Personal Finance

Should you insure that trip or TV? Here’s what an economist would do

You can buy insurance for practically anything these days.  Planning a vacation to France? Your airline, travel agent or even hotel will likely offer trip insurance in case you need to change your dates or cancel. Going to the casino? You can insure your blackjack hand in case it’s not your lucky day.

Recently, I was even asked if I wanted to pay US$20 to insure a pair of $80 ice skates beyond the three-month warranty or $12 to protect a $40 television cable for a “lifetime” of protection – a quarter of each product’s price in exchange for extra “peace of mind.” But is it really worth paying the extra money? Here’s how an economist like me would answer that question. Continue reading Should you insure that trip or TV? Here’s what an economist would do →

Is there a simple way to reduce credit card fraud?

Credit card fraud is a major problem, which costs billions each year.  Banks and credit card issuers have tried a number of ways to reduce the fraud.  Recent examples are the rollout of cards with computer chips.  Cards with chips are more secure for in-person transactions.  Unfortunately, chipped cards are no more secure than older cards without a chip for remote transactions, such as paying for something over the phone or buying something on the Internet. Continue reading Is there a simple way to reduce credit card fraud? →

Do Ethical People Finish Financially First or Last?

It is almost Christmas time and the song “Santa Claus is coming to town” keeps playing over and over.  For me the key lines of this ear-worm are “He knows if you’ve been bad or good so be good for goodness sake.”  The song clearly states doing the right thing leads to more gifts on Christmas day.

I have been puzzling over these lyrics for years and wondered if the lines are true.  Outside of Christmas does being ethical and honest lead a person to riches or poverty?  While the debate has lasted a long time, only recently have actual data been gathered that can answer the question.  My recently published analysis contained results that surprised me; only a few ethical and unethical acts were associated with financial changes. Continue reading Do Ethical People Finish Financially First or Last? →

How Economics Helps You Save Money When Traveling Internationally

The number of international travelers is soaring. Many travelers need different currency as they arrive in new countries.  In the past, travelers using an ATM, credit or debit card were simply charged for purchases and withdrawals in whatever currency the locals used.  For example, U.S. travelers to France were charged in Euros when they used their credit card in Paris.

Recently, instead of being simply charged in the local currency many travelers are being asked if they want to pay in their home currency.  Companies offering the service call it “dynamic currency conversion.”  For example, some U.S. travelers to France are now asked if they want to complete transactions in dollars.

The change is occurring because ATMs and credit card terminals now have the ability to check where a card was issued.  Then international travelers can be asked whether they want to use their home currency for their transactions.  The question seems innocuous, but agreeing to use your home currency in a foreign land can inflate the cost of every purchase. Continue reading How Economics Helps You Save Money When Traveling Internationally →

Could gambling be the secret to saving when rates are so low?

Many interest rates in the U.S. are close to zero and even negative in some parts of the world, like Japan.

Not unexpectedly, U.S. savings rates are also quite low as individuals ask themselves: “Why save a lot of money at a bank if I get no return?”

This situation has many commentators wringing their hands because low savings rates are a problem for many reasons.

Individuals who don’t save face spending their golden years of retirement in poverty, instead of plenty. In addition, people with no savings face financial problems and potential ruin when unexpected large expenses occur and cannot help out their children with large bills like college or a down payment on a first home.

In the absence of a rapid increase in interest rates, which appears unlikely, is there anything we can do to change this problem and get people to save more?

As odd as it may sound, gambling could be part of the answer. Continue reading Could gambling be the secret to saving when rates are so low? →

Is It Time to End Tipping?

Today’s Wall Street Journal (Feb. 29, 2016, page R7; online version is here) printed  an article I wrote.  They asked me to be part of a debate on “Should tipping be eliminated in restaurants?”  I took the “yes” side.  This is a follow on article from the piece I wrote a year earlier in February 2015 (see the original piece here) that advocated the same idea. Continue reading Is It Time to End Tipping? →

Winner of $1.5 billion Powerball Faces Long Odds – But even longer odds of keeping it

The U.S. Powerball lottery is holding a drawing this week for a jackpot that’s already reached US$1.5 billion. That’s after the 18 drawings held since November failed to yield a winner, causing the grand prize to swell to this record sum.

This jackpot is drawing such attention that more people are buying tickets, and even the lottery’s own projections are changing rapidly. During the weekend the payout was an estimated $1.3 billion. Monday it was revised to $1.4 billion and on Tuesday it hit $1.5 billion. Continue reading Winner of $1.5 billion Powerball Faces Long Odds – But even longer odds of keeping it →

Why do stocks fall when the Fed considers raising interest rates?

A top-level committee of the Federal Reserve, the US’ central bank, is meeting this week to discuss when it should begin raising interest rates.  Why do stock prices fall when a country’s central bank boosts interest rates?

Continue reading Why do stocks fall when the Fed considers raising interest rates? →

Three reasons why most of us shouldn’t worry about the global stock market meltdown

On Monday, the world’s stock markets continued to fall after suffering steep losses the previous week.  The Dow Jones Industrial Average, one of the most widely followed indexes, opened for trading by dropping more than 1,000 points in the first six minutes, or about 6.5%. This thousand-point drop was the largest intraday plunge in the index’s history. Continue reading Three reasons why most of us shouldn’t worry about the global stock market meltdown →

Why you shouldn’t fear your finances (you’re probably richer than you think)

Do you procrastinate about taking care of financial matters in your life?  Recently a fascinating article about financial procrastination appeared online. The author publicly admitted that “after years of procrastinating,” he finally logged on to his retirement account. It took him years to get around to dealing with it because the entire task made him anxious. Continue reading Why you shouldn’t fear your finances (you’re probably richer than you think) →

Should Tipping Be Eliminated?

Tipping is widespread across North America. People tip taxicab drivers, hair dressers and hotel doormen. However, the place where the most people tip is in restaurants and bars. The problem for many customers is that tipping is confusing since tipping rules are not clear and payments are arbitrary. Many people agree the “standard” tip is 15%. However, on what amount do you tip 15%? Is it the total bill? Is it the total bill excluding tax? Is it the total food bill, with expensive bottles of wine tipped at a separate rate? Many people agree the tip rate for large groups should often be higher, but how many people comprise a “large” group? Most importantly, tipping means doing math, which is a difficult task for some people and a challenging task after drinking alcohol in a bar or restaurant. Continue reading Should Tipping Be Eliminated? →

Why Don’t More People Have Emergency Savings?

Financial advisers and the media (e.g. Time and NY Times)  suggest the typical person should have 3 months of income saved in case of emergency. Emergency funds are important because people without these savings have no fall back when an unexpected bill, reduction in income or incredible opportunity arises. While having emergency savings is a good idea, relatively few people have this backup. Why don’t more people reduce their financial risk and put money aside? Continue reading Why Don’t More People Have Emergency Savings? →

How Did the Famous Economist John Maynard Keynes Become Rich?

This past week I was in England and I had the privilege of looking through John Maynard Keynes’ personal papers stored at Cambridge University.  Keynes was a famous Englishman who helped lay the cornerstones of modern macroeconomics and helped create the modern financial system.  Keynes’ archive is amazing because the man was a pack rat.  He kept everything.  You can look at some of his golf scores, check book stubs, and read his personal letters to friends, family and many of the famous people alive from the 1920s until World War II.  Among the things I examined were the ledgers where Keynes recorded his personal purchases and sales of stocks, bonds, commodities and currency.  (It is a real treat to hold the books written in the great man’s own handwriting.) Continue reading How Did the Famous Economist John Maynard Keynes Become Rich? →

Is There a Limit to How Much a Person Should Tip?

I was cleaning up my desk when I came across the picture at the bottom of this blog entry.  The picture is of a professional sports team’s bar tab after they won the league’s championship.  The service fee was 20% of their bar tab.   Twenty percent doesn’t seem like something worth blogging about, but this team ended up paying $25,000 service fee for 2 hours of just drinking and not eating a single bite of food.   Professional sports teams do crazy things after winning championships so having a giant bar tab is not unusual.  What was unusual was the team in addition to drinking lots of beer and whiskey, drank one bottle of very rare champagne that cost $100,000.  The waitress didn’t  open the bottle or serve it, that was done by the players themselves.  However, by having one single bottle of champagne the players’ tip jumped from a $5,000 service fee to a $25,000 service fee.  The huge increase led me to wonder, “Is there a limit to how much a person or group should tip?” Continue reading Is There a Limit to How Much a Person Should Tip? →

Inheritance Taxes: What Does the U.S.A’s Richest Man Think of Them?

Bill Gates is currently the U.S.A.’s richest man with a net worth of about $80 billion dollars according to Forbes magazine.  Mr. Gates has been at the top of the wealth charts for decades.  As the wealthiest man he is the person most impacted by any kind of inheritance tax since his estate will pay the most when he dies. What does Bill Gates think about inheritance taxes? As I’ll show below, Mr. Gates thinks that inheritance taxes are a good idea. Continue reading Inheritance Taxes: What Does the U.S.A’s Richest Man Think of Them? →

Would You Accept A Negative Interest Rate?

The Wall Street Journal reported yesterday that “The yield on the U.S. Treasury bill maturing on Oct. 2 traded at negative-0.01%.”  The negative rate means that the USA’s government is paid to take out loans and buyers of the treasury bills are charged for saving money.   This situation is similar to someone asking you if they could borrow $10 today with the promise that they will pay you back $9 tomorrow.  You know ahead of time it is a bad deal that will cost you money.  While some professional traders knowingly made money losing trades yesterday, would you ever accept a negative interest rate?

Continue reading Would You Accept A Negative Interest Rate? →

Why Would Olive Garden Offer People the Chance to Eat Unlimited Pasta for 7 Weeks?

This past Monday Olive Garden, a chain of 800+ locations that that serves Italian food began offering passes that gave 1,000 people the chance to eat as much pasta as they wanted for seven weeks.  The passes cost only $100 and entitled the holder to any kind of pasta dish.   Plus, the pass holder and everyone who ate with the pass holder got unlimited soda.  A few days before the promotion I gave a lecture that emphasized well- run companies focused on making a profit.  One of my students asked “Why would any business do something this crazy, since Olive Garden was going to make a loss, not a profit, on every pass sold?” Continue reading Why Would Olive Garden Offer People the Chance to Eat Unlimited Pasta for 7 Weeks? →

Is it Better to Pay off the Mortgage or Save for Retirement?

I was listening to a financial radio show where listeners call in their questions.  A man called in with a frequently asked question; “my wife and I have a 30 year mortgage at 3.5%, we have a little bit of extra money now and were wondering if we should pay down the mortgage faster or put the money into our retirement accounts?”  The financial expert gave the standard advice and said “fund the retirement accounts.”  He then gave a detailed explanation why funding a retirement account was much better.  Unlike most callers this one had some guts and told the expert he was not convinced and then hung up.  The caller’s negative reaction got me thinking; is the standard advice wrong?

Continue reading Is it Better to Pay off the Mortgage or Save for Retirement? →