Hi All,
Looks like the Federal Reserve is implementing new rules on banking overdraft fees.
Enjoy.
James
Author Archives: Team Dinks
Saving for a Big Trip
Recently a friend and I decided that 2010 was the year that we are going to make our long talked about trip to Ireland. We have been talking about this trip since we graduated from college and had always found an excuse to put it off. We didn’t have any money when we first graduated, then I had other, pricier financial obligations (buying an engagement ring, financing a wedding and a honeymoon, getting my savings straightened out so my new wife and I would be properly prepared for the future, paying for school, etc… etc… etc…). The excuses kept piling up until a couple of weeks ago when, during a phone call, my friend basically made the point that there will always be reasons why we should put the trip off to a future date, so we just have to do it. Emboldened by that and the fact that this is definitely something we want to do, we decided to plan to take this trip in the late spring of next year, so that means planning has to pretty much start now.
Most of my planning consists of the financial variety. I have my passport ready because of my honeymoon, and I will be able to save enough vacation time from my job that taking time off won’t be a problem (and I’ve already received the OK to move forward whenever, provided I provide my boss with enough lead time). So that just leaves making arraignments (a task aided by a friend of a friend who has made multiple trips to Ireland) and paying for it all. Assuming we want to leave around June 1st, 2010 and have everything paid for – outside of the normal vacation expenses such as food and activities incurred during the trip – by May 1st, that leaves me with about seven months to save up enough money, which should be plenty of time to get everything together.
The challenge for me will be in finding ways during the planning process to save money on the big ticket items – plane tickets, places to stay, pre-planned activities – that I can have some extra money left to allow myself to enjoy the things that make Ireland great. I’ll certainly keep you up to date during the planning process in case I come across some tips and tricks that could benefits you in the future.
From a personal finance point of view, big trips can run right up against many main tenants of managing your money. A vacation is supposed to be fun, and fun often costs a reasonable amount of money. I’ve worked hard to get myself to the point where I’m conscious of where my money goes and diligent in ensuring that I’m wasting as little money as possible. How am I going to reconcile that with the fact that this trip will be a huge expense? The honeymoon was easy: we saved up and bought an all expenses paid vacation. Everything (including enough activities to keep us busy) except drinks other than water at meals and souvenirs was included – I essentially dropped my wallet (and my cell phone) in the safe in the room and enjoyed myself. This trip to Ireland certainly won’t be like that. I don’t have that figured out yet, but I have realized a few things:
* The more planning the better: Pre-paid activities will be our friend. By paying up front, we’ve already taken care of the expense and we can just enjoy what we’re going to do. That and the fact that we both enjoy quiet downtime should help things. Going on the fly could get expensive, and could introduce large expenses for activities that we didn’t plan for.
* Budget tracking doesn’t stop at the border: Just because I’m on vacation doesn’t mean that I can forget where my money is going. I’m going to do my best to estimate my expenses beforehand and when I’m gone I’ll keep a record of my spending, in an effort to keep things under control.
* But most importantly, I’m going to just have fun. I’m going to accept the fact that I will be spending money and that it’s ok as long as I’ve planned for it. Vacations are the reward for hard work at home so it’s important that I enjoy myself.
When I was in college a friend of mine went on a trip overseas (interestingly enough, also to Ireland) and he ignored his finances and unfortunately ran out of money – literally. I suppose that’s a good lesson to keep in mind. I’m excited about the trip and eager to get with the planning! Readers, if any of you have any tips or interesting travel experiences, I’d be happy to hear them.
Michael
Twitter: @michael_dink
Inflation Controversy
In my first post in this series I talked about inflation figures as they are calculated by the Bureau of Labor Statistics. Today I’ll discuss some of the criticisms of this statistic and why it might actually be higher than what is being reported.
A cursory analysis of the information-gathering methods described by the Bureau of Labor Statistics certainly raises some questions regarding the accuracy of inflation figures. Any type of survey can introduce sampling errors, and it’s important for the surveyor to accurately quantify that sampling error, which the BLS does provide. However, this is nothing new within the general area of statistics, as CPI detractors focus more on the non-sampling errors. These errors include (according to the BLS) “logistical lags…difficulties in defining basic concepts and their operational implementation, and difficulties in handling the problems of quality change”. These are real issues that, if improperly managed, can have a significant impact on the final CPI values, and consequently, the inflation rate. The BLS attempts to manage these potential areas by periodically reviewing their price calculation and CPI weighting algorithms, as well as relying on their commodity experts who are responsible for making sense out of the figures the field analysts return. Regardless, questions have been raised by many economists about the validity of these values.
In this post I’ll discuss two main areas that critics have focused on: whether the 80,000 item index represents an impact felt by a “typical” family and how the BLS takes in account changes in the goods and services.
Having over 80,000 items in the index has its advantages and disadvantages. As far as the advantages are concerned, by having such a large index, you’re tracking most of the items purchased by American consumers. This will enable high granularity information on the costs of running a household. Pretty much anything you could think of purchasing is on the list. However, that fact doubles as a disadvantage, as the entire index is too extensive to act as a strong indicator of how the impact of inflation is felt by you as an individual. The BLS admits as much on their website, stating: “It is unlikely that your experience will correspond precisely with either the national indexes or the indexes for specific cities or regions”. Since the indexes are based on the average household experience, there will be goods and services used that are not representative of your experience.
Others have attempted to compensate for this deficiency by examining the CPI and eliminating non-essential items, or by focusing solely on major categories that are of high importance or are monitored closely. For example, housing is an area that garners a lot of attention. By focusing a specific index of the fluctuations in the housing market (and identifying differences between renting and owning, for example) you’re able to gain a clearer understanding on the housing statistics, numbers that could be washed out in the overall average. The U.K. for example publishes the same figures as the U.S. However, London’s The Independent compiles their own inflation figures relying on what they’ve identified as “core” goods and services. Their figure is often as much as twice as high as the government-released data.
Changes in goods and services present an interesting problem for the BLS. If, for example, a 2003 Buick costs the same as a 2009 Buick (same model) are they equivalent products? Obviously not, as the newer model contains improvements that increase its intrinsic value (better safety equipment, more efficient engine, etc…). If the 2009 model is $5,000 more, does that $5,000 properly represent the increase in value of the new model? So how does the BLS commodities experts quantify those differences? That is where they rely on the expertise of their economists, to make judgment calls (based on their experience and historical data) that affect how those figures are calculated. The same goes for things like technology. How much more worth is contained within an iPhone 3GS than the first generation iPhone? That is a very difficult thing to quantify.
Ultimately the issue of inflation is drawn back to income. If your income increases at a rate greater than the rate of inflation, then you are ok; you’re building wealth (assuming you buy the same goods and services every year). If you receive a raise that is less than the rate of inflation, then your paycheck might be larger, but you’re purchasing power is lower. While you might not necessarily be able to make a one-to-one comparison between government-released inflation figures and your own experience, it’s still a good figure for examining the health of the economy as a whole.
Michael
Twitter: @michael_dink
How Is Inflation Calculated?
David from The Liberty Blogger recently raised an interesting point on a post of mine a bit ago regarding discrepancies between the official government inflation rates and some alternative ways of calculating inflation. That piqued my interest in the ubiquitous economic indicator that we all have a general idea of what it means but I for one have been unclear on some of its specifics. Over the next two posts I’ll be discussing inflation. In today’s post I’ll discuss what inflation as we commonly know it is. My next post will discuss some of the criticisms surrounding how inflation is calculated and its political and economic impact.
Inflation is regarded as the general movement of prices of goods and services in an economy over a period of time. It is also intrinsically tied to the idea of “purchasing power” – the number of good and services that can be acquired with a given unit of money. Assuming a stable income level, an increase in inflation is met with a decrease in purchasing power. For example, $5 in 1950 would allow you to purchase more goods and services than $5 in 2009; a decrease in purchasing power. Therefore, the purchasing power of a dollar decreases as prices increase.
Inflation, as we commonly know it, is calculated by measuring changes in the Consumer Price Index. The Consumer Price Index is a value that attempts to quantify the cost impact of a series of goods an services on “typical” urban families. Calculating the CPI is a two-step process. First, Census data is used to select areas in the U.S. where information on the prices of goods and services will be taken. Next, again using the Census data, a sample of around 14,500 families are selected to provide information on the types of goods and services typically purchased and where those goods and services are most commonly obtained. Then each month, analysts from the Bureau of Labor Statistics call or visit those selected retailers to gather information on the goods and services that make up the index, roughly 80,000 carefully selected items.
In addition to price information, information regarding any changes are also noted – most commonly things like reduced packaging or the discontinuation of that good or service. Once all that information is gathered, specialized analysts at the Bureau of Labor Statistics review the information, compiling the national figures while taking into account variations in the products described above. All the numbers for all the goods and services are aggregated into its designated category (including Food and Beverages, Housing, Apparel, Transportation, Medical Care, Recreation, Education and Communication and Other). Each category value is then weighted and combined with the other category to produce the final CPI value.
Of course it’s not that simple, as many different CPI values can be produced. Values can be seasonally adjusted (recalculated for the effects of the season), or restricted to “core” value (removing categories like Food, as they tend to be more volatile), restricted to Wage Earners and Clerical Workers (as opposed to All Consumers), or restricted to a specific region.
In my next post I’ll discuss some criticisms leveled towards this model of inflation. Stay tuned.
Michael
Twitter: @michael_dink
Don’t Fall for Advertising
Hi Folks,
Regular readers may have wondered if I’ve fallen into a hole, or off the edge of the planet. Leaning towards the later, as I’m beyond the horizon, currently in Monrovia, Liberia. I’ve been busy working instead of blogging, but wanted to bring you some Saturday commentary.
So here in Liberia, my reading resources have gone dry. I under-calculated my reading needs and have run out of all reading material. This meant that I started scrounging around the work guesthouse to see what I could find.
I had been reading a 2003 National Geographic magazine, when this morning I noticed the back add.
It was from AIG. The ad claimed that it was the bank that you could invest in for your great, great, great, great, great, great, great grandchildren.
Of course, fast forward a couple of years, and this is clearly a bunch of baloney to those who lost both small and massive amounts of money in AIG.
Lesson of the Day: Don’t get duped into falling for advertisements. They are probably worth less than it cost them to develop.
Have a great weekend!
Miel
The Great Big List Of 75 Budgeting Tools
is over at Bible Money Matters. Check it out.
Doing Things Yourself vs. Paying Someone Else
My senior year of college my roommates and I emerged from finals week and realized we had to get right on to moving out of our apartment. Because we lived in University-owned student housing, that meant a thorough cleaning which would be verified by a member of the housing staff. Any violations would result in a fine and we were staring a whole apartment worth of fines straight in the face. After surveying the considerable damage, one of my roommates and closest friends turns to me and with a completely straight face suggested we hire a maid service. I emphatically rejected this proposition based on the fact that a.) we had absolutely no money to pay a maid, certainly not enough to pay a maid to clean this disaster and b.) I swore I wouldn’t pay someone to do a job I’m more than capable of doing myself. We ended up cleaning the apartment ourselves, much to the chagrin of my friend, who complained the whole time.
I was reminded of this story the other day when I realized I was overdue for a trip to Jiffy Lube to get my oil changed. I hate going to some place to get my oil changed for the same reason I didn’t want to hire a maid to clean my senior year apartment. I may not be the most capable auto mechanic but given the right tools I can do the basic jobs: rotate tires, change the air filter, check the spark plugs, refill fluids, change the battery, replace fuses and lights and change the oil. Unfortunately my apartment complex does not allow me to make auto repairs, to the point where they have in the past indicated that they would fine people caught taking up space to perform auto maintenance. So, begrudgingly, I take my car to the local Jiffy Lube, sit in an uncomfortable chair in a smelly room for a half an hour until the job is done. But it makes me think about the cost comparison between doing it myself and going to Jiffy Lube (or some other similar place). To do it myself, I need the following equipment:
* Ratchet – $15
* Wrench for the Oil Filter – Wrench sets usually run around $25
* Oil Pan – $10
* Funnel – $2
* Oil Filter – $5 to $10
* Oil – Let’s assume four quarts at about $5 a quart, so around $20 (just like oil filters, this can be cheaper if bought in bulk)
* Rag – Negligible
Of course those are all rough estimates for the sake of argument. That’s a total cost of $77-$82, but only $25-$30 of that are recurring costs. Compared with around $35 for a oil change at Jiffy Lube, it would take about a year to make your money back, quicker if you already have the necessary tools.
That isn’t a lot of savings, but over the lifetime of your car, you could save a decent amount of money. Either way, I’d still rather do the work myself, on my own time, but I can certainly understand why some would choose to let someone else do it and save the hassle. Ultimately with these types of services (housekeeping comes to mind as well), what you’re really paying for is the time you save. For me, a guy who sits at a computer all day, it’s kind of nice to do something productive with my hands, but the time and hassle you can (potentially) save by going to a service station would certainly be nice.
What about you readers? What services are you willing to pay for, and which would you rather do yourself and why?
Check out other great savings posts at the 5th annual Saving with Sadie Carnival.
-Michael
Twitter: @michael_dink
Microcredit and Pre-Bankability
In 2006 Muhammad Younus and the organization he founded, the Grameen Bank in Bangladesh was awarded the Nobel Peace Prize for their work in providing loans to the poor in an effort to provide a means of self-employment and a hopeful path out of poverty. As he tells in his book, “Banker To The Poor: Micro-Lending and the Battle Against World Poverty”, the idea first came about when he loaned $27 of his own money to a group of stool makers in a tiny village. He famously talks in his book about how those individuals just needed a little bit of money to buy the basic materials necessary to start their business and eventually work their way out of poverty.
The essential idea of microloans is the extension of credit to those impoverished individuals with limited employment and credit history who lack the necessary collateral or other means to obtain a loan (sometimes referred to as “pre-bankable”). The loans provided to those people would be used to start a business, hopefully kick-starting an entrepreneurial enterprise that would not only benefit the individual acquiring the loan, but also other impoverished individuals as the business gets off the ground. Microcredit is considered more of a sociological initiative than a financial one, as it is viewed that helping small businesses in poor areas benefits everyone in the community. Most of the loans made are relatively small, or like in the case of organizations like Kiva, made up of a series of very small loans.
Despite the publicity and goodwill directed towards microcredit, it is not without its detractors. Some argue that external governments who provide microloan assistance become more likely to cut back on more direct-funding aid. Also, the argument has been made that issuing credit in these types of situations is no different than credit cards and consumer spending: the borrowing can be sucked into a cycle of lending that fails to improve their financial standing while making them more and more dependent on those loans. And of course there are instances of corruption. Kiva has been the target of a fair amount of criticism, mostly centering on the interest rates that are set for the loans, which can be relatively high. Kiva defends their rates by making the argument that those loans are extremely high risk, and are expensive to provide to those in under-developed nations. Additionally, Kiva has opened up microlending to the United States, a decision that was met with a sharp outcry. Kiva’s critics argued that while the poor in the United States are certainly in need of assistance, they still have access to education, limited health care and government assistance, services not available to those in the developing world.
Microcredit is certainly not a perfect model for eradicating poverty world-wide. The Grameen Bank has provided great services to the poor in Bangladesh, but has also sparred with the World Bank, an organization with wide-spread influence in the fight against poverty. From a ideological standpoint, Younus has faced opposition from heads of government and skepticism from fellow economists (he once referred to credit as a “human right”) but there’s no question that despite the criticisms, microlending has made a significant impact in the fight against poverty. This type of aid (and although it is a loan, I would still consider it aid, due to the high risk involved and the individuals targeted) goes directly to the person most affected. Whether it is successful or not, it provides an individual the opportunity to improve their standing in life, and sometimes all that is needed is the opportunity.
If you want to learn more about the development of microlending, I suggest you read Younus’ book – “Banker to the Poor” and check out websites like Kiva.
Michael
-Twitter: @michael_dink
Giveaway: The New Rules For Mortgages
Hi All,
It’s Tuesday on the east coast. If you are interested in learning more about the mortgage market, this is the posting for you. We are giving away a free copy of Dale Robyn Siegel’s latest, The New Rules for Mortgages. Just leave a comment at the bottom of this post and we’ll pick the winner at random on Friday.
Whats really valuable about this book is that its an up updated and comprehensive look at lending standards in the mortgage market. Because of the housing crash the lending market has changed considerably – gone are the days when you could get a fat loan without a job or a down payment. If you’re shopping for a house or are looking to pick up an investment property, this book can provide you an updated and thorough sense of the lay of the land.
Best part of the book – its free!
Folks – don’t forget, if you’re interested leave a comment with a valid way to reach you. Once the winner is chosen on Friday the book will be sent to you via snail mail.
Best,
James
How Great American Fortunes Are Acheived
Hello Folks,
In my spare time, I’ve been working through a copy of C.W. Mills The Power Elite. For those of you who haven’t heard of the book, its a treatise from the 1950s by Colombia University sociologist C. Wright Mills. The work is a masterpiece and provides a convincing explaining how wealth and power are distributed in American society.
Here is what Mills has to say about how great fortunes are generated in the US. If you’re interested in attaining a great fortune – and you probably are otherwise you wouldn’t be reading this blog – here an excerpt from the book:
I. No man, to my knowledge has ever entered in the ranks of the great American fortunes merely by saving a surplus from his salary or wages. In one way or another, he has come into command of a strategic position which allows him the chance to appropriate big money, and usually he has to have available a considerable sum of money in order to parlay it into really big wealth. He may work and slowly accumulate up to this big jump, but at some point he must find himself in a position to take up the main chance for which he has been on the lookout. On a salary of two or three hundred thousand a year, even forgetting taxes, and living like a miser in a board shack, it has been mathematically impossible to save up a great American fortune.
II. Once he has made the big jump, once he has negotiated the main chance, the man who is rising gets involved in the accumulation of advantages, which is merely another way of saying that to him hath shall be given. To parlay considerable money into the truly big money he must be in a position to benefit from the accumulation of advantages. The more he has, and the more strategic his economic position, the greater and the surer are his chances to gain more. The more he has, the greater his credit – his opportunities to use other peoples money – and hence the less risk he need take in order to accumulate more. There comes a point in the accumulation of advantages, in fact, when the risk is no risk, but is as sure as the tax yield of the government itself.
Once you have a million, advantages will accumulate – even for a man in a coma.
I hope you’ll excuse the archaic language, gender roles have become significantly more egalitarian since Mills wrote and its possible for the same processes to apply equally well to women in todays world, otherwise Mill’s core insight remains relevant and important to understanding how true fortunes are built.
Enjoy,
James