There’s a hole in my budget

Posted on June 23, 2011 by Kim Stephenson

I was asked to contribute to a feature about budgeting recently.

There were three simple questions:

 

  1. How do you prepare yourself mentally for the arduous task of budgeting,
  2. How do you keep yourself on track and
  3. How do you stop yourself from unnecessary purchases?

 

They are simple, but actually doing them is quite difficult.  So I thought I’d make some suggestions about each separately.  Here’s the first one,

 

How do you prepare yourself mentally for the arduous task of budgeting?

 

If you trying to prepare mentally for budgeting, it helps to be realistic.  If you are going to budget when you haven’t really done it before, you are trying to change a habit.  That means three things:

 

First

Changing a habit is difficult and there are no “magic bullets”.

 

Yes, I know that you have a friend (or usually have heard of a friend of a friend of a friend) who woke up one day and gave up shopping (heroin, gambling, smoking etc.) just like that.

Some of those stories are probably true, but:

a) they are very rare in real life as distinct from stories,

b) you usually find that the person who gave up so quickly goes back to it just as quickly and

c) the “overnight” cure (like overnight success) was often contemplated for years in advance before it finally resulted in an “overnight” cure.

 

Second

Changing a habit  is not impossible.

 

Yes, I know you tried before and it didn’t work.  It is difficult, and because there are lots of people peddling “instant cures” (like diet pills, sure fire investments, quit smoking schemes etc) that make it sound easy, you get confused and disheartened when you haven’t lost 5 stone and gained £1 million in two weeks or whatever you were promised.  However, it is possible, and you can do it, but you will have to work at it.

 

Third

People are different, and need to do different things in order to change.  The same person may also need to do different things at different times in order to change.

 

Yes, I know it would be easier if there was a magic formula to be sensible with money (or lose weight, stop smoking, banish social anxiety etc) that everybody could use.

 

It would also be easier if one application of one method helped you whatever sort of problem you had (buying shoes from stores, buying gadgets on the Internet, buying junk generally etc) or wherever you were with the problem (concerned about spending, contemplating the bill you can’t pay, considering bankruptcy etc).

It would also be nice if we could end world hunger and get everybody to love one another, but that’s another one that has no simple solution, is very difficult but not impossible, and that we have to look on as a work in progress!

 

So if you want to prepare for budgeting, remember that you can do it, you probably won’t find it easy and you need to work out what works for you (I’ll give some further help in the next post), because simply following what somebody else did isn’t necessarily going to work.

 

 

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Jobs and stress

Posted on June 16, 2011 by Kim Stephenson
I was recently asked to comment on some new research by Everyman about the stressors in life.  The reason it got to me was that Terri Bodell, Deputy Chairman of the National Association of Counsellors, Hypnotherapists and psychotherapists, noted “money and work are often the two primary factors for stress.” I was asked to comment for the BPS website.

 

 

According to the Everyman research, the average British adult spends approximately 36 minutes a day worrying, with monetary concerns the main driver of this.

 

On the BPS site (as above) I made the point that people identify with their job.  If you meet somebody, the first question is often, “what do you do”?  People say, “I am an X”, not “I work as an X”.  News reports about job losses say “hundreds of workers made redundant”.  They mean that jobs are redundant – the work isn’t needed any more.  But if you say to the workers, “you aren’t redundant, your job is”, you’ll probably get a reply that, more bluntly, says – “it doesn’t matter about semantics, I’ve been made redundant”.    If you are your job and your job is, or is likely to, be taken away, where does that leave you?  If you are “redundant”, what value do you have, might you simply cease to exist? Naturally enough, people are anxious about  that

 

And where do most people get most of their income?  Their job (or business for the self-employed).  If there are job losses, what does that say about the prospects of pay rises, dividend increases, secure income streams?  What does it promise in terms of uncertainty, pay cuts or freezes, economies, short-time working, maybe redundancy and no job prospects?  And what do the economic headlines suggest about council tax bills, energy  prices, fuel prices etc. that are driving the problems. ?  Incomes static or shrinking, expenses rising, how does that strike you?

 

The surprising thing to me is that people only worry for about half an hour a day about it.  Given that it is an average, I would have expected a few hours – largely because most people don’t really know how to manage their money, their thinking about life or their thinking about money particularly well.

 

That is very much what this site, and the book are about.  Getting control of the way you think about your money and your life, so you can enjoy your life – whatever money you have.

 

 

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Once in a lifetime

Posted on June 2, 2011 by Kim Stephenson

Are you going to the Olympics?

 

I have to say I’m not that bothered for myself.  But I’ve got friends who have gone for the maximum value of tickets they can afford (and sometimes rather more!)   And I’m surprised that there have been various people saying that tickets are a waste of money in times of economic pressure.

 

If you look back at the posts on the site, you’ll see something that comes up quite a lot – happiness is about living your own life.  Money is supposed to be a means to an end, not an end in itself. The idea is to use money to provide you with a “good life”. What is a good life for me might not be for you, and vice versa.  So you have to work out what your “good life” is.

 

But although it is different for everybody, there’s lots of evidence (have a look at some of the books on the resources page) that a lot of happiness and feelings about a good life come from experiences. You’ll probably be much happier spending your money on experiencing life, on having lived while you were alive , than you will accumulating material possessions so that you can boast on your death bed that you were rich (but didn’t actually live) while you were alive.

 

And an Olympic year comes round only every four years, so you’ll only be around for maybe 20 of them, and you’ll most likely only ever see one in your own country.

 

It’s literally a once in a lifetime event for most people.  So if you are tempted to say, “it’s a waste of money”, think about it.  What is more important, whatever you are going to do with that money, or experiencing (and maybe letting your children experience) that once in a lifetime event?  If the money is for something that you’ll really value and remember forever, great.  That’s what I’m planning to do with my own money.  But if what you’ll do with the money is to buy more “things” that you’ll forget you ever had in a few years, maybe you want to think about it.  You can always buy things, you can’t always buy memories and experiences.

 

 

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Mum, dad and Wayne Rooney

Posted on May 19, 2011 by Kim Stephenson
There was a nice article in the Mail today that quoted me fairly extensively (and mentioned the book), on the lengths parents go to in funding their adult children, with weddings etc.


I also did an interview on Tuesday, 17th May on BBC Radio Wiltshire, with Graham Rogers. There’s apparently a tape of it online, but it seems not to have been put up yet.  As soon as it is, I’ll put in a link to it!
The basic concept was that people are secretive about their income – something I have covered in the book. We got from that onto being happy and ignoring what other people have got (which Graham does very well) and even celebrating other people’s success. Graham  made the point that in the UK, we seem to build people up only to pull them down, while in the US they celebrate success. I thought that this was mainly about whether we think somebody deserved it – it didn’t occur to me at the time but the example I could have used was Henry Cooper, a lovely man by all accounts. Who would have begrudged him a premiere league footballers salary?

But we do begrudge people who don’t seem to deserve it, like most modern footballers!

I did make the point that footballers make stupid tweets, that cause immense trouble and, for example, rugby players don’t. OK, rugby players don’t get paid as much, but even if they did, you don’t see Her Majesty objecting to having Zara bring home Tindall as her fiancee, what would the opinion be of, say, Wayne Rooney! Graham said it would be interesting to see what The Queen made of Beartrice or Eugenie bringing him round for tea!

We had a bit of a chuckle today over how prescient we were. I see Wayne Rooney, has got into trouble for tweeting (to his 570,000 followers!) how he challenged somebody to a fight in the car park (a bit like deliberately swearing into the camera). Can’t see Tindall doing that (or Our ‘Enry, either).

Perhaps Her Majesty would defer to Prince Phillip on the subject of Rooney coming to tea and he would echo Mr. Burns – “release the hounds (corgis)”!

 

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Consumer Confidence

Posted on May 9, 2011 by Kim Stephenson

 

There was a nice illustration of some of the basics points that I keep making on the BBC last week.

 

One is the habit economists have of simplifying everything to the point that they can understand it, which is the point at which their theories have nothing to do with the real world any more.  Another is the fact that nobody commenting on the economy, on money, on consumers, on trends or anything else seems to be able to think about more than one aspect at a time.

 

For example, the economist is quoted:

 

The real key factor to confidence, he says, is what is going on in the labour market.

 

That gets shown to be an oversimplification by other commentators, who realise that individual issues make a difference and so does the context.  To illustrate that, I got asked last week for a comment about an apparent anomaly in consumer figures.  Sales at Thorntons, the chocolate company were significantly down.  But Next was showing healthy sales.  So the question was – which way is the economy going.

 

I was a bit puzzled why they wanted a psychologist’s interpretation, to be honest.  I’m usually the first one to suggest that psychology is massively underrated as a profession and that the contribution it can make is immense.  But I’m not sure I need a doctoral level qualification and lots of experience to reason:

 

  1. The weather has been unseasonably hot.
  2. When it’s hot, people might like ice cream, but probably don’t buy as much chocolate.
  3. When it’s hot in April, people start feeling like the spring is turning to summer and buy summer outfits, which have started appearing in shops ready for the rush to buy before the summer holiday season.

 

So is it hard to work out that Thorntons’ sales will be down and Next’s up?

 

And is it hard to see that there is a bit more to consumer confidence than “the labour market”?

 

Later on in the article, we get the statement that consumer confidence is all about the price of petrol – and this is allegedly proven because moneyexpert.com readers think lowering prices would improve confidence.  It might.  But then at various times we’ve been told that fuel prices rising (or falling) are effecting confidence, that rising (or falling) house prices are fueling (or retarding) economic growth and that interest rates are being kept too high (or too low) and this will stall (or start) an economic recovery.  I’ve said before that the economy is too complicated to make those sort of predictions with any likelihood of being right.

 

But apart from these things all being guesswork anyway (who anticipated the market was about to fall because of the Japan earthquake, and rise after the news of Bin Laden being killed, before those events were seen to have happened), the individuals who make up the economy – you and I – are influenced differently.  Maybe you regularly shop at Next and see lots of people buying, maybe you don’t drive a car so don’t care if the price of fuel goes up, but you have lots of savings that are getting a lousy rate of interest so you’re pretty optimistic but would be more so if interest rates went up.  Or maybe you drive huge distances, like chocolate and see that you are the only one buying and you have a huge mortgage so the only thing that would depress you more would be for interest rates to go up.

 

And all that is in addition to your natural tendencies to optimism or pessimism, your view of your own job security and all the other factors in your life.

 

It isn’t simple

 

But you can do something about your own confidence.  You can raise your own level of optimism (to an extent) and you can get more control over your own life and how you view the world.  There are lots of ways to do that, there are some posts on it, for example “the pursuit of happiness” and a lot of the books and websites in the “resources” section of this site.  I don’t suppose anybody else is going to suggest you do that, but actually, if you put all the different aspects of economic confidence together, it is the most logical action for you to be happier and have more financial control.

 

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Deferring Gratification

Posted on April 30, 2011 by Kim Stephenson
If you see a pair of shoes, a gadget or whatever your favourite “impulse buy” is, can you just ignore it? If you can, well done!
 
How about if it is on sale?  Can you convince yourself that it makes no difference, or do you think – “it’s on sale, I want it, I’ll buy it some time so I might as well get it now”?
 
How did you get on?  Not easy is it?  This is the effect of it being difficult to “defer gratification”, we want what we want now, not in the future.
 
Most of the textbooks talk about the ability to “defer gratification” as something that children have to learn, assuming that adults can all do it.  This is partly because the effect was first demonstrated in children and mainly because the psychologists and everybody else who has studied the effect don’t want to face the fact that they (and all adults) are subject to it as well
 
There is a classic type of experiment where children are offered a sweet and told that they can eat it now, but if they wait to eat the sweet they will get a second sweet (or a bag of sweets, or a better sweet, depending on the particular experiment) in ten minutes or so when the experimenter comes back.  In theory, around a particular age children learn to “defer gratification”, to take less reward (or none) now, in order to have a bigger reward later.
 
In theory!

It’s a reason adults don’t save for pensions, we still like the sweet now instead of the bag of sweets in 10 minutes.  However, once we’re grown up we buy a car instead of a single sweet now and have £25,000 a year less pension instead of a bag of sweets in 30 years time.However, a solid result of research into this is that children who could defer gratification better were more successful later in life, they got higher school grades, had better incomes etc.  That doesn’t mean one causes the  other, there could be other factors involved and it is always dangerous to  assume that because two things are correlated (in this case, childhood ability to defer gratification and adult success) that one causes the other.
However, it does suggest that being exposed to situations where deferment of gratification is useful and can be practiced, and particularly to seeing, practicing and learning strategies for doing it effectively are handy things for children (and adults) to get.

 
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Mental Accounts

Posted on April 22, 2011 by Kim Stephenson
Another experiment I did at my workshop on 26th March was about something called mental accounts.   You might like to try it.  It’s one of the most looked at, least understood habits we have about money.  But if you understand it, you could save a lot of money.


Imagine that you buy a ticket to the Cup Final or a hit show.  At the stadium or theatre you realise that you have lost the ticket that cost you £120.  You have another £120 to buy a new ticket.


Do you buy a new one?


Think about that, and decide before you read on.


Imagine the same situation, you are going to the Cup Final or a hit show, but this time you are planning to buy the £120 ticket when you get there.  At the stadium or theatre box office you realise you have dropped the £120.  You have another £120 to buy a new ticket.


Do you buy a new one?


Think about that, and decide before you read on.


What normally happens is that in the first case, only about 30% of people say yes, they will buy a ticket.  Most people will not buy a new ticket if they have lost the ticket.  But about 70% say yes in the second case.  If they have lost the money, they’ll buy a ticket.


How about you?


Obviously, in both cases you’ve got the same situation – you’ve lost £120, it doesn’t seem logical to buy a ticket in once situation and not the other.


The usual reason we do this is that most of us have “mental accounts”.  The same money (money inherited, money on credit card, money spent on tickets, money found in the street) is all money, but we think of it as different.  We put it into different accounts in our heads.  So most of us think that when our “ticket money” is gone, we have no more money and can’t buy a ticket, but if we have “general spending money” we can use that for anything we want.


Which gave rise to an interesting result.  When I did the experiment at the workshop, about 60% said they would buy if they had lost the money, but only 50% if they had lost the ticket.  So we got the same sort of result, but with much less difference.  Apparently this group were not normal.  Why?


One of the audience actually suggested the solution.  There were a lot of psychologists there.  They’d studied decision making and knew the “logical” result.  Because that is always supposed to be better (It isn’t.) they went for the “logical” result and tried to think of all the money as being equal.  Of course, that didn’t work completely for everybody, but even if it had, being logical isn’t all it is cracked up to be.  It’s better to be aware of how you think.


For example it is often supposed to be “logical” to have an emergency fund.  So people in one study in the US had an average of $5.000 on deposit as an emergency fund earning them 3% and $3,000 on a rolling balance on credit cards costing them 19%+.  They were losing 16% a year for their emergency fund.  But that – I’ve heard- is because people think of the emergency fund as a mental account, so it is still better to be logical.


Think about another situation.  You want to save, and leave the money to build up, but keep raiding the saving to cover small bills, the extra credit card expenses, the new tyre for the car etc.  Imagine that you were left the money by Great Aunt Gertie, whose favourite you always were.  If you had that money, could you spend it on trivia?  Or would you save it for something important, like a new house or the children’s college fund?  That’s illogical, isn’t it?  But it is a good way of saving.  If you can make the money “sacred”, imagine it is Auntie Gertie’s or whatever, you’ll get to the position that you’d rather sell a kidney than spend that money.  So you won’t fritter it away, will you?


There are lots of applications of this – mental accounts are one of the easiest mental habits to use to your own benefit (there’s a lot more about using them to help you in my book).  But you can only do that if you understand what you’re doing.  Trying to be “logical” doesn’t work anyway (human beings are not like that) and it actually limits your options when dealing with money.

 

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The impact of debt.

Posted on April 16, 2011 by Kim Stephenson
I recently got asked by a news agency to comment on whether debt had a major effect on wellbeing, whether it was common for people to worry about debt and if so, what those in debt can do about it.

Debt or money worries are the biggest reason for couples to consult Relate.  Debt or money worries usually rank third or higher in any list of reasons for people seeking treatment for depression or anxiety. Given that
millions of days are lost each year to illness, depression is a major illness and money worries a major cause of general distress, which contributes to depression, it’s probably a very common thing.  Especially since only a proportion of people who worry actually consult anybody about depression, marital problems or whatever, most just suffer in silence.  Physical health problems (and accident rates) seem to increase among those who are stressed, depressed etc. as well.

So yes, it effects wellbeing and yes, it is frighteningly common.

There are loads of things people can do about it, I’d suggest starting by looking at the finding help page, which gives resources and a guide to where to get the appropriate help (counselling, financial, coaching, debt
advice) and how to tell if an advisor is worth dealing with.

A big problem, both with people coping better and even trying to cope better is the UK attitude to money, to wellbeing and in fact to everything.  In the UK, the whole system is reactive, it is treatment, not prevention. So the Happiness Index and similar elements of positive psychology could be used to help people not to become depressed over money worries or debt in the first place.  But the Government sees happiness as a way to introduce a separate measure that might make them look better than the dismal economic figures, and doesn’t connect the two.

Similarly, the NHS has prescribed anti-depressants 40% more than last year.  It also proudly claims that it has increased “talking therapies”, (because an economist told them that this was cheaper than pills, which it is, but it’s still more expensive than people not getting depressed in the first place).

The problem is the lack of connected thinking, and the obsession with money and not what the money does.

It doesn’t seem to occur to anybody that if we changed the way people generally thought about money and happiness we could actually waste a lot less on pills, therapy and pointless political point scoring.  We’d also have more money to do what we really want (we could buy helpful stuff instead of pay the NHS to buy pills) and we wouldn’t all have become so depressed in the first place, so we’d be able to enjoy the things we got instead of lying prostrate, popping pills and complaining that we don’t have
any money!

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Bigness bias

Posted on April 5, 2011 by Kim Stephenson

I did some experiments at my workshop on 26th March. One was about what is called “bigness bias”. Maybe you’d like to try it, it could help you save a lot of money.

 

Imagine that you go to a shop to buy a lamp that is £100. At the shop, you find that at a branch 2 miles away it is on sale for £75. Do you go to the other branch to get the lower price?

 

Think about that, and decide before you read on.

 

At the workshop about 70% of the audience said yes and 30% said no (I got them to stick little labels on a sheet hanging on the wall, to “vote”).

 

Now imagine that you go to the shop to buy a dining room set, which is £1,775. At the shop, you find that at a branch 2 miles away it is on sale for £1,750. Do you go to the other branch to get the lower price?

 

Think about that, and decide before you read on.

 

This time, at the workshop about 20% of the audience said yes and 80% said no. How about you?

 

The results I got are pretty much what everybody has got when that type of experiment has been run (and it’s been done thousands of times). The thing is, the £25 discount is the same – so lots of people think you “ought” to make the same decision each time. But very few real people do. We tend to think that the “big picture” is important and small amounts are trivial.

 

But imagine that you’re going to buy a household appliance, costing £600. You’ll probably spend a lot of time trying to get a discount, find the best deals, get free delivery etc. While you’re doing it, consulting Which? and so on, you’ll go on with your life.

 

You leave home for work on Monday morning and on the way to the station you pick up a paper and a decent cup of coffee. Mid-morning you send out for a cappuccino and at lunchtime (because you’re on a bit of a healthy eating programme) you get a nice organic sandwich a bowl of fresh fruit and an organic smoothie. During the afternoon you get a latté and on the way home you stop for a quick glass of wine and get an evening paper. All trivial, right?

 

At a rough estimate, you’ve spend about £20 (in money after tax) on coffee, papers, lunch and drinks. Do that every day and you’ve spent £100 in a week. That is about £400 in a month, and £4,800 in a year. If that went into a pension scheme you’d get tax relief on it and perhaps be saving £7,500 each year.

 

But I bet you tell people you can’t save, you just don’t have any money, it is so hard to make ends meet these days, you are even working really hard to save 10% on the new appliance!

 

You are probably doing this sort of thing. It is the reason lots of people buy useless extended warranties, buy expensive add-ons they don’t need for new cars and so on – we all lose the small amounts in the big ones.

 

You’re human, you’re almost certainly not going to be logical, or be able to do what you “ought” to do. Just be aware of it, and think about all the little expenditures, because they add up to very big ones.

 

 

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Index linked funds

Posted on March 25, 2011 by Kim Stephenson

 

I was recently asked in a comment on the site whether using indexed funds would be a good investment strategy.  These are funds (unit trusts, mutual funds, etc.) that buy shares in companies that make up the market index.  That means that the index fund follows the index (whether it is the UK “Footsie”, a US or Far East Market or a specialist area like technology). 

 

I’m not going to suggest particular funds, you need a good IFA for that.  But in general, if you’re going into the stock market, indexed funds are a good plan.  That’s partly because they tend to be cheaper (you don’t have to pay for lots of research and management, the fund buys the shares and that’s it – so you aren’t paying for lots of swapping around that the managers do to try to “beat the index”).

 

There’s a couple of other things about index funds.

 

One is that they tend to help you to avoid trying to predict what the market is going to do.  If, for example, you think that oil stock is going to rise then you might try to buy lots of oil stock.  Or if a managed fund manager things that technology stock is a “good buy”, they may get lots of technology companies.  That works well if you guess right.  You buy everything that is going up.  You gain on the swings and on the roundabouts.  But of course, if you get it wrong (if the Far East market goes down because there is an earthquake, or oil stocks drop because of political unrest) then you lose on the roundabouts and on the swings.

 

Since people can’t predict the future accurately, that is a bit of “all the eggs in one basket”.  So it seems to make sense to buy a range of investments (such as all those in the index), so that if some go down, others will possibly go up and what you lose on the swings, you gain on the roundabouts. 

 

It is human nature to think that you (or your fund manager) are, like Jose Mourinho, “the special one”, that you can predict the future, beat the experts, outperform the index etc.  But the evidence is that you can’t.

 

The second point is regarding index linked performance itself – in comparison to actively managed funds and direct share investment.  There was an analysis of lots of studies a few years ago (by Werner De Bondt, who is a leading academic in the field of behavioural finance).  This indicated that index funds outperform 75% of actively managed funds over virtually any time period.  And half of the remaining 25% of managed funds only outperformed their relevant index by chance.  This also ignores the many failed funds.  That is relevant because companies often fold up unsuccessful funds, or merge one fund into another.  That way, they can wipe out their really obvious mistakes and pretend that they are doing better than they are.

 

So you might do better with direct shares or with actively managed funds.  But you probably won’t. 

. 

As a final comment on this point, if you want a master investor as a role model, you need look no further than one of the richest men in the world, Warren Buffet.

 

“Most investors, both institutional and individual, will find that the best way to own common stocks [shares] is through an index fund that charges minimal fees.  Those following this path are sure to beat the net results (after fees and expenses) of the great majority of investment professionals.”

 

Warren Buffett—Berkshire Hathaway Annual Report, 1996.

 

If you know somebody who is a better investor than Mr. Buffet, please let me know.  If you don’t, I’d generally follow his advice!

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