Handling Finances

With recent worldwide food shortages causing riots, the scarcity and price of food is a serious issue.  Our food prices have increased significantly from flour and rice prices up 13% this year to eggs that are now 30% more expensive than last year!  While increasing prices are squeezing some who are just barely making ends meet, the truth is that the vast majority of us can easily absorb this kind of price increase simply by occasionally biking to the store or canceling our internet access or cell phone contracts.  The truth is that we’re not in danger of starving as in many countries.  I was surprised, then, to see an article from the Wall Street Journal advising readers to stockpile food as an investment (note: I linked to the Yahoo Finance page since it’s freely available to everyone)!

Be honest — how much money do you actually spend on rice every year?  I eat rice once a week or so, and I suspect I could “invest” $60 in a year’s supply of basic white rice.  Even if price increases accelerate (and they probably will), earning 20% on this investment will gain me $12 a year.  Yes, 20% is a lot, but thinking clearly for a moment, how much space am I willing to invest along with my money?  I’ve got to be honest, emptying out a closet for my food stockpile is not worth the $200 or so I could save a year.  And that’s not even counting the fact that I’ll eat a lot more of these stockpiled foods if they’re so easily available.

What Should We Do?

Are you really worried that food prices will continue increasing?  I sure am!  But instead of throwing out your kids toys to make space for bags of flour and rice, consider investing that money in companies that will profit from increased food prices.  Farmers will certainly make more money, and in turn they will buy more farm machinery and have more money for fertilizer and irrigation etc…  Of course, you could also invest in funds that buy wheat, corn and rice directly, but I find that pretty immoral — essentially you’re hoarding much more food than you could ever use and driving up the price at a time when people around the world are starving and rioting due to the scarcity of the food.

Also, I don’t see a problem with keeping your pantry full.  Don’t buy as little flour as possible because it’s more expensive, keep your flour bin full and as long as the prices continue to increase, you’ll always have some food at lower, pre-increase prices.  This strategy also gives you a bit of a buffer in case the locals go a bit crazy and buy all the rice in your town for a week or two.  While you won’t be contributing to the panic buying, you’ll also have plenty of food to last until new shipments come in and demand drops to more reasonable levels.  We’re not going to run out of anything — it’s just going to get a bit more expensive!

Why are Prices Increasing?

It’s really pretty basic supply and demand.  Countries like India and China are becoming much more wealthy, and as their citizens rise from poverty, they start to purchase more and more high-quality food.  At the same time, the global demand for bio-fuel like corn-based ethanol drives the prices of some specific crops.  When certain crops become more profitable than others, farmers abandon other crops, decreasing the supply of ALL crops and raising prices across the board.  Add in the occasional local drought or flood, and mix in some institutional investing (i.e. pension funds buying wheat futures for profit) and price increases aren’t all that surprising.

Stop Complaining and Give!

In the end, it’s no use complaining about it.  Some Americans will have to tighten their belts and maybe even give up high-end foods like porterhouse steak.  A few will have to choose between staples like clothes or food.  Most of us will simply have to accept that inflation works in cycles and be grateful that we’re wealthy enough that we don’t have to worry about whether we’ll survive the riot when we go to the supermarket.

Look at your rising food costs and instead of feeling sorry for yourself, consider those around you that truly can’t afford the increase.  Increase your giving to food shelves that are hurting badly at the double problem of rising prices and lower contributions in a slowing economy.  Consider donating to charities that specialize in bringing food to the neediest on our planet.  I’m particularly fond of CARE as they try to purchase food locally instead of dumping cheap food in a country and potentially harming local farming, but the issue is not one-sided, and in a time of crisis like this, any well-run charity that fights poverty will make good use of your money!  Check out Charity Watch for information on charities that use money responsibly and to weed out the scams.

On Wednesday, I wrote about recognizing expensive habits that can bust any budget. While recognizing habitual spending can help set priorities, recognizing how we make decisions can help us to develop good habits to begin with. Unfortunately, this isn’t as easy as it might sound.

To put it bluntly, our days fighting tigers in Africa have left us with some quirks that lead to poor decisions.  Advertisers are fully aware of these behaviors and use them extensively to affect our behaviors.

Be aware of anchors.

The first is something I find particularly fascinating — anchoring.  We don’t simply memorize every single price we’ve ever seen, instead we tend to compare similar items to determine value.  A good example of this is in restaurants where there’s a long list of similar foods for various prices.  If sales of the more expensive (and profitable) dishes are slow, lowering prices can actually hurt sales further.  Instead, increasing the price of a couple of dishes will make the rest of the food seem more reasonably priced!  Similarly, even discount stores will often prominently display expensive items along with slightly lower “sale” prices to make the sales seem even better than they are.

Similarly, when people develop anchors, they’re hard to change.  When people move from areas with low house prices (say, Iowa) to places with high prices, they tend to buy much smaller houses.  If they move from areas with high prices to low prices, they tend to pay the same amount and get much larger houses.  In moving, it’s generally a good idea to rent for a year or so to allow time to reset the anchors.  With other  items, it’s important to evaluate the actual value (i.e. will you use the item?  How often?) and consider what else that money could purchase.

Consider cost with each purchase.

Say you normally make coffee at home, but one morning you didn’t have enough time.  You purchase a small cup at the coffee shop near work, and go on with your day.  It’s just a one-time thing, right?  Probably not if you’re an average human.  You see, we’re wired to take shortcuts in our thinking and one shortcut is that we avoid making the same decision more than once.  Once you’ve bought coffee at that coffee shop, you’re much more likely to go back in a couple days — maybe even if you didn’t forget to make coffee in the morning!  To avoid this kind of habit, you have to develop the habit of considering the cost every time you make a discretionary purchase.  Don’t just assume (as we’re all prone to do) that because you have been spending at a particular coffee shop, the spending is worth the cost because it’s entirely possible (even likely) that that spending started as a “one-time thing” that you just never reconsidered.

Think before buying.

Again, it’s important to think before each purchase — even everyday purchases.  Experiments have shown that simply thinking about what else you could purchase with the same money minimizes the effect of anchors and habitual spending.  Spending some time to consider the purchase can result in odd behavior — I sometimes stand in line for a few minutes for a drink or snack before turning around and leaving when I decide the purchase isn’t worth the cost.  Still, I think that a little weirdness is well worth the saving you get from carefully thinking before buying.

I’m a big fan of expensive luxuries. I own an expensive digital camera (with expensive lenses), two computers, a keyboard, and a rather long list of other things I don’t really need. I use most of them extensively and I feel they’re worth the thousands of dollars I put into my hobbies.

Unfortunately, small habits can eat away at earnings and pull money away from the large purchases I strongly value. For example, spending just $5 a day at work for lunch is 3% of your salary at $20 an hour or 2% at $30 an hour. And that’s before taxes! Drinking coffee instead of water can eat up hundreds of dollars a year even if you brew your own — I promise you’ll wake up again once your body gets used to non-caffeinated life again. Drinking alcohol is even more expensive, and I won’t even get into more addictive habits like smoking!

Kick the habit?

If money were the only goal, we’d all be riding bicycles to work and eating Ramen for each meal. In truth, money isn’t important except as far as it enables you to accomplish the things you really value. Because of that, I’m not interested in condemning expensive habits, but it is important to be aware of them. When you are conscious of what your spending on morning coffee, you can choose whether or not the cost is worth the benefits. The one thing I would advise is to ignore withdrawal symptoms (unless you’re on hard drugs — then get professional help!) If you enjoy your morning coffee, by all means continue to pay for the caffeine jolt, but I can guarantee that years of spending money on coffee will heavily outweigh the month-long battle to stay awake as you wean yourself from the drug.

Once you’ve recognized the habits, you can also choose to simply cut costs rather than cutting the habits. If you think spending thousands of dollars a year on high-end, prepared coffee is too much, you can always learn to make it for a fraction of the cost at home. If it’s the caramel lattes you really enjoy, you can do that at home too, for the price of a little more time each morning.

Take control.

I don’t care if you do value your morning mocha enough to spend $10 a day on coffee — the key is that you need to be aware of the cost and make an active choice to spend on coffee. After all, I don’t know how much you make, how much you spend (or save) in other areas or what you value in your life. All I know is that if you allow habits to continue without carefully considering what they cost, you’ll lose money like water through a fire hose. Even worse, if you don’t know where your money is going, when it dribbles out through your habits, you won’t feel like you got your money’s worth when it’s gone at the end of each month — even if you’re spending on stuff you value highly!