Yesterday, I took out a debt consolidation loan, and I posted about it on a frugal living website where I also post. The comments that I received were supportive of my getting my act together, but also chastising–why don’t you cut spending instead? Why don’t you find a lower loan rate? Of course, on a frugal living site, that is the type of comment you will get. But this also forced me to think about what one buys when one takes out a loan.
If one takes out a longer term loan than one actually needs (as I did), *and* (importantly) there is no prepayment penalty, then one is actually buying oneself some freedom and flexibility. And with fixed loan payments rather than hopping around from one 0% credit card balance transfer to another, I am also buying myself considerable peace of mind and the ability to schedule.
Yes, it is true that the money I spend on debt repayment won’t be there for retirement. But THAT’s a sunk cost. And sunk costs are irrelevant to future decision making! The debt accrued, I’m not sorry for the expenditures (much of it spent on trying to save dying pets and on professional development expenditures to support my career change), and the debt needs to be repaid in any case. One can’t undo the past, one can only move forward from where one is.
And while for people who are unlikely to ever have the money to repay the debt, avoiding it is a good idea, for those of us who have good reason to believe that our careers are on an upward course and who, with good reason, believe that they will eventually have the wherewithall to pay, using debt as leverage to purchase some peace of mind is not necessarily a bad idea—perhaps even a good one. I wouldn’t do this if my debt to equity ratio were over 60%, as it was a decade ago. But mine is currently under 21%, which provides good odds that my spending a bit more on interest to buy peace of mind will have a good result.
Some interesting things to know if you are one of the people who, like me, is buying their own insurance from the healthcare exchanges and receiving an advance subsidy from the government to help pay for it:
1. If you received a subsidy this year that was directly paid to your insurance company, you MUST have your return filed by April 15th. No extensions–not even if you are missing crucial information like K-1s from partnerships etc. Your preparer will have to make a good faith estimate, note the number under question in a statement attached to the return, and file an amended return if needed. The IRS needs the return in order to calculate whether you received too much subsidy and need to return the advance payments, or whether you received too little and get a refund.
2. This January (or actually, for 2015, February 2) and every year henceforward, you (EVERYONE, not just people buying care off the exchanges) will receive a new tax information form to be brought to your return preparer with information about your health insurance. Most of these forms are numbered 1095 with a letter indicating whether the insurance was purchased through your employer or from other sources. Your preparer cannot file your tax return until you have your information form, so tax season will be delayed and abbreviated this season. Expect very harried tax preparers especially as tax season progresses. Also because of the additional work required to reconcile the information, potentially up to an additional hour per return, especially if your insurance changed during the year or if you had a coverage gap during the year, expect tax return costs to go up this year. On the other hand, you are much more likely to be able to avoid or minimize penalties if you are using a qualified tax preparer–and especially if you have a tax planning meeting before year end–so the value provided in return for the fee only increases. But if you are focused only on the cost, it will probably go up more than usual this year.
3. If your income changed during the year in any substantial way from the way you estimated it last year when signing up on the exchange, you should have gone on to healthcare.gov or your state exchange and updated your information during the year. Especially if your income went up substantially, you could lose the subsidy and have to repay it–even if your modified AGI was just one dollar over the limit for your filing status.
4. If you chose to remain uninsured this year, you will owe a penalty. The MINIMUM penalties rates are relatively low this year (the $95 Single minimum penalty number has been much bandied about) and will rise steeply over the course of the next two years, but if your income was a middle class income and you went uninsured, your penalty could be quite steep–up to 1% of income this year (going up to 2.5% by 2016), and capped for this year at $9800 (the national average price of a bronze plan for a family). Some taxpayers are going to be in for a nasty surprise.
5. If you owe a penalty and have a balance due on your tax return, as opposed to a refund, if you don’t pay the amount that is due because of the penalty, they won’t actively come after your for it. What will happen is that interest and penalities will continue to accrue, and if or whenever you next have a refund due, the IRS will take it. Interest will accrue until the entire balance is paid.
6. The subsidies are now under Supreme Court challenge for those of us who receive the subsidy from Healthcare.gov, as opposed to from a state exchange. The Supreme Court on Friday accepted the King v. Burwell case, which challenges the legitimacy of subsidies received from the federal as opposed to the state exchange, since the governing law refers to “State” subsidies. Two different Circuit Courts decided differently on this issue, hence the Supreme Court acceptance of the challenge. TBD by June-yet another way the Right is trying to make the Affordable Care Act go away. Two-thirds of people would lose their subsidies if the word “State” is interpreted in the narrow rather than in the broad sense, making insurance unaffordable for them and effectively undermining the law.
Lately, I have been reading about Mindfulness. I posted two reviews over at Amazon.com, which I would like to share. But first, some initial thoughts about the relationship between Money and Mindfulness that I hope to be able to expand on in the future.
- People have strong emotional reactions to financial issues–as one therapist put it to me, “Patients are far more comfortable talking about sex than they are about money!”
- While much of this reticence may be about social comparison and social norms that people are aware of, I believe that much of this discomfort is due to nonconscious forces. Money is itself merely symbolic, not real, which gives us tremendous latitude in how we think about it. And our attitudes about money are formed early–not as early as attachments, but certainly during our early years, we pick up a lot from our parents about their views of money during that early childhood time when our minds are largely nonverbal. Is money gold or is it sh*t? Our conscious mind may see one while we retain less conscious associations that say the other. Whether you believe in Freud or not, I think there is ample evidence from research on neuroscience that our brains operate at multiple levels, some primitive, some higher order, and that these levels may conflict without our conscious awareness.
- Thus one way that mindfulness can help is by enabling greater access to other levels of the brain. When one routinely practices mindfulness and nonjudgmental watching of brain activity and trying to focus on sensations without categorizing them, one becomes aware of little brain flashes and associations that are not accessible in our controlled conscious linguistic mode–at least, that has been my personal experience.
Emotional intelligence (EQ) consists of skills that help with “the accurate appraisal and expression of emotions, the effective regulation of emotion in self and others, and the use of feelings to motivate, plan, and achieve in one’s life” (Salovey & Mayer, 1990). While the debate is still out on whether EQ is more important than IQ for career success, EQ is at least as important as IQ. That is, given equal IQs, the person with higher EQ will probably do better in their career.
One reason there is still a debate about whether EQ or IQ is more predictive is that the relative importance of the two undoubtedly varies for different careers. But there can be little doubt that EQ is critical to the job search, no matter whether the job you are hunting for is Mechanical Engineer or Sales Manager.
Daniel Goleman, in his book Working with Emotional Intelligence (1998), divides emotional intelligence into four factors: Self-Awareness, Self-Regulation, Social Awareness, and Relationship Management. As a psychologist, I have studied the self-concept, so I will focus on the two self-oriented aspects of EQ in my discussion.
Self-Awareness and the Job Hunter
A first EQ factor that is relevant in the job search is self-knowledge. This includes knowing your skills (specific and job-relevant), knowing your strengths (broader aspects of personality functioning such as humor, creativity, and leadership), and knowing your current state, in particular your capacity for tolerating frustration and anxiety given your current life circumstances.
There are three reasons having good self-awareness is important for the job hunter.
- What is optimal for one person is not optimal for another. There is no such thing as “a great job”—there’s a great job for you.
- What is optimal for a person in one set of circumstances may not be optimal for that same person in a different set of circumstances. Even if you normally thrive on excitement, your capacity for dealing with the stresses of the job hunt might be compromised if you are also simultaneously caring for an aging or dying parent or going through a divorce.
- What matters most is having a reasonably good fit between the job and your personal characteristics (Colón (2010) suggests at least 70%). People who are a good fit to the job and the job environment tend to be more satisfied with their jobs (Furnham & Schaeffer, 1984).
Self-Regulation and the Job Hunter
A second EQ factor in the job search is the impact of negative emotions. Depression is associated with feeling helplessness and hopelessness, and leads to withdrawal. The person feels that success is so unlikely that they may not even try, thereby dooming themselves to failure.
Even more common for those with prior job success is anxiety. Anxiety is associated with feelings of uncertainty. The anxious person may engage in self-defeating behaviors (e.g., procrastination, or failure to sufficiently prepare for an interview) that allow them to preserve an illusion of competence (“I probably would have gotten the job if I’d had more time to prepare for that interview”) by creating an excuse for failure in advance (“self-handicapping”).
Alternatively, the person may prepare, but choke during the actual interview. There is not a straightforward relationship between motivation and performance—the relationship is an “inverted U” (Yerkes & Dodson, 1908; Beilock, 2010). That is, increasing motivation improves performance but only up until a point—after that, increasing motivation interferes with performance because the person focuses more on the negative emotions than on the task. Too many people act as though putting more pressure on themselves or others will inspire better performance. That excess pressure undermines performance instead.
Thus, to manage a job search effectively, manage your emotions.
- Go to only as many motivational job hunting events as you can tolerate. While the information is useful, these seminars may serve as often to make people feel inadequate as they do to pump them up to achieve. Social pedagogy theory teaches that we have a comfort zone, a learning (and anxiety) zone, and a panic zone (Senninger, 2000). Your goal is to increase your comfort zone by gradually moving into the learning zone while avoiding the panic zone. Hitting the panic zone is what causes people to behave in a self-defeating way. If going to too many job-hunting events puts you in the panic zone, limit your exposure. Don’t avoid them, but don’t overwhelm yourself either.
- Use exercise and stress reduction techniques like meditation, yoga, or tai chi to keep the anxiety under control. Recent research on meditation shows that you actually change your brain through meditation in a way that makes controlling anxiety easier (Note: some excellent “starter” meditation audios can be found at http://marc.ucla.edu/body.cfm?id=22), and a decade of intensive research shows benefits for mental health, physical health, behavioral regulation, and interpersonal relationships (Brown, Ryan, & Cresswell, 2007). Yoga and its counterparts such as Tai Chi have similar effects, and may be particularly appropriate for a person whose anxiety is so high that they become flooded with their fears when they sit down to meditate.
- Learn techniques that will help you reframe the situation and your own negative thoughts. Effective techniques come from cognitive-behavioral and acceptance and commitment therapy (I’d recommend two books, “The How of Happiness” (Lyubomirsky, 2009) and “The Happiness Trap” (Harris, 2010) for good introductions). These techniques will help you think differently about the situation, and while perception is not reality, it certainly shapes how you respond to reality.
- Take baby steps (a technique called “partializing” by therapists, which is somewhat similar to the Kaizen management approach used in Japan (Maurer, 2004)). Taking just one step is much less anxiety provoking than imagining the entire journey. Taking baby steps helps—but make sure they are the right ones. As job coaches say, the vast majority of jobs are obtained through networking and not through the online job boards. We can fool ourselves that we are taking action by spending 8 hours a day at our computer filling out job applications, but most of those applications go into the “black hole” (Colón, 2010) and gain us no response. Put your efforts where they are most likely to count.
- Work smarter not harder, don’t spend all your time sending out applications, but DO get out there—do volunteer work, go to networking meetings, develop your interests, and find some kind of exercise to do that you can do with others in a group. You never know where you will benefit. The friend you made at an environmental group a decade ago might just turn out to be someone with connections to the company you want to work at. Focusing on ancillary activities will build your network, your credentials, and your self-confidence, and if one of the activities is exercise, will reduce your anxiety as well. In addition, engaging in activities you truly enjoy makes you feel good and also provides “self-affirmation” which can decrease the likelihood of engaging in self-defeating behaviors (Wurf et al., 1991; Siegel et al., 2005).
- Finally, practice. All humans are “limited capacity processors”—there is only just so much cognitive space that we have to devote to regulating our behaviors and our emotions. As psychologist Roy Baumeister and his colleagues have shown (Baumeister & Tierney, 2011), willpower is like a muscle: it exhausts and becomes less effective when used, but its capacity builds with practice. Also, practice builds neural connections and neural speed. Behaviors become automatic and require less cognitive capacity to perform. So, practice: rehearse your 30-second elevator pitch and your answers to key behavioral questions. In addition, try to practice as much as possible in the types of situations where you will be tested. The situation does not need to be an exact replica—emergency room physicians get excellent practice using simulated heart attack emergencies. A simulation is not as emotionally overwhelming as the real event but it is similar enough to make a big impact on performance when the real patient comes in. Start by practicing in front of a mirror, then go to networking events where you have the opportunity to practice with your peers.
As career coach Kevin Kermes (http://www.kevinkermes.com/) said, “A job hunt is a marathon and not a sprint.” Marathoners know that the race is as much about mental strategy and preparation as it is about physical, and marathoners prepare by running a lot of short runs and relatively fewer long ones in preparation for the race. Similarly, be strategic in your job-hunting. Pay special attention to knowing yourself and the jobs you apply for, focusing on your fit to the job description, rather than applying willy-nilly to as many jobs as you can; and carefully manage your emotions so that you keep an upbeat, optimistic attitude.
Baumeister, R. F., & Tierney, J. (2011). Willpower: Rediscovering the greatest human strength.
Beilock, S. (2010), Choke: What the secrets of the brain reveal about getting it right when you have to.
Brown, K. W., Ryan, R., & Cresswell, J. D. (2007). Addressing fundamental questions
about mindfulness. Psychological Inquiry, 18, 272-281.
Colón, R. (2010). Win the race for 21st century jobs.
Furnham, A. & Schaeffer, R. (1984). Person-environment fit, job satisfaction, and mental health. Journal of Occupational Psychology, 57, 295-307.
Goleman, D. (2002) Working with emotional intelligence.
Harris, R. (2008). The happiness trap: How to stop struggling and start living.
Lyubomyrsky, S. (2008). The how of happiness: A new approach to getting the life you want.
Maurer, R. (2004). One small step can change your life: The Kaizen way.
Salovey, P. & Mayer, J. (1990). Emotional intelligence. Imagination, Cognition, and Personality, 9, 185-211.
Senninger, (2000). The learning zone, http://social-pedagogy.co.uk/concepts_lzm.htm
Siegel, P. A., Scillitoe, J. & Parks-Yancy, R. (2005). Reducing the tendency to self-handicap: The effects of self-affirmation. Journal of Experimental Social Psychology, 41, 589-597.
Wurf, E., Costello, K. & Protomastro, M. (1991). Self affirmation eliminates self-handicapping (American Psychological Association conference poster presentation).
Yerkes, R. M. & Dodson, J. D. 1908. The relation of strength of stimulus to rapidity of habit formation. Journal of Comparative Neurology and Psychology, 18, 459–482.
1. We are poor at “affective forecasting,” or predicting how we’ll feel—in large part because we tend to project our present emotions into the future. As a corrective, hink not just about how you will feel about getting the item, but think about how you’ll feel after you’ve had it for a while.
Remember those items of clothing in your closet that still have the tags on them, or the books or DVDs you’ve bought but never managed to read or watch.
Also think about the downsides of the purchase—the excessive packaging waste if you’re an environmentalist, the need for storage, the decrease in your checking account.
2. It is helpful to know something about brain organization—not to be a brain scientist but to know that we have a “triune” brain—a “reptilian brain” that helps us with basic biological, sensation & perception and movement, a “mammalian brain’ that is focused on emotions and memories, and a “hominid brain” in the prefrontal cortex that is focused on our higher-order reasoning powers. Desire is rooted in the dopamine systems of the mammalian brain, and our hominid brain, with maturity and practice, usually has the ability to control our desires. It is also useful to know that “wanting and liking” are separate from each other, according to Kent Berridge’s work, and this means that it is possible to want what we ultimately do not like, which becomes the case in many addictions.
3. A key idea from psychology is “automaticity”—we only use the higher order powers when we really need to and much of the time we operate on automatic pilot. So you want to make the desirable behaviors like saving automatic and the less desirable behaviors like overspending more conscious or mindful.
- Put your saving and investing on automatic pilot.
- Make a list and sticking to it when shopping.
- Track your spending. If you sign up for an online “data aggregator” account on Mint.com, wesabe.com, yodlee.com, or mvelopes.com and input your bank account information, which is secure, your spending will be automatically tracked, and then you can make an appointment with yourself each week to check that you are on track. Or if you’re a paper and pencil type, use envelopes, or if you just don’t want your data on the web, get a program to put on your PC—I like You Need a Budget.
4. Making a precommitment and keeping track of how long you’ve been on track can be useful because it’s easier to make a commitment in advance of being in the actual situation, and also because we hate to break streaks (Rachlin’s work).
5. Fight automaticity by building in a delay—I use my amazon.com shopping cart and wish list to keep track of things I want to buy, but never allow myself to buy them immediately. I’d say that I ultimately buy 10-20% of the things that I put on the list and felt that I “needed.” (The amazon.com shopping cart allows you to put up to 600 items in and then move to “save for later”).
In the interim, I look for alternate ways to get hold of them—for example, from the library.
6. Pay attention to WHY you’re buying—are you buying a symbol of what you want—will buying the 20th cookbook actually make you the cook you desire, or is this a purchase an image of a “desired” possible self.
7. Channel factors—we are very influenced by how easy or hard it is to do things (eg Leventhal tetanus vaccination study), so make it hard for yourself to spend by
don’t go shopping for recreation—find substitutes
Don’t bring your credit card—limit yourself to cash on hand, which you have precommitted yourself to.
8. For women, especially, social support is key. Women often make shopping recreational, so its important to make “not shopping” a fun part of your social life too. Develop a support group around simple living, or around an alternate activity like cooking, watching videos at home, or hiking.
9. When you do spend, remember that what people often end up valuing most in retrospect is experiences rather than material things, so try to make room in the budget for a day at the shore or some other fun experience, and choose that rather than the new handbag, because ultimately you will treasure the memory and the handbag will end up donated to goodwill when it goes out of style.
Yesterday’s (5/17/08) New York Times featured an article by Ron Lieber titiled, “Five Basics for Building a Solid Financial Future.”) This reminded me of other “summary rules” posts I’ve seen, most notably the two below:
After thinking long and hard (and based on these and other readings!), I have compiled my own list of rules.
1. Spend less than you earn. (You can do this by either or both spending less and by earning more.)
2. Be prepared for the unexpected.
3. Know your goals, and allocate risk accordingly.
4. Invest primarily using index funds.
5. Only get into debt when it is leverage on an investment.
6. Automate billpaying and investing as much as possible
7. Adjust the price of items to reflect their cost to you in time spent working before you decide whether to pay it (adjust upwards to reflect both income taxes and the additional costs you incur by working; a good approximation for many working middle class people will be a 50% increase).
8. Know what you are buying, which is not necessarily what they are selling (ATT is selling “relationships” with “Reach out and touch someone,” but you are only buying a phone service; cosmetics are selling the vision of yourself as sexy and desirably but you are only buying a lipstick), and get what you pay for (be a good consumer advocate for yourself; ask for service, make returns if the product is unsatisfactory).
9. Use the power of time to make your money go further (take advantage of compound interest on investments; give yourself a day’s delay to limit impulse spending).
10. The ultimate financial goal is financial independence.
11. Invest not only financially, but in relationships, self-development, and in your health.
12. In deciding what to spend or invest your money in, remember that making a decision that is “good enough” rather than “the best possible decision” maximizes satisfaction (Schwartz) and that, in the end, people value experiences more than material goods (Van Boven), regret things not done more than the things that they have done (Gilovich), and will often end up happier than they expected with difficult decisions due to the operation of the psychological immune system (Gilbert) (the names cited are the psychologists who have done relevant research).
*To earn $30 to spend, you need to earn more than $30 because of taxes–federal, state, and local income taxes, Social Security and Medicare, state unemployment insurance–totalling these together, using the average rather than the marginal federal tax rate will approximate 25% of income for most people, so you need to earn 1.25 * $30 = $37.50 to have $30 to spend, just by adjusting for taxes.
But one also must consider that one spends a lot of money to earn money (as is elaborated in Joe Dominguez’s and Vicky Robbin’s Your Money or Your Life, from whom this next idea is taken)…one spends on increased transportation costs (gas, parking, increase depreciation and repair), increased food costs (more meals out and prepared food bought at the grocery store because you don’t have time to cook), increased costs for clothing (professional clothing, dry cleaning, professional haircuts, cosmetics), and increased “stress reduction costs” (massages, vacations that you need because you’re stressed from working), and increased technology/communication costs from trying to keep up with the pace of business life, not to mention child care costs for those who have children (or even in some cases, “fur kids”). Say that those expenses total 20% of your total spending.
Dividing 37.50/26 yields 1.5, or a 50% premium on the stated price–what you really need to earn in order to pay it.
On the face of it, it sounds like trying to get the best deal is a good thing. Who wouldn’t want to get the best possible product for the least possible price? But economic theory and psychology research show that this isn’t what you always want to do.
From economics, one relevant concept is opportunity cost. The cost of a decision includes not only its price, but also the cost of the time and effort spent deciding. If it takes you thirty minutes to decide what you’re having for lunch, then that’s thirty minutes that you’re not able to spend taking a walk, doing errands, or earning more money. So while it’s probably worth it to spend 30 minutes looking up reviews on that hundred-dollar toaster oven you’re thinking about buying, it’s probably not worth it in terms of the time and effort sacrificed to spend the same 30 minutes agonzing over a $6.95 lunch entree.
Another relevant concept from economics is the principle of diminishing returns. Let’s go back to the toaster oven purchase example (I bought one of these just last week). With the advent of the internet, doing a bit of basic research is very easy–amazon.com and other online retailers usually offer consumer reviews, and there are independent review sites such as epinions as well. Twenty or thirty minutes spent browsing one of these sites can tell you which products the majority of (commenting) buyers are happy with, give you an idea of the price you can expect to pay, and the relevant features to look for in making your decision. What you learn in the first half hour of research should make your decision a significantly better one. (To quantify it, we’ll say that your deicision is now twice as good, or 100% better). But some people continue their research well beyond this time frame. Spending 4 hours, for example, on online research for a hundred dollar product is not worth it. Yes, you may end up with a better product, but the improvement in quality in what you find in your second, third, and fourth hours of research over what you already learned from your first hour of research is not that much better. Whereas your first 30 minutes of research yields you an outcome that is 100% better, the second half hour may add only a 50% improvement beyond that. Using the idea of “halving” your improvement, by the end of your third hour of research, you still may be finding a better product that you found after 2.5 hours of research, but now it’s only 3% better–not enough better to justify the additional time and effort.
According to research in psychology, however, not everyone recognizes this. Professor Barry Schwartz of Swarthmore College, in his book The Paradox of Choice, proposes that people can be divided into two types, Maximizers and Satisficers. Maximizers are motivated to get the best possible outcome, while Satisficers are happy with an outcome that’s “good enough.” Maximizers are particularly likely not to recognize the diminished returns from extra time and effort spent shopping. So they spend more time, may actually end up with a marginally better product, but end up much less satisfied with their purchases than Satisficers do.
One of the underlying assumptions of economics is the idea of human rationality–that people will attempt to maximize their own well-being, or “utility.” In contrast, some perspectives in psychology–most notably the psychoanalytic–have presumed the fundamental irrationality–the “psycho-logic” (as opposed to logic) of human beings.
The conflict between perspectives has eroded over the last 20 years as the new integrative field of behavioral economics (also known as behavioral finance) has developed. My goal in this blog will be to explore some of the ideas and concepts from both psychology and behavioral finance and to consider how understanding these can help people develop a higher level of financial well-being, or fiscal fitness.