Monday Night Finance- Volume 79

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Where to Exchange Currency- (It’s Not the Bank)

There’s nothing more exciting than an international trip! After years of restricted border crossings caused by the COVID-19 pandemic, more and more people are returning to the skies and exploring different cultures. One of the biggest pains of international travel though is currency exchanges. While “paying with plastic” has eased some of the headaches of international currencies, you might get hit with nasty fees, a bad exchange rate, or both if you aren’t careful. In this article, experienced travelers Lauren and Steven share how they circle the globe paying the absolute lowest amounts in currency exchange fees.

By the way, when you swipe a US credit card abroad, the merchant may ask if you’d like to pay in US dollars or in the local currency. As a general rule, you should always choose the local currency and let your credit card company do the foreign currency exchange for you. Merchant terminals typically impose unfair exchange rates.

Lauren & Steven- Trip of a Lifestyle

The easiest way to get the best rate on currency exchanges is to use your credit card as much as possible. However, you’ll want to make sure that you’re using the right card for the job. Lauren and Steven compare their favorite US Card (Citi DoubleCash) to the card they’re using in Australia right now (Chase Sapphire Preferred). The DoubleCash card charges a 3% surcharge on all international purchases whereas their Sapphire card has no foreign transaction fees and a favorable exchange rate. Not everything can be paid for with a credit card however. Lauren and Steve also found the best checking account for international travel. The Schawb Investor Checking has no foreign transaction fees, no ATM fees, and will even refund ATM fees if the ATM you uses charges you a fee. Seems like a great deal. While these two accounts can get you through a lot of the headaches of travel, they have even more tips if you need to withdraw large sums of cash. Check out their article for how they bought a car for the 3 months they plan to stay in Australia!

Endowment Effect – Housing Market Edition

When I was in my 20’s, I won my age group in a local triathlon. The race didn’t have medals, but they did have prizes from local businesses. I ended up getting a pepper grinder as a reward for my excellent finish. It wasn’t an especially nice pepper grinder, but I loved it. I prominently displayed the pepper grinder on our dining room table each night. I even started adding more pepper to my food. What does this pepper grinder have to do with finance? Well, it’s a good example of the “endowment effect”. Economists have found that when people are given a gift or have won something, they value it more highly than its actual worth. In fact, we tend to believe everything we own is more valuable than its true cost because we’ve become attached to it.

The endowment effect is a bias that causes us to overvalue something that we own, regardless of the market reality. Simply because we own it, we assign a higher value to it. Daniel Kahneman and Richard Thaler studied and wrote about the endowment effect after conducting a series of tests with students in 1990. After distributing coffee mugs to half of the students, they asked the students to trade the mugs for an agreed-upon price. Despite the theory suggesting that half of the mugs would trade hands, Kahneman and Thaler found that far fewer mugs were exchanged. The students who had randomly been given the mugs, assigned much higher values to the mugs than the students who had not received a mug.

Blair duQuesnay, CFA®, CFP®

Perhaps one of the biggest places we experience the endowment effect is in the housing market. If you’re a homeowner, chances are you think your house is worth more than it is. Not only is it four walls to protect you from the rain, but it has also given you thousands of memories through the years. Even though we try to be rational, we may be subconsciously inflating the value of our house when we go to sell. This endowment effect can cause friction in the housing market and prevent buyers and sellers from moving homes when they want or need to move. If this sounds interesting to you, this article by Blair duQuesnay is a masterclass on how emotions can interfere with the housing market.

Marginal Benefit

Are you a social security expert? Do you know how your social security benefits will depend upon your work history? Or have you never really paid attention to the exact relationship between wages and social security benefit? Even if you have looked at benefits estimates provided to you buy social security, do you know how they came up with those numbers? If not, you might be surprised to learn that working another year at a high paying job may barely impact your benefits.

 To illustrate, imagine a hypothetical worker named Fred who was born in 1960 and started his career at age 22. Notice that Fred gets nothing if he stops working before turning 32. That’s because it takes 10 years, or 40 quarters, of payroll tax contributions to be eligible for Social Security benefits. Also note the diminishing effect of Fred’s contributions on his benefits during the second half of his career. His benefit’s growth decelerates in his early 40s, and almost stops after age 57, even though he works five more years.

Sanjib Saha- Humble Dollar

This article by Sanjib Saha is one of the easiest to understand explanations of how the government calculates your social security benefits. Sanjib does a great job of explaining the marginal benefit to working another year in terms of your social security benefit. The biggest marginal increase you get in social security benefits is when you reach 10 years (or 40 quarters) of contributions to the program. Before that mark, you would earn no social security benefit, but then it quickly jumps up. At the end of your career, there may be little to no change in your social security benefit, even with additional years of work. Check out the article for a detailed explanation of why this is.