Anyikire: Just Keeping Up

My fellow colleague Chikaod Anyikire shows his Ramsey Roots in the excellent guest post below. I hope to get him to write for us more in the future.

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The American culture has in recent years evolved around accumulating debt. One of the reasons many people have gained so much is because of the age old adage “Just Keeping Up with the Joneses”. Now, it has become more common to file for bankruptcy and depend on credit cards to maintain a financial lifestyle. Now, after a year of bailouts and stimulus packages there is a small group of people who are saying “I just want to Keep Up”. There are many ways to get your life back on track and gaining financial peace. There are so many spokesmen and women, books, and internet sites that provide information about digging ourselves out of the hole we created.

An effective way is to become conservative when it comes to handling financial decisions. A radio host, Dave Ramsey teaches that aggressively paying off your debt, tearing up your credit cards and never using them, and “Living like no one else, so you can live like no one else” are just a few things he teaches through his books and programs. This means making some tough decisions by sitting down and creating a budget, living off of ramen noodles or rice and beans until you pay off your debt, then taking steps to saving up for retirement, education for our kids, and charities. This financial philosophy creates the foundation to live a life full of financial peace where a person has not to worry about debt collectors, garnishing of wages, and liens against where your family sleeps, your home. The benefits outweigh the future stress that would develop without taking steps to paying off your debt.

Let’s hope that this culture of paying off debt and leaving under our financial means thrives in our culture like a once wealthy Babylon, so that we all can achieve financial peace.

More information about Dave Ramsey … www.daveramsey.com

Why Financial "Firm Nudges" Work

This week's topic comes from an excerpt of the Financial Times (a Wall Street Journal competitor) touched a bit on behavioral economics and finance as part of a larger article. Here are a few excerpts that I'd like to expound on:



They first give some examples of behavioral economics in everyday life:

If people's magazine subscriptions are automatically renewed, they renew a lot more than if they have to send in a renewal form. Moreover, people are influenced by how problems are framed. If told that salami is "90 per cent fat-free" they are far more likely to buy salami than if they are told it is "10 per cent fat"…



Findings of this kind suggest that even when people have freedom of choice they are influenced, or nudged, by the context in which their decisions are made. This power gives business and governments opportunities. Automatically enrolling people in a savings plan dramatically increases participation, even though people retain the right to opt out.

My first impression after reading the article was the seriousness this newspaper commands even though it's printed on pink paper. But seriously, it's the last sentence in the quote above that I found to be interesting. If sellers can exploit the complacency of the American consumer, why can't savers do the same? I think the idea of automatic enrollment programs would definitely be a good thing. It plays to the out-of-sight, out-of-mind mentality we all have in some aspect. If you automatically enroll people in a 401(k) or IRA while giving them the opportunity to opt out, you don't take the freedom of choice away, and you get people to save.



Some people may be against this on "nanny-state" grounds—many feel that they should be able to do whatever they want with their money and they shouldn't have a company "making" them save money. In response, I'd say that (1) an opt-out feature is available for those smart enough to take it, and (2) given the state of Social Security and Medicare solvency, it's important to have a "safety net" available just in case said nanny-state haters get to a point where they will need the government to help out in old age.

Spending More Makes You Feel Good?

So I saw this on CNN recently:

Researchers in California have uncovered that Americans are more satisfied by a wine's taste if they "know" it's more expensive. Antonio Rangel, associate professor of economics at the California Institute of Technology, has analyzed the reactions of 21 volunteers who were presented 15 wines in a random manner, the only information being the price.

Unbeknownst to them, two of the wines were repeated, but presented with different price tags. The researchers also carefully observed changes in a part of the brain known as the medial orbitofrontal cortex, which plays a central role in many types of pleasure.

They found out that test subjects were more pleased by the taste of wines they thought were expensive.

Well, there you go. Although the sample size in this study was small, I still think it is an important study. This is not dissimilar to the not-as-scientific study performed by the libertarian comedians Penn and Teller, who tried to see how patrons reacted in an upscale, high-end restaurant when they were served very cheaply-prepared food. See the clip in my September article here. But wait! There’s more:

As part of the test, a pricey $90 wine was provided marked with its real price and again marked $10, while another wine was presented at its real price of $5 and also marked with a $45 price tag. In both cases, the volunteers thought that the wine was better when the higher price tag was presented.

This should be no secret to most people; however, most consumers still fall prey to it because they are convinced that more expensive products are “better” and “cheaper” is somehow less in quality. For consumer goods, not just wine, this is just false. But why do people behave this way? From the study:

The results showed that the way in which the brain works is that it mixes pleasure with expectation as to how good the wine should be. Since the expensive wine was supposed to be better, their brains perceived it as the superior drink.

This means that no matter how good a cheap wine may taste, consumers will still likely buy the more expensive wine and believe it tates better.

Again, not all that surprising. But it’s usually the “well duh” stuff that trips up the average consumer in restaurants, in the electronics store, the grocery aisle, and even the car salesman’s lot. I’ve had countless people try to justify why one particular shoe “wears better,” how no mp3 player’s sound quality can rival the iPod, or the name brand grape soda taste better than the store brand. To be fair, sometimes these conclusions are true, usually though its hard to objectively prove. Marketing departments at major companies know this, and it usually works in their favor. People buy more expensive goods with the expectation (feeling) that it should be better, and their brain’s logic center loses out and confirms this “feeling.”

There are times though, when it doesn’t work. Witness the sales race between the PlayStation 3, Microsoft’s Xbox 360, and Nintendo’s Wii. On paper, the PS3 looks as if it should be “better” by a long run, and it is of course more expensive. The same occurs for the Xbox 360. The consumer market however, bucked the trend and opted for the cheaper Wii, and demand continues to outpace supply for the device.

But let this be a warning that you should always consider—never underestimate the power of marketing, and don’t ever think that paying more for something makes it better. Moving forward, you should be aware (and more careful) of your spending decisions.

Change Your Comfort Level

News Flash: People don't like being made uncomfortable.


In the wake of the two boycotts from last week--one by the e-mail chain letter many of you probably received (and will get next spring) and one by rapper-now-blogger Twista, the price of fuel responded in kind—by going UP last week. Note that the two actions are probably not linked at all, but what this shows is that one-day boycotts generally don't work. The most famous boycott I can remember was the Birmingham Bus Boycott, and it lasted over a YEAR.


Thing is, in order for major change (of any type) to happen, people have to change their behavior over a long period of time. Let's use some finance examples. Generally, people don't mind making changes to their financial behavior as long as it doesn't involve a lot of work. So people who haven't really developed spending plans on paper in the past won't do it moving forward. Oh sure, they'll start and may get a couple months into it, but sooner or later it gets annoying and they stop.

Oftentimes, this refusal to change behavior can be taxing to your finances but the perceived cost is not worth the behavior change. A one month gas boycott, for instance, sounds as if it could work... Maybe.

However, people may not be very conducive to using mass transit, biking, or even carpooling to work because it would require a major lifestyle change, even if it saves money. It removes you from your comfort level.


So, what to do? Well, a disciplined lifestyle is the foundation needed. Make a decision and set a goal-meeting timetable. You should also visibly track yourself, which will keep you inspired to go on. More specifically, try to take the tough decisions on how to better manage your money, or try to generate extra funds for saving purposes by taking on more work. Let's face it—gas prices probably won't be coming down any time soon. It's probably best to adjust and adapt while others complain.

Can We Stop with the Gas Boycotts?

So it's that time again. Summer is approaching, and school is letting out--which means trips to theme parks, cookouts, family reunions, and the requisite increase in gas prices.

It's no surprise that the e-mail boycotts are back. This one calls for a strike on May 15th that for that day we don't buy gas, which will apparently (and inexplicably) lead oil companies adjust their prices down for the American consumer. From the Charlotte Observer:

A one day "gas out," the note claims, will cost oil companies billions of dollars and tempt them to lower fuel prices. A similar campaign 10 years ago led to a 30-cent drop, it alleges.

Of course, the 30-cent drop is unproven. More from the Observer:

Boycotting gasoline at the pump for a day is analogous to the fat guy who boycotts the "Biggie Fries" for one day as a means of dieting," said Tom Kloza, chief analyst for the Oil Price Information Service. "It accomplishes nothing."

Mr. Kloza is right. Boycotting gas for 1 day will accomplish nothing, especially when you consider most people will fuel up the day before or the day after, making virtually zero impact to any oil company's balance sheet. The money they didn't get on the 15th they get on the 14th or 16th.

Another newspaper states that the boycott is high on symbolism, and less on effect.

My advice?

- Consider purchasing some stock in these companies. They have a product that is always in demand, and the demand GOES UP as they raise the price. If demand stayed flat or went down, I could understand, but apparently people have too much "stuff to do" to bother changing their driving habits. Which also leads to...

- Consider changing your driving habits. Carpool once a week. Try talking your employer into teleworking once a week (or every other week). Use mass transit if you have access to it. Plan better driving trips. Slow down. All these can be helpful.

Ok, that's my rant.

I'd be interested if anyone is going to boycott on May 15th. Let's pay attention to keep note how the 15th Boycott impacts anything. I'm not holding my breath.