Price Targeting, Coffee Shops, and Supermarket Secrets

I recently started reading The Undercover Economist by Tim Harford. So far, it’s a little like Freakonomics but a bit more economics and with slightly less controversial topics.

One interesting concept explained was price-targeting. Let’s say a coffee shop has to spend 50 cents to make a cup of coffee, including labor and materials but not rent. Now, each person walking by has a certain trigger price. If the coffee is cheaper than their personal trigger price, they buy, and if the coffee is more expensive, they don’t buy.

In a perfectly efficient market, a person would be honest about their trigger price, and a business could sell their coffee to anyone whose trigger price is above 50 cents. A frugal person might walk up and pay 75 cents, while a spendthrift coffee addict in a rush would pay $4 for the same cup. Obviously, this wouldn’t work in the real world, so stores have to find a way around this. Getting people to pay as close to their trigger price as possible is called price-targeting.

Instead, you have the current Starbucks menu = an entire wall of caffeinated options differing slightly by roast, size, flavoring, and preparation. When I need to get out of the house, I usually go in and get an iced coffee for about $2. They will add milk, or I can add it myself and you can get their syrup sweetener for free since sugar packets are hard to dissolve in cold drinks. Alternatively, a frappaccino is basically the same time but blended with some whipped cream for $3.50. So the “frugal” version is for the people looking to spend $2 on coffee, and the “premium” frapp is for those willing to spend over $3. The frapp probably cost around 10 cents more to make, while Starbucks made an additional $1 in profit.

A similar thing takes place in supermarkets, and is summarized well in this CFP Board newsletter article Taking Aim at Price Targeting:

Imagine you’re at the supermarket and want to buy a bag of chips. If you tend to be an impulse shopper, grabbing the first thing you see, you’ll likely end up with the most expensive chips available, conveniently placed at eye level by the supermarket’s thoughtful management. If you’re bargain conscious, however, a brief scan of the shelves will reveal cheaper chips tucked away closer to floor level. By offering similar products at different prices, the supermarket can make everybody happy: the impulse shopper gets her chips, the bargain hunter gets his bargain, and the supermarket maximizes profits from both types of customer. “In price targeting, customers pay what they are willing to pay,” Harford says. “It doesn’t depend on being a sucker. It’s even a good thing because if companies weren’t able to target, then nobody would get the lower prices.”

This is also why supermarkets have sales on a rotating range of products, instead of the same products or just lowering prices in general. The price-sensitive frugal folks will pretty much only buy what is on sale, and they’ll be drawn in and the store will make a little profit with slimmer margins. The people who never check what is on sale or are just buying ingredients required for a specific recipe will end up buying a lot of non-sale items which are marked up at a higher profit margin. Again, the store tries to get as close to a “perfect” market as possible.

The lesson? Be aware of price-targeting, be aware of your own tendencies, and look around to make sure you’re getting the best price when presented with a variety of options.

Posted in Book Reviews, Frugal Living | 12 Comments »

Budget Long-Term Travel: Explore Longer For Less

The following is a guest post from Matt from NomadicMatt, who as you might guess has a passion for travel and doesn’t like to stay in one place for too long. He wrote this while running around Spain! If you like what you see, I encourage you to check out his site for his travel blog and other travel tips.

One thing that always irks me about my fellow countrymen is the huge perception that travel is expensive. With only two weeks away a year, I can see why a lot of people would want to splash out on an expensive holiday. There’s nothing wrong with that. But a lot of people spend more money and get less value. They spend money on things the travel industry tells them they need but could find much cheaper. I’ve been traveling around the world for three years and whenever, I have friends come visit me in places, they are amazed at how little they spend compared to what they thought they would. I don’t penny pinch but I don’t spend money stupidly.

Take for example my trip to Thailand with a co-worker. Flights to Thailand can run anywhere between 800 and 1200 dollars for an economy class ticket. You can only hope to get on the lower end and sites like Momondo and Mobissimo are good at that. Additionally, you can check out my page on how to find cheap flights. My friend asked me how it would cost her for the two and half weeks we were going to be there. Should she bring 1,000 dollars? 1,500? Thinking about what I had planned for us, I told her $700 should be enough, unless she wanted to shop - then she should bring a few hundred more. She didn’t believe me but I was right. Here’s the break down:

• Accommodation - Typical double bed room with shower, fan, or a/c. Nothing fancy but not super dirt, “I see a cockroach” cheap either. It cost us 20 dollars a night, which was split by two people.
• Transportation - We took the local buses and trains around the country. They are very cheap with a train costing only a few hundred baht. (It’s 35 baht to one dollar). Overall, we spent $50 dollars on transport.
• Food - Having lived in Thailand, I know the best food there is on the streets, which is also the cheapest food. A meal is about 30 baht. We also ate a lot of seafood on the islands which is about 300 baht a meal. Throw in a few sushi and Italian dinners at about 800 baht each and in total for 2 1/2 weeks we spent about 3,500 baht on food, which is $100 dollars.
• Alcohol - We like to party so this was a bit of a budget buster. We easily spent $100 USD on going to clubs and beach parties.
• Tours - We took one tour through the national park that cost us 1,500 baht for two days. The guides spoke perfect English and new things about the area that amazing. When we went to the beach, we did a snorkel tour for 500 baht.
• Other sights - We spent about $10 dollars on the palace and temples in Bangkok.

So for 18 days we spent about $560 dollars per person, or about $31 a day, without skimping on anything, eating the local food, taking a few tours, and doing nothing really cheap. For 18 days, that is not a lot of money.

Thailand is a cheap country so I’m always amazed when people walk away spending lots of money. A typical two week tour to Thailand runs about $1,000 dollars from Gap Adventures, which actually specializes in inexpensive tours. We spent less in longer. (Editor’s note: Or you could stay an entire month for the same price of $1,000.)

Moreover, when most people travel to Thailand they stay at the big international hotels like the Marriott or the Sheraton, fly everywhere, and stay at luxury beach bungalows for 2,000 baht a night. When they eat, they eat out at fancy places. Relative to their home country, whether the U.S. or Europe, this may seem like a bargain (Wow! I just got a beach bungalow for 70 dollars a night!) but compared to how living locally is a third of the price, you aren’t getting good value for your money.

If luxury is what you want, go for it but if you want more value for your money, live more like a local, take the local transportation, and stay in middle of the road places. You’ll save a lot of money but also get to know the pulse of the location more. There’s nothing wrong with spending money but I find not getting the most out of the money you spend a waste.

(Photo credit: NomadicMatt)

Posted in Frugal Living, Travel | 30 Comments »

Personal Finance Education, Delayed Gratification, and Marshmallows

Many people agree that there should be more personal finance education in school. This is supposed to be one of the keys to making the average person save more money, have less credit card debt, and invest wisely. You know, teach a high schooler the wonder of compound interest and the related trap of credit card minimum payments.

But I’ve perhaps the problem is even more basic than that. I recently ran across something called the Marshmallow Experiment by Walter Mischel. Check out this video (hat tip to Rob Garcia of LendingClub):

Here’s a quick summary of the original 1960s study. A group of four-year olds were put in a room with just a chair and a table. The kids could pick either a marshmallow, a cookie, or a pretzel stick. The child was then given an option. They could either eat one marshmallow right away, or if they waited until the researcher left and came back, they could have two marshmallows. How long could they wait? The researchers continued tracking them and found that those with the ability to wait were better adjusted, had less behavioral problems, and scored an average of 210 points higher on the Scholastic Aptitude Test.

Teaching Delayed Gratification
Along the same lines, I think a core requirement of good personal finance “education” is teaching people delayed gratification. Imagine how many adults wouldn’t be able to wait a year to get $500 versus getting $250 today. If you can exercise such self-control, then you won’t buy things on credit cards because you “gotta have it now”. You’ll be able to save money towards a retirement that may be decades away. It will be easy to spend less than you earn.

How do you teach delayed gratification? Since it would require years of practice, you’d want to start early and the responsibility would fall heavily on the parents. From an interview with Mischel in a related New Yorker article:

“This is where your parents are important,” Mischel says. “Have they established rituals that force you to delay on a daily basis? Do they encourage you to wait? And do they make waiting worthwhile?” According to Mischel, even the most mundane routines of childhood—such as not snacking before dinner, or saving up your allowance, or holding out until Christmas morning—are really sly exercises in cognitive training: we’re teaching ourselves how to think so that we can outsmart our desires.

But of course, not all parents will do that. So the problem is then how do we systematically teach children this skill in school, which is what researchers are working on now. In my opinion, that would be the ultimate in personal finance education. Because if you don’t have the ability to defer gratification, then learning about index funds isn’t going to help very much.

Posted in Family, Frugal Living, Retirement | 17 Comments »

Finding The Actual Hotel Name On Hotwire.com Before Purchase

This is a follow-up to my 5-Step Guide to Finding The Lowest Rate For Hotel Rooms, which includes tips on using “opaque” sites like Hotwire.com and Priceline.com to save on hotel rooms.

Specifically, I’ll show you how to greatly improve your guess as to which hotel you’re actually bidding on Hotwire.com before pulling out your credit card. This was initially inspired by a helpful comment by reader Nasty N8, but I expanded and altered his advice a bit.

Finding The Hidden Hotel

When you run a search for hotels on Hotwire, you only get the price, star rating, and the general neighborhood. For example, here’s a search result for hotels near the Orlando airport (MCO) on 12/20/09.

Hotwire Participating Hotels
I see that I can get a 4-star hotel near MCO for $56+taxes. But which one? How do I know if it is any good? Using the Hotwire Hotel List for Florida at BetterBidding.com, I scroll down to the Orlando MCO section and see two listings: Hyatt Regency Orlando Airport and Renaissance Orlando Hotel Airport (Marriott). Again, this list is not 100% accurate, but it does provide a shortcut possibility and also another data point for later (see scenic route).

TripAdvisor Clues
I click on the red box “Continue” to see the total with taxes per night ($69.45), and also learn more details about the actual hotel. If I scroll down I see some information from TripAdvisor:

With this information, I can usually reverse engineer the specific hotel from the TripAdvisor (TA) site. There are three points of interest here:

1. Tripadvisor Traveler Rating (Out of 5). Based on customer reviews, this is an average rating of quality. Sometimes they won’t match up perfectly (i.e. TA will show 3.5, but Hotwire will round up to 4), but most of the time they will.
2. Number of reviews. This will not be exact, but instead be rounded off to the nearest 20. So if TA has 35 reviews, then Hotwire will say 20+. If TA has 41, then Hotwire will show 40+.
3. Date of last review. Simply look at the date of the first review you see on TA, and compare with this date.

Mix-n-Match
Let’s go back to the initial hotel list. Here are the Tripadvisor pages for the Hyatt Regency (4.5 dots, 163 reviews, last on Aug 2009) and the Renaissance Hotel (4 dots, 57 reviews, last on Aug 2009). Remember, 57 is the same as 40+.

We see here that the most likely hotel is the Renaissance Orlando Hotel, with all factors matching. At Expedia.com, this hotel would have cost $112 per night with taxes on the exact same day. By doing a little legwork, you could secure a savings of over $42 per night (38%).

The Scenic Route
If you did not find a match, then the hotel may not be updated on the list yet. Here, you’ll have to run a search on Tripadvisor. Use the “Hotels” tab and act as if you want to book a hotel, using your travel dates and everything. Do not just use the search box. Now, the left sidebar will have a ton of options to narrow down your search results. Again, use your region, your Tripadvisor rating, and also the star class rating. (Note: The hotel class “star” rating by Tripadvisor will sometimes vary from the ratings from Hotwire, so you might allow one star difference either way.)

Here is a nice screenshot that shows how I narrowed it down to 6 hotels. As you can see, the only hotel left that matches the Tripadvisor stats is… again the Renaissance Orlando Hotel!

You can also do this down the line with all the different Hotwire search results. Now that you can figure out the actual hotels, you might feel that $50 a night at a 3-star Holiday Inn is better than $100 at at 4-star Hyatt. Happy hotel hunting!

Posted in Frugal Living, Travel | 16 Comments »

How The Average U.S. Consumer Spends Their Paycheck

Here’s an interesting graphic of the spending breakdown for the average U.S. consumer. It’s based a theoretical household “unit” consisting of 2.5 people, not individuals. Looks like such a household unit spends approximately $50,000 per year. Click on image for larger version.

I guess taxes are not considered an expense by the government. I’m not sure where leisure travel or vacation spending falls under, perhaps split as transportation and housing?

The image was created by Visual Economics, using information taken from the Consumer Expenditure Survey by the U.S. Department of Labor.

Posted in Budgeting, Frugal Living | 24 Comments »

Historical Net Worth & Goal Chart Updates

I finally got around to updating all my net worth charts and graphics. Here is my net worth since I started tracking it on this blog in December 2004:

You can also view my net worth since graduating from college in my Net Worth page. You can download my tracking template here.

Since I had all the data handy, I also put together a chart of the value of my retirement portfolio. This is simply the sum of all the money in our 401k/IRA/403b’s over the years, including any gains/losses and contributions. Since I did a Traditional-to-Roth IRA conversion a while back, I normalized all the values by taking 30% off of any pre-tax account values. Therefore, the chart is of (estimated) after-tax balances.

As you can see, my portfolio is small enough that regular contributions have been able to counter the rather mediocre returns over the last 5 years so. The swings in our property value is also contributing to making our overall net worth very volatile recently.

Goal Tracker Chart
I also wanted to update my little goal meter on the top-right of every page. I updated our 401k contribution progress; we are on track to max them out for 2009. My first long-term goal is pay off my home mortgage, so I won’t have a house payment anymore. My second is to build a $750,000 investment portfolio. More details here.

At a 4% inflation-adjusted withdrawal rate, a very rough rule-of-thumb, $750k would create an annual income of $30,000 per year ($2,500 monthly). This should cover all our non-housing expenses. At the current $140,000 value, I’d theoretically be able to produce about $467 of “passive” income per month.

I’d like to come up with a better graphic to track these things, but for now I’ll stick with the progress bar. Any creative ideas out there?

Posted in Frugal Living, Goals, Investing, Retirement | 6 Comments »

Costco Membership Certificates w/ $50 in Free Costco Coupons

I am happy to be able to offer special Costco membership certificates again to MyMoneyBlog readers. Available only online, they are $50 each with free shipping, and are good towards new Gold Star memberships and also upgrades to Executive Membership. Just bring them into your local Costco to redeem.

This is exactly the same price as you would pay at a Costco store, but with each membership certificate you order, you will also receive a coupon booklet worth more than $50 by itself, including a FREE rotisserie chicken, FREE 100-print digital photo processing, a FREE Kirkland Signature™ 2 lb. bag of coffee, FREE Kirkland Signature 48 pk “AA” batteries – and more.

• Join as an Executive Member: Purchase two Membership Certificates at $50 each.
• To join as a Gold Star Member or upgrade your existing membership with one Membership Certificate at $50.
• Give the gift of Costco Membership Certficates for any occasion.

More details:

This offer is only valid online and is not available at Costco locations.

Restrictions: Valid for new memberships and upgrades to Executive Membership. See the Membership Certificate for details. Costco Membership Certificate orders are fulfilled by participating National Membership Program organizations. Please allow approximately 2 weeks for processing and shipping. Costco Wholesale Membership Certificates are not replaceable if lost, stolen or destroyed. Bring the certificates to your local Costco membership counter to activate.

Posted in Deals & Offers, Frugal Living | 28 Comments »

Goldstar: Half-Off Local Events In 8 Major Cities

Feeling the recession, but still want to get out of the house? You might consider signing up for Goldstar, which helps you to “Go out more”. They offer half-price tickets on plays, concerts, sporting events, and museum exhibits.

So far, it includes events in these areas: Los Angeles, San Francisco, Chicago, D.C. Metro, New York, Boston, San Diego, and Las Vegas. Events are summarized into weekly e-mails, and there is also a social networking component where they collect a lot of individual reviews of each event.

For example, if you live in the SF Bay Area, you could ride an all-day Golden Gate Bay Cruise this weekend for $11, see the Giants play baseball tonight for just $5, watch professional beach volleyball for $5, or even watch bassist Charlie Haden at Yoshi’s Jazz Club for free.

They do tack on a service fee for each ticket, which varies but is at least disclosed relatively early. I saw from $2 to $6 per ticket. Also, for each new friend you refer that joins Goldstar, you get $1 credit towards service fees.

Posted in Deals & Offers, Frugal Living | 1 Comment »

Saving Money on Pet Costs: Frontline Plus Flea Medication

Now that we have two dogs, we’ve had to keep a closer eye on pet costs. One regular expense is flea medication, for which we have found Frontline Plus to work acceptably. If you buy it straight from the vet or in a retail pet store it can be around $15 per monthly dose.

In the past, we’ve found that the cheapest price has been on eBay, getting costs down to about $8 per dose for the exact same 6-pack product packaging. But a recent development amongst eBay sellers is to sell the bigger vials made for 89+ lb. dogs, and then have the consumer split the medication fluid into smaller doses themselves. Here’s an example of the cost breakdown for a small dog (under 22 lbs).

At less than $3 a dose, you can save over 80% off of retail. The absolute savings are only about $7-$11 per month, but it adds up quickly. Especially if you have multiple dogs, the ongoing savings could be hundreds of dollars per year.

Of course, you could also just buy the extra-large doses from Amazon.com for $61.49, which equates to $3.42 per small dog dose. However, the eBay auctions also include a glass vial and a marked syringe/dropper to easily measure out the correct doses. (Some also include latex gloves.) If you’re going to go through the extra trouble, you might as well go all the way!

More Accurate Dosing
Another potential benefit of essentially buying this stuff in bulk is that you can more accurately dose your dogs. By default, Merial categorizes dogs into four broad categories: 0-22 lbs, 23-44 lbs, 45-88 lbs, and 89-132 lbs. This corresponds to vial sizes of 0.67 ml, 1.34 ml, 2.68 ml, and 4.02 ml. I don’t know about you, but I see a pretty big gap between 45 and 88 pounds.

If you take the largest size for each category and divide by the vial size, you get 0.0305 ml per pound every time. So if you have a 25 lb. dog why give them double the dose of a 22 lb. dog? Just give them a bit more (0.76 ml) and you should be fine - and save even more money!

As with all these flea medications, you can do some trial and error to see what brand and dosage level works for your dog. You might need more or less than indicated. Either way, with this method you should still save a good chunk of money.

Follow-up: I’ve had good experiences buying from eBay sellers with good reputations and become a repeat customer after I used their product, but as shown above you can also buy the XL packs from anywhere, split the medication yourself, and get most of the savings without eBay ($3.42 from Amazon vs. $2.61 from eBay). It’s easier to apply using a plastic syringe (w/o needle) anyway.

Posted in Frugal Living | 33 Comments »

The Hawthorne Effect and Better Money Management

I was reading an article in Wired Magazine about improving one’s health with new personal metrics devices such as the Nike+iPod kit, which is a neat device that helps you easily track and records details about your running. Did you know that all it measures is the amount of time your foot is on the ground? (That time is inversely proportional to your speed.)

The Hawthorne Effect
In the 1920s, the management at the Hawthorne Works factory decided to try some things to improve productivity. When they improved the lighting, workers assembled parts faster. When they were given more breaks, workers assembled faster. But then, the reduced the lighting back to normal, and productivity was still increased. After months of tinkering, when all the work conditions were set back to the original state, productivity remained higher. The fact that they were being watched was the primary reason things changed.

The idea that the act of observing itself will change the phenomenon being observed became known as the Hawthorne Effect (also known as the “observer effect”), and has since been confirmed by many other follow-up studies.

Application to Personal Finances
While this seems like common sense, it is actually quite powerful to know that simply noting down what you spend every day or month in itself may improve your finances. You could set a budget or analyze trends later, but don’t worry about that for now. Don’t judge your expenses. Don’t try to change them. Just track them.

On that front, online aggregation sites like Quicken Online, Yodlee, Mint, and Geezeo make the data collection easier, just like the Nike gadget takes away the stopwatch and logbook. They all pull up your transactions automatically (if you trust them with your passwords and data). Otherwise, I still see nothing wrong with using simple pen and paper and/or a spreadsheet.

Making a Habit
Nike also found that once a Nike+iPod user uploads five runs to the software, the user is much, much more likely to keep running and uploading data. Maybe it would be good to set a goal of tracking expenses for… 5 weeks? 5 months? We need time to get addicted to the stats!

Posted in Budgeting, Frugal Living | 18 Comments »

What Is Your Motivational Burrito Currency?

(image credit: chipotlebreakfast.com)

Sometimes people wonder why a guy who makes a six figure salary will still bother to fill out a form for a free razor, or sign up for a credit card for the $100+ bonus. Well, for one thing it’s a habit leftover from making $15,000 per year. Back then, adding anywhere from $2,000-$5,000 a year to my annual income from various shenanigans was a huge benefit. It allowed me to enjoy niceties like not eating spaghetti three times a week and booking flights to visit my girlfriend (while still paying down student loans).

In this way, I started to correlate little savings with specific things. $5 meant a plate at the Indian food cart or a loaded burrito. So $100 wasn’t just an amorphous $100 to be deposited into a bank and forgotten, it was 20 meals. I’ll do XX for a month of naan & curry!

By extension, creating additional freelance income of $1,000 to me meant a flight + hotel to a new and strange spot in the world I hadn’t been before. For another person, they might think in terms of Lucky jeans, automotive gear, or ski lift tickets. I know this is a consumeristic form of thinking, but you don’t have to spend all the money you make, nor do you have to save all the money you make.

Do you have a form of motivational currency? Or is cash king?

Posted in Frugal Living | 34 Comments »

My Dog’s Favorite Chew Toy Is Now Free

This might be completely obvious to others, and I’m probably opening myself to ridicule, but I only recently discovered it and find it awesome. If you have dog that like to chew things, many of those fancy plush squeak toys last about a day. But if you take an empty plastic water bottle, slip in inside an old sock, and tie off the end, you now have an endless supply of free dog toys!

I did this after finding $10 “bottle buddies” at a dog store, and have already gone through three of these things in a little over a week. Removing the cap and ring helps avoid a choking hazard.

Posted in Frugal Living | 13 Comments »

Creating Your Own Three Legged Stool of Retirement

You may have heard the term “three-legged stool”, taken from the idea that a stool needs three legs to maintain balance. (Photographers use tripods, no duopods or quadrapods. Even a four-legged chair will likely wobble.)

Old Three-Legged Stool of Retirement

Traditionally, the components of the three-legged stool of retirement have been presented as Social Security benefits, Pensions, and Personal Savings (401k, IRA, and other assets).

image via Michigan.gov

This is partially supported by data from the Social Security Administration:

image via Pbs.org

The Qualified Retirement Plans slice combines pensions, 401ks, and IRAs together, making it hard to see the breakdown. The Other Assets include income from other investments like capital gains or dividends from taxable accounts and real estate. We observe that a quarter of all income in retirement is still from working for a paycheck.

Shaping Your Own Retirement Legs

These are just averages, and each of us will have their own path to retirement. If you’re planning on retiring early, you won’t have Social Security yet. For people born after 1960, the full retirement age for benefits is already 67, and expect it to rise even further the younger you are. I think some form of SS will still be around when I’m 70, but who knows.

1. Flexible, reliable, part-time income
We already saw that lots of people over 65 still work. Even though I want financial independence early, I’ve also come to realize that I’ll never stop working. Ask yourself what are you really going to do in retirement? In addition, I think it would be stressful to stare at a big pile of cash and think to myself - “Crap, I hope this lasts for 30+ years!” Maintaining a part-time job and the related skills would help my cashflow, and also ensure that I could return to the workforce if disaster strikes.

I would want a part-time job that could provide some socialization and a sense of improving your community or helping others. Most of my imagined jobs involve teaching, coaching, sporadic technical consulting, or something tourism-related. It can’t be 9-5, and I’d want to be able to take months off at a time. This won’t be easy to find, so I need to start developing more “fun” skills as well as personal relationships now.

2. Personal Savings: Accumulate 30 times annual (non-housing) expenses
Without a pension or Social Security, you’ll need to live off your own savings. If you invest in a balanced portfolio of 60% stocks and 40% bonds, studies have estimated that you can have a “safe withdrawal rates” of about 4% per year. By being a bit more conservative than that, this means accumulating 30 times your annual expenses.

For example, if your annual expenses are $30,000, then you need to save $900,000. This is a very general rule of thumb. Taxes are tricky, but if your income is only $30,000 per year, you won’t be paying very much income tax. Check out the historical effective tax rate over a past 25 year timespan:

image via krusekronicle.typepad.com

For reference in 1995, to be in the bottom 50% (safely in Q1/Q2) your adjusted gross income had to be under $31,000. And this even includes payroll taxes of about 9%, which you won’t have to pay on investment income. The result: very low taxes (possibly under 5%) if you keep your expenses down! Which brings me to…

3. A Paid Off House
I don’t think everyone needs to own a home. However, I happen to enjoy many of the intangibles of owning a home, I love my house and neighborhood, and plan on staying here a while. The cost of this leg can vary widely, from a $1,900 house in Detroit to… where I live, so choose where you want to live carefully.

Financially, owning a home protects you from future inflation and rising rents. You are still subject to property taxes and maintenance costs.

In addition, not having to pay rent means you need less income from savings, reducing your needed nest egg in #2 above. You also pay less taxes. Withdrawing additional money from an IRA, for example, will mean subjecting them to your marginal tax rate, which could be 25% or higher. So to pay $750 in rent, you’d have to withdraw $1,000. Not very efficient.

So there, you have it, my three-legged stool. Yours may be very different - you may like renting, have a pension, own investment property, or have some other sources of income. I still worry about health insurance, but I’m still hopeful that some positive health care reform will occur that will create affordable health insurance for individuals under 65 not covered by an employer group plan.

* You can read more about the last two legs in my related post A Quick & Dirty Plan To Reach Financial Freedom.

Posted in Frugal Living, Real Estate, Retirement, Taxes | 10 Comments »

5-Step Guide to Finding The Lowest Rate For Hotel Rooms

Whenever I’m not traveling on the company dime, I usually run through a checklist to find the lowest price on hotel stays. Let’s say you’re like me and need to find a room in New York City for a few nights, checking in August 30th. I’d like to stay somewhere near Times Square in Manhattan, close to all the sights and action. I’m also leaning towards something reliable and not bargain basement - this is NYC and I don’t want a Hotel Carter experience involving bed bugs, roaches, and urine smells. (Note this for later: At their website, they charge $99 a night.)

1. Check the hotel’s direct website.
If you have some favorite chains due to corporate agreements or loyalty points, then this narrows your search down and you can try and check directly with their website. For example, there is Hilton.com, IHG.com, and StarwoodHotels.com for Sheraton/Westin/W Hotels. Here are some quotes (all prices not including taxes):

Hilton Times Square, $195
Hilton New York, $169
W NY Times Square, $272
Westin NY Times Square, $232
Sheraton Manhattan Times Square, $189
Four Points Midtown, $157

This gives me a benchmark to work from. Another benefit here is that they usually have some form of “Best Rate Guarantee”. Starwood will beat a competing vendor’s price by either 10% or give you 2,000 Starpoints.

2. Try to use loyalty program points.
An extension of the above, at times it is better to redeem your points, or some combination of cash and points. For example, the Westin NY Times Square would only cost 12,000 Starpoints per night, or 48,000 points for 5 nights (avg. 9,600/night). Keep in mind the point redemption even covers taxes, which would turn the $232 listed above to $268 per night. Too bad I’m low on Starpoints after visiting Madrid.

You can earn Starpoints faster and get up to 25,000 bonus Starpoints with the Starwood co-branded American Express card.

3. Use the travel search engines. Expedia, Kayak, Hotels.com, etc.
You know the drill. Actually, you can search most of these all at once through Kayak.com. Sometimes one site like Expedia may have special rates for a block of rooms that aren’t available on other sites.

From Kayak, I note that the prices for the Starwood and Hilton hotels were basically the same. After sorting by price, I see that the Holiday Inn NYC is slightly cheaper at $160/night + taxes. A bit farther away in Midtown East there is the DoubleTree Metropolitan at $149. Not too bad. Oh look, Hotel Carter is discounted at $67. Too bad it doesn’t include the cost of burning your clothes afterwards!

4. Use opaque sites like Hotwire and Priceline.
Finally, there are what are called “opaque” travel sites, because you don’t know the name of the hotel until you’ve paid for the non-refundable room. You must decide only based on the star quality rating and general neighborhood of the hotel, which means you can’t look up reviews easily either. Priceline is done using a reverse auction format, while Hotwire just gives you the price.

On Hotwire, I find that I can get 2-star hotel (examples given are Comfort Inn, La Quinta, Days Inn) for $93+tax ($112 total) in a large and vague area that basically covers everything south of Central Park.

5. Using database sites to reverse engineer the hotel information. Sites like BiddingForTravel and BetterBidding gather information from successful purchasers to remove some of the mystery.

For example, what exactly might be a 3.5 star hotel in the Midtown area? Does Hotwire call the Westin Time Square 4 stars, or 3.5 stars, or 4.5 stars? What if Priceline disagrees? What one site calls Midtown West might be Midtown Central to another.

Well, here is a list of hotels in NYC that Hotwire and Priceline has sold rooms for, complete with star rating and neighborhood. From this list, the only 2* in Central Park listed is WooGo Lincoln Center. Of course this might not be the hotel you end up with, but it is a good possibility and you get a sense of quality (mixed reviews).

In addition, you can find a list of winning bids posted by users, and BetterBidding even has a calendar for easy searching. Here are the applicable ones for my situation:

Hotwire Winning Bids
4*, Central Park, Empire Hotel, $139
3.5*, Midtown Central, Sheraton Times Square, $119
3.5*, Midtown East, Millennium UN, $116

Priceline Winning Bids
4*, Midtown Central, Sheraton NY Towers, $125
4*, Midtown West, Sheraton NY Towers, $115, $110, $126
4*, Times Square, Westin TS, $169

Putting things together, if Hotwire is offering me a 3.5* hotel in Midtown Central on these dates, it is most likely be the Sheraton Times Square. Or, in the same price range, I could likely get the Sheraton NY Towers. After reading some reviews, I chose the Times Square location. The prices keep fluctuating, but when I was searching it was at $113. That’s a pretty good price for a solid hotel.

To be the most aggressive, I would go onto Priceline and bid about 20% below the Hotwire price for a 3.5* hotel in the Times Square region, say $95. I don’t want to bid too low, because each time I get rejected, I must change a search parameter (star rating, neighborhood) to bid again. Also, I run the risk of getting another 3.5* hotel that I don’t like as much.

So I held my breath, used Hotwire… and got it. Whew! In the end, I got what I wanted at 40% off the “guaranteed” low price, $113 vs. $189 per night at the Sheraton Times Square.. Over few nights, that’s hundreds of dollars in savings.

To think, if you did no research, you might end up with the Hotel Carter for $99/night! If you have tips to improve this process, please leave a comment below! I know I could try hostels or even couchsurfing and such, but that’s not what I was looking for on this trip.

Posted in Frugal Living, Travel | 25 Comments »

The MPG Illusion: Comparing Fuel Efficiency Can Be Tricky

While researching the benefit of swapping one of my 21 mpg cars for a 31 mpg Honda Fit, I came across a site called the MPG Illusion. The easiest way to illustrate their point is via a quick quiz.

Pop Quiz
The full quiz and explanation is here. But the very core of the argument can be summed up below. Assuming that both cars are driven 100 miles per week:

Without breaking out the calculator, you might think that having 50 mpg and 10 mpg together might average out to about 30 mpg, beating out the two 20 mpg cars. The problem is that using miles per gallon is not intuitive. Why?

Miles per gallon (MPG) is more useful for things like calculating the range of your vehicle.

Gallons per mile (GPM) would be better for estimating the actual cost of driving your car, since gallons is directly proportional to dollars spent.

Okay, a little math. Getting 10 miles per gallon is the same as saying you use 10 gallons every 100 miles. 20 mpg means 5 gallons every 100 miles. 50 mpg means 2 gallons every 100 miles. So in one week, the Option 1 uses 10 gallons per week. Option 2 uses 12 gallons per week. Option 1 wins!

If you remember gallons = $$, this chart below shows (also from MPG Illusion), the savings you get from going from 10 mpg to 20 mpg is a lot greater than going from 30 mpg to 40 mpg. In fact, going from 16 to 20 mpg can save as much gas as the shift from 31 to 50 mpg.

Higher mpg numbers are still better, but the benefit is diminishing. Going for the hybrid might get you the most “green” points, but you might be getting most of the benefit for a lot less money by simply switching to a more affordable car with a decent mpg bump. Is it almost used Honda Fit time? Run the numbers for yourself at this GPM calculator.

(Does this make the “Cash for Clunkers” program more palatable? I don’t know, they could still raise the minimum improvement amounts.)

Posted in Frugal Living | 20 Comments »