In the book Paradox of Choice by Barry Schwartz, he talks about how there are two types of people, maximizers and satisficers (think satisfy + suffice). I will simply quote the excellent summary from the book’s Wikipedia page:
A maximizer is like a perfectionist, someone who needs to be assured that their every purchase or decision was the best that could be made. The way a maximizer knows for certain is to consider all the alternatives they can imagine. This creates a psychologically daunting task, which can become even more daunting as the number of options increases. The alternative to maximizing is to be a satisficer. A satisficer has criteria and standards, but a satisficer is not worried about the possibility that there might be something better. Ultimately, Schwartz agrees with Simon’s conclusion, that satisficing is, in fact, the maximizing strategy.
If you can’t tell already after 10 seconds of reading this site, I am a hardcore maximizer. I love collecting data, poring over alternatives, finding out secret exceptions, all so I can choose the “best” choice. I prefer the term “good enough-er” to satisficer. For some people, the second it reaches the “good enough” stage, they are done and move on.
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A Pathetic Maximizer Story This happened just last week. A friend of mine comes over, and brings some McDonald’s with him. After he leaves, I go to throw out the garbage but notice an unpeeled Monopoly game piece. I peel it out of curiosity, but I get no instant-win and two random streets (St. James Place and Atlantic Avenue). But wait… I vaguely know that one of the rules of the game is that if you collect all the streets of a neighborhood (same color), you win a cash prize. However, some streets are given out all the time, while others are very rare. What if I had one of the rare pieces?
Of course, I then had to fire up the computer and search for the rare pieces. Lo and behold, Wikipedia also has a list of all the rare pieces. For example, Ventnor Avenue is also yellow like Atlantic, but is always the “missing” piece and thus essentially worth $25,000 by itself. My pieces were of course worthless. But I still had to know.
Maximizing and Investing I began to think about how this relates to personal finance. In investing, you’d obviously like to maximize your returns. However, it is very difficult to know in advance which stock or mutual fund will outperform the rest. You could read books, financial statements, interview executives, or watch CNBC all day. You could listen to Warren Buffett’s every bowel movement and dissect all his annual shareholder letters for hints and tips.
Or if you’re like me, you may decide that even though the market isn’t perfectly efficient, it is still very efficient especially when costs like mutual fund fees, trade commissions, and tax considerations are taken into account. I now invest passively, and agree to be “satisficed” with the returns of the world markets minus costs. But even here, I am trying to maximize my returns by minimizing costs by buying Vanguard index funds or similar ETFs so that my portfolio costs less than 0.20% of assets annually.
Better to Satisfice? The things I could maximize financially go on and on. From bank interest rates to cell phone plans, credit card reward structures to auto insurance premiums. Would I be happier if I just picked something “good enough” and moved on? Perhaps it is you readers that are the smartest, letting us slightly kooky bloggers do all the research for you, and then just picking what is good enough for you!
Where maximizing hurts most is when it stops you from taking action. It doesn’t matter if your interest rate is 1.8% vs. 1.85% when your money is still stuck in a 0% checking account at some megabank. It doesn’t matter if you get the optimal 401k asset allocation if you’re not even contributing the most you can to the plan. For me, I have been putting off fixing up my house and adding solar hot water for several months because I want to find the “best” contractor. Meanwhile, I’m still using too much electricity and the tax breaks may expire.
Are there some things where you maximize, and others where you satisfice?
American Express has a new card called the Premier Rewards Gold Card, which offers these primary perks:
* Earn 15,000 Membership Rewards bonus points when you spend $1,000 in your first 3 months of Card membership. MR points are very versatile, and can be converted to 15,000 frequent flier miles in a number of programs (or 10 Southwest credits), or you can simply get $150 in gift cards at several stores like Home Depot, Crate & Barrel, or Macy’s. I think you can also get cash equivalents at a reduced ratio.
* Offers 3X points on airfare, 2X points on gas and groceries, and 1X points on everything else.
* Earn 15,000 Membership Rewards bonus points when you spend $30,000 per calendar year. * No annual fee for your first year. After that it is $175.
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There are two ways to maximize this offer. The easy way is to simply sign-up, grab the 15,000 MR points bonus, and then cancel anytime within the first year, that’s a quick $150+ bonus which is rare these days.
The only other scenario is that you are a big spender and purchase a lot of airfare, because triple MR points is pretty rare and you’ll have to reach that $30,000 spending target to offset the $175 annual fee after the first year.
This is a interview/guest post with blog reader Ariel Hoffman, who recently spent a year traveling around Asia with his girlfriend Michal with a combined budget of only $10,000 - and managed to come back with $3,500 of it! I love to read nonfiction travel essays, so not only are there some great frugal travel tips below, it was also very exciting to read about their adventures. Thanks again for sharing, Ariel!
What was your inspiration to go on this adventure? In Israel, it is mandatory to serve in the armed forces for at least 3 years. After that you just want to get away, and Asia is the perfect destination for someone who’s just saved up 3 years worth of the army’s 100$-a-month salary. Also, Israel’s a pretty small country, so there isn’t much domestic travel to be had like there is in the US.
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The itinerary my girlfriend (Michal) and I came up with was mostly about avoiding the rainy season, and minimizing air travel. Air travel is expensive and boring, and you try to avoid it if you have a lot of time to spend.
How did you come up with your budget? Did it end up costing more or less than you thought? We sat down and did some serious homework, mostly on websites like lonelyplanet.com and their forums. The budget they offered sounded ridiculously low, so we nearly doubled everything we read about, and came up with a rough estimate of about 10,000$ for the two of us, for the entire year.
What we realized, however, is that not only were the estimates online pretty accurate, but also that two people don’t spend exactly twice as much as one - lots of things are shared (such as meals, transportation, hotel rooms etc.) and so it’s more like budgeting for a person and a half rather than two. We were very pleasantly surprised when we came back home to count our remaining traveler’s cheques and see we still have about 3,500$ left over for next time!
How did you fund it? Did you save up the cash upfront, borrow some money, work while on the trip, or some other combination? In preparation for our trip, we both took on extra work and saved up every Shekel we made. It took us about 5 months. Once we reached our goal of 10,000$, we exchanged all our cash into traveler’s cheques - a great way to keep your money both liquid and safe when abroad. Luckily for us, the exchange rates were in our favor the whole time, which gave our savings an extra 2%-5% throughout the journey.
Walk us through a typical day on your Year in Asia trip. Most days would begin with trying to find breakfast - not always an easy task. Most Asian countries do not serve what we would consider breakfast, especially my vegetarian Michal. Although chicken porridge and spicy rice is very nice, it’s not everyone’s idea of the right way to start your day. After eating some novel type of cookie in spiced tea, we would set off to whatever National Monument/UNESCO World Heritage Site/Giant Temple/Yearly Festival was in the town on that day. After a day’s tour of the attraction we would start hunting for a suitable lunch, which meant looking around for a street stall with a good crowd, or a local restaurant with a queue. Nothing says fresh like a long line of customers, and Asian vendors normally close their stalls every day when they’ve exhausted all their stock, so food is never kept overnight and doesn’t have time to spoil. Another plus is that the food is not made of pre-cut ingredients, which makes preparation slower, but at least you see exactly what you’re getting so there are no surprises.
Evening was normally a time for sitting on the beach, going to some performance or sitting in some tea-shop with friends. For a while we had a small kitchen in our room, so I would cook dinner for us while Michal practiced yoga. In China we bought a Wii, and at night we’d plug it in and invite friends over for kart racing - it’s OK to enjoy modern fun even when on the road! We spent a lot of time on trains and buses, getting from A to B. Sometimes as long as 27 hours! Israel’s longest train ride is only 4 hours long.
What are some basic money-saving tips you might offer us readers?
One idea is to stay aware of your budget, even when you’re on vacation. We met too many people who weren’t keeping track of their spending, and that’s a surefire way of going overboard. Michal and I calculated a daily projected budget (not including things already paid for like insurance or flights), and every day we’d sit and go over all our purchases and write down in our diary how much over- or under-budget we were. It was a fun way to remind ourselves of everything we were doing, as well as a great way to keep track. Also, we were able to go wild sometimes, knowing exactly how much surplus we had on our budget.
Another thing to think about is that almost everything you do is a compromise between time and money. The more “guided” or “organized” your trip is, the less time you spend on questions like “what do you want to do today?”, “where to go next?” and “how many hours is the train going to be late today?”. On the other hand, the more you rely on other people to make arrangements for you, the more money you’ll spend. For example, we went to many national parks around Nepal without a tour agency. Although it took us 3 days to see what most people saw in only 2, we did spend about half of what the tours were charging for the same itinerary. So almost every decision you make - to walk or to take a rickshaw, to search for another hotel or to stay in the one you’re next to - all have to do with finding your budget’s “sweet spot” between spending more time or more money. Feel OK about spending more to save time every now and then, but try and keep it balanced.
Another thing to remember, is that in Asia prices are much more negotiable. In the US it’s possible to bargain, but most consumers just shop around until they find someone who makes them a good offer without any haggling at all. Not so in Asia - finding a good price is normally a combination of guessing the worth of some item (based on experience, the average wage in that country etc.) asking around for a few baseline price offers (preferably in places where you don’t really intend to buy it) and then haggling with someone to fine tune the price. It’s a huge waste of time, but it’s the way business work in that part of the world. Some people shy away from this, saying it doesn’t really matter (what’s a dollar more here and there?), and that they’d rather just pay whatever they’re asked, but it adds up to a very big difference, AND it’s the socially accepable thing to do. Just remember - always go for a lower price than you’d be willing to pay, so you can go up later and let the seller feel respected. If they say 300, don’t feel wrong offering 25. You can always go up to 50 later. Also, never underestimate the power of walking away! You can always come back to a store and resume negotiations from the same point - and you’ll probably be stopped with a better deal on the way out.
Not everyone is honest in Asia. A lot of people tried to cheat us: from simple cons like overcharging us for our bus fare, to impostors trying to sell us phony jewelery or their “original” artwork. A lot of common sense is needed, as well as the “hutzpa” to ask other people for help. Don’t feel bad looking to see what other people are paying for the same item you’re buying! Learning the numbers (in speech as well as in writing) of the local language is unbelievably helpful, and it changes people’s attitude towards you as well.
An international student card was a big help. ISIC cards are pretty cheap (you can even get fake ones made in Thailand in under an hour if you lose the original) and around China mostly they proved worth considerably more than their weight in gold. They’re light.
Try roughing it out sometimes. We found that the “hard sleeper” trains in China were actually perfectly good for our needs, and that sleeping in the air conditioned train in India was too cold and boring - in the “normal” berths you meet so many interesting characters!
What are some non-financial travel tips you might offer us?
Follow Nike’s advice: Just Do It! Try things, eat things, talk to people, experiences strange religious ceremonies. It’s the reason to travel, isn’t it?
Don’t worry! Almost every place we went to had everything we needed, and if we were in trouble people always helped out. You won’t get stranded, lost or murdered in Asia. You won’t starve, be bored or get lonely. Just keep your wits about you, and your money well hidden, and all the rest will fall into place. Really, it will. (Although travel insurance isn’t a bad idea.)
Take classes - learn to play the sitar, cook Thai food, make silver jewelery, surf. Using a skill you’ve learned abroad is twice as fun.
Try to represent your country as an exemplary tourist - respect other people’s beliefs and customs, no matter how infuriating they may be.
Don’t worry too much about planning your trip. Although knowing your general route is a good idea, it’s surprising little villages that you get to on the way to somewhere else that are the real attraction in world travel. Leaving extra time in case you want to linger longer or take a detour is essential.
Try to be ecologically conscious during your trip. Minimize the use of plastic, dispose of waste properly, and try to forgo flying.
What are some “controversial” ways to save money that you tried? We hitchhiked quite a bit. It’s a good way to get around and meet people, but it can also be dangerous. Most of the time, especially if you’re traveling as a couple, it’s quite alright. I had used couchsurfing.org to find places where people would put me up for a few nights in a spare room (or the living-room floor!). This not only saves on money and time - finding the right hotel requires both - but you also see the way locals live in a much more intimate way. It’s amazing how many great families will open their hearts and homes to a complete stranger. We have decided to keep an extra room in our new flat in Kiryat Shmone, Israel, for any couchsurfers who might want to visit. I slept a few times in my tent, which I bought in Thailand. If you’re in a really expensive country (such as Macau) for only one night, opening a tent on the beach can be very romantic. It works in airports, too! If you’re not sure you’ll make it to your morning flight, it’s always an option.
What was the scariest moment on your trip? The firsts were always the scariest. Our first day in Kathmandu, just getting off the plane and realizing it’s a whole new world out there, was overwhelming. We ran away from all the sights, smells and sounds that attacked us from all sides into the first hotel we found, and went immediately to sleep although it was only late afternoon. The third world’s quite a shock, even if you think you’re prepared. You get used to it, though, but it takes time.
When we got off our first bus ride in Nepal we were on our knees thanking god for our very lives. It was a night-long ride on an overcrowded bus without headlights hurtling in complete darkness down winding cliffside roads, using its horn instead of its brakes. Oh, and did I mention, we were sitting ON THE ROOF?
Our first night in India was scary, too. We’d just arrived to discover it’s an eight-day holiday, with all banks closed and no available hotel rooms anywhere! We walked around Bihar, India’s second-poorest state (and that’s saying something!) without any money in the middle of the night, and to top it all there was a locust infestation so we were covered in bugs from head to toe. WE were rescued from sleeping in the train station (which had four dead beggars lying in one corner, covered in locusts) by an Indian priest! He took us home, cooked us some food and let us sleep in his bed until our train arrived.
What was the one place you’d want to most visit again? Why? I feel like Bangkok is probably the place I’d like to visit again most. It’s such a wold city, full of everything a tourist can want. From great markets where you can get lost all day to the best food on the planet. It’s also such a great place to meet other tourists and share travel stories, and the Thai people are just so welcoming it’s hard not to fall in love with their beautiful capital. It’s a place worth revisiting, and often.
Anything else that you wanted to add? Yes! I just want to say to everyone that thinks traveling is a waste of time, just because it’s “unproductive”, that they’re flat wrong. Not many experiences can change your life and your personality as much as close contact with other peoples, lifestyles and opinions. It’s so very important to get out of your comfort zone once in a while and see what else you can do, and if you’re doing it already - do it on a grand scale. It’s possible. It’s affordable. It’s the best fun you’ll ever have.
Anybody else got a bit of wanderlust from reading all that?
Have you heard of this? A network of dentists will buy back your Halloween candy for $1 to $2 per pound at HalloweenCandyBuyBack.com. After a few zip code searches, there actually does seem to be a few dentists in many metro areas. They are then encouraged to donate the candy to be sent to troops overseas.
Seems like an idea with good intentions, but somehow seems funny to me. Candy is bought by my neighbors, which is given out free to kids in costume, which gets sold to dentists for cash, and then is finally donated?
As a kid, the best part was trading candy between friends afterward. (I’ll add that I was always made to brush regularly and have never had a cavity in my life.) What was your favorite Halloween candy? I still love Dum-Dum lollipops.
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Here’s another good reader question about crappy 401k plans. Reader Robert saves enough to max out his 401k each year if he wanted to, in addition to maxing out his Roth IRA every year which he already does. However, his 401k plan is filled with expensive actively-managed mutual funds. He has no company match. Should he contribute to his 401k anyway, or invest outside in a taxable account?
Factor #1: How Long Will You Keep Your Job? Even if you have a bad 401k plan, remember that as soon as you leave that company, you can roll over those tax-advantaged funds into a Rollover IRA at the company of your choice! You may or may not have a good idea of how long you’ll stay there, but the fact is most of my friends have not worked at any company longer than 5 years or so.
(A few plans offer what is called in-service withdrawals, where you can roll over your 401k fund into a IRA without leaving your employer. These are rare, but it’s worth asking about.)
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Factor #2: Can You Help Your HR Department Make A Change? The reason why expensive 401k plans exist is because they tend to be cheap for the employer. Essentially, the administrative costs for running the plan are shifted to the employees. Big companies tend to have better plans because they offer enough assets for companies like Vanguard to jump in.
Still, you might be able to enact some change. Print out some material about how high plan expenses can really hurt performance and thus people’s retirements. Talk to your co-workers, and make it an worker attraction/retention issue. You may not need to switch providers, but perhaps they’ll at least offer a better option or two. I’ve even read about Congress considering a law requiring all 401k plan administrators offering at least one index fund option.
Factor #3: How Expensive Is It? Unfortunately for Robert, he shared his available investment options along with their annual expense ratios, and they are the worst I’ve seen yet:
Blackrock Fundamental Growth C MCFGX 1.94% Blackrock Global Allocation C MCLOX 1.88% Blackrock Government Income Portfolio C1 BGIEX 1.53% Blackrock International Value C MCIVX 2.60% Blackrock Large Cap Core C MCLRX 1.97% Blackrock Large Cap Value C MCLVX 2.00% Blackrock Value Opportunities C MCSPX 2.34% Davis New York Venture C NYVCX 1.71% Evergreen Core Bond C ESBCX 1.45% J P Morgan Dynamic Small Cap Growth C VSCCX 2.12% Mfs Total Return C MTRCX 1.52%
It may be tempting to think “well, no matter how bad the plan is, it will still be better than a taxable account, right?” Wrong. Actually, given current tax rates, it can be better to keep your money in a taxable brokerage account than in a 401(k) plan if the options are expensive enough. Here are some quick and dirty examples.
Let’s say you put in $10,000 in a taxable account. You invest in an index fund with 0.20% expense ratio. The broad US stock market earns 8% per year. Since you get the gains minus expenses, you get 7.8% per year. You get a 15% tax hit at the end for long-term capital gains. Your final after-tax balance after 30 years is $80,906. (Yes, I’m ignoring the annual taxation of dividends for now.)
10,000 x 1.078^30 x 0.85 = $80,906
Let’s say you put in $10,000 of after-tax money in a Roth 401(k). You buy a Blackrock fund with 2% expense ratio. Again, on average, all mutual funds that invest in the broad US stock market will earn the market returns (8%) minus expenses (2%), giving you a 6% return per year. However, you have no tax hit at the end since it is a Roth. (You’d get the same result with pre-tax money in a Traditional 401k.) Your final after-tax balance is only $57,434.
10,000 x 1.06^30 = $57,434
The above is a very simplified comparison, but the point is that the gradual annual hit of a high expense ratio can overcome the tax break advantage. Usually this takes an expense ratio above 1% and a long time horizon.
Recap / WWMMBD If you think that your current plan options will continue to be this bad for the next 10 years or more, and you don’t think you’ll leave your company before then, then it may indeed be better to just invest outside a 401k plan. (Keep up the IRA contributions!) However, I think that soon 401k plans will be more tightly regulated, and the trend is for plans to at least offer a few low-cost options. I know my plan seems to get a little better every year. If it were me, I’d probably suck it up and still tuck money away in the 401k in the hopes of a brighter future.
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How did you come up with your budget? Did it end up costing more or less than you thought?
Another thing to think about is that almost everything you do is a compromise between time and money. The more “guided” or “organized” your trip is, the less time you spend on questions like “what do you want to do today?”, “where to go next?” and “how many hours is the train going to be late today?”. On the other hand, the more you rely on other people to make arrangements for you, the more money you’ll spend. For example, we went to many national parks around Nepal without a tour agency. Although it took us 3 days to see what most people saw in only 2, we did spend about half of what the tours were charging for the same itinerary. So almost every decision you make - to walk or to take a rickshaw, to search for another hotel or to stay in the one you’re next to - all have to do with finding your budget’s “sweet spot” between spending more time or more money. Feel OK about spending more to save time every now and then, but try and keep it balanced.
What are some “controversial” ways to save money that you tried?
Our first night in India was scary, too. We’d just arrived to discover it’s an eight-day holiday, with all banks closed and no available hotel rooms anywhere! We walked around Bihar, India’s second-poorest state (and that’s saying something!) without any money in the middle of the night, and to top it all there was a locust infestation so we were covered in bugs from head to toe. WE were rescued from sleeping in the train station (which had four dead beggars lying in one corner, covered in locusts) by an Indian priest! He took us home, cooked us some food and let us sleep in his bed until our train arrived.
