Issue time 1:02 pm, by CT VBT
Category:Debt Management
How to Trick Yourself Big Time with Home Appraisal
June 3rd, 2010A few days ago we published a guest post at http://www.fivecentnickel.com entitled Our House is Worth a Ton of Money – No, Really, It Is! There we discuss how the mere fact that we own something especially our house makes us think that it is worth a lot more than the market is willing to pay for it. Since I wrote the post I was well aware of this trick our head plays with us. So, what do I do? I try to trick my brains in turn. Really, I honestly thought I could do that.
When my wife and I guessed what the house was worth we picked a number before we got the estimate back from the appraiser. (We entered into a gentlemen’s bet even though a woman was involved in the bet.) She picked over, of course, because the number we set was pretty low. I picked under since I have been very concerned about the state of the housing market. Besides, I am keenly aware of how much my wife and I like living in our house. We think it is truly wonderful, but the fact of the matter is that we bought the house very cheap in a rising market a little over six years ago. There had been two signed contracts before we got to bid on the house. Both transactions had fallen through and we had to buy the house “as is”. Compared to the first signed contract from a year earlier, we bought the house for a 16% discount – all this in a rising market. Not bad, right?
Now my thinking is that this very same thing could happen again. We sign a contract, a home inspector checks the house, and the next thing you know is that the contract falls through. It happened before, it could easily happen again. This is why I am so cautious when I value our house. Alas, I conveniently “forget” that we bought the house with an appropriate discount. Our cost basis already reflects a discount. There should not really be another discount on the house just because I own it and because my perception of its value is tainted.
Needless to say, my wife won the bet hands down. We were, no I was, way too low on our over/under number. I was pleasantly surprised, but my wife thinks that the appraiser underestimated the value. He forgot to account for one bathroom and a few other major things. In any case, we won’t really find out the true value of the house until we actually sell the house, but that is beside the point. The fact of the matter is that my knowledge of mental traps has led me to fall into another trap altogether. I tried to neutralize the known trap to become objective and failed miserably.
What is the moral of this story? – We have to accept the fact that we can’t be objective. Humans are not made that way. Rational thoughts and decisions don’t always have to win out. And even if we try very hard to be rational and objective, we may still not reach our goal. That’s just the way it…What do you think?
Issue time 1:10 pm, by CTreit
Category:Net Worth Calculator
Diagnosis: Net Worth Calculator Obsession
June 1st, 2010Running your financial numbers through a net worth calculator is a necessary exercise when you want to give your personal finances a thorough look. But by no means is it the only exercise that matters. Make sure you care for other important parts of the personal finance picture – controlling debt, budgeting appropriately, and adding to retirement savings are just a few examples. Moreover, don’t get hung up on calculating your net worth, and certainly don’t let it become an obsession. Calculating your net worth once a year is often enough. If you keep on top of your financial goals, your net worth will be fine and you won’t have to obsess over it.
I know that our society is obsessed about money; being obsessed about your net worth is just a natural extension of that. So, I can understand if you want to calculate your net worth frequently. But when you are done calculating your net worth, you might do this exercise to help keep things in perspective.
1. Think about how many people you know who have a high net worth. You know of the big time billionaires like Bill Gates, Warren Buffet, Steve Jobs, the Walton family, and the billionaires of times gone by like the Rockefellers, Vanderbuilts, Morgans, etc. All these people and families have a high net worth. (The Rockefellers are still wealthy just like the Kennedys or the DuPonts are.)
2. Now think about nice and famous people who make a difference for humanity. You have heard about the Dalai Lama who is an icon of peace, even if the Chinese Communists disagree with that view. Then you’ve got Mother Teresa, who made an enormous difference to people whose poverty we cannot even imagine. Maybe you even want to include some rich people who have a bent for philanthropy like Warren Buffet and George Soros. But you can think of a lot less nice people than rich people, right?
3. Finally, think about the people who make a difference in your life. How many of them are wealthy? How many of them are kind? – I bet you that you know a lot more nice people than you know wealthy people. I also bet you that you appreciate the nice people in your life a lot more than you appreciate the wealthy people. (I mean no offense to the wealthy, but I think it’s a safe bet that the Rockefellers are not reading my blog. I’m pretty sure, too, they know very few poor folks, nice or not, although I’m fairly sure some of their wealthy friends are really nice.)
The moral of this post: While your net worth is important to survive (well) in our society, your kindness has a lot more positive impact on the people around you. So, while you nourish your net worth, don’t forget to also develop well as a human who makes a difference to the people who know him or her.
Do you know the saying, “It is nice to be important, but it is more important to be nice”?
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