Self Improvement For Smart People
Back in January I posted these goals as the things I wanted to accomplish in 2011. Looking through them now, I’ve accomplished a lot. Yes, some of these goals failed and some only partially succeeded, but I aimed really high in 2011. I also learned a lot about setting goals and creating plans; information which I am going to apply to 2012 goals. [Read more...]
I’m on a plane to Austin right now. I’m going to be meeting some customers there tomorrow and then flying back home tomorrow night. When I boarded the flight I saw a sign that said “free Wifi mid air” and it occurred to me just how wonderful these times are that we live in.
Sixty years ago it took my grandparents two weeks to escape from Romania to Israel. They huddled in trains and on ships, not quite sure where they were going or what was going to happen to them. They left behind all their belongings and faced a completely unknown future. And here I was, making a journey of about the same distance in comfort. I sip my complimentary drink and surf the web 30,000 feet above the American southwest. [Read more...]
First of all, yes, all of life is sales. You may not like it and you may think that’s not the way it should be, but it’s the way it is. Whether you’re trying to get a job, get a raise, get a date, get married, get a house, get a loan, get into school or just get on that last flight home, you’re trying to sell something. You want the other person to do something for you in return for whatever it is you’re trying to offer. You need to understand that and get used to it. Even when someone is doing you a “favor” you’re still selling. You’re selling them on the fact that your friendship is important or that one day you’ll return the favor, or maybe you’re just selling them on the fact that if they do what you want you’ll stop bothering them. Doesn’t matter, you’re still selling. Don’t like that fact? Too bad. [Read more...]
2011 is off to an AWESOME start! I wrote about a couple of experiments a few weeks ago, one involving weight and the other involving money. Well, both experiments are going very well.
Last week Tim Ferris, of The 4-Hour Workweek
So you want a raise for the great job you’re doing? Nothing unusual there, we all want a bit more money. However, have you ever really thought about whether or not you deserve that raise?
Doing A Good Job Is Not Enough
Yes, I know, you’re good at your work. Sorry, that’s not good enough. When your employer hired you, do you think they hired you because they thought “Let’s find someone mediocre!” or “Let’s find someone that’s just barely good enough”? No, they hired you because they expected you to be good at your job. That means just being good is meaningless. You’re expected to be good so why would you get additional rewards just for doing what’s already expected? No, in order to get that raise you need to go above and beyond good; you need to provide real additional value.
What Does Value Mean?
At most jobs, providing value means doing things that will help the business make more money. Making money is after all the goal of the business. This is slightly different at non profits and I’ll talk about those later. At for profits companies though, if you’re not adding value to the bottom line then you don’t deserve that raise. So if you want a raise, you need to make your boss think “wow, this person is really helping us make / save more money than we expected.”
Let me illustrate with an example. I have a friend called Chris who’s a personal trainer at a local gym. Chris is paid by the gym, not by his customers. In other words, Chris is an employee of the gym. Chris started out at $20 an hour but it’s now been a year and Chris thinks he should get a raise. So, does Chris deserve a raise? Doesn’t seem like it.
Personal trainer clients pay the company $60 per session. That’s what they paid a year ago and that’s still what they pay now. Out of that $60, the company has to pay for the facilities, various overhead expenses and then give Chris $20 of salary, which leaves them with about $20 of profit. So every single additional dollar they give Chris is one less dollar the company makes in profit. If they give him a $5 raise, they make $5 an hour less. There’s not a company in the world that really wants to make less money so my friend Chris is well and truly screwed. He will not get a raise, and frankly, he doesn’t deserve one. He’s not making the company more money so why should they give him more money?
Dead End Jobs
By the way, this is a classic example of a dead end job. There’s just no way to advance in a position where any raise will cause the company to make less money. You’re either going to be stuck with the same pay forever or you need to get a new job. Quite a few low paying jobs are similar to this. Think about security guards or airport screeners. There’s almost nothing they can do to add value to their positions. No one thinks to themselves, “wow, that airport screener is really efficient! By being quicker, they just helped the Transportation Safety Authority (TSA) save money! They should get a raise.” Realistically, any job in which you can’t really prove value to your employer is one in which you’re never going to get a raise based on merit. You might get one based on seniority or some union contract but you might as well forget about performance based raises. Your performance doesn’t matter and so you’ll never get a raised based on it.
How To Make A Dead End Job Less Dead End
There are three ways of making a dead end job less dead end. First, you can go into business for yourself. For example, if Chris quit his job at the gym and started working as an independent personal trainer, he could charge what he was really worth. If he was a great personal trainer, he would get more money from his customers and thus a raise. This is a great example of why working for yourself is in many cases better than working for other people. You get to keep the profits you make, so if you’re motivated and hardworking, you may want to consider working for yourself. Conversely, if you’re not so motivated and prefer the easy life where you don’t have to work very hard, working for someone else may make more sense.
The second way to get a raise in a dead end job is to help the company overall. What does that mean? Well, let’s think. There’s no way Chris can directly make his employer more money. He simply doesn’t have more hours in the day to take on more customers. However, what if Chris comes up with a better way of scheduling clients that doesn’t require as much overhead? What if gets his clients to recommend the gym to their friends and therefore build up a bigger customer base for the gym? What if he gains some extra certifications and works with the gym to offer “Extreme Personal Training” sessions for $70 an hour? In all of these cases Chris is helping the gym make more money and therefore he deserves a raise. However, I would argue that if Chris is this motivated, he should really start working for himself.
Third, Chris can make himself indispensible. That means Chris becomes so good at his job that he becomes something more than just another personal trainer. For example, what if Chris was such an amazing personal trainer that his customers would quit coming to this gym if Chris stopped working there? In this case the gym’s decision is a little different. Now if they don’t give Chris his raise he’ll quit and his customers will stop paying the gym their $60 an hour. The company’s decision is not between $20 profit (no raise) and $15 (after giving Chris a raise). Instead it’s $15 an hour profit (If Chris stays) vs. $0 an hour profit (if Chris goes and takes his customers with him). Now it’s clearly to the company’s benefit to keep Chris around. Note that even in this case it’s probably better for Chris to go work on his own. If he’s that good, he can keep a lot more of the money his clients pay him.
Non Hourly Jobs
If you’re like me, your job doesn’t really pay you by the hour. You have a certain role and you’re expected to fill it. This may sound very different than being a personal trainer paid by the hour but it’s really not. You are still contributing value to the company’s bottom line (profits!). If you want to get a raise, you need to contribute more.
Assume for a second that your boss is competent. If so, that means he or she hired you knowing what kind of value they expected you to provide. So just doing a good job doesn’t mean you qualify for a raise. Doing a good job is basically what’s already expected of you. Therefore, to qualify for a raise, you need to do better. Let me give you some examples:
Both of these are examples of people going above and beyond what was expected of them and increasing their value to the company. So now let me go back to you with a few questions.
If you answer these questions honestly, you can figure out if you deserve a raise or not. Once you do that, go have a polite talk with your boss. If you’ve really been providing extra value, he or she has probably already noticed. If you haven’t been providing value and can’t figure out ways to do that, go have a talk with the boss anyway. Tell them what you want and ask them for suggestions on how to increase your value to the company. Trust me, most bosses love employees with this kind of initiative.\
Good luck, and enjoy your raise 
I have a good friend who frequently comes over to my house late in the evening to walk the dog with me. It’s a habit he and I developed a few years ago and one which I still cherish to this day. It’s a great way for both of us to chat and discuss topics ranging from relationships and work to travel and video games. One of the topics which comes up relatively often is money. We both enjoy managing and we both marvel at the mistakes some people make. A recurring topic is one of tax returns. My friend is a tax accountant and he’s always amazed at the amount of people who are happy at the end of the year to find out they have a tax return coming. To him this signifies someone who doesn’t understand some basic ideas behind money management and / or can’t be bothered to put in a little effort that could save them a lot of money.
The basic thing you need to understand if you want to know why a tax return is a bad thing is something called “The Time Value of Money”. From the Wikipedia entry:
The time value of money is the value of money figuring in a given amount of interest earned over a given amount of time.
For example, 100 dollars of today’s money invested for one year and earning 5 percent interest will be worth 105 dollars after one year. Therefore, 100 dollars paid now or 105 dollars paid exactly one year from now both have the same value to the recipient who assumes 5 percent interest; using time value of money terminology, 100 dollars invested for one year at 5 percent interest has a future value of 105 dollars.
What the heck does this mean? It means that money today is better than money tomorrow.
Money Now!
Why does money today mean more than money tomorrow? Because of this lovely thing called interest rate. Even today, with interest rates at record lows, you can still find perfectly safe investments like a savings account that will pay you around 3%. That means every dollar you put in at the beginning of the year is worth 1.03 at the end. How does this translate into “Tax returns are bad”? Let me show you.
Let’s say you pay $100 out of your paycheck every month in taxes. Total taxes paid for the year is $1,200. At the end of the year you do your taxes and figure out that you really should have only paid $600 in taxes. Therefore, you are owed a $600 tax return. Sounds good, right? You got $600 back! Except this is actually pretty bad because you gave the government an interest free loan for a year.
Let’s play with this a bit. What if you took the $100 you paid in the first month and only paid $50 of it. All the rest of the months you kept things the same and paid $100. Total taxes paid would be $1150 (1 month at $50 and 11 months at $100). Your actual tax liability would still be $600 so your tax return would be $550 ($1,150 minus $600). Boy, that sounds bad, you got $550 back instead of $600, but hold on! You got an extra $50 in month 1, right? So the total extra money you got this year was actually $600. Except this still doesn’t seem right. Seems like you got the same amount ($600) either way. So what’s the point? Well, the point is the time value of money.
If you had taken that $50 at the beginning of the year and put it in a savings account paying a modest 3% you would have $51.5. That’s an extra $1.50 for absolutely no work. Doesn’t sound like much but it does add up. If you did that every month, you would have a nice amount of cash at the end of the year. Even better, what if you adjusted your income taxes so that you actually owed money at the end of the year? Now it’s the government giving you an interest free loan instead of the other way around. NOTE – Do be careful here. The government frowns on people who do this too much and they do charge interest at some point. So please consult with a professional before you do anything rash. However, my point is that money now is better than money later so extra money in your paycheck now is better than extra money in your tax refund later, and this is the time value of money.
The Math!
If you want to calculate the present value of future money by the way, here’s the formula:
So $1000 a year from now is actually worth:
1000/(1+.03)1 or 1000/1.03 or $970.87.
That’s right, even assuming a very modest interest rate of 3%, $1000 a the end of the year is only worth $970 right now. By the way, this is why you should be careful when someone promises you money some time from now, because it’s not really worth as much as you think. Let’s say someone offered you an investment where you paid in $4,000 now and got $5,000 five years from now. That doesn’t sound too bad, does it? You make $1000 in 5 years! Except that $5,000 in five years is only worth $4310.15 right now. In other words, you’re accepting the risk of whatever investment you’re looking at in order to increase your money’s value by $310 right now. Is that worth it to you? No clue, that’s up to you, but at least now you know the true value of that investment.
If you look at the calculation of future value:
The future value (FV) formula is similar and uses the same variables.
You can see that the $4,000 today would be worth about $4,600 if invested in a 3% savings account. So that investment above is actually better than a simple savings account. However, it could also be riskier. Either way, it’s important to know the true value before you make any kind of decision and for that, you always need to know the value of money today versus the value of money at some other point. That’s why you need to understand the time value of money and how to calculate it.
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Thank you to Your Financial Independence for including one of my articles in their financial independence compilation. Thank you also to Health Fitness Support blog for doing the same in their Total Mind and Body Fitness carnival. Finally, thank you to my old friends at Fitbuff for including my recent article on frugality and dieting in their recent link roundup.
A few days ago over at I Will Teach You To Be Rich, Ramit talked about saving and compared it to cutting out various foods in your diet. His attitude seems to be that “frugality is for losers!” just like “cutting out all the good foods you love never works in the long term!” and in a way, I agree with him. If you’re going to feel deprived by your frugality or your diet then sooner or later you’re going to stop sticking to it. However, I think this answer misses something, and that’s what I’d like to talk about here. There’s a difference between scrimping and saving because you feel like you have to and making life changes that end up making you happier. Let me explain.
Last Resort Measures
Changes that make you feel as though you’re depriving yourself of something rarely work simply because your motivation is not going to last forever. Sure, it sounds good to cut all that candy out but are you really going to keep that up for the rest of your life? Sure, it sounds good to save money by never going out to a movie again but six months from now when that new Twilight movie (go Jacob!) comes out, are you really going to stick to your promise? Probably not. The only time these kinds of measures work is when something dire is on the line.
For example, people who have just had a heart attack usually have good motivation to stop eating steak every evening just like people who lost their job tend to save more. However, even here we all know that’s not always the case. How many of you know someone who had a heart attack and yet keeps smoking and never exercises? How many of you know someone out of work who still has cable TV and still goes out on occasion? Think about that. If these measures don’t work even for people in dire situations, why the heck do you think they’ll work for you when all you want is to look good in a bikini or to go on a nice vacation to Hawaii?
Heck, we’re still in the worst recession in multiple generations and people are already going back to their free spending ways. Check out this graph of American savings rates:
Notice that even as the economy was crashing all around them, people only increased their savings rate by a paltry 4%. That’s right, banks are collapsing, the stock market is taking a giant nose dive and we all react by saving an additional 4 cents per dollar. Oh, and one year later, even though banks are still collapsing, unemployment is sky rocketing and houses are still falling in value we already start seeing people go back to the low savings rate of 2008. Seriously, if we can’t even change our ways in the middle of this incredible economic crisis, what makes us think we’ll ever stick to our “no more morning latte’s” promise?
I know we all want to think that we’re different and we’re not as weak willed as those fat/poor people but the truth is that we’re just like them. We’re wired to find gratification and the short term gratification of a chocolate cupcake is way better than the long term and nebulous gratification of good health. So, if these methods don’t work, why am I still talking about them?
Some Changes Actually Feel Good
The problem with Ramit’s argument is that he assumes any change which causes us to remove some foods from our diet or remove some spending from our budgets is one which will make us feel deprived. If his assumption is true then he’s 100% right, these changes are pointless in the long term. However, I’m going to challenge that assumption with a few examples from my own life.
There are more examples but these four are enough to illustrate my point. In each example I made a change that Ramit might consider self depriving. I saved money and became healthier with each of these and the best part is that all of these changes seem permanent.
Why Does This Work?
The trick here is in finding changes that improve your life rather than making you feel deprived. The added health and money are then side effects or fringe benefits rather than the driving force. In other words, I stopped looking for ways to save money or be healthier and started looking for new things to do that I might enjoy more. I tried new things because it’s fun and exciting, not because I had to. As for you…
See where I’m going here? Stop looking for ways to save $5 here and 10 calories there. Start looking for ways in which you can have more fun in life. Just don’t rule out something because it happens to be frugal or healthy. We’ve somehow gotten to a point where people assume that any habit which saves you money or makes you healthier must also be a horrible thing to bear and will take all the fun out of their lives. Stop thinking that way. Experiment with your life without any preconceived notions and see what works for you. If you happen to find something that you enjoy and saves you money / makes you healthier, that’s great! You’ll be surprised by how much fan you can have without spending a lot of money or eating two gallons of Ben and Jerry’s Phish Food.
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Thank you to That Girl Is Funny for posting one of my articles in their TGIF Links and 20 Blogging Tips From Expert Bloggers and thank you to Blog Conduit for doing the same thing with their Blogging For Profit Carnival.
I was going to write something on priorities when I realized I needed to explain costs first. So then I was going to write about costs but I realized I needed to explain sunk costs and opportunity costs first. So here I am, writing about sunk costs when I really want to talk about priorities. That’s ok though, sunk costs are still a worthwhile topic.
So what the heck are sunk costs? Wikipedia tells us:
“In economics and business decision-making, sunk costs are retrospective (past) costs that have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted with prospective costs, which are future costs that may be incurred or changed if an action is taken. Both retrospective and prospective costs may be either fixed (that is, they are not dependent on the volume of economic activity, however measured) or variable (dependent on volume).”
Which is useful if you already have an MBA but not so useful if you’re trying to figure out what the heck I’m talking about. So, let’s try this one more time only this time without fancy economics terms.
Sunk costs are costs which you’re not getting back regardless of the decision you make. They’re gone, they’re spent, they’re sunk and you’re never getting them back. Therefore, sunk costs should have no impact on your current decision.
Notice how I bolded that last part? There’s a reason for that and that reason is because most people totally ignore that part and make one bad decision after another as they fail to recognize what sunk costs are. Let me give you an example.
My friend Bob started a business. He tried to make a go of it for 2 years. In those two years he spent around 50k of his own money to get the business started. The business hasn’t been going real well so now he faces a choice of staying with the current business idea or trying something new. If he wants to keep trying his current business (idea A) he will need to invest another 2 years and another 50k. He estimates his chances of making idea A successful with this additional investment at about 20%. His new idea (idea B) will also require a 2 year and 50k investment but this new idea has a 25% chance of success. So how does Bob look at his option set? Well, if Bob is like most people he thinks of it this way:
And thus, Bob choose to stay with Idea A. After all, idea B means investing the same amount of money AND throwing away all that past investment for only a slightly higher chance of success. Doesn’t seem worth it. This my friends is the sunk cost problem.
Sunk Costs Are SUNK and You Will NEVER Get them Back
Sunk costs are gone. They’re in the past. Nothing you do will get them back for you. Those 2 years and 50k Bob spent are gone. He will not get them back. He will not get a refund nor a rebate nor a credit for those years and dollars. They’re gone and sunk and therefore should not be used in decision making. The true options Bob is facing are:
Now which option should he pick? This time it’s obvious. Option B offers a higher chance of success for the same resources spent and so should be picked every time.
Sunk Costs Are Sunk
I want to emphasize this again because a lot of people are going to argue here. They’re going to say, what about getting a refund, or selling the business or blah blah blah. Whatever! If you can get some money back then those are not sunk costs and should be part of your decision. However, a cost that does not change regardless of your decision is a sunk cost and should not be a part of your decision criteria. Sunk costs are SUNK! They are gone, you will not get them back and therefore they should not have an impact on your decision.
Where Else Does This Apply?
Sunk costs are easily seen in financial issues like the above, but where else do people make mistakes like these? How about relationships? How often have you heard someone say “well, I’m not really happy but I’ve already put in so much time and effort into this relationship…” or how about in health “well, I’m not really hungry but I’ve already paid for this meal…” How about travel? “Well, I don’t really want to go but I already paid for the ticket and I can’t get a refund…” STOP! Just stop using this “I’ve already” excuse. Your decisions should not be based on the resources and time you already spent, they should be based on the resources and time you will need to spend to get what you want.
Is there a chance this relationship will work? Is the time and effort you’re going to need to spend worth it? Is there a better chance for you to find the partner of your dreams if you end this relationship now and move on? Those are the right criteria to think about, not time you already spent.
Are you hungry? Will you get pleasure out of eating this meal? Are you going to enjoy going to that show more than doing something else? Remember, either way you’re not going to get the price of your meal or of your tickets back, so why consider that in your decision?
I think the old saying “stop throwing good money after bad” says it best except I will also add “stop throwing good time after bad.” If there’s no chance of getting time, money and resources back then they should not be a factor in your decisions. Remember, sunk costs are sunk. Don’t sink yourself by going after them.
