Net Worth: $50,000,000

Annual Salary: $3,500,000

Home:  Lives with family in $6,200,000 Los Angeles, CA home

Vehicles: Smart Car (Can’t drive yet!)

Investments:  Investment Fund (Locked until 18 years old)  

I’ve managed to keep my losses to a minimum these past few months but I’m still afraid to look at my portfolio every day… so I can only imagine how investors across the country are feeling.  I’m sure a lot of people are asking “What should I do in this Bear Market?”.  It seems like every day we hope for a turnaround but the Dow continues to dip and crude oil prices creep up.  One coworker asked me “Can I really afford to keep my money in stocks?  I’m thinking of pushing everything into cash”.  It takes everything inside of me to stop from screaming.  DON’T DO THAT!  We’ve all heard the phrase “Buy low, sell high” but why is it so difficult for us to practice that?  It’s one of the fundamental guidelines of investing yet novice investors continue to fall victim against their better judgement.  Why would you wait until your stock plummets, sell at its low, and then miss out on the rebound?  You’ve taken the risk associated with holding a stock and now you should be rewarded with the rebound.  In 1974, during the first nine months of the year, the Dow sank 30%.  But in the month of October, it rebounded a whopping 17%!  For investors who couldn’t stomach the risk and sold in September, they missed out on 17% of gains.  If only they held on one more month.  I was browsing CNN Money and came across this article that I really liked.   Here’s some advice to help you stomach this bear market:

1.  Goals.  If you’re saving up for retirement 10, 20, 30 or even 40 year away, this bear market will barely be a blip on your financials.  Remember that historical data is on your side.  While we’ve seen many rises and falls (Oct 19, 87/Tech Burst/etc) historically, the market has gained.  So stop fretting, your retirement in thirty years is still secure.

2.  Perspective.  It might seem like the end of the world right now but a little perspective is always good.  In the 1970s, GDP was falling but today, it continues to inch ahead.  Our unemployment rate of 5.5% is about half of what it was in the early 1980s.  Inflation was 14% in the early 1980s yet is sitting at around 4% today.   

3.  Reevaluate.  This might be a great time to review your portfolio.  Is your portfolio really as diversified as you want it to be?  Has this bear market exposed any weak aspects of your portfolio?  Many times investors plunge head first into risky investments but once their stocks start to lose money, they realize they can’t stomach the risk.  Two of my friends are in this position right now.  Now that they are losing money, they want to cash in when the opportunity arises and go into some safer investments.   Take this as a (hopefully-not-too-expensive) learning experience. 

What techniques do you use to stomach this bear market?

Net Worth: ~$200,000,000

Annual Salary: $19,500,000 (NBA Contract) $19,500,000 (Advertisements - Sony, Vitamin Water, Nike)

Home: $4,300,000 Newport Beach, CA

Vehicles: Range Rover, Ferrari 360 Spider, Lamborghini Murcielago, Bentley

Investments:  Co-owner of an Italian basketball league, Olimpia Milano   

1. Flight Change Fees - Most of the “cheap” plane tickets found today are non-refundable and non-transferable. If you want to change your flight date or time, be preparted to pay more than $50 in fees. For that price, that “cheap” ticket doesn’t seem so cheap anymore. Make sure your plans are established. If you think you may have to change your flight, look into spending a little extra to ensure your ticket is flexible.

2. Seating Choice Fees - Do you want to choose your own seat?  Nobody wants to sit in the middle seat and everyone wants some extra legroom.  There are a few options you have to ensure a more comfortable ride, but you’ll be paying for them.  American Airlines charges $15 to change seats for those who don’t buy their ticket directly from them.  United Airlines has an economy plus program that gives you 5″ of extra legroom whenever you fly.  But you’ll be paying a handsome $299 a year for membership.

3. Booking Fees - Unless you’re booking a flight directly from an airline’s website, you’ll likely be paying a booking fee.  Your bargain airfare suddenly becomes $15 or $20 more expensive.  Even if you call into the airline and directly book, you’ll be charged around a $15 phone processing fee.  Buying directly from an airline’s website is the only way to avoid paying a booking fee.  Can you find the same deals on an airline’s website though?

4. Curbside Check-in Fees - Many “quick-and-easy” curbside check-in locations will charge a few bucks to handle your luggage.  The upside is the lines are generally shorter and quicker if you’re in a rush.  The downside?  You’ll feel like a jerk if you don’t tip the person on top of the fee you pay.

5. Extra Luggage Fees - This is one fee that has consumers in an uproar right now.  Most airlines charge fees when luggage exceeds a certain weight or if you want to check in more than the standard (1 or 2) bags.  Now more airlines are charging fees to check in any bags.  United charges $15 each way for customers to check in a first bag and $25 each way to check in a second bag.  That means a person that wants to check in two bags for a round trip flight will pay $80 extra!

6. Hard Copy Ticket Fees - If you are clinging on to the past and have yet to embrace e-tickets, you’ll be paying a huge fee.  Airlines are charging people $50 to $75 if you want your plane ticket sent to you through the mail.  For me, e-tickets are much less of a hassle.  I don’t have to worry about forgetting my plane ticket and all I show up to the airport with is me and a form of ID.

7. In-Flight Ammenity Fees - More airlines are starting to charge fees for “comfort” items.  Air Canada now charges $2 for a pillow and a blanket and Jet Blue recently added a $2 charge to their headphones.  Others are following suit and adding fees to everything from snacks to coffee.

8. Redemption Fees - If you have frequent flier miles or travel vouchers that you want to redeem, you may have to pay some fees.  Northwest airlines charges $50 if you wait until the last minute to redeem voucher ticket.  And most of the time, you can’t redeem vouchers through the internet.  But if you redeem it over the phone, be prepared to pay those phone booking fees (see 3).

What new fees have you heard about?  Have you had to pay for any outrageous fees?

Self serving bias is pretty similar to the fundamental attribution error.  The Fundamental attribution error says that other peoples successes and failures are a direct result of their actions while our own are attributed to situational factors. The self serving bias is purely on a personal level. It states that our own successes are a factor of our actions but our failures can be justified by external factors. 

We all do this… I know I do.  If I play a round of golf and I score an 85 (great for me) then it’s ostensibly because I’m a skilled player and the next Tiger Woods (it has nothing to do with the fact that my ball hit the cart path and ricocheted off the rock and rolled into the hole).  However, if I play a round of golf and I score a 100 (not so great for me), then I may look to blame the high winds or my aching back or the poor course quality.  If you say you’ve never committed self serving bias, you either have a bad memory or are lying to yourself!

When we fall victim to self serving bias in investing, it tends to lead to overconfidence.  When we attribute great stock picks to our abilities and we don’t consider other external factors, we gain more confidence in our investment skills.  At the same time, when we pick a poor stock or fund and quickly look to blame anyone but ourselves, we don’t fully take responsibility for our mistakes.  In an extreme case, if we were to do this for every scenario, we would tell ourselves that we pick great stocks 100% of the time!  Similarly to the other cognitive biases, we can avoid self serving bias and its implications by being aware of it and honest with ourselves about our track record.  We all want to be great at whatever we do but the reality is NO one is perfect.  Have you ever caught youself comitting self serving bias?  What happened?    

I really hope this information has been helpful in developing your investments and personal knowledge!  Comments and feedback are always welcome.

Framing is the way we interpret things, based on stereotypes and preconceptions, that help us understand the context of events around us.  In any situation, if we are given no context, there can be several different explanations for why things are happening.  Framing is our minds way of gathering that information and processing it into a logical conclusion.

One example of framing deals with everyday social interaction.  When a friend closes and opens one eye quickly, how do you know whether they are blinking, winking at you, or just trying to get dust out of their eye?  It lies in the context of the situation and environment around you. 

In investing, two different investors may interpret the same information differently, depending on how the information is presented to them and how they frame the circumstances of that information.  Let’s use my favorite example, Apple (AAPL).  I may look at Apple’s financial reports and ratios and recent news to decide on the direction of the company.  However, my friend John could take those same financial reports and ratios and news and come to an entirely different conclusion based on his preconceptions.  Sometimes, even the knowledgeable investor isn’t always successful.  It’s equally important to mention what we do with the knowledge that we receive.  By keeping our emotions out of our investing decisions, we can remain impartial and make smarter investments.      

Last day tomorrow… self serving bias!

I spent the day yesterday volunteering at Airpower Over Hampton Roads working at a soda booth concessionaire. I’m not the biggest fan of airshows or even planes but that left me with plenty of time to ponder.  As I often do, I thought about ways I could relate real life situations around me to business and finance.  Well I didn’t have to look very far because the answer was in my little soda booth.  We were selling bottled water and soda at $3 a piece (200% markup from vending machines) yet people were lined up to no end to buy them.  What drove this phenomenon?  It was quite simply, price elasticity of demand. Price elasticity of demand explores the relationship between a change in price of an item and the associated change in quantity demanded.

 An elastic item reflects large changes in quantity demanded from small changes in price.  The easiest way I remember that is in the term “elastic”.  I think of an elastic band that is very changeable or movable.  In an elastic item, consumers are very changeable.  If there is a small increase in price, quantity demanded will drastically go down and vica versa.  An inelastic item is just the opposite.  It’s very stubborn and unchangeable.  Small swings in price do very little to the quantity demanded.  How does this relate to our soda booth?  In the hot sweltering heat of summer, our bottled soda/water were liquid gold (it didn’t hurt that outside food/drinks weren’t allowed).  We could charge $3 a bottle and because a) people really wanted them and b) there were very few alternatives, people were willing to pay 200% markup for our inelastic soda.  However, it’s important to always research your environment. Had we been trying to sell that same soda outside of Walmart where a) the demand isn’t as strong and b) there are many alternatives, our good would be elastic and we’d have to carefully set our prices in relation to our competitors.  If you take a look around, elasticity in supply and demand is everywhere.  Can you think of any other examples of highly inelastic goods?

When you’re negotiating and you know the inherent value of something, you can easily barter a fair price.  But when you’re unsure of an item’s value and the other person first names a selling price, you’re more likely to “anchor” your counter offer somewhere in the vicinity of their price.  Anchoring is a cognitive bias that describes our human tendency to rely too heavily on one trait or piece of information.  Any secondary adjustments are usually made relative to the “anchor”.

 Let’s say you’re at a flea market and you want to buy a “beechin” (or a widget).  Beechin’s are worth $10 a piece but you don’t know that.  When you walk up to the beechin vendor, he a) smiles politely and asks for $10 or b) smiles politely and asks for $50.  Now, human tendency is to anchor our counter offer to that original price (I would counter $7 for scenario “a” and $40 for scenario “b”).  Another great example is from MIT professor Dan Ariely.  He did a study where he asked a group of people to write their last 2 social security digits on a piece of paper.  Then, he asked them to write down bids on items such as chocolate or wine.  When sorting through the data, he found that people that had higher social security numbers were more likely to bid 60%-120% more on the items.  They took a totally arbitrary piece of information (SSN) and anchored an unrelated number to it because their minds were connected to the first number.

We can use this new found knowledge of anchoring to become smarter investors.  Let’s say we want to invest in Apple (AAPL) stock back in the winter of 2007 when it was trading at close to $200 a share.  If we knew nothing else about the stock or company or market and we saw it had dropped to $165 a share in one days trading, we may be persuaded to buy up shares.  Our minds tell us that since it was $200 and is now $165, it must be a good deal.  What we may not be taking into account, however, is that $200 may be an arbitrary number that does not accurately reflect the value of the stock (see tech bubble burst).  I’ve talked to countless people that knew nothing else about investing, but thought that a stock was a good deal solely based on the fact that it was a lot lower than a past price.  What’s the mantra of investors and financial planners worldwide?  PAST PERFORMANCE DOES NOT INDICATE FUTURE EARNINGS!  We have to make sure not to be swayed by unrelated information when making our investment decisions.  Probably the best way to avoid anchoring is by being an informed investor.  As long as we know the true value of something, we can never be pushed into something that is not in our best interest.  Whether in your negotiations or investing or life, what are all of your anchoring examples?

Tomorrow…  Framing!

This is the underlying position of the fundamental attribution error.  We have a tendency to over emphasize the result of other people’s actions as personality-based.  A person’s actions are not situation-based but rather determined by what kind of person they are (or other unrelated factors).  However, when justifying their own behavior, people are more likely to attribute situational events (also known as actor-observer bias).   Author Malcolm Gladwell takes a slightly different approach to this and gives an example.  He writes about a study that shows how neat a students homework is or how punctual they are to class tells us absolutely nothing about how clean his room is.  However, we attribute something unrelated to his personality, and make other judgements on it. 

In investing, there are many times we can fall into this trap.  Let’s say we know certain factors about a company (Apple [AAPL]):  1.  The CEO and CFO are making a lot of money from the company 2. Their products are very well made and selling well.  From these known factors, we assume that AAPL is a strong stock to buy and dump a lot of money into it.  We falsely attribute unrelated factors (the “personality” of the company) to stock prices and make a decision based on it rather than looking at “situational” factors (financial statements, valuation etc).  We can avoid falling into this trap by looking at a broad picture of a company and focusing on those factors that directly correlate to its stock price.  Do you have any good examples of fundamental attribution error in your lives?

Tomorrow…  anchoring!

Or… you’re sitting at a Blackjack table in Las Vegas with a 7 and 5, the dreaded 12.  Do you stay or hit?
Stay: Dealer flips over and has a 15.  “Man, I KNEW I should have hit”
Hit: You get a King.  Bust.  “Man, I KNEW I should have stayed”

Hindsight bias describes our inclination to see events in the past as more predictable than before the event took place.  When our predictions turn out correct, we tend to remember those predictions to be much stronger than than they actual were.  Self proclaimed as the “I knew it!” syndrome.  Some psychologists think we use hindsight bias as a way to create explanations so that the world can be “predictable”.  There was an experiment done in 1986 by Karl Teigen that displays this bias perfectly.  In his study, Teigen gave participants several proverbs to evaluate as true or untrue.  First, the participants were given the proverb “Fear is stronger than love” and most participants rated it as true.  Then, participants were later given “Love is stronger than fear” where most participants again rated as true.  How can this be?  As things are validated as truth, people tend to establish a stronger connection to it.  In this experiment, the fact that the statement was a proverb and printed on text seemed to give validity to the statement.  Um… both statements.  
   

How does hindsight bias relate to our personal investing?  Well, many investors today will look back at the tech bubble burst [insert any bubble] in the early 2000s and claim it was obvious that it occurred.   Well, of course looking back at it now, our minds will remember factors leading to the tech bubble burst more significantly.   This behavior constantly happens and it contributes to overconfidence.  For investors, overconfidence can be a very dangerous thing.  It gives people the belief that they have a superior ability to pick the best stocks when in fact, that may not be the case.  We can avoid hindsight bias through acknowledgement.  When we look back at events (like the tech burst), we must remember to explore both arguments.  If we think of all the reasons that we did not see it coming, we can acknowledge that it truly wasn’t so predictable.  Do you ever catch yourself committing hindsight biases?     

Tomorrow… fundamental attribution error!

How can we relate confirmation bias to investing?  The common investor usually makes decisions driven by a mix of logic and reason as well as passion and emotion.  These emotions, whether positive or negative, fuel our biases for stocks, bonds and funds that we evaluate.  If an investor has a preconceived notion about a stock, they tend to seek information to validate that notion.  Burton Malkiel, author of A Random Walk Down Wall Street, describes this as “Castles in the Air”.  Investors sometimes dismiss the financial fundamentals of a company but rather fall in love with the company itself and the hype around it.  Sometimes I catch myself doing this without realizing it.  If I fall in love with a company’s products and hype (let’s say Apple [AAPL]), I find myself wanting to seek information to validate the company’s worth and dismiss information that disputes it.  We can fix this behavior by making an active effort to push personal biases aside in investing and making sound decisions from a financial and fundamental standpoint.  As investors become more experienced, it should become easier to accomplish this.  

Tomorrow…  Hindsight bias!

What exactly is a split and why would stocks/ETFs want to do that?  Well a split is exactly what it sounds like.  It’s decreasing the price of an investment while increasing the shares (A 2:1 split would be double the shares at half the price).  A lot of companies will split their stock as a psychological move.  If the price appears cheaper, then more investors may see it as a value investment.  For ETFs however, price is not driven by speculation but it merely represents the market that it tracks.  However, a split can increase the trading volume of an ETF which in turn correlates to its liquidity.  

Bottom Line:  I will not be checking my portfolio tomorrow…

Tomorrow…..  Confirmation Bias

I booked a flight last week.  In three weeks, I’ll be travelling 2700 miles from one coast (Virginia Beach, VA) to the other (Orange County, CA).  Of course with the recent surge of oil prices and disastrous airline market, I was ready to pay a small premium on top of my standard $500 flight. That’s when an article caught my eye during my morning ritual of browsing finance and money websites. Seemed simple enough. So I employed a few of the tips that I got off CNN Money and combined them with some of my own, and set out to find the cheapest plane ticket I could. The result after taxes and fees? $320! Awesome, right? Here are 4 tips that you can incorporate to successfully find a cheap flight:

1.  Use the internet!  The main two websites I use to find plane tickets are kayak and farecast. Kayak is an airfare search engine that searches hundreds of travel sites (including orbitz and travelocityetc) and finds you the cheapest airfare.  The reason I really like this website is because I can do all my research on one site and it is great for customizing.  I can add/delete multiple airports, travel dates, times and more at the touch of a button.  Farecast has recently adopted a very similar format to kayak but with one key addition.  Farecast incorporates a “buy” or “wait” suggestion based on historical prices and data between the two airports.  It also has a confidence percentage based on the certainty of the suggestion as well as an estimated price increase or decrease to come.  For example, if I type in Norfolk (ORF) to Los Angeles (LAX), it’ll tell me that I should “buy” with 75% confidence. 

2.  Pick off peak days to travel.  Monday and Friday are peak travel days for business travelers and are more expensive.  However, Tuesday and Wednesday are generally slow days for airlines and it is reflected in the price.  Of course, sometimes you have no control over what days you fly, but red eye flights are usually discounted as well.

3.  Buy at the right time of the day.  We all know that airfare changes constantly as supply and demand fluctuates.  Airlines generally change their fares three times a day.  The best time to check prices is early in the morning since airlines try to leave the market as open as possible.  Another great time to check is at 5 PM.  If seats haven’t sold throughout the day, airlines start to aggressively cut prices around 5 PM to try to sell off those seats.

4.  Look for package deals.  If you’re going on vacation and you know that you’ll need a rental car and hotel on top of your flight, why not book a package deal?  Package deals are usually attractively priced.  But did you know that sometimes airfare + hotel + rental car package deals are cheaper than just the flight alone?

What tips do you have to find cheap airfare?  

A target date retirement fund is a mutual fund.  More specifically, it is a multi-fund portfolio “customized” for your projected retirement date.  Instead of building your own portfolio of stocks, funds, bonds etc, the only decision you make is when want to retire.  The fund is managed appropriately so that it incorporates more aggressive funds (and asset allocation) when you’re younger, and gradually becomes more conservative the closer you get to your retirement date.  Also, once you retire and start relying on those funds to buy red sports cars, bayliner yachts and million dollar mansions, the fund takes that into account and adds more income producing investments.  Since these funds are mutual funds, they are actively managed by “professionals” and incur a cost (usually in the form of the expense ratio, front loads or end loads).  

Vanguard’s target date retirement funds are highly regarded by the investment community so let’s look at one as an example.   Let’s say you’re in your 20’s and you want to retire somewhere around 2050.  

You would put all of your retirement money into VFIFX, Vanguard’s target retirement fund for 2050.  Today, 90% of the fund would be invested in stocks (more aggressive).  In 2030, that fund would comprise of around 80% stocks, a slightly less aggressive approach.  Last, in 2050, that fund will be close to 50% stocks and 50% bonds, an extremely conservative approach.  Seems peachy, right? Well here are the pros and cons of target date retirement funds:

Pros:  

*Bypass minimum investments - Most mutual funds have a minimum investment (usually a few grand) to buy into the fund.  If you try to buy into various funds individually to create a well diversified portfolio, you will need a substantial amount of cash.  For target date retirement funds, you only pay this minimum investment once. 

*Automatic investments - It doesn’t matter how much self control or investment knowledge you have.  You automatically get a desireable asset allocation that shifts with time.  Along with that desired asset allocation comes a certain amount of reassurance that you won’t lose your entire nest egg.
 
Cons: 

*Subpar performance - Investment firms will undoubtedly look out for their own interests.  Therefore, firms like Vanguard or T Rowe Price will only include their companies funds (stock/bond/investment/emerging market) in their target retirement funds.  Therefore, you may lose out on performance.  Surely, that company does not have the best mutual funds in every single market.  

*Lack of control - The selling point of target date retirement funds is that you don’t have to own anything besides it.  But at the same time, you shouldn’t own anything besides it (or you will throw off the asset allocation. That means apart from that one fund, you have zero control in your retirement assets.

*Fees - This is the same argument between mutual funds vs index funds.  Sure you’re paying someone to manage the fund, but can you get the same or better performance from owning the market (index fund)?

Bottom Line:

You have to weigh the pros and cons of target date retirement funds with your investment style and future goals.  If you have no desire to have any control over your retirement assets and are okay paying a small commission for someone else to do it, you may want to consider these funds.  But if you (like me) enjoy having full control of your finances and believe you can make a better play with index funds and virtually no fees, I’d advise you stay away from target date retirement funds.

How do you allocate your retirement finances?  What are your thoughts on target date retirement funds?  

Any time you’re getting ready to buy new home, automobile, boat or other large purchase, you usually have to apply for a loan. When you go into the bank to apply for that loan, they are going to check your credit report and find out what your credit score is. The better your credit score and history are, the lower your interest rate will be. For a large dollar purchase like a house, a lower interest rate will mean significant savings over the course of the loan. Your credit score may also determine whether you have to put down a security deposit on apartment rent or utility bills.

So what is the magic formula? How is a credit score calculated?

*Payment History (35%) - Ideally, you want a long history of successful and timely payments. Factors such as on-time payments, past due payments, amount delinquent, and quantity of delinquent payments all play a part in this calculation.

*Utilization Ratio (30%) - This is how much credit you’re using compared to the amount of credit available to you. If I have two credit cards with a combined limit of $10,000, and I owe $1,000, my utilization percentage is 10%.

*Length of Credit (15%) - The more time you have credit accounts actively open, the higher your score will be.

*New Credit (10%) - New credit requests and certain inquiries into your account will affect this category. Requests for credit reports made by you and your employer do not count against you.

*Credit Types (10%) - The various vehicles of credit that you employ also affect your credit score. Credit cards, automobile loans or mortgages are all different types of credit.

With this new-found knowledge, here are 5 steps you can take to raise your credit score:

1. Make sure you are continuing to make timely payments.  Consistency is key.  If you have delinquent accounts in the past, make sure to start being more responsible from now on.  It may take some time, but it’ll definitely be worth it in the long run.

2.  Pay down debt to maximize your utilization ratio.  If you know you’re applying for a loan in a few months, make an effort to start paying down those credit card bills until you’re under 20% utilization.

3.  Don’t close out old accounts.  It is beneficial to you to have active accounts open as long as possible.  If you have an inactive account, it might be beneficial put a $2 purchase on it every year or so to keep that established history going.

4.  Limit new credit requests.  Especially if you know you’ll be applying for a loan, avoid opening up five credit cards the month before.  Make sure when you request a new line of credit it is actually necessary.

5.  Have a good balance of various types of credit.  Rather than having just one automobile loan, it will increase your score if you have a good balance of loans, mortgages and credit cards.  Of course, this doesn’t mean go out and secure a mortgage JUST so you can increase your credit score!

One additional note, everyone is entitled to our credit report for free once a year (by three different credit companies). To get this credit report, google “Annual Credit Report” and follow the instuctions on the website.

Do you have any tips or tricks to raising your credit score?

I’d like to preface this by saying that I realize that gas price increases have many implications to product prices and consumer confidence etc.  But that’s not the issue at hand.  People are so intent on stretching out their tank of gas from 300 miles to 310 miles.  Or searching and searching for that gas station that’s 2 cents cheaper.  I think we need to transform the way we think and look to other places within our finance that are far more inefficient with room to save.  

So let’s get a little perspective.  Most people fill up a tank of gas once every week or two.  Let’s say I’m filling up my 12 gallon 2005 Acura RSX once a week, or four times a month.  One year ago, when gas was priced at $2.90 a gallon (Virginia), I would have spent $139 a month on gas.  Today, with gas priced at $3.80 a gallon, I spend about $182 a month on gas.  Now this is only an increase of $43 a month on gas.  Is it really worth all that time and effort to save $43 a month? For some of us, that might be considerable amount to spend extra each month but for others, it’ll barely put a dent in their finances.

Some easier ways to save $43 a month: 
* Stop eating out so much.  Cook at home instead (it’s probably healthier too)
* Buy in bulk.  There are certain items you KNOW you’re going to need in the future (toilet paper, shampoo etc).  Why not save money by buying in bulk (And save an extra trip to the store while you’re at it).
* Stop impulse buying.  I guarantee for most of us, impulse buys amount to way more than $43 a month. 

There’s a term in personal finance when a person is so intent on saving pennies here or there while not capitalizing on savings opportunities when buying large dollar items.  For example, Linda will shop around for the best prices on eggs and milk and groceries to save a few dollars here and there whenever grocery shopping.  But when it comes time to purchase a new car, Linda does not want to hassle with negotiations and ends up paying $2000 more than necessary.  The term is “inefficient consumer” and it’s a trap we all fall into from time to time.

The bottom line, I am a believer that we should cut out our unneccessary spending and save as much as possible.  But really, is all this hoopla really necessary?

1.  Set up an automatic transfer - The great thing about automatic transfers is that you can set up recurring payments and forget about it.  If you divert $50 or $100 from your savings each month and reallocate that automatically to an emergency fund, you can slowly yet painlessly fund your reserve!

2.  Sell off old stuff - We all have tons of impulse purchases (see 5 Steps to Quell That Materialistic Mentality) laying around all over the house.  Why not use it to fund your emergency fund?  If you are deathly afraid of the internet or just enjoy human interaction, you can set up a garage sale.  For everyone else, websites like Ebay and Craigslist have made it easy to sell off all your unwanted junk.

3.  Cut entertainment costs - Most of us have a budget laid out.  Some of us plan out every little detail of where our dollars are spent while others may plan out in their heads.  If you can make a sacrifice and cut your entertainment costs for a few months, you can fund your emergency fund.  This might mean going to the movies or clubs a little less for a month or two but these are the prices we pay for security.

4.  Reallocate portfolio - If you’re averse to doing any work and don’t want to implement any of steps 1-3, then there’s an easier option.  You can pull a few months of expenses from another fund/portfolio (Unsheltered Investments, Savings, etc) and put it all into an emergency fund.  That way, you’re covered in case of a contingency and now you can work to build up that other fund/portfolio back up. 

Just because you set aside money, doesn’t mean its still not YOUR money.  Do something with it!  While it would be counter-intuitive to tie up that money in a long term CD, Money Market funds are a liquid way you can still make your money work for you. 

What methods would you use when you want to set up your emergency fund?