I’m not sure if you’ve seen the commercials for Prudential’s Retirement Red Zone website, but I had and decided to see what it’s about. The commercial claims there’s a video on the website that will help you learn how to plan for a successful retirement when you’re near or just entering retirement.

       But when you get to their website, all you’ll find is one huge sales pitch for variable annuities – probably one of the worst choices you can make when it comes to retirement investments. Not only will you pay high expenses for the insurance side of things (the guarantee of income for life), you’ll pay high expenses on the investment side of things as well (the variable part of the annuity). Variable annuities, especially deferred variable annuities, are only suitable for a small number of people – and it’s not usually retirees (or those near retirement). Annuities can have a place in retirement planning but they’re not for everyone (which is what Prudential and other insurance companies would like you to think).

       The video you’ll find at Prudential’s Retirement Red Zone is not educational either. If you want to learn about annuities, you need to go somewhere else. They’re not something I’ve discussed yet on Provident Planning, but I’ll get to them eventually. Just know that there are some good reasons you probably shouldn’t be buying a variable annuity any time soon:

1. High Fees – The fees for most annuities are quite high, and this is even more true with variable annuities. Costs do matter, so it’s important to consider them when making investment choices.

 

2. Complexity – Each annuity comes with a prospectus, which is supposed to explain the product and costs to you, the buyer. But trying to read one of these documents is almost impossible. First, they’re HUGE. I downloaded a prospectus for one of Prudential’s annuities and it was 264 pages (8.5″ x 11″)! Second, they make up their own meanings for words so you must check their definitions, but even those can be difficult to parse out. And third, they’re not laid out in a way that’s easy to understand – even for financial professionals, much less the average consumer.

 

3. Better Options – Finally, there are better ways to secure guaranteed income in retirement than variable annuities. As I said before, I’ve not explored these options so far, but I will as time goes on. Just know that you really need to consult a trusted financial advisor before purchasing an annuity. Once you buy it you can’t change your mind. (You can switch to another annuity, but you generally can’t get your money back without huge penalties.) And when I say trusted financial advisor, I don’t mean your stock broker or insurance agent. You need to find someone who is held to a fiduciary standard – which means they are legally required to put your best interests first when advising you.

       So that’s my public service announcement for today. If you want to continue learning about personal finance without the sales pitch, then sign up for free updates to Provident Planning today!

       I borrowed The Complete Tightwad Gazette by Amy Dacyczyn from my local library a while back because I’d read so much about it on other personal finance blogs. I started reading through it, and I found so many good tips and ideas that I decided to buy a copy for myself from Amazon. This post is the first in a series where I’ll share my take on some of my favorite tips from the book.

Track Your Spending for 3 Months

       One of the first tips you’ll find in the book (on page 9, in fact) is to track your spending for 3 months. Amy says the first step for anyone who’s looking to become more frugal is to find out where your money is going now. I agree with her. It’s hard to know where you should start looking to save money if you’re not sure what you’re spending it on.

       By taking the time to track all of your expenses, you’ll learn two things. First, you can categorize your expenses into essentials (needs) and non-essentials (wants). Breaking things down this way will help you see where you can make room in your spending.

       Second, you’ll see just how much you’re spending on your budget categories. Knowing this helps you target the biggest expenses to get the most impact. It will also make you more aware of where your money is going. Blind spending is a quick way to destroy your finances.

How to Do It

       So if you want to track your spending, what are your options? Here are some ideas:

• Paper – You can always do it by hand with pencil and paper. This is a time intensive method and makes it difficult to work with the data you collect. I wouldn’t recommend this method.

 

• Spreadsheet – Microsoft Excel, Open Office Calc, Google Spreadsheets, or Zoho Spreadsheets can be also be used to track your expenses. This is another manual method that takes a bit of time, but at least you can sort and use your data. If you’re not dedicated to routinely entering your expenses, it won’t work for you.

 

• Budgeting Software – Three of the best software choices for budgeting and tracking expenses are Quicken, You Need a Budget, and Gnu Cash. The advantage of these programs is that they store all the information on your computer, and they can automatically download your transactions from your banks and credit cards. They also offer more advanced reports than you’ll want to create in a spreadsheet. This is a much easier solution than the first two.

 

• Online Budgeting Websites – There are multiple options if you’re interested in using an online budgeting website. Mint, Thrive, Wesabe, and Yodlee all offer a free, online solution for budgeting and tracking your spending. You might not be able to use these sites if you bank at a credit union or small local bank, and you might be concerned about security issues with having all your info in one place. Security was my initial concern, but I did some research and decided to go with Mint. I like it so far, and I’d recommend you read their FAQ if you’re interested. This is by far the easiest solution. It only took me about an hour to set it all up the way I wanted.

Sign Up for Free Updates!

       If you want some more good ideas on saving money from The Complete Tightwad Gazette, make sure you sign up for free updates from Provident Planning. I write on a wide variety of personal finance topics, so even if you’re not interested in frugality I’m sure you’ll find something useful here.

This article contains affiliate links. Read my ad policy here.

       Jason Zweig, a senior writer for Money magazine, is the author of a very interesting book called Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich. The book talks about how your brain can affect your money decisions, often detrimentally, and how you can learn to spot the problems you can create for yourself. It isn’t heavy in technical discussion, but it also doesn’t practically lay out exactly how you should invest your money. You should use it more as a guide to understand why it’s foolish to keep reading the investment news all the time and to help you understand why active investing is so widely used even though it has no academic research to stand on.

       Today, I just want to talk about a few excerpts from this book so we can understand why we tend to make the mistake of seeing patterns where there are none. This is often the case for those who believe in technical analysis or market timing or many other tenets of active investing. I hope this example can help you begin to see how our brain tricks us into thinking we can predict the future based on some pattern we see.

Humans Are Great at Finding Patterns

       Zweig acknowledges that humans are very good at finding and understanding simple patterns. This ability was extremely important to our ancestors and still serves us well today.

       That’s what helped our ancestors survive the hazardous primeval world, enabling them to evade predators, find food and shelter, and eventually to plant crops in the right place at the right time of year. Today, our skill at seeking and completing patterns helps us navigate many of the basic challenges of daily life. (“Here comes the train I have to catch.” “The baby’s hungry.” “My boss is always a butthead on Mondays.”)

Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich – Jason Zweig

       It’s really great that we have this ability – but only when we actually need it. When it comes to investing, obsessively looking for patterns in random data can be extremely detrimental to our investment performance. By trying to find patterns and use them to our advantage, we often do much worse than if we had taken the statistically superior route.

Pigeons and Rats – Why They Can Often Be Smarter Than Us

       Many people spend an amazing amount of time looking through tons of stock market information trying to find some kind of pattern they can use for a great new investment strategy. Even though the information is essentially random, we look for patterns that aren’t there so we can find a way to make even more money. In the process of doing all this, we often lose much more money than if we had just invested in a diversified portfolio of index funds.

       For decades, psychologists have demonstrated that if rats or pigeons knew what a stock market is, they might be better investors than most humans are. That’s because rodents and birds seem to stick within the limits of their abilities to identify patterns, giving them what amounts to a kind of natural humility in the face of random events. People, however, are a different story.

Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich – Jason Zweig

       Experimenters can test this by flashing one of two lights, green or red, onto a screen. The sequence is completely random, but 80% of the time they will flash a green light. They’ll flash the red light the other 20% of the time. (For example, a set of 20 flashes could be: GGRGGGGRGGGGRGRRGGGG. Another run might look like this: RRGGGGGRGGGRGGGGGRGG.) If you’re going to try to guess the next color to appear, your best strategy is to always pick green because it’s going to show up 80% of the time. Rats and pigeons generally use this optimal strategy when researchers reward them with some food for guessing the right color.

       Humans, however, tend to flunk this kind of experiment. Instead of just picking green all of the time and locking in an 80 percent chance of being right, people will typically pick green four out of five times, quickly getting caught up in the game of trying to call when the next red flash will come up. On average, this misguided confidence leads people to pick the next flash accurately on only 68 percent of their tries. Stranger still, humans will persist in this behavior even when the researchers tell them explicitly—as you cannot do with a rat or pigeon—that the flashing of the lights is random. And, while rodents and birds usually learn quite quickly how to maximize their score, people often perform worse the longer they try to figure it out.

Your Money & Your Brain: How the New Science of Neuroeconomics Can Help Make You Rich – Jason Zweig

To Get Better Results, Stop Trying So Hard

       Once you realize you have a tendency to seek patterns where they don’t exist, you can stop yourself from making stupid mistakes about your investments. Trying to pick stocks based on anyone’s predictions (yours or someone else’s) can easily lead to bad results. Companies can go down for a myriad of reasons you’ll never be able to predict no matter how much research you do. As Jason Zweig says, “No one can predict the unpredictable.” So relax, learn more about index fund investing, and spend more time doing the things you enjoy instead of worrying about your portfolio.

       If you find that you can’t tear yourself away from Jim Cramer or endless hours of researching companies, try this suggestion. Keep 90-95% of your invested money in a diversified portfolio of index funds. Use the other 5-10% to try out Jim Cramer’s predictions or your own hunches, but don’t use all of your money for these “strategies”. Having a play money account can help keep you from making serious mistakes with your entire nest egg—as long as you don’t start believing you’ve just found the best investment strategy in the world. Give it a few years and you’re likely to always see the index portfolio outperforming your play money.

       There’s a ton more discussion and examples of how our brain can mess up good financial decisions in Jason’s book. So if you’re interested, check it out at your local library or purchase a copy from Amazon.

       I’m a big proponent of careful and wise giving to make sure resources are used most effectively. There are many charity watchdogs, but after careful analysis I prefer The American Institute of Philanthropy (AIP) over the rest. Here’s why:

AIP Strives for Independence

       AIP does not charge the charities it reviews and accepts absolutely no advertising in its publications or on its website. Heads of nonprofit organizations are excluded from their board of directors to prevent conflicts of interest. Over 95% of their support comes from individual donations (which provide membership and a subscription to AIP’s Charity Rating Guide). This allows AIP the freedom to speak openly and to be critical of unethical practices in the charities they review without fear of losing funding.

AIP Uses Stringent Review Criteria

       AIP’s standards for evaluating charities are considered the most stringent among charity watchdog organizations. They carefully review the financial information of each charity using audited financial statements. This information has been verified and reported by a third-party outside of the charity. This helps AIP see how charitable gifts are really spent. When rating a charity, AIP considers how much actually goes to charitable programs, effectiveness of fundraising efforts, and years of available assets.

AIP Reviews a Wider Range of Charities

       Other charity watchdog organizations will only review charities that are required to file Form 990 as required by the IRS. They will request audited information from religious charities and social welfare groups (like the ACLU, Human Rights Campaign, National Right to Life Committee, and the Sierra Club). These charities and groups are not reviewed by other popular charity watchdogs like Charity Navigator. For example, AIP is the only place I can find a review of one of my favorite charities, Mennonite Central Committee.

AIP Provides Valuable Tips and Reports

       You can find a list AIP’s top-rated charities and their grades for free online. You can see a list of all the charities they review here. A donation of at least $40 is required to become a member, which will provide you with their triannual Charity Rating Guide where you can read reviews of all the charities. Additionally, they provide several free articles about charities and their practices as well as valuable tips. Check out their article on tips for giving wisely to charities or seven tips for reducing unwanted solicitations.

Do Your Homework

       AIP does not screen charities for certain values (religious or otherwise) – they only look at how effective the charities are at using the money they receive. I think their top charities list is a good place to start. But if you want a charity that also follows your values, you’ll need to do further research on your own. I’ll be looking at some of the top-rated Christian charities in future posts. Sign up for free updates to Provident Planning if you want to get future articles in your email or feed reader!

       A couple months ago, I received a free copy of Upside Living in a Downside Economy by Mike Slaughter from the publisher for my review. Mike is the lead pastor at Ginghamsburg United Methodist Church in Tipp City, Ohio. In this book, Mike offers insight into God’s perspective on our money concerns using passages from the book of James and other Bible verses. At 96 pages and 5″ x 7″, it’s a short little book. However, it contains some powerful ideas about how Christians should approach their personal finances. I’ve broken down this review into the four chapters you’ll find in the book:

Seeking God’s Perspective

       In the first chapter, Mike focuses on getting the right perspective on our finances. First, he looks at God’s character as a loving father. Next, he mentions a couple of God’s perspectives on money and emphasizes that we must seek to put God first and serve Him with our money. This is key to following God’s plan for our finances and fully understanding His desire for our lives. Then, Mike talks about checking our motives. We have to be careful about pursuing material things and loving money. Finally, he finishes the chapter by asking us to look at the source of our motives and who we are listening to. He warns of listening to the media and recommends that we seek God’s Word and wise advice from Christians instead.

Rebalancing Life Investments

       Mike then looks at seven “right actions” we should take as a response to God’s priorities for our finances and lives:

1. Do the first “right” thing: planned giving to God.
2. Seek wise counsel through an accountability group or counselor.
3. Write or rework a budget.
4. Perform plastic surgery and reduce your debt.
5. Set future goals and practice delayed gratification.
6. Nurture an attitude of gratitude.
7. Pray, pray, pray.

       These seven actions cover some important ideas God teaches us through the Bible. They’re not comprehensive, and Mike’s discussion of these actions is mostly motivational. It is not a step-by-step guide, and Mike never claims that it is.

Do It Today

       Mike then discusses the importance of planning in accordance with God’s Will. Planning for the future does not mean we are not relying on God. Throughout the Bible, God encourages us to prudently plan and prepare for the future. However, when we are planning for the future, we should be careful to make sure we approach it prayerfully and seek God’s Kingdom first.

       Mike covers what he calls the “fundamental life principles of sowing and reaping”:

1. You reap what you sow.
2. You determine the size of the harvest at the time of planting.
3. You will reap more than you sow.
4. The harvest comes in a later season than the sowing.
5. You are responsible for the work of sowing; God is responsible for the harvest.

       Anyone familiar with gardening or farming can tell you these are accurate statements regarding sowing and reaping (with the exception of disasters that wipe out the entire crop). When you apply these principles to your finances, God can bless you just as He has promised. Your actions show your faith in His promises.

       Finally, Mike talks about seven steps in creating a financial plan:

1. Do a financial analysis.
2. Begin an aggressive program of debt reduction.
3. Create an emergency fund.
4. Be sure you have adequate life insurance.
5. Write a will.
6. Look at your giving.
7. Create a budget.

       Again, this is not a full list of the things you should do when creating your financial plan, but they are a good start. If you can do these seven things, you’ll be ahead of most people. This section is more about leading you down the right path rather than directing you along the way.

Investing in God’s Future Harvest

       In the final chapter, Mike discusses three ways we can invest in God’s future harvest. First, he looks at living and giving thankfully. We must realize that all we have is from God, and we should be thankful for the blessings he gives us. We need to appreciate what we have, even during hard times. Second, he talks about living and giving faithfully. God calls us to live by faith regardless of our circumstances. We must always lean on God and trust in His teaching. In this way, we can live free from fear.

       Finally, he covers living and giving sacrificially. As Christians, we have to remember we are the body of Christ. We are how He blesses and cares for people. Our purpose is to complete the work He has prepared for us—not to achieve the “American Dream” or other materialistic goals. Mike challenges us to give everything over to God—our money, our time, our entire being. Though it seems foolish or impossible from the world’s viewpoint, it is the true calling God has for those who follow Christ and it is possible through faith in Him.

Rebalancing Your Life

       At the end of the book, there’s a short section where you can reflect on the ideas in the book and write down goals for yourself. It’s only four small pages, but it’s a start to looking at how you should use the lessons in this book in your own life.

My Recommendation

       Upside Living in a Downside Economy is not a book that will guide you through the steps needed to fully align your finances with God’s Will. But it will give you a good start at understanding God’s perspective on our finances and our lives.

       My only concerns with Mike’s teaching in the book have to do with his emphasis on tithing and the incongruity of his views on giving to the poor and his own personal life. Any emphasis on tithing as God’s desire for Christians fails to acknowledge that Christians are called to give much more generously than just 10% of their income. There are also other problems with teaching the tithe that I will address when I discuss giving in my personal finance Bible study.

       I also found it hard to give credence to Mike when he discusses how Christians must live and give sacrificially in the same book where he explains that one of his personal goals was to have a mountain home by 2004. It’s difficult for me to think that having a second home of any sort is really sacrificial when millions of people around the world don’t even have suitable shelter. There were a couple other passages in the book that gave me this same feeling. I don’t mean to attack Mike and I’m not saying I’m better than him. There are areas of my life where I am not congruent in my actions and God’s teaching, but God is changing me as I grow in Jesus Christ. I agree with his ideas about living and giving sacrificially and most of his ideas in the book, but I would have liked to see him living out examples of this more clearly as a teacher of God’s Word.

       At a cost of $8.00, I’m not sure I can recommend that you buy the book. It is short and doesn’t contain much on the side of practical application. However, if you’re just starting to seek God’s perspective on money and want to start with an easy read, Upside Living in a Downside Economy may be right for you. Borrow it from the library, your church, or a friend if you can, otherwise feel free to click the picture of the book above and purchase it on Amazon.

Win a Free Copy of Upside Living in a Downside Economy!!!

       If you can’t borrow the book, can’t afford it, or don’t want to buy it but would still like to read it, leave a meaningful comment below using a valid email address. I’ll randomly pick one commenter from all submissions made by 5:00 P.M. EDT on Friday, July 3, 2009. You have 48 hours to reply with your mailing address once I contact you by email or I’ll choose another winner. I will only mail the book to those living in the U.S. Thanks for reading!