Worse News for Retail?

Last week I called one of my former CEOs, a serial entrepreneur named Dave, to wish him a happy new year and to shoot the breeze. I like keeping in touch with old colleagues and friends, and especially ones that I respect and appreciate, and this gentleman is such a person. Dave is a Harvard Business School MBA and a highly intelligent guy. He has been in retail and retail concept development for pretty much his entire career. His most recent venture is an 8 store personal care retail chain - similar to Body Shop - which he had apparently acquired in the past year.

Unfortunately, Dave's business update was all bad. According to him sales pretty much collapsed in December. He wasn't talking about a 4% - 5% decline, he was talking about a complete route. According to him the chain's flagship store that until recently was averaging about $1,000 in sales per day, saw average sales numbers of about $300 per day in December. Dave told me that unless things turn around in a hurry, the chain will have to fold in the next two months...

Dave explained to me that Department of Commerce statistics regarding retail sales, which have recently been showing consistent but relatively mild declines, are misleading. He claims that these numbers are greatly skewed by such retail behemoths as Wal-Mart and Target. People still have to buy the basics and they are apparently flocking to discounters. However, he says that any retail business that relies on anything that is remotely considered a luxury has been in complete collapse. That's not encouraging, but it's understandable from a personal finance perspective - hell, we've been cutting back ourselves.

With respect to the economy as a whole, I continue to believe that we are pretty close to the bottom of the cycle. I believe that massive fiscal and monetary stimuli will work their way through the economy and ultimately lead to a recovery. With respect to the stock market, I still believe that we are within 10% to 15% of a market bottom - which we may have already seen. The job market will no doubt continue to see a painful contraction for the next year. 

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

could gambling be rational?

This post was inspired by a comment Plonkee left on one of my previous posts. In my post I was commenting on the fact that the Casinos in Lake Tahoe where I was vacationing were doing OK, in spite of the poor economic situation, to which Plonkee replied that:

"I'd expect gambling to go up in a recession. Who wouldn't want to win lots of money for very little outlay?"

That got me thinking. What if gambling is a very rational thing to do. I am going to resort to a little economics 101 here, so bear with me. 

In economics there is a concept called decreasing marginal utility. To understand what it is, consider the following example: if you are hungry, the first few bites of your food are very important to you. These bites give you the fuel that you need to live. As you keep eating however, you get less and less benefit from the food, until eventually you are stuffed and want no more. This is the decreasing marginal utility: as you get more of something, the extra that you get is of less value to you.

The same can be said for money. If you are making very little, every little bit of extra cash means a lot. However, if you are a billionaire, making a few more thousands of dollars should matter very little to you. It's not that this additional money you earn has less value objectively, only that it is less important to you personally. This little additional money doesn't do much for you.

Back to our gambling discussion. Could it be, that gambling is an opposite case? A case of increasing marginal utility? Consider a person who makes enough money to live on and stash a few more dollars in a savings account every month. That person can use this additional money, but he knows that those few extra dollars will not dramatically change his life. However, if he uses a dollar or two to buy a lottery ticket, and he happens to win, his life will change completely over night. Now, it's true that on average playing the lottery is a losing proposition for this person - his expected payoff is negative, he needs to spend more money than he can expect to win - however, perhaps the microscopic chance of winning, combined with the dramatic impact of such a win, is worth more than the money he is giving up by playing. 

In that sense, is it possible that gamblers are being completely rational in the economic sense of the word? Personally, I think they just like the thrill of the game, but who knows?

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

Credit Card Lost and Found Again...

On Friday I went to a business lunch with a customer, and as expected I picked up the tab using my American Express Blue card. The surprise came that evening when I was looking for my card to make another purchase... gone! I immediately made the connection since the restaurant where we had lunch was the only credit card purchase I made all day.

Using the credit card receipt I called the restaurant and was reassured to discover that they did indeed find the card and that they would be holding it for me so I could pick it up the next day. Just to be sure that everything was honky-dory, I did called American Express to place a hold on the card until I could get it back. The American Express representative assured me that no other purchases were made using the card and placed a 24 hour hold on it. He told me that if I did not call back within the allotted 24 hour period, the card would be automatically cancelled and a replacement card would be sent to me immediately - the downside being that a new card number would thus be created, and I would need to make changes to all the places where my card number is currently used (iTunes, Quicken, Amazon etc.)

But, all's well that ends well. On Saturday afternoon I drove back to the restaurant and collected my card from the register where it was being held for safe keeping. It's not the first time that I had walked away from credit cards and ATM cards after making a transaction (but it's the first in several years). This typically happens to me when I am in the middle of an animated discussion with someone, talking on the phone or otherwise distracted. Apparently I am not very good at multitasking...

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

The Value of Two Incomes

Yesterday an anonymous reader left a comment on my recent post about our 2008 spending: 

"Does your wife actually make enough marginal income to pay for your childcare expenses? Given your marginal tax rate you might save more on child care, transportation, and dining out than she makes working part time."

I have previously written that stay at home parents pay a professional price, in more ways than one, but there are other serious considerations at play. In addition to losing years of work experience and potential career progression, becoming rusty in their professional skills and facing serious obstacles to moving back into the work force, stay at home parents also face other economic and personal challenges:

1. Increased Economic Risk - in this age of economic uncertainty and massive corporate lay-offs, my opinion is that a family's economic risk is reduced if both parents are working. For example, if I were to lose my job (something which I don't expect to happen in the next 12 months), we would still have one source of income. By both working we are diversifying our income sources;

2. Personal Hardship - I don't know about others, by I know for a fact that I could not be happy staying at home with three small kids as my main occupation. I need the company of adults and the mental stimulation of a dynamic business environment. I love my kids, but being a full time parent is simply not something that would be satisfying for me. I think that my wife is the same way. While she wants more time with the kids than would be afforded by the more than full time marketing position she previously held, that does not mean that she wants the job of a full time parent.

3. Kids Happiness - our kids love school and they love their after school programs. Often when we come to pick them up from day care, one or more of them beg to stay some more, to finish a game or finish listening to a story. They love being with their friends in a rich stimulating environment. We don't want to pull them out of this environment.

So in answer to my reader, my wife's current income is roughly equal to the amount that we spend on day care. However, the long term economic impact of leaving the work force, our personal interests and the need to diversify our income sources mean that even if from a short term cash flow perspective we don't benefit much from my wife's part-time work, in the long run this is absolutely the smart economic and personal decision for us.

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.

Where Did Our Money Go in 2008?

Now that the holidays are over and all the credit card transactions have been processed and checks from last year have been cashed, it's time to see how we spent our income last year. As background information, my wife and I have three kids: a 6 year old son who attends public school and an after school programs; and three year old twins that go to pre-school. My wife has been fully employed until October, but has been working part-time since, while I am an executive in a technology company. We have medical insurance (PPO). Although we do not have a formal budget, we are careful about our spending and lead a modest life style. We live in the San Francisco Bay Area in good ol' California. So where did our money go last year?

The really good news is that including our retirement savings, last year we saved 29.3% of our after-tax income.  The remainder of our after-tax income was spent as follows:

Childcare 35.1%

Rent 20.4%

Medical 6.93%

Groceries 5.87%

Dining 4.4%

Utilities 3.98%

Vacation 3.69%

Household 3.33%

Auto 3.22%

Recreation 3.07%

Clothing 3.04%

Cash 1.78%

Insurance 1.25%

Gifts 1.2%

Charity 1%

A few comments on the numbers: 

First, careful readers will notice that the numbers do not add up to 100% - there are a few other categories that I track, each of which accounts for under 1% of our spending. Nothing too exciting.

Medical - What struck me as amazing is that our third largest expense was health care, which accounted for about 7% of our spending, and this does not include the fact that I pay another $200 per pay period, or $4,800 a year, to cover my family under my company's PPO. This is insane! What do people WITHOUT insurance pay? We are pretty healthy and have decent medical insurance and still pay a very large amount of money for coverage. This system is truly broken.

Auto - note how little we spend on our two cars. We purchased each with a lump sum cash payment, and my 1997 Geo Prism - or as I lovingly call it: crap-on-wheels - is serving me well for my 12 mile round trip commute every day.

Vacation - normally we spend more of our money on vacations, but this year we were more modest given the economic situation.

Charity - we gave too little to charity last year. This is a spending category that we need to increase for sure.

All in all, I think that we save and spend very reasonably and I hope we can repeat this performance in 2009. Incidentally, to gather this report that I shared with you, I used Quicken software.

Enjoyed this post? Please consider subscribing to Money and Such by free RSS Feed or by email.