Bank Fees Going Up

As reported in the Wall St. Journal on September 30, Bank of America and many other large banks will begin charging a monthly fee to use a debit card. Why? Congress has put pressure on banks to make their fees more transparent, which is a good thing. So, the Federal Reserve made a new rule in June that banks with over $10 billion in assets cannot charge a merchant more than 24 cents per debit card transaction. Currently, the average charge is 44 cents. Since the banks can no longer collect the fees from merchants, they will begin collecting from customers.

Does this matter to you? It depends. If you keep a healthy balance with a large bank, chances are you will be exempted from the fee. If you keep all of your money with small banks or credit unions, who are not subject to the rule, then they might copycat the large banks and charge you anyway, but probably not. If you have an “extra” checking account with a small balance at a large bank, it may give you an incentive to close that account, or at least close the debit card linked to it.

In the bigger picture, though, is an irony. The rule was prompted and encouraged by Democrats, known as champions of the little guy. Now, the little guys with the small accounts at the large banks will be eating the fees that the middle class and rich guys used to bear whenever they bought from a merchant. More than likely, little guys will switch to credit unions and small banks, and the big banks will be left with the big balance accounts. So who did it really help?

As a fiduciary, I am all in favor of disclosing, in plain sight and in plain English, every cost and every fee that financial consumers, borrowers, businesses, and investors are about to incur before every transaction. But this rule goes beyond disclosure and forces a needless shuffling-around of accounts and costs. It would have been better for everyone to have merchants and banks disclose the cost of a debit card transaction to their customers, and let them decide on their own what to do.

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Battle Strategies for Rational Behavior

Our brain’s limbic system is emotional; focused on now; and fears loss.  Our brain’s rational cortex system is logical and does not put emotions on time frames. Therefore, successful strategies to overcome our limbic system’s emotional influence on decisions where we need to be rational do one of two things:  1) change the rewards and penalties in future decisions; and/or  2) change the number of “decision points.”

Giving Ourselves Rewards and Penalties

What kinds of rewards might we set up for future decisions?  They don’t have to be financial. More success comes from social rewards.  Charities tend to use this fact. For example, most fundraising events revolve around the social rewards of belonging to a group, and supporting a good cause.  So before heading out to the event, we can write our check in advance for the amount we wish to give.   In another realm of behavior and choices, rather than attempt a diet solo, we can agree with a group of friends to commit to a weight-loss plan.

What kinds of penalties can we set up for ourselves?  In the financial world, we can make funds unavailable. Christmas club accounts; requesting excess tax withholdings; and pensions accomplish this.  We can choose products with actual penalties, like CD’s and annuities.  We can choose investments with high costs to buy and sell, like real estate, or a business.

Other penalties we want to avoid are “felt losses.”  We feel a loss when we have to pay to work out or take a yoga class.  To increase the likelihood of doing the desired behavior, we can prepay for “painful” behavior changes.

Professionals who charge by the hour could change to flat-fee arrangements to avoid making their client incur a “felt loss” every time they meet with them.

Decision Points

Another way to trick ourselves is to manage “decision points.”  We should increase decision points for options that are hard to resist, and decrease decision points for options that are hard to do.   Here are some examples:

  • In one study of the “hard to resist” kind, people ate less than half the number of cookies when they had to individually unwrap each one.  The act of unwrapping added a decision point to the process of eating the cookie.
  • In the “hard to do” category, successful savings and investment programs are often automated, eliminating the decision point of manually making a transfer from a spending account.
  • Debtors can request a credit freeze through reporting agencies, forcing them to go through a “thaw request” in order to get more credit.
  • During the 2008 stock market meltdown, Dan Ariely, a Duke psychologist who studies behavioral finance decisions, knew he might be tempted to do something rash in his investment account.  So, he purposely input the wrong password three times so that he would be locked out.  This kept him from selling into the downturn.

Think you’re above your limbic system?  Studies find that the cortex consistently overestimates its abilities.  In fact, winning the cortex/limbic battle isn’t about willpower.    It’s about acknowledging our emotions and fears, and planning around them.

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Why Money Can’t Solve Our Problems

“I don’t know who I am or what I want. I just know I want to make more money and then I’ll figure it out and be happy.”  Ever felt this way?  At one time in my life, I sure did.

If you are reading this, most likely, you have a full tummy most of the time, shoes to protect your feet, a closet full of clothes, and an apartment or a house to keep you dry and comfy.   You were taught to read.  You have several years, maybe close to two decades, of education.  You may have participated in sports or music or arts or outdoor activities.  You may have experienced love in one or several different forms – from your parents, friends, siblings, a pet,  a spouse, or from a child.  To most of us, these are just the basics.   Take away any of these “basics,” though – our physical needs, our literacy, our leisure, and our love –  and we become seriously unhappy.

In contrast, how much did your happiness increase when you got your last new car? How about your last new outfit?  Your last new set of towels?  Your last bag of groceries?  How long did the happiness last? Think about each of these things as if you had never had one before.  How would the change in your happiness level compare then to just replacing an old one?

Once we reach a certain level of wealth, each additional dollar brings us a diminishing unit of additional happiness.  Economists call this a “diminishing marginal return.”

Even though we have scientific studies confirming money’s diminishing marginal return to happiness, we still seem to think, “If I had more money, I could do or have that,” or “I can’t do or have that, I can’t afford it,” or simply, “I would be happier if I had more money.”   Is this really true?

Money does give us choices.   We like having a choice between Lexus and Toyota.  We like latte and cappuccino.  We like menus.  We like variety.  We like Sam’s Club.

Before thinking more money was the answer to a problem, though, I think about whether there was anything else I could give up to get what I want?  If it didn’t involve giving up the “basics,” then I could afford it.  I just didn’t choose to.

If we want our money to work for us, it has to be efficient.  It can’t be wasted on unimportant things.    If we cannot be clear about what’s unimportant, though, we are likely to find ourselves perpetually wanting “more,” which is a prescription for perpetual unhappiness.

In The Seven Habits of Highly Effective People,  Stephen Covey wrote about the “Abundance Mentality.”  Having an Abundance Mentality means living as if there are plenty of resources and money to go around for everybody.   Ironically, once we precisely define what we want in our life, the world does appear far more abundant.  Life is no longer  a game of scarcity and competition.

By doing the hard work of figuring out everything we don’t need, voila’, the important stuff becomes much more “affordable.”  Money isn’t the answer to our problems.   We are.

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Wild Promises and Pixie Dust

A reader wrote to me this month, aggravated at some TV ads.  In her market, (South Carolina), a large financial company is running ads depicting people who made bad choices (didn’t save for kids’ college, didn’t plan for retirement)  With a soft Southern preacher accent, the advertiser is telling them to come in and sit down with their advisers.  Her impression from the ad is that the message is, “It’s ok you’ve made bad choices for the last 20 years.  Just y’all c’mon in and we’ll fix it for you.”  She called this message, “Pixie dust.”

I can’t discuss any specific financial company’s product in my newsletter without crossing the regulatory line, but she is right to be suspicious.

I can make my readers aware that, as human beings, we tend to value certainty over uncertainty. A lot.  The financial industry knows this.  Most human beings will overpay, or accept a lesser return or other tradeoff, for a product that appears to have some kind of guarantee.

We value this so much that we tend to overlook it if the guarantee has conditions, or loopholes, or possible higher costs down the road.  As long as the person informing us about it appears to be trustworthy and competent, we hear “guarantee” and (neuroscientists have shown this) a primitive part of our brains says, “YES! SIGN ME UP.”

Pay attention to which part of your brain is doing the listening.

1.  Ask to see the contract and the fine print.  If you don’t want to review it, find someone who enjoys that kind of reading.  (Hint:  I’ve been reading prospectuses and contracts for over 20 years and I love it.  The thicker, the better.)

2. Ask the nice, trustworthy, competent person how much they will make if you buy.

3. Ask what alternatives he or she considered before recommending this one.

4. Ask what could go wrong.

5. Ask what would be involved if you want out.

6. Ask at least one other adviser about the same product, preferably an adviser that will not make a commission on selling it to you.

Once you have your answers, then let the rational part of your brain make the decision.

College and retirement funding are ambitious goals that can be achieved in many cases, with time, ongoing financial education, informed decisionmaking, and a financial plan crafted with the family’s best interests in mind.

Perhaps that’s exactly what the advertiser is selling.

Then geez, why did they have to make it sound like pixie dust?

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Read more about the article Investing Vehicles: Getting You Where You Want To Go
Are you in the right investing vehicles for your destination?

Investing Vehicles: Getting You Where You Want To Go

With the stockmarket falling, it’s normal for investors to wonder what kind of investing vehicles to choose right now. Stocks, bonds, even real estate, seem poised to crater as soon as we decide to buy. It’s probably the most common question a financial planner receives in times like this – “Where should I put my money?”

The media is filled with quick-fix advice on this all-important question. Research has shown that the best long-term predictor of investing success is the percentage we have in stocks vs. bonds. Further down the list in importance is the specific stocks and bonds (or mutual funds) selected.  But, financial products, or investing vehicles, are what sell pop-up ads and keep eyeballs glued to our screens. So, it’s no wonder that this is a common question.

The Question Before The Question

However, precisely because it is so important, it’s not a question that can normally be answered in an hour, or even two.

There is a reason that financial products are called “vehicles.”  They get you where you want to go.  Consider – if you get behind the wheel of a real vehicle, turn on the ignition, put it in drive, and step on the gas without a destination in mind, what happens? You might have some fun and adventure, but not a lot to show for the trip before you have to fill up again.

Wild Destinations

When investors are asked where they would like the vehicle to go, financial planners often hear something like the following:

  • Rich-Land (News flash: most of us are there already.)
  • Growth-With-No-Risk Land
  • 100%-Guaranteed-Income Land
  • Cake-and-Eat-It-Too Land
  • Whatever-the-Most-My-Portfolio-Can-Make-Me Land

These kinds of wild places only exist in Financial-Fantasy-Land. They are too vague for any kind of meaningful map. Having one of these as your sole destination is a recipe for exhaustion and frustration. No vehicle will get you there, no matter what you might hear or read.

Fun and Fulfilling Destinations

In comparison, what are some examples of fun and fulfilling destinations? Try these:

  • Have $X per year to support my basic living needs beginning in 20__
  • Replace my car with one like it every 5 years until I can’t drive anymore
  • Spend 3 weeks every year in Scotland beginning in 20__
  • Put my kids through private school
  • Provide sufficient support for the kids to attend a liberal arts college at age 18 if they want to
  • Buy a mountain house by 20__
  • Host my children and grandchildren on a cruise every summer beginning in 20__
  • Build my own boat by 20__
  • Hold a 50th anniversary party for my parents
  • Open a beachside bistro by 20__
  • Go to graduate school full-time in 20__
  • Spend 20 hours per week volunteering at the shelter beginning in 20__

These are real-life goals from real-life people with real achievability. Some of the destinations they knew off the top of their heads. Others took some time to dream, discuss, and discover.

In some cases, that discovery was hard work. But once we knew the destination, then we knew what kind of investing vehicles were necessary and appropriate. To carry the analogy further, it was obvious whether we needed snow tires, a sunroof, hatchback, manual transmission, tinted windows, or halogen headlights. Investing decisions all fell into place.

Destination First; Vehicle Later

In short, figuring out the investing vehicles is not the hardest question. The more challenging ones are:  Where do you want to go?  What do you need, what do you want, what do you want to hedge against, and what do you wish for?

If you need further help, download our lifestyle planning questionnaire: Beyond the Numbers; check out one of our books or sign up for an award-winning monthly e-letter, “The View From the Porch.”

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Painful Lessons from the Blackberry Patch

eating fresh picked

On the 40+ acres where we spend most of our weekends, we have wild blackberry bushes.  Last year, I planned to pick fresh blackberries at the peak of their ripeness and make cobbler, one of my favorite desserts.  In our neck of the north Florida woods, blackberries peak in June.  Throughout the spring I walked around the property, watching as the berries turned from green in March to red in April to black in May.  By the beginning of June, little black corpuscles grew into shiny clusters of ball-bearing-sized berries.

On June’s second weekend, I decided it was time to harvest.  The heat index was at a record in the high 90s.  To defend myself from thorns, sun and mosquitoes, I donned my long-sleeved cotton t-shirt, blue jeans, knee-high socks, Steel-Toe boots, gardening gloves, sunglasses, and wide-brimmed hat.  I drank a pint of water, put sunscreen on my face and neck, grabbed my colander for collection, and thought about how good that shower was going to feel in an hour.

My recipe called for two cups of blackberries.  From my previous broad surveys of the property,  two cups should have been no problem.   Tossing the two-cup requirement aside, I had instant visions of filling the colander – 4 to 6 cups – with leftovers for ice cream toppings, afternoon snacks, and oatmeal.  Judging from what I knew I had seen, I was excited about having fresh blackberries every day for the next week.

Not So Fast

I started at the scraggly patch close to the house, a 10-foot diameter group surrounding a skinny tree in the middle of the hayfield.  More red ones were there than I remembered, and the black ones weren’t as large as I thought, either.  Not wanting to waste my trip to the patch, I picked a few clusters for the sake of having something to show.   A bit frustrated, I marched 200 yards across the field to the big oak grove, intent on finding better quality there.

On the south side of the elliptical two-acre grove, the sun was intense.  The berries there were slightly better than the first patch, but some had little beetles on them that reminded me of stinkbugs.  I squinted carefully before I picked, sweat beads dripping into my eyes, to make sure no bugs were getting into my colander.  Even if it was a big juicy cluster, I left it alone if there was a bug on it.

About an hour into my venture, sweaty and thirsty, I walked to the east side of the grove.  Not only was it shadier for me, but the shade must have been good for the berries.  Instead of 12 inches tall, some of the bushes were 3 feet tall.  I didn’t have to bend over as much, but the banana spiders found the environment perfect for their webs. Like the stinkbugs, I preferred to avoid spiders rather than kill them or disturb their web.

But, whoa!  Some of the clusters were the size of my big toe (which was now a little uncomfortable in the cotton socks inside the Steel-toe boot).  Yet, how sweet!  And not many stinkbugs.   When I found a patch with no spiders or stinkbugs, it felt like the jackpot, but I had to be more careful. I went to pluck the big clusters, but they were so ripe that my gloved fingers squished them, or they tumbled into the tangled mass of thorns, ticks, or who-knew-what below the branches.  I checked my colander.  My excitement faded.  For ninety minutes of effort, I didn’t even have my minimum.

Light Bulb Moment

With my head down, I noticed how soaked my jeans were, covered with thorns, which wet jeans seemed to attract. Yikes!  I felt the familiar sting of a mosquito on my shoulder, through my shirt, which was sticking to my skin.  Ignoring the thorns would be easy, because the mosquito bites were worse.  I wondered if the tradeoff of bigger berries for mosquito bites was going to be worth it.

But I didn’t have my two cups.   I had to press on.   I hurriedly looked up for webs, down for berries, swung my free arm to clear webs and then slap mosquitoes, while trying not to spill the colander.  I looked like a sweaty, disheveled marionette being operated by a 5-year-old.

I stopped again.  “How did someone with an MBA end up with such pathetic productivity?”  I thought.  I was clearly not cut out for the ag business.  My efficiency had to improve or else, no cobbler.  This was an unacceptable result.

I took ten steps back.  From that distance, I could scan the next patch for webs and big clusters.  If no big clusters or too many webs, I moved on.  If big clusters or few webs, I gently plucked easy-to-reach, bug-free big berries. I thought of my speed reading class – keep your eyes moving down the page.  So while I was picking the current patch, I scanned the next one.  Working faster lessened the number of mosquitoes on my shirt. Although I was itching from the previous bites, the rate of new bites was declining.  (That’s what an MBA would tell herself in order to keep going.)  But, I was getting only the best berries.  In ten minutes I covered the rest of the oak grove and transitioned to the trails in the woods.  Productivity problem solved.

Within the next hour I had picked through five shady acres in the adjoining woods and filled my colander.  I wearily strode back to the porch, peeled off my boots and socks, and walked inside.  I put the colander in the sink and took my long-anticipated shower.  Afterwards, rinsing the berries, I thought,  “I could have paid $6.99 at the store.”  Worse, I took the risk of getting Lyme disease from a tick, or encephalitis from a mosquito.

Lessons Learned

I then thought about other lessons I already knew, but didn’t apply, that morning:

1)  In Florida in the summer, applying mosquito repellant underneath your clothes is not a crazy idea.
2) Sometimes there’s no substitute for experience. Although I thought I was well-prepared,  if I had consulted someone who had already learned these lessons, I would have saved three hours of heat-borne agony.
3) Among all of the “wish I had known thats,” the most disheartening was that the ripest, juiciest, biggest berries aren’t in the sun.  They don’t have to be plucked at the bottom where the thorns are. They grow in the shade.  With the right technique, they fall off the end of the branch into your hand.   (“It’s all in the wrist,” my father, a tennis player, would say.)  Knowing the right techniques makes a big difference in time and quality results.  Even berry-picking has techniques.
4) If quantity is the only goal, then pick every berry on every bush and be done.  If quality is important, then don’t burrow in the single bushes.  Step back and scan the whole patch first.

Considering the physical risks I took, this could have been a very expensive outing.  Was it worth it?

Well, for the short while that I was enjoying fresh hot cobbler with Cool Whip, in clean, air-conditioned comfort on a suffocating June day, yes, it was.

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Turning Japanese? I Don’t Think So

Some economists have been listening to the 80s song by The Vapors in their warnings about a decade of Japanese-style deflation.  While we do share similar predicaments,  there are vast differences between our two economies, based partly on our different cultures.  Deflation may be the Japanese story of the last lost decade, but it probably won’t be ours.

First, though, what do we have in common?   We both have massive government spending programs put in place to stimulate the economy and revive battered banking systems.   While our stimulus is relatively new, Japan’s is over a decade old.  Japanese government debt now exceeds 180% of GDP, according to a recent article in The Economist.  That’s the highest of any developed nation.  The U.S. is “only” at 56%  but rising fast.  Yet despite all that spending, Japan hasn’t seen inflation in over 20 years.  What gives?    Inflation comes from overspending, and overspending can only come from 3 places:  government, private sector (consumer spending and business investment), and foreigners (who buy exports).    Japan is a big export machine, enjoying global demand for consistently high quality products.    Government has also done its part.  However, both together were not enough to outweigh the drag created by Japanese consumers’ underspending.

Why do Japanese, on average, underspend?  First, they tend to have a higher work ethic.  Working longer hours, they simply have less time for shoppiong.  Second, after centuries of fires and earthquakes, Japanese families have a long history of saving to rebuild their house every 15 years.  So, they don’t spend on lavish home improvements like those that drove our last boom cycle in the U.S.  Third, their population is shrinking and aging.   Finally, Japanese culture doesn’t encourage borrowing.  For the average Japanese consumer, repayment is a lot more enjoyable than borrowing.

The end result of pumping a lot of dough into an economy with little spending and little borrowing is…nothing.    The money (in Japan’s case, the government’s stimulus money and our export money) just sits as reserves in the banking system, as cash on business balance sheets, or as savings for consumers.  It’s not in circulation helping the economy to grow. One possible answer for their problem lies in the overregulated small business and service sectors, where more economic freedoms could spark both business and consumer spending.

The Japanese are famous savers, and this has kept their economy from recovering for over 10 years.  Now Americans have entered an era of “New Frugality” – could we end up in the same boat?  I don’t see it. In contrast to the  average Japanese, average Americans are practically born and raised at the mall. Spending Saturdays “just browsing” is a national pastime.  While fewer of us may be doing so now, the cultural urge to splurge is as ingrained as Japan’s urge to save.  Further, the “American dream” of owning a home  isn’t a trend that will disappear in a decade.  Americans love owning their homes, love spending on them, and will continue to borrow profligately to buy and improve as much house as the bank tells us we can afford.   Repayment?  I’m not sure many Americans know what that is.  No, I don’t see American consumers  standing in the way of an eventual recovery like the Japanese have.

Does that mean inflation is on the horizon?  Not as long as we have a hobbled banking system and a trade deficit.  For at least 20 years, the Japanese have made products the world adores and demands.  They have collected foreigners’ (our) money and given up little of their own.  That’s called a trade surplus.  The last time the U.S. ran a trade surplus was 199?  One  possible way out of our troubles is to start making  more goods and services the world adores and demands than buying others’ goods and services that we adore and demand.  Not an easy task in a consumption-and-borrowing based culture.

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