Why pay someone when I can do it myself?

May 9, 2011

You still need to build wings, seats, landing gear and beverage carts, too. Seriously, it's easier to just visit Southwest.com

Because sometimes it makes sense.

It’s called Ricardo’s Law of Comparative Advantage. It says that things work best when everyone does what they’re best at. Ignore it, and you’ll hurt yourself financially.

Say you work as a salaried salesperson, but you also happen to be a capable amateur gardener, and can trim 50 tree branches an hour.

(sigh) Why does there always have to be math?

There’s very little math. Stop whining.

A mustachioed man wearing a Chivas USA cap knocks on your door, and explains in broken English that he’d like to trim your branches for $9 an hour. You reluctantly agree, even though hiring him means depriving yourself of a relaxing pastime.

So you hire him, and find out he’s half the gardener you are: he takes an hour to trim 25 branches. Should you grab the garden shears out of his hand (points facing downward), say you’ll do it yourself and fire him?

No.

If you earn $40 an hour, forgoing an hour of that to trim your branches makes no economic sense. Better to pay Javier $18 to do it and free up your time.

But if you really enjoy gardening that much, then yeah, go ahead and garden.

Real life example: we have a woman who cleans the house fortnightly. She charges $100, takes her time (usually about 8 hours), and is amazing. Of course we could clean the house ourselves, but it’s easy for us to get distracted. Whereas for our housekeeper, our house is strictly a place of business – not somewhere to walk around naked and listen to loud music in. (As far as we know. We try to stay away on days she visits.)

But she’s good at what she does. It’d take us longer than it takes her, and even though it’s our place, we admit we wouldn’t be as thorough. Also, we hate cleaning. (That being said, we’re still the kind of people who will spiff the place up, at least a little, for the housekeeper’s arrival.) We also don’t have the fancy equipment she has, nor would we be willing to invest in such. Furthermore, we travel frequently enough that it’s sometimes worth it just to have her there to feed and water the cats, which can allow us to extend some trips by a day or two.

If you don’t enjoy doing something, and the professionals don’t charge an exorbitant amount to do it themselves, it’s perfectly fine to hand them the wheel.

Are there exceptions? Well, what do you enjoy doing?

An example: changing motor oil. Again, there’s a capital investment involved. We happen to drive SUVs that require more oil than that effete little subcompact you drive to Whole Foods in. This isn’t a primer on how to change your oil, but here’s the list of ingredients:

6 quarts of synthetic blend $24
Filter $4
Pan $3
Cap wrench $8
Swivel wrench $14
Jack $140
Jackstands $90

That’s about it. Everything else, you can steal.

Go to Jiffy Lube, you pay $35 for a synthetic blend change. We save $7 by doing it at home, but have to buy $255 worth of additional equipment. It’ll take 47 oil changes for the capital investment (most of that involved in getting the truck off the ground) to pay off.

But this is for 2 SUV’s*, so that’s 23 oil changes apiece. Say we average 4000 miles between changes, that’s 92,000 miles each. And we can use the jack and stands for other maintenance, too.

Jiffy Lube techs have an underground station and muscle memory – their least competent employee can change oil far faster than yours truly can jack up the SUV. However, we’re at their mercy as far as getting in, jiffily or otherwise. Meanwhile, there’s zero wait time in our garage.

Also, they’ll test the vehicle’s battery**, recommend an unneeded replacement of an air filter***, maybe find a few other things wrong. Some of those might even be legitimate.

The psychological reward for changing your own oil is substantial, too. Chicks claim that they dig scars, but what really gets them hot is grease-stained hands.

On the flip side, paying someone to do what you can isn’t necessarily bad nor even something to discourage. You can eat every meal at home, but every now and then it’s only natural to want to leave your palate in the hands of a professional cook (and your dirty dishes in the hands of professional bussers.)

*We normally use “trucks” to describe what we drive, simply because they carry lots of cargo and we take them off-road. However, if they were authentic trucks in the F-150 or Tundra or Ridgeline sense, they’d have an extra inch of clearance or so – possibly just enough to allow a normal-sized person to get underneath without spending $230 on hydraulics and accessories. Thus our use of the term “SUVs”.

**A battery tester can cost $80. Seeing as that’s almost the price of a battery, is it worth it if you’re going to change your oil at home instead of getting a free test and readout at a professional oil change place? Well, while batteries die gradually, it’s pretty hard to perceive their imminent death without a tester. You’ll just wake up one day and she’ll be cold and unresponsive. Which she was going to be anyway. Jumper cables get you to the AutoZone, where they’ll test your battery without charge (haw!) and install a new one, also without charge. Well, they’ll charge you to buy it, that is. And you can assume it’ll be charged. Dropping it in place will be on the house. But it’ll still be charged. For no charge.

***If you plan to keep your car for even as little as 25,000 miles, buy a K&N filter.  They cost 5 times more than standard air filters, but you can wash and reuse K&Ns. And they come with a million-mile guarantee.

**This article was a #1 pick in the Best of Money Carnival 103rd Edition**

and

The Festival of Frugality #280

Filed Under: Capitalism, Making Smart Choices Tagged With: , , ,

It’s not what you earn. It’s what you negotiate I

May 4, 2011

Meet this week's winner of the non sequitur street sign award

Time and again, it’s the one complaint we hear most often from people who spend more money and earn less than they’d like – “I suck at negotiating.” “I couldn’t sell space heaters to Eskimos.” “Not only did I pay the seller’s asking price, I gave him a 15% tip and offered to spend the next couple of weekends painting his house. And pay for the paint.”

There are plenty of books about negotiation – Ron Shapiro and Mark Jankowski’s The Power of Nice is worthwhile if you can find a partner to do the exercises with – but none will teach you anywhere near as much as actual bargaining and deal-cutting will. As anyone who’s read a book on automotive maintenance knows, theory is no substitute for practice.

Here’s a quick and cheap way to build valuable negotiating experience, with very little downside. Best of all, it’ll make you feel like an aspiring criminal.

Ticket scalping.

Particularly, live scalping. None of that StubHub child’s play. We’re talking about the kind of negotiation where you actually have to face the other party in the transaction, should a transaction occur.

That last clause is critical. There doesn’t have to be a deal. Millions of people carry the mistaken belief that sealing a deal is necessarily an accomplishment. It isn’t. Most negotiations are worth walking away from, at least temporarily. Time can often be your friend, especially if the other party’s facing a deadline.

The standard example for ticket scalping is sports, but concerts also work if the artist is big enough. If you live in a city with an NHL or NBA team, one scalping session – either as a buyer or a seller – will teach you enough to go into your next car or house negotiation in a far better position.

Strategies differ if you’re a buyer or a seller. We’ll address each individually.

BUYER:

Say you’re in Des Moines a week from tomorrow and want to see Bon Jovi at the Wells Fargo Center.

1. Find out how much tickets officially cost. In this case, they range from $20 to $130. That venue diagram is critical.

2. Spend a minute on eBay and 30 seconds on Craig’s List to determine going rates, which rarely match list price.

3. Determine how badly you want to see this show. Assign a dollar figure to it if you can. “I’d love to be on the floor, but not for a penny more than $150.” If you’ll spend the rest of your life in regret if you miss the show, then presumably you should have bought tickets beforehand. This isn’t Led Zeppelin at the O2 Arena or the Super Bowl. There’ll be other Bon Jovi shows. Jon will still be dreamy.

If the event is something you can live without seeing, it’s time to have some fun.

4. Go to the venue no more than 20 minutes before showtime. That is, get yourself there in enough time to have parked and walked to the ticket window (which, of course, is where scalpers congregate.)

You don’t want to get there any earlier. If you linger without visible purpose for an hour, you’ll betray yourself as someone who’s looking for tickets and will be propositioned by any number of professional scalpers. Any scalper who propositions you will force you to make a decision then and there. If you want to defer your decision until shortly before game time, your bargaining power with that scalper will rapidly decrease. He (they’re always male) then might even refuse to sell to you out of spite, which is an option for him if there’s at least one other buyer visible.

If you haven’t memorized the seating chart, bringing it with you wouldn’t hurt, although you don’t want to tip your hand as a naïf by making the chart visible to the regular scalpers. (Who’ll be easy to spot, and even easier to hear.)

Next week, we show you how to go in for the kill.

Filed Under: Capitalism, Making Smart Choices, Net Worth, Shopping Tagged With: , , , , ,

Micro Millions

April 25, 2011

Brandi couldn't find the man of her dreams until she won the lottery

Indulge us for a few minutes before you go out and buy this week’s lottery ticket(s)?

Mega Millions and Powerball are America’s two biggest lotteries, available in 41 and 43 of the contiguous United States, respectively. And every week, tens of millions of idiots feed the beast.

Both games are for mental patients, but let’s deconstruct only Mega Millions for now.

To win the jackpot, you have to pick 5 out of 56 white balls and 1 out of a separate 46 red balls.

Regard each of the two colors separately. For white balls, you can pick any one of the 56 for your 1st ball. That leaves 55 choices for your 2nd ball, 54 for your 3rd, 53 for your 4th and 52 for your 5th.

Which would be

56 x 55 x 54 x 53 x 52

except you need to remember that every combination is counted multiple times. Say you pick balls 8, 13, 25, 33 and 50. Well, that’s the same as 25, 8, 50, 13 and 33, right? Any one of your five chosen balls can be in the 1st position, leaving four balls for the 2nd position, three for the 3rd, etc. There are 120 possible permutations, so the total number of five-ball combinations is:

56 x 55 x 54 x 53 x 52
5 x 4 x 3 x 2

Which equals…well, it doesn’t matter what it equals because we’re not done yet. We still have to multiply by the chance of you getting the red ball right, which you have a 46-to-1 shot of doing. So the chance of the numbers you pick being the numbers that come up is

56 x 55 x 54 x 53 x 52 x 46 = 175,711,536
5 x 4 x 3 x 2

That’s right, 176 million to one.

Lots of people, including most lottery players, don’t bother to distinguish among large numbers. They figure that once you get beyond 10,000 or so they’re all pretty much the same. The chance of winning Mega Millions is about the same as the chance of you choosing a U.S. resident at random, then correctly guessing her street address.

Of course, not every dollar collected goes to prizes. No lottery is or can be a zero-sum game. Each lottery corporation needs to keep some cut to cover expenses and turn a profit.

In California, that cut is about 48%.

ExxonMobil’s 2009 profit margin was 8.6%, and more than a few thousand people regard the oil and gas multinational as exactly the kind of thieving leviathan society needs to dismantle brick by brick.

This week’s estimated jackpot is “$105 million”, which is a gigantic lie. Look at this, direct from MegaMillions.com:

The ESTIMATED JACKPOT number is in 20-point font, and ALL CAPS. The Cash Option number is in 11-point font. In other words, the estimated jackpot isn’t $105 million. It’s $66 million. Wanting to believe it’s the higher number doesn’t make it so.

Do you work on commission? Even if you don’t, if your employer offered you a $40,000 bonus this week, would you be interested?

Okay, what if he then said,
“Well, the commission is really $16,900 after taxes. We could cut you a check for that much now, but if you’re willing to take $128 installments every month until 2037, and also add the taxes back in, then that totals $40,000.”

You’d cry dishonesty, and you’d be right. This is yet another example of government functionaries obfuscating the truth in a way that if you or I attempted, we’d get sued. And lose.

After taxes (which average 7¾% state and local in some jurisdictions, plus 25% federal), that jackpot shrinks to $44,452,250.

But that’s assuming that only one ticket will win. The chance of there being exactly one winner varies with the number of tickets sold, but it can never be more than 37%. In other words, there’s never a scenario in which the most likely outcome is that exactly one person wins. If you win – which as we’ve all but proven, you won’t – there’s a good chance you’re going to have to split that prize.

Say there are two winning tickets, which are thus each worth $22,226,125. For doing the near-impossible – getting all six numbers right – you’d get 6% of what you should get. The remaining 94% goes to the government. The very government that has a monopoly on these games, and also has a de facto monopoly on education – and has taken the responsibility of teaching math to the same populace it sells lottery tickets to.

As the brilliant Durango Bill points out, if you drive 1000 yards out of your way to buy a lottery ticket – 500 yards there and 500 yards back – it’s more likely that you’ll die in a car accident en route to get your ticket than you’ll win.

But hey, you can’t win if you don’t play.

**This article is featured in the Totally Money Carnival Blog Carnival #20**

Filed Under: Bad Examples, Capitalism, Consumer Debt, Making Smart Choices, Math Tagged With: , , , ,
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