Happy 4th of July

Happy 4th of July. I hope everyone has a happy holiday and long weekend! My wife and I are visiting both sets of parents over the holiday, and are looking forward to an extra couple days of work. I’m planning to catch up on my reading list, and perhaps catch up on sleep as well.

If you are traveling this weekend be sure to bring a book along for the ride (or flight). It’s easy to waste the time you have waiting for flights, etc. If you want to continue to learn and improve your skill set, why not pick up a non-fiction book on the topic of your choice and learn something? It doesn’t have to be financial-related either. It could be a trade magazine, a NY Times bestseller, or a book a colleague recommended. Heck, why not make it a book about improving your marriage or on raising kids. The topic should be specific to you, but using travel time to learn something is a great way to pas the time. Audio books work well too!

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Learn To Be More Content

It’s difficult to have “enough”. Most of us want more of something. More money. More time with family. More time outside of work. More friends. More more more. Reaching the contentment is difficult in a consumer-driven world, and given our own limited resources it’s amazing any of us can save rather than spend every penny that comes into our lives!

I’m trying to be more content with what I’ve been given. After all, the average person on planet Earth earns ~$8,200 USD per year. That makes me rich on a global scale at least.

It’s also amazing what we can do if pushed into a corner. For example, I could probably cut my expenses in half if I had to in order to save the life of a family member. I could work a second job (or third job) if needed. I could find a way to make ends meet if I was laid off or suddenly became ill and had to exit the workforce for a period of time.

Situations can force us to change, but I don’t want an undesirable event to teach me how to be content. I think contentment is mostly just based on what you’re used to. If you’re used to having a widget (sorry to go ‘microeconomic’ on you) and it gets taken away, you feel bad. If you never had a widget to begin with you wouldn’t necessarily feel bad.

My solution to this issue is to ramp back on an item until it hurts a bit and then ease up. For example, if I start to feel like I’m ungrateful towards my entertainment choices I pull back on my entertainment until it’s uncomfortable. Then, after a week or a month it’s easy to reinstate some of those activities and feel like my quality of life has taken a dramatic step up!

Here are some areas I struggle with:

• entertainment - movies and dining out
• food - buying dessert items, more soda than we should consume anyway, etc.
• car’s - this one’s a tough one for me, because the car I drive is already on the low end of the spectrum. I definitely feel more content when I drive my wife to work though (which is about 45 minutes round trip out of my way).
• work - just talk to your friends that work at other companies. My employer is great to compared to a lot of other choices in this area!
• housing - go on a mission trip or do some international travel. I’ve heard even a lot of European hotels are a bit on the low end of ‘fine living’

On a related note I also review my budget monthly to ensure that I’m getting enough joy out of my purchases (a la Your Money Or Your Life). It keeps me conscience of all the blessings I’ve been given and ensures I’m not wasting away those resources.

FrugalDad wrote an article on contentment as well that I highly recommend.

Image Credit: xtheowl

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Don’t Procrastinate On Long-Term Goals

You’ve probably heard that you should have goals. Perhaps you’ve even heard that you should write them down on paper.

I agree with both recommendation. One issue I’ve observed, however, is that most of us have a hard time getting started on our long-term goals. We’re all very visual, and visualizing our end state can be difficult because many of our goals may not be achieved for a while. This is particularly true of financial goals, like saving for retirement or paying off your mortgage. I’m 33 years old, and with a 30 year mortgage it’s hard to visualize the day when I own my house free in clear. I’ll be 63 if I make the expected payments, I’ll probably have children that have grown up, moved out, gotten married, and possible had kids. Yikes. It’s hard to imagine!

Likewise retirement or long-term career planning is difficult to do, so most of us tend to procrastinate. If you polled 100 people I would guess that 60 would say they plan to save more next year. I would also guess that 15 of those 60 actually do save more the following year.

The key point is this: long-term goals should be actively pursued. “Long-term” doesn’t mean “wait to start”. It simply means that a long-term goal will require more time and more steps to complete. This is why it sometimes helps to break a goal into smaller steps. If you’re trying to increase the amount you save, try these small steps:

• don’t buy something small you were planning to buy. A soda. A bagel. Dessert at a restaurant. Your goals and your pulmonary system will thank you. Put that money in your savings account.
• increase your retirement account contributions the next time you get a raise. If you get a 3% raise, put 1% more in your 401k. If you get a 1% raise, put 1% more in your 401k!
• set a monthly or yearly debt reduction goal. Just pay off one of your accounts. The more emotion there is to the account you choose the better. Pick the largest one, or the one that calls you the most. Choose the one that has the highest interest rate, or the the one that makes you angry (like a car loan when the car no longer runs!)

Small steps allow you to reach big, or long-term goals. The way to achieve success it to take small steps forward consistently. Action breeds more action, and soon enough you’ll have a paid-for house or a fully-funded retirement account.

Image Credit: eliazar

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Sunk Costs

Sunk Costs are costs that have been incurred that cannot be recovered. The problem with sunk costs is that they frequently enter our decision-making process, and this mistake can lead to making the wrong decisions. This is sometimes referred to as the sunk cost fallacy.

In the corporate world this most frequently relates to capital investments. Let’s assume a manufacturer decides to buy a new production line that costs $10MM. Once that line is purchased it’s not something that can be easily sold if the company finds out they don’t need it or want it. Therefore, the $10MM is a sunk cost. Once the money is spent, the company should decide what to do with the line regardless of the money already spent. Should they use it, spend more to enhance it, or use it as a giant box of spare parts? The feelings of loss (and loss aversion) related to this purchase should not sway the company’s decision regarding how to use the asset now that it is purchased.

Why Should I Care?

People also tend to make decisions based on sunk costs, and this can lead to making the wrong choice. Economics suggests that sunk costs should be ignored in decision-making, because a decision should be evaluated exclusively on its own merits. The decision to spend money on something in the past is done. It’s over. The money spent should not be considered when making future decisions (assuming you cannot reclaim those funds).

The concept of sunk costs ties in with loss aversion, because people typically think that current value of an item is related to the price they paid for that item. An example might be a purchased cruise ticket. If you spend $500 to go on a cruise and decide not to go, you would not be able to easily resell that ticket to someone else. Once you’ve purchased the ticket, you still have the choice to go on the cruise or not go on the cruise. The decision to go or not go shouldn’t be based on the cost of the ticket. Most of us, however, would feel like skipping the cruise would be the same as incurring a loss of $500. It’s not the same though. If you can’t exchange the ticket for $500, then it’s no longer worth $500. What you paid for the ticket is irrelevant to the decision at hand.

This type of situation can also cause people to throw good money after bad. Trying to buy your way out of a bad investment, a bad business deal, or a used automobile may not be the best thing to do. The problem is that we “feel” like we will incur a loss if we change directions, and these feelings cloud our judgment.

Beware of the sunk cost fallacy. These types of decisions can come up in any situation where the money you spent on an item no longer represents the value of the item. These scenarios come to mind:

• Purchasing or leasing a car
• Invested time in a relationship or friendship that you would no longer choose to pursue
• Investing time or money in a business that, based on the current situation, should not continue to exist
• Trying to recoup investment losses based on an inaccurate current value of those assets
• Continuing to pursue a career because of the time and effort you’ve invested and because it’s what you’ve always done
• Finishing a book that will no longer provide value to you

Image Credit: Ben Scicluna

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