Friday, August 25, 2017

The Law of Supply and Demand

Did you ever take Economics in school?  I'm not talking about personal finance, I'm talking about Economics--the study of money.

One of the topics studied in Economics is the law of supply and demand and I thought I'd take a look at that law today.

Basically, the law of supply and demand is the way prices are set in a totally free economy.  Let's take something simple--I make these really cute Christmas ornaments out of craft sticks, hot glue and glitter. All my Girl Scout parents say how cute they are so I decide to go into business.

I can buy craft sticks on Amazon for about 3 cents each, and I use 5 of them to make the ornament.  I also use about 10 cents worth of glitter and glue.  I figure I can put up a free website to sell them, and will take payment via Paypal.  How much should I charge?

Well, I've got about 25 cents worth of raw materials in each one, and the mailer and postage, hypothetically will cost me about $2.00 each.  Paypal will take a cut of every sale.  It takes me between 5 and 15 minutes  to make each one (less time per item if I'm making a bunch and can do them assembly-line style, rather than getting everything out, doing one, waiting for it to dry between steps etc.) I think my time is worth $30 per hour and I am going to average the time and say it takes me 8 minutes to make each one.  Therefore, I am going to price them at $6.25.  Makes sense, right? 

First, as I'm sure many of you realize, I'm going to find out pretty quickly that an isolated free website isn't going to bring in any business, so I switch to Etsy, which does have fees.  Does that mean I get to raise my price? Maybe, so let's say that per item the Etsy fees work out to $.50.  Now my ornaments are $6.75.  That's a  price that pays me for my time, buys my materials and pays for selling and shipping.  That's fair, that's right, and that's what they should sell for, right?

In a controlled economy, $6.75 would be the price of my ornaments if the government functionary in charge of holiday decorations agreed with my reasoning about my time value; conversly if that person thought crafters were only worth $10 per hour, the price of my ornament would be set at $4.08.  Which is right?  Which is fair?

Free economies are not concerned with "right" and "fair".  In a free economy I now have an Esty site with my lovely ornaments for sale.  Since I know I'm going to be a great success, I've already made 100 of them, and I'm practically counting my money already--though at this point the only money is mine, since it cost me $25 to make them. At this point, one of three things can happen:

Nothing:  Hot glue, 5 craft sticks, glitter, Girl Scouts....hmmm...are you getting the mental picture I am?  All of us parents have plenty of those types of ornaments, and those who haven't chosen to be parents are glad they do not.  For some reason no one is buying them.  My supply of these creations exceeds the demand for them.  Since I have $25 invested, I want it back.  I decide to lower the price, and do so by $.25 per week, but how low can I go?  If I price them below $2.25, I go further in the hole, since it costs me that much to mail them and pay Etsy, so I'll put them on my tree, give them as gifts or throw them away before I do that.  In this case, the market has told me that my creations are not worth what it costs me to produce and distribute them.

They sell, at least some of them do.  Ok, maybe there is a market for my artistic creation.  I sell three or four of them a week starting right after Thanksgiving.  I tried lowering the price one week, but sales were the same as the week before, and when I raised the price back to the "regular" price, I again sold about the same number.  In this case, my price is about right.  People who want my ornaments are willing to pay that much for them, and lowering the price did not seem to increase demand for them.  After Christmas however, no one was buying them.  I didn't want them here all summer so I lowered the price to $2.50 and that increased the demand enough to get rid of the last ones.  Since I have not found a great demand for my ornaments in February, I am not making any more.  The supply goes down.

They fly off the shelves.  Of course this is what I hope happens.  I open that Esty shop and the first day, I have twenty customers, each of whom orders two ornaments.  At this point the demand for my ornaments outstrips the supply. I do what any reasonable business woman would do--I raise the price.  I watch my numbers.  I still have lots of orders, so I raise the price again. Then someone realizes that I'm charging (and getting) $25 for 25 cents worth of craft sticks, glitter and glue and decides that he can do it too.  He opens his Etsy shop and only charges $20.  My business slows, and I just bought a lot of supplies, since I was doing so well. I need to move them, so I lower my price to $19.50.  We end up in a price war, and eventually those ornaments are back down to $6.75.  He doesn't lower his price below that, because I guess he thinks his time is worth something too.  As the profits on the item increased, so did the competition (supply) which then drove the price down.  Supply and demand.

Supply, Demand and Lending Club

Supply and demand comes to mind because I just finished checking my Lending Club account, and found that my returns are still dropping.  A couple of years ago, investors were complaining that the number of people who wanted loans was lower than the number of people who wanted to invest.  Lending Club worked to increase the demand for its product by lowering credit qualifications and interest rates.  Now, the supply of loans is up, and the demand for them is decreasing, at least among some people, like me.  Lending Club is trying to woo us back by raising interest rates.

As an investor, I want to make money.  Over the last year, my Lending Club account has averaged about a 2% annual yield.  To me, given the relatively strong economy, that's not good enough.  I'm lending money.  Right now, while there are people who are losing their jobs, in general, the economy is good.  If I can't make money on Lending Club loans now, what makes me think I could make money on them when layoffs are rampant?

Supply, Demand, and Dividend Stocks

Supply and Demand are very evident in the stock market.  When you buy shares of stock,  you are buying part of a business.  While the business owns some things that are easy to value, like land and machinery, it also owns a stream of income and goodwill.  How much is that worth.  Every day when the stock market is in session, traders make that determination.  During the course of a day shares of the same company may sell for very different prices, based on supply and demand.  

Of course, most people want to buy the stock that is priced below what they consider its value to be.  They do that buy studying the company and finding reasons to disagree with the consensus in the market about the company (or by dumb luck). 

One type of stock that is very popular today is dividend-paying stocks.  When companies have profits that they do not need to invest to grow the business, those profits are distributed to shareholders as dividends.  These dividends can provide a source of income to the stockholder. Generally speaking, companies that pay dividends are established and profitable.  Since the dividends are generally determined by the profits of the company rather than by the cost of the stock, if the price of the stock goes up, the percentage yield for the dividend goes down.  Because of the popularity of dividend-focused investing the price of the stocks has increased, and therefore the dividend yield has decreased.  

Realizing that the law of supply and demand is alive and well can help you evaluate your investments and figure out why the price has change.  

*Part of Financially Savvy Saturdays on brokeGIRLrich.*

Friday, August 18, 2017

If You Take Care of the Process....The Product Will Take Care of Itself

I have a confession to make:  I am more than a couple of pounds overweight.  In fact, I've fought a weight battle my entire adult life.  Every so often I get sick and tired of the way I look and feel and then do something about it, but I'm the classic yo-yo dieter--and on every pass the low weight gets higher.  Of course, aging doesn't help with that, and the last couple of times I've tried to lose weight I've given up in disgust after a few weeks because the scale wasn't moving, at least not fast enough. 

This time, I'm trying something different--no I'm not going gluten free, low carb or following any of the trendy diets of the day.  I'm sticking to the old-fashioned eat less and exercise more plan.  We are taking my daughter's Girl Scout troop to New York City next summer and I don't want to be miserable walking through the city with the girls.  What am I doing differently?  I'm only getting on the scale every other month.  

Instead of worrying about the PRODUCT--the weight loss, I'm worrying about the PROCESS--controlling my eating and getting my body moving.  If I limit my calories and exercise regularly, I will lose weight.  Some week's I'll lose more than others, and realistically, some weeks I'll be going places or doing things that involve eating and usually broiled fish and steamed vegetables aren't what I want (if they are even available).  I'm in this for the long haul and I'm not going to eat only grilled chicken breasts for the next year.  

After limiting my calories and increasing my exercise for two months, I lost 15 pounds.  I'm hoping for 10 more pounds when I get on the scale six weeks from now.  After two months, if I've done what I'm supposed to do (followed the process) I should see noticeable weight loss, which is reinforcing.
So why am I writing about weight loss on a financial blog?  It struck me that saving money is much like losing weight.  You give up what you want today in hopes of a better future.  You have a lot of competing interests--should you put that money in the bank, or buy the new toy?  However, the bottom line is that if you don't do what you are supposed to do, you'll pay the price, and if you do, you'll reap the rewards.

There are bloggers out there who pride themselves in spending almost no money.  They live in small houses, rarely eat out, drive old cars and only buy secondhand clothes--and save a huge percentage of their paychecks.  Their goal is to amass as much money as quickly as possible so they can retire and spend the rest of their lives doing what they want to do. If that is their goal, they are welcome to it. 

In much the same way, there are people who always watch every bite that goes in their mouth.  They never eat a dessert that is not unadorned fresh fruit.  They work out over an hour a day every day.  They look great, and if it is worth it to them, they are welcome to it.

But what about the rest of us?  The ones who want to spend some of our money today, because we know we aren't guaranteed tomorrow?  The ones who want their chicken fried, or their sweet potatoes with praline crunch on top?  Hopefully we realize and accept the cost of what we are doing.  

Back to what we were talking about earlier.  The process of investing for the future involves spending less than you earn and investing the difference.  When the stock market is blowing and going, and you are watching your net worth go up all the time, staying motivated is easier than when the market is in a downturn and, despite investing more money, the value of the account goes down.  In a similar way, it is easy to stay motivated on the weight loss journey when the weather is great outside, you have lots of time to exercise and a friend to join you, and  harder when you are rushing and grab fast food for lunch and skip the exercise due to bad weather.  

In both cases, the trick is to remember the process and accept that there will be short-term setbacks.  Find a check-in period that works for you.  Weighing weekly was too much for me--I got discouraged too quickly.  On the other hand, I have no trouble checking in weekly with my investments, even when they are going down. 

You also need to find a process that works for you.  Some people swear by the fad diet of the week and others religiously write down everything they eat, weighing it and computing calories.  I've tried that, and for me, it doesn't work--it feel constrained, and I hate paperwork.  I have some "go-to" breakfasts and lunches for which the calories are either on the box or easy to compute.  For supper I just watch m portion size.  It is working for me.  

In the same way, some people create and stick to elaborate budgets that give a job to every dollar.  That would drive me nuts.  Overall our lifestyle is lower than our paychecks can afford.  A certain percent of our paychecks goes into savings before it hits our bank account.  Once that's taken care of, the rest is available for spending.  Some months we spend more than others and once a certain amount has built up in the checking account it gets invested.  We set up a process that, if followed, allows us to achieve our goals.  

With both weight loss and saving money, if you take care of the process, if you do what you are supposed to do, the product, the end result, will take care of itself.

Saturday, August 12, 2017

Should My Next Computer Be a Mac, a PC or a Chromebook?

One trick to getting your money's worth with any purchase is to buy enough product to meet your needs, and not more.  If TV is your major source of entertainment, the big-screen, all the bells and whistles model may bring you a lot of pleasure.  If you watch it an hour or two a month, just about anything will probably be fine.

If sitting at an antique table set with beautiful china and real silver gives you pleasure and you can afford it, go for it. If all you see is furniture to dust and silver to polish (what a pain) then you'll probably be happier with a Wal-Mart table and stainless steel flatware (and save a few dollars).

What about your next computer?  Until recently, you had two basic choices:  you could buy a PC or you could buy a Mac.  Now you have a third mainstream choice--a Chromebook.  Should you buy a PC or a Chromebook?  Should you buy a Mac or a PC?  Let's look at the options.

Things to Consider When Buying a New Computer

  • What would you like to use it for?  If you could spend as much as you want, what would your new computer do? If the answer is send emails and surf the internet, you will probably be happy with a lower-priced machine than the person who wants to play graphics heavy games.  If you have particular software you want to run, check to see if it can be run on the computer you are considering.

  • Where do you want to use it?  Obviously if you want this computer to travel with you, it will need to be some sort of laptop.  If it is for office use only, you may prefer a tower hooked up to multiple monitors (though you can hook your laptop up to multiple monitors as well).

  • Who is going to be using it, and how computer savvy are they?  Some people like to tinker with their computer and software while others just want it to work.

  • How much do you want to spend?  How important is price?  
  • Reasons to Buy a Windows PC--And Reasons Not To

    A PC (personal computer) that you buy in a store runs the Windows operating system, which is the most commonly used operating system today.  Today you can get a desktop computer, without a monitor, a laptop, or an all in one desktop computer that integrates the processor and the touch screen.  Generally speaking the desktop design gives you the most processing power for the dollar, though laptops are more comparable in price now than they were a few years ago.  All in ones are the new kids on the block and like most things, if you want the newest, you'll pay more.

    The main reason to buy a PC is compatibility.  Since the Windows operating system is the most popular, particularly with businesses, there is more software available for it than for the other systems, so if you need to run software that is only written for Windows, you may need to buy a PC (there are ways around it, but they generally require some level of technical expertise to implement and maintain). 

    Overall, Windows works reasonably well, though you won't find many people who love it, and because of its ubiquity, finding people who know how to tweak it or fix problems isn't difficult.  On the minus side, that same ubiquity means Windows is a popular virus target.

    One thing some people consider to be a big minus for Windows (and others consider an advantage) is that they have moved to automatic updates.  Rather than releasing new versions of the software, Microsoft is pushing updates to current users.  While they will take "not now" for an answer, they keep requesting to update and even if you don't want to do so, you may eventually end up accidentally hitting the "yes" button and updating.  Microsoft does this to keep the program secure, but people with finely tweaked systems or who are running outdated software may find that one of these updates "breaks" their system.  

    Reasons to Buy a Mac--And Reasons Not To

    Like PC's Macs (Apple Computers) come in desktop and laptop versions.  

    People who use Macs often love them and hate to even think of going to Windows.  People who do a lot of graphics or other artistic work tend to use Macs more than most businesses, so if that is your field, you may need a Mac to be compatible with other people--and I tend to think that if most people in a field are using Macs there must be some economic advantage to doing so.   

    Macs do not tend to get the viruses PCs do because there are not as many of them and because  they work differently.

    While Windows has become a lot more user-friendly lately, Macs have a reputation of just plain working--if you want something to fiddle with and tweak, go buy a Windows  PC.

    While you can buy Windows PCs in a lot of different configurations, made by a lot of different companies, at a lot of different price points all Macs are made by Apple and there are relatively few price points.  In general Macs are more expensive than Windows PCs, but they are durable and high quality.

    Reasons to Buy a Chromebook--And Reasons Not To

    The new kid on the block in the computer business is the Chromebook.  In a lot of ways, these computers are glorified web browsers, or tablets with keyboard--and whether that is a good thing or bad depends on your needs and wants.

    When you turn on a Windows PC you have to wait for it to "boot up", for all the background programs to start, before you can start doing what you want to do.  Chromebooks turn on in about 5 seconds.  

    Chromebooks are designed to be connected to the Internet and to run apps rather than locally installed programs.  While you can use them offline, it is not what they were designed for and if WiFi is not generally available where you are going to be using this computer, a Chromebook is probably not the best choice.

    The main strengths of Chromebooks are their price, ease of use, and battery life.  Even with a keyboard, their size and weight are closer to tablets than laptop PCs. They are becoming school favorites because they can be made school-ready (connected to the school's network, with chosen apps downloaded) in a matter of minutes.  Updates can be made to all computers in a school via a central control panel in a matter of minutes, whereas Windows PCs must be individually updated. 

    Chromebooks under $200 are easy to find, though a recent Amazon search also found one for over $400.00.  The one my daughter's school required cost right at $200.  Most Chromebooks will last close to eight hours per battery charge, far more than the average Windows laptop.  

    The main disadvantage of Chromebooks is that they do not run Windows software (though they can connect to Cloud Office).  If you have a need for a particular program and there is no Chrome app for it, you will have to chose another platform.  If your need is for web browsing, basic word processing and basic spreadsheets, a Chromebook will probably meet your needs.  

    What will your next computer be?  At this point, I'm still thinking Windows PC but Chromebooks are looking better all the time.

    Disease Called Debt