Watson Inc http://www.roshawnwatson.com Personal Finance News and Commentaries Sat, 23 Feb 2013 19:20:23 +0000 en-US hourly 1 How to Buy Happiness http://www.roshawnwatson.com/how-to-buy-happiness/ http://www.roshawnwatson.com/how-to-buy-happiness/#comments Tue, 16 Oct 2012 07:00:49 +0000 http://www.roshawnwatson.com/?p=823 By: Roshawn Watson

Money doesn’t buy happiness, or does it? Actually, it may be overly simplistic to presume that money doesn’t influence happiness. For example, it is a fact that there are psychological and biological (including dopamine and insula) rewards associated with spending money, particularly if you are a spendthrift. However, we also know not all purchases are created equal. For instance, if you derive pleasure (rather than pain) from your purchases, do you get a greater sense of reward from a series of small purchases or from a single big purchase? According to numerous studies, the answer depends largely on the type of purchase(s) you are making. Today’s article will discuss how you can buy happiness by augmenting the type of purchases you make.

Related Article: Tightwads and Spendthrifts

Material Purchases Cause Stress

Did you know that there is an emotional burden to making material purchases. Apparently, purchasing trinkets and doodads (such as iPads and smartphones) are associated with increased stress and temporary satisfaction. This happens for numerous reasons. First, we’re more likely to interrogate such purchases to ensure that we get the best deal. With the abundant options available, this in itself can be an exhausting process.

It is the preoccupation with possessions, more than anything else that prevents us from living freely and nobly. Bertrand Russell

Additionally, after we make material purchases, if we subsequently find out that we missed better options, our happiness often will quickly give way to buyer’s remorse. For example, I remember looking at laptops last year. I saw what appeared to be a fabulous deal. It had great reviews. Amazon was the most competitive with respect to pricing. I was just about to pull the trigger UNTIL my wife happened to show me the Target sales paper from 2 weeks earlier. The computer, MY computer, was on sale for 25% less. Of course, Target’s sale had already come and gone. Amazon was now the best deal, but just I couldn’t purchase it anymore, not at THAT price.

Interestingly enough, some data suggest that we are even prone to jealousy of those who capitalize on deals that we couldn’t. Additionally, material purchases can adversely affect us biologically. For example, such purchases provide us with anticipatory highs. They literally activate part of the brain’s reward circuitry. You would think that this would be a good thing; however, the problem is upon their obtainment, our desire for them is satiated, and the “high” dissipates. This phenomena is known as hedonistic adaptation, which is when the joy and excitement obtained from purchases diminish with time. Once it loses its novelty, the thrill is gone as well. Thus, many thrillseekers repeatedly make material purchases in order recapture this pleasure.

Related Article: Is Extreme Frugality for You

Experiential Purchases

In contrast to material purchases, experiential purchases (purchases for experiences) are less stressful, are remembered fondly, and satisfy important needs that bring lasting happiness. When we purchase experiences, we are less likely to critically critique them before, during, and after the purchase. We recognize their uniqueness and value the ways that they enrich our lives. It’s is why people will pay hundreds of dollars to go to concerts when they can instead buy the cd for less than $15. We are likewise less prone to compare experiential purchases to other purchases, as we allow them to stand on their own.

A mind that is stretched by a new experience can never go back to its old dimensions. Oliver Wendell Holmes, Jr.

Moreover, experiential purchases are often remembered more fondly afterwards than during the actual experience. How often have we reframed experiences that we previously took for granted as we recognized just how truly remarkable they were? For example, people often relabel their high school or college years as “their best years,” but how many felt that way during that often awkward time.  Experiences also provide memory capital for re-living the moment, so they are not as subject to the same boredom we experience after we get material purchases. They additionally appeal to our psychological needs. Experiential purchases, such as going out to dinner or the movies and even going on that special vacation, satisfy higher order needs.  According to the need theory , we crave vitality (feeling alive) and social connectedness, and that’s precisely what experiential purchases tap into. Experiential purchases provide us with the greatest sense of well-being. Material purchases simply pale by comparison!

Incidentally, not all types of experiential purchases are the same. Experiential purchases that lend themselves to sharing , rather than individual experiences, tend to result in greater happiness.

Small Purchases or Big Purchases

New data suggesting that a series of small purchases is associated with a similar degree of happiness as a single big ticket item must be viewed within the context of the “material versus experiential purchases” framework. The prevailing thought is that smaller (low cost) purchases, such as dinner and a movie, may more frequently lend themselves with shared experiences, which in turns brings happiness. In the study, participants were most concerned with who they would share the experiences with for smaller (lower cost) purchases. However, for large (high cost) purchases, participants were more concerned with the types of purchase and the prices, which makes sense but also may suggest that these purchases may lead to less happiness. Or course, big ticket purchases can also be for shared experiences, such as family vacations. Thus, review the study results with these points in mind.

I love sharing my stories and experiences with people and connecting to them on both a humorous and emotional level. Tori Spelling

Concluding Thoughts

The takeaway is that it is not the dollar amount that is associated with happiness, despite  popular belief. While it is true money buys fun, fun is not the same thing as happiness, and the amount of fun one has is not necessarily proportional to the amount you spend. The perfect example is how Trent (The Simple Dollar) loves board games. Dave Ramsey has mentioned that he does as well. Such games don’t cost much money but are big on interaction and can be done very frequently, so my guess is that this “small” purchase results in a lot of happiness.

Moreover, be particularly careful how you frame your purchases too. For example, if you frame a small material purchase, such as buying a new cd as hours of a pleasurable experience rather than obtaining someone’s latest release, you are more likely to derive greater join from it. Who is to say that you couldn’t have a rich life on a small budget, provided that your budget includes meaningful experiences that provide you with a deeper connection with people you care about?

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Is Social Mobility Fact or Fiction? http://www.roshawnwatson.com/is-social-mobility-fact-or-fiction/ http://www.roshawnwatson.com/is-social-mobility-fact-or-fiction/#comments Sat, 06 Oct 2012 11:37:18 +0000 http://www.roshawnwatson.com/?p=817 By: Roshawn Watson

Is America the land of exceptional opportunity? I certainly think so. Where else can someone who is remarkably poor, such as Farrah Gray, wind up a millionaire before the age 15? It may be somewhat naive to believe his story is possible just ANYWHERE. The problem is this doesn’t prove that social mobility is obtainable on a significant scale in America and similarly industrialized nations. The data may forever change your view of the importance of wealth to your future . Let’s explore whether opportunities for social mobility for the masses are fact or fiction.

Focusing on Outliers Obscures the Real Issues

One of the first things that I had to suppress when looking at social attainment research was my urge to provide countless examples of people who made it against all odds. After all, 8 out of 10 millionaires are first generation affluent.The problem using these as examples for social mobility for the masses is that they are people most would consider “outliers:” an extraordinary deviation from the norm. Outliers are remarkable because they are NOT what you would expect given the circumstances. Outliers provide a great deal of inspiration and insight into the attributes of those who are different, which is valuable, but the fact that some people beat the odds doesn’t disprove the fact that the odds exist and are stacked against people who don’t have wealth.

The fact that some people beat the odds doesn’t disprove the fact that the odds exist and are stacked against people who don’t have wealth.

Perils of Social Mobility Research

Now, most social attainment research focuses on parental income, education, and occupation. As we discussed in Does Wealth Reduce Compassion?, there are many perils to ignoring wealth as a determinant of financial behavior. Income serves as a poor proxy of wealth because  building substantial wealth is significantly more difficult than obtaining a high income. Thus, the character traits and values of the wealthy differ from drastically those of the merely income affluent.

Income is simply a poor proxy of wealth because building substantial wealth is significantly difficult than obtaining a high income. Thus, the character traits and values of the wealthy differ drastically from those of the merely income affluent.

Related Article : Does Wealth Reduce Compassion?
The fact that wealth is omitted in the majority of social attainment models is not novel. It is often not included because reliable wealth data is a lot more sparse than income data. Also, wealth can vary more, as asset values (i.e., portfolio, real estate, and business values) fluctuate. Net worth can be subjective; for example, many businesses, as pillars of building wealth, are privately held, making their valuations anything but straightforward. Additionally, wealth is private, perhaps even more private than income to some people.

Wealth and Opportunity

Despite these challenges, the reason why inclusion of wealth is paramount, particularly in social attainment research is that wealth buys opportunities and protects us. It provides access to better health care and education and insulates us against economic instability including job losses. However, sociologist Fabian Pfeffer argues the implications of wealth on social mobility are far more significant and subtle than would be predicted based on income, partly because the distribution of wealth is far more unequal than the distribution of income (Keister and Moller; Wolff 2006). Moreover, he argues that wealth creates inequalities that are independent of AND more important than any other familial socioeconomic characteristic including income. Thus, even if you took income out of the equation, parental wealth would still confer a significant benefit to children. Studies by Conly (1999, 2001), Morgan and Kim (2006). Haveman and Wilson (2007) and Belly and Lochner (2007) confirm the educational advantage of children from families with money.

Wealth as a “Transformative Asset”

You may wonder how can this be? In 2004, Thomas Shapiro proposed viewing parental wealth as “transformative assets that lift [children] beyond their own achievement.”

The purchase of a home has central implications to the wealth one accumulates. We know, for instance, that most millionaires purchase homes in neighborhoods where their wealth exceeds that of their neighbors by six fold. However, your home also affects the educational opportunities available to your children. Parents often select neighborhoods based on the reputation of the school districts. In other words, where you live affects the quality of your education.

De-facto Purchases of Educational Resources
Another example of how wealth affects available opportunities is with the purchases of educational resources. In his book Outliers, Malcolm Gladwell evaluated Johns Hopkins University sociologist Karl Alexander’s research about the achievement gap. He looked at the test scores of first through fifth graders of low, middle, high socioeconomic status (SES). Although there was a modest and proportional improvement of grades associated with better SES during the first grade, the gap was more than doubled by the time the students reached fifth grade. However, the raw numbers are deceiving. He also tested the students before and after summer vacation and compared those with the before and after the school year results. The data then told an entirely different and more accurate story. During the school year, there was no discernible differences between how much low SES students learned compared with those of high SES. However, during the summer the students of high SES status had a such a substantial improvement in their overall test scores that the differences were large enough to account for for the overall achievement gap noted in the fifth graders. Thus, we cannot diminish the impact of de-facto purchases of educational resources by concerned parents who will leverage their wealth for sake of their children.1

Postsecondary Education
Given that tuition costs continue to rise disproportionately to inflation, it is no surprise that students tuition and living costs are often not met by parents’ disposable income. Even if students assume debt to meet the gap between school costs and their family’s wallet, student debt is associated with a lower likelihood for postgraduate education and decreased quality of life including delayed marriage, delayed starting family, delayed moving out of parents house, and stress from creditors.  Nobel laureate and Columbia University professor Joseph Stigliz recently pointed out that a mere “8% of students at America’s elite universities come from households in the bottom 50% of income” even though many of those universities are “‘needs blind’— meaning admission isn’t predicated on your ability to pay.” Thus, familial wealth appears to play an undeniable role in college education as well.
Related Article : Stolen Life

Labor Market Advantages
Wealth also provides safety nets (both tangible and psychological). The tangible safety net wealth provides is typically most apparent when one is out of work. If your provision is not directly associated with your current production, then you tend to make different choices. For example, your reservation wage, the minimum you require to do a job, will likely be higher. If offspring are supported by parental wealth, their job searches can be maintained for longer until they receive an “appropriate” job offer. Additionally, the psychological safety net allows young people to explore careers that may be high-risk but also provide high rewards for success.

Related Article : What Makes You So Special?

Concluding Thoughts

“There’s not much mobility up and down. The chances of someone from the top [income bracket] who doesn’t do very well in school are better than someone from the bottom who does well in school.” — Joseph Stigliz

It is hard to argue with the above statement when I can think of so many celebutarts who qualify for doing better than those who did well in school. Also recall that most millionaires are C students (gasp, horror!). That said, I don’t think this research neatly fits in any political agenda. For example, Pfiffer had another surprising observation: the same wealth inequality and social mobility problems observed in the US were also present in Germany, where higher education has been tuition free (I hear this is changing) and many living costs are covered by need-based aid. Germany has also had very generous unemployment benefits for several years that have served as a tangible safety net for the unemployed, and Germany’s labor market had been relatively stable compared to the US, so the psychological safety net may not be as much of an issue there. Based on these dynamics, one would expect that these government provisions and this economic environment would diminish the impact of parental wealth in Germany, yet this is NOT supported by the data. All we can conclude is that a disparity in opportunities exist despite government intervention and a more stable job market, work to provide children with the best opportunities we can, endeavor to be outliers, and stop discounting the role wealth has on our wellbeing and that of our families.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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Even Adults Need Those “Look What I Did!” Moments http://www.roshawnwatson.com/even-adults-need-those-look-what-i-did-moments/ http://www.roshawnwatson.com/even-adults-need-those-look-what-i-did-moments/#comments Fri, 28 Sep 2012 07:00:38 +0000 http://www.roshawnwatson.com/?p=803 Child: Look at what I did mommy!
Mom: Wow, that’s nice dear…good job!

It is funny how as we grow older, we outgrow many things such as bibs, recess, training pants, and naptime. However, one constant appears to be our need for approval. Even as adults, psychologists note that we have an overwhelming desire to be affirmed and judged competent. What’s interesting are the major implications this desire  have to our wallets.  While it drives some of us to consume, it motivates others to produce.  Today, we look at some different ways our need for approval can affect our wealth.

Approve Me

As we develop cognitively, our self-awareness increases, as does our dependency on the opinions of others. According to research by the late Cooley (1903) and Mead (1934), we begin to construct our concept of self by incorporating the perceived opinions of others into a “generalized other.”  We decide whether to esteem ourselves highly or lowly by gazing into a social mirror. The ‘self’ that is reflected back is comprised of what we believe are the collective opinions of others, “the generalized other.” Now, this isn’t necessarily done consciously, so we often don’t realize how much of our concept of self is influenced by our social circles. However, numerous studies suggest that  praise, approval, and support from peers, friends, and family members are powerful predictors of our global sense of self-worth. Notably, of all the types of support we can get, approval from others was the most highly correlated with self worth.

Related article: Why You NEED Blow Money

Conspicuous Consumers

When you live in a luxury house, you are also buying a luxury lifestyle. Included in this lifestyle are the pressures to redecorate frequently, join the country club, and send your children to private schools. Your property taxes continue to skyrocket, along with the cost of utilities and insurance. Plus the prices of nearby services tend to be higher, from grocery stores to dry cleaners. Thomas Stanley

This desire for approval causes some of us to conspicuously consume (spend like money is going out of style) because of what we believe others will think about us for making such purchases. That’s why some of us will opt for the flashier cars or outfits. It is why we sometimes will buy certain homes (surprisingly, it is not purely for the better school districts). In fact, some rich kids and wannabes will even over-disclose details of their excesses to the extent of posting images of their receipts on public websites just to “prove” their fortunate financial status, which is known as “receipt porn”. The status labels are a way of announcing to the world “I’ve made it,” “I’m still there,” or at least “I’m alright”; they allow us to gain or maintain the approval of others, at least temporarily.

I remember watching an episode of the Montel Williams Show where a financial expert blasted a poor kid for having a pair of new and pricey kicks (shoes). His rationale was obvious: the money spent for those shoes could have been put to so much better use elsewhere. The financial expert was VERY indignant about the poor choice. “Why would you purchase this?” he said. Montel responded in a way that I will always remember. He mentioned all of the terrible things that boy had survived; his mere presence, after all of that, was a testimony of his resilience. Although the kid didn’t have much, those shoes provided him the external validation that allowed him to continue holding his head high. Thus, while it was clear that name brand shoes were not necessary, they served as his lifeline to sanity. Dear friend, it is NOT “personal finance” unless it is “personal.”

Related article: Broke People Afford Everything

Of course not all indulgences are bad for your wallet, as we discussed for the last 2 weeks. You don’t necessarily have to give up your lattes to achieve financial security, and your entire financial plan may be in jeopardy if you deprive yourself entirely. Thus, before one can truly determine whether financial pathology is driving purchases, it is important to appreciate the underlying motivations for spending, not just the dollar amounts.

It is not “personal finance” unless it is “personal.”


Of course, everyone is not oriented to conspicuously consume. For example, the majority of the millionaires are relatively frugal, even with respect to the typical American household. Does this mean that they are super human: they are not susceptible to the same desires as nonmillionaires? That’s not even close. Just because most millionaires choose NOT to acquire artifacts simply to denote financial superiority doesn’t mean that their desire for approval wanes. The desire just manifests in a different way.

Related article: When Lattes are Not Your Problem

I believe this desire is often channeled into building. It is not coincidental that most millionaires own businesses, nor is it an anomaly that the top 2 millionaire-producing occupations are professions requiring considerable time to even gain entry into  (physicians [10.01%] and lawyers [8.85%]). Being able to build thriving businesses or careers is frequently a source of great esteem for millionaires, just as having designer duds and symbols of high status provide esteem to conspicuous consumers. Unfortunately, this is where the similarities end because whereas the desire for approval increases wealth significantly for the builders, it eviscerates the wealth of the conspicuous consumers.

The link between approval and production in builders is why some become taken aback when they feel they are not being allowed to  “own” their victories: diminishing the self-effort and sacrifice involved in creating wealth, businesses, and personal brands is akin to assaulting a critical part of their esteem.

Before one can truly decide whether financial pathology is driving purchases, it is important to appreciate the underlying motivations for spending, not just the dollar amounts.

Closing Thoughts

Just because you no longer hang with your school social circle, doesn’t mean that you are not unknowingly being influenced by a desire for acceptance. Whether the desire manifests in terms of professional competence, heroic efforts on the domestic front (super mommies and daddies), building extraordinary businesses, or altering your attire to present yourself similarly to your peers, it is unlikely that all your actions are indifferent to a social mirror.  Rather than allowing this desire to diminish our wealth for fleeting glances of approval, channel it into something productive. The next time you say “Look at what I did,” let it be to announce something significant.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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4000 Millionaires Don’t Pay Taxes – Uncommon Money News (Round Up) http://www.roshawnwatson.com/4000-millionaires-dont-pay-taxes-uncommon-money-news-round-up/ http://www.roshawnwatson.com/4000-millionaires-dont-pay-taxes-uncommon-money-news-round-up/#comments Fri, 28 Sep 2012 04:00:16 +0000 http://www.roshawnwatson.com/?p=810 By: Roshawn Watson

An estimated 4000 households with incomes >$1 million don’t pay income taxes, and 14,000 households making between $500,000 and $1,000,000 pay no income tax. Of course, these numbers are totally dwarfed by the number of households earning <$100,000 paying no taxes (>99% or >75 million households). Oh the “joys” of our tax code never cease!

21 Ways Rich People Think Differently (Yahoo Finance)

Don’t Spend to Impress – I actually read this after I wrote today’s post, but these words are so truly and directly applicable to your wealth accumulation (The Simple Dollar)

People Want the Real You – Chris reminds us that people want us… not a caricature of ourselves…the authentic us – (Chris Brogan)

Would you live in a 120 square foot home to save money? (Yahoo Finance) – Some sacrifices are just too great!

I love the Jim Collins reference in this practical article Taking Your Family’s Finances from Good to Great (Sound Mind Investing)

Dr. Daniel Crosby gave a great Ted Talk about biases common to people in love and those making financial decisions

Jefferson (editorial assistant by Michelle) breakdown some sad retirement stats for the US in I don’t want to eat dog food when I retire (See Debt Run)

Maria discusses how to determine the level of insurance to carry. Insurance is the kind of thing that everyone hates until they need it. (The Money Principle)

Do you think about your finances like a business? Joe provide some spot-on  wisdom about how to fix your get out of debt plan through objective assessment and planning. (Free Financial Advisor)

Lance watches ‘Big Brother’ and weighs the financial implications of appearing on the show
(Money, Life, and More)

Andrew talks about a investing in the rail industry (Disclaimer: This was chosen for educational value, as we own NO individual stock)

Yakezie Carnival

Carnival of Personal Finance
Carnival of Personal Finance #377 ( Editor’s Pick )
Carnival of Personal Finance #378 ( Editor’s Pick)
Carnival of Personal Finance #379
Carnival of Personal Finance #380

Festival of Frugality
Festival of Frugality #355 ( Super Editor’s Pick – Entire Carnival Based off of Why We Worry About Money!!!)

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Why You NEED Blow Money http://www.roshawnwatson.com/why-you-need-blow-money/ http://www.roshawnwatson.com/why-you-need-blow-money/#comments Thu, 20 Sep 2012 07:00:38 +0000 http://www.roshawnwatson.com/?p=792 By Roshawn Watson

There’s an EPIC battle going on. The stakes have never been higher. Your very destiny hangs in the balance. Both sides have experienced warriors, and only ONE will emerge victorious.

I’m speaking of the battle between your self-control and your desires. One of my biggest exposures to this conflict occurred when I was in debt. I went contrary to much of what I read and heard. I insisted on retaining some “blow money” (discretionary funds). In order to achieve my aggressive timetable for paying off my debt, I counted blow money vital. Now, the amount allocated for this was marginal: the pitiful crumbs that I kept for myself paled in comparison to what I gave my debtors (mainly Sallie Mae) each month. However, it provided a degree of balance in an otherwise unbalanced process. I found blow money necessary to maintain my tenacity over the long term. It was my lifeline to normalcy. To this day, I consider blow money an important part of my budget, and to my delight, I recently read a great series of studies supporting why you should have blow money too!

Constant Denial Depletes Your Energy

I know few people who love budgeting. We tolerate budgets. We abide by budgets, but we don’t generally love budgets. Budgets typically require discipline, and until it becomes habitual, budgeting can be downright dreadful. We will be painfully aware of every sacrifice. We will count the days until the misery budget ends. It will require our continual effort. The whole process will feel unnatural. That’s because it is unnatural. If you have budgeted and failed, find solace in the fact that MAYBE YOUR BUDGET WAS RIGGED TO FAIL FROM THE BEGINNING. I know that is a bold statement, but hear me out. Understanding the implications of the following eight words will save you MUCH pain related to budgeting, dieting, and any other activity the requires you to deprive yourself.

Constant denial depletes energy needed to resist temptation.

In other words, you may look the same when you are tired as you do when you are fresh (excluding the dark circles underneath your eyes); however, studies from Baumeister and others have now repeatedly shown that you are NOT the same person. Your will and strength to persist can diminish with constant conflict. Tired eyes rarely see a bright future.

Related Article: How to See a Bright Future

We see many applications of this principle. From detectives wearing down the wills of compelling suspects to divulge incriminating details of their alleged crimes with lengthy interrogations to grocery stores placing the most delectable treats right by the checkout counter, the concept of resource depletion has tangible implications to your overall wellbeing, your waistline, and YOUR WALLET.

One of the things that I found the most interesting about this research was that it apparently did not even matter what area a person was trying to exercise control in, if he had already performed acts of self-control, doing so diminished his ability to exercise control in the future. For example, researchers looked at subjects’ abilities to watch a comedy without permitting themselves to laugh, to resist chocolate chip cookies, to use a handgrip, and to persist in the face of failure on unsolvable anagram.

With respect to budgeting, this means that: without blow money, you are more likely to spend impulsively. After all, the very resources you would use to resist impulsive spending would be depleted through prior efforts to tame your spending beast (aka, prior denials).

Blow Money Can Replete Your Energy

One of the biggest reasons why having “blow money” works is because it allows you to strategically deviate from the savings, investing, and (sometimes) giving script with minimal, if any, harm to your overall goals. Conceptually, I consider blow money the same as having weekly “free day” as a part of a healthy diet. As anyone who has been on one can attest, diets can be very difficult to abide by. Indeed, the diet industry would not be a $60 billion industry if diets were easy. Some of the best advice I have heard regarding dieting is to allow yourself a “free day:” a day when you can eat anything in any quantity you want. Part of the rationale behind the free day is that: if you had to eat healthy ALL the time, even when many of your friends and family are chowing down on all sorts of deliciousness during weekend outings, holidays, and special occasions, then your diet is impractical. One reason is that such a diet isolates you, and that in itself weakens you. The same is true for your budget. If your budget alienates you from any fun, what incentive would you have to stick with it? Another reason this diet sucks is because you would become MORE sensitive to the effects of high-sugar, high-calorie treats. Believe it or not, I’m not just referring to the psychological impact of such deprivation. Biologically, data in rats suggest that deprivation leads to increased sensitization to bad foods. If impractical diets are unsustainable, why would anyone think impractical budgets would work?

Diets are to eating plans, what budgets are to spending plans, and if having an free day, where you enjoy yourself, is considered a vital part of a reasonable diet, then shouldn’t the same apply to budgets?

Interestingly enough, I often find that I am more motivated after changing things up, as it kind of allows time to take a step away from the mechanics and gain a better, more objective, perspective of the best plan forward. Financially speaking, “blow money” serves to reawaken you to why you save in the first place. That way, you can approach subsequent challenges to your budget from a position of strength rather than one of depletion.

Related Article: Why Do We Save Anyway

Blow Money Neutralizes the “Well, I Already Screwed Up” Scenario

Another interesting rationale for keeping blow money a part of your budget is that it absolutely neutralizes the “well, I already screwed up” mentality. This behavior was described well by Polivy and colleagues. It occurs when you screw up from a plan (i.e., budget or diet), feel embarrassed about or ashamed of your mistake, and then count the day’s efforts to control yourself entirely lost because you already dropped the ball. Consequently, you let yourself go (lose control) even further. In other words, if your willpower isn’t enough to prevent you from partaking in a cookie, you are likely to get a double hamburger with cheese fries and a milkshake too.

Once you flirt with chaos, it has a way of owning you.

This is equally true with budgeting. Once you lose control, often it is hard to find yourself again. When you don’t have blow money, you are wrestling with the pleasure you feel from satiating your desires through impulse splurges and the guilt that you have over deviating from your budget. This is obviously a weak and unhealthy position to place yourself.

Of course, that doesn’t have to be the case. For example, if you include “blow money” as a part of your spending plan (budget), then when you blow money on something that you deem “fun,” you haven’t messed up. This spending was already budgeted for. There wouldn’t be the same excuses to abandon your budget if you included blow money in your budget in the first place.

Related Article: The Dreaded B Word

Closing Thoughts

Budgets certainly do not have to be swear words in your house. Successful budgeters remember to establish some flexibility to their maintenance plan based on their needs, such as “blow money.” They don’t risk  not achieving their spending goals by having unrealistic budgets that only work if everything goes perfectly and if they deny themselves  fun from today until retirement! They systematize their saving, investing, AND spending. They don’t expend so much energy resisting temptation that they lose sight of why they save anyway!

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

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The Dreaded B Word
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When Lattes Are NOT Your Problem http://www.roshawnwatson.com/when-lattes-are-not-your-problem/ http://www.roshawnwatson.com/when-lattes-are-not-your-problem/#comments Fri, 14 Sep 2012 07:00:46 +0000 http://www.roshawnwatson.com/?p=767 By: Roshawn Watson

People sometimes get so overwhelmed that they don’t know where to start with investing for retirement, especially while trying to simultaneously invest for a college education for children, pay for adequate insurance, and pay off their homes. This is where the Latte Factor comes into play. It is deceptively simple. By siphoning money designated for a seemingly inconsequential daily indulgence into investments, a latte, you can jumpstart your retirement savings and win financially.

Personal finance author, David Bach, famously illustrated his concept with the following scenario:  by investing the amount that you would pay for a latte and a muffin (ie, $5/day*30 days/month=$150/month), you could amass an impressive $948,611 over 40 years (assuming an aggressive 10% annual return). That’s substantial, especially considering that 51% of households risk being unable to maintain at their pre-retirement standards of living at 65. Nonetheless, the Latte Factor has been surprisingly maligned over the years, but it typically has little to do with the math.

While conceptually sound, the Latte Factor may have overstated the power of forsaking caffeinated delight. The overwhelming consensus is that sometimes lattes (or your ” latte” equivalents) are NOT your problem.

The Biggies Are Out of Control

Don’t be penny-wise but pound foolish.

Many people expend an inordinate deal of time and effort finding ways to save a little money. The wisdom for doing so is clear: small leaks sink big ships. However, I always wonder what would happen if we would devote a similar amount of effort in trimming some of the larger expenses instead. After all, according to the Law of Parsimony, sometimes it is easier to sale 50,000 books one time than sale 1 book 50,000 times. For example, housing is typically Americans’ biggest expense followed by transportation, according to the Bureau of Labor and Statistics. Today, housing and transportation comprise of more than half of American household income. That’s because sixty percent of Americans are homeowners, and higher rent costs, particularly in coastal cities, constrictive urban policies, and a shortage of multifamily homes all contribute to an acute rise in housing expenditures for non-homeowners. Unfortunately, housing alone can be as high as an untenable >40-50% of income for some.

Similarly, many families drive themselves straight to the poor house. Buying a vehicle is more than simply a means of transportation: cars are emotional purchases. America has a long-documented and complex love affair with our vehicles. Basing vehicle purchases solely on dollars and cents simply won’t do for many.

Related Article: Why Do We Save Anyway?

However, if the same effort was put into significantly reducing housing and driving costs ( large expenses) that was put into saving on the small budgetary items, many could afford more small luxuries AND hit their financial goals. Money Magazine writer, Walter Upgrave, indicated that driving less expensive cars (such as Honda Accord versus Acura) during a lifetime could save one $180,000; sending your child to a public university could result in $164,000 in lifetime savings relative to private school costs; and cutting vacation spending by $1,000 a year could yield an extra $122,000. For some of us, the savings could be much more.

That’s the reason most millionaires live relatively more frugally (particularly in terms of housing and driving) than even the typical American households. Doing so allows them to invest more aggressively and gain greater control over their destinies.

Related Article:  Why The Rich Get Richer

Don’t be penny-wise but pound foolish. It is important to gain control of the “biggies” too.

Suppose You Like Lattes

One of the biggest criticism of the Latte Factor has little to do with its impact on your finances. The issue is some apply the Latte Factor indiscriminately; thus, they use it to deprive themselves things that they really enjoy for the greater good. While such deep sacrifice is laudable and some sacrifice  IS necessary, using the Latte Factor to cut things that you really value is not really the intention. If your daily latte (whatever a “latte” means to you) brings you significant joy, foregoing it may be too much sacrifice. It is hard to have a serious budget with longevity if it is so restrictive that you never have any fun (more on this next week). Never forget, why you save in the first place.

Related Article: Broke People Afford Everything

The Latte Factor is concerned with eliminating frivolous and/or unconscious frequent spending. Most of us have such spending, even if it has nothing to do with Starbucks, such as habitual spending on eating out for lunch, smoking, magazine and newspaper subscriptions that no longer engage us regularly, or even the rarely used gym membership. Trent, from The Simple Dollar, suggested that perhaps suggested changing the Latte Factor to the Detergent Factor to reflect how you can save $10 in 10 minutes by making your own detergent to reflect that the purpose is to focus on “luxuries” that you wouldn’t miss. The purpose of the Latte Factor isn’t to eliminate Starbucks (or Tide detergent) from your life but to highlight that there is some fat that you can likely trim almost painlessly, and that the value of that money of over time can be substantial if properly invested. Thus, consider cutting the frivolous and/or unconscious spending.

The problem isn’t having it all… it is having it all at once.

Walter Upgrave said it this way “You are probably going to have to give up something today for a shot at a better tomorrow. But by going about it the right way, you can often find tradeoffs that will allow you to sock away real money while still leading a rich, full life.”

Income is Simply Too Low

Another situation of when the Latte Factor doesn’t apply is when there is a serious income deficiency. In this scenario, one’s expenses are reasonable and his budget excludes luxuries, yet his income can not cover the living expenses. People in this situation have no lattes to cut, spend almost exclusively on necessities (food, shelter, transportation, utilities), and struggle to tread water.

This is why caution is needed in telling OTHER people to simply cut deeper, as if reducing expenditures is a cure all. Cost-cutting advice will likely only serve to frustrate those in this situation, as unreasonable expenses are not their problem in the first place.Sometimes the budget has already been cut to the bone. Increased income generation, rather than cost-containment, is needed, which is a different beast entirely.

Closing Thoughts

Clearly, the Latte Factor is about more than just coffee. Eliminating the fat in our budgets is worthwhile. Expenses that once made sense may no longer be reasonable or worthwhile for us. The Latte Factor does stimulate such examination, which  is valuable. Additionally, it provides a needed rebuttal to people who argue that they can’t save anything, yet somehow they afford everything but saving and investing. However, sometimes  it simply may not be directly applicable to your situation at all. Financial maturity is knowing when concepts are to be applied literally or figuratively and knowing their assumptions and limitations. Sometimes lattes are simply NOT your problem.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Articles
Why Do We Save Anyway?
Broke People Afford Everything
Why The Rich Get Richer

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Does Wealth Reduce Compassion? http://www.roshawnwatson.com/does-wealth-reduce-compassion/ http://www.roshawnwatson.com/does-wealth-reduce-compassion/#comments Fri, 07 Sep 2012 07:29:34 +0000 http://www.roshawnwatson.com/?p=760 By: Roshawn Watson

Most of us are familiar with Scrooge, the wealthy businessman who is high on ambition but short on compassion. Unfortunately, Scrooge isn’t a fictional anomaly; businessmen are frequently depicted negatively in Hollywood. Michael Medved found that since 1970, businessmen have been portrayed as “villains” twice as often as “good guys.” Could there be a legitimate reason for this depiction? If we are to believe one researcher’s assessment of recent data, the answer is YES! She concludes that wealth is inversely related to compassion: the more wealth one has, the less oriented towards others’ needs and feelings he will be. As with most data though, the devil is in the details. Let’s explore some recent findings and decide if they really indict the wealthy.

Fascinating Data Regarding Money and Compassion

The first studies the researcher cited were conducted by Berkeley psychologists, Paul Piff and Dacher Keltner.  These studies explored the prevalence of unethical behavior amongst people from “upper” and “lower” social classes. Social class was measured as a composite of (wealth, education, and income). The investigators measured the behavior of the 2 classes in various ethical situations and “found upper-class individuals were more likely to exhibit unethical decision-making tendencies (study 3), take valued goods from others (study 4), lie in a negotiation (study 5), cheat to increase their chances of winning a prize (study 6), and endorse unethical behavior at work (study 7) than were lower-class individuals.” The psychologists also studied a busy four-way intersection and found that luxury car drivers were more likely to cut off other motorists instead of waiting for their turn at the intersection, regardless of gender, time of day, amount of traffic, or eye contact with pedestrians.

Related Article: Do You Have the Courage to be Wealthy

Another series of studies cited by the author were done by Keltner and colleagues and explored the role of the environment and compassion and class. Social class was measured by asking participants questions about their family’s level of income and education. They found that the environments of lower-class individuals promoted greater concern for the pain or comfort of others. For example, less affluent individuals were more likely to report feeling compassion towards others on a regular basis. The less affluent would more frequently agree with the following statements: “I often notice people who need help,” and “it’s important to take care of people who are vulnerable;”  these findings were independent of gender, ethnicity, spirituality, and other factors believed to influence compassion. Another study performed by the same team had subjects watch 2 videos and monitored their physiologic responses (i.e., heart rates). One of the videos was a compassion-inducing video (children with cancer). Subjects “on the lower end of the spectrum, with less income and education, were more likely to report feeling compassion while watching the video of the cancer patients. In addition, their heart rates (more frequently) slowed down while watching the cancer video—a response that is associated with paying greater attention to the feelings and motivations of others.”

Related Article: Creating Phenomenal Wealth Over Time

The Fallacy With that Data Interpretation

While the results are undoubtedly compelling, the biggest problem with concluding “wealth reduces compassion” from this research is that the studies cited do NOT evaluate wealth! Every study cited investigated “social class,” as measured by income, education, and luxury cars, NOT wealth. Even in the cases where wealth was considered a component of social class, it was part of a composite measure (lumped in with other factors) that was tested for a relationship with compassion rather than measured as an independent influencer of compassion. It would have been easy to look at wealth as an independent variable and test whether it directly caused diminished compassion or even was associated with less compassion. One must ask why wasn’t this done?

This may seem like splitting hairs, but the implications of are big. Extrapolating  characteristics of the wealthy based on a biased and nonspecific variable, such as social class, can be troublesome and lead you to the wrong conclusions. One reason this occurs is because infinitely more difficult to build wealth, particularly lasting wealth, than it is to obtain a high income or high academic standing. Look no further than Evander Holyfield, who recently had a house go into foreclosure and a recent ex-wife filed for bankruptcy, or Mike Tyson who also filed bankruptcy after earning a whopping $300-$400 million throughout his professional boxing career. In both cases, their incomes were astronomical, but their wealth was fleeting. The same thing also happens on a daily basis to countless high income professionals. The financial courage, delayed gratification, and financial excellence required for most people to become and stay wealthy gives them distinct character attributes than most high-income earners.

Related Article: Becoming A Financial Champion

Simply stated, the income-statement affluent (high income earners without corresponding high net worth) and the balance-sheet affluent (high net worth individuals) are often not the same type of people. For example, they typically exhibit different spending orientations, savings and investing discipline, and overall lifestyle. Thus, wealth and class are not necessarily interchangeable. In fact, even the millionaire population is not homogenous. You will find great differences even among millionaires based on whether they favor luxury or more conservative brands (see Toyota Millionaires versus Mercedes Millionaires).

Thus, while one could certainly argue those with high social class, as assessed by the aforementioned variables, lack compassion relative to those with low social class, suggesting anything more seems like a stretch based on the data presented.

What About Inherent Character Flaws Independent of Wealth

Notwithstanding the flaws in the original conclusion by the commentator (not by the study authors), she does provide two reasons for why she believes “wealth” reduces compassion that warrant further exploration: independence and the “greed is good” philosophy. I find the independence rationale for lacking compassion fascinating. By definition, wealth makes you financially independent, which in turn means you are less beholden to your neighbors. Personally, I think independence is a GOOD thing. Independence is part of self-actualization, and according to the late Dr. Stephen Covey, marks an important state in our personal development. Moreover, I don’t want people being nice to me because of what they can get out of me or because I tell them false truths in a pathetic attempt to maintain their approval. Healthy relationships are not founded on leech-like or phony associations anyway. Thus, I question the harm in being financially independent, even if it means you do not have to play nice. If independence means you can be real, then I fail to see that as a bad thing.

Related Article: Toyota Millionaires versus Mercedes Millionaires

As far as embracing the “greed is good” philosophy, I think money only amplifies character traits and beliefs that are already present. In other words, if someone is rotten without money, she will be more rotten with money. The good fortune will only serve to make her a more exaggerated version of herself rather than change her altogether. Thus, how is wealth really the problem in itself? The greedy come in all shapes, sizes, and bank accounts. For example, some people piously claim to only want a little money for their families not realizing that this focus in itself is the embodiment of greed because they only care about themselves.

Money only amplifies character traits and beliefs that are already evident.

I am still convinced it is A LOT easier for most people to build significant wealth ethically by providing value to others through great service than by being greedy. Greed is rooted in the poverty mentality anyway: it is dominated by the fear of running out, which is not generally conducive to building wealth anyway. After all, it is hard to reap a significant harvest when you are afraid to sow into business and others.

Closing Thoughts

Compassion is a good thing. I hope we all are moved by compassion, regardless of income,  wealth, or social standing. Because wealth gets such a bad reputation, sometimes it is good to remember that wealth clothes the naked, feeds the hungry, builds hospitals for the sick, retires abused school bus monitors, and does a lot of other good in the world. If future data ultimately indicate that wealth DOES indeed decrease compassion, then so be it. However, until researchers evaluate a real wealthy population, allegations of reduced compassion among the wealthy is simply not supported by facts and is little more than popular sentiment.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Articles
Do You Have the Courage to be Wealthy
Creating Phenomenal Wealth Over Time
Becoming A Financial Champion
Toyota Millionaires versus Mercedes Millionaires

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Why Do We Worry About Money? http://www.roshawnwatson.com/why-do-we-worry-about-money/ http://www.roshawnwatson.com/why-do-we-worry-about-money/#comments Thu, 30 Aug 2012 10:30:10 +0000 http://www.roshawnwatson.com/?p=723 By: Roshawn Watson

Some of us regrettably major in worry. Worry is sometimes easier than picking ourselves up off the ground, scraping together good solutions, and having faith that things will work out.

Although financial worries are very prevalent, particularly due to the economy, they are in no way innocuous. According to a poll on About.com (part of the NY Times ), 7 out of 10 report they are “very stressed” about their finances. The American Psychological Association found that 80% of survey participants reported having significant stress because of the economy, which was up from 66% in 2008. The National Sleep Foundation found that 27% of people surveyed in 2008 had sleeplessness due to economic anxiety. According to the NY Times , the National Suicide Prevention Lifeline calls jumped to 50,158 in January 2009 from 39,465 a month in January 2008, and economic stress more frequently “played a central role.”  Financial worries are typically a top cause of clinical anxiety, depression, and relationship problems. Increasingly people are complaining about of is referred to as “Recession Anxiety,” for example, where they  suffer panic attacks, have insatiable appetites for economic news, lose sleep, lose weight, are placed on medications, require therapy sessions, and have marital discord.

Interestingly, many of these people are gainfully employed and haven’t personally experienced “significant economic losses,” yet they are worrying that they will or are reacting to the “pervasive economic uncertainty” (NY Times ). Here are five reasons why we worry about money and some ways to deal with it.

Lack of Confidence with Money

One reason we worry is because of our lack confidence managing money. Consequently, we shy away from investing, eliminating debt aggressively, and maintaining adequate solvency and insurance. Lacking confidence with money often stems from incompetent education. Many of us are not being exposed to solid financial teachings.

Fortunately, we can become more confident and better equipped to manage our finances through experience and learning. After all, confidence is not the absence of ability but a lack of belief in your ability. Pick a few podcasts (such as Motley Fool Money and Dave Ramsey Podcast), read at least 3 solid personal finance books (such as Millionaire Next Door and Rich Dad, Poor Dad ), subscribe to a few popular personal finance magazines (such as Money and Kiplinger ), watch CNBC, read quality personal finance blogs (such as Watson Inc, Free Money Finance, The Simple Dollar, and Average Joe’s Money Blog), look for seminars and conferences in your area, join organizations, and post on forums (such as Savings Advice or Bogleheads). Of course, you don’t have to do all these things nor do you have to agree with all of the advice your read. Find a few that you like, and read and interact with (if applicable) them consistently, and you will be amazed at your progress. A knowledge deficit is among the easiest to address.1

Confidence is not the absence of ability but a lack of belief in your ability.

Fear of Screwing Up

Closely related to lack of confidence is fear. Fear of failure can be logical, but we often lose perspective. For example, anyone over 12 years old has made financial mistakes. In fact, expecting everything to be perfect would be more irrational than expecting some minor missteps. Fortunately, not all missteps, including financial flubs, are mission critical. Thus, we shouldn’t be so terrified of making them that we paralyze our progress. It was Henry Ford who stated “Failure is the opportunity to begin again, more intelligently.”

Related Article: The Price of Eliminating Failure

If you realize that you are in fear, it is paramount that you deal with it before it causes you to lose financial victories. For example, I remember when I resigned to purchase my first outright. At the time, it was a staggering sum to come up with, as I was still a teenager. I had plenty of reasons to doubt my then unproven plan. I knew I set myself up for ridicule if I was unsuccessful. However, I knew that I didn’t want a car note. Had I succumbed to fear, I would have never had the financial courage to demand that the dealer go down on price by 40%, which he did. Fear will halt you only if you let it.

Fear is pain arising from the anticipation of evil. – Aristotle

Conditioned to Worry

One reason worrying about our finances is so common is because there is comfort in the familiar. When we are conditioned to worry about money, intense focus on the bad becomes very familiar territory. We begin to see evil even in the most innocent situations. Nothing is above reproach, and just about everyone has an ulterior motive. We prepare ourselves for an inevitable disappointment in every situation. While mentally and emotionally preparing yourself for the worst can make handling a crisis more mechanical and remove some of the accompanying insanity associated with it, it is important to remember that many crises are brought on by worry in the first place. The following passage illustrates this point:

If you fear employees will rip you off, and set up spying processes—you will get ripped off.
If you fear employees will steal from you, and institute lie detector tests—they will steal.
If you fear your employees will talk to search firms, and tell the receptionist to screen calls—they will talk.
If you fear your employees will take your secrets to a competitor, and force them to sign non-competes—they will try to take secrets to a competitor, and if they can’t do that, they’ll bring on a whole lot of other nasty side effects. (Charles H. Green)

Mr. Green is right, “you empower what you fear.”

Worry doesn’t empty tomorrow of its sorry. It empties today of its strength. Corrie Ten Boom

At the end of the day, I don’t want crisis to become commonplace or an everyday concern. I don’t want to be weighed down by a hundred possibilities of why things won’t work out. I don’t want to die a thousand deaths because I can’t control my thoughts.

A coward dies a thousand deaths. A soldier dies but once.

Worrying Feels Like You’re Doing Something

Worrying also makes us feel like we are doing something. This is why it is vital to distinguish between busyness and productivity. Just because we are doing something pertaining to a problem doesn’t mean we are solving the problem. I consider it this way: you’re productive when there is an authentic alignment of your actions and your goals and when those actions correspond to incremental improvements in your situation. Anything else is deception.

For example, I think some financial news outlets can be a big culprit of this. There are many journalists who purport to just be stating the facts but do nothing to suppress their own fearful biases. Case in point, last year USA Today ran an article indicating Americans were so much poorer, but after we worked through the numbers, much of the commentary was unfounded and was hyperbole. It is amazing what you can do with numbers and statistics; people frequently manipulate or cherry-pick numbers to suit their arguments. Regardless of intention, this obscures the real issues.

Related Article: Did Americans Get Poorer or Is USA Today Wrong

While being uninformed about your finances carries its own liabilities, as you are collecting information, be sure to watch for biased commentaries designed to affect your emotions but lack the substance to improve your situation. If you don’t, it will be very easy to content with fretting over finances instead of doing the very things that would strengthen your financial position and remove the threats to your financial sustainability.

You’re productive when there is an authentic alignment of your actions and your goals and when those actions correspond to incremental improvements in your situation. Anything else is deception.

Sometimes Worry “Works”

As much bad as worrying brings, I admit occasionally “works.” For example, that uneasy feeling that you overspent can cause you so much discomfort that you choose not to spend other discretionary funds. Sure, it is technically the action of not spending rather than the worrying is what really improved your finances, but your wallet doesn’t know the difference! The worrying prompted a behavioral change, which is what mattered. This is one of the main reasons that many of us allow ourselves to worry: there are fortuitous times when it leads to a beneficial outcome.

Even a broken clock is right twice a day.

According to Jerry Porras, “lots of enduringly successful people suffer the dark side, the ‘shadow self’…(they) chose to use pessimistic behaviors selectively when the stakes were great. The most notable place for pessimism, of course, is when the cost of failure is death… Once you take death … out of the equation; however, it’s tougher to measure what is rationale…”

In other words, if you expect enduring success, you must possess an ability to discern the situational differences between when a mistake would be absolutely fatal (high stakes) versus when it would be of marginal consequence (low stakes). Otherwise, you run the risk of being so overly cautious that you miss out on many opportunities that would enrich your future.

Closing Thoughts

Who by worrying can add one inch to his stature is a paraphrased, popular biblical reference about the futility worrying. Simply put, worrying usually doesn’t accomplish anything but to weigh you down mentally, physically, and emotionally, and it takes you away from the very things that could prevent or solve your financial problems: strategic planning and acting on your convictions. I’m convinced that any benefit achieved by worrying is grossly outweighed by the havoc it wreaks on your life. Financial worries have been linked to stress, anxiety, diminished quality of life, and depression, and decline in physical health. 2 Additionally, worrying robs you of the strength to fight. It causes you to focus on how big the problem is instead of how big you are. The goal isn’t to deny that cares and concerns exist but to instead focus so much on the endgame or answers that they become more real to you than the challenges you face. Don’t bank on getting lucky by worrying. Make your luck today.

Lastly, if you like this article, please subscribe to my FREE email updates or RSS feed (reader), Retweet it, Like It on Facebook, Tipd it, Fark it, Stumble it, and tag it on Delicious. Also, click here to receive my eBook for FREE.

Related Articles

The Price of Eliminating Failure

Did Americans Get Poorer or Is USA Today Wrong

Image Credit: Photoloni

1 This paragraphs includes affiliate links.
2 according to multiple studies including those conducted by the American Psychological Association and American Society of Clinical Oncology

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Uncommon Money News (Round Up): Olympian Finances Edition http://www.roshawnwatson.com/uncommon-money-news-round-up-olympian-finances-edition/ http://www.roshawnwatson.com/uncommon-money-news-round-up-olympian-finances-edition/#comments Thu, 30 Aug 2012 07:40:15 +0000 http://www.roshawnwatson.com/?p=750 By: Roshawn Watson

A few weeks ago, someone asked me “why do many pro athlete parents and Olympians go broke?” I wanted to to provide some insights.

  1. Opportunity Costs– Olympians forgo earning potential while training. Accordingly, during their prime income-earning years, where many people are getting established in their careers, Olympians are training. This takes a toll on both them and their parents who are often shouldering part or all of the economic burden during this period.
  2. Direct Costs – There are significant costs associated with becoming an Olympian. For example, Olympians typically require high-quality coaches that do not come cheap. Raising one’s profile in a sport often mandates that future Olympians travel the country and world, and without sponsorship, traveling can be quite expensive. Olympians also need specialized diets, pay for equipment and/or access to equipment and training facilities. Families also may have to relocate, which was the case for Olympian Gabby Douglas (moved from Virginia Beach to Iowa); I suspect that may have something to do with her mom’s reported bankruptcy filing.
  3.  Other Factors – In many countries, Olympians receive national support from their local governments, but there are no such provisions for American Olympians. Additionally, Olympic prize money and sponsorship are not significant for most, particularly if you are not the elite of the elite. Consider the following levels of prize winnings:
  • American Gold medal  (London) – $25,000
  • American Silver medal (London) – $15,000
  • American Bronze medal (London) – $10,000

USA Track and Field Foundation found that only 50% of the American track and field athletes ranked in the top ten in the nation earn more than $15,000 a year from the sport.

All in all, it is certainly not as glamorous as you would think for most Olympic athletes, at least financially speaking. Sure there are the elite of the elite, such as Phelps who one source suggested may have $100,000,000 lifetime earnings, depending on how he parlays his Olympic fame into endorsement and special correspondent deals. He’s the exception of the exceptional not the norm.

***Special Thank You to Average Joe Money Blog/Free Financial Advisor for discussing Do Americans Know What Poverty Is? during their podcast:

Here are some personal finance and business articles from around the web that I thought you may appreciate:
Practice monthly home maintenance – Trent offers practical wisdom that will save you money. (The Simple Dollar)

Billionaire’s generous gift to stranger – A reminder to be kind the next time a stranger ask you for a favor

New Ipad (Ipad 5), New Kindle (Kindle Fire 2), and many other new devices expected to come to a store near you– While the technology life cycle is too short for most people to replace their “toys” every time a new product comes to market, if it is time to replace them, then look out for some new arrives.

Livestrong donations skyrocket after Armstrong’s decision to no longer fight doping allegations – Personally, I do not believe that he cheated. The real story is that he has raised >$500,000,000 for cancer research.

How much wealth it REALLY takes to be a member of the 1% – Forget the much purported annual salary, here is how much wealth is required to join the ranks of the financially elite.

Tricks Restaurants Use To Get You to Spend More – All I can say is that I have seen many of these “tricks” recently, so I think understanding the motivating forces behind the servers recommendations may be a defense against their persuasion.

USA Wrestling decided to provide $250,000 to wrestling gold medalists in London – I know we talked about the Olympian’s finances in today’s post, but here’s an organization that is trying the make the Olympic victory a financial one too for its members.

How Theme Parks and Movie Theaters “Price Gouge” for Food  The title says it all (Money Life and More)

You have no idea what I paid for this room – A tale of love, money, and exorbitant hotel bills. Lindsay Lohan’s Chateau Marmont dilemma has nothing on this (Average Joe Money’s Blog)

What does it mean to be retired? – Joe has to defend his retirement again. Is retirement a state of mind? (Retire by 40)

What not to do with investments now – Portfolio manager Barbara offers her investing insights (Barbara Friedberg Personal Finance)

The following are some carnivals that I have recently participated in:
Yakezie Carnival
Yakezie Carnival (Passive Income to Retire)
Yakezie Carnival (See Debt Run)
Yakezie Carnival (Frugal Portland)
Yakezie Carnival (The Ultimate Jungle)

Carnival of Personal Finance
Carnival of Personal Finance #371 (Sweating the Big Stuff)
Carnival of Personal Finance #372 (The Financial Blogger)
Carnival of Personal Finance #374 (My Personal Finance Journey)
Carnival of Personal Finance #375 (Narrow Bridge)
Carnival of Personal Finance #376 (Good Financial Cents)

Festival of Frugality
Festival of Frugality #346 (One Smart Dollar)
Festival of Frugality #347 (This That and the MBA)

Image Credit: The US Army

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Getting Haters Out of Your Wallet http://www.roshawnwatson.com/getting-haters-out-of-your-wallet/ http://www.roshawnwatson.com/getting-haters-out-of-your-wallet/#comments Fri, 24 Aug 2012 07:00:44 +0000 http://www.roshawnwatson.com/?p=719 By: Roshawn Watson

If you have been in the “way” – the frugal way – for any length of time, you build wealth. Wealth is the product of good stewardship of resources, but building wealth and having the tangible products of wealth are not the same things. You can fare well without having obvious displays of material wealth. For instance, you may be increasing your net worth, investing for retirement, maintaining a fully funded emergency fund, and developing multiple streams of income but lack the resources to support taking a year or 2 off or purchasing a luxury car outright (if that’s your thing) for years to come. It’s all the Law of Process. Unfortunately, the fact that time is required before you get to the “good stuff” is often lost on haters who love to play armchair quarterback of your life. In short, there is a disconnect. Of course, you are not going to abandon all of your hard work for shallow, conspicuous consumption simply to appease an idiot who wouldn’t know a good financial plan from a menu at Ruby Tuesday’s. That said, it can still occasionally hurt to have your efforts and progress minimized, ignored, or even dissed, particularly if the perpetrator is family or a “friend.” Building wealth is typically a long-term marathon rather than a sprint, regardless of how it is portrayed in the media. Here are some key points to remember when people comment on the apparent disconnect between your financial plan and your consumption.

Grasping Hold of the Invisible

Lately, I have been so disillusioned with some of the most common measures of wealth. For example, a coworker was completely stunned by my response to his admiration of another coworker’s BMW. Not only was I unimpressed, I offered my sympathy. It’s been years since I even considered BMW or Mercedes true luxury brands (gasp). Sure, they can be pricey, and millionaires sometimes drive them (not as many as you would think), but so does nearly everyone else (at least it seems that way). 1 They are downright common, and a hallmark of luxury is exclusivity. I mean NO disrespect if you dream of driving one of these cars, but I typically think about the payments that the nonwealthy use to acquire these brands rather than the “joy” or the supposed “status” of owning them. The only time I celebrate someone owning any luxury car is when they purchase them for cash (and typically used so their “asset” (ie, car)  doesn’t instantly depreciate by 40%) and have a considerable net worth. For example, when my friend purchased a Maserati after wanting it for 20+ years or when my other friend bought her Rolls Royce, I was ecstatic for them, as they have truly paid the price financially to own those vehicles.

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Obviously, I’m in the minority, or the “luxury” dealership would probably be out of business. Most people do look at external measures to assess financial success. Perhaps, that is one of the reasons most of us are not wealthy. On the other hand, most millionaires perform cost-benefit analyses before making such purchases and similarly scorn conspicuous consumption, at least until it no longer significantly impacts their net worth. For example, wealth researcher, Thomas J. Stanley, found that millionaires typically live in neighborhoods where their wealth exceeds that of their neighbors by over 6-fold. Clearly, these millionaires esteem their financial security above the adulation of their “peers.” Consequently, they have way more money and freedom. The problem isn’t having stuff; the problem is being addicted to the approval of others regarding their finances. Essentially, by choosing neighborhoods where they are not barraged with constant pressure to live at or above their means, they have freed themselves of the emptying impact that living near the Joneses would have on their wallets.

The problem isn’t having stuff; the problem is being addicted to the approval of others regarding your finances.

Chicken or the Egg

Thus, they instead focus on their finances from a long-term perspective. Now, I realize that being able to focus on long-term wealth is a luxury of having surplus, but one of the main reasons millionaires have surplus to begin with is due to their long-term orientation. For instance, consider some popular careers that have high proportions of millionaires, such as physicians, lawyers, dentists, college professors, and scientists. All of these professions take several years in order to build the knowledge base, credibility, and skill sets necessary to perform these jobs satisfactorily. Similarly, many business owners and entrepreneurs persist in business after business until they find a winning formula for them, even though it often means forsaking immediate payoffs; note 9 of 10 businesses are said to fail. Of course, there are usually (hopefully) nonfinancial reasons for pursuing aforementioned career paths as well, but in order to persevere through the rigor and years of sacrifice, a long-term orientation is critical. By focusing on where you want to be in the next 5 to 20 years rather than tomorrow, the quality of your decisions will instantly improve.

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The Longest Night Ever

If all of this happened overnight, it was the longest night ever! Unknown

Success takes time. Recently, we saw remarkable displays of what it took to be world champions by the Olympians. It is simply staggering to consider that so many of them worked 6 days a week for the last 4 years for a few minutes (or even seconds) of glory. They sacrificed physically, financially, relationally, and professionally to make this dream happen. It is laudable and the perfect illustration as to what “overnight” success really means.

In reality, most (successful people) are hailed as leaders in their field(s) long after they commit to their calling(s) or to… particular way(s) of living in the world that hold special meaning to them. The mainstream media stories about successful people – along with wishful thinking about instant gratification or a magic pill for success – make it seem as if they were overnight success, but it rarely happens that way. Builders mostly toil with every ounce of their energy and persistence, with heart and soul, for their whole lives. Jerry Porras

Opinions That Count… Only the Qualified Need Apply

You need quality advice, so none of this discussion is to diminish the value of getting input. It is not prudent that you rob yourself of the valuable insights you can glean from seasoned professionals and experienced mentors. That said, don’t get dismayed when others express dissent about your life choices. After all, the only thing that qualifies one to have an opinion is breathing air. No matter what you do or how well you do it, it will never be enough to please everyone. Fortunately, obtaining everyone’s approval is totally unnecessary. If you have vetted your plan and explored the best options, then sometimes you may have to turn a deaf ear to others’ “preferences” regarding YOUR decisions. Just because they would have tackled something differently doesn’t mean that you’re wrong. That’s the beauty of diversity. More importantly, if you continually live your life for others rather than exploring your own passions, callings, goals, you risk carrying regret to your grave. Studies show that people experience more sadness towards the end of their lives about the things that they DIDN’T do rather than what they did. If your primary financial objective is independence, comfort, abundance, and/or to leave a legacy, then ignore noise to the contrary. Gird yourself with the truth that your goal IS possible. Know that normal people become financial heroes, so you qualify.

The only thing that qualifies one to have an opinion is breathing air.

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Closing Thoughts

To those who are working towards avoiding or paying off debt, purchasing cars and homes for cash, investing for retirement or education, building businesses, and/or leaving a legacy for your heirs and communities, your sacrifices are meaningful, EVEN if they draw the scorn rather than adoration from your peers. It is alright if your life choices don’t always compute to those who observe you. Remember, if you did everything “the right” their way, their approval is fleeting anyway. Make decisions based on your priorities not popular opinion or to appease others. Perhaps the first step to financial independence is to get the opinions of haters out of your wallet.

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1 Yes, I realize that a Mercedes C-Class is different from a S-Class.

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