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

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The Ultimate Guide on What To Do With Your Year-End Bonus

Credit: http://www.flickr.com/photos/muppethouse/341714428/sizes/m/in/photostream/So last week, I had surgery to remove TWO of my wisdom teeth – one on each side. Now, if you’ve ever had your wisdom teeth extracted, you’ll know that the operation is relatively painless, but the aftermath hurts like a b****. Seriously. Try stuffing 2 golf balls in your mouth and you’ll get an idea of what it’s like. Owtch.

On the bright side, it left me with a surprisingly long SEVEN-DAY medical leave from work (Though I spent the first half of it writhing in pain). Pain or no pain, a weeklong break from work is awesome. I caught up on my sleep, reorganized my room, and watched like 20 episodes of Modern Family (which is awesome btw, go watch it).

How to Handle Unexpected (Nice) Surprises

A weeklong break from work is a nice surprise, and so is the other great institution of a regular job: the year-end bonus (or “13-month bonus” as it’s commonly known in Singapore).

It feels pretty damn awesome to receive a year-end bonus, even though it’s not really a true “bonus” per se. So what are you going to do with your year-end bonus this year? Here are 5 possible options:

1. Spend it – What most consumer sheep will do. “Ooh extra money! Time to buy an iPad/massage chair/goat NOMNOMNOMNOM” (coupled with crazed look in their eyes)

2. Save it – What most people will do with the remainder after they’ve purchased said iPad/massage chair/goat. Be sure to take your shopping home in a cab – the possibility of upcoming bus fare increases might leave you with a remainder of maybe $4.70.

3. Sock it into a tax-sheltered SRS account – What very few people will do but could save you hundreds of dollars in taxes next year, depending on your tax rate.

4. Invest it – What old uncles will do (also with crazed looks in their eyes)

5. All of the above – what I think you should do.

Credit: http://www.flickr.com/photos/nicubunuphotos/5296305774/sizes/m/in/photostream/This is what your bonus will look like if SMRT increases its bus fares

The All Of The Above Option

There’s really no reason why you should limit yourself to one or two choices with your year-end bonus. Instead, see your bonus as a way to give a boost to everything that will improve your life. Here’s how I’m allocating my year-end bonus this year:

1. Spend 10% of it on whatever I want – In true L’Oreal wisdom: “Because I’m worth it.”

2. Save 45% of it by adding it to the house downpayment fund

3. Sock 45% of it into my SRS account. Ta-dahhh: instant tax savings!

4. Invest the amount in the SRS account in a portfolio of sensible index ETFs

The great thing about this formula is that it lets me resist the temptation of overspending, meets my dual objectives of saving and investing, AND it saves me money on taxes next year to boot. Awesomesauce.

Do It Now

Most people get really ambitious when it comes to planning their time and money. We plan to use our time to get through our to-do lists, and we plan to save and invest our money.

But our plans inadvertently break down once time and money unexpectedly fall into our laps. Instead, we’ll spend our medical leave watching Modern Family, and squander our year-end bonuses on iPads which will probably become obsolete in 6-9 months.

Don’t make the same mistake as the other consumer sheep. Make a decision on the percentage of your bonus that you’re going to spend/save/invest. Then transfer the amounts to the relevant accounts immediately. If you’re reading this outside, set a reminder to do this once you get home. And if you’re home, do it now. If you put this off till later, you’ll run the risk of it disappearing mysteriously. Seriously. Do it now.

Are you done?

Okay, now you can go reward yourself with a couple of episodes of Modern Family. 😉

How to To Save Free Money

Happy Chinese New Year! It’s that time of the year when the malls play annoying “dong-dong-dong-dong-chiaaanngggg” music, when Singapore gets a 2-day holiday (and China gets like 14), and we get to stuff our faces with pineapple tarts and abalone and those awesome prawn rolls. Oh, and single people get to receive some FREE cash money, handed to us in red packets (Singaporeans call those ‘ang pao’) by nice relatives, accompanied with the inevitable question “So… when are you getting married?” Oh, Asian relatives. Gotta love ’em. That awkward question aside, it’s helluva awesome to be getting free cash just for not being married.

Funny thing about free money – there’s been research in behavioral economics showing that people have a tendency to do something called “mental accounting” – meaning we tend to be less cautious with our winnings than we would with our earnings. That’s also the reason why lottery winners tend to end up bankrupt. Couple that with the tradition of 2 to 3 days of partying and informal gambling (Some explanation here – Chinese New Year turns the most frugal Singaporeans into hardcore highrollers, yelling ‘HUAT AH!!!’ while playing blackjack with their ang pao cash) and it’s no wonder that your newfound wealth disappears faster than a delicious plate of bak kwa. In fact, there was one year I found myself poorer than what I’d started out with, even though I’d been sitting on my ass receiving money all day. How the hell did that happen?

It’s simple – easily accessible money is easily spent. Transfer cash from your red packets to your wallet, and it’s gone. Think about another similar scenario: You’re out with your friends at dinner and it’s time to split the bill. You realize you don’t have any cash on you, so you card it and have everyone else pay you back in cash. You leave the restaurant with $200 bucks in your pocket… and promptly spend it all within the next 3 days. Sound familiar?

Easily accessible money is easily spent. Which is why I always advocate transferring your savings into a separate bank account so you can’t touch them. This year, don’t take the money out of your red packets. In fact, shove all your red packets into some deep dark corner (just make sure you can find them later). Keep ’em in there till the end of Chinese New Year, and chances are you’ll be helluva surprised at how much you managed to accumulate. Then take your newfound wealth to the bank and deposit it that same day. Think about it – it’s the perfect chance to boost your savings or use it as an initial investment into your stock portfolio (more on that later).

If you’re going to gamble, decide beforehand how much you’d be comfortable losing, draw it from an ATM, and go wild with it – but no more than that amount. Just like what you would do in a regular casino. That practice also gives you an unintended psychological advantage – Drawing your gambling funds from your bank account forces you to acknowledge that every bet affects your net worth, thereby making you less reckless, and more strategic (definitely a good thing for poker). Conversely, gambling with the ang pao money that literally fell into your lap makes you value it less, and hence more likely to lose it. (Again, notice that I’m not saying you should NEVER gamble. Part of being rich means that you can kick back, have fun, and blow some cash if you want to. Just be smart about it :)).

Sound like common sense? Of course. Everyone knows what they should be doing, but surprisingly few people actually go and do it. If you want to achieve anything great, like building up your hugeass bank account, start with the baby steps first. Once you get the small habits down, it becomes way easier to manage the larger sums of money that’ll be coming your way. Here’s wishing you an awesome (and wealthy) Year of the Dragon. HUAT AHHHH!!