Companies Make Big Money Off People Who Don’t Pay Attention

You hear a lot of people moaning that the rich get rich on the backs of the poor. A more plausible source of riches comes from people who don’t pay attention. This is a frequent warning I give to students, especially when talking about banking and ATM machines. (A couple years ago, I learned that companies like McDonalds pay employees with prepaid debit cards if they don’t have bank accounts for direct deposit, and I was shocked to learn that kids were paying $4 fees to cash $20 paychecks.)

Today I added several more data points to support the “riches from the ignorant” hypothesis. I had my car serviced; just an oil and filter change and tire rotation. (Yes, I can do it myself, but I had a coupon that got it all done for under $30, with tax.) The service scammer (she claimed “advisor”) told me the technician recommended several things: a fuel injector cleaning, a coolant flush, a brake fluid flush, and a wheel alignment “because you have some feathering on the outside of the front tires.” The total bill would be $670. Surprisingly, they didn’t recommend an engine air filter change since the manufacturer’s recommended service calls for it at my mileage.

It was easy to spot the scam and decline all the services because I’m familiar with the manufacturer’s service schedule, which I always review before doing anything to the car. The manufacturer recommended interval for a coolant flush is 6 years or 120K miles, but it’s a very high profit service with low materials cost and very little required labor, so dealers push it as often as they can, especially at the change of seasons to “winterize” or “prepare for summer heat.”

The fuel injector service is also a scam because the service manual does not mention a requirement for such a service… ever… at any mileage. Other dealers offer an “induction system cleaning” which basically means cleaning all the plumbing from the intake up to the cylinders… yes, plumbing that’s kept clean by an engine air filter (and up to the air filter is supposed to be cleaned when the filter is replaced). If it’s not in the manufacturer’s recommended maintenance, don’t pay someone to do it.

The alignment claim could be legitimate, if you haven’t already identified a scammer. In my case, I had just had the front suspension bushings replaced under warranty so an alignment had been done less than 5K miles before. Also, I knew I was getting close on my tires so I looked at them carefully before dropping the car off. The wear on each tire was perfectly even.

At a previous visit to this same dealership, the service scammer brought me a dirty engine air filter and suggested I replace it. I thought it odd that my filter could be that dirty because I only had 15K miles at the time and the manual calls for replacements every 35K miles. As usual, I declined. When I got home, I popped the hood and looked at my filter. It was spotless, and it wasn’t even the same size as the one the scammer showed me.

Dealerships aren’t the only scammers out there. On the way back, I stopped for gas and the pump defaulted to premium even though I pushed the button for regular. I’ve seen that happen at this particular gas station before and I wonder how many people don’t notice and pay the extra $5+ for a fill up (figuring $0.50/gal and 10 gal of gas).

 This isn’t exactly a new idea. The phrase “a fool and his money are soon parted” dates back to 1587 (Dr. John bridge, Defence of the Government of the Church of England). This is your reminder to not be a fool with your money.

McDonald’s Kiosks and the Labor-Capital Tradeoff

Earlier this week, there were several stories about McDonald’s adding self-order kiosks. CNBC’s Sarah Whitten did a rare “just the facts” story that says McDonald’s is adding the kiosks to 1000 stores each quarter for the next two years. Sadly, most other stories read like editorials in favor of or against the new technology and blaming or exonerating minimum wage laws. For example, Christian Britschgi at insists the kiosks are not a reaction to the minimum wage,  ignoring former McDonald’s CEO, Ed Rensi, crediting “Fight for $15” as the reason for the kiosks two year ago. Let’s look the economics of the issue to avoid getting overtly political.

Consider the simplest model of a firm that wants to maximize profit (p ), using two generic inputs, labor (L) and capital (K). We’ll use perfectly competitive input markets, so the firm can use as much of each input as it wants at the prevailing markets’ costs, wage (w) for labor and rental rate of capital (r) for capital. The firm also faces a competitive output market, so it can sell all the output it wants at the market price (p). The firm’s production is a function of both labor and capital, q(L, K), which gives the maximum amount of output for a given level of inputs. The firm’s optimization problem is summarized here:

Labor-Capital Eqn1

Solving this problem is straight forward. Take partial derivatives with respect to both decision variables and set them equal to zero:

Labor-Capital Eqn2

Both of these can be solved for p:

Labor-Capital Eqn3

Where MPL and MPK are the marginal products of labor and capital, respectively. So the ratio of price and productivity for both labor and capital are equal. What does that mean? If any of the four parts of this equation change, the firm will take actions to restore the equality. For example, if the wage doubles, the productivity of the workers would also have to double. Otherwise, the firm will substitute away from labor and employ more capital (until the equality is restored).

In the case of McDonald’s kiosks, the switch to more automation could be the result of better productivity from automation (i.e., higher MPK), but is more likely a “perfect storm” of both artificially increasing wages and increasing productivity from capital. That’s bad news for low-skilled and entry-level workers.

If you want to ensure your employability, focus on improving your productivity (i.e., raise your MPL). You do that by investing in your human capital through better education or job training. Focus on being more productive for your employer rather than simply demanding higher wages.

When to Take Social Security Benefits

Once upon a time, I promised a blog post on when you should take Social Security. Procrastination pays off because The Motley Fool just ran a post that did it for me. The short version: take your benefit as soon as you can (i.e., age 62). The trade-off is to wait and increase your monthly benefit at the expense of lower overall payout from Social Security.

Your “full” retirement age is between 65 and 67, depending on your year of birth. For younger generations, that age will probably increase as the system becomes insolvent. Currently, your monthly benefit increases about 8% for each year you delay your benefits. That could be the right decision if you don’t have enough savings to supplement your benefits. You will need your own savings because the current average Social Security benefit is only $1,372 per month. That’s $16,646 per year, barely above the poverty line for a two-person household. The maximum benefit at “full” retirement age is $2,687 per month ($32,244 per year).

Of course, all this Social Security talk only applies to those lucky enough to reach age 62 while Social Security is still solvent. According to the Board of Trustees, Social Security will pay more in benefits than it collects in taxes, starting in 2034. So if you’re under age 45, you’d better start saving to fund your own retirement. The earlier you start, the better, because of the power of compound interest. Learn more in Basic Personal Finance.

Bubbling Assets Are Not Good Investments

A recent column by Gail MarksJarvis in the Chicago Tribune warned that “Investors Should Be Wary of Bitcoin.” She warns that while Bitcoin has seen 358% gain this year, it’s probably approaching the peak of its asset bubble, and newer investors will get caught holding the hot potato when the bubble pops. They’ll be just like the losers from the 2008 housing crash, the 2000 tech bubble crash, and the Nikkei crash in the 1980s.

I’d like to add a separate warning that also applies to many other alternative investments, like gold or real estate. Often, the rationale for these investments is that they have “real” value or they’re more stable because they don’t rely on the financial system. Really? NOTHING has inherent value unless it can feed you, clothe you, or provide shelter for you. Everything else only has value because people agree on its value.

Take gold, for example. It’s a nice, non-corroding, malleable metal that’s also a good conductor of electricity. What good is it when the economy crashes and the zombie apocalypse starts? You’ll have hunks of metal. That won’t help you grow food or even buy food if there’s none available. It only has value if you find people willing to accept it in exchange for whatever they’re willing to sell.

One of the arguments people use for Bitcoin is that it’s independent of governments and central banks, so it’s more stable than fiat currencies and will survive the pending banking collapse from all the debt problems. Sorry, but nothing that grows at 300% per year is stable. Again, consider the worst case zombie-apocalypse scenario: if the “system” goes and there’s no power generation, what good is cryptocurrency when no one can use a computer to verify you have any?

If you’re really concerned about doomsday economic scenarios, build up a stockpile of food, water, and essential living supplies. If you’re looking for solid financial investments, jumping on an asset bubble is not a long-term strategy.

Financial Discipline Begins with Personal Discipline

You’ve heard the saying, you can’t love others until you first love yourself. The same can be said of your personal finance: You can’t have financial discipline if you don’t have personal discipline.

A new study by CareerBuilder shows that 78% of Americans live paycheck to paycheck. Their survey of 3,462 full-time workers and 2,369 full-time employers showed people struggle to make ends meet even at higher wages. People earning over $100,000 (9%) were living paycheck to paycheck; 28% of those making $50K to $99K do too.

The big problem is behaviors that lead to debt. 71% of those surveyed had some kind of debt and 56% said they would never pay off their debts. The same percentage (56%) save less than $100 per month.

Brittany Jones-Cooper at Yahoo Finance reported on the survey and interviewed a financial planner. He said the first step is to look at non-monetary factors like shopping and drinking in bars to “relieve stress.” The Yahoo story offers a bulleted list of ideas to consider, but it boils down to take personal responsibility. For the most part people don’t live paycheck to paycheck because someone else is not paying them enough. It’s because they are spending too much.

The solution is to create a budget to understand where your money is going. Then develop a plan to cut back the bad habits. You need to have personal discipline to stick to that plan. In time, you’ll learn to live within your means and save at least 10% of your income for the future. It’s all covered in Chapter 3 of Basic Personal Finance.

College Earnings

Georgetown University’s Center on Education and the Workforce has a bunch of reports “to better articulate links between education, career preparation, and workplace demands.” That means they attempt to determine the value of various college degrees and majors based on employment opportunities and wages.

My last post talked about AA degrees that earn more than BA degrees (based on a Chicago Tribune column that referenced a Georgetown study). The also used Georgetown data to rank 173 majors based on median income and unemployment rates.

The top 5:
1. Petroleum Engineering
2. Pharmacy Pharmaceutical Sciences/Administration
3. Geological/Geophysical Engineering
4. Mining/Mineral Engineering
5. Naval Architecture/Marine Engineering

The bottom 5:
169. Studio Arts
170. Human Services/Community Organization
171. Composition/Rhetoric
172. Miscellaneous Fine Arts
173. Clinical Psychology

For perspective, number 1 earns more than three times more than last place: $135K vs. $43K. (Remember those are median incomes.)

Think about the future earnings and jobs potential of your academic major, not just how entertaining (or easy) it might be just to get a diploma. The more you earn, the more you can save.

4-Year Degree Isn’t Only Path to a Good Job

I tweeted this, but I wanted to add a link to the blog so it would be searchable on the site. Gail MarksJarvis had a great column in the Chicago Tribune talking about all the good jobs available without a 4-year college degree. It’s based on a Georgetown University study that found 30 million jobs that don’t require a bachelor’s degree and pay an average of $55K a year.

A great line from the column: “28 percent of people who get associate degrees from community colleges end up with better jobs than those with bachelor’s degrees.” I suspect a lot of that has to do with what these people studied in the bachelor’s programs.

Things not to study (BA with poor pay) : communications, art, psychology

Things to study (AA with good pay): nursing, computer specialist, mechanical technician

Other good fields (didn’t mention pay): welder, plumber, HVAC maintenance, electrician, carpenter, bookkeeper, food service manager, security guard, industrial production manager

Classes just started again across the country. Make sure you’re studying something that’s good for your financial future.

Car Buying vs. Leasing

Are you looking to buy or lease a car and wondering what the best decision is from a financial perspective? Car and Driver just posted an article based on an interview with Daniel Blinn, a Connecticut lawyer who specializes in automotive financing. Of course, the best way to get a car is to have someone else buy it for you. If that doesn’t work, the next best way (from a financial perspective) is to get a reliable used car that’s as cheap as possible… as long as it’s also a good track car, but that’s for a different blog.

If you must have new car smell, read the C/D post to help decide on buying versus leasing.

How’s Your Financial Wisdom?

After my last post on baby boomers failing their retirement planning, you might have some smug thoughts that you’re doing much better than them. Here’s a little test, thanks to The Atlantic:

  1. Suppose you had $100 in a savings account and the interest rate was 2 percent per year. After five years, how much do you think you would have in the account if you left the money to grow? A) more than $102; B) exactly $102; C) less than $102; D) do not know; refuse to answer.
  2. Imagine that the interest rate on your savings account is 1 percent per year and inflation is 2 percent per year. After one year, would you be able to buy A) more than, B) exactly the same as, or C) less than today with the money in this account?; D) do not know; refuse to answer.
  3. Do you think that the following statement is true or false? “Buying a single company stock usually provides a safer return than a stock mutual fund.” A) true; B) false; C) do not know; refuse to answer.

The correct answers are 1-A; 2-C; and 3-B.

Based on a survey by economists Annamaria Lusardi and Olivia Mitchell, only 30 percent of Americans answered all three questions correctly. Their findings are published by American Economic Association (subscription required).

The Atlantic author warns that financial ignorance becomes more devastating in a modern economy. Fortunately, the study authors found that basic financial education can boost someone’s economic situation (by 82% of initial wealth for people with low levels of formal education and 56% for college graduates).

If you’re reading a personal finance blog (or read my book), you probably did pretty well on the test. Try to share your financial knowledge with someone you know who needs the help. They might not even know it. Start with the quiz.

Learn From Boomer Mistakes

A MarketWatch article over the weekend pointed out some important facts about baby boomers being unprepared for retirement. The article claims baby boomers will need $658K in their retirement funds, but the average employer-sponsored defined-contribution plan for boomers only has $263K.

The article goes into specifics on asset allocation, but that’s not important. Let’s look at the numbers to put them in context. Let’s assume these retirees will live 20 years beyond age 65. A $658K nest egg, growing at a conservative 3% real return, will provide $44,228 per year, or $3686 per month. Add the average monthly Social Security benefit of $1,341, and you’re looking at living on about $5K a month. That’s just below the BLS average income for all households, which would give you a fairly comfortable retirement.

The boomers who only have $263K saved up will be living on $2,814 a month (including Social Security). Can you handle living on $2,800?

It’s an important lesson to the rest of us. I’ve never met a retiree who said, “You know what? I wish I’d spent more when I was younger because I have too much money now.”

The article warns that “the typical middle-aged American couple only has $5,000 saved for the future.”

Use this article to learn from the mistakes of others. Plan for your future now. If you’re not saving at least 10% of your income now, you’ll be the example used as a warning to others in the future.