A Dollar Here, A Dollar There_ Still cannot Save at the End of the Day because of Mental Accounting

          

           We all try hard to save money by catching good deals but at the end of the month we still cannot save, why that happens? All because of mental accounting. How the mental accounting works and affects us? The examples below help to understand that people with good awareness of saving does 

not help them to really save money.

            Imagine that a customer goes to a store to buy a bedroom rug, which sells for $100. At the store the customer discovers that the same bedroom rug is on sale for $70 at another branch of the store, which is six blocks away. Will the customer go to the other branch to catch the lower price? 

            Now imagine that the same customer goes to the same store to buy a bed room set, which is sell for $1400. At the store he discovers that he can buy the same bed and side tables set for $1370, at another branch of the store. This other branch of store is also six blocks away. Will that same customer go to the other branch for lesser money to pay? 

            The studies shows that more customers will go to the other branch to save money. However, they are not really saving money because to save $30, they won’t walk six blocks but will spend that money on car gas. Some stores provide free delivery if the customer lives in their local area. If the customer will buy the furniture from a store which is six blocks away, he also will pay for delivery charges. 

  

            The main culprit, of course is mental accounting as $70 for the rug and $1370 for the bedroom set seems less, but at the end of the day the customer spends the same amount and could not save at all. People are cost-conscious when making large financial decisions such as buying a house or car but mental accounting makes customers relax when making small purchases. The cost of small purchases get lost among larger expenses, such as groceries, clothes and movie refreshments every week or every day. Being cost conscious when making little purchases is where spenders can often make big savings. Spenders does not realize that they should be more cost-conscious in decisions and can make more savings, in long run while making small purchases.   

Belskey, Gary, and Thomas Gilovich. NOT ALL DOLLARS ARE CREATED EQUAL. New York: SIMON & SCHUSTER, 1999. 37-41. Print. 

The Value of every Dollar in Mental Accounting

While reading for my managing finances blog, I came across an interesting story, in a book called “WHY SMART PEOPLE MAKE BIG MONEY MISTAKES”. I realized that I myself fall in the same category. In general, people do not treat all dollars equally because of their mental accounting or calculations in their minds.

            Here goes the story, a newlywed couple after spending $1000 of gambling allowance at the third day in Las Vegas for their honey moon, came to their bedroom to sleep. The bride went to sleep and the groom noticed a $5 chip on the dresser (the chip referred here as the chip use to play for roulette table). The groom noticed a number 17 shining on the chip, he quickly put on his robe and rushed down to the casino at the roulette table and put his chip on the square marked 17. Luckily the ball hit 17 and the 35_1 bet paid him $175. He let his luck ride on the path of winning; he again played for number 17 and won until he comes to the figure of $7.5 million. The groom was informed by the manager of the casino that the casino did not have much money to pay him if the ball hit 17 again. The groom rushed for a taxi and went to a better financed casino to play more. He once again bet all of his money for number 17 and ball hit the same number, making the fortune of $262 million. The overjoyed groom let his millions ride and the ball hit number 18 this time. Sad and broke groom walked back several blocks to his hotel. When questioned by his wife, the groom told his wife that he was playing roulette. “How did you do? Not bad. I lost five dollars (Belsky and Gilovich 32).”

            Whether you agree or not but the majority of people do think like the groom. The money won by playing at any casino is usually not real money and the groom’s losses were not the real losses. The groom could have stopped playing and had bought a brand new Rolls-Royce and still be a happy millionaire. It all depends how people see and consider the value of every dollar in their mental accounting.

           

Belskey, Gary, and Thomas Gilovich. NOT ALL DOLLARS ARE CREATED EQUAL. New York: SIMON & SCHUSTER, 1999. 31-34. Print.            

Potential Sources

The Potential Sources

The potential Sources for my final analysis paper will be the text books of "Personal Finance for Dummies" which explains every detail in very easy terms to understand and every new word or term is explained before further talking about it.

The second source will be Mr. Money Mustache web which is helping me to focus on which topics I can research for my blogs.

The third source is the You Tube, before writing about any topic I search on YouTube. the visual effects and videos helps me understand my topic myself before writing about it.

I have also found another blogging site of www.personalfinance4u.info which talk about daily routine finances and how to manage them. I will be searching for more blog link which can help with my research throughout the semester.

Investing in Bonds

While managing finances, why invest in Bonds?

Growing in a third world country, saving money for rainy days is a very common practice. At times, on kids birthday’s many relatives and friends give prize bonds instead of gift cards. At that time, being in childhood, what a bond is and how it does works, was not easy to explain. While studying for managing finances, a lot of resources talk about the stock investments, retirement plans and bonds’ investment. This blog will provide information about the bond investments and how it works. In near future the blogs will include about the retirement plans and stock investments. While personal managing finances, it is important to invest money at the right place. Bonds can bring in money and at the end of maturity date, they pay back the same amount, invested earlier.

What is a Bond and how does it work?

Whenever a bond is bought or the money which is invested in a bond, the investor (person who has bought the bond) lends the money to an organization or industry.  When a bond is bought it will have a maturity date, at that time the investor gets the principal money back. Principal money means whatever amount is invested will be paid back. Bonds also have an interest rate. Most of the time the interest rate is fixed. For example if an investor buys a five-year bond, of 5-percent issued by WalMart, then the investor lends money to WalMart for five years at an interest rate of fine-percent. This means if an investor, invests a $1000 of 5% interest than he/she will get $50 every year on that investment. However, after five years when the bond is matures, investor can take back the $1000 back from the WalMart which is called the principal money. The interest money is paid annually or at time semi-annually.

“The value of the bond moves opposite of the directional change in interest rate” (Tyson 177). An increase in the interest rates causes decrease the value of the bond. For example if the investor holding the bond at 5-percent and the company’s interest rate increases to 7-percent. Then, upon comparing with newly issued bonds of 7-percent interest, the previous issued bond of 5-percent interest decreases in value.

In general Bonds differ in the following main ways:

1)      Duration of the maturity of a bond: Short term bond usually have a maturity date with in a few years and the intermediate bond maturity date is in between three years to ten years. With the long term bonds, the maturity date comes within thirty years. The long term bond offers a high interest rate but that can decrease the value of the bond itself due to the change in interest rate over that long period of time.

2)      Credit quality of the organization to whom investor lends money: This means that the borrower will pay the interest and the principal money back at the agreed terms and dates.

3)      Different types of institutions to whom investor lends money: There are many  institutions which issues bonds. The bonds issued by state or local government are called municipal bond. Bonds issued by the federal government, means lending money to Federal government. Another type is corporate bonds issued by the corporations.

To summarize the information about investing finances in bonds, the video above helps to understand it easily as well.

If you want to invest money in bonds the video clip below talks about bonds information is much more detail. For this blog, this video helped me to understand why investing in bonds is saver than investing in stocks, if the a company file for bankruptcy.
Also it is very important to check the credit-rating agencies for investment safety on a scale where AAA is the highest possible rate which also explained in the video clip below. I hope you will like this blog and the informative videos.

 

   Tyson, Eric. Understanding Your Investment Choices. 6th ed. New Jersey: Wiley Publishing, Inc., 2010. 175-177. Print.

Etrade, , comp. "What is a bond? ETRADE, INVESTING AND TRADING EDUCATION." What is a bond?. ETRADE, 25 September 2012. web. 19 Sep 2013.http://www.youtube.com/watch?v=O2IiwstF_UE.

 

Finding the Keys to Successful Spending

For a large amount of population, spending money is cooler and more pleasurable than earning it. It is difficult to inform or advise anyone, what to and where to cut the spending? For that purpose, this blog includes the general advice how to successfully spend the money in day to day life.  Spending imprudently, can add burden on the earned income and can increase the future need to continue working. The four keys to successful spending is as follows:

·       

1.        Living within Means

      “Spending too much is a relative problem” (Tyson 98).  The writer further explains with an example of two people who spend almost $40,000 a year but still have a very different financial conditions and status. The reason is that one spender earns $50,000 a year and saves $10,000 annually. However, the second spender earns $35,000 a years and owes $5000 after a year as debt from his/her credit card or spend money from the savings, saved prior year.

     Moreover, “Don’t let the spending habits of others dictate yours” (Tyson 98). Try to avoid hanging out with friends or relatives which spend a lot at shopping. Also do other activities besides shopping with them. Furthermore, if you have to go out with them, go with limited cash in pocket and leave the credit or debit card at home. This tip will help to avoid spending incautiously.

     2.    Looking for the Best Values

     It is a good practice to look for a high quality and the low price in a product. Always do the calculation for the long run. At the end of the day, the product which cost less with good quality, is the one which need to be bought.

     A good example for this key is when deciding between two used cars, which are Solid Sedan for $12,000 and branded sports car for 10,000. The amount of both cars shows that branded sports car will be cheaper and will have a good quality. On contrary, over the years branded sports car will have higher insurance and maintenance rates than Solid Sedan. While evaluating the cost of a product or service always think in terms of total long-term cost.

     3.    Do not Waste Money on Brand Names

     It is beneficial not to compromise on quality. However, also do not be fooled by believing that high lined brand name products have a better quality and worth a higher price. Almost all big brands advertise their products a lot, which is costly for the company. All the cost of the advertisement is taken out from the consumer's products. Before spending for anything question yourself, is is a need or a wish? Can you survive and be alive without buying this product? This way it will be easier to decide on what and where to spend money.

      4.    Getting Money Back

·     

     Looking around the house will alarm us as many product which were once bought but were never used. It is time to return all of them and put some in money in the pocket. Before buying any product always check for the company’s fair return policies. Also, before buying any product, always check online the customer’s and original user’s feedback on that same product.

 
           It is not easy to cut down all the expenditures all at once but spending intelligently is the fruitful way to go.  The above four keys mentioned above, I hope will help readers to spend successfully.

Tyson, Eric. Reducing Your Spending, Personal Finance for Dummies. 6th ed. Wiley Publishing, Inc., 2010. 97-102. Print.

What kind of Student Loan is Beneficial in regard to personal finances?

College expenses

Related to personal finances, students have to pay for college expenses and it plays an important role in their personal finances. According to Student’s Guide to Financial Literacy, out of every three students, two students are using some kind of student loan (Lawless 4). To handle the financial cost of college students can also apply for scholarships, grants and loans. Some kind of work-study jobs also helps to cover a part of college expenses.

Grants and Scholarships

One helping key to overcome a part of college or education finances are scholarships and grants. Scholarships and grants are the awarded money for students and they are worth seeking! The reason is students do not have to pay back this money. Grants and scholarships are available with some merits, achievements and financial needs. Students which show great academic scores can get scholarships. Students and their family’s financial status is the prime factor to get a grant.

All students have to do is, to make some effort and spend some time with either the financial office or with the financial consular available at the college. Another source for this information is http://studentaid.ed.gov, where students can find more information related to federal student aid (Lawless 5). It is students right to look for other sources available to handle their finances wisely and should not feel hesitant about it.

Students Loans

            

     The biggest part of the financial aid for students is taken as student loan. This student loan is divided into two branches that are subsidized loan and unsubsidized loan. Students are not required to repay the Federal Government student loan until the graduation is achieved. The question comes in mind which loan is preferable?

·         Subsidized Loan: this kind of loan does not involve the students to pay interest. Federal Government pays interest on the behalf of the students. Students only have to pay back the exact amount of loan which was taken.

·         Unsubsidized Loan: this kind of loan requires the students to pay back the loan taken and also to repay the interest on it. Unsubsidized Loan is usually provided to students who have a good family income but still cannot afford the cost of college expenses. This loan has a low interest rate.

Private Loans for Students

           

     Students also have the option to get private loan either from a private company or from the Federal Government. Federal student loans have fixed rates of interest (Lawless 6). However with private student’s loans the interest rate always varies. Moreover, parents or the students with poor credit history have to pay higher interest rate while taking private student’s loan.

Conclusion

            

     After going thought the different options available for students to fulfill the college cost, any student can decide better how to help their finances for college expenses. Also which kind of loan is beneficial in a long run is the purpose of this blog. I hope you will find it informative.

Lawless, Robert. PAYING FOR COLLEGE. THE Student's GUIDE TO Financial LITERACY. 1ST ed. California: GREENWOOD, 2010. 3-6. Print.