Archive for September, 2006

Linda Stern and rules for retirement savings

September 30, 2006

My favorite personal finance journalist is Linda Stern. Her articles (distributed via Reuters, I believe) are practical and clear, and they avoid so many of the traps of personal finance writing: parental/disciplinarian voice, overpromising, false precision, mind-numbing boredom, and so on. She just tells it like it is and lets you know when there’s no good answer for a particular fear. How refreshing!

Her latest column, on planning for retirement, is a great example of this. You should read the whole piece — it’s a great, simple introduction to thinking about how much you’ll spend during retirement, and building a retirement savings plan from that. Here, though, is a snippet that is characteristic of her style:

Don’t waste too much time mulling over those retirement rules of thumb that seem to pop up everywhere. They’ve never been very useful, but changes in the way people live and work make them even less so.

Here are a couple of rules debunked.

— That 80 percent spending maxim. Once you start planning for retirement, you usually run across this “rule”: “You’ll need roughly 80 percent of your pre-retirement income once you retire.”

That’s a ridiculous figure, pulled out of thin air. Investment companies say they often use that number to “help” people who don’t have any idea of how to plan their retirement savings. But it mainly helps to scare people into thinking they have no hope of saving enough for retirement.

In truth, they may spend more than that in the first couple of years after they stop working, but they’re likely to spend far less, on average, over their entire retirement period. By the time they are 75, they’re likely to be spending about half of what they did when they were 50, according to the Labor Department’s survey of consumer spending….

I love that she debunks the very general saws financial articles typically throw around, and then backs up her assertions with better numbers from reputable sources. When you think about how easy it is to fall into the “personal finance traps,” it makes what she does that much more impressive. Definitely worth reading every week.

Freakonomics, Information Asymmetry, and the Internet

September 28, 2006

FreakonomicsSteven D. Levitt and Stephen J. Dubner’s book Freakonomics is well-known as an introduction to actually interesting and useful microeconomic views on the world — not like that “rational actor” nonsense they fed you in college. I thoroughly enjoyed the book and have appreciated seeing a boom in livelier economics writing in its wake. It almost feels as though economics has become hip or something — quite a turn.

I was surprised, though, when I read this section from chapter two, which talks about the imbalance of information between real estate agents, and the home buyers and sellers who rely on agents to represent their interests:

It is common for one party to a transaction to have better information than another party. In the parlance of economists, such a case is known as an information asymmetry. We accept as a verity of capitalism that someone (usually an expert) knows more than someone else (usually a consumer). But information asymmetries everywhere have in fact been mortally wounded by the Internet.

Information is the currency of the Internet. As a medium, the Internet is brilliantly efficient at shifting information from the hand of those who have it into the hands of those who do not. Often […] the information existed but in a woefully scattered way. (In such instances, the Internet acts like a gigantic horseshoe magnet waved over an endless sea of haystacks, plucking the needle out of each one.) […] The Internet has accomplished what no consumer advocate could: it has vastly shrunk the gap between the experts and the public.

In the specific case of real estate agents, I posted a few weeks ago about how true this is — the Internet has been doing an excellent job of connecting home buyers and sellers to information they previously would not have had, at least not easily. Yet, I think Levitt and Dubner dramatically overstate the “mortal blow” information asymmetries have been dealt. It seems to me, instead, that specific industries have been signficantly changed, but that the overall consumer experience is still the same, and that many industries haven’t been affected, or hardly at all.

Unquestionably, it is much easier to compare prices for products — new products through review sites, like Amazon and Shopzilla, and used products particularly through eBay. Likewise, specific markets, like cars, travel, and real estate, have seen significant changes in their pricing power through the development of Internet companies such as Edmunds, Orbitz, Farecast, Zillow, and Redfin. Some very general review sites, such as Yelp and Judy’s Book, are taking on five-star reviews of local businesses of a wide variety.

But does this add up to a mortal blow for information asymmetry? Let’s take a look at a specific example for a moment: auto repair. Yes, the Internet can help you get a new car with much better pricing information than ever before. But what about getting your car serviced? Assume the warranty has expired, and you actually have a choice of where to take your car for service — the dealership, or an independent shop. Does the Internet — search engines, or specific sites — make it possible for you to find a good auto shop without having to be a car expert? Can you compare the price and satisfaction you should expect?

I looked up a BMW auto shop in Berkeley, California (where I live) by the name of Bavarian Professionals. (As it turns out, they’re a fantastic shop, and I highly recommend them if you’re in the area.) I wondered what I could find out about this shop if I didn’t already know they do excellent work:

Almost all of these sites also included the address and phone number for the shop, and a couple showed a map. The Better Business Bureau did not publish information on the Internet about this business, and if there are other relevant sites with good information about them, I couldn’t find them. These searches did turn up some other information — for instance, the New York Times wedding announcement for the general manager (belated congrats, Mr. Sears!) — performing, as Freakonomics claimed, as a giant magnet for any and all information about this shop. But none of these searches helped me make a better decision or comparison between Bavarian Professionals and the dealership — the only comparison I was able to make was using five-star ratings scattered across many sites.

So, what did the Internet get us, for all of our research on how to get our car fixed? An address, a bunch of stars and a few short reviews.

In this example, pricing information is completely absent. Not one of the reviews or ratings would give you any information around which to plan a budget or compare prices between shops. The information that is available — star ratings and reviews — only comes from those consumers so motivated to rant or rave about a business that they’ll take the time to find a good site for doing so, and then to voice their opinion. While each time I’ve been to Bavarian Professionals they seem to be servicing 10 or 20 cars, the largest number of reviews I could find on any site, even Yahoo!, was two.

Compare this to many of the other purchases you might make as a consumer: housing, groceries, restaurant meals, medical services, and so on. If you apply for a rental apartment, think about how much information the landlord can get on you (through your credit report and the like) versus how much you can get on them. Think about how much a grocery chain knows about your buying habits if you pay with your credit card, versus how much you know about them and their pricing. It seems like you should know more, since there are far fewer grocery stores than there are consumers who shop at grocery stores, but no. Consumers have no way to aggregate and compare information about our purchases for nearly all of the money we spend every day.

So, I don’t buy it — I don’t think the Internet, nor any site on the Internet, has yet dealt a mortal blow to information asymmetry. Businesses have access to far more, better structured, professionally collated information about you as a consumer — your credit rating, your salary history, demographic profiles of you, warranty cards you’ve completed, and so on — than you have access to about them as a business by a long shot, and that has not materially changed for nearly all industries. Pricing information is indeed flowing more freely, but satisfaction measurements are relegated to the five-star review Amazon perfected a decade ago, and those measurements have advanced no further. We need more.

I was already far down the road with Wesabe before I read Freakonomics, so I was surprised to read the paragraphs quoted above. Levitt and Dubner are definitely right about their general characterization of the power the Internet can bring to consumers, and should bring to consumers. I disagree with them only as to whether that power exists for consumers today. The raw material exists, but the “gigantic horseshoe magnet” doesn’t just appear — we have to make it happen, together.

Personal Kyoto

September 27, 2006

My friend Upendra sent me an email about Personal Kyoto. What an amazing idea! The site (currently only for New Yorkers) tracks your personal energy usage by logging into the electric company’s web site and downloading your usage information. It then shows you how you’re doing relative to the goals of the Kyoto Protocol. I love this. Government isn’t doing what you want? Ratify the Kyoto Protocol in your living room, one house at a time.

Personal Kyoto

Seeing the site made me think about James Duncan Davidson‘s great blog post today, talking about the way he was able to take data from around the web and craft it to his purposes when redesigning his personal site:

The neat thing is that this page goes beyond being a simple list of books with “Buy It!” links. There are the Customer Review ranks for each of the books (as an aside, I’m proud that all of my efforts have received at least 4 out of 5 stars). Then, by jumping to each book’s individual page, you can read the reviews for the books. There are my pitiful sales rank numbers. And there are links to my Amazon Wish List and other goodies. All of this is maintained by somebody else. It’s hosted on somebody else’s infrastructure. […]

Instead of just letting Amazon and Flickr and the other sites have all the fun, it’s like taking a bit of it back and collecting a web presence that’s wider than just what I can provide on a single system built by just me.

He’s right, and I love how far they’ve taken the same idea at Personal Kyoto. That’s my data: let me put it to work for me, and make of it what I want.

Jason Fried interview at Mutual Improvement

September 26, 2006

I’ve very much been enjoying Mutual Improvment, the new blog from the makers of the fabulous site 43Things. It talks about, as they say, “personal development, happiness, statistics, emotions, neurobiology, cognitive science and all the things that make life worth living.” A great mélange, and wholly relevant to Wesabe and what we’re hoping to do.

They recently posted an interview with my friend Jason Fried, and I loved one of the things he says about money problems:

I don’t think you have money problems until your problems are someone else’s benefits. When someone is making money off your money problems you’re in trouble.

That’s a great way to think about it. He qualifies that he isn’t talking about mortgages, but instead debt or loans with “no payoff in sight.” The rest of the interview is also worth a read.

Mouse Print

September 26, 2006

Via The Red Tape Chronicles, check out this amazing site: Mouse Print. The purpose of the site is to enlarge and interpret the “mouse-sized” fine-print that advertisers use to squeak past false advertising bans and trap consumers in bad deals. Some of the examples are incredibly, er, cheesy:

Wow. Where most accounts today earn only a few percentage points of interest, this bank is offering a rate from yesteryear: 10.38%.

Are you going to make a killing with this interest rate? Don’t bank on it.

For one, you have to visit a particular branch of West Gate Bank in Lincoln, Nebraska.

What else?

*MOUSE PRINT: “Minimum and maximum amount of $500 only.”

So how much money are we talking about really earning here? Six months’ worth of interest on $500 is approximately $25.95 (maybe a bit less). At their regular rate of interest (4%), you would earn about $10. So despite the attention grabbing headline of 10.38% interest, this offer is worth less than $16 in extra earnings.

I love the idea and some of the posts are written with a great sense of humor. I wish there were an easier way to get the information for a purchase I’m considering — these posts are great for fun, but not very practical to remember in the checkout line. Hopefully the site will get high enough ranking in search engines that it shows up for people who need the information. Great job and well worth a visit.

Which banks best protect you from identity theft?

September 25, 2006

Here’s some good news for Bank of America, JP Morgan Chase, and Washington Mutual:

Looking for a bank that protects well against identity theft? Bank of America, JP Morgan Chase and Washington Mutual are your best bets, according to a new report. Out of 24 of the top financial institutions in the U.S., these three banks scored best in a test of their ability to prevent, detect and resolve ID theft, Javelin Strategy & Research said in its annual Banking Identity Safety Scorecard, which is slated to be released Tuesday. KeyBank and Marshall & Ilsley Bank also receive honorable mentions in the report.

I can’t say I think too much of the methodology quoted in this news article — it sounds like (from the article alone) they focused on feature checklists and informal testing. I’d be interested to see this report backed up by data from the victims of identity theft, rating their experiences with their financial institutions after reported a problem. But this is a great start, and given how disruptive an identity theft case can be, these banks should be praised if they handle identity theft cases well.

Anyone have experiences dealing with identity theft at these or other banks? How did they rate for you?

Back from travels

September 25, 2006

I had a great time in Brussels at EuroOSCon, and met a bunch of entrepreneurs with fantastic ideas. I was somewhat surprised, talking with people at the conference about Wesabe, about how clearly they wanted the same sorts of tools. Reading news accounts in the U.S., you sometimes get the impression that struggles with debt and credit are more severe in America than elsewhere, and that certainly is true by some objective measures. But still, people all over seem to have the same feelings of uncertainty and guilt about money, and the same desire for better support.

Just after getting off my return plane flight, I dropped by Adaptive Path in San Francisco, and gave a demo of our preview release to the people there. It was a huge amount of fun to talk to people who know web apps as well as their team does, and to see them latch on immediately to some of the ideas I find the most exciting about Wesabe. Thanks to David Verba and Janice Fraser for the invitation to speak. I’m going to take some of the slides from my talk and turn them into posts here later this week.

So, what else can you do with that?

September 18, 2006

One of the early seeds for Wesabe was a conversation I had several years ago about credit card fraud detection. If you’ve ever gotten a call from your bank or credit card company asking whether some of your recent purchases were legitimate, you’ve seen the effects of fraud detection. These companies run increasingly sophisticated programs to find purchases that look “fishy” for one reason or another. Maybe a purchase took place in one city while you were withdrawing cash in a city across the country. Maybe your card was suddenly used to purchase ten cells phones at once. The fraud detection programs look for patterns of “normal” purchases, and try to find cases where something just doesn’t look right. This helps you, and it helps the card companies (since they bear most of the responsibility for fraud).

Western Union

The conversation I had was with two people who write this kind of software. They were talking about how intricate the fraud detection programs had become over the years, and how much more effective it has gotten. “It’s really interesting stuff,” one of them said, “to see how patterns form in people’s spending. Patterns of purchases speak volumes.”

At the time I didn’t reply, but what I was thinking was, so, what else can you do with that software? If the patterns of “normal” purchases are that interesting, could you get a lot more out of them than just fraud detection?

Of course, banks and credit card companies do just that, and use that data to help set your credit limits and offer you new financial products. Where my thought led me, though, was to the idea of pattern-detection software that could help consumers. Some of the ideas you’ll see in Wesabe are simple beginnings of that process. Now that we’ve been running our software for a few months, I agree with the fraud detection developers: you can learn a lot from looking at patterns of people’s purchases, and I’m happy to say that there’s a huge amount in that data that can help consumers get more for their money.

After all, shouldn’t there be more tools that try to do just that? Help consumers — really help people with their money? It astonishes me sometimes that there aren’t.

Update: There’s a good story on fraud detection software in The Economist this week.

The best time to buy, and money magazines

September 14, 2006

Via Stop Buying Crap, here’s a good list from SmartMoney of tips for getting good deals in different categories, by timing your purchases to catch sales and low-demand seasons.

I almost didn’t read this piece, because I don’t usually get that much out of SmartMoney and similar magazines — I want to like them, but I often think the advice is so general that it’s very far from the specifics of my life. “Spend less!” Got it…thanks. One magazine I do like is Consumer’s Checkbook, which is a non-profit, locally-targeted list of good vendors and services. Their web site is a little tough to navigate, but the magazine is worth checking out if it’s published near you (“in the Boston, Chicago, Delaware Valley, Puget Sound, San Francisco/Oakland/San Jose, Twin Cities, and Washington, DC, areas”).

The next generation

September 13, 2006

When I tell parents that I’m working on a site to help people with money, one of the first things I often hear is, “Oh, great, I’ll sign my child up so they don’t make the mistakes I made!” One such parent forwarded me this news item today: High school dropouts earn far less money.

Adults who don’t finish high school in the U.S. earn 65 percent of what people who have high school degrees make, according to a new report comparing industrialized nations.

These articles — and similar ones on retirement planning, compound interest, and flossing — all seem to hit parents in the same place. If only I’d known that then!

There’s a fantastic impulse in wanting the best for the next generation, and I’m sure that Wesabe will be a big help for any teenagers or young adults who decide they want to participate. I’m not sure, though, if I would have joined myself at that age. If I’m at all good with money now, it’s because I’ve fought for many years to get better at it, and that effort would not have come naturally while I was in high school. Certainly the best way to keep me from joining would have been a suggestion I do so from the adults in my life! It may be that different kinds of sites are needed for different ages, just as MySpace tends to serve high school-age people and Facebook is more for people in college. But maybe not — Flickr (one of our favorite topics of discussion at Wesabe) seems to span a lot of age groups.

We’ll see what happens. We’re designing, though, to make the community as good as we can make it for anyone who decides to join.