Financial tips

MyFinancialAdvice.com Helps the Average Person Find a Financial Advisor

Many companies send me press releases and e-mail trying to get my attention. Some of these companies suck. Others are fine, but I don’t have the time to look at them. Every once in a while, though, I find what seems like a true gem, something I think would be of real use for Get Rich Slowly readers.

Last week, I spent an hour chatting with the folks from MyFinancialAdvice.com. Based on what I’ve seen and heard, I think this is one of those true gems, a service that many of you may want to consider.

How does it work?
MyFinancialAdvice.com is designed to connect clients with financial advisors. “The point of this service is that this is for the average person,” CEO Ron Peremel told me during a call last week. He spent 30 minutes showing me how the site works.

To begin, you can select from a variety of fixed questions in six categories:

• Financial Planning, where you can ask questions like “How do I manage my household budget?” and “How can I survive a financial crisis?”
• Investing, where you can ask questions like “Is real estate a smart investment?” and “Which stocks are right for me?”
• Taxes, where you can ask questions like “How do I reduce my taxes?” and “Which tax forms do I need to complete?”
• Mortgage and Debt, where you can ask questions like “What does my credit score mean?” and “How can I use home equity to reduce debt?”
• Insurance, where you can ask questions like “Do I have enough life insurance?” and “How can I reduce out-of-pocket medical expenses?”
• Employee benefits, where you can ask questions like “Am I in the right company health plan?” and “Should I roll over my company retirement plan into an IRA?”

Once you’ve selected a question and entered your state of residence, you’re shown a list of advisors who have offered to address that specific problem. For example, if I say I’m in Oregon and want help managing my household budget, I get a menu that looks like this:

From here, you can see a list of advisors, a summary of the services they offer, their ratings from other users, and their fee level. For example, here you can see that Mr. Wesling is expensive and is rated 6.2 (our of 10). Mr. Gardner is less expensive and has a 10.0 rating. You can click on the rating score to see the number of times has been rated (and a few more details).

Not all advisors have ratings yet (and those that do may only be rated by a handful of clients), but each advisor has been vetted by MyFinancialAdvice.com. According to the representatives I spoke with, “Details on every advisor’s profile page have been confirmed to be accurate; their proper licensing has been verified. All advisors are held to an enforced Code of Ethics. They sell nothing but their advice, just as you request it. The advisors are all independent professionals with small office practices all over America.”

How much does this cost?
Your initial consultation with an advisor is free. If you decide do engage someone, you can either pay a flat fee to get advice for pre-packaged questions (like those I listed above), or you can pay an hourly rate for more detailed advice. The fee column of the advisor menu gives you a rough idea of the hourly costs:

• $ = $0 – $125
• $$ = $126 – $150
• $$$ = $151 – $179
• $$$$ = $180 – $400

To re-iterate: These rates apply only if you ask for detailed personal advice (and you don’t pay until you accept the advisor’s proposal). If you’re asking a pre-packaged question, you just pay a flat fee.

You can even request a Free Financial Health Checkup by pushing the button on the home page and selecting an advisor from those listed who offer this service.

Why would you use MyFinancialAdvice.com?
As many GRS readers have learned, financial advisors generally aren’t interested in dealing with you unless you have around half a million dollars to invest. It’s just not cost-effective for them to take on smaller clients.

MyFinancialAdvice.com attempts to bridge the gap, to make it possible for folks like you and me to get the same sort of financial advice in a way that makes financial sense to all parties.

If you do decide to use the service, be smart. Remember that nobody cares more about your money than you do. Be careful when you pick an advisor; ask questions to be sure their financial philosophy matches your own. (If you’re an index-fund investor, you’ll probably want to work with somebody that shares your views, for example.)

I’m curious to hear people’s experiences with MyFinancialAdvice.com. If you’ve used it before, what did you think? If you end up giving it a try, be sure to come back and let us know how it went.

Note: I don’t have a financial relationship with MyFinancialAdvice.com, and neither does Get Rich Slowly. I’m not being paid to write this — I just really think it looks neat. However, GRS may pursue a financial relationship with MFA in the future.

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Related Articles at Get Rich Slowly:

• Long-Distance Phone Tax Repealed
• Survey: How Much Do You Spend on Food?
• 8 Questions to Ask BEFORE Hiring a Financial Planner
• Best Jobs in America
• Commitment Contracts and StickK.com

Source: Get Rich Slowly

Roth IRA Conversions Made Easy

This is a guest post from Steve Juetten, a fee-only certified financial planner in Bellevue, Washington, and long-time Get Rich Slowly reader. He has written a book for consumers on the topic of 2010 Roth IRA conversions. You can find out more about Steve, the book, and his services at finpath.com.

Traditional and on-line media have been filled with 2010 Roth IRA conversion stories since the start of the new year, and if you’re wondering how this might help you and you’re confused, you’re not alone. It’s a complicated subject because to really know if a Roth IRA conversion is a good idea for you, you need to:

1. Understand some confusing tax ideas, and
2. Be able to foresee your future with a high degree of confidence.

It’s the second point — predicting your future — that makes knowing if a Roth IRA conversion is right for you so frustrating. Let me see if I can present the tax issues clearly so you can decide if you’re a good candidate for a conversion; we’ll leave the prediction section to the end.

Why bother?
On 01 January 2010, the law changed to allow anyone to convert their taxable IRA into a tax-free Roth IRA regardless of their income. Previously, if your joint income was more than $100,000, you couldn’t do a conversion. So why would someone want to convert a traditional IRA to a Roth IRA? There are four main reasons. If your situation fits into one of these, you’re a good candidate to consider a move like this.

• Economics: You want to pay taxes on the value of your IRA right now when it’s smaller than it will be in the future when you take it out.
• Thinking of your heirs: You may want to leave a tax-free asset to your heirs by paying the tax now.
• Retirement income control: Money in a Roth IRA does not have to be withdrawn during your lifetime to meet the IRS required minimum distribution (RMD) rules.
• Tax diversification: You might like the idea of having some of your assets in a tax-free account and some in taxable accounts because future tax policy is always un-certain. You like the idea of “hedging” your tax liability.

These are the four main reasons most people list as their motivation for considering a Roth IRA conversion. There are many other reasons you might want to convert to a tax-free Roth IRA this year, such as currently living in a state with low income tax rates, but planning to retire to a high income tax state (i.e. California); having hefty charitable contributions you’re carrying forward or want to take now; or some other unique tax situation. If you think you have a special tax situation that might be helped by a Roth IRA conversion this year, please see your tax advisor.

The tax game
The first thing to understand about a Roth IRA conversion is that you’ll owe taxes on any money you convert. These taxes should probably be paid using money from outside the IRA. Unless you’re older than age 59-1/2, any money withheld from your IRA account to pay taxes is considered an early withdrawal by the IRS and the dreaded 10% penalty applies. Same rule applies to holding the money in the Roth IRA account for at least five years. This means that not only will you have to pay income taxes on the amount you withdraw or use before five years, but you’ll have to pay a 10% penalty on that amount. Not a good idea.

If you add to your income as a result of a conversion, it may have serious side effects:

• First, the additional income may push you into a higher tax bracket.
• Second, the conversion may disqualify you from certain tax benefits, such as the child tax credit and the higher education tax credit.

To determine if you might be affected this way, add the value of your IRA (or a portion of it; you don’t have to convert it all) to your other income and see if it moves you to a higher tax bracket.

You can choose to delay paying the income tax due on a 2010 Roth IRA conversion and split the income into two years. You would pay the conversion tax when you file your 2011 and 2012 taxes. Keep in mind that tax rates are scheduled to increase for the 2011 tax year.

Finally, if your IRA was created with only tax-deductible contributions (for example, from a 401(k) rollover), the tax liability is straightforward. Any money you convert is taxable. But if your IRA has both taxable and non-taxable contributions, a portion of anything that is converted is taxable, and another portion is tax-free; however, you don’t get to choose which part to convert. The full value of all of your IRA accounts has to be counted for this purpose. This complexity is called the IRS pro rata rule, and you’ll need to talk to a good tax person to understand what it means to you.

Predicting the future
Now we get down to the really frustrating part of the Roth IRA conversion question: predicting your financial future. Here’s the bottom line from an economic standpoint:

A Roth IRA conversion only makes economic sense if you’re going to be in the same or a higher tax bracket when you take the money out of it.

You may be saying, “Wait a minute. When I retire, shouldn’t I be in a lower tax bracket? After all, I’m not planning on working so darn much, and instead, living off what I’ve set aside.”

And you may be right. If the tax structure stays the way it is now, you probably will be in a lower tax bracket when you retire. But that’s a big “if”, which is what makes many tax and financial planning professionals nervous. The U.S. tax system is always changing, so it’s hard to know what your tax bracket will be in 10, 20 or 30 years. Even if your tax bracket is the same now as it will be during your retirement, it’s a very close call to decide if it makes better sense to convert a taxable IRA to a tax-free Roth IRA in 2010.

Summary
You’ll need to look at your own situation to know whether it makes sense to convert. Think about the reasons you might want to convert to a Roth IRA. Consider the tax implications, and make a reasonable guess about your future tax rates. If you need help, consult with a qualified tax advisor.

If your research clearly shows converting to a Roth IRA is a good choice for you, go for it. The benefits may outweigh the risks.

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Related Articles at Get Rich Slowly:

• Weekend Update: PF101 Edition
• Clearing Up Roth IRA Confusion
• Why I Love the Roth IRA
• Roth IRA vs. Traditional IRA: Which is the Best Deal?
• Can You Have a Savings Account in a Roth IRA?

Source: Get Rich Slowly

How to Self-Diagnose Your Financial Health

The New York Times Your Money section features consistently great advice from Ron Lieber and his team. (This team includes Carl Richards, who you may remember from his excellent blog Behavior Gap; Richards has shared a couple of guest posts here at GRS in the past.)

Last week, Your Money featured an article from Tara Siegel Bernard in which the author explained how to self-diagnose your financial health. “We asked planners what they ask their clients during their annual financial physicals,” Bernard writes. “Their questions can help you diagnose your financial situation.”

Here are the eight questions she recommends you ask yourself during your financial check-up:

• Is your net worth growing? Your net worth is the total of your assets minus your liabilities. (So, if you have $200,000 worth of stuff but owe $220,000, your net worth is -$20,000.) I don’t see much value in knowing my net worth, and I don’t track it, which seems like heresy to some people. Many folks use net worth the primary tool to track their progress, and the New York Times article argues that it’s one of the best gauges for measuring financial health.
• How are your financial ratios? According to the article, you can also track your financial health by looking at your debt-to-income ratio, your personal savings rate, and the size of your emergency fund. The article offers some guidelines for people at different stages of life. My recommendations? Keep your total monthly debt payments — including mortgage — below 33% of your gross (pre-tax income), and below 25% if possible; save as much as possible, but aim for 10% or 15% or more (my wife saves over 25% of her income); and aim to have enough money set aside to cover 3-6 months of expenses.
• Are you spending more than you earn? This question gets to the crux of personal finance. If you spend more than you earn, your cash flow is negative and you’re losing ground. But if you can outearn your spending, you’ll actually build wealth. The New York Times recommends that you track your spending to be certain you’re not outpacing your income.
• What changed in your life during the past year? Life is fluid. People get married, have children, move, change jobs, get divorced, and, yes, die. All of these events can affect your financial situation. Plus, your own personal goals may change, leading to a shift in priorities. While it’s important to have fixed financial goals, it’s also important that you make periodic course corrections.
• Are you still adequately insured? We don’t talk a lot about insurance around here (I don’t know much about it, and when I bring in outside experts, you folks get cranky!), but it’s still an important subject. Insurance is a vital part of your financial arsenal — it’s there to protect against catastrophes. But as your life changes, your insurance needs change. Be sure to conduct periodic reviews.
• Do you need to make changes to your estate plan? Just as your insurance needs change with time, so do your needs for estate planning. As you accumulate wealth and build a family, things can become complex. The New York Times suggests reviewing your will (or other documents) at least once every five years.
• Does your investment portfolio require maintenance? The stock market has been going gangbusters for over a year now (although you might not guess that from the continued hysterical headlines in some corners), but that doesn’t mean you should be pumping all your money into it. Instead, it’s important to remember the lessons from the crash. If the wild swings in your portfolio caused you stress and worry, you may need to reconsider your asset allocation.
• Have your goals or outlook changed? Are you happy? “At its core, financial planning is not simply about money,” Bernard writes. “It is about finding the best way to finance what you want out of life.” This echoes a couple of elements of my core financial philosophy, and I think it’s the key to maintaining financial health.

To read professional advice on how you should approach each of these questions, read the article from The New York Times.

While you’re at it, check out their 31 steps to a financial tuneup, which is a customizable checklist of tasks that you can use to boost your financial health. (This tuneup reminds me of my own suggestion that you take a Money Day, a self-imposed personal-finance workday, once a year.)

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Related Articles at Get Rich Slowly:

• Health and Fitness Roundup
• Ask the Readers: How Do You Manage Health Care Costs When You’re On Your Own?
• links for 2006-10-19
• links for 2007-04-09
• Drama in Real Life: Caring for a Parent in Crisis

Source: Get Rich Slowly

A Two-Step Approach to Breaking Bad Money Habits

This post is from GRS staff writer April Dykman.

Bad money habits, like other bad habits, can be tough to break. Relying on willpower alone to stop cold turkey makes us long even more for the Stuff or the behavior that we’ve forbidden ourselves. The focus becomes solely on what we can’t have, which sets us up for failure. We’ll lapse, feel guilty, and the cycle repeats. Think about people who lose 70 pounds on a carb-free diet, only to regain the weight, and usually more.

Another example is someone who shops and overspends because he feels depressed. He gets a temporary high when he acquires the new Stuff. Unfortunately, his depression will return and worsen when he starts to feel guilty for spending too much money on things he didn’t really want or need. Maybe he’ll vow to curb spending temporarily, but then the depression leads to shopping and spending again as he looks for that temporary high.

Each of us create patterns or habits that we fall back on in specific situations. In the example of the overspender, he feels depressed, so his habit to relieve the depression is to shop. This pattern is so deeply entrenched that “willing” himself to stop isn’t enough. Forcing himself to say no to shopping without changing anything else will fail because it feels like punishment, and he’s too accustomed to his patterns.

It’s a vicious cycle, but there are ways out of the loop that are much more effective than willpower. If willpower were the answer, the majority of Americans would be slim and fit with a six-month emergency fund in the bank.

Habit is habit, and not to be flung out of the window by any man, but coaxed downstairs a step at a time. — Mark Twain

Step one: Awareness
The first step to changing bad habits is to become aware of the habit. Most of the time we follow our well-worn patterns without giving much thought to how we got to the end point. In the case of the emotional over-spender, he might be shocked by his bank balance at the end of the month and wonder how he could have spent so much money.

If he sets the intention to become aware of when he is spending, he can start to ask himself why he is there in the store, spending more money than he should. He’ll start to recognize that he’s shopping because he feels anxious or sad.

This isn’t an exercise in self-discipline. The point is not to criticize himself for what he is doing or to feel like a failure. In fact, that is counterproductive and would prevent him from observing the pattern. The goal is to accept the impulses, not shut them down.

When we acknowledge a behavior, we draw our attention to it. With time, we become aware of our actions sooner and sooner in the chain of events and can understand the origin of the habits we want to change. Exposing the root of the problem eventually kills the bad habit.

Step two: Encouraging the opposite
The second part of the bad habit-busting equation is to encourage the opposite behavior. Note that this is not the same as distracting yourself with another activity. Encouraging the opposite means intentionally creating new habits and patterns that are the opposite of the bad patterns.

In the case of the emotional over-spender, the opposite of spending is saving. He could find ways to encourage himself to save money, perhaps by setting a worthy goal like saving an emergency fund or putting money aside for a vacation. When he’s depressed and needs to get out of the house, he could turn to low-cost or free diversions so that he can keep saving money. The best money-saving activities are the ones that give him the same high that shopping temporarily gave, without the lows that follow overspending. With enough practice, his default action when he’s depressed will become one of these other activities.

There isn’t one solution that will work for everyone. What works for one over-spender won’t necessarily work for another, but with awareness and trial and error, you can discover what works for you. It’s a way to sneak around our bad habits and introduce positive ones, and it’s certainly a kinder approach than punishment and self-criticism when willpower fails!

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Related Articles at Get Rich Slowly:

• Daily Links: Money and Power Edition
• Is Frugality a Necessary Evil?
• Ask the Readers: How Do You Keep from Losing Control?
• Book Review: Work the System
• How to Replace Bad Financial Habits With Good Ones

Source: Get Rich Slowly

Reader Story: How I Learned to Save LESS — and Loved It

This guest post from Avistew is part of the new “reader stories” feature here at Get Rich Slowly. Some reader stories contain general “how I did X” advice, and others will be examples of how a GRS reader achieved financial success — or failure. For the past year or so, Avistew has been an active and eloquent commenter on this site. Here’s her story.

Many readers of this blog started their journey with debt, and had to learn to save. My journey was the opposite. I had to learn to spend. The important part of “Get Rich Slowly” for me was always the “Slowly”. I used to think I was doing fine: I put money aside every month, I barely spent anything — I didn’t even need to pay a rent. But I was miserable.

This is how my life was before, when my husband and I were living in France:

• I had a stressful, minimum-wage job. I worked in a frozen-food store, which meant I split my time between carrying boxes of frozen goods into a huge freezer (which made my asthma worse) and dealing with customers at rush hour. I hated it.
• I didn’t pay rent: My parents let my husband and I use an small apartment they owned. For free. This came with a heavy price, though. My parents would drop by without warning, and meddle with our life constantly. But it meant free rent, so we put up with it.
• We were more than frugal — we were cheap. We bought the cheapest of everything, no matter if the quality wasn’t there. We dropped what we called “luxuries”, basically anything that wasn’t needed to survive. We bought food, but no junk food, no frozen pizzas, no chocolate, no desserts (save for fruit), no treats. Ever. We never bought drinks: Water was good enough and we could get it from the tap. We never ate out or ordered in. We didn’t buy any entertainment-related things. No books, CDs, DVDs, or comic books. No going to the theatre. Everything we owned was borrowed, a gift, or something we had purchased prior to getting married.

We were piling up money, so we thought we were doing things right. But it was never enough. I started being obsessed with money. We could never save enough of it: I wanted to cut off more and more. Sometimes I’d go without eating just to spend less.

I’d forgotten that money is a means, not an end. I’d forgotten that the goal is to save up to have a good life, not to have more money.

And then the crap hit the fan.

And here my troubles began
First came the health problems. My husband’s psoriasis (which is stress-triggered) spread to over 90% of his body, accompanied by intense swelling. He had to spend two weeks in the hospital before he was allowed to come out.

Without him to keep me sane, I stressed out more and more. I started having anxiety attacks and developed agoraphobia. I quit my job after having a breakdown in front of everyone in the store.

My parents were worried. The became more present than ever, even when I told them about my stress, and that I needed them to stay away, not contact us unless contacted, and not drop by unannounced. They kept doing it all until I became terrified of them.

Soon after my husband was released from the hospital, my parents came banging at our door one night. When I refused to see them, they accused my husband of keeping me locked up against my will. They threatened to denounce him to the police, and said they would get me in an asylum.

I was already completely panicked, and this didn’t help. Both my parents are doctors, I thought, is there a way they could do it? I would certainly seem crazy to anyone who checked up on me. Hell, I seemed crazy to me.

They were noisy enough to alert the neighbors, who made them leave. We were completely panicked. What if they came back? What if they had us taken away and separated? We needed each other more than ever.

A survivor’s tale
My husband is Canadian, I’m French. We decided right away that we’d move to Canada, stay with his parents at first, and get our own place once we could afford it. We immediately booked plane tickets online. This was Friday. We bought the first available seats on Tuesday.

We had a weekend to get ready before leaving for another continent. That weekend was in some ways the hardest of my life; in other ways, it was a blessing.

We had to sort through all our possessions. With such a short notice, we didn’t have time to sell anything. Neither could we take everything along, with only two suitcases allowed each.

• Books and the like mostly had to be left behind. The bibliophile in me cried the hardest at that. I had books from the time I was born until the time I got married, only a year prior. Every one of them had memories attached to it.
  We gathered those we couldn’t live without and had them shipped — at a hefty price.
• CDs, DVDs, videogames had to be packed without their cases. That was probably harder than it should have been. How can you care so much about a plastic case?
• Furniture, appliances had to be left behind. What wasn’t too big to take along or ship wouldn’t have been compatible in Canada anyways.

And we left. We sent the keys and a letter explaining everything to my parents from the airport. As soon as the plane took off, we felt so much better. Like we had escaped from a prison. (But for the most part, we’d built that prison ourselves.)

Learning from the past
We were adamant that we wouldn’t make the same mistakes again in Canada, so here’s what we did:

• We left my husband’s parents’ place as soon as he got a job. We could have stayed longer — it would have been cheaper — but who knows how that would have turned out?
• We established an actual budget. Up to that point, it was “buy whatever is cheapest”. Now, with an actual budget, we know if we can treat ourselves without putting a hole in our pockets.
• We created entertainment categories. One for the two of us, and one each. Now we can have a date, or buy something we like, and we don’t need to worry too much about it. Because we have our individual fun funds, we can buy a gift for each other without spending each other’s money.

The biggest lesson there though is that although money is important, it’s not that important. [J.D.'s note: Repeat after me, everyone: "It's more important to be happy than it is to be rich."]

When we left, it cost us a lot. Plane tickets bought a few days before the date, boxes shipped the day before we left, and of course all our utilities had to be cancelled on such a short notice, so there were fees involved there. If we hadn’t been living in France, the hospital stay might have ruined us, too.

But the thing is, we didn’t care. We didn’t think the money was as important. And sure, we wasted a lot of it. Had we not pushed ourselves so much, we wouldn’t have had to spend nearly as much. But we’re glad we spent it.

My advice to everyone would be: Invest in yourself. Invest in your happiness, your health, your education. If you don’t, it’ll cost you more than you’ll save. (Financially or otherwise.)

And you know what? We’re still saving! We didn’t make the opposite mistake of overspending and going into debt. There’s a middle ground.

I think there’s a danger, when you used to be in debt, to overdo it and make the opposite mistakes. To become what I used to be. I want to tell you: It’s not worth it. Try to reach a balance. If you’re saving, you’re saving, and that’s good. Could you save more? Maybe, but make sure it’s worth it first.
Sometimes, it’s better in the long run to save less.

Reminder: This is a story from one of your fellow readers. Please be nice. After nearly a decade of blogging, I have a thick skin, but it can be scary to put your story out in public for the first time. Remember that this guest author isn’t a professional writer, and is just learning about money like you are.

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Related Articles at Get Rich Slowly:

• How One Father Taught His Son About Money
• Reader Story: The Secret Millionaire and the Mathmobile
• Reader Story: What My Father Taught Me About Debt
• Reader Story: How I Learned to Stop Worrying and Moved in with Mom
• Reader Story: How I Got Married on the Cheap — And Loved It!

Source: Get Rich Slowly

Video Contest Reminder

This is the first of several weekly reminders that Get Rich Slowly is currently running a video contest in which you could win $500 — or a signed copy of Your Money: The Missing Manual. All you have to do is make a 2-minute video featuring either a personal-finance tip or your own financial success story and submit it by April 15th.

Winners in each category will win $500. Ten runners-up will each receive a copy of my book. (And if you have a website, you’re also eligible for a $500 prize in the bonus website category.)

Entries are beginning to trickle in — and I’m eager to see many more in the future. I love seeing what you folks come up with. For example, Jamison from Tech Tips for Parents just submitted his success story. I think it’s pretty good:

You can view all of the contest entries here. (There are just a few so far, so each entrant’s odds of winning are pretty good right now!)

For more details, see the announcement post, the contest page, or the official contest rules. And if you have questions, drop me a line!

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Related Articles at Get Rich Slowly:

• Contest Deadline Approaching!
• One-Millionth Hit Contest
• Reminder: Enter the Get-Rich-Slowly Holiday Tips Contest
• Win $500 in the 2010 Get Rich Slowly Video Contest
• One-Millionth Hit! Contest Winners Announced!

Source: Get Rich Slowly

What Do Ancient Spice Traders and the Modern Financial Industry Have in Common?

This is a guest post from Chett Daniel, who writes about improving your life through personal fitness and personal finance at 5k5k.org. Last year, Chett shared what fourth-graders “know” about money.

What role do financial professionals have in our personal finance lives today and in the future? Are they still the gateway to understanding financial info that’s too difficult for the common person to grasp? Or have they created a profit-producing “need” that is slowly slipping through their fingers?

I asked myself these questions recently while listening to a recent Planet Money podcast episode called “When Cinnamon Moved Markets”. The podcast had nothing to do with financial professionals or their current need; it discussed a time when spices were currency, and the Arabs controlled the spice trade to much of the known world — and the knowldge about exactly how to get the spices.

Here’s a synopsis of what I learned:

He who controls the spice…
In the ancient world, the Arabs controlled most of the spice trade. They ran secret trade routes from the Indies and other eastern countries. The spices they gathered were then sold and traded for extremely high prices to the Greeks and Romans in Alexandria, the Wall Street of its time. The Europeans knew many of the spices came from the Indies, but they weren’t exactly sure where the Indies were and how to find the actual spices. This allowed the Arab traders to capitalize on the lack of information.

According to Herodotus in some of his fifth-century B.C. writings, the Arabs led the Greeks and Romans to believe gathering cinnamon was a matter of life or death. The story was told that Arab traders and merchants had to dress in full body suits of ox-hide to protect themselves from terrible winged creatures. They would have to leave a sacrificial cow to lure the winged monster bird off of its nest made of, wait for it…cinnamon. As the Arabs told the story, the winged creature would inevitably knock portions of their nest on the earth below as it flew to claim its offering. The merchants would then risk their life to grab the few pieces of cinnamon stick nests they could gather before the winged creature attacked them.

Herodotus also recorded stories of the Arabs regarding frankincense and ginger. According to the legends, frankincense grew in the tops of trees and was guarded by flying snakes. Arab traders would then cheat death by driving the flying snakes from the treetops while other merchants would quickly gather the frankincense they could. Ginger supposedly washed from the Garden of Eden.

…Controls the universe
What was the purpose of these ridiculous fantasies? Not only did the Arabs control the supply, they also manipulated the perceived value of their product and services by controlling all of the information of their origins. But the barriers of information in the spice trade began to fall around 120 B.C.

According to Tom Standage, business editor at The Economist, here’s how it went down: In 120 B.C., a ship wrecked in the Red Sea. One survivor was found and taken to the court in Alexandria. He told them he was on a ship traveling between India and the Red Sea and it went off course and wrecked. The court sat speechless because as far as they knew, there was no direct route from the known western world to India. (Common belief at the time was that to reach India, ships would have to hug the shore, sail all the way around the Arabian Peninsula, up the Persian Gulf, and back down towards India, past Persia and Pakistan.) The stranded Indian trader bargained to show the Alexandrian court this “secret” direct route if they give him a ride home.

Within a few years the new, shorter routes are known to all of the Europe, and the fantasy stories were found to be nothing but myths used to inflate prices and scare away those who may want to find the spices themselves. In time, the Romans industrialized the spice trade and flooded the market with spices. This changed peppercorn from a spice you could pay a month’s rent with, to something that is given away free is small paper packets in fast food restaurants today.

Is this a metaphor?
As I listened to this story, my mind drifted back to a little over a decade ago when most stock trades had to go through brokers who earned hefty commissions on each transaction. Today, those same transactions cost less than $5 on most websites, and can be executed with the click of a mouse. Investors who used to receive most of their information about the value of an investment from an “expert”, can now research for themselves which investment choice is right for them. Companies like Vanguard have reduced their fees and made their prospectuses so user-friendly that even a financial novice like me can select an investment choice that works for my goals.

In this Information Age, does the financial industry look anything like the Arab spice traders? Are the markets (and the products sold on the markets) really as complicated as they’ve been made out to be? Or have they simply been constructed to funnel money into the coffers of the brokers and advisers? Has the financial industry profited from a system that looks strangely similar to the secrets of the Arab traders? And what do you think the role of the financial professional will be in the future?

Spice photo by Sudhamsu. Market board photo by Katrina Tuliao.

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Related Articles at Get Rich Slowly:

• Buying Cheap Spices: Unit Pricing in Action
• Cinnamon Spice Muffins: An Easy, Frugal Recipe for March
• What to Consider When Opening Your First Brokerage Account
• A Brief History of Money
• Snake-Oil Salesmen? Debating the Role of the Financial Media

Source: Get Rich Slowly

Waving Good-Bye to the Joneses

A new study out of the U.K. confirms what many of us have already learned: Money only makes you happy if you have more than those around you. According to the London Telegraph:

Despite the vast improvements in general standards of living in the past 40 years across Britain, ‘keeping up with the Joneses’ is still our biggest aspiration, the findings suggest.

Researchers have found that owning a fast car, a large home and having a good job may only make you happy if those around you are less well off. The pursuit of wealth is leading more people to work longer hours as they seek to pay their mortgages and climb the social ladder. Dr Chris Boyce, of University of Warwick’s psychology department, said Britons were victims of chronic dissatisfaction.

Americans are victims of this same chronic dissatisfaction. It’s too easy to compare ourselves with those around us. (And television gives us a chance to make false comparisons: We see what “normal” people have in commercials and in various programs, and we subconsciously begin to want these things too.)

But even if you know that you oughtn’t compare your life with others, it can be tough to exercise self-control. It’s easy to get swept up by materialism, especially if all of your friends are into it. (If they all have iPhones, you want an iPhone. If they all wear expensive clothes, you want expensive clothes.)

If you want to wave good-bye to the proverbial Joneses — the ones you’re always trying to keep up with — you have to quit paying attention to them. You have to make a conscious effort to not care about what they own and do. Instead, focus on your goals and your needs. What you want or need to own shouldn’t be defined by what other people have; it should be based on what you want to do in life, and what brings you intrinsic happiness.

Ask yourself at what point you’ll have Enough:

• If you have five more DVDs, will that be Enough?
• If you complete your collection of Patrick O’Brian novels, will that be Enough?
• If you buy three more sweaters, will that be Enough?

How much is Enough?

Only you can answer that question — and the answer may change with time. But until you spend some time contemplating Enough, you’ll always be tempted to buy what your neighbor buys — to keep up with the Joneses.

The great thing about deciding you have Enough in your life right now is that this also helps you have Enough in the future. If you don’t need to spend your money to buy things (because you don’t want things), you can use your cash for saving and investing. That money will then be there to assure you have Enough when you’re older, too.

Nearing Enough
Kris came to me yesterday afternoon. “Your birthday’s tomorrow,” she said, “but I didn’t get you anything.” (Today I am 41.)

“That’s fine,” I said. “I don’t need anything. Just be sweet.”

“I’m always sweet,” she said. Then she added, “Are you sure?”

“Yeah, I’m sure,” I said. “What more could I possibly want? I have everything I need. We’re having friends over this weekend [for a bacon-themed party]. A birthday present would just be more Stuff, you know?”

Kris thought for a moment. “How about I go to work late so we can go out to breakfast together?” I really like going out to breakfast, but it’s just not Kris’s thing.

“Perfect,” I said. “That sounds like a great birthday present.”

I don’t want to pretend I’ve licked all of my wants. I still want things. (I just ordered an iPad, for goodness sake!) But I’ve reached a point in my life where I really do have Enough, and I know it. The only thing I really need more of is time, and there’s no way to buy that!

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Related Articles at Get Rich Slowly:

• Richer Than Rockefeller: Putting Wealth in Perspective
• How to Live a Rich Life — On a Budget
• Financial Commandments from Kiplinger’s
• Daily Links: Calm Before the Storm Edition
• Weekend Update: PF101 Edition

Source: Get Rich Slowly

Your Money: The Missing Manual — On Sale Now!

Things may seem calm and quiet on the surface of the blog, but behind the scenes here at Get Rich Slowly, everything’s a whirlwind. I don’t know if I’ve mentioned this before, but blogging doesn’t scale. That is, one man (or woman) can handle a small blog with a few hundred readers, but the bigger a site grows, the more demands there are on your time. Even though I’m using more and more help lately, I simply can’t keep up. So, the calm surface here belies the turbulence underneath.

Of course, part of the hubbub comes from the release of Your Money: The Missing Manual. The book is now available at Amazon, and folks have had kind things to say about it. (Thanks for all of your nice e-mails; they make me smile.) Other bookstores should be receiving their copies over the next month. It’s also now available from Borders and Barnes and Noble, and will soon be available from Powell’s.

Speaking of Powell’s, I’ll be giving a talk at Powell’s Technical Books at 7pm on Thursday, April 15th. (Which also happens to be the fourth anniversary of Get Rich Slowly.) I’d love if you came out and gave me some support. I’m a hesitant public speaker, and if there are some friendly folks in the crowd, that’ll give me more confidence!

And that’s not the only event associated with the book release. No no no. Publishing a book is an exercise in self-promotion, which isn’t something that comes naturally for me. Among other upcoming events:

• I’ll join my pal Chris Guillebeau for a meet-up in Chicago on the evening of Monday, April 5th. Alexandra Levit is helping us plan the details. (If you’d like to come hang out with us, RSVP at Chris’ site — and tell him you came from GRS!)
• I’ll be doing a series of radio interviews in major markets around the United States. These are scheduled for the week of April 12 to April 16th, so I’ll let you know when I have more info. (And I’ll be on Computer America tonight at 8pm Pacific.)
• Next Thursday, April 1st, I’ll be participating in a live videochat/webast over at O’Reilly’s website at 10am Pacific (1pm Eastern). (O’Reilly is the book’s publisher.) You should come join us as we chat about money. Again, I’d love to chat with a bunch of GRS readers. (There’ll be a recording of this event available if you miss it.)

If you do show up for the webcast, you’ll reportedly be able to buy the book from O’Reilly for 40% off (~$13.20) or the e-book for 50% off (~$8.99). If you don’t want to wait that long, you’re in luck. Your Money: The Missing Manual is O’Reilly’s “deal of the day” today: You can buy the e-book for just $9.99 by using the code DDYMT. (Note that the e-book edition includes Android, Mobi/Kindle, PDF, and ePub formats.)

You can always get 30% off the print or e-book version of Your Money: The Missing Manual by entering the discount code ABF09 when checking out at O’Reilly’s store.

Help make this book a success!
How can you help make Your Money: The Missing Manual a success? Help me spread the word about the book, if you feel so inclined. Tweet about it. Blog about it. Tell your friends about it. As I say, I’m not very good at self-promotion, so I’m counting on you folks to help me. If you like the site, please help me spread the word. It’d mean a lot to me! (And hey — link back to your favorite GRS post while you’re at it.)

Finally, I wanted to share something I found funny. All of the “missing manuals” have a “missing CD” page, and my book is no exception. But somebody made a typo when entering info for Chapter Four (”Defeating Debt”); instead, they’ve credited me with more knowledge than I possess!

Defeating death! I wish. Unfortunately, I do not yet possess the secrets of immortality.

Thanks for allowing me to shill, everyone, and enjoy your weekend.

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Related Articles at Get Rich Slowly:

• Your Money: The Missing Manual — Table of Contents
• Free User Manuals For Electronic Equipment
• Back from Belize
• Daily Links: Extreme Editing Edition
• The Consumerism Commentary Podcast

Source: Get Rich Slowly

Do You Get What You Pay For?

This post is from GRS staff writer April Dykman.

Like many of you, I’m a proponent of quality over quantity. I’d rather buy one good coat that will get me through three seasons and last for years than replace a poorly-made, cheap one every year.

But it’s important to consider that expense is not necessarily an indication of quality. And even when the more expensive item is of higher quality, it might not be the best buy.

The following are five examples that illustrate that the more expensive option isn’t always worth the extra expense.

Kitchen gear
While researching this post, I happened upon countless articles advising to spend big on a quality chef’s knife. That’s exactly what I was planning to do a couple of years ago, until I read the Cook’s Illustrated review on chef’s knives. (For me, Cook’s Illustrated is the final word in cooking — they’ve never steered me wrong.) They tested brands that varied widely in price, giving the highest rating to a $30 Forschner Fibrox knife, noting that “knives costing four times as much would be hard pressed to match in performance.” I can attest that it’s a good one.

Food writer Mark Bittman says in most restaurant kitchens chefs use an eight-inch, plastic-handle stainless alloy chef’s knife that costs $10 at a restaurant supply store. Bittman also shows readers how they can equip a basic kitchen for $200.

It seems despite the standard advice of “investing” in a chef’s knife, the pros use and recommend the cheaper ones.

Prescriptions
There are a few exceptions to the rule, but in general, generic brand medications are equivalent to their brand-name counterparts. According to the U.S. Food and Drug Administration (FDA), generics can be sold at a substantial discount because generic manufacturers don’t have to pay investment costs to develop the drug. The FDA requires generic drugs to have identical purity, quality, strength, and stability as brand-name medications.

The prescription drug commercials we see on TV would have you believe that their brand-name drug is superior, but the FDA says it isn’t so.

Cameras
Haje Jan Kamps from Photocritic.org on why he doesn’t need an expensive camera:

All I’m saying is that at my level (and, I wager to say, at the level of many other photographers), the 450D (and any equivalent low-level SLR cameras) are plenty good. The problem with photography is that it’s simply too tempting to splash a lot of money for everything and then end up bankrupting yourself on the wrong things.

I used to have a bad habit of thinking that I needed the newest and most expensive Stuff for both established and new hobbies. It’s tempting to get top-of-the-line equipment, but most of it is unnecessary unless you’re a professional. A pricey camera won’t make you a  better photographer.

Skin care
Ever heard of Crème la Mer? It’s the ridiculously expensive face moisturizer touted by various celebrities. And by ridiculously expensive, I mean $125 for one measly ounce of the miracle cream.

One beauty blogger decided to pit Crème la Mer against Crisco (yes, you read that correctly, the big, blue tub of vegetable shortening). It turns out that everyone from beauty experts to doctors recommend Crisco as a serious skin moisturizer, and in the blogger’s trial, there was minimal difference between the La Mer side of her face and the Crisco side. A 16-ounce tub of Crisco is about $3.50. A 16-ounce jar of Crème la Mer is $1,350.

I can’t say I’m going to try this one myself, but it shows that there are cheap and effective skin care alternatives that work just as well as the ones that cost a fortune.

Wine
In Evolved Primate, a Psychology Today blog, social psychologist Daniel R. Hawes discusses an experiment where wine tasters rated the same wine differently depending on what they thought it cost.

…when tasting the same wine, the participating wine tasters systematically reported superior taste for the wine that came out of the $90 bottle, in contrast to the wine that came from the $10 bottle.

The study suggests that we perceive the quality and likability of a wine relative to its price.

In the article Expensive Wines Doesn’t Always Mean They’re Better, wine critic and author Matt Kramer writes that a more expensive wine is better than a less expensive one to a degree, but not to an extreme degree, and price is determined by many factors:

…there’s no “right price” for a wine. If you can get people to pay a high price, because of quality, public relations, high scores, marketing muscle, or just plain luck, well then, you’ve found the right price. It’s that simple — and that complex.

My favorite wine is Brunello di Montalcino, but it’s expensive and therefore a rare treat. I have to wonder how I’d fare in a blind taste test, though. Is it truly the taste of the wine I enjoy, or the feeling of indulging myself and the memories of the little trattoria in Florence where I had my first glass?

Good news: Consumers aren’t morons
Even though consumers may perceive expensive products to be of higher quality, that doesn’t mean we’ll buy. A Cornell study found that although a more expensive product may generate a more favorable view, it doesn’t necessarily mean consumers will buy it.

Cornell behavioral economist Ori Heffetz was surprised by the results, expecting larger effects:

More expensive products might be perceived as more attractive — which could increase demand — but they are also more expensive, which our study showed decreased demand.

In other words, I may think a $1350 jar of moisturizer is superior to a tub of Crisco, but that doesn’t mean I’m blowing the rent on face cream. Score one for consumer sensibility.

What are some more examples of when the expensive product isn’t the best option or the highest quality? What is the cheaper solution that works better?

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Source: Get Rich Slowly

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