Smart Shopping After the Holidays

The holidays have come and gone, and hopefully you’ve gotten to enjoy the things that truly matter. You’ve gotten some time with your friends and family; you’ve gotten some much-needed rest off from work or school; and you’ve gotten to catch up on the sleep you’ve been missing.

Those are the things with a lasting impact during the holidays, but people also make a big deal of the shopping that comes with them. For stores looking to unload their merchandise, it isn’t enough to have big sales leading up to the holidays. Instead, when the holidays pass, they continue with the steep discounts to get rid of the inventory they still haven’t moved. It’s all one big cycle, but it’s one out of which you can make the most if you come prepared.

Here are some tips for smart shopping after the holiday season:

Saving Money on Flights

It’s now winter break, and many of us are headed home for the holidays. Soon, if not already, you will probably be booking plans for your return to campus. And that’s where this article comes in.

The recent boom in web technology and user interfaces has given regular people access to a ton of information about flights. With all those resources out there, it can be a bit overwhelming at times to book a trip. How do you know if you’re really getting the best rate?

Fortunately, there are a few tips that I can recommend for saving money on your next bit of air travel:

The Importance of (Free) Tax Preparation Software

After a brief hiatus from our series on taxes, we're back with a new article about how to make the process incredibly simple.  In the past, filing your taxes required getting together a ton of paperwork, filling out forms by hand, tallying up all the numbers, and sending in the proper documentation. No longer. Today, over 80% of tax returns are filed electronically, either through a tax professional or with independent software. And the amount of people filing those taxes on their own is on the rise.

For young people, downloading free federal tax software is a must. There is no cost to it, as long as you earn below roughly $50,000, and if anything, it is another resource that could be used in conjunction with something like professional advice. Here are a few other reasons to use free federal tax software:

Spotting Phony Investment Secrets

I’ve written previously about what I think are the best investment strategies for young people (well worth another read), but this is a topic that needs rehashing. Especially as the country approaches the fiscal cliff (automatic decreases in government spending and increases in taxes that could harm consumer demand), people are anxious about the stock market. And because people are anxious, they are prone to making some poor decisions.

What’s the problem with people being anxious about the markets? Well, for one, they might be tempted to pay large premiums for “expert advice”—even though they would be better off passively managing their money. That is, instead of turning to an expert who promises to get them large returns in uncertain times (but fails), they could be putting their money in low-cost index funds and earning a higher, more consistent return.

There are other problems with fears about market conditions: People are more likely to buy at peaks of the market—when conditions seem to be going great—and to bail out of it at the bottom—when things seem as if they could not be going worse. The problem is then, of course, that people are buying high and selling low; they are losing a lot of money on their purchases by getting scared, instead of letting the market build back up. And that is just one mistake that people make with stock trading in times of uncertainty.

Saving Money on Holiday Gifts

Giving holiday gifts is about more than their cost. Gift-giving makes you feel good; it lets people know that you care about them; and it provides a great opportunity to bond with people that you otherwise might not get.

Of course, to say that gift-giving is more than the costs is not to say that the costs don’t matter. In fact, the costs are quite significant. Online spending was over $1 billion on Black Friday—a day known more for its in-store sales than for its online deals—and that amount isexpected to be even higher for today’s Cyber Monday.

In other words, people are spending veritable fortunes on holiday gifts. Because it’s so easy to get carried away in the holiday spirit and spend more than you expect, it’s important to take cost-saving measures where you can. And that’s where we can help.

Here are a few tips to save money on gifts during the holiday season:

The Importance of Giving

In the spirit of Thanksgiving, I’d like to take a week off from the technical tax stuff I’ve been discussing, and instead talk about something potentially more meaningful: how to give effectively.

A lot of the material on this site talks about furthering your own finances—how to invest it wisely; how to save it for the future—but I don’t mean to suggest that hoarding is the only way, or the best way, to live life. I don’t think that there’s anything inherently wrong with having a lot of money; I think that a lot has to do with how you use your wealth. And to that extent, I think that giving away a portion of your money is a good social action.

A Guide to Paying Your First Taxes (Part Two)

In Part One, I discussed a few basic questions related to paying taxes. Here are a few more issues that young people often face:

Where can I go for tax assistance if I need help?

For people who make below $50,000, there are a few options available. One that I definitely recommend is taking advantage of free tax preparation software, which I will be discussing in the next post. You are also able to get free tax-preparation advice on top of that software, as outlined on the IRS’s website here.

A Guide to Paying Your First Taxes (Part One)

The tax-paying process often gets a bad rap in the media as complicated, difficult, and overly stressful. Those descriptions can certainly be true at times, but if you approach tax-paying with certain knowledge and the right mindset, you can handle it with relative ease.

Unfortunately, a lot information about taxes is convoluted and difficult to find. That is where this guide comes in. Although it is not a substitute for professional tax assistance—or better, the kinds of free tax preparation software that I’ll be discussing in a future post—this guide will attempt to cover the most important concepts for young people to understand to pay their taxes properly. (If you have any questions about a term discussed here, or one omitted, please add it in the comments section!)

Here is a list of common tax questions, and answers that are relevant to young people:

The Finances of Surviving a Hurricane

A hurricane has hit much of the east coast, and people are being warned to prepare for the worst. If you live in the hurricane’s projected path, not only are you likely getting calls from worried parents telling you to stock up on water and non-perishables, but you might also be getting emails from stores trying to lure you in. Natural disasters present a big opportunity to increase spending, and businesses are not shy about using that to their advantage.

What makes natural disasters so difficult to navigate is that it is hard to assign a dollar value to your life or well-being. (Does the small chance that you might need another gallon of water justify its purchase?) Not only is it difficult to decide some value for your well-being, but it is also just uncomfortable. People don’t enjoy imagining the worst, and nobody wants to admit that, at a certain point, they might put money ahead of their well-being.

What to Watch Out for with Free Trials

Last week’s article discussed situations in which free merchandise might not actually be so free. It could, for example, contain hidden costs of your time or health, or it could lock you into purchasing other complementary items. In other words, free isn’t always so free.

Despite these hidden costs, however, marketers often use the concept of free to lure in new customers—particularly with promises of “free trials” or “money-back guarantees.” These programs can offer great opportunities to explore a product and decide if it is for you, but they aren’t really risk-free. In fact, if not used properly, free trials and money-back guarantees can wreck havoc on your decision-making.

Want to get the most out of your free trials and money-back guarantees? Here are some important tips to keep in mind:

When Free Isn’t So Free

Getting items for free can be great: there’s no apparent cost; you get to enjoy the item you receive; and your brain might even receive a small buzz from finding such a great deal. All in all, choosing to get something that is free seems like an obvious decision. If you want the item, then you use it. If you don’t, then there was no harm to the transaction—because it was free, right?

Unfortunately, free isn’t always so free. In fact, free can sometimes be downright costly. Consider this example from Dan Ariely, a professor at Duke University and whose book, Predictably Irrational, I cannot recommend highly enough:

A New York City nightclub recently promoted an event by giving out “free tattoos” with admission. Somewhat surprisingly, over 70 people signed up for these tattoos over the course of five hours. On the surface, this appears to be a great outcome: the club was able to attract customers for its event, and the customers who came out presumably had wanted to get a tattoo anyway. So what’s the big deal?

Can Certain Passwords Cause You to Spend Less?

Presh Talkwalkar of MindYourDecisions, one of my favorite sites about interesting decision-making dilemmas, had a great article recently (re-posted below) about how people's passwords could influence their rate of savings.

Although not backed with data, Presh muses that using passwords such as 'SaveforRetirement' or 'Thinkofthecollegefund' could cause people to spend less impulsively because they have to consider alternate uses for their money. I am a big fan of this approach because of the way it leverages what psychologists call priming.

Earning Money in College: Don’t Sleep on Potential Gains

I started college on the wrong foot financially.

One afternoon, I returned to my dorm and found my roommate tracking his sleep schedule on a spreadsheet. He had signed up for the university’s sleep study, he told me, and he was being paid to record his daily sleep and wake up times.

The sum was laughable: $1 a day, with a potential to earn more for streaks of compliance-—for example, an extra dollar after five consecutive days. He recommended that I, too, should sign up for the study, but I resisted. After all, was it really worth my time to track my sleep schedule for a mere dollar?

Why Your Credit Score Matters More Than You Think

Last week’s article discussed what a credit score represents and how young people can build up their scores. Now it’s time to get into a bit more detail about why your credit score is so important.

The FICO credit score—the most widely used credit score for individuals in the US, and the one discussed in the previous article—ranges from 300 to 850. Of all people, about 60% fall between 650 and 800. A fairly typical score is 720. These scores play a critical role in determining both what credit you are able to obtain and at what rate of interest. But a fair question remains: Just how important are these consequences in credit and rates?

Building a Strong Credit Score

One of the most popular questions I’ve received since starting this site has to do with building and maintaining a strong credit score. For all the jingles and commercials floating around the airspace, many young people haven’t learned the basics of credit scores—how they’re calculated, how to build strong ones, and why they matter. Next week’s article will discuss why credit scores matter; this week's article tackles the prior two questions.

Did you know that there is not one universal number referred to as your credit score? In fact, there are three different major credit bureaus in the United States, whose task is to assemble information relevant to your credit rating. That information can be pieced together in different ways, potentially resulting in vastly different credit scores depending on a specific score’s algorithm. Some lenders even have their own proprietary rating formulas, which they use to assess potential borrowers. With all of this confusion about credit scores, how can young people begin to make sense of their own credit level? Fortunately, there's a way.

Meal Credits, Sports Tickets, and the Sunk Cost Fallacy

Imagine the scene: It is 1:30 a.m., and the university dining options close in half an hour. You still have a meal credit remaining for the day, and it will expire at 2 a.m. if left unused. You aren’t that hungry, and it’s drizzling a bit out, but you have already spent the money on the meal credit. There are no refunds. Do you go out to spend your credit?

Or consider this scenario that applies to non-college students (as described in an article by Hal Arkes and Catherine Blumer, then of Ohio University): You have paid for a non-refundable ticket to a football game. Just before you leave your house, however, a blizzard begins. The roads are sure to be icy and dangerous, and you know that the commute to and from the game will be far more painful than any pleasure from the game itself. Still, you don’t want to waste your money. Would you drive to the game?

Better Ways to Trade Stocks for Teens and Young Adults

Stock-picking has long been glorified by the media. Even after the financial crisis and Occupy Wall Street, analysts such as Jim Cramer still have television shows where they go on the air and dispense ‘expert advice’ for an hour at a time. Stock-traders are paid very high salaries, and people are understandably captivated by them.

Of course, most people cannot successfully emulate these traders--nor should they attempt to. In a recent article, I explained why most investors should just put their money in low-cost index funds and let it sit for a while. I stand by that advice. Still, I know that stock-picking can be tempting, and some readers will surely try it—I, too, held some stock for a bit of time this year. Because some readers will try stock-trading, it is important to understand how to trade wisely without throwing away your hard-earned money.

If you are going to trade stocks, there are a few rules that you should follow to get the most out of your investments:

Mutual Fund Madness: A Simple (and Successful) Investment Strategy

It is widely accepted that individual investors should diversify their assets so that they aren’t too prone to a downturn in one sector. For those investors, it’s hard to beat the diversification of mutual funds: Instead of individually buying up and monitoring stock in a bunch of companies to ensure that their portfolio is balanced, investors get to pool their money with others and buy into a fund that does those processes for them. Sounds simple enough, right?

Well, not quite. In trying to decide the “Best Mutual Funds for 2010,” US News and World Report assigned scores to over 4,500 different mutual funds. My Charles Schwab account (which I love, by the way—their service made it incredibly simple to start investing) lists over 9,000 matches for a broad search of mutual funds. There are a lot of options to sort through.

With all of those choices, how could a young adult, busy with school or a job, possibly comb through them all and make the best decision?

NEWS: Law-Makers Consider New Standards for Financial Advisers

The Wall Street Journal's SmartMoney site recently featured an article (posted below) about proper standards for financial advisers. At issue is whether advisers should be free to sell their clients any "suitable" investment option (and perhaps claim a larger commission at their expense), or should be fiduciaries for their clients--agents legally required to act in their clients' financial interests.

Although most young people are not yet hiring financial advisers, there are a few questions to keep in mind if you plan on hiring one in the coming years, or even in the long-term, as changes proposed now could stick around until our generation hits retirement planning:

NEWS: New Website for Managing Student Loans

The New York Times featured a blog post yesterday (posted below) detailing a new site that helps young people manage their student loans. The site, called Loanlook, seems fairly useful for staying on top of payments and paying off debt efficiently, although there are certainly downsides to keep in mind.

For one, a conflict of interest might exist between the site and its sister organization, which aims to collect on student debt. For another, it seems that Loanlook might be introducing a per-transaction fee for certain features in the future, which could hamper the cost-savings for users.

Saving for Retirement as a Young Adult: Using Roth IRAs

This post is a bit more serious than the others, but it’s also among the most important. This post is about saving for retirement—and, specifically, using a tool called a Roth IRA—to get the most from your money.

Now, I know what you’re thinking: “Do I really need to start saving for retirement this young?” “Shouldn’t I just enjoy my money for now and start saving once I have more?” I had a lot of the same questions until I started researching the importance of saving money. Since then, I’ve been thoroughly convinced that saving often and saving a lot is the best way to have money for a comfortable retirement.

Applying for Your First Credit Card

In a previous post, I wrote about how credit cards can cause you to spend more money than you otherwise would. Still, credit cards can be incredibly convenient, and some of the time you’ll really need them. Given those benefits, many young people wonder how they can get a credit card as a teen or young adult.

If you are under 18, talk with your parents or legal guardian. In fact, you should probably do this even if you are above 18. Certain credit card companies will prey on young people by offering easy credit or low initial rates that jump up later in the card, and you don't want to start off on the wrong foot.

Giving Better Gift Cards

 How much would you estimate that your family has in unused gift cards? $50? $100? The odds are good that the total is a lot larger. In fact, a recent study found that the average American household has about $300 in unredeemed credit cards. When you add up all households, the sum comes to about $30 billion—nearly double NASA’s budget for the year 2012.

Gift cards are a $90 billion industry annually, but roughly 7% of them go unredeemed. Why is such a seemingly popular gift so unpopular with consumers? How can gift card givers ensure that the recipient enjoys the present and gets the most out of its value?

What Will This Cost Me?: How Credit Cards Can Distort Spending

Pretend for a moment that you have just bought a gray sweater from me. It costs $100, and I give you two options in terms of how you can pay.

The first option is to pay me in cash and be done with the transaction—simple enough. Of course, you might not have cash on you; you might not have the cash for the payment at all. In that case, you can delay payment, but there are a few catches.

Groupons, Coupons, and the Illusion of Savings

Picture the scenario: It’s a hot day, and you walk into a convenience store to buy a drink. When you get to the display case, you see that there’s a special deal for two of your item, promising a savings of $1—two drinks for $3, as opposed to $2 for one. Would you buy the additional drink to gain the $1 savings?

I know all too well from experience that I would make the purchase. On more than one occasion this year, I walked into the CVS near my dorm intending to purchase a Powerade or two and instead walked out with ten, lured by the promise of “savings.” I certainly spent less on the 10-for-$10 deal than if I had bought ten at their normal price of $1.40 each, but had I really “saved” money by buying more of the good?

Welcome to Young Adult Financial

Imagine that it is poker night with a few of your friends. You glance around the table and notice that you’re up quite a bit of money so far—nearly triple what you paid to enter. The betting on a particular hand swings around to you, and the amount is larger than you would normally wager. On this night, however, you’re playing with ‘found money’; why not just toss in a few extra chips?

This blog discusses financial advice to help young adults with newfound independence. Much of the advice is derived from the fields of psychology and economics, which jointly form the field known as behavioral economics, but I will also use real-world examples to (hopefully) stay relevant and engaging.

Here are some questions this blog will tackle: