Multiples and Money

Pay Less at the Gas Pump This Summer

Kevin O'Reilly, CFP® — Tue, 30 Apr 2013 15:51:29 +0000

Summer is approaching, and that means many Americans are making vacation plans. Parents of triplets and other large broods may not all be excited about trekking across the country with the kids in tow, but some of us enjoy a good old-fashioned road trip. Others of us also would rather not pay for five airplane tickets and a rental car on the other side. Depending on where you’re going, driving to your destination may be preferable to flying. For some, driving IS the destination.

How much will gas cost?

Unfortunately, part of the planning ritual for the more, ahem, analytical types among us includes guessing analyzing how much gas will cost along the way. In reality, the price of gas is an issue even for those who are not dumb adventurous enough to drive 1,800 miles across the country with eight-year-old triplets.

How can we reduce the price of gas?

While we can’t control much of what goes into the setting of gas prices, a recent Motley Fool article outlines some practical ways for us to reduce what we actually pay at the pump. Some of the suggestions are either not necessarily repeatable, or they may take more effort than some of us want to expend to save a few bucks. There are, however, a couple of recommendations that we do in my family to save as much as possible on the price of gas.

Technology can help reduce personal gas costs

Although I don’t have empirical evidence of this, I have the sense that most people who take a driving trip basically monitor how much gas they have in their tanks, and start thinking about a refill some time after they hit about 1/4 tank remaining. That is certainly a rational approach, but the big swings in gas costs from state to state and county to county mean that a bit of planning can really pay off in terms of overall expenditure on gas.

GasBuddy to the rescue

A quick look at GasBuddy, a tool I’ve been using for several years, tells me that today gas prices in the U.S. range from about $3.15 in Greenville, SC to a state average of $4.35 in Hawaii. Those are extremes, but if you’re driving from Phoenix to Chicago as my family does every summer, you’ll see a lot of variation. GasBuddy’s Gas Price Heat Map shows us that, if we were to leave tomorrow, it would make sense to a) get into New Mexico before filling our tank for a second time, b) fill up in Amarillo, TX, c) fill up just about anywhere in Oklahoma, and d) fill up in Missouri before hitting the St. Louis area. These “rules” don’t actually vary that much each year, but the dynamics do change and it pays to spend a couple of minutes re-planning before each trip.

Groceries can reduce your personal gas costs

According to the Department of Labor, the average family of four spent $709 per month on groceries in 2008, and the cost of groceries increases 4% on average each year. That equates to a budget of $862 in 2013. (Unfortunately, the magic of compounding can work against us as well). That’s pretty much in line with what we spend in our house for a family of five. My wife and I buy the vast majority of our groceries at one local grocery store. A couple of years ago, a gas station popped up in the same parking lot as that store. As Rewards members, we instantly had a line on saving $.10 per gallon for every $100 we spent on groceries. There was no need to change our habits particularly, and it certainly didn’t require us to buy extra stuff that we didn’t need. We now save 80 or 90 cents per gallon on gas for one fill up each month. Because my wife and I are cheap frugal, we fill up both of our vehicles at once, which allows us to save about $30 per month. That won’t alter our retirement plans, but consider:

We didn’t change where we shop for groceries.
We don’t spend any more than we would if we didn’t get the discount.
The gas station seems to match the price of its competitor down the street, where we bought gas prior to the new station springing up.
We fill both cars at once, so we can maximize our discount. That’s probably a bit weird, but not particularly burdensome.

What if our closest grocery store didn’t have an attached gas station? They’ve actually paired up with a national gas chain to offer this same deal at their stations, so it’s not difficult to implement this plan. At least not in Phoenix.

The Bottom Line – how much can you really save on gas?

Our savings? Probably between $100 and $150 for the round trip. Add that to $30 per month around town as well as some additional shorter trips, and we are saving around $500 per year for less than an hour’s worth of effort. Not only that, it’s sometimes tough to pay more for something that does not deliver any extra value. Paying for quality is one thing; paying more than is necessary for the same item feels wasteful.

Of course, your mileage will vary.

Next Generation Debt (Hint: It’s Decreasing)

Kevin O'Reilly, CFP® — Fri, 29 Mar 2013 15:37:17 +0000

Several recent posts have talked about the nature of consumer debt in America. Although older generations have recently added debt, a new article in the Wall Street Journal highlights the character of debt carried by young adults. The good news? It’s decreasing.

(Note: the article is subscription-only, but click the graphic and you’ll get the picture).

Mick Jagger Guards Against Economic Outpatient Care

Kevin O'Reilly, CFP® — Tue, 26 Mar 2013 16:22:44 +0000

Mick Jagger may have some sound financial planning advice for you and your family.

That may sound odd, so let me start with some background. I’ve been a reader my whole life. Between non-fiction and fiction, I easily read a book each week, and I’m sure I end up reading somewhere between 50 and 100 each year. It’s probably worth noting that not all of these books would qualify as fine literature, but I digress.

Over the years, several books have had a big impact on me in the sense that the ideas have stuck with me. I’d like to believe that some of them addressed broad, weighty matters that transcend the ages. For better or for worse, though, from a practical standpoint no book has stuck with me more than The Millionaire Next Door.

One important topic covered in the book is Economic Outpatient Care. This term refers to the practice of wealthy parents subsidizing the consumption of (some) of their children. In Dr. Stanley’s research, a millionaire typically produces three children. No, it’s not “typical” that the three are triplets, but certainly the concepts apply in that case. One of these children tends to achieve beyond his or her parents, and one tends to need excessive help to support a high consumption lifestyle. I’ll cover more of the related lessons covered in separate posts, but suffice it to say that the authors “found that the giving of such gifts is the single most significant factor that explains lack of productivity among the adult children of the affluent.”

So what does this all have to do with Mick Jagger? Well, it seems that Mick has displayed the audacity to deny buying homes for his three children. Clearly, this isn’t due to a lack of funds. Instead, it appears that he simply doesn’t believe in “parental housing subsidies”. Perhaps all is not lost for Mick’s generation.

Debt, American Style

Kevin O'Reilly, CFP® — Fri, 08 Mar 2013 16:20:46 +0000

American consumer debt…what does it look like?

The Wall Street Journal recently ran an interesting article titled 12 Debt Myths That Trip Up Consumers. While I intend to cover a couple of those myths in separate blog posts, the article included an infographic summarizing the nature of consumer debt in America. Definitely worth sharing. Note that consumers hold significantly more student debt than credit card debt.

(Click to view more clearly).

Debt Myth: You Don’t Qualify for Student Loans

Kevin O'Reilly, CFP® — Tue, 05 Mar 2013 15:00:16 +0000

Do you qualify for Federal student loans?

It’s not Breaking News that a college education is expensive and getting moreso at a rate that exceeds the inflation rate. If you’re a parent of twins or triplets, so much the worse.

How that education gets paid depends on personal values, income and assets, among other things. Some of it is just the result of hard work, like chasing down college scholarships for twins and triplets. Earning a six-figure income doesn’t guarantee sufficient assets to pay for college, but many such earners believe that they won’t qualify for Federal student loans. That’s not necessarily true. This point is addressed in 12 Debt Myths That Trip Up Consumers, a recent Wall Street Journal article.

Some key points:

The FAFSA - Free Application for Federal Student Aid, is required to be considered for federal student loans.
Federal student loans generally have more favorable terms than private student loans.
41% of families earning $100k or more per year haven’t filed the FAFSA in recent years.
Some federal loans do not have income limits!

The bottom line: regardless of your income, you may qualify for student loans that have favorable terms, and could make paying for college a lot easier.

When Is the Best Time to Buy Something?

Kevin O'Reilly, CFP® — Fri, 01 Mar 2013 14:45:49 +0000

Some very handy information from Mint.com and LifeHacker.

Stuff My Triplets Say – Press Releases

Kevin O'Reilly, CFP® — Mon, 25 Feb 2013 15:45:00 +0000

Several years ago, when my kids were in Kindergarten, my middle triplet decided to offer his advice on the subject of a press release I was writing. I believe it was on the topic of a new certification I had been granted. The conversation went something like this:

Me (to my wife): “Honey, I need some help with this press release title. Here’s what I have…what do you think?”

Son (interjecting): “Really, Daddy? You’re going to say that?”

Me: “That’s where I was going. Why, how would you make it better?”

Son (earnestly): “By turning you into a ninja.”

Can You Live by the 30% Rule?

Kevin O'Reilly, CFP® — Fri, 22 Feb 2013 15:00:04 +0000

When I was a student at Indiana University, I worked as an analyst in IU’s Center for Real Estate Studies. I didn’t get rich, but it was a cool college job. Much of my effort was directed at producing the Housing Affordability Index for the state of Indiana. (In a somewhat related side note, Indianapolis was the most affordable major metropolitan area in the nation in 2012.)

The concept of housing affordability is somewhat abstract, because it relies on a definition of “affordability” that is not really universal. At IU, we compared median house prices to income for each county in the state, and that also provided us with an index to measure the average for the state. So we knew if a given area was relatively more affordable than another, and our statewide index could be used to compare to other states. That was all relative, though.

The 30% rule has come to represent the idea that a homeowner is “burdened” if housing expenses represent more than 30% of gross income. It’s a de facto standard that isn’t perfect, but is probably a pretty good guide. But is it realistic, especially if you’ve just welcomed twins or triplets to your family? A recent infographic from mint.com illustrates the answer. (Click on the graphic to make it more readable).

The Easier It Is, the More We Spend

Kevin O'Reilly, CFP® — Tue, 12 Feb 2013 17:18:02 +0000

The research is pretty unambiguous – the average consumer spends more when using a credit card than when paying cash. This probably makes sense to most of us on an intuitive level, but it may seem like the gap would be small. Furthermore, credit cards have some definite benefits over our traditional transaction mechanism, cash.

Is it a good idea to abandon credit cards?

Foremost among the benefits credit cards offer is the protection they afford us. When I was a kid, it wasn’t that unusual to hear of people finding big bills – or even wads of cash – sitting on the street. I’m sure that still happens once in awhile, but there’s just not that much cash floating around anymore. If we lose a credit card we can call and disable its use immediately. Our exposure is minimal. Likewise, credit card usage facilitates doing long-distance business with people whom we’ve never met. They may be scamming us, and it still makes sense to be vigilant, but we’re pretty well protected from any kind of significant loss.

One thing credit cards don’t do is protect us from ourselves, which brings me back to the fact that we simply spend more when we use credit cards for our purchases. In an oft-cited study titled Always Leave Home Without It, researchers Drazen Prelec and Duncan Simester conducted several studies to gauge the willingness-to-pay of individuals using credit cards versus cash. One example involved telling participants that they could purchase highly desirable, sold-out basketball tickets. Some could pay with cash, others had to use credit cards. The credit card users were willing to pay more than double what the cash buyers were.

There are certainly multiple reasons why we are more willing to spend when we use credit cards than we are when we use cash. The most obvious in my mind, though, is that credit cards are simply easier to use. If we go to the store with $50 in our pocket and no credit cards, we can’t buy that shiny $150 item.

Mobile payments

Unfortunately for those of us who are concerned about our spending, it will only get easier. Given our propensity to spend more using credit cards, imagine what it will be like when we can walk through and pay via smartphone, while that phone remains in our pocket! Mobile payments are coming, and they’re going to be huge. In fact, according to a recent Crain’s Chicago Business article, eMarketer Inc. estimates that such transactions will jump from $640 million in 2012 to $62.64 billion in 2016.

For the sake of full disclosure, a lot of these high-tech solutions excite me. In many ways, technology continues to improve our lives. The payment process will certainly become more efficient, and technology should wring costs out of the process. Unfortunately, it ignores the impact on consumers from a behavioral finance perspective. By way of example, it’s pretty clear that the ability to trade anywhere – for stunningly low costs compared to 15 years ago – has only hurt the average consumer.

Utility and payment method

A recent video blog post by noted Duke professor Dan Ariely called The Pain of Paying highlights this phenomenon in reverse. Ariely explains that the pain of paying adds a “moral tax” to consumption in the form of guilt, and that the timing and method of payment affects our enjoyment. Not surprisingly, the preferred method for paying if you want to increase the pain is to use cash. If you want to decrease the pain, you should use credit cards. Ariely also cites the use of prepayments as a way to decrease pain: ”prepayment can focus our attention on the enjoyment of an experience”. In other words, put the pain of paying out of your mind and just enjoy what you’re doing. This makes a ton of sense to me, and is one reason I like the idea of all-inclusive trips. However, doing this for all of your consumption could be devastating to your financial health.

I believe the flipside of the prepayment notion is more universally helpful. It goes to a point I often make to clients of mine, which is to try to focus on the utility of a purchase prior to making it. That’s kind of an abstract concept, though, which makes it tough to implement. Changing your payment method to make it a little harder to pay for something is an easier way to add a bit of mental accountability.

What will you with this knowledge?

Technology will march forward. There’s little question about that. That doesn’t mean that we have to march with it, however. If you’re a parent of triplets, you’re probably worried about spending at some level, regardless of your net worth or income. Don’t make your job harder by sabotaging yourself into spending more easily. If ditching the credit cards and using cash works for you, go for it. For me, the ideal is to pay recurring bills that are non-discretionary with credit cards. If you shop online a lot, credit cards are also an obvious choice, although services like PayPal can facilitate a more cash-oriented lifestyle. When new payment technologies arrive, and they will, don’t be an early adopter. If it’s feasible, don’t be an adopter at all. Get your technology fix elsewhere.

When the Structure Breaks Down

Kevin O'Reilly, CFP® — Mon, 28 Jan 2013 15:35:09 +0000

The free fall in Apple’s share price has been documented ad nauseam by the financial media in recent weeks. But how has it impacted fixed income investors?

This weekend’s Wall Street Journal (subscribers) features an interesting case study that details how investors in income-generating “structured products” fared poorly by investing in products that are linked to Apple’s stock price. One case in point:

UBS issues ”trigger yield optimization notes” with a face value of $700.71.
They mature in one year, and pay 8.03% annual interest.
They cost 2% to buy.

Sounds great, right? Even for a high fee, the net interest is just north of 6% for a year, when typical short-terms bonds are paying closer to 1%. You get your $700.71 back and pocket some solid cash.

Oh yeah, there is one other stipulation that you might have missed. If Apple closes below $595.60 in a year, investors don’t actually get $700.71 back. They get one Apple share. Yesterday, Apple closed at $439.88, which is a long way from $595.60. If the stock were to close at this level at the end of the period in question, investors would lose over 30%, rather than cashing in a cool 6% in interest.

It is true that there are risks and rewards in investing. The problem in this case is that the downside risk is high, and the upside is…pretty pedestrian. If Apple closes at $1000 at the end of this one year period, do investors reap the benefit of that price appreciation? No. They earn about 6% after fees. So they’re left with constrained upside, and unlimited downside. Worse than than, many retail investors may not understand the downside risk.

Of course, written disclosures make clear the fact that the risks are substantial. At least one investor understood it differently this case, though, assuming that the worst case would be to break even on the investment.

Two important investing principles are in evidence in this case study:

If it seems too good to be true, it undoubtedly is.
If you don’t thoroughly understand what you’re buying, don’t buy it.

Note: these products are sold by investment banks, not Apple. If you’re still a rabid Windows fan who owns a Samsung Galaxy, feel free to continue disliking Apple. Don’t let the actions of Wall Street steer you away from that iPhone 5 purchase, though.