Personal Finances

Hermione Loses

If you’ve read any of the Harry Potter books, you’re familiar with Hermione Granger, one of Harry’s friends at the Hogwarts School of Witchcraft and Wizardry. She’s a planner and an anticipator. She’s also a bit of an optimizer. She is anything but a procrastinator.

In many ways, I understand Hermione. When planning and executing our DIY study abroad in Spain, I found that I too liked having details like lodging, transportation and a schedule worked out well in advance. The responsibility of six little people depending on my planning is a pretty big weight.

But can Hermione-like behavior lead to suboptimal financial outcomes?

When Does Hermione Lose?

While traveling in Spain on our DIY family study abroad, we often travelled between cities and on day trips via bus. Dissuaded by the online “convenience fees”–sometimes as high as 15% more–I decided to risk it and buy the bus tickets at the bus station, immediately before the trip. The risk would be that there wouldn’t be enough seats to accommodate all eight of us. It was difficult intentionally procrastinating these purchases until the last minute, but it paid off.

As another example, I filed my 2019 taxes in late-February, very Hermione-like. I had a refund and I didn’t want to wait until April to collect. Two weeks after filing my taxes COVID-19 happened and the federal government slapped together a stimulus package that included pushing the tax filing date out paired with stimulus payments. Unfortunately, because I had already filed my 2019 tax return, the stimulus payments used that return instead of my 2018, which had a lower AGI. For a variety of reasons, my 2019 AGI was high enough to bumped me into the phaseout and my stimulus payment was reduced by a not-insignificant amount.

If I could have seen the future, I’d have put off filing my 2019 tax return. In this case, not procrastinating cost me.

All is not lost. It’s likely my AGI will be lower in 2020. The stimulus payments use the 2019/2018 returns as a guesstimate but end up being calculated from the 2020 return, so I may get some of the stimulus in 2021.

When Does Hermione Win?

A counter-example of Hermione winning takes us to another travel example. Besides taking the bus, we also travelled many times via the Spanish high speed trains. The Spanish train company, Renfe, uses dynamic pricing. Ticket prices track demand all the way up until the day of the trip. In addition to buying tickets early, purchasing in advance online avoids a 5% fee when buying tickets in person at the station. Hermione wins!

A second counter-example is booking our airline tickets for our trip. We settled on when we’d travel to and from Spain far in advance of the trip. As I searched for flights, I had a hard time not buying the tickets as soon as when they first started to drop. However, prior research suggested that waiting until the range between 90 and 120 days of the trip was the optimal window so I held off buying the tickets. And sure enough, the ticket prices fell even more and I was rewarded for holding out. In the end, combined with points, we were able to get the whole family to and from Spain for less than $600 total, or $75/person. All that research is surely a Hermione-like trait.

Conclusion

In reality, Hermione sometimes loses and sometimes wins. Both researching and being able to deal with the stress that comes from waiting until the last minute are useful skills when trying to optimize a financial outcome.

Do you have a good story about Hermione winning or losing? I’d love to hear it.

Hasta, luego.

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