Here's a guest entry from Tynan. This is the first of a series of posts about how a professional gambler looks at money. Look for additional installments in coming weeks.
I was eighteen, and a freshman in college. For the past few years I'd been making a few hundred dollars a month selling Palm Pilots on eBay. It was a lot of money for a teenager with no real expenses, but of course I spent it all. My knowledge of personal finance was fuzzy at best. Naturally I squandered any money I made.
Then, through a strange series of events, I became a professional gambler. It happened fast, and soon my “studies” were being neglected for long nights of blackjack, roulette, and video poker. Eventually I dropped out of school to make serious money, and thus began my real financial education.
There are a lot of analogs between gambling and real life finance, which should come as no surprise since gambling is simply the bizarre intersection of fun and finance. I learned more about personal finance, discipline, and math during my six years as a professional gambler than any other period of my life.
My hope is that through this series you'll receive the same education, without the inconvenience of making piles of money.
When a gambler plays a game, he receives a payout. A 100% payout is what he'd get from a perfectly even game like flipping a coin. No one has an advantage. A 99% payout means that the gambler will lose, on average, 1% of what he bets. A 101% payout means that the gambler will earn 1% on what he bets. This may sound like a slight amount, but when betting tens of millions of dollars a year, that 2% spread between 99% and 101% represents the difference between going broke and living very comfortably.
As a gambler, I would implement changes to my playing habits. Each alteration might only increase my payout by .05%, but each .05% pushed me closer to the promised land of 101%. When I understood this concept, I realized that life is the same way. Either your spending habits are building your wealth or bleeding it — just like gambling.
For example, do you take money out of an ATM every week? If you do, that's costing you an average of $2.91 per week (according to Bankrate). People don't feel good emotionally taking out $160 at once instead of $40 a week, but that emotion has nothing to do with the real financial costs associated with the extra ATM fees. This irrational emotion is exactly what fuels casinos.
The profit in switching to a monthly withdrawal schedule is $104.76 ($2.91 * 3 * 12 ) per year. That negative emotion some people have is costing them $104.76 per year.
What about tipping 25% instead of 15%? If you're an average American, you're spending an additional $440 per year to feel generous. I'm not saying it's not worth it — I'm just saying that it's costing you.
Switching a credit card balance from 25% APR to a newly opened 10% APR card can save $1250 on a $5000 balance.
We ignore these habits and expenses on a daily basis, but as a professional gambler, small improvements in our habits are the difference between making a living and going bust. I learned my lessons fast and was a successful gambler for six years.
In real life, if we pay attention to our small habits and adjust them, they too can make a big difference. I've listed three changes that an average person could make. The benefit over ten years? Almost $18k — that's big.