The Rule of Small Bits

There is no wedge in the pie chart labeled "waste" - whether it is your personal life or the government budget.

 When I was running my own business, I was distressed to see that while I was working hard, and we were taking in hundreds of thousands of dollars in income, we were not making much money.

One of my employees, said, "Well, you just have to cut out the waste!"  He had a similar theory about the Federal Government - that all they needed to fix things was to "cut the waste."

Unfortunately, when I check my Quickbooks, there was no pie wedge labeled "waste" that I could just click on and delete.

What I learned, the hard way, over many years, and am still learning, is that "waste" is very hard to trim, as it comes in very small bits that are difficult to track down. Savings come not in huge chunks, but in tiny savings here and there, that when added up, save large amounts of money over time. a few dollars on the phone bill, a penny here on copy paper, 10% on your utility bill - things like that. These are difficult savings to find and implement, but they pay off. It is hard work.

For example, you may wonder why, at the gas station, there is no hot water when you wash your hands. I wondered too. Until I realized that at my office, there was a sticker on the side of the hot water heater that said "This appliance uses $450 of electricity a year." Well, I went and turned off the circuit breaker and bam! Saved $450. All we used water there for was to make coffee, flush the toilets and wash our hands. Since it took several minutes for the hot water to even get to the sinks, no one ever had hot water anyway.

Did this change my business overnight? No. Did I get a check for $450 in the mail? No. But the savings were there, equal to about $30 a month or so on my utility bill. You have to think outside of the box, and sometimes come up with creative cost-cutting solutions.

And small savings are cumulative. Just as time is the big wheel that multiplies compound interest, time is the big engine pushing debt and costs. One reason our Government is in financial trouble right now is not that we have spent a lot of money in any one given year, but rather that we have not trimmed waste over the years, and have allowed debt to accumulate.

During the last year or so, I have been able to trim my budget considerably, using the rule of small bits. I shopped my homeowners insurance and saved $500 - not an inconsiderable amount of money. I reviewed my auto policies and realized I was paying for collision insurance on a car worth $6000 and driven maybe 3000 miles a year. I saved $1500. Here and there, we found a dollar, ten dollars, 20 dollars, particularly in recurring costs (like the cell phone bill). Each savings wasn't much, but over a year, cumulatively, we've probably knocked $15,000 to $20,000 off our expenses - without changing our lifestyle all that much (Your savings may be less, we do have an extravagant lifestyle).

With debt, this works the same way. If you have $20,000 in intractable credit card debt, you did not come to this overnight. Rather, you more likely spend a dollar here and a dollar there, and every month, added another $100 to the pile, which, with interest and over time, "suddenly" balloons to twenty grand.

Weight loss, as I discuss in my companion blog, works the same way. You run a calorie surplus of maybe 50 calories a day for a decade, and you will be 60 pounds overweight. It does not take much, just an extra snack or a candy bar. "Suddenly" one day, you look in the mirror and you are overweight.

Trying to fix such problems with radical solutions, like cutting all spending, or starving yourself rarely works. Problems that take years to manifest themselves can take years to fix. The Federal Budget crises will not be resolved by years end - or perhaps even by the end of the decade. But we can make progress on all fronts.

The Rule of Small Bits applies in other areas as well. For example, Gambling can cause you a world of pain, but not all at once. Rather, the gambler dies by a "death of a thousand cuts". What do I mean by this?   Well, let me explain.

Every gambler I know has a gambling problem.  And every gambler I know insists they don't.   When you ask them about their gambling habit (and it is a habit) they rationalize it away by saying, "Well, I went to the Indian Casino last weekend, and I won $50!"  Gamblers tend to selectively remember wins and forget about losses.

If you push them on the latter, they will admit, "Well, most weekends, I come out behind, but usually only by $50 or so.  But if you factor in all the free drinks, and such, it is not a bad deal, for the entertainment involved!"

Again, the gambler deceives themselves, as the losses are likely much higher than that.  And unlike "high rollers", the gambler is not often "comped" meals and rooms.  So the overall expense, including travel, is higher than they'd like to admit.

And some would argue, "Well, what's wrong with spending $50, $100, or even $200 a weekend on gambling losses?"   And again, the Rule of Little Bits applies.

Suppose our gambler spends one day a week at the Indian Slots and loses $50 each time.  Over a month, that's $200.  Over a year, that's $2400.   Over a decade, that's $24,000. For the average middle-income person, that's a lot of money, particularly as a percentage of their disposable income.

That money, invested at compound interest, over the years, could be well over a hundred thousand.   Yet many gamblers I know have little saved, hoping for a big casino win to fund their retirement.

Most of the gamblers I know are middle class or lower-middle-class people (mostly lower) and a surprising number are poor. They have serious money issues, but would never consider giving up gambling as one approach to solving their money problems.

And here is where the law of Little Bits doesn't apply in the cure: You can't "wean" yourself from compulsive gambling (and there really is no other kind) by trying to cut back or taper off your participation.  Gambling, like alcoholism or drug use, is one of those "cold turkey" kind of things. It may take us years to become gambling addicts, or drug addicts, or alcoholics, but we can't afford to spend years undoing that kind of behavior - and the taper-off approach rarely works.

Gambling is a very bad idea.  It is nearly impossible to go to a casino to "gamble a little bit" as it is to go to an "all you can eat" buffet to "have a snack." You can't have a credit card in your wallet and go to the mall and expect not to spend. No one has that kind of self control, and that is just what they count on - your human weakness. So whenever possible, just resist the temptation by avoiding it entirely.

So for many types of behavior, we find that small bits of excess over time can result in large problems that may take small bits of corrective behavior, over time, to fix. The only exception to this Rule of Small Bits is in the case of addictive behavior, which generally requires a "cold turkey" approach in order to fix.

And sometimes this means cutting up credit cards, stopping the habit of "shopping", avoiding the "all you can eat" buffet, kicking the drug habit, or stopping gambling altogether.

Converting Ordinary Income to Capital Gains

Capital gains rates are often less than marginal ordinary income rates.  Wouldn't it be nice to pay taxes at a lower rate - legally - while investing at the same time?

In our previous post, we illustrated the differences (on a very simplified level) between taxes on wage income and on capital gains.

If you are earning money at the 35% rate, and then paying another 16% on top of that (total 51%!) it would seem to be a lot more attractive to pay taxes at the capital gains rate of 15%, wouldn't it?

Well, it can be done, and how it is done is one reason our Real Estate market went haywire over the last decade. You see, you can convert ordinary income into a capital gain, simply by investing in Real Estate. It all works through the magic of Depreciation as we started to discuss in our last posting.

Depreciation confuses a lot of people as they tend to think it means something is depreciating, when in fact, usually it is appreciating. It is just a word that identifies a tax concept, and once you get over that, it is easier to understand. If it helps you, just call it "D" and forget about trying to figure out what is Depreciating, because nothing is.

It is like trying to understand Entropy and Enthalpy in Thermodynamics. You'll drive yourself nuts trying to visualize these terms as physical entities, and probably flunk the course in the process. Once you accept them as labels for mathematical ideas (and memorize the equations for the exam!) you'll pass the class.

Our tax laws allow people to use Depreciation as a deduction on their income taxes. If you own an investment property, you can (but are not forced to) Depreciate it every year, say by 10% of the Basis. So you can deduct that amount from your income.

So for example, say you have an investment home that you paid $100,000 for. You rent it out at a break-even point and it pays for itself. The rent covers the mortgage, taxes, insurance, and upkeep.

The tax law permits you to deduct 10% of the value (I am using a round number here, not the actual code numbers) of the property every year as a Depreciation Deduction. So you and deduct $10,000 from your income taxes.   Note:  Nothing is actually "depreciating" here - it is just a term used in tax law.   Don't let that confuse you.

If you make $100,000 a year, this lowers your taxable income to $90,000, which means you save the 35% in income tax and the 16% in self-employment taxes, or about $5100. Not a bad way to save money!

But of course, Uncle Sam will get his taxes in the end. When you go to sell the property, you pay taxes on the Capital Gain. As we discussed before, the Gain is calculated as "Amount Realized" (sales price) minus the Adjusted Basis".

Here, the "Basis" is "adjusted" by the amount you "Depreciated" over the years. Say you keep this property for 5 years. You depreciate it by $10,000 a year, so your "Basis" (what you paid for it) is now "adjusted" downward by $50,000. You sell the property for $200,000.

So your "Gain" is not $100,000 (the amount of profit you made) but actually $150,000, the Sales price minus your ADJUSTED basis. You will have to pay a 15% capital gains tax on $150,000 of Gain.

At first this may not seem fair, but bear in mind that over the last five years, these depreciation deductions have knocked over $25,000 off your taxes. And the additional taxes from the phantom "gain" is only $7,500.

So you've taken $50,000 in income and legally converted it into a Capital gain, and paid the tax, deferred by five years, of less than a third of what you would have paid as ordinary income tax.

Sounds outrageous? Well, to some extent it is. But there is a legitimate reason for it. If you own a rental property that is mortgaged, you pay money into a mortgage every month. Some of this is deductible as an interest expense. But some of it goes to paying down the balance on the note, which is not deductible.

In our example, the property was self-sufficient - it took in as much in rent as it paid out in taxes, mortgage, insurance, and repairs. So there is no taxable "income" on any "profit" from the rental, right? You did not receive a penny in cash out of the deal that year.

But you'd be wrong about that. The amount you paid down the mortgage is indeed a profit, as it represents a decrease in money you owe on the property (and thus more equity in your pocket). In such a situation, you could end up owing taxes on a "profit" that you do not immediately realize. You have to pay taxes, but you have no income to show for it.

The Depreciation deduction tries to offset this effect, but perhaps does it a bit too well. For most investment properties held only a few years, the amount of mortgage paid down is minimal compared to the depreciation deduction. The use of Depreciation ends up being a neat vehicle for high-income-earners and the self-employed to legally offset their income and thus pay fewer taxes.

And of course, in a rising Real Estate market, they make money on the equity side as well. The rich get richer, right?

Well, that was the idea, anyway. Unfortunately, in the 2000's too many people jumped on this bandwagon, thinking they could buy Condos in Vegas and rent them out and depreciate them and knock thousands off their tax bills.

And so long as the Condos held their value or increased over time, it was not a bad plan. And so long as they could be rented out to cover the overhead, it was not a bad plan. But once the market was flooded with units, the rentals market was flooded, and no one was covering costs. Worse yet, this forced prices down, and people lost real money.

Yea, I know, you feel very sorry for all these rich folks who got their weenies caught in the wringer, trying to avoid paying income taxes.

But that is basically what happened in many markets. Aided by funny-money financing, a little mortgage fraud here and there, and of course more than one homeowner who thought he could "have it all" with a no-doc toxic arm loan.

I learned this technique from my Tax law professor in law school. Again, it is perfectly legal. And when the market was going up, and rents were high, it worked well for me. I cashed out of the market before the major crash, and managed to do OK.

However, one downside to this scenario is that the capital gains taxes can actually exceed the amount realized. For example, if you "fully depreciate" a property, the gain will be equal to the sales price. Your taxes will be 15% of the sales price (plus State taxes, don't forget those!). As a result, you could find yourself making a lot of money, but owing a lot of taxes. If the property is mortgaged, the amount cashed out could be about equal to the taxes, or even less.

When I sold one property, I had to scramble to come up with the cash to pay the Feds and the State the Capital Gains Taxes due. It worked out in the end, but I ended up borrowing some money to pay the taxes, which is how I ended up starting this blog.

So, there are pitfalls to this technique. But overall it has worked for me. For others.... well..... not so good!

But that's how you can convert ordinary income into Capital Gains.

P.S. - you can even avoid paying the capital gains tax if you either transfer your basis to another property using a Starker deferred exchange, or live in the property and declare it as a personal residence for three years.  No tax is even better than lower tax!  See your tax adviser for details, however, as laws change over time!

Understanding Capital Gains Tax

Understanding Capital Gains Tax

Most folks have little or no understanding of our tax system. As I have mentioned before, no one really makes it easy to understand, and many folks would prefer you didn't understand it. They show you huge volumes of the tax code and TELL you it is "too complicated" to understand.

But it really isn't all that difficult. Most of those huge volumes don't even apply to you. Basic tax code is not all that hard to understand - at least at the level where it applies to your finances.

Ordinary income is taxed on a progressive basis. So the more you make, the more you pay in taxes - on the increased amount. The table below illustrates the actual rates for 2010:

Year 2010 income brackets and tax rates

Marginal Tax Rate	Single	Married Filing Jointly or Qualified Widow(er)	Married Filing Separately	Head of Household
10%	$0 – $8,375	$0 – $16,750	$0 – $8,375	$0 – $11,000
15%	$8,376 – $34,000	$16,751 – $68,000	$8,376 – $34,000	$11,951 – $45,550
25%	$34,001 – $82,400	$68,001 – $137,300	$34,001 – $68,650	$45,551 – $117,650
28%	$82,401 – $171,850	$137,301 – $209,250	$68,651 – $104,625	$117,651 – $190,550
33%	$171,851 – $373,650	$209,251 – $373,650	$104,626 – $186,825	$190,551 - $373,650
35%	$373,651+	$373,650+	$186,826+	$373,651+

But the main thing to understand is that if you are in the highest bracket, the last dollars you make are taxed at about 35%.

Ordinary income includes wage income and ordinary dividend and interest income. But wage income is also subject to another tax - or taxes - for social security and medicare. This amounts to about another 8% in taxes, and your employer matches this. If you are self-employed, you end up paying about 16% which represents what you would have paid in social security and medicare taxes, plus the matching amounts from your employer. So a dollar made at a wage job is worth more than a dollar made when self-employed.

Capital Gains are considered to be money made on the appreciation of an asset, such as stocks, houses, and the like. If you buy $100 of stock and a year later you sell it for $200, you have a Capital Gain of $100. At the time of this writing, Capital Gains are taxed at a flat 15% rate. (UPDATE 2022: See chart above - Capital Gains have been adjusted during the Trump administration).

What constitutes a Capital Gain is often an artificial construct and one reason many folks argue the tax should be eliminated. To begin with, we tax only "realization events" - usually where you buy or sell an investment. So if your stock goes up $100, that is not a "Realized Capital Gain" until you actually sell it at that price.

If you buy a stock for $200 and then sell it for $100, you have a loss of $100, which can be used to offset other gains or income and thus reduce your taxes.

If you buy a rare Ferrari as an investment and sell it for double the money, that is a Capital Gain and you have to pay taxes. However, if you buy a Ford Taurus for your personal use for $25,000 and sell it five years later for $12,500, that is not considered a "loss" you can write off. Go Figure.

Similarly, if you buy a stock 20 years ago for $100 and today sell it for $200, you owe taxes on the $100 "Gain". However, over 20 years, that is not much of a rate of return, considering inflation, and arguably you actually lost money.

Some have proposed amending Capital Gains taxes to account for inflation, but others have argued that it would be a nightmare of accounting. Yet others say "get rid of it entirely".

One argument against the "get rid of it entirely" crowd is that it is possible to take dividends in a company and pay them out as stock (as in a split) and thus avoid taxation as dividend income (and people do this already). If there were no Capital Gains tax, there would be no taxation on most income from stocks (and some argue this is fair as well!).

As noted above, Capital Gains are calculated based on what you PAID for the investment, subtracted from what you SOLD it for. We call the amount you sell it for "Amount Realized" or AR, and the Amount you Paid for it your "Basis" or "Adjusted Basis" or AB.  So the formula for Capital Gain is very simple:

GAIN = AR - AB

But why do we call it "Adjusted Basis"? Well, sometimes, other parts of the tax code allow you to change the Basis value along the way - usually to lower it. This is called Depreciation. And that is the subject of our next post!

Closing a Credit Card Account

Paying off and closing a credit card account is a wonderful feeling.  They will refer you to a "closing specialist" when you close the account.  Listen carefully to see if you can get a good deal, but don't be tempted by the siren song of more debt.  In most cases, you are better off just closing the account.

Hopefully, if you have followed some of the advice here and elsewhere, and cut back on spending and paid down your debts, you will reach a point where you have paid off one or more of your credit cards.

The question is, should you keep that card, now that it is paid off? As it is hard to survive in this economy without a credit card, I would not suggest closing all your credit card accounts. But it does not pay to have multiple credit card accounts.

Many Americans have two, three, four or more credit cards, all with high balances, as well as store cards, gas cards, and other consumer debts. I would suggest it is better to have one, low interest rate credit card (6-8%) with a reasonable balance limit ($5000) than to have all these open lines of credit.

If you don't have a lot of debt, and need to borrow money, trust me, you'll be able to. The idea that you should keep a credit card open "just in case" you need a line of credit later on is troublesome. Human nature being what it is, an open line of credit is a temptation to spend - a temptation that you will give into, eventually.

Not only that, but an open line of credit will lower your credit score. Even if your credit card is "paid off", if you have a $20,000 credit limit, it shows on your credit report, and will lower your score and make lenders more reluctant to lend, as you could rack up a lot of debt, in not a lot of time.

So, once you have paid off a credit card (preferably the higher interest rate cards first) it is probably a good idea to close the account. This can be done by phone. When you call the credit card company and tell them you are closing the account, they will switch you to a "closing specialist". Some consumers get upset that they have to talk to yet another person. However, this "closing specialist" chat can be an opportunity.

You see, now that the card is paid off, you are in the catbird seat. If you have been making payments on time, then they don't want to lose you as a customer. Before, when you had credit card debt, you were not in a position to negotiate anything. But now, with one foot out the door, you may be able to wrangle concessions.

For example, I closed a Citibank Visa account a couple of years back. The card had a high interest rate and it was no bargain. The closing specialist asked me why I was closing the account and when I told him it was the interest rate, he immediately offered me a lower rate, if I would stay on with them. When I demurred, he put me on hold for a moment and then came back with a new offer: If I would switch to a Mastercard, they would lower the rate to 5.99%.

That's a pretty attractive offer - lower than many people's mortgage interest rates, these days. And far below the average interest rate on most credit cards (14.5%) Not only that, but they were willing to do a balance transfer from a higher rate card with zero percent interest for 10 months. Now note that balance transfers can be tricky things - see my posting on this subject. But in some instances, they can be used, if you are very, very careful, to save money and help you pay down debt.

The point is, once you have paid off a card and threaten to leave, they are willing to do things to keep you onboard. This can be an opportunity, so look into it.

Other card companies might not be so eager to keep you on. Barclay's Bank, for example, did not have much to offer me. It was a mileage rewards card, and as I have learned from hard experience, these are often no bargains. When I paid off the balance on the card and closed it, they sent me to the "closing specialist". He was not able to offer any serious interest rate cuts (to less than the other cards I have) but did offer a balance transfer. However, at this point, such a transfer makes little or no sense, as my base interest rates on my cards, and the remaining balances are low.

It made better sense to close the card. By the way, once you close the card account, make sure you monitor the account (through the card website) for at least a few months. While the card may show as closed, the account will remain active, as recurring charges or late closed charges may still appear. You may still own the card company money. Once the card has been closed for several months, make sure you check the status on your free annual credit report (the really free one, not the con-job that is advertised heavily) to make sure it shows as closed.

If you are closing a credit card account, congratulations. Hopefully this is a step toward more financial responsibility and a brighter future. Once you pay off debt and become debt-free, you'll find that your opportunities improve. The best loan terms and interest rates are offered to people who "don't need the money". So just as getting into debt can spiral into a pit of increasing indebtedness, higher interest rates that are increasingly hard to recover from, once you are out of debt, your financial options improve accordingly - you are offered better terms and better deals.

And that, in a nutshell is what this blog is all about. Once you get out of the debt lifestyle, you can live a life that is twice as rich - or work half as hard, if you want to. How you spend your money makes a huge difference in how your life is lead. Unfortunately, for many Americans, life is one long continual string of debt that ends only when they die.

We don't have to live that way, if we choose not to.

Nothing Succeeds Like Success!

Marge Simpson's Pretzel Wagon

In my Finding a Good Dentist Post, I mentioned briefly the habit or psychological effect that occurs with many people, in assuming that a business or person who appears successful, is often the best place to do business. People shun businesses and services that are not slick, smooth, and marketed, and are drawn to people and businesses that "look professional":

"And yet, many people assume that the Dentist with the flashy office is "successful" and therefor must be "good." For the same reason, people will drive by a locally owned diner that makes excellent gourmet food at cheap prices, and eat instead at McDonald's - because the McDonald's is shiny and new and flashy, and obviously successful. So it must be "better", right? (This effect is prevalent in any industry, and probably the subject for another article)."

OK, well, here is that article.

The impulse to be attracted to businesses that appear successful is probably natural. And to some extent, it may be a survival skill. If you are shopping for a mechanic, the shop that is clean and well organized may be a better place to take your car, than the shop that is cluttered with junk and dirt, and surrounded by abandoned and wrecked cars.

And similarly, a restaurant that appears to be dirty, unclean, or unsanitary, is not a good place to eat. We are naturally drawn toward a restaurant that appears to be clean, sanitary, and busy.

These are, perhaps, well-ingrained survival skills dating back centuries. And yet, we should not let "flash" blind us when making economic decisions. Oftentimes, a business or person who appears to be successful and prosperous is not exactly what they seem. And often, shady businesses and persons hide behind a false front of prosperity.

This phenomenon was neatly illustrated in an episode of The Simpson's, when Marge's "Pretzel Wagon" franchise is upstaged by the slick-looking Fleet-a-Pita truck:

Lenny: Wow, check out that van! It looks like it doesn't even need our business!

Carl: Hey, let's go!

The writers of that episode (where have they all gone?) nailed this human instinct down in two lines - that we are attracted to businesses that look successful or act like they don't need (or want) our business. In recent years, some businesses have adopted this as a wholesale model. For example, Starbucks thrives by insulting and belittling its customers - and by convincing them that some pimply-faced teenager working for minimum wage is a skilled "barrista" worthy of worship. Psychology sells! And idiots buy.

Con Men play upon this basic urge of ours. You are more likely to find a con men dressed in a sharp suit than anyone else. The average working Joe has to roll up his sleeves and work for a living. His suit will be creased and worn. But the crook rarely dirties his fingers, and his shoes will be the shiniest ones in the room. When someone appears to be too slick, too well dressed, too perfect, your suspicions should rise.

For example, an acquaintance of mine wanted to partner in a business venture. He always wore expensive suits and Italian loafers and was as slick-looking as an Italian model. He visited me in my office and complained that our gravel parking lot was ruining his expensive shoes. I realized right then that it was not going to work out. While he had a great facade of slickness, he did no real work, which is why he was looking for a job in the first place. I told him to take a hike in his Italian loafers.

But similarly, many businesses use (sometimes literally) a "false front" to make the business appear to be larger or more successful than it is. And in many instances, people are drawn to what they perceive to be a "successful business" thinking it will provide the best bargains, than to some alternatives which are far better.

Nowhere is this more true than in the car business. As I (and many others) have noted, the best bargains in automobiles are to be found from an individual owner, selling a personally used car, that is 1-3 years old with relatively low mileage. An individual, such as yourself, selling their own car, is at a horrible disadvantage to the car dealer, as they cannot offer financing or other services (temp tags, registration, etc.) and moreover their negotiating skills are more likely to be on a par with your own.

And this disadvantage is reflected in the NADA, KBB, and Edmunds "book" prices for used cars. A car sold by an individual will generally sell for 20%-30% less than the same USED car sold by the dealer.

20-30%. That's a LOT of money. Add in the fact that if you are buying from the owner of the car, you can better find out how well it was cared for, are more likely to have service records, and can judge how well the car was treated. At a car lot, the cars are all generic and there are no "back stories" to them. The abused clunker and the creampuff sit side by side, and you have little or no way of distinguishing between the two.

And yet, the majority of people buy their used cars from used car dealers. Why is this? I think the answer is multifaceted, but it has largely to do with the image of success.

When I ask people why they go to a used car dealer, the answer I receive most often is the most puzzling: Trust. Used car dealers are routinely rated near the bottom of the barrel (sometimes below lawyers!) in terms of trustworthiness. They have been reviled in stories and jokes since time began. And yet, people cite it as one main reason for going to a dealer. Why is this?

I think the answer is that people are enthralled by the trappings of success. The dealer has shiny signs, bright lights, rows of clean cars, salesmen in suits, impressive buildings. All of these taken together project the image of a profitable and successful business. People are drawn to that like a moth. Of course, they rarely think as to who is paying for all these trappings of success. And the answer is, of course, the customer, which is why dealers have to charge 20-30% more for their product than the individual with no overhead.

A person selling their own car, from their home, has no "flash" to sell. They are just like you and me. They cannot hype the product as well as a salesman. They may tell you the truth about the car, which is not bad per se, but not as open-ended as the mystery of the used car on the salesman's lot.

Of course, the individual seller cannot offer financing, slap temp tags on the car, and take your old car in trade. So those factors are highly important as well. But the "hassle" of going to your credit union and the DMV, as well as selling your own car, are well worth 20-30% off the purchase price. And yet so few bother to go this route (which is all the better for you and me).

This is, of course, not to say that all car dealers are crooks and all individual sellers are saints. There are "curbstoners" out there who sell cars for a living, posing as individual sellers (often to skirt dealer laws). And there are individual sellers who think they are just too clever and will ask more for a car than it is worth. But it is not hard to spot such folks (usually by their over-inflated asking prices and egos) and just walk away.

The same effect, as I noted above, occurs with restaurants. People will drive by very good restaurants, often local institutions, to dine at some chain restaurant, such as McDonald's or Bennigan's. When asked why they do this, they often reply that they like the certainty of the chain restaurant - knowing what will be on the menu and at what price. They live in fear of getting a bad meal.

And yet. the food at many chain restaurants can be wildly inconsistent, as can be the service. And since the food is often prepared by teenagers working for minimum wages, the idea that such places are cleaner or more sanitary than a family-run restaurant can be flat-out wrong (search on YouTube if you don't believe me).

But more important that that, the local restaurant is more likely to offer good food, regional food, and often at better or more competitive prices. But to go to such establishments often takes a modicum of courage. When traveling, one is naturally reluctant to stop at a local diner. In the back of your mind, you expect to walk in, have the screen door creak shut, and have everyone in the place stop talking and slowly turn to look at you. At the counter, an overweight local Sheriff slowly drawls, "You-all ain't from around here, arya, boy?" Suddenly the hamburger at McDonald's sounds a lot more attractive, even if some high school teen behind the counter has spit in it.

But the reality is, many of the local, family-owned businesses are not that way at all. You are served with grace and speed, and the food is often better, healthier, and cheaper than the chain restaurant down the way.

And in addition, you are supporting a real business run by real people - not some mindless chain that is run from a corporate headquarters, that pre-cooks the entrees and then hires the least-skilled and least-paid labor possible to thaw and serve it for you. These chain restaurant survive and thrive because people patronize them. The really great restaurants of the world struggle as a result.

Again, this is not to say that every chain restaurant sucks, and that each Mom-and-Pop "dive" is a gem in the rough. There are some locally owned restaurants that should not be in business, and there are some chains that are quite good, when the entrees are thawed properly.

In order to find the good local spots, though, you have to be willing to take risks. Risk-takers reap the rewards in life. Is there risk? Well, some, but not much. At the very worst, you may have a bad meal. Yet even that trivial risk is too much for most Americans to take. They live in ragged fear of the bad meal. And so they settle for a known quantity - endless mediocre meals at chain restaurants. I'll take risk, thanks.

This effect can also be inverted. For example, as I noted in my Wal-Mart blog, many people are surprised to find that the quality and prices of food at Wal-Mart (yes, Wal-Mart) are on a par with, or better than the "upscale" grocery chains. And yet, many folks turn up their noses or refuse to shop there, because they have preconceived notions as to what the store is all about. So they go with the "safe" choice, pay 2-3 times as much for their groceries, and come home with wilted lettuce.

In finding real bargains in the world, you have to strike a balance, I think. There are successful businesses out there that provide real bargains, or at least reasonable deals (all that anyone should hope for, really). But there are also lesser known channels of commerce that can provide a real gem of a deal, in terms of quality or pricing. It is worthwhile to seek out such bargains and not be blinded by a flashy office, a nice suite, or a neatly printed business card.

But this takes judgment, and by that I mean judging the product or service offered, not the packaging it comes in.