Alma 37:6^↩

A Tale of Two Dinners

The three biggest expenses for the majority of Americans are food, housing, and transportation. If you can get your spending under control in those areas then you'll have a much easier time in general. They're what you might call "big wins." I'll talk about the latter two in another post, but I wanted to talk about food a little bit.

One typical piece of advice that people get is to stop eating out and cook your meals at home. I agree with this advice as far as it goes, but what are you supposed to cook? I was at the store the other day buying groceries for a couple of meals, and I was struck by the differences in price. Here are links to the recipes:

Thai Shrimp and Noodles

Potato Leek Soup

Both of these meals will be cooked at home, but the amount I pay per serving is hugely different. Take a look at the approximate¹ ingredient cost for the Thai dish:

1 pound cooked medium shrimp, peeled and deveined - $10.00
1/3 cup Italian salad dressing - $0.33
8 ounces uncooked angel hair pasta - $0.50
1/4 cup chicken broth - $0.10
2 tablespoons minced fresh cilantro - $0.15
2 tablespoons chunky peanut butter - $0.13
1 tablespoon honey - $0.17
1 tablespoon soy sauce - $0.17
1 teaspoon minced fresh gingerroot - $0.25
1/2 teaspoon crushed red pepper flakes - $0.03
1 cup julienned carrots - $0.35
1 cup chopped green onions $0.65
2 tablespoons canola oil - $0.06
1 tablespoon sesame oil - $0.35

Total Ingredient Cost: $13.24
Cost Per Serving: $2.21

I consider this meal to be extremely expensive compared to a normal meal at home, but most of that is the shrimp. Even so, this meal costs about the same amount to make as it would cost my family to eat at Wendy's (if we're eating off the dollar menu). If you made this kind of meal every night, you would spend nearly $400 per month on dinners alone. Adding in the other two meals and snacks and you've got a food budget that is out of control.

Now compare that to the Potato Leek Soup.

2 tablespoons neutral oil, such as canola or grapeseed oil - $0.06
4-5 medium russet potatoes (1 pound), peeled and roughly chopped - $0.65
3 large leeks (1 pound), cleaned, and thinly sliced - $3.00
6 cups vegetable stock (or light chicken stock) - $4.60 (or basically $0.10 if you use water)Kosher salt, to taste (I consider salt and pepper to be basically free when figuring out recipes since they're so common and usually not measured in specific amounts)
1-2 tablespoons freshly squeezed lemon juice - $0.07
1/2 cup heavy cream $0.62 or 1/2 cup crème fraiche (I just use 1 cup of heavy cream, but the price would be similar) $0.62
1/3 cup minced parsley or chives - $0.35

Total Ingredient Cost: $9.97

You're starting to save money with this, but as I mentioned above, I would probably use water instead of vegetable stock, and maybe add a little celery or something. With those changes, the price would look more like this:

Total Ingredient Cost: $5.72
Cost Per Serving: $0.95

Look at that. Less than a dollar per serving to feed people a nice dinner. If you eat like this every night, then you would only spend $171 per month on dinners. This dish isn't even the cheapest one you can make. Just by changing your meal planning a bit you can find over $200 per month that you can use to pay off debt, invest, or take a vacation. So while the general advice of "eat at home" is good advice and will generally save you money, even within that framework there are lots of options for optimizing your life and saving you money.

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1 The prices are a mix of what I payed on the receipt and what random prices I could find with a quick internet search. The actual prices you would pay might vary quite a bit. I'm sure a dedicated coupon clipper could get both meals for cheaper, but the relationship between the two would be similar.^↩

Teaching Kids About Money

My parents were basically fantastic. I'm going to indulge in a little bragging right now, so forgive me. They have a good strong marriage, they taught all of us about the Gospel, school, work, happiness, marriage, and getting along with others. Basically they covered most of the major topics that a person needs to know to have a happy and fulfilled life. I've heard them say that one of their major goals was to create self-sufficient and well-rounded children who could do well in the world. While that's probably a goal for most parents, mine worked and planned to teach us the things that we'd need. More than just a nice platitude, that goal informed the way they approached parenting. Basically, when my wife and I are unsure about what to do with our kids, we'll try to figure out what my parents would do.

As great as they were, finances are one area that my parents could have covered better in their various life lessons. I don't think they fully understand money themselves though. They hit many of the most important things like "spend less than you earn," and "save up for things you want instead of buying them on credit," but they didn't really do much to explain other concepts like investing, savings rates, asset allocation, etc. I didn't really start to understand how investments worked until I researched it on my own.

My wife and I have been pondering how to teach my kids more about money than I learned. They're pretty young, so we have some time to figure things out. but we have done one thing: we established a custodial account for each of them.

A custodial account is a special kind of brokerage account. Basically you can buy stocks just like you would with a regular account, but the stocks are owned by the child whose name is one the account. You (the parent) act as the custodian and have full control until the child reaches a certain age. In most states the age is twenty-one, while a few are as low as eighteen.

I am a firm believer that kids learn best by doing. In this case, I want to have a real account statement that I can show them. I'm hopeful that it will be a useful tool for the kids to learn about money and math. For instance, when you're learning addition and subtraction, how much more interesting would it be to be able to use real numbers and see how much money you made or lost in a year? What about when they're learning about compounding interest? Suddenly they can see a real example of compounding interest before their eyes. I can imagine them using data points to create plots when they learn about graphs. Basically I want this to be something that they can be involved in and see grow.

A custodial account lets them own real securities in companies that they like. While I typically consider index funds to be the best investments for most people, for a kid to own a few shares of Disney, General Mills, Mattel, Nintendo, or Coca-cola could be something really exciting and could tie all this financial stuff to the real world.

I have high hopes for these accounts as learning tools, but there are a few drawbacks to be aware of if you're suddenly considering starting these up for your kids. First, it's possible that your kid might be an idiot when they're eighteen or twenty-one. I know I was. For me, it would frustrate me if they wasted this money, but at some point you have to let them make their own mistakes. I would consider that I had done my best to teach them, so if they mess it up there's nothing I can do about that.

Second, they aren't great vehicles for transferring a lot of wealth. I'm looking at probably less than $15,000 when all is said and done. If you've got a much larger amount of money to transfer to a child, you'll be better off with a trust fund.

Third, if one child's investments do better than the other's there could be some jealousy. This could be a problem or an opportunity. I'm hopeful that my kids will learn to be happy for each other, not to compare themselves negatively with each other, though that might be a bit of wishful thinking. We'll cross that bridge when we get there.

Finally, the money is actually the child's as soon as it goes in the account. There are serious issues with parents having some buyer's remorse and wanting their money back. You can't do that. In the eyes of the law, it's robbing from the child. Technically you could probably get around most legal issues if you raided the account, but it's wrong to do so. We believe in "obeying, honoring, and sustaining the law," right? Don't put money in there that you're going to need back in the future.

As for me, I'm excited with the possibilities that come with the custodial accounts. I think there are tremendous opportunities for teaching my kids and I'm excited to see what happens with these accounts.

If you're interested in opening a custodial account, there are lots of options. I chose sharebuilder.com since we already do our banking with capitalone.com, but do what works for you.

Happiness Comes from Sticking to Your Principles

I was browsing the forums at one of my favorite money sites and I ran across this post, which I've been thinking about quite a bit. The ten percent tithing payment in the budget caught my eye. I don't know if he's Mormon or not, but the reader who submitted the post at least has a similar set of values.

The reason that I've been thinking about the post is that several commenters suggested that he reduce or eliminate his tithing payments. A favorite argument of this crowd is that you don't pay while you're young, and then when you're a little older and more financially secure you can give ten percent or even more to the church. God wouldn't want you to put your family in danger or struggle financially because paying tithing is hard, right?

Here's the problem I have with that philosophy: money is just a tool. It's pretty good for buying a blender or something like that. It's excellent for buying time and freedom, but it's garbage at buying self-respect and principles. More money can increase your happiness and satisfaction to a point, but if you compromise your beliefs in order to get there, then you'll lose more than you gain every time.

How many of us still remember stupid things we did wrong from long ago? A test you cheated on, a lie you told, a small item you stole, a friend you betrayed... Those things stay with you.

I will freely admit that I love talking about money and I love the way it works. I hope every dollar I get acts like a polygamist and makes a whole lot more dollars. But I refuse to compromise on things that I believe God has commanded me to do. So if anyone ever asks for my advice with a budget, I will put tithing right at the top, where it belongs.

OftM Principle #2

One guy is you, one is your money. You pick which is which.

Returning to my "One for the Money" discussion, it's time to look at the second principle that Elder Ashton gives: "Learn to Manage Money Before it Manages You."

One of the greatest travesties perpetrated by our modern educational system is that lack of formalized instruction on money management. The reality of life is that you need to take responsibility for your own education in this subject. I see stories all the time of people with decent salaries who live beyond their means and end up ruining their lives. I also see stories of people making their budgets work no matter how much they are making.

I've mentioned the Micawber principle before, but it bears repeating. You're happiness will be heavily influenced by how well you manage your money.

There's a fantastic line in the second paragraph that I think people overlook. "New attitudes and relationships toward money should be developed constantly by all couples." Preach brother. I can't stress this enough. My wife and I deal with money differently than we did last year or even six months ago. Your relationship with money must change constantly based on your income, your goals, and the broader economy. Most people respond far too quickly to an increase in income with an even greater increase in lifestyle. Conversely, most people are far too slow at reducing their lifestyle when faced with a reduction in income. Don't be that person. You and I can do better. We can be better at this than the average person.

Once again the pamphlet is spot on with its advice. Money should be a tool, not a taskmaster.

Your Greed is Robbing Your Future Self

Look at that stressed out old man. He's probably worried about money.

I just read an article that makes me sick. Here is the link. It's long, but you can get by without reading the whole thing to get the gist of it. Basically, the world is entering a massive retirement crisis. The baby boomers are starting to retire and government benefits are not going to be able to keep up with the strain on the system.

The article points to three main problems that are converging to create the perfect storm of retirement crises.¹

Here are the three main points:

     - Countries are slashing retirement benefits and raising the age to start collecting them. . .

     - Companies have eliminated traditional pension plans that cost employees nothing and guaranteed

     them a monthly check in retirement.

     - Individuals spent freely and failed to save before the recession, and they saw much of their

     wealth disappear once it hit.

I added some italics to point out something important. Which of those three factors has the largest effect on your eventual financial position? Which of those factors do you have even a small amount of control over? The answer is the same: your individual spending and saving rates.

If you give in to rampant lifestyle inflation and don't save for retirement then you have no one to blame but yourself and your bad decisions. Now I know that stuff happens. The economy goes bad. We start wars. People get sick or lose their jobs. But if you save a sufficient percentage of your income you will be prepared for those types of problems and be able to weather the storm.

The reality of modern life in a first world country is that ninety percent of the things that we have are really wants, not needs. Our greed has made us almost unable to distinguish between the two. Allow me to quote a wiser man than I am, "If we are not careful, it is easy for our wants to become needs. Remember the line 'There, there, little luxury, don’t you cry. You’ll be a necessity by and by.'”2

I would submit that many, if not all of us, are already there to some degree. So don't worry so much about the national debt or excessive spending on entitlements. You can't control everything that will happen. However, if you can manage your own greed then this retirement crisis doesn't have to ruin you.

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1 Do you remember the movie "Perfect Storm"? It was awful.^↩
2Joe J. Christensen, April 1999 Conference "Greed, Selfishness, and Overindulgence"^↩

Captain Kirk Will Get You a Cheap Hotel

I don't really want this blog to turn into a series of ads for services that I like, but if there's something good that I think saves me money, then I'll definitely give it a post. In this case, I really like Priceline negotiator for booking hotels. It's not so great if you're looking for a cheap motel during a roadtrip, but if you want something pretty nice for a good value, I've never found a service that works better. So without further ado, this is my (mostly) foolproof system for getting good rates on hotels:

1. Figure out the general details of the trip. You obviously need to know how you're getting to your destination, how long you'll be there, etc.

2. Once you've got the general outline of things and it's time to get a hotel, then go to priceline.com and click on the "Name Your Own Price" section. After you enter your info, you'll get to the important stuff.

3. Priceline won't let you enter identical (or nearly identical) bids within too short a timeframe, but with small changes you can put a lot of bids in during a short time period.

4. Decide what level of hotel you're interested in. As I said, this really only works with slightly better hotels, so I put my cutoff at the 3.5 star level.

5. Go through each of the different areas and note the ones that don't have 3.5 star hotels in their area. This will be important.

6. Now select all the areas that you're interested in staying and put in a bid. I usually start at $30. If it's accepted, fantastic. If not, go back and add one of the areas to your list that doesn't have a 3.5 star hotel in it. That way, you're still bidding on the same pool of hotels, but the site will let you enter bids rapidly back to back.

7. Move your bids up in increments of about 5 until you get a hotel.

8. Congratulations. Thank Captain Kirk because he just got you a cheap hotel.

Using this method, I've gotten 3.5 and 4 star hotels for as cheap as $40 a night. It's way cheaper than the posted discounts. I'm a big believer in frugality as a general rule, so anything you can do to save money on a vacation or business trip is totally worth it.

Tithing

No financial principle more distinctly sets Mormons apart from the rest of the world than tithing. While many other churches encourage donations as the members of the congregation feel inclined to do so, Mormons donate a set percentage of their income. The law is simple: pay 10% of the money you make to the church. I consider this to be the cornerstone of financial success. We are promised to have the windows of heaven opened to us if we pay tithing. Why would you try and build your net worth without that kind of wind in your sails? Even more importantly, "It profits a man nothing to give his soul for the whole world ... but for Wales?"

Tithing is simple. Tithing is easy. Tithing is effective. There are plenty of arguments for it and stories about how things work out when you pay your tithing. I have my own share of those stories, and I imagine that many of the people who read this will have similar experiences. This post doesn't need to be long because not much needs to be said about tithing. Pay it promptly and strictly honestly and you will always have what you need.

Successful Money Management is More About Psychology than Optimization

I don't really follow sports, so I got to this article a little bit late, but it illustrates a huge point about money management that I wanted to mention. Essentially, this basketball player (Michael Carter-Williams) created a trust fund for himself with the massive amount of money that he's earning from his basketball salary.

A trust fund is kind of a strange vehicle for someone to create for himself or herself. Usually they're used to transfer wealth between parties. In this case, it seems like he created a trust to prevent himself from doing something stupid and blowing all his money. By forcing himself into a sort of savings plan, he can avoid the pitfalls that many other pro athletes fall into.

I think that's brilliant.

Managing your money is about playing to your own strengths and doing things to compensate for your weaknesses. If you can't deal with seeing stock prices fluctuate, maybe you should invest in real estate or something else where you don't get constant price quotes. If you can't read a balance sheet and you don't want to think too much about your investments, then index funds are a beautiful thing. There are options for every disposition and temperament, you just have to know yourself well enough to choose the right thing.

Also, my brain exploded when I read this paragraph:

The lack of financial health is a major epidemic in pro sports, Dzamba said, with 60 percent of NBA players declaring bankruptcy within five years of their athletic retirement and some 78 percent in the NFL doing so, according to a Sports Illustrated report.

What!? There are no words for how ridiculous this is.

The tale of three siblings: Stocks, Bonds, and Cash

I was thinking about asset allocation this morning, and I hit on a good metaphor. Let me know what you think.

The proper asset allocation is one of the most important decisions that you can make when dealing with your stash. Unfortunately, the ideas about the proper asset mix range from people like Peter Lynch who would say that you just stay 100% in stocks all the time, to people who avidly listen to Rush Limbaugh, many of whom I assume have taken their savings out of the market and invested heavily in gold. That assumption is based entirely on the commercials I heard when I stopped on his show for ten minutes once when driving. Therefore, I'm sure that it's 100% accurate.

I believe the more conventional idea that most people should have some mix of stocks, bonds, and cash. To illustrate my point, I'm going to use my wife's family as an example. Not so much their financial situation, but the life situation of some of her siblings.

First, my sister-in-law just got her mission call (huzzah!) to Taiwan. It will probably be a crazy ride. Weird, unexpected things will happen. It will probably the very stressful until she adjusts. The reward for all of this will be exponential growth. I'm not one of those who believes the stupid idea that a mission is the best two years of your life, or even the hardest two years of your life, but missions do a fantastic job of preparing you to meet later challenges.This to me is analogous to investing in the stock market. You get the expectation (over a long timeframe it's a near certainty) of fantastic growth, but there are a lot of ups and downs along the way. Stocks are the thing that does the heavy lifting in your portfolio.

My first brother-in-law is doing a degree at BYU. He's changed his major once or twice, but no matter what he does, as long as he finishes he'll get a degree in a relatively useful field (this doesn't apply to everyone...myself for instance). He'll have some growth, but not as much as a missionary. The main thing here is that he invests a certain amount of money and work for a virtually guaranteed reward (a degree). This is like bond investing. You're not going to hit it out of the park with bonds. The goal with bond investing is a predictable return and safety of principle They reduce your portfolio's volatility and act as a hedge against deflation.

Finally my second brother-in-law basically finished his degree at BYU, but didn't apply for graduation yet, so that he can take a few extra classes and (I assume) figure out what he wants to do with his life. I don't think he has been working much, and he definitely hasn't settled in to a career path. He's not married, not dating anyone seriously (that I know of), and basically still in the process of figuring out what he wants out of life. But when my wife got sick and we needed a lot of help around the house, which of the three siblings do you think was the first one to come and stay with us? Which one was the first person to make sure our house kept on running smoothly when everything was falling apart? This brother-in-law is like having cash on hand. You won't see the same growth the you will from the other two investments, but cash is there when you need it. When everything falls apart in your life (and believe me it will at some point), you want to have some cash on hand to make sure that you're not completely derailed.

So there you have it. Three siblings, three investments. If you haven't looked in a while, maybe it's time to check on your asset allocation.

Money Management and Marriage

As I said in the last post, I want to start breaking down the "One for the Money" pamphlet in more detail because it's such a great resource. After some initial introduction, the pamphlet opens with a story about a young couple who is planning on getting married. They're basically in good shape, but they haven't talked about money at all. He goes on to share some numbers (which I couldn't find anywhere) that something like 88% percent of divorces can be traced back to money quarrels.

Okay, I admit, that number seems high to me. Like really high. However, whether the number is accurate or not is irrelevant to the point. A significant number of divorces occur at least in part because of money problems. So what do we do about that? Elder Ashton gives a few good points. First, when choosing a spouse, "money management should take precedence over money productivity." I love that quote. Don't worry about how much your spouse will make, worry about how they'll manage what they get.

This idea is deeply connected to the Micawber principle. Micawber was a character in Charles Dickens' novel David Copperfield. He articulates a foundational principle of money management, "Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds nought and six, result misery." It's better to be poor and solvent than rich and in debt.

Finally, Elder Ashton's other suggestion is that the money management in the home should be "on a partnership basis." Even children should be involved on a "limited partnership basis." Don't stick your head in the sand and leave the financial work to your spouse. Division of labor is one thing. In our house, my wife pays most of the bills that aren't automated, but I still try to be aware of what is going on. The illustration of a yoke of oxen is apt in this situation. You need to have both partners pulling together in the same direction in order to get where you want to be.

"One for the Money" - Still Good After All These Years

When I think of money management, one of my first thoughts is this old pamphlet put out by the church called "One for the Money." It's based on a talk by Marvin J. Ashton given in 1975. I've been given probably 10 or more copies in my time in the church. Bishops seem to love handing it out.

I reread it today, and I can honestly say I'm blown away by how good all the advice is. He lays out step by step how to take care of your financial house. If everyone followed this pamphlet, I would have a lot less to write about. Reading through it, I think I could do dozens and dozens of posts on the content in there, while it covers everything in about 15 pages. I'm going to start breaking it down in detail in future posts, so look for that in the next few weeks (or months depending on how in depth I decide to go).

You can get the pamphlet online here.

Welcome

The first post of new blog is always a bit of a pain to write. I, like many people, have the skeletons of several now-defunct blogs floating around on the internet, so I've written several of these. I'm never really happy with how they turn out, but I figure I have to put something down on the page so I can get started writing about what interests me.

As far as this blog goes, I want to talk about personal finance, but I want to be free to put a religious perspective into my posts and thoughts. Since I'm a Mormon, the religious stuff will mainly come from an LDS perspective. Basically, I've been reading and studying about this stuff somewhat obsessively for the past six or eight months and my wife is starting to get a glazed look in her eyes when I talk too much about money. Thus, you find me here.

A little about me, I'm in my late 20's and nearing the end of my DMA program. As I've mentioned, I'm married and I have two little kids. After I (finally) finish school, I'm planning on saving as aggressively as possible in order to retire early. I'll probably get into more specifics as my posting continues, but that's enough for now.

If you're new here, feel free to look around and drop me a line if you have any questions, gripes, moans, complaints or suggestions.