photo: herval

Wall Street’s bull statue stands as a symbol of unbridled capitalism. It also represents the inherent masculinity of the financial services industry.

But then came the 2008 Wall Street crisis, and with it, the collapse of the world economy. Suddenly, the manliness of Wall Street was severely dented. Images of newly unemployed bankers carrying boxes of personal belongings out of office buildings were screened around the world. The men in charge, like Hank Paulson, had lost control and had no clue what steps to take. And when Dick Fuld’s Lehman Brothers had to file for bankruptcy, leading to a worldwide loss of confidence in the market, the limits of mathematical models and the efficient market hypothesis were finally exposed.

The era of confidence was over, and attention shifted to the role of emotions and irrationality in economic behavior — essentially, the psychology behind economics.

The Psychology Behind Economic Behavior

Behavioral economics and behavioral finance are concerned with the psychology of economic and financial behavior.  These disciplines have been around for a while, but the financial crisis suddenly threw them in the limelight, and proponents like George A. Akerlof and Robert J. Shiller easily sold many copies of their book, Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism. The financial industry’s dream of a rational market was shot.

Our Financial Decisions Aren’t Rational

The study of behavioral economics aims to understand how psychological phenomena like emotions and group dynamics influence economic decisions. Studies have found that people often make decisions that are not in their best interest — or at least what economists consider their best interest.

For example, from a rational point of view, it’s best to start saving for retirement early in your career. But many don’t, and research shows that people are often terrible at long-term savings.

Investment decisions appear to be prone to all kinds of cognitive and emotional influences. Conventional economists always argued that irrational behavior couldn’t happen in financial markets. Irrational people may distort the perfect equilibrium of market prices, but savvier people would bring prices back to rational levels. But this equilibrium was hard to sustain after 2008. Behavioral economists, who often claim to have a more worldly and empirical approach than economists, who are occupied with models, refuted the belief that bankers behave rationally, carefully balance their decisions and only focus on maximizing their individual self-interests. Homo economicus clearly fell off his pedestal.

Groupthink, for example, has received part of the blame for the financial crisis. Collective beliefs and delusions, it is argued, arise and persist within groups like teams, firms, bureaucracies – and also in markets. Self-censorship, belief in inherent morality, collective rationalization, and stereotyped views of people outside the group are important symptoms.

Deluded By Success

Moreover, bankers and investors tend to be influenced by success stories. And if they belief in such stories, they become resistant to any evidence to the contrary. Besides, envy-inducing tales of young millionaires (and even the fictional Gordon Gekko in Wall Street) were a driving force for many to seek employment in the financial sector.

Business practices leading up to the financial crisis prove the disastrous consequence of ignoring evidence to the contrary of those practices. Hardly any banker could imagine falling housing prices, and they kept on selling all kinds of products backed by mortgages. Only a few hedge fund managers thought outside the box and saw the irrationality of the belief in ever-rising housing prices, as vividly illustrated in Michael Lewis’ The Big Short: Inside the Doomsday Machine.

Regulators Are Just As Irrational

Not surprisingly, the people who were supposed to supervise the bankers were also prone to groupthink and shared beliefs about the rationality of markets. In a brave move of self-reflection, a recent report from the International Monetary Fund’s (IMF) watchdog indicates that the fund fell victim to groupthink, preventing them — and I would argue, other regulators as well — from correctly identifying mounting risk within the financial markets. It was beyond their imagination that emotions and other psychological characteristics (such as herd behavior) could severely alter the world economy.

Does The Problem Lie With The Male Psyche?

Clearly, bankers and regulators operating in this overconfident environment were not sufficiently aware of their irrationality. But since these traits are so masculine, would we have avoided a crisis if mostly women were at the top? I doubt it. Despite increased awareness about the influence of irrationality and emotions in economic behavior, it would, however, be too soon to rule out risky masculine decision-making in the financial sector. Bankers aren’t suddenly doing deep soul-searching; entrenched habits and cultures are difficult to change. And power games (something behavioral economics tells us little about) between bankers and regulators about too-big-to-fail and bonuses demonstrate that, though Dick Fuld may have left the center stage, masculinity still thrives in the financial sector — be it rational or not.

Behavioral Economics: The End of “Manly” Banking? was provided by AskMen.com.

At some point, you have to face the big question: How will I pay for my child to go to college?

Don’t wait to start saving
Nowhere is the value of compounding returns more evident than in saving for a goal with a fixed time limit, such as financing a college education. If you start early, the amount you have to save to reach your goal will be far less than if you delay implementation of your savings plan until later on.

Even though this makes sense intuitively, it’s particularly surprising when you actually look at the math. For these purposes, assume that your investment grows at 10% with monthly compounding in a vehicle not subject to tax and that you have until your child turns 18 to save money for your child’s education. If you wait just three years to start saving for your child’s education, you will have to save one-and-a-half times as much to end up with the same amount as if you start saving immediately after your child is born. If you wait until your child’s eighth birthday, you’ll have to save almost three times as much over the remaining 10 years to catch up with someone who saves from the child’s birth. And for the true procrastinators who wait until their child starts high school before starting to save, it’ll take more than 10 times the monthly savings each and every month during those last four years to make the grade.

As you can see, getting started early can bring huge rewards to disciplined savers. However, there are many different types of accounts for parents to choose from, each offering different benefits and characteristics. Here’s a look at some of the most popular vehicles for educational savings.

1. Savings bonds

The federal government has added a number of twists to old-fashioned savings bonds, including one that gives strong tax incentives for their use. Most savings bonds already have a tax advantage; while interest accrues on the bond on a monthly or semiannual basis, the owner of the bond doesn’t pay income tax on the interest until he or she cashes the bond in. One added twist is that for certain savings bonds whose proceeds are used for educational purposes, the interest on the bond can escape taxation entirely.

Although savings bonds don’t always offer the highest returns available, they do provide a great deal of flexibility. Savings bonds come in amounts as low as $25, and you can buy them without paying any fee. To take full advantage of available options, however, parents and grandparents should also consider other options.

2. Custodial accounts

It sounds simple: Since you’re saving for your child, why not set up an account in your child’s name? In fact, setting up a so-called custodial account for your child is relatively easy. But there are traps for the unwary, so before you decide to go this route, make sure you know the ins and outs of custodial accounts.

3. Coverdell Education Savings accounts

For those looking for something a little more sophisticated than a custodial account, Coverdell ESAs give you a tax-advantaged option to help you save for educational expenses. The Coverdell has some unique properties, but it doesn’t let you save very much — just $2,000 per year currently. It’s worth looking into, but it probably won’t be the only tool you’ll want to use for saving for college.

4. 529 plans

No college savings strategy is complete without a look at 529 plans. These let parents and grandparents keep control of money they save for kids while giving them investment flexibility and relatively high contribution limits.

online finance software and financial planning are two things that we care about here at Mint. Learn more with great financial planning tips in our blog article index.

How much money did you spend on In-N-Out, Alerto’s burrito, and fast food last month? What about gas? Or Groceries? Do you ever wonder where your money went at the end of the month?
Keeping track of your daily spending can definitely be a challenge, but thankfully, there will soon be a very Minty way to do it using
online finance software!

So why is it important to keep track of your daily spending?

1. Doing so lets you know where your money is going, so you can direct it to where you really want it to go.
2. 2. It allows you to create a reasonable, realistic, and workable budget. (Yes, we said the “B” word.)

If you’re inclined to a start a budget, the very first thing you should do before you start setting limits is to find out your actual spending habits. If you don’t have a clear picture of how much money you actually spend on a specific category, it will be very easy to set unrealistic and unattainable goals.

Example: You have a family of five and your actual monthly grocery spending is about $650. Without knowing your family’s actual spending, you set a goal of $500 for groceries in your budget. Of course, you easily exceed the budget. You may get frustrated and decide that budgeting just won’t work for you.

Even if you don’t want to budget, keeping track of your daily spending with budget planner software allows you to know where your money is actually going, so you can better direct that money toward an area you really want it to go. After all, how many of us have spent more than we realize on shoes, entertainment, and eating out without realizing it?

Example: You don’t have a budget (because you already have the discipline to put away a good percentage of your income every month). You notice that money is getting just a little bit tighter in recent months, so you log into your favorite free personal finance tool, and sure enough, there is a spending warning on the “Eating Out” category. You make a mental note to stop treating your less generous friends, and all is well again.

Give Me Some Real Life Examples, Please

Imaginary scenarios aren’t cutting it, eh? Let’s take a look at how fast food spending surprised a certain anonymous person.

For the past few months, I’ve noticed that I’m missing a couple of bucks here and there. Being the curious budgeter that I am, I logged into my favorite free personal finance tool, and typed in “Gas.” I’d been driving a bit more recently, so I thought it’d be a good place to start.

Hmm… Everything looks good. I did drive a bit more during April, but that one extra tank of gas shouldn’t account for the missing pieces of eight. Fun observation: I pump about the same amount of gas during each trip to the gasoline station, which is about 12 gallons. Even though I haven’t changed the amount of gas I pump, the price has steadily gone up — a reflection of recent raising gas prices. D’oh!

Deciding that gas wasn’t the culprit and taking another bite out of my juicy carne asada, I typed in “fast food.”

Uh… $112 on fast food? Woops?

You’ll notice that before the week of March 28, I didn’t even spend a dime on fast food. Quite a contrast in spending habit, and I didn’t even notice it. Five dollars for a combo meal here and there can really add up over time.

If I didn’t decide to check my fast food spending and keep the spending trend up, I would quickly spend about $700 per year on fast food alone (not including eating out at restaurants). Yikes!

Different Methods to Track Your Daily Spending

The important thing about keeping track of your daily spending is to find the method that works best for you. Having said that, here are various different methods you can try out:

• The small notebook – A great way to record cash spending! Carrying a small notebook around allows you to quickly jot down cash purchases (or any other type of payment). It’s especially easy helpful for anything you buy without your credit or debit card, because you can easily have a large expense category called “cash” without knowing what you really spend.
• The debit/credit cards – Handle all your purchases by debit or credit cards. This is possibly the easiest way to keep tabs on your expenditures, because all your transactions will be available via your bank statement or credit card bill. It’s a very good method for those that can pay their bills in full, but not such a good method for those that carry balances.
• Keep receipts – It’s very simple and straightforward, but can get a bit disorganized if you forget to record the expenses or update your receipt shoe box. The great thing about receipts is that you can often distinguish certain spending habits without even physically recording the amount of money spent. When 20% of the receipt is from Target or 7-11, you can easily tell where you money is flowing to.
• Minty budget planner software – Use the many available free spreadsheets online, or create your own (we recommend a very simple spreadsheet from Of Zen and Computing). Tools such as Microsoft Money and Intuit Quicken can also be handy to track your daily spending (although in our opinion there are simpler, cheaper applications out there).

Whatever you decide, choose a method that you’re comfortable with and can keep up with. Try keeping track of your spending for a month and then add it all up at the end of the month. You may be surprised to find out how much you’re spending on trivial expenses!

Quick suggestion: When you categorize and add up the expenses, make it meaningful by creating categories that means something to you. For example, you can have a large category called “food,” but that won’t really let you know where the money is going. Specify a category for “eating out at sit-in restaurants” and you’ll be able to better distinguish between your spending.

What to Do With the Numbers?

You can take your expenditure tracking a step further by creating a budget, making a mental note to direct your spending toward higher priorities, or inputting the numbers in convenient online calculators such as the Daily Spending Calculator from Canada’s Office of Consumer Affairs. It’ll allow you to see the really big picture.

Example: Using the calculator, I input my weekly spending on fast food (according the graph above), which is about $14. I plugged in my age of 24, maintained the retirement age of 65 and inputted the expected inflation rate along with expected investment return. The results, I’ll admit, are mind boggling.

The total amount of money I’ll spend on fast food until my retirement would amount to about $30,000. Had I saved and invested the money instead, I would have gained a return of $270,000. All from a daily spending of about $2 for a quick lunch!

Tracking Your Daily Spending Check-List

1. Find a method of tracking that works best for you and be consistent!
2. At the end of the month, total the amounts in meaningful categories.
3. Decide if your spending is where you want your money to go.
4. Take the next step and create a budget!

Have your own secret sauce way to keep track of your daily spending that wasn’t mentioned? Feel free to share!

Further reading on the Topic:

Budget Planner Software

Online Finance Software

Free Financial Planning Tool