Mailbag!

September 16, 2010

Actually, it's a European carry-all. Not gay in the least

Dear Control Your Cash:

Hi, my name is Kari (with a “k”!) J I’m a stay-at-home mom (most important job in the world LOL!) and part-time volunteer with 3 sometimes bratty kids (LOL!) I’ve been paying off my student loans for my sociology degree for 4 years now, and they’re down to $5,347 (at 6.8%). I’ve also got $13,349 in credit card balances, at 14.29% after we did a balance transfer from a 19.9% card (pretty smart, huh?) We also owe $18,348 on our car, which we bought with 0% financing over 60 months.  Anyhow, my husband and I were watching Dave Ramsey and he said we should pay off our smallest debt first, then the next biggest one, and so on. He calls this the debt snowball. He seems so nice and helpful on TV, what do you think?

Sincerely,

Kari in Corpus Christi

Dear Kari:

Thanks for the clarification on how to spell your name, in case we get the exact same email from someone who spells it with a “c”.

I’m sure Dave Ramsey is pleasant and forthright. However, the man’s mathematical prowess is shaky at best. One thing we preach here ad nauseam is look at each transaction from the other party’s (or parties’) perspective. Let’s say all those loans were with the same lender. If that lender were seeking advice from us, it’d read something like this:

Dear Control Your Cash:

I’ve got an open-ended $5,347 investment that pays 6.8%, a $13,349 one that pays 14.29% indefinitely, and an $18,348 one that’s guaranteed to tread water for the next 5 years. Which one should I get rid of?

Sincerely,

Confused Wealthy Person

Dear Confused Wealthy Person:

How much more obvious could the answer be? Sell the $18,348 investment, hold onto the $5,347 one to the extent that you can, but above everything else, move heaven and earth to preserve the cash cow that is the $13,349 investment. That’s your ticket to riches.

(End of meta-question)

That answer took less than a second to formulate.

Which means that from the original perspective of someone trying to eliminate debt, the investments (debts) should obviously go in the reverse order. Do everything in your power to negate the $13,349 debt, then worry about the $5,347 one, and don’t even think about the $18,348 one while the clock ticks.

Think about what the credit card balances are costing you (i.e. earning for the lender) each month, versus how much the student loans are earning for their lender, versus the $0 in interest that Ford Credit or GMAC or whatever is getting for the car loan. This is so obvious it hardly counts as an observation, but there you are. Dave Ramsey’s advice is counterintuitive, bad, and rooted more deeply in psychology than in finance.

———————————

Dear Control Your Cash:

My friends and I are traveling to Las Vegas next weekend. I bought my ticket well in advance on Southwest ($119 round trip) and got the hotel room on Orbitz (Caesars Palace, $59/night, double occupancy.) Because I’m saving so much money before even getting there, I decided to up my daily gambling allowance from $120 to $200. The moment I hit $200 each day, I’ll quit and hang out by the pool. Thoughts?

Sincerely,

Brandon in Burbank

Dear Brandon:

So you’re committing to lose money? Awesome! Here’s an equivalent scenario:

“My friends and I are going to Camden, New Jersey next week. We’re from Detroit, so as far as we’re concerned Camden is a vacation spot. Anyhow, I plan to walk through the worst parts of town with $20 bills hanging out of my pockets, asking people for directions and reminding them that I’m not from around here while keeping my back turned as much as possible. As soon as I get mugged for a total of $200 each day, I’ll stick to major streets during daylight hours, start putting my cash in my wallet (or better yet, depositing it in an ATM) and keep the wallet in my front pocket. Thoughts?”

The relentlessly sanctimonious anti-tobacco lobby has spent hundreds of millions of dollars convincing people that it’s idiotic and suicidal to smoke, yet still haven’t gotten through to 23% or so of American adults. No anti-gambling lobby is quite as vocal, even though gambling is as moronic as smoking (although the former won’t turn your lungs black.)

A gambling “budget” makes zero sense, as long as you’re competing against a house that can’t possibly lose in the long term. The slot machines will beat you. The roulette wheels will do it almost as quickly. As will the blackjack tables, only they offer some false sense of camaraderie while bleeding you dry.

Your savings account will return at least 100% of the money you deposit into it. Your gambling “budget” will not.

Nothing will convince people of this, even their own losses, so it’s all a non-gambler can do to remind them of the foolishness of putting up your money against someone who holds a permanent advantage. If you’re that addicted to trying to defy the laws of probability, then play fantasy football or something. Or make straight-up sports or poker wagers with your friends, where no one takes a cut and in the long run, everyone’s winnings (and losses) hover around zero.

P.S.: As Nevada residents who enjoy not having to pay state income tax, we encourage you to ignore all the above advice given to Brandon in Burbank. Come to Vegas, or Laughlin, or Winnemucca, and spend as much as you possibly can. Split that pair of 10s at the blackjack table: you could win twice as much! Don’t just bet on football, play the parlay cards! You could win 1000 times your bet! And always take 23 red in roulette: a guaranteed winner.

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

Charles Barkley, Read This

September 13, 2010

From NFL.com, and for ENTERTAINMENT PURPOSES ONLY

 

Ah, football season and all it encompasses: tailgating. Camaraderie. The thrill of seeing elite athletes injure themselves for your gratification.

And setting money on fire.

Look, we can’t convince you not to wager on football: God knows it makes the game more exciting, and even the people who follow it for a living and have to remain objective as to the games’ outcomes can’t always help themselves.*

 

Al Michaels is the kind of guy who sounds like he just might have placed a modest wager or two at some point in his life. If you’re going to bet, bet with your friends. In the long run you’ll probably win no more than you lose, and most importantly, if you bet with your friends no one’s getting a cut.

Unfortunately, people don’t. And nothing sounds cooler among a certain brand of guy than saying you’ve got some sort of institutionalized action on a game. (With a bookie named Lefty? With a sports book? With Vegas?) If you announce that you’ve placed a sanctioned wager on a game in progress your friends will like and respect you, but not nearly as much as the bet middlemen themselves will.

If this only makes partial sense, you’re fortunate not to know the basics about gambling on sports. Honestly. But to justify the time you’re spending on our blog, here goes:

When you wager through a casino, a bookie, or an online sports book (let’s just say “an intermediary”), the intermediary is not your opponent, taking the other side of the bet and hoping you lose. The intermediary facilitates your bet, finding one of its other customers to take the other side. Obviously, the intermediary needs to get paid for accepting your bet. The industry standard is 10%, so if you want to win $10 on a standard bet, you have to wager $11.

So does that mean the intermediary makes 10% off every bet? Of course not. Half those bets are going to win. For every $22 the house collects ($11 on one side of a game, $11 on the other), it pays out $21. That’s 4.5%, which is still a sweet return for 3 hours’ work (if you can call simply holding onto money “work”. Even banks have to approve and make loans.)

Would you be interested in an investment that pays 4.5%, say, every 3 months? You should: it’d pay 19.5% annually. So. How about an investment that pays 4.5% over the course of an afternoon?

The volume with which you answered “yes” should equal the volume with which you should answer “no” if you’re the one on the hook for providing the return. That quick 4.5% is how much the intermediaries make off you.

It gets worse, much worse, in the form of parlays: the most efficient method devised for impoverishing you since the invention of the state lottery ticket.

A parlay, if you’re not familiar, is a high-risk/”high”-reward bet that involves multiple events. Instead of a straight bet – Team A to cover the spread, or Team B to – a parlay also incorporates Team C or D, and maybe E or F, up to and including Teams CC and DD.

In other words, with a “3-team” parlay you need the Lions, Buccaneers and Vikings all to cover. With an 8-team parlay, you need the Chiefs, Cowboys, Texans, Seahawks and Jaguars to cover too. If all 8 teams pull through for you, a $1 bet would pay $100.

If 7 of your 8 bets come through, you win nothing. Sure, that sucks, but look at that amazing payoff for going 8-for-8!

Do you know how hard it is to pick 8 games correctly?

Let’s start with an easier example, picking 3 games correctly. Somewhat obviously, there are 8 ways to pick 3 games (Home-Home-Home, Home-Home-Visitor, Home-Visitor-Home…all the way to Visitor-Visitor-Visitor. Try it and see.)

Only one of those ways pays. And with standard wagering odds, it’ll pay 6-to-1.

But mathematically, it should pay 8-to-1.

So on average, for every $8 the house takes in on 3-team parlays, it pays out $6 and pockets the rest. That’s a 25% “interest rate” for an afternoon’s trouble.

And that’s about the best (for the player) cut, or “vigorish”, that the house collects on parlays.

Back to our question about how hard it is to pick 8 games. 28 = 256. An 8-team parlay should pay 256-to-1, instead of the 100-to-1 it does (numbers courtesy of BetUS.com.)

To a lot of people, innumerate people, it doesn’t really matter because 100 and 256 are both big numbers and thus either one is a great return as a multiple of a $1 bet.

At 100-to-1 odds, the house takes 61% of the players’ money. Even the Obama Administration doesn’t confiscate that much from high-income earners, yet.

Still not convinced? Here’s a handy parlay chart. Enjoy tonight’s games.

# of wagersBetUS oddsTrue oddsVig (%)
22.6435
36825
4121625
5253222
6406438
77512841
810025661
915051271
10300102471
11450204878
12600409685
13750819291
149001638495
1515003276895

*Exhibition game, San Francisco favored by 3½. That’s Minnesota’s 3rd-string rookie quarterback.


**This post featured in the Festival of Frugality #248**

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

Or Go Read Man Vs. Debt Instead

September 9, 2010

You're going to need one of these

Why can’t you be like other sites?

It’s the one complaint about Control Your Cash that we receive most often: where are the first-person stories about your struggles with income and debt?

1) There are several thousand other blogs that already memorized that riff and can play it by heart. We wouldn’t be bringing anything original to the party. Besides, this isn’t a place for self-indulgence. We don’t give a damn about the details of your finances*, and don’t expect you to care about ours. Or anyone else’s but your own.

We used to think that other people’s Facebook photos were the Ultima Thule of human boredom. But they’re captivating compared to hearing a personal finance blogger yammer about how he’ll now pay off his student loans 3 nanoseconds faster thanks to this handy new money-saving method he discovered for making your own duct tape. Also, the Sunday paper is full of coupons for your next grocery shopping trip.

2) No struggles to speak of.

Oh, does that sound condescending? Then would you feel inadequate if Danica Patrick told you she has no trouble negotiating traffic at 160 mph? How about if the chick from Evanescence said she could easily hit notes in the whistle register?

We’ve spent our adulthoods doing the prudent, common sense thing and seeing where it leads. So far, it’s working. At least more so than buying pet clothing and paying for tax refund anticipation loans might have.

You want commiseration? Start drinking or become a sex addict. Meetings in the church basement, Tuesdays at noon. No crosstalk, please.

Good. Now that we’ve got the children out of the room, join us for something worthwhile. Two things we try to do here:

-explain financial concepts that people presumably want to know about, or should, but don’t.
-show how not being financially idiotic can pay tangible rewards. And occasionally, show instances where you might think you’re doing the smart thing but aren’t.

If this sounds dictatorial, it isn’t. No more than your 3rd grade teacher was when she explained how multiplication works. Look, there’s no secret to gaining wealth. The mantra, again:

Buy assets, sell liabilities. Do this often enough, measure the results, and if you do nothing else you’ll get rich in spite of yourself.

Financial self-sufficiency is nowhere near as simple as “spend less than you earn”, but it’s not as complex as you think, either. That wedding you’ve been fantasizing about since you were a little girl? Unless it involves only you, the groom, a justice of the peace and a visit to IHOP afterwards, it’s a liability. Sell (i.e. don’t buy) it. The matching funds your employer offers for your 401(k), which will give you more tax-free income when you retire in exchange for a few seconds of incremental effort today? That’s an asset. Buy it.

Almost everything in your financial life fits into one category or the other – if not individually, then cumulatively. The bachelor’s degree in women’s studies is a liability. The interest-bearing student loan to pay for it is a meta-liability, and an obscene waste of money. The used DSLR camera that you can pick up from a highly rated eBay seller and is indistinguishable from a new one that’s twice as expensive? That might not be an asset by our definition, but the difference in their prices is. Buy the camera, assuming you’ll use it.

If you want patently obvious advice and feel-good pabulum, Google “personal finance blog” and you’ll find it. If you want to be challenged and inspired, stay here. Read the archives. And let us teach you how as much as you’re willing to digest about how money works (and how it doesn’t.)

*Dang. That should have been the subtitle for the book.

**This post is featured in the Carnival of Wealth #5**

Filed Under: Bad Examples, Consumer Debt, Education, Making Smart Choices, Personal Finance Tagged With: , , , ,
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