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 Hermès, 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

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

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

Can You Make Your Payments?

Recently there has been much talk among governments and economists about the household debt to disposable income level in both Canada and the USA. The latest numbers show that in the USA household debt is 147.2 per cent and in Canada it is slightly higher at 148.1 per cent. That means that for dollar earned the household is caring about a buck and a half of debt. So a 2 income family earning $65,000.00 a year would have debt of almost one hundred thousand dollars.

They go on to break this down saying it is not so bad when you look at good debt vs. bad debt, and when you look at what was purchased. One economist was pointing out that it is not so bad if you did not go out and buy speed boats or motorhomes but cars and house.

A lot of talk about how things are not so bad when you look at net worth which has been going up of late.

All those discussions are totally mute in my option. The only thing that matters is CAN YOU MAKE THE PAYMENTS? It doesn't matter if your net worth is high if you can't afford to make the payments.

The scary thing is a lot of people are right on the edge, they are making the payments but just barely. If anything was to happen to decrease income, like getting laid off or downsized or have to take a pay cut, or if the cost of debt / payments was to go up, then things would not be so good. The governor of the Bank of Canada recently warned that one of these days interest rates are going to be going up. They can't go any lower, and are only being kept this low to try to spar on business investment. His comments were “When the reckoning comes, it could be swift and brutal.”

So my advise, get out of debt and stay out of debt. Keep your payments as low as you can by not spending money on things you don't need and can't afford. With Christmas just around the corner it is extra critical that you keep an eye on what you spend.

Have a very Merry Christmas and a Happy New Year, but watch what you spend and put those credit cards away.

Cheap-O Economics.