July 14, 2012

The 11 Ways That Consumers Are Hopeless at Math

This is a reprint of an article in The Atlantic website by Derek Thompson  a senior editor at The Atlantic, where he oversees business coverage for the website.  I read it and wanted to share it as it helps you understand what the marketing people are doing to pry your hard earned cash from your hands.  The one thing I got from it is think before you spend.

The 11 Ways That Consumers Are Hopeless at Math

(1) You walk into a Starbucks and see two deals for a cup of coffee. The first deal offers 33% extra coffee. The second takes 33% off the regular price. What's the better deal?
"They're about equal!" you'd say, if you're like the students who participated in a new study published in the Journal of Marketing. And you'd be wrong. The deals appear to be equivalent, but in fact, a 33% discount is the same as a 50 percent increase in quantity. Math time: Let's say the standard coffee is $1 for 3 quarts ($0.33 per quart). The first deal gets you 4 quarts for $1 ($0.25 per quart) and the second gets you 3 quarts for 66 cents ($.22 per quart).
The upshot: Getting something extra "for free" feels better than getting the same for less. The applications of this simple fact are huge. Selling cereal? Don't talk up the discount. Talk how much bigger the box is! Selling a car? Skip the MPG conversion. Talk about all the extra miles.
There are two broad reasons why these kind of tricks work. First: Consumers don't know what the heck anything should cost, so we rely on parts of our brains that aren't strictly quantitative. Second: Although humans spend in numbered dollars, we make decisions based on clues and half-thinking that amount to innumeracy.
Here are 10 more ways consumers are bad at math, with an assist from historian and author William Poundstone.
(2) We're heavily influenced by the first number. You walk into a high-end store, let's say it's Herm├Ęs, and you see a $7,000 bag. "Haha, that's so stupid!" you tell your friend. "Seven grand for a bag!" Then you spot an awesome watch for $367. Compared to a Timex, that's wildly over-expensive. But compared to the $7,000 price tag you just put to memory, it's a steal. In this way, stores can massage or "anchor" your expectations for spending.
(3) We're terrified of extremes. We don't like feeling cheap, and we don't like feeling duped. Since we're not sure what things are worth, we shy away from prices that appear too high or too low. Stores can employ our bias for moderation against us. Here's a great story:
People were offered 2 kinds of beer: premium beer for $2.50 and bargain beer for $1.80. Around 80% chose the more expensive beer. Now a third beer was introduced, a super bargain beer for $1.60 in addition to the previous two. Now 80% bought the $1.80 beer and the rest $2.50 beer. Nobody bought the cheapest option.
Third time around, they removed the $1.60 beer and replaced with a super premium $3.40 beer. Most people chose the $2.50 beer, a small number $1.80 beer and around 10% opted for the most expensive $3.40 beer.
In short: We are all Goldilocks.
(4) We're in love with stories. In his book Priceless, William Poundstone explains what happened when Williams-Sonoma added a $429 breadmaker next to their $279 model: Sales of the cheaper model doubled even though practically nobody bought the $429 machine. Lesson: If you can't sell a product, try putting something nearly identical, but twice as expensive, next to it. It'll make the first product look like a gotta-have-it bargain. One explanation for why this tactic works is that people like stories or justifications. Since it's terribly hard to know the true value of things, we need narratives to explain our decisions to ourselves. Price differences give us a story and a motive: The $279 breadmaker was, like, 40 percent cheaper than the other model -- we got a great deal! Good story.
(5) We do what we're told. Behavioral economists love experimenting in schools, where they've found that shining a light on fruit and placing a salad bar in the way of the candy makes kids eat more fruit and salad. But adults are equally susceptible to these simple games. Savvy restaurants, for example, design their menus to draw our eyes to the most profitable items by things as simple as pictures and boxes. Good rule of thumb: If you see a course on the menu that's highlighted, boxed, illustrated, or paired with a really expensive item, it's probably a high-margin product that the restaurant hopes you'll see and consider.
(6) We let our emotions get the best of us. In a brilliant experiment from Poundstone's book, volunteers are offered a certain number of dollars out of $10. Offers seen as "unfair" ($1, let's say) activated the insula cortex, "which is otherwise triggered by pain and foul odors." When we feel like we're being ripped off, we literally feel disgusted -- even when it's a good deal. Poundstone equates this to the minibar experience. It's late, you're hungry, there's a Snickers right there, but you're so turned off by the price, that you starve yourself to avoid the feeling of being ripped off. The flip-side is that bargains literally make us feel good about ourselves. Even the most useless junk in the world is appealing if the price feels like a steal.
(7) We're easily made dumber by alcohol, time, decisions. When you're young and drunk at a bar, you're more likely to do stupid things with strangers. "Am I fully assessing this complex romantic situation?" is a difficult question to answer on seven glasses of wine, so we're more likely to ask ourselves a simpler question: "Is s/he hot?" When we're drunk, stressed, tired, and otherwise inattentive, we're more likely to ask and answer simple questions about buying things. Cheap candy bars and gum are situated near the check-out at grocery stores because that's where exhausted shoppers are most likely to indulge cravings without paying attention to price. Boozy lunches are good for deal-making because alcohol narrows the range of complicating factors we can hold in our heads at once. If you want somebody to take an under-examined risk, get him boozed, tired, or ego-depleted.
(8) We're pained by transaction costs... In a personal finance column here, Megan McArdle implored her readers to give up recurring payments like gym memberships and subscriptions to papers and services they don't use. "Don't buy stuff you don't consume" seems like obvious enough advice, but Megan had a great point. We're drawn to subscriptions and memberships and bundles partially because we seek to avoid transaction costs. We'd rather overpay a little than suffer the psychological pain of pulling out a wallet and watching our money go to each gym season/movie/etc.
(9) ... but we're weird about rebates and warranties. Now that I've just told you that consumers try to avoid additional payments, I should add that there are two additional payments we love: rebates and warranties. The first buys the illusion of wealth ("I'm being paid money to spend money!"). The second buys peace of mind ("Now I can own this thing forever without worrying about it!"). Both are basically tricks. "Instead of buying something and getting a rebate," Poundstone writes, "why not just pay a lower price in the first place?'
"[Warranties] make no rational sense," Harvard economist David Cutler told the Washington Post. "The implied probability that [a product] will break has to be substantially greater than the risk that you can't afford to fix it or replace it. If you're buying a $400 item, for the overwhelming number of consumers that level of spending is not a risk you need to insure under any circumstances."
(10) We're obsessed with the number 9. Up to 65 percent of all retail prices end in the number 9. Why? Everybody knows that $20 and $19.99 are the same thing. But the number 9 tells us something simple: This thing is discounted. This thing is cheap. This thing was priced by somebody who knows you like things discounted and cheap. In other words, 9 has transcended the status of charm

July 11, 2012

How much money are you spending that you don't need to?

Over the years my wife and I have learned the value of sending less.  Now that may sound very simple, but when you look deeper it is profound.  One of the ways we stretch our money is to get great value for every dollar we spend.  We are a one income family yet manage to have a standard of living that some two income families can't manage.

How do we do it?  First thing is we have built our pantry to the point that now we only buy food when it is on sale.  We are no longer caught in the situation of having to pay full price for the groceries for supper.  We know what food items we use and what a good price is on those things and when we find them on sale we stock up on them (this alone effectively cuts our grocery bill by more than 30%).   We have also refinded  our dining cuisine to feature less expensive food items.  First and foremost  we stay away from prepared foods that cost way more.  Our goal is to keep the cost of food to less then $5.00 per day per person and that includes eating out.  Take note that I still have meat with most meals even at that price.  We also avoid the candy and cookies and potatoes chips and pop, as these are all very expensive and do not a meal make.  You can buy steak cheaper than chocolate.

Second, FORGET Fashion and NAME BRANDS, and go with practical and appropriate.  The jeans for $9.00 from walmart are just as good as the $80.00 brand name jeans.  Unless you are playing in the NBA you don't need $150.00 running shoes, (and neither do your kids).  Today I look as sharp as anyone else and for a fraction of the cost, pants from walmart, shirt from the thrift store (it still had the new tags on it $35.00  for $3.00) shoes on sale, my last two coats were bought at yard sales.

Third, read my recent post about not driving a new car.  You can save a bundle.

Fourth, we save a ton of money on things like cell phones (bought both of our cell phones at yard sales for less than $5.00 each) and have them on a pre-paid plan. We don't text and the cell phones are used sparingly and are often off more then on.

Do you really need 130 cable channels, 4 movie channels, pay per view sports?  You can function without a 64 inch HD LCD TV, really you can.

Fifthly, watch what you spend, things like gym membership, go for a walk instead.  Limit your eating out (brown bag it at lunch).  Turn off lights when they are not needed, like when there is no one in the room.

Think about what you spend and where you spend it, work on getting the best value for all your hard earned dollars.

Cheap_O Economics

May 1, 2012

Coming Soon to a Service Station Near You!

As gas prices keep creeping up and up and up, and with summer vacation season fast approaching, when gas prices classically climb, we are getting to a point where the average family will soon be, if they are not already, spending more on putting gas in the family car then they do on there shopping trips to the grocery store.

With gas prices in parts of Canada at a high of $1.439 per liter and gas  running as much as $4.59 a gallon in San Francisco CA  and $4.69 in the Chicago area (gasbuddy.com) filling up the family car is becoming more and more costly.

The USA consumes 400 million gallons  of gasoline every day and a lot of that gas is spent getting to and from work, and getting family members where they need to be.

This would be a good time to step back and decide now what your plan of action is for the day in the not to distant future when you have to decide food or fuel, eat or walk to work, mac and cheese instead of steak so you can take the kids to school next week.

What trips can you cut out or double up on?  Can you walk or ride a bike?  Can you work from home at least a couple of days a week?  Can you arrange a car pool for work or school or sports?  Can you watch a movie at home rather then going to the theater?  Eat at home instead of eating out?

Things you can to to stretch your gas dollar.   Don't leave your car idling.  Check your air filter and make sure it is clean.  Check your air pressure in your tires.  Combine trip so you double and triple up on your trips in the car, use a shopping list so you can organize your outings and not have to run back to the store for that forgotten item.  Can you work longer hours on fewer days so you have to drive to work less often?

Cheap-O Economics

April 16, 2012

Cost of Driving

It was just the other day as my wife and I were driving along in our 1986 Dodge miniVan and we were sitting at a stop light, when one of those new Ford 3/4 4X4 HarleyDavidson limited edition pickups pulled along side us. Now if you are not aware these HD limited editions pickups are very hot pickups... and when it is all tricked out they are very very pricey.

I turned to my wife and told her that we could buy 67 of our vans for the price of that pickup bedside us. She could not believe it when I told her that. I explained that if we bought a different van every year for the $1200 we spend on this one, that we would be over 12o years old before we spent as much money as that truck cost

The point I was making with her is that New cars and trucks are very costly and they go down in value not up. That our van, that we paid less for then 2 months of that pickups payments for, was getting use from point A to point B very nicely, and with no payments and the van was going to be worth what we paid for it as long as it continues to run. Where as a new car or truck goes down in value.

You don't have to drive a 26 y.o Van...but it is economically unwise to dive a new car.. at the least go for a car or truck that is 4 years old...to get the best value..

The main thing is think about what it really costs for that car or truck.

Cheap-O Economics

April 4, 2012

Cheap-O Economic Returns

Cheap-O Economic Returns

It has been a year since my last post. During that time a lot has happened. In Feb. Of 2011 I suffered a heart attack, and had quad bypass surgery in May 2011. It took all that summer and fall to recover and get back to being able to function. The good news is that I am doing great and the surgeon tells me my heart is better then it was 20 years ago. For that I am very greatful.

Now I am going full strength and ready to pick up where I left off. I have a list of projects left over from last summer plus ideas and plans for new projects, more then enough to keep me busy for the whole summer.

I trust that everyone is doing great and that the economic climate is encouraging you to take the steps to necessary to regain control of your money and your economic future.

Gas Prices and Mortgage Rates Creeping Up

Every time I pull into a gas station it costs a little bit more to fill up. A few cents a liter or a gallon adds up by the tank full. We have seen gas prices at the pumps go up by more then 10 %. With the average family already spending $6000.00 per year on gas that extra 10 %, means they will have $600.00 less to spend each year on things like food and clothing. Given that the forecast is for gas prices to keep moving upward, there will be less and less money available for other purposes.

Don't forget that with increased transportation cost, businesses will pass the increase cost of doing business on to the consumer, which translates to everything will cost more.

Morgage rates are moving up as well. Royal Bank and TD Bank both raised there 5 year rates .20 percent and that trend is upward as well. The fact is that at some point interest rates have to return to a "normal" level.

Business analyst ate telling us that even a 2 % increase in mortgage rates would result in a significant number of consumers having to spend greater than 40 percent of their paycheck just for debt service. Add that to the increase in gas expenses and you can see that there is trouble on the horizon.

So how do you adjust to cope with this onslot. First DO NOT incur any additional debt, if you feel you have to have that new High Definition 54 inch LCD TV, wait to buy it until you have the cash to pay for it, don't put it on the credit card. Make a concerted effort to pay off your debts, starting with the debt with the highest interest rate.

Next drive less, I know that is easier said then done, but there are things you can do to cut down on the number of miles you drive. Walk or ride a bike, if that is not practical then organize your trips so that you are combing several trips into one.

A lot of money advisors would suggest getting a car that gets better milage, and that is a good idea, BUT not if you have to borrow thousands of dollars to save a few hundred on your gas bill. I own a. 1984 Dodge that I paid $500 for, I can buy a lot of gas, even expensive gas for less then making car payments. So make sure you are looking at the total picture when making decisions.

Automotive experts tell us you can save a lot of gas by following some simple rules. Don't let your car idle for any length of time, check the air pressure on your tires, slow down, keep your car tuned up, check your air filter often and keep it clean or replace it should it need to be changed.

Don't be like those people that have a bumper sticker that says, "I owe I owe it's off to work I go". Start now staking your claim to economic freedom. You should always be striving to reduce your debt, and reduce your cost of living. It can be done.

Cheap-O Economics

April 3, 2011

If you think there is more month left at the end of the paycheck you are right.

If you think there is more month left at the end of the paycheck you are right.

If you are starting to feel like you are working harder and have less to spend you are not alone. In fact wages have been flat, in some sectors of the economy even going down, while prices for food, gas, heating oil and other must have things is going up and up and up.

With 13.5 million americans out of work and the average workweek running just over 34 hours a week, that paycheck is not going to be getting larger anytime soon.

So what are your options?

Find a way to live on less. Yes it takes work but it is worth it in the long run.

First, work hard at getting out of debt and not taking on anymore debt. The less you have to pay in payments the more money there is left over for food and gas and to enjoy life. That may mean driving your car another year or two, rather then trading it in and buying a new one. It might mean downsizing your home to reduce your monthly payment. It will for sure mean putting away or better yet cutting up your credit cards and their 19.8% interest rates.

Second, adjust your expectations, No you do not need that new outfit, No you do not need a new LCD HD TV, No you do not need...well the list goes on and on. Find a way to do with out and you will need less money to live.

Third, change the way you shop for food, work out a menu and stick to it. Buy the food that is on sale, buy in bulk. Stop eating out, you can eat at home for a fraction of the price and eat better.

Fourth, don't go shopping, that is the best way to not spend money. It is in fact that simple, in you aren't in the store you won't be spending the money.

You can in fact beat the paycheck game, you just have to be playing it smart.

Cheap-O Economics

January 15, 2011

2011 - The Year Ahead

2011 we are all wondering what the year ahead has in store for us. We look back over 2010 and some of us are better off then we were a year ago, for a lot that is not the case. So what does the year ahead hold in store for us.

That is the Zillion Dollar Question. I have been reading the predictions of the political pundits and the Economists from the Right, the Left, the Center and some that are so far out they are not even in the ballfield, The one thing I notice, not a one of them has a clue, oh don't get me wrong, they can show projections, and charts, case histories, trends, but when it comes down to it, they don't have a clue, Even the best guessers are making less then good guesses.

So are interest rates going up, YES, they can't go down any further or they will be paying people to borrow. So once you hit bottom no place to go but up. The question is not if rates are going up,, but HOW much are they going up by. For a lot of home owners a 2% increase in interest rates would be devastating, a 4% increase would wipe them out. But you say, rates can't go up that much or that high, OH yea they can and have, check out the 19% mortgages that we around in the 1990's and how people walked away from their homes after their payment doubled, tripled or even quadrupled. My uninformed dumb luck worst guess, an increase in mortgage rates of about 2% by end of 2011.

The value of the Dollar??? Well the Canadian Dollar is a par with the US buck, and likely to be worth more as the year progresses. The US Greenback will suffer against other major currencies, BUT that could all change if one or more of the EU countries have a major meltdown and the Euro takes a hit.

Cost of Food and Fuel. Well given that China added 25 Million new cars last year and will add that many again this year and that India now has Middle Class population of 350 Million (roughly the same as the total population of the USA), the competition for quality food and protein will increase, and with more and more cars on the roads in Asia, the cost to the consumer of Food and Fuel is going to likely keep raising. Add to that weird weather, snow in Florida, floods here there and everywhere, who can even guess at how crop land and food production is going to be effected.

So plan on spending more at the service station and at Safeway, But, stores will have great specials once people are buying less, they have to keep their product moving and there are going to be some deals to be had. But you need cash on hand to grab those deals.

On that note, if you happen to have some extra money just laying around, there are going to be some great deals as stores dump inventory, as businesses go down the drain, as homes remain unsold (in 2010 there were more then a Million homes foreclosed on in the US those have to be resold to someone.), as luxury items are sold off by people reducing their debt and lowering their payments.

Employment outlook. Well in the US it is going to stay at the 10%+ unemployment range, and the longer it stays there the more and more people that won't be able to find a job. If you are a grad from college and you don't find a job in a year, guess what, next years grads are now looking for the same job you are. Statistically, the longer you are out of a job the less likely you are to get a job. Now there are a few Bright spots out there. Western Canada (not counting BC) is healthy and Saskatchewan has lots of jobs available. The clean up in the Gulf is going to create jobs. Major urban areas of the US, well don't hold your breath.

Then of course what are the political leaders in Washington, London, Ottawa, Mexico City and the other capitals going to do? Mess things up, of course. Do the worst possible thing, of course. Make matters worse, for sure. The one thing political leaders and their advisers forget is that all the theory and all the great plans won't work if no one can figure them out, and people are going to do what is in their best interest.

My suggestion, the same as it has been for the past couple of years. REDUCE, Reduce your monthly cost of living, reduce your debt, pay everything off, spend less, buy less. Reduce your dependence on a job.

DO grow your own food or at least some part of it, DO stock up on food when it is on sale, DO evaluate if you really need that gym membership, cable TV, Cell phones for everyone, 2 or 3 cars, a house that big.

Don't spend money you don't have, Don't use your Credit Cards for everyday living expenses, Don't incur any more debt, put off buying that new car or truck and NO you do not need or have to have that new wide screen LCD HDTV, or that new IPhone or that new whiz bang toy, Don't pay other people to do things you can do.

Oh and by the way, I don't have a clue, anymore then the rest of the people making predictions, my best guess is bases solely on what I see out the window and from making up my own mind after perusing the vast array of options expressed out there, BUT I do know that having taken the steps we have I can ride out things a lot better then most people.

Happy New Year
Cheap-O Economics