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The Super Awesome Budget method is more frugal than your budget method–guaranteed

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Via the Consumerist, we found an interesting article in Financial Ramblings about consumer spending psychology. The pith:

According to a recent study in the Journal of Consumer Research, consumers tend to spend more with worn bills as compared to crisp, new bills. And they’re also more likely to break a worn, larger bill as opposed to spending crisp, smaller bills.

The authors delved into why this is true and found evidence for a “push-and-pull emotional mechanism” wherein people are disgusted by worn bills (which are perceived to be filthy) while taking pride in crisp currency.

Interesting stuff! And these findings gave us an idea for a newer, better budgeting method, one that combines the frugality of the personal finance blogs, the know-how of the travel blogs, and the latest cutting-edge research in behavioral psychology. We call it the Super Awesome Budget. Are you ready for us to rock your wallet? Here we go:

STEP 1: Load a Target Amex prepaid using a 2% cashback credit card, either the Fidelity Amex or the Priceline Mastercard. You can load up to $1,000 at a time, and the Target Amex charges a $3 fee, so you’ll net 1.7% out of this.

STEP 2: It’s believed that people spend more with credit cards than cash, so you want to use cash for your actual spending as much as possible. Fortunately, it’s possible to pull cash off the Target Amex. You get one free withdrawal each month, then it’s $3 each time thereafter. If you can find a no-fee ATM that lets you get $400 at a time, then you’re looking at an additional $6 in fees per thousand, bringing your credit card yield down to 1.1%. (Just to be safe, make a couple of small purchases per month on the Target Amex so it doesn’t look like you’re laundering money.) If you spend more than $1,000 per month (in other words, if you’re married or have kids), then your credit card yield will be closer to 0.8%–but still, every little bit helps, right?

STEP 3: If those bills aren’t crisp and new as per the article above, go to your bank and trade them in for some new ones that you’ll be less likely to spend.

STEP 4: Use one of those strict budgeting systems like the Envelope Method. It got us through the Great Depression, so it must have something going for it, right?

And that’s it. It combines the best of the frugal living crowd with the best of the points-and-miles crowd. And as the points-and-miles crowd would point out, there is room for improvement here. For example, instead of the 2% credit card you could sign up for credit cards with good sign-up bonuses and use them to load the Target Amex. Or you can use some manufactured spending techniques to juice your returns a little bit. Chasing The Points or Frequent Miler could probably think of a bunch of ways to spice this up, and for all we know maybe there’s something better than the Target Amex.

We haven’t actually tested this Super Awesome Budget yet, seeing as how we just thought it up today. But that doesn’t make it any less super or awesome. If you can think of a better way, let us know. But you probably can’t, because this budget method is super awesome.

Happy Friday, and enjoy your weekend!

UPDATE: This post was linked at AdamHagerman.com’s Carnival of Personal Finance.

People worth $5 million are happier! Also, how to make an easy $5 million

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People always say money can’t buy happiness, and there’s some truth to that, but it’s also true that money can provide things which get you happiness. Case in point:

A survey from Spectrem Group found that individuals worth $5 million or more are far more satisfied with their jobs, relationships and work than those worth $100,000 or less.

The study found that 53 percent of those worth $5 million or more were “very satisfied” with their job or previous job. That compares with only 21 percent for those worth $100,000 or less.

The multi-millionaires are also twice as satisfied with their social life, presumably since the wealthy have no shortage of friends and invitations.

Nearly three quarters of the penta-millionaires are very satisfied with their marriage or “committed relationship” – far more than the 45 percent reported for the merely affluent. Millionaires are also significantly more likely to report higher levels of satisfaction regarding their relationships with their children (59 percent vs. 52 percent).

So contra the stereotype of lottery winners who end up miserable, it would seem as though being worth a lot of money really isn’t all that bad. But how to get that $5 million?

Here’s how they do it on Wall Street: they take advantage of what’s known as asymmetric risk. Consider this thought experiment:

Here is a guaranteed way to get paid well if you work on Wall Street. Find a best friend at a competing bank or hedge fund and take opposite sides of the same large bet. In one year’s time one of you will have a huge profit and get paid well. The other person will have lost and perhaps be fired. The sum of both your profits will be zero, but the sum of what you get paid will be positive. Split the pay.

Nobody does that exactly, but they are taking advantage of the underlying principle: they’re making bets with vast quantities of someone else’s money. If they win, they get to keep some of it, but all they have to lose is their jobs.

The key here is the incentives. People generally respond to incentives–for example, our financial system currently gives people the incentive to sign up for lots of credit cards just to get the bonus points, and boy, do people respond to that. In the case of high finance, people have the incentive to behave irresponsibly:

That asymmetry in pay (money for profits, flat for losses) is the engine behind many of Wall Street’s mistakes. It rewards short-term gains without regard to long-term consequences. The results? The over-reliance on excessive leverage, banks that are loaded with opaque financial products, and trading models that are flawed.

Regulation is largely toothless if banks and their employees have the financial incentive to be reckless.

How does Wall Street pay its employees? At the end of each year traders are paid a base salary and a bonus. The bonus, which fluctuates wildly, is usually a percentage of a trader’s profit. Some companies even pay a contractual amount, often between ten and fifteen percent. The average bonus of all employees is about three hundred thousand dollars but payments of $1 to $15 million are common. If traders lose they still get their base, often around two hundred thousand dollars. If their loss is great enough, they are fired. They never have to return money.

The incentives are clear. If you make a bunch of money you get personally wealthy. If you lose then you just go home and look for a new job.

In other words:

This strategy is certainly not in the long-term interest of the firm, but it’s the smartest strategy to benefit the trader.

We recommend reading Nassim Taleb’s “Fooled by Randomness” for a deeper understanding of this issue. “Black Swan” got all the press, but we think the first book was better. As the 2008 financial crisis showed, a lack of proper risk management can have severe consequences for both businesses and taxpayers, and we’re all for an informed citizenry. Whether or not very bright people in New York should be given taxpayer money to take risks is a public policy issue, not merely a matter of private enterprise. 

Gaming the online dating system! And another tip for getting free stuff from your credit card

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IN YOUR FACE, CUPID: A woman who wasn’t having much luck with her online dating efforts decided to apply some rigorous analytical techniques–and landed herself a husband! Author Amy Webb’s account of how she did it:

My profile was obviously attracting the wrong kind of man. After one particularly disastrous date—he casually dropped the fact that he was actually married—I decided to change my approach. Drawing on my background in data analysis, I set out to reverse engineer my profile. I outlined 10 male archetypes and created profiles for each of them on JDate. There was JewishDoc1000, the private-practice cardiologist who hated cruise-ship travel, and LawMan2346, an attorney who was very close to his family and a former national debate champion.

Posing as these men, I spent a month using JDate. I interacted with 96 women, cataloging how they behaved and presented themselves online and scraping data from their profiles (such as the language they used or the number of hours they waited before emailing back one of my profiles). Wanting to learn everything I could about my competition, I kept a detailed database, and I recorded which female profiles were popular…

What did I discover? Popular profiles used aspirational language (like “I want to travel” or “a big ambition of mine is…”), kept descriptions short and generic and lied about various physical characteristics (though not the ones you think). Their style was easygoing, youthful and spontaneous. I’d never once referred to myself in writing as “fun” or as a “girl.” But it was easy to see that I had been far too stuffy and professional in my presenting myself (I’d gotten lazy and cribbed from my résumé).

I learned that short profiles that express just enough information to pique someone’s interest are the ones that do best. A good cutoff point is the 500-word mark. Profiles that go on longer than that tend to be by an accomplished woman with lots of education and some kind of license (doctor, lawyer) to brag about, or by a not-so-attractive woman who seems horribly lonely and desperate to date. In my case, I’d written close to 900 words—a dissertation. That put me in the bottom 8% of all profiles I looked at. If I was blathering on that much  before even meeting someone, what would I be like in person on a first date?

I assumed that daters lied about their weight. I certainly rounded down. What shocked me, though, was how many women seemed to be lying about their height. All of the 96 women I interacted with listed their height as between 5-foot-1 and 5-foot-3, even though the average height of an American woman is 5-foot-4.

And the results?

Soon after it went live, my super profile attracted more than 60 responses, many of them notably different from the ones I’d attracted before.

Among them was a response from a profile called Thevenin, an attractive, Jewish man who seemed smart and funny. His real name was Brian, and he was my last first date.

There’s a lot more there. Apparently it’s an excerpt from a book called “Data, A Love Story: How I Gamed Online Dating to Meet My Match”, due out in a couple of weeks.

ANOTHER WAY TO GET FREE STUFF FROM YOUR CREDIT CARD: If you’ve got a big purchase coming up, call your credit card companies first. Poster mojoshtudd had a good tip on Fatwallet:

 I had a ~$1000 purchase to make. I just called Chase, Citi and Amex. I told them that I have a largish expense coming up and trying to decide which CC to put it on; and if they would give me a promo based on a spending requirement, it would help me decide.

A lot of the time, one of them ends up giving me something. E.g., just now, Chase and Citi said sorry but the Amex SPG rep gave me 3000 points for $1000 spend. Worked perfect for me. Since I value SPG at about 2-3x cents per point, this is an easy 6-9% cash-back for me.

Later he adds:

In general, I have found that one can get innovative and “suggest” promos to CCs and sometimes they will accept. The last time my United MileagePlus card was up for a $95 renewal, I called and asked for promos to offset it. CSR [Customer Service Rep] says 5k. I asked for 10k and he said 5k is limit for United. I asked if he can put 5k miles on United and another 5k points on my Freedom or CSP [Chase Sapphire Preferred] if I agree to a spend requirement. Silence for 30 seconds and then he says yes to CSP, and no spend requirement.

As always, it doesn’t hurt to ask!

Here’s how much your taxes will increase in 2013 (Happy New Year!)

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DON’T LOOK SO SURPRISED: If you’re like us, you got bored as hell reading about the fiscal cliff negotiations and lost interest pretty quickly. Fortunately, Dough Roller has summarized the results for us. (SPOILER ALERT: your taxes are going up.) His conclusion:

I’ve been a member of the middle class all of my life. I was in the lower middle class as a child, the middle class as a young adult, and in the upper middle class today. And if there’s one thing I know it’s this–whether by increased taxes, decreased spending, or both, folks in the middle class will be the ones that pay for our profligate spending.

I don’t care if you worship the current administration or loathe it. Republican or Democrat. In favor of tax increases or not. The wealthy, however defined, cannot save us from $16 trillion in debt, $1 trillion in annual deficits, and entitlement programs heading for a real fiscal cliff.

Middle class, gird yourself. As surely as night follows day, we will sacrifice more than anybody to pull us out of our fiscal mess.

FREE $2 MP3 CREDIT FROM AMAZON: Go here. Answer their question and share on Facebook. Enjoy! (H/T: SD)

FREQUENT MILER, AS ALWAYS, IS ON TOP OF THE SITUATION: One technique you can use to reduce your expenses and/or increase your credit card rewards is the double dip. The two steps of the double dip:

  1. Using an online rewards portal, buy a gift card for your desired merchant.
  2. Use the portal again and make your purchase with the gift card.

It’s pretty simple in concept, but where it gets complicated is in the varying policies on awarding points for gift card transactions. Sometimes you’ll get points for step 1, sometimes for step 2, sometimes for both, and sometimes for neither. Or else the terms & conditions will say that no points are awarded for step 1, but they are for step 2, except the opposite will happen. And so forth and so on.

Fortunately for us, Frequent Miler is on the scene with a listing of who’s likely to give you what. If this sort of thing appeals to you, then his article is definitely worth a read. He also covered how to find the best online shopping rewards portals a while back as well.

ANOTHER APP-O-RAMA: Another credit card churn data point, this one from Point Me To The Plane. The results: 8 new credit cards and a potential 350,000 points. Not a bad haul! PMTTP also tracked his credit scores. Transunion dropped by 8 points and Experian dropped by two. Fears of credit card apps hurting your credit rating tend to be overblown. Unless you’re getting ready for a mortgage, there isn’t much to worry about.

DO MORE BY TRYING TO DO LESS: According to Slate, the best way to approach your new year resolutions is to aim low:

If you were to ask Princeton psychologist Eldar Shafir or Harvard economist Sendhil Mullainathan for a better New Year’s strategy, they’d likely suggest that the best resolution you can make is to do fewer things in 2013. The researchers argue that when busy people get busier, it leads to ignored deadlines, a cluttered desk, and a vicious cycle of falling further and further behind. Amid the disorder, a lot of bad decisions get made, and the best means of escape from this cycle may be a moratorium on new obligations.

Shafir and Mullainathan are leaders in the field of behavioral economics, which aims to apply insights from psychology to the study of economic decision-making. In their recent work, summarized in the forthcoming book, Scarcity: Why Having Too Little Means So Much, they use behavioral economics to explain why conditions of scarcity—whether of time or money—often lead people to make bad decisions.

Makes sense, although we’re always suspicious of people who tell us exactly what we want to hear.

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