How many times have you said that, then amassed a surprisingly large total at the supermarket checkout and brought home many bags instead of just the 1 or 2 you were planning on?
Yeah, me too.
Why does this happen?
1) We don't make up shopping lists or stick to ones we do have
2) We pay with plastic instead of cash
3) We LOVE shopping
4) Supermarkets know we humans succumb to impulse buying if the display looks nice and plentiful and the prices are good (and easy to see).
It isn't always a bad thing, but for some people, impulsive buying controls their life. For these people, some major changes are in order that are well beyond the scope of this blog. For most of us, some simple reminders will help us keep more of our money in our pockets:
1) Feed the Beast - your Shopping Monster
Allow yourself to buy one or two things you weren't planning on, but keep the number low and engage yourself to make a decision between 2 or more things that catch your eye. This will allow you to prevent explosions of buying. By deciding between impulse buys, you may even decide you really don't need/want any of them.
2) Would the item make your list?
Ask yourself the question of whether the item you are about to buy would have made your shopping list had you thought about it and been aware of the current price. If yes, then maybe you have a good purchase. If not, you may be more interested in the concept of buying it than in the actual use/consumption of it.
3) Do Not buy anything within 5 feet of the checkout register
This is where supermarket managers do some of their best psychological experiments. They know you are captive and highly worn down having 'completed' your shopping. These items would hardly ever make your shopping list and for good reasons.
4) If you decide you don't want it, will you return it? Really?
Some of us are good at returning items we get home but then decide we don't like/want/need. Most of us see the barrier to return items as being much larger than the one we overcame to buy it. Don't trick yourself into buying something by saying you will return it if you don't like it if that isn't the type of person you are.
5) Don't go shopping when you are hungry
An oldie but a goodie. This doesn't apply just to food hunger but also to emotional hunger. If you are depressed, don't feed your pain with your AMEX. If you find that you really need to shop to get out of your funk, then definitely follow my last suggestion:
6) Pay in Cash
I have mixed feelings about this one which is why I list it last. If the only way to control your shopping fever is to restrict the money you have to pay with, your self-control problems are probably big enough to be causing lots of other problems. It can have some benefits for those times when you want to cut loose to make yourself fell better as in #5 above. That way, you can make a conscious decision on how much you want to spend when you are still marginally sane. This is kind of like deciding how much money you want to lose before going into a casino.
Impulse buying can be good as long as you wind up using the item(s), don't wind up consuming (much) more than you would have otherwise and is a small part of your monthly shopping.
Thursday, October 22, 2009
Thursday, October 15, 2009
Getting a Big Tax Refund
We all like it. A nice big check from Uncle Sam on that wonderfully colorful Treasury check paper, just sitting in our mailbox in May or June. Oh what will we do with this 'found money'. Perhaps take that nice vacation. A swimming pool for the kids? A down payment on that sporty car you have been looking at? You know, they are making 60" plasma TVs now that are under $3000!
Wow. Hold on there. This really isn't a gift from Uncle Sam. Actually, he is returning the loan you gave him last year. That 0% loan you kindly gave him, a little bit every pay day. I'll bet you didn't realize you were floating the federal government some of your hard earned money, and feeling pretty happy about it when you got it back a year later with no interest added!
One of the problems is that even when we go through all the instructions on the W-4 form to properly calculate the number of exemptions we should claim, the formula still over estimates the amount of Federal tax withheld from our paychecks. Few people feel good about getting no money back from their Federal Tax return and even fewer want to come up with money to pay any extra tax owed at tax time.
The tax refund has become part of our seasonal holidays and a gift receiving holiday it is! Our tax refunds come about half way between Valentine's Day and Christmas and is often received just when the weather is turning warmer. Summer is coming, we have new money, life is good!
Uncle Sam has been pretty happy as well. How nice that we can do something that makes everyone happy!
Most accountants will suggest that we make our Uncle a little less happy by calculating our tax withholding so we wind up getting a $0 return. Some accountants may even suggest intentionally under-estimating, so you are effectively getting an interest free loan, although I do not suggest this approach for most people.
What I suggest you do:
Work with your accountant or do the math yourself to figure out the following:
1) What is your estimated tax responsibility for the current year?
2) How much was your tax responsibility for the previous year?
This is not how much you paid at tax time or even the amount you see on your W-2 form. It is the amount of Federal Tax you owe for the year as it shows on your 1040 Tax return. On the 2008 form it was Line 61 (TOTAL TAX).
You want to pay enough tax during the year that you are not going to be penalized. You also don't want to pay so much that you wind up giving the Federal Government this generous interest free loan for 1 year.
Accountants will have different suggestions of exactly what you should do, but here is a very basic strategy:
1) Unless you are making a lot less money than last year, make sure your payroll Federal tax withholding adds up to AT LEAST the amount of your TOTAL TAX for the previous year. Generally, (everything dealing with the IRS has some amount of variation), you will not be penalized if you pay AT LEAST the tax you owed the previous year OR at least 90% of the tax you do owe for the current year. (Disclaimer - If your income for this year is substantially more than last year and you were aware of it early enough in the year, you could wind up having some trouble if you are audited, so get some good advice).
2) Estimate your Total Tax for the current year. Do you best, but don't sweat it, you'll be wrong, but you just need to get close.
3) Decide how close you want to make your tax deductions to the total tax you wind up owing. a $5,000 margin is being to generous to Uncle Sam. 5-10% is probably a good guideline. (If 5-10% of your total tax is $5,000, congratulations on your income level and thank-you for helping to reduce the national debt.)
4) Add your margin to your estimated Total Tax for the current year.
5) Go with the higher of your total from 4) and your total tax from last year.
In addition to using the exemptions on your W-4 form instruct your Payroll Department how much federal tax to withhold for you, you can actually give them the exact amount you want taken out. So, if you know what total withholding you want for the year and how much has been withheld to date, subtract one from the other and divide that by the number of remaining payrolls for the year.
If you are uncomfortable with the possibility that you may have estimated low and don't want to have to figure out how to pay the government the extra you owe them next April 15th, here is a nice solution:
Every month, instead of paying an extra $100-200 in Federal Tax Withholding, have that auto-deducted from your payroll and invested in a money market account. Instead of giving the 0% loan to Uncle Sam, you are keeping the money yourself and earning some interest (although not much as of this writing). If at tax time next year you need this extra money, you will have it.
If you wind up having done some pretty good tax estimations and you don't need this money, then maybe that Cruise to Bermuda is a possibility after all. But perhaps it shouldn't be. In an upcoming article, we will write about how we think and spend differently depending upon whether we receive money in a lump sum or over a period of time.
Wow. Hold on there. This really isn't a gift from Uncle Sam. Actually, he is returning the loan you gave him last year. That 0% loan you kindly gave him, a little bit every pay day. I'll bet you didn't realize you were floating the federal government some of your hard earned money, and feeling pretty happy about it when you got it back a year later with no interest added!
One of the problems is that even when we go through all the instructions on the W-4 form to properly calculate the number of exemptions we should claim, the formula still over estimates the amount of Federal tax withheld from our paychecks. Few people feel good about getting no money back from their Federal Tax return and even fewer want to come up with money to pay any extra tax owed at tax time.
The tax refund has become part of our seasonal holidays and a gift receiving holiday it is! Our tax refunds come about half way between Valentine's Day and Christmas and is often received just when the weather is turning warmer. Summer is coming, we have new money, life is good!
Uncle Sam has been pretty happy as well. How nice that we can do something that makes everyone happy!
Most accountants will suggest that we make our Uncle a little less happy by calculating our tax withholding so we wind up getting a $0 return. Some accountants may even suggest intentionally under-estimating, so you are effectively getting an interest free loan, although I do not suggest this approach for most people.
What I suggest you do:
Work with your accountant or do the math yourself to figure out the following:
1) What is your estimated tax responsibility for the current year?
2) How much was your tax responsibility for the previous year?
This is not how much you paid at tax time or even the amount you see on your W-2 form. It is the amount of Federal Tax you owe for the year as it shows on your 1040 Tax return. On the 2008 form it was Line 61 (TOTAL TAX).
You want to pay enough tax during the year that you are not going to be penalized. You also don't want to pay so much that you wind up giving the Federal Government this generous interest free loan for 1 year.
Accountants will have different suggestions of exactly what you should do, but here is a very basic strategy:
1) Unless you are making a lot less money than last year, make sure your payroll Federal tax withholding adds up to AT LEAST the amount of your TOTAL TAX for the previous year. Generally, (everything dealing with the IRS has some amount of variation), you will not be penalized if you pay AT LEAST the tax you owed the previous year OR at least 90% of the tax you do owe for the current year. (Disclaimer - If your income for this year is substantially more than last year and you were aware of it early enough in the year, you could wind up having some trouble if you are audited, so get some good advice).
2) Estimate your Total Tax for the current year. Do you best, but don't sweat it, you'll be wrong, but you just need to get close.
3) Decide how close you want to make your tax deductions to the total tax you wind up owing. a $5,000 margin is being to generous to Uncle Sam. 5-10% is probably a good guideline. (If 5-10% of your total tax is $5,000, congratulations on your income level and thank-you for helping to reduce the national debt.)
4) Add your margin to your estimated Total Tax for the current year.
5) Go with the higher of your total from 4) and your total tax from last year.
In addition to using the exemptions on your W-4 form instruct your Payroll Department how much federal tax to withhold for you, you can actually give them the exact amount you want taken out. So, if you know what total withholding you want for the year and how much has been withheld to date, subtract one from the other and divide that by the number of remaining payrolls for the year.
If you are uncomfortable with the possibility that you may have estimated low and don't want to have to figure out how to pay the government the extra you owe them next April 15th, here is a nice solution:
Every month, instead of paying an extra $100-200 in Federal Tax Withholding, have that auto-deducted from your payroll and invested in a money market account. Instead of giving the 0% loan to Uncle Sam, you are keeping the money yourself and earning some interest (although not much as of this writing). If at tax time next year you need this extra money, you will have it.
If you wind up having done some pretty good tax estimations and you don't need this money, then maybe that Cruise to Bermuda is a possibility after all. But perhaps it shouldn't be. In an upcoming article, we will write about how we think and spend differently depending upon whether we receive money in a lump sum or over a period of time.
Wednesday, September 30, 2009
Why Do We Tip?
Many folks would say that they tip to reward (or punish) the service they just received. Economists tend to look at tipping and ask what is the tipper trying to accomplish? Giving someone money at the end of service will not induce them to perform any better since they are already done. It could encourage the server to perform better the next time we see them, but in most cases, we tip people we will never see again. The potential of a tip could provide incentive to the server to give great service, but how much we tip or even if we tip at all after the service will not get us anything.
Perhaps we tip out of a sense of goodwill or fairness, perhaps as a thank-you for the service provided. Perhaps we feel good after tipping someone and that is the value we get for giving up about 15% extra. Then why don't we tip everyone who serves us instead of just certain people such as waiters/waitresses, hairdressers, or baggage handlers? How about a salesclerk at a department store, a bank teller, a pharmacist or even our doctor? Who we tip might be a topic for a future post, but it does point us in the direction of answering today's question.
Perhaps the main reason we tip is not to gain something, but to avoid the cost associated with not following a social rule. We just want to do what is expected of us. In the US there is a complicated set of rules for who to tip and how much and all we want to do is not offend anyone. How those rules on tipping came into place is unknown by most of us, but they are socially accepted and in many cases defensible, so we tend to follow them. We see the waitress carrying 4 platters at one time and know they are being paid a low hourly wage and reliant on tips, so we feel a duty to provide part of her wage.
It is said that you should reward great service with larger tips and punish bad service with smaller ones or none at all. However, tips tend to vary very little as service changes. For stellar service, we may increase our tip another 5%. Sometimes for bad service, we'll drop it to 10%, but often it will stay at a flat 15% because we really just want to be done and move on. In fact, some studies have shown that tipping changes the most for things that have very little to do with actual service.
As for how much to tip, that is always a big question. You can get some guidelines for both US and international tipping at the TIPPING PAGE. You can get some additional ideas on who NOT to tip at the TIPPING ETIQUETTE webpage.
So in this instance, we spend our tipping money, mostly to follow decorum (one we don't understand particularly well), rather than attempt to get something with our money. If you want to actually tip in a way that will get you even more, try this:
a) Tip the server at the beginning of service
- this may not work in many circumstances, but is amazingly effective in others. If you are with a group, give this a shot.
b) Tip regular servers more than you otherwise might
- this is the one time when you can prepay good service in the future
c) Tip big on small bills
- for a small amount (ex. a few extra dollars on a $20 haircut) you are making a big statement and providing the server with some warm fuzzies and yourself with some really good karma
Perhaps we tip out of a sense of goodwill or fairness, perhaps as a thank-you for the service provided. Perhaps we feel good after tipping someone and that is the value we get for giving up about 15% extra. Then why don't we tip everyone who serves us instead of just certain people such as waiters/waitresses, hairdressers, or baggage handlers? How about a salesclerk at a department store, a bank teller, a pharmacist or even our doctor? Who we tip might be a topic for a future post, but it does point us in the direction of answering today's question.
Perhaps the main reason we tip is not to gain something, but to avoid the cost associated with not following a social rule. We just want to do what is expected of us. In the US there is a complicated set of rules for who to tip and how much and all we want to do is not offend anyone. How those rules on tipping came into place is unknown by most of us, but they are socially accepted and in many cases defensible, so we tend to follow them. We see the waitress carrying 4 platters at one time and know they are being paid a low hourly wage and reliant on tips, so we feel a duty to provide part of her wage.
It is said that you should reward great service with larger tips and punish bad service with smaller ones or none at all. However, tips tend to vary very little as service changes. For stellar service, we may increase our tip another 5%. Sometimes for bad service, we'll drop it to 10%, but often it will stay at a flat 15% because we really just want to be done and move on. In fact, some studies have shown that tipping changes the most for things that have very little to do with actual service.
As for how much to tip, that is always a big question. You can get some guidelines for both US and international tipping at the TIPPING PAGE. You can get some additional ideas on who NOT to tip at the TIPPING ETIQUETTE webpage.
So in this instance, we spend our tipping money, mostly to follow decorum (one we don't understand particularly well), rather than attempt to get something with our money. If you want to actually tip in a way that will get you even more, try this:
a) Tip the server at the beginning of service
- this may not work in many circumstances, but is amazingly effective in others. If you are with a group, give this a shot.
b) Tip regular servers more than you otherwise might
- this is the one time when you can prepay good service in the future
c) Tip big on small bills
- for a small amount (ex. a few extra dollars on a $20 haircut) you are making a big statement and providing the server with some warm fuzzies and yourself with some really good karma
Tuesday, September 29, 2009
Why We Aren't Smart with Money
Welcome.
I have always thought a lot about money, although perhaps not frequently enough about how to make a lot of it. Most of my deep ponderings have focused on things like why we spend the way we do, how we assign values to things, why we view one large amount of money differently than lots of little amounts that add up to the same, etc.
We are all smart people, in one way or another, but very few of us are very smart with money. Even those who are smart with money make some unexplainable decisions. Why is that?
A lot of what I write here touches on the field of Behavioral Economics. Even though I majored in Economics (and Mathematics) more than 25 years ago, I have never thought of people being exceptionally rational or consistent when it came to decisions (although we certainly are self-interested). I was happy to see the field of Behavioral Economics gain at least some mass appeal, if not the respect of the traditional Economics community.
Actually, everything we do is rational and consistent with our values. It is often the case that we have trouble understanding exactly why. That is what I will try to do here. I will bring up a topic, often common to everyone, bring out the conflicts of reason, explore the reasons for the chosen behavior and then in some cases where appropriate, suggest methods of changing that behavior if so desired.
I hope you leave smarter than you were before you joined us.
I have always thought a lot about money, although perhaps not frequently enough about how to make a lot of it. Most of my deep ponderings have focused on things like why we spend the way we do, how we assign values to things, why we view one large amount of money differently than lots of little amounts that add up to the same, etc.
We are all smart people, in one way or another, but very few of us are very smart with money. Even those who are smart with money make some unexplainable decisions. Why is that?
A lot of what I write here touches on the field of Behavioral Economics. Even though I majored in Economics (and Mathematics) more than 25 years ago, I have never thought of people being exceptionally rational or consistent when it came to decisions (although we certainly are self-interested). I was happy to see the field of Behavioral Economics gain at least some mass appeal, if not the respect of the traditional Economics community.
Actually, everything we do is rational and consistent with our values. It is often the case that we have trouble understanding exactly why. That is what I will try to do here. I will bring up a topic, often common to everyone, bring out the conflicts of reason, explore the reasons for the chosen behavior and then in some cases where appropriate, suggest methods of changing that behavior if so desired.
I hope you leave smarter than you were before you joined us.
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