What Chinese New Year Blackjack Taught Me About Money

blackjackOkay, hypothetical scenario.

Imagine you’re on your honeymoon in Las Vegas, chilling in your swanky hotel room while your spouse is taking a shower. While checking out the minibar, you come across a $5 gaming chip in one of the drawers – the previous occupant must have mistakenly left it there.

You take the $5 chip and head downstairs to the roulette tables, where you bet it on your favorite number: 25. To your surprise, the ball lands on 25 and the dealer hands you $175. You decide to let your winnings ride by betting it on 25 again. Once again, the ball lands on 25 and your stash grows to $6,125. Taking this as a good sign, you bet it again and win, netting you $214,375.

You’re on a roll! You’re still in luck in the next round, which gives you $7.5 million dollars, more than what most people will ever earn in a lifetime. You bet it all on 25 again and amazingly, you now have $262 million, which makes you richer than Mitt Romney.

You decide to try your luck one last time. If it works, you’d be worth almost ten BILLION dollars. Sadly, this time the ball plops onto the number “00” with a sickening thud, and you lose all your winnings. You walk back to your hotel room and tell your spouse you were playing roulette downstairs. Your spouse asks how you did.

“Not bad,” you reply, “I only lost $5.”

The Great Chinese New Year Mystery

Sooooo…. What does a botched up roulette game have in common with Chinese New Year?

For most of us here in Singapore, Chinese New Year involves a helluva lot of eating, answering awkward questions about why you’re not married, and… gambling.

This year, I found myself wondering why Chinese New Year was such a popular time for gambling. Most of the time, I scoff at the hordes of people who frequent casinos and throw their hard-earned savings away. But whenever Chinese New Year rolls around, I find myself stumbling to blackjack games like a delirious addict on too much bak kwa.

After pondering over this curious dilemma for a couple of days, I had my conclusion: The culprit was the innocuous little ang bao.

(Side note: For my international friends who don’t know what “ang baos” are, they’re red envelopes filled with cash that your relatives give you during Chinese New Year while you’re still unmarried. #norushhere)

Mentally Accounting for Mental Accounting

Psychologically, receiving an ang bao has exactly the same effect as finding a $5 chip in your Las Vegas hotel room. Namely, they’re both “found” money, which inflicts this interesting psychological effect on you known as mental accounting.

Nope, mental accounting has absolutely nothing to do with your ability to multiply 17 x 32 in your head. Instead, it’s a psychological phenomenon that causes you to treat money differently depending on where it comes from, where it is kept, or how it is spent. So mental accounting posits that you’d treat $100 from an ang bao very differently from $100 you’ve worked hard to earn. Mental accounting causes you to spend $500 in your vacation allowance way more freely than you would for the same $500 in your savings account.

But mental accounting has a dark side too. It causes you to be flippant when you’re dealing with “surprise” or “additional” money, like your bonuses, or your gambling gains. Ever find yourself winning a hand at poker, and then aggressively calling or raising in subsequent rounds? That’s mental accounting at work, and it could easily work against you.

Two Systems to Prevent You From Getting Screwed

The strategy to prevent mental accounting from screwing with you is to set predefined systems, something I practice as much as possible. Go to all gambling games with two predefined rules: 1) a stop-loss and 2) a lock-in percentage.

Most people are familiar with a stop-loss, which is a predefined amount you’d be fine with losing. But few people implement a lock-in percentage, which kicks in once you start winning. For example, if I set a lock-in percentage of 20%, I pocket 20 cents for every dollar I win and don’t touch it for the remainder of the night. These rules have helped me to save hundreds of dollars over the past few years.

But the awesomeness of the lock-in percentage rule goes way beyond Chinese New Year blackjack games – Think about how you can apply it to your bonuses, allowances, inheritances, rewards, rebates, or any sort of “found” money you come across. For example, predefining a rule that states you’ll save 50% of your bonus will help you to save way more effectively than the average cubicle dweller who blows his entire bonus on dumb things to overcompensate for his sad, sad life.

When applied right, predefined rules could potentially save you tens of thousands of dollars throughout your lifetime.

Psychology > Tips

Ask most people how they handle their personal finances, and they’d give you all sorts of tips and tactics like choosing the right credit cards or investing in some obscure growth stock.

However, while we don’t think of it often, it’s interesting how psychology has such a disproportionate influence on our ability to hold on to and grow money. A mastery of a couple of psychological principles could be way more effective than hundreds of money tips and tactics.

So remember this the next time you’re at a roulette table. Don’t say I didn’t do nothin’ for ya. 🙂

Footnote: Definition of mental accounting and casino example taken from “Why Smart People Make Dumb Money Decisions” (aff link) by Gary Belsky and Thomas Gilovich

Image credit: Images_of_Money

Advertisements

Why You Should Never Be Jealous

Credit: http://www.flickr.com/photos/brennuskrux/3356833255/sizes/m/in/photostream/Hola! So sorry for being MIA for the past couple of weeks. It’s the usual November workplace crunch, and I’ve been occupied with a ton of work including, among other things, emceeing my company’s World Marketing Conference – a glitzy 2-day event attended by senior management and hundreds of overseas sales and marketing staff. Here’s what was running through my mind right before the event started:

Emcee-ing W.M.C

I’m standing in the middle of the stage, microphone clasped in my sweaty palms, bright spotlights training on me like police searchlights on a trapped prisoner. In front of me sits a sea of hundreds of business-suited men and women, murmuring in anticipation. My CEO in the front row looks expectantly at me and frowns.

I’m nervous because I’ve never emceed a formal event before, let alone one as huge of a scale as this. Backstage, I silently pray that my scripted jokes wouldn’t be met with stony silence. One screw-up, one waver in my voice, could affect my reputation for years to come. It’s like freakin’ high school all over again.

But then again, no one knows better. Just by looking at me, no one can tell that the only emceeing experience I’ve ever had is hosting my baby cousin’s birthday party. And so I get a stunning revelation:

Just fake it.

I take a deep breath, smile my biggest smile, and start talking. The delivery goes well. My colleagues congratulate me afterwards. No one could tell I was nervous as hell. One of the big bosses slaps me on my shoulder and tells me to get ready for more emceeing gigs. I may not ever be as good as a professional, but I can totally fake a performance that’s good enough.

How Do They Afford All This?

My successful attempt at faking got me thinking about how everyone goes through life wearing masks and faking something.

Whenever I hit the clubs, I can’t help but observe the dudes sitting at the VIP tables. They’d be surrounded by other rich-looking, beautiful people, as if they just stepped out of a Like A G6 music video. Just like me, they’d probably be dressed in a casual shirt and jeans, but their shirts are $400 apiece from Armani and mine are $40 from the sale rack at Uniqlo. They’d be downing champagne by the bottle, while I’d be chilling with my bottle of Tiger Beer. Once the night is over, they’d be driving home in their Porches or Maseratis, while I’d be stumbling to find a cab (or a Night Rider bus if I’m not too tipsy).

For a brief moment, I’d think to myself: “How do they afford all this?” I’d start to wonder what they do for a living, and how awesome it must be to be them.

Wealth – The Easiest Thing To Fake

And then I remind myself that I’m simply jumping to conclusions. What if they’re faking it, just like how I was faking my prowess as an emcee? After all, wealth is the easiest thing to fake. Blow a couple of months’ salary on clothes and drinks, and anyone can look like a superstar.

The truth is, I don’t know anything about them. I don’t know if they’re prudent in their spending, or if they spend every cent they earn. I don’t know if they earn thousands of dollars in passive income, or if they lie awake worrying about how they’ll keep up their lifestyles. I don’t know if they have a rock solid portfolio, or if they’re so deeply in debt that even their enormous paychecks can’t make a dent in their credit card bills.

Redirecting the Moolah

And then I remind myself about just how much I’ve been pouring into my savings and investments, month after month, without fail. No wonder I haven’t bought a new pair of jeans in 4 years – I’ve been too busy shoveling cash into index ETFs and building up a downpayment fund so I don’t have to take on too much mortgage debt.

No wonder I can’t afford to celebrate the end of the year with five bottles of champagne, because I’d much rather set aside a few hundred dollars every month for travel, funding trips like my $3,500 West Coast vacation. It’s not that I can’t afford to spend on nice clothes and drinks, I just choose to put my money towards things that I value much more: freedom and experiences.

Lots of people fake their wealth. But without looking at their audited personal financial statements, there’s really no way to tell if they’re the real deal, or if it’s just a well-polished illusion. We simply can’t make assumptions just by looking at people.

So keep that in mind the next time you watch an emcee on stage, or catch yourself getting jealous of that well-dressed dude at the VIP table. They might just be faking it. 😉

Using Systems to Dominate Learning (And Anything Else)

The MIT Challenge

Recently read a guest post by blogger Scott Young, who stunned the world by doing the impossible. Scott completed MIT’s notoriously difficult Computer Science curriculum, which usually takes bright MIT students four years to finish, in one year. Watch the TED talk on his MIT Challenge here:

To do this, Scott adopted a carefully constructed learning system that let him compress the concepts of a 4-year education into a short span of time. This wasn’t simply a matter of cramming for exams. Scott not only passed all the exams but also completed all the programming projects, which require a deep understanding of the material. How did he do it?

First, he watched all the lectures online to get a birds-eye view of the material. By watching the video lectures at 1.5x-2x the normal speed, he managed to go through a semester’s worth of lectures in a couple of days.

Next, he spent a lot more time developing insight and drawing connections. He’d first take a piece of paper and write the concept that he was trying to understand at the top. He then wrote out his own explanation, as if he was teaching it to someone else. When he came to a gap in his knowledge, he’d go back to the textbook or find it online. In this way, he systematically filled in all the knowledge gaps until he had a deep, complete, understanding of the material.

Third, he went through practice problems with the solution key in hand. He’d check his work question-by-question, getting immediate feedback for every question he did. Compared to other students who might have to wait weeks before they got back their graded assignments, Scott’s system gave him a tight feedback loop which dramatically improved his effectiveness.

As Scott wrote in a guest post describing his journey: “…the method you use to learn matters a lot. Deeper levels of processing and spaced repetition can, in some cases, double your efficiency (emphasis mine). Indeed, the research in deliberate practice shows us that without the right method, learning can plateau forever.”

In short, Scott wasn’t studying harder; he was using a system to study smarter.

The Power Of Systems

Scott’s MIT Challenge forms the premise of the book I’m currently working on: That adopting the right systems can help you to achieve much, much more than the average individual.

You can use systems to create a desirable habit, deliver happiness to people, get fitter, be more productive, negotiate better.. pretty much anything you want to achieve in life.

Most people don’t know how to improve their own lives because they rely solely on “trying harder”. How many of us make New Years resolutions to go to the gym more often, only to fail miserably before February comes around? How many of us resolve to be more productive at work, but end up online shopping and Facebook stalking before lunchtime? And how many of us resolve to saving and investing more this year, only to have all our extra cash wiped out by a year-end vacation?

Instead of trying harder, applying systems is infinitely more effective. Here’s why:

1. Systems remove the need for “willpower”

The trouble with willpower is that it’s easy to lose steam. We burn out. John Tierney, coauthor of Willpower: Rediscovering the Greatest Human Strength, describes willpower as a finite resource that runs out just as easily as a fuel in your car tank. Systems, on the other hand, take control away from you. They force you onto a certain path so that you don’t have to use willpower. It sounds counterintuitive, but we’re more likely to be successful at something when we are willing to hand over control to a system.

2. Systems are much simpler to follow 

If you’re trying to lose weight, think about the barrage of information out there on weight management. Hundreds of articles and blogs give handy “tips” and nuggets of advice, but they’re often conflicting and confusing. A system, on the other hand, is based on rules. Step 1, 2, 3. Go to a personal trainer and he’ll tell you exactly what you need to eat, how to exercise, and all that jazz. You don’t have to think – all you need to do is stick to the system, and you’ll succeed.

3. Systems are smarter

Think about Scott Young’s system for accelerated learning. It’s a simple formula, but it’ll save you a lot of time and effort when it comes to studying. Think about how much easier it is to set up a GIRO standing instruction that automatically helps you to save every month, instead of putting in time and effort to “save harder”. Finding the right system can help you to do things a lot more efficiently and effectively than most people.

Viewing the world from a systems perspective

Systems are effective, more so than many of us realize. That’s the premise of this blog, as well as the upcoming book. So far, I’ve showed you how to use systems to improve your savings and investments, find the right types of insurance, and spend more efficiently on the things you love. The book will delve a little more deeply into the psychology of saving, spending and investing, and will describe more detail on the systems that will help you tackle your personal finances.

You start to see things differently once you look at life from a systems perspective. Large challenges suddenly don’t seem so daunting anymore, and possibilities start to open up.  Are there any problems that you’re currently stumped by, but could possibly be solved by applying a system? I’d love to hear from you, even if you haven’t found a solution yet. Leave a comment, or send me an email at cheerfulegg@gmail.com.

Cheers 🙂

The New Psychology of Spending Money

So last weekend, I met up with a friend who’s kind of a huge foodie, like she wouldn’t think twice about dropping 200 bucks for a meal at a restaurant. She’s really fussy about her food, which I can never understand because I pretty much eat anything. Except papayas, they’re gross.

Anyways, this friend was thinking about checking out this flashy new Michelin Star restaurant that just opened. She was excitedly telling me about her plans, but abruptly stopped herself and said, “But you probably wouldn’t approve.”

I was a little taken aback. Why wouldn’t I approve? “Because you’re all about saving money and personal finance,” she retorted.

And then it struck me: Most people believe that “personal finance” and “spending money” are polar opposites. This couldn’t be further from the truth – I’ll tell you exactly why following a personal finance system means you can spend on what you love (and no, you don’t have to wait till you’re all white-haired and wrinkly).

The Toilet Paper Thief vs The Guy Who Spends On What He Loves

Let’s compare 2 friends – we’ll call them Mike and Paul. Mike is your typical frugal saver. He doesn’t have a personal finance system but he tries his best to save more. He cooks ramen at home to save money. He takes the bus instead of the subway so he can cut 10 cents per day on his trip to the office. He wears the same pair of jeans every time he goes out. When he goes travelling, he steals the toilet paper and soap from the hostels. He picks up 5-cent coins from the ground.

Paul doesn’t scrimp as much as Mike does. In fact, he spends on what he loves. Paul manages to do this because he has a kickass personal finance system: He’s automatically saving and investing pre-determined amounts every month. He’s automated his credit card and phone bills so he never has to worry about missing a payment. He’s set aside “Big Play” money for parties and vacations.

Once all that is done, Paul has a few hundred dollars left over each month which he can spend on the things he loves, no matter how much they cost: Clothes, meals, drinks, massages – in short, everything that makes it awesome to be young.

Paul doesn’t break a sweat if his cash runs out before the end of the month. He simply stays home, cooks, and reads a free book to pass the weekend. In a couple of days, he’ll receive his next monthly salary, automatically save/invest/pay off his bills, and with the amount of money left over, continue spending on the things he loves.

Who do you think leads a richer life?

Old Psychology vs New Psychology

Most people assume that just because I write about saving and investing, I’m one of those crotchey old personal finance dudes, hobbling around with a gin and tonic in one hand, nagging people to stop spending money. That’s the old psychology of spending money, the one that most clueless people mistakenly follow.

There’s a new psychology of spending money: If you’re faithfully following a personal finance system, you’re allowed to spend on anything you want with the money left over.

In the past 2 months, I’ve had a $325 dinner, went on a $3,505 vacation, bought a new Amazon Kindle, and last night, I paid as much as $14 for a beer (that last one was totally not worth it). I did all of the above absolutely guilt-free, because I’ve built, and followed, a personal finance system that takes care of my saving, investing and payments.

There’s a key difference between the following two statements:

Crotchy Personal Finance Dudes (like Mike): “I will never ever spend on a $200 dinner”

People who read Cheerfulegg.com (like Paul): “I’ll totally spend on a $200 dinner, as long as I can afford it after I’ve saved and invested.”

Which person would you rather be?

PS: Leave a comment or send me an email (cheerfulegg@gmail.com) on how you feel about spending money. What do you spend on and why? What is the one biggest thing you struggle with when it comes to spending? What would you like to learn from my blog to help you overcome it?

The First Mention of My Top-Secret Project

So I might as well be upfront about it right now: I’m writing a personal finance guide for young Singaporeans.

I honestly have no idea on how it’s gonna turn out, or how long it’s gonna take to write. But the pre-research I’ve done for the past couple of weeks from various interviews has given me some very positive results, so I’m super psyched about this project!

Before I go any further, I’d like to really understand what’s important to my potential readers. So if you’re a young Singaporean (21-35 years old) with a full-time job, or if you’re about to start working, I’d love to hear from you via this really short survey. It should take you less than 5 minutes to complete, but it would help me tremendously.

A Bonus for Your Efforts

Now, I know that most surveys are annoying to fill. So to show my appreciation, I’m creating a free gift that might be useful to you. Remember how I’m always preaching about opening a Long-Term Savings account? You’ll want this account to have as high of an interest rate as possible – because that’s where the bulk of your savings will go.

The trouble is, it can be a pain in the ass to find a bank with the right interest rate. Most banks tack on so many conditions to their accounts that it can be really hard to compare them. So… I created a Singapore Savings Account Cheatsheet that compares the interest rates and summarizes the conditions, so you don’t have to do the legwork yourself. This itself could be worth more than a hundred bucks – If you have $25,000 in savings, even a small 0.5% increase in your interest rate could mean a difference of $125 a year.

I’ll email the cheatsheet to you in a couple of days if you submit your email address and sign up for my private list in the survey.

Also, it would be supermegaawesome if you could share this survey with 3 of your friends – It’ll really help me to get better insights, which will in turn help me to write a better book for you.
Here’s the link to the survey again: http://www.surveymonkey.com/s/T9BTPYS. Thanks in advance! 🙂

How To Get Rid of That Bulge In Your Pants

Yes… it’s a big one. And I confess that I walk around with it all day.

Honestly, if we could all just get rid of cash and pay with credit cards, like in this Visa ad, my wallet – and that bulge in my pants – could get a lot smaller (Insert snide comment about my manhood here). I have a love affair with credit cards – they’re compact, sexy, help you to rack up rebates, and build your credit score – which could save you tens of thousands of dollars if you ever take out a mortgage. Some people are irrationally scared of them (“them credit cards are the devil!”) only because they don’t understand how to deal with them. That’s stupid. Credit cards can totally work for you if you have a system that integrates them into your life.

So far, I’ve blogged about the essential credit card ingredients:
1. Set up automatic payments
2. Use cashback/rebate cards as much as possible
3. Limit your number of cards to 2 – 4

Today, I’m gonna talk about how to put all of ’em together into a system, so you never ever have to worry about credit card admin ever again.

The sexiest credit card system you’ll ever use

1. Decide on the single most important reward you’d like to get out of your credit card, and pick a card that offers it. We’ll call this your SEXY IMPORTANT CARD (SIC). They could be anything, but you have to pick just one:

  • Cashback – My personal fave, so I don’t have to figure out how to spend my points before they expire, and it’s like getting a discount for everything I buy.
  • Airline Miles – if you travel a lot
  • Random dining/shopping rewards

2. Channel 80-90% of your spending towards your SIC to maximize the rewards that are the most important to you. Literally try to spend everything on this card: wining and dining, shopping, toothpaste, major purchases and gifts, and Oompa-Loompa slaves.

3. Pick 1-3 other cards which will allow you to enjoy any exclusive credit card benefits not covered by your SIC. We’ll call these your AWESOME BENEFIT CARDS (ABCs):

    • 1 Visa and 1 MasterCard should work just fine for most people – I advocate having at least one of each because they’re the most general purpose and widely used, and you can take advantage of Visa-only or Mastercard-only promos if you come across them
    • I hardly ever charge anything to my ABCs. I keep them strictly to enjoy any exclusive card benefits that my SIC isn’t eligible for.
    • Don’t fall into the trap of opening too many new ABCs – read my post on limiting your number of cards.

4. Keep your ABCs active by directing a small, regular, recurring charge to each of them.

    • This could be as tiny as a monthly $5 magazine subscription. I have 2 ABCs –  I direct my $20/month phone bill to my Visa and my $100/month transport charge to my MasterCard.
    • The main idea is to keep your ABCs active – this lets the card companies know that you’re alive, which makes it easier for you to negotiate for fee waivers and credit limit raises when you need them.
    • More importantly, it builds your credit history – a long repayment history on these cards (even if it’s just $5 every month) will help to boost your credit score, as long as you pay them off on time every month.

5. Arrange for automatic payments for your SIC and your ABCs so you never miss a payment.

That’s it! This system will concentrate your spending on your SIC, accumulating rewards where it matters most to you. Your ABCs will give you the flexibility to enjoy whatever benefits that come your way which isn’t covered by your SIC. And automatic payments will ensure that you don’t have to deal with all the damn admin that comes along with paying those bills. (The only bit of admin that you do have to do is to check your monthly statements to ensure that there aren’t any suspicious charges like HOOKERS on it. But that shouldn’t take you more than 5 minutes every month)

Sexy and you know it

Credit cards are getting more general purpose these days. Visa has a wave and go option. If you’re Singaporean, some cards double up as an EZ-Link card (to my overseas friends – what we use to ride our subways/buses). We might eventually not have to use cash in the future, and be like this guy: 

In the meantime, try my system out, and let me know if it helps you out. 🙂

Treat A Friend To Lunch

I’ll let you in on a little secret: Being happy doesn’t depend on how much you earn, but how you spend your money. 

We’ve all heard that money doesn’t buy happiness – Multiple studies have shown that beyond a certain (surprisingly low) income, happiness very little to do with how much you have. Yet, we spend all this energy worrying about how we’re going to buy that ridiculously expensive house, that car, that iPad, and all the bling bling in the world – only to find that when we’re finally able to afford them, they’re not gonna make us a whole lot happier. Kind of stupid, isn’t it?

The trouble with possessions is that we get used to them. Really quickly. How many of you look at your iPhone and marvel at its technological wonders and go “Wow! I really don’t need another gadget for the rest of my life! Love AAPL ❤ ❤ <3”. Nope. Instead, we aimlessly flick through our apps, lock and unlock our home screens, and complain about the shitty battery life that can’t even last you till lunchtime. Retail therapy doesn’t work – and the rest of your possessions aren’t going to make you consistently happy either.

Here’s my contention: I think you can be a helluva happy right now. At this very moment. WIth the income you’re earning. How? Pick up your phone and arrange to meet someone this weekend. For brunch, for dinner, for drinks, for a museum, for a picnic, for a concert. Oh, and offer to pay.

What?! But personal finance is all about saving money, is it not? How the hell am I supposed to save money when I’m friggin PAYING for people all the time? Die, you freeloading leeches, die!!! Just stop for a second and think for a bit here – what are you saving all that money for? I don’t know about you, but I only want two things out of being rich: security and happiness. I’m pretty confident that your financial security’s pretty easy to take care of with a basic savings and investment plan, that I’ve ranted about here previously. (In fact, this article writes that you can pretty much live a super happy and comfortable retirement by by investing $1,1,65 per month at 8% p.a for 35 years. Or, if you’re married with a spouse earning $50k per year, that amount drops to just $303 per month).

So security is taken care of, and with the amount of money left over, you just have to address the “happiness” part of it. And according to Laura Vanderkam, author of the upcoming book “All the Money In the World”:

“Planned pleasant experiences give you a triple happiness whammy. You anticipate them beforehand – and as any kid waiting for Christmas knows, anticipation is often as pleasurable as the experience itself. You live through your adventures, and then you savor the memory afterwards. Eating is, of course, one of the most pleasurable things people do. In one study in which women reported how happy they were at different points of the day, eating ranked just below sex.” (from this Yahoo Finance article)

The point is, experiences count. And if you want to be happy, then spend as much as you can on experiences. I don’t really spend a lot of money on stuff. I think I own like 4 shirts and 2 pairs of jeans that I pretty much wear over and over. I don’t own an iPad or a car (and I don’t see the need to own either within the next few years). I spend pretty much all of my guilt-free spending account money on dance classes, vacations, drinks with friends, and lately, exploring yummy restaurants throughout Singapore with amazing company 🙂 Last Tuesday, I had a bowl of steaming hot pho noodles with beef balls, got treated to a Ben & Jerry’s waffle with TWO SCOOPS of ice cream (zomg life win), and then sweated it out at a helluva fun dance class. I came home at midnight, and collapsed into bed with a huge smile on my face. And that, my friends, is happiness 🙂