Tag Archives: Saving

Thinking of buying something on credit?

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Mr Bean Cartoon Image

‘Need’ a plasma TV? Perhaps you ‘just’ need a new car?

There’s ALWAYS a way to find the money that you need WITHOUT putting yourself further in debt … just ask Mr Bean :

http://youtube.com/watch?v=42AHISKy2Kk

Mr Bean (a.k.a. Rowan Atkinson … played the priest in 4 Weddings and a Funeral) is not as well known in the US as he is overseas … he’s one of my favorite comedians and comedic actors.

Anyhow, I hope that you enjoyed this short clip for today’s installment of our Video on Sunday’s series as much as I did?!

AJC.

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How to sort the rational wheat from the emotional chaff …

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I published a post last week called 10 steps to whatever it is that you want … how to weigh up the cost of a lifestyle decision which outlined a basic Making Money 101 decision-making process to help you sort your way through a discretionary purchase decision (you know the type: “Hey, that 48″ plasma screen would look really great on that wall!”).

You see, I come from the school of Ambivalent Frugality – sometimes you should … sometimes you shouldn’t. After all, money was invented to trade for ‘stuff’, right?

We just have to trade it for the RIGHT stuff, only when we can AFFORD it; and, the 10 Steps were designed to help us do exactly that.

Now, I don’t normally do a follow-up post so quickly … after all, what will I have left to write about next month?! 🙂

[AJC: kind’a reminds me of the old joke: why shouldn’t you look out of your office window all morning? Because you’ll have nothing to do all afternoon!]

But, Diane had a great question attached to my original post that this post is designed to help her answer – and, I hope that it helps you, too!

Here’s part of Diane’s question:

Have a dilemma regarding is it a need or a want – I have a house now, student loans, bad debt ) and need to decrease everything. I have a rescue Old English Sheepdog I’ve had now over a year and a half. Always meant to get a [larger] fence up, even prior to getting him, but had different expenses and no savings to cover them (hence the debt climb) and have put off getting a fence up … under the 10 questions, it doesn’t qualify as something to change lifestyle, but … I think this is a need, but … it is a financial decision as well. It’s not putting food in our mouths, but it is providing shelter and protection for the family dog who is also protection for us (single mom household). Or is this too left-field?

Now, this is definitely not left field, but – at least on the surface- the 10 Questions seem more designed to answer “can I afford ‘stupid stuff'”-type questions than these really tricky emotional ones.

In my experience, when we get into emotional ‘need v want v life-changing’ questions, rational decision-making can fall flat on it’s head.

But, I have a simple solution …

… one that doesn’t need to involve attempting to answer (preferably, Qualified Shrink Assisted) a myriad of ‘soft’ questions like: “will the animal suffer if you don’t put the larger fence up?” and/or “will YOU suffer if you delay puttin the larger fence up?” and/or “did your parents emotionally ‘fence’ you in when you were young and are you projecting this onto your dog?” and so on [AJC: Sigmund would be SO proud of me].

Instead, I shortcut the whole process for Diane – and, I suggest that you give this a try next time you are trying to avoid answering the 10 Questions because you really need something that you probably can’t afford, too – by simply asking her to do the following:

Follow the 10 questions exactly as written … that’s what I put them there for!

Simple … isn’t it?

Now, Diane, if you followed this advice on Sunday when you left your comment, by now you would have made your own sane, rational decision. Right?

If as I suspect, given your financial position, it was against Poor Pooch then I have a question for you:

How do you really feel now, having made that really hard decision?

…… [Diane inserts emotional feeling of (a) relief having made the ‘right’ decision, or (b) pain having made what feels like a terrible, albeit financially correct decision, or (c) she’s emotionally dead] …..

Diane – and all of us – that is the only way to sort through an emotional need from a want:

Make the decision rationally, then see how you really feel …

… then, go with your feeling!

That’s what LIFE is all about … and, didn’t we just say that our money is to support our life?

AJC.

PS There’s a neat shortcut to this process: when faced with a difficult choice – and you don’t want to pay for professional advice to help you get through the decision-making process – simply flip a coin and mentally go with the decision. Dig deep to see how that makes you feel … and, go with your feeling!

 

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How do I figure social security and pension plans into my 'Number'?

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In a couple of posts, I have talked about The Number – the amount that you need to have saved (preferably, invested in passive income-producing investments) by the time you retire.

Before we move on, it’s probably time for a quick review of what I mean by ‘retirement date’ because it’s not the same age-related date as most Personal Finance books and blogs assume:

‘Retirement Date’ = The Date YOU Choose to Stop Work!

… This is not 65 or any other age your boss, the government, or society tells you! If you are 35 years old and actually want to retire @ 65 on $1,000,000 a year this is NOT the blog for you!

Now, having got that one off my chest (!), one of my readers, who IS close to the traditional retirement age, asks a great question about how to figure his retirement benefits (which, he will receive as an annuity rather than a lump sum) into The Number for him …

… you can read his original comments here, but this is the essence of his problem:

I am just having trouble trying to quantify my pension so I can include it in my net worth … the trouble is I don’t receive a lump sum, but rather 65% of my base upon retirement, every year, which includes increases for cost of living every year.

The problem is that this reader was trying to find a way to calculate the ‘implied passive asset value’ of this pension into his Net Worth … while you could do that, there’s no real reason to.

If you are in a similar situation, what you really need to know is:

Can I live my ideal retirement on this pension … if not how much extra do I need to count on having in investments by the time I do want to retire?

To do that, we only need to make a slight modification to the formula we have used before.

1. STATE how much you need to live your ‘ideal retirement‘ assuming that you stopped work today (it’s not how much you would have, but how much you would need). What is that number?

2. DOUBLE that amount for every twenty years that you have left until retirement (add 50% if only 10 years, etc.). What is that number?

3. SUBTRACTthe annual value of any social security, annuities, pensions, or other regular amounts that you are reasonably (actually, very) certain to get. What is that number?

4. MULTIPLY your answer by 20 (slightly conservative) to 40 (very conservative). That is The Number … for you!

A couple of points:

I usually ignore Social Security and other government benefits, mainly because governments and regulations change … the longer until your chosen ‘retirement’ the more chance that these things will vaporize before you get there.

Similarly, I work on pre-tax numbers, because I have no idea what the tax regulations will be like …. the longer you have to wait until your chosen ‘retirement date’ the more chance that taxes will change (read: increase) before you get there.

But, these are only rough calcs to get you aiming towards a (probably) larger target than you previously figured on … as you get closer to your planned retirement, you will no doubt have had a number of sessions with a suitably qualified financial adviser who will figure out the exact effects of things like: inflation, taxes, social security.

Now, if you are still a fair way away from retirement (say 10+ years) you may want to figure in the impact of the pension on your Investment Net Worth.

You could multiply your expected yearly retirement benefit, again assuming that you were retiring today, by 20 (this time using the lower number means that you are being extra-conservative) and add this figure to your assumed Investment Net Worth.

You could also add it to your ordinary, garden-variety Net Worth to make 20% Rule decisions regarding how much ‘house’ you can afford.

You could do these things … but, I wouldn’t.

Why?

How certain can you be that you will qualify for any of these things in 10+ years?

What happens if you can’t work, get laid off, your company goes broke or it can’t meet it’s obligations, or … ?

The reason for these ‘rules’ is to ensure that you put your foot on the investment gas … now … and, hard!

Don’t use possible future company or government benefits as an excuse to over-spend and under-invest!

By the time you do retire, you’ll be glad that you didn’t …

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Applying the 20% Rule – Part I ( Your House)

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Since my early post How Much To Spend On A House is still one of the most visited posts on this site, I thought that I should write a little follow-up piece that gives some examples on how to apply this important ‘rule’.

First a recap:

You should have no more than 20% of your Net Worth ‘invested’ in your house at any one time; you should also have no more than 5% of your Net Worth invested in other non-income-producing possessions (e.g. car/s, furniture, ‘stuff’). Why?

This ‘forces’ you to keep the bulk of your Net Worth in investments i.e. real assets (stuff that puts money into your pocket … not stuff that drains your finances)!

Warning: most people think of their house as an asset, but by this definition, it most definitely is not … let this be a warning to all those ‘house rich … asset poor’ people out there who think they can retire just from their house.

For those mathematically minded, as a formula, this can easily be represented as:

20% (max.) for your house + 5% (max.) for all the other stuff that you own = 75% (min.) of your Net Worth always in Investments! Simple, huh?

Also, for those who have been tracking my posts, the difference between your Notional Net Worth and your Investment Net Worth will be the Current Market Value of Your House + the Current Market Value of Your Possessions; if you’ve been following my advice this should be no more than 25% of your Notional Net Worth.

Now, you may have noticed something interesting:

The Current Market Value of Your House will usually go up over time (current market conditions aside!)

The Current Market Value of Your Possessions will usually go down over time (collectibles aside!).

Houses generally appreciate … possessions generally depreciate.

This sets up some interesting situations that we should discuss … by no means an exhaustive list:

1. Aspiring Home Owner – The chances are that you have debt (particularly if you were recently a student), little income, some possessions, virtually no savings or investments. You will probably never be able to buy a house at all – or, if you can it may never be bigger than a cardboard box – if you follow the 20% Rule …

… My advice is to buy the house anyway IF you can afford a decent down payment (ideally 20+%) and can afford the monthly payments (lock in the interest rates for the max. period that your bank will allow, ideally 30+ years).

A lot of financial mumbo-jumbo has been written in the press, books, and blogosphere about this … ignore what you may have read: for most people, it’s the only way you will ever get financially free.

2. Already A Home Owner – Revalue your home (be conservative … don’t wear ‘rose-colored glasses’ … check what other houses around you have actually sold for … don’t rely on any realtor’s advice – they may ‘talk’ up the price to convince you to sell – we don’t want to do that, yet!). Do this every 3 – 5 years (yearly is better).

If the conservative value of your house puts the equity in your home (Your Equity = What the Home is Conservatively Worth – Today’s Payout Figure On Your Home Loan) at greater than 20% of your Current Net Worth (you will need to redo this calculation at the same time as you revalue your house), then it is time to extract that ‘excess equity’.

What to do with this excess equity? Invest it of course! For example, you could buy a long-term, buy-and-hold, income-producing (get the picture!) rental property … or you could buy stocks … or you could take some risk and buy / start a business … or it’s up to you!

But, if you locked in your home mortgage at a cheap interest rate, you probably don’t want to refinance it, so be sure to ask a professional about suitable options for you (second mortgage; use your home’s equity to ‘guarantee’ the loan on another, etc.) … just be sure that you can afford the loans on both your house and your investment/s … make sure you have a cash [AJC: better yet, a Line of Credit] buffer against emergencies (loss of job, loss of tenant, etc.).

 3. Right-Sizing Home Owner – Again, revalue your home … but, of course you can down-grade (let’s say that you are retiring or the kids have moved out) – but just because you have freed up some equity and can easily fit into the 20% Rule doesn’t mean that you can slack off on your Investments.

ADD the freed up amount of equity to your Investment Plan … it will help you retire earlier and/or better!

Remember, your Investments should be a minimum of 75% of your Net Worth … you can and should invest more wherever and whenever possible! 

Again, if your original house is rent-able, and you have locked in a cheap interest rate (like I told you), you may want to keep it as an investment … consider doing so!

Now, buying houses isn’t always about making the right investment choice; there will be times in your life when you have to consider changing houses whether it fits within the 20% Rule or not (one obvious example was our First Home Purchase) …

… most likely, this will be at major life changes (marriage, divorce, babies). So be it!

Remember our Prime Directive: Our Money is there to support Our Life … Our Life isn’t there to support our Money (that would be just plain sick)!

Just make sure to revalue every year at first, then every 3 – 5 years min. and try not to get off-track, but if you do, simply realize if you are off-track financially and that you just have to get on-track at the first opportunity …

AJC.

PS You may want to bookmark this post (using the convenient links below) and review at every major ‘house change’ decision!

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10 steps to whatever it is that you want … how to weigh up the cost of a lifestyle decision

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In Devolving the Myth of Income – Part I we discussed the case of Docsd (or just ‘Doc’) who said:

I have been awaiting approval on … an older historic horse farm on several acres … my goal has always been to live as far below my means as possible while accumulating wealth.

This generated some debate, which eventually boiled down to the following well known saying:

Never invest in anything that eats or needs repairing.

Attributed to Billy Rose, the famous Broadway producer and investor.

But, you can’t always just distill your life down to the pursuit and saving of money – there is a word for being too frugal: it’s called being a miser! Sometimes, you have to make a lifestyle decision …

For example, buying a house to live in may not be the best financial decision in the strictest sense (but, still a sensible financial decision for most people) yet we often buy them for the emotional values: sense of ownership, stability, a house is a home, my wife will divorce me if we don’t 🙂 and so on.

Put simply: there are many acquisitions that we want to make in life that are lifestyle acquisitions not investment acquisitions.

And, the real financial question associated with them is: I really want it but can I afford it?

Unfortunately, there are no hard and fast rules on these things … so I came up with a fairly simple financial decision-making check-list that you can use:

1. Are you saving at least 10% of your GROSS income? If not, do not buy.

2. Are you putting aside enough to meet your future obligations (e.g. college fund, donations, family medical expenses)? If not, do not buy.

3. Have you paid down all of your consumer / bad debt? If not, do not buy.

4. Do you have all of the right insurances in place and have you saved and put aside a 3 – 6 month buffer against emergencies? If not, do not buy.

5. Have you bought your first home? If not, do not buy.

6. Have you paid down your mortgage sufficiently (and/or has the equity risen sufficiently) to ensure that you meet the 20% Rule (i.e. no more than 20% of your current Net Worth as equity in your own home)? If not, do not buy.

7. Are you Investing at least 75% of your Net Worth? If not, do not buy.

8.  Have you saved enough money so that you can pay cash for the item without changing your answer to any of the above and still meet all of your current commitments? If not, do not buy.

9. Can you afford to pay all of the associated expenses (insurance, repairs & maintenance, running costs) on the item without changing your answer on any of the above and still meet all of your current commitments? If not, do not buy.

10. If you have made it all the way to this Step without triggering a ‘do not buy’ …. what are you waiting for?!

… you’re a hard-working adult, if you really want it, go ahead and buy it … you deserve it!!

There you have it … 10 Steps to Whatever It Is That You Want, simply designed to ensure that you can buy the things that you want as long as you put things of lesser long-term intrinsic value (maybe of a higher emotional value) behind activities that:

Keep you out of the poor house, and keep you heading towards your ultimate financial goal. There is a short-cut if neither of these goals are important to you: Buy now and hang the expense!

But, I don’t recommend it 😉

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Celebrating Spending Week!

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For the remainder of this week I want to do something that I believe has never been done in the history of Personal Finance: encourage spending!

Why would I do a ‘heathen’ thing like that:

1. Well spending is good for the economy … it’s how we got things going after WW2 … go ahead be a Patriot!

2. Money has NO PURPOSE until you spend it

3. Money SPENT NOW is worth more than MONEY SPENT later (due to a little thing called Inflation)

4. Learning when/how to spend is AS IMPORTANT as learning how to save … after all, you WILL spend b/w 50% and 90% of your weekly paycheck!

5. If you don’t SPEND when you CAN and SHOULD, society has a word for you: Miser and we don’t want to confuse being SENSIBLE with being STUPID, do we?

But, there is a why and a wherefore that I will be exploring for the rest of this week … enjoy!

And, don’t forget to let me know what you think … we want to be on the cutting-edge of Personal Finance thinking, not the BLEEDING EDGE … your feedback will help us determine where we stand.

AJC.

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Fire your boss before he fires you … the 50% solution!

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There is a cycle of life in the workplace … it begins when you get your first job, and hopefully it ends when you retire.

At least, it used to, when people worked their way up from the shop floor to the executive penthouse by working hard and staying with the same company.

By saving as they could, and relying on a good company pension plan (indexed at a reasonably high percentage of their ‘ending salary’) these loyal, hard-working folk could look forward to a reasonably relaxed retirement at the age of 65.

Not so any more …

A news release published in August 2006 examined the number of jobs that people born in the years 1957 to 1964 held from age 18 to age 40.

According to this report, these younger baby boomers held an average of 10.5 jobs from ages 18 to 40 (In this report, a job is defined as an uninterrupted period of work with a particular employer).

Sometimes, this is because of new/better employment opportunities – or simply due to a change in life circumstance – but, all too often, it is due to being laid off.

This brings me to a recent post on Get Rich Slowly that asked “What To Do If You’re Laid Off?” … I’ll let you read the post and the comments, but I can’t help thinking that you need to put in place a ‘backup’ plan (something a little more meaty than the usual “save up a 3 month savings buffer“).

And, I think that the whole process should begin as soon as you get your first job …

… so, I was pleased to see this really cool post on The Simple Dollar, for all you college kids or school drop-outs out there [AJC: this is an equal opportunity ‘get rich(er) quick(er)’ site!].

The article was called About To Enter The Workplace For The First Time? Try The 50% Solution which really boils down to:

– We all know that Paying Yourself First 10% – 20% of your gross salary is a really cool thing, so

– Starting your very first job by Paying Yourself First 50% of your gross salary must be a really, really, really cool thing?

Read the post for more details, but TSD is absolutely right … why?

A. If you’re used to living on NOTHING, then living on 50% of SOMETHING has gotta be a snap 😉

B. If 10% of your gross salary compounded for, say, 40 years can give you $730,000 then 50% compounded for the same 40 years should give you $3,700,000 [AJC: It won’t be WORTH $3.7 mill. but that’s another story!].

But, as some of that post’s commenters pointed out, it can be very hard to start saving 50% of your starting salary, even if you lived on nothing before, because now you need to buy: food, shelter, transport, and so on.

But, the principle of setting your target much higher (TSD suggests 60/40 … spend 60% save 40%) when you start out and trying to maintain your momentum holds water.

Here is what I think that everybody who is still working for a living should do, regardless of source and amount of income, or their age:

1. Use this post, and the others that I have referred to, as a wake-up call that your job is NOT secure … therefore, your life is NOT secure until you take your future security into your OWN hands.

2. Once you realize that you are taking a financial risk every day at work, it becomes much easier to think about ways to break free. Start by putting as much behind you as quickly as possible, in case the ‘worst’ happens:

i). Commit to an maintain a Pay Yourself First mentality that may be as little as 10% of your current salary or as much as 50% – anything less is not enough … anything more and you are a miser 😉

ii). For any future increase in salary – commit to saving 50% of the increase and putting it to work in your Investment Plan

iii). For any future ‘found money’ including bonuses, tax refund checks, overtime payment, spouse back to work, etc. – commit to saving 50% of the increase and putting it to work in your Investment Plan

iv). Start a part time business – or find another way to increase your income – commit to saving 50% of the increase and putting it to work in your Investment Plan.

Take these actions with the eventual aim of firing your boss before he fires you!

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It's a musical life?

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[AJC: Since I wrote this, I notice at least two other blogs posting the same video … oh well, I guess it’s worth another look]

Occasionally, I lapse into the philosophical rather than the purely practical.

For example, I wrote a post fairly recently about the importance of The Journey … money is the result, not the object … yada yada yada.

While true, this Allan Watts video, produced by the South Park Boys (Trey Parker and Matt Stone) says it SO much better … enjoy.

Please!

http://www.youtube.com/watch?v=ERbvKrH-GC4

AJC.

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Why do personal finance bloggers blog … what's in it for me?

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I must admit that whenever I read a personal finance book I ask myself the question: was this guy rich before he wrote this book or because he wrote this book?

Sadly, for many, writing the book is a way to wealth for the author … not a way to express wealth to the reader.

For personal finance blogging, I feel that it is different, simply because there isn’t enough money in it to justify the time … even for those who do accept advertising on their blogs.

So, why do personal finance bloggers blog?

For the answer to that question, I turned to a blogger who is clearly so successful that he can’t possibly be in it just ‘for the money’ – or the fame – Guy Kawasaki … he already had plenty of both!

If you don’t know Guy and his blog, I suggest that you open a new tab in your browser and get acquainted with him now.

In a recent post, Guy talks about a a three-part study from C-NET, appropriately called “The Influencer Study from CNET Networks: Challenging Perceptions.”

Guy says that the study “explored the structure of social networks, the motivations for giving advice, and methods of acquiring information.”

The part that interested me was this comment about influencers: 

Influencers aren’t driven to share information for the sake of appearing knowledgeable or to demonstrate their expertise. They’re primarily motivated by a basic desire to help others. They develop a stronger sense of self-confidence when it’s well-received, further motivating them to help and advise others.

Now, I can relate to this …

I write this blog because I want to share what I learned the hard way … there was no clear roadmap for me to follow when I was struggling financially, so I want to create one for others to follow.

The many books –  and blogs – that are out there dealing with the subject of money seem to mainly focus on how to save and get debt free, or how to retire on plus/minus 20% of your current salary …

… while important, none addressed my need to be totally financially free, at a (relatively) young age and with enough ‘play money’ to do the things that I needed to do.

And, none showed me how to do that quicker than ‘get rich slow’, but more safely than ‘get rich quick’.

I  guess I had to write my own ‘manual’ on how to get rich – by trial (many) and error (many) as I went along … this blog is the result.

I hope that it works to make your path to wealth a little quicker and easier for you than it was for me!

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STOP PRESS: Investor Finds Bank-Owned Bargains Galore!

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I am (temporarily) shelving today’s post because a very interesting e-mail arrived in my in-box last night.

 It was an e-mail newsletter from a foreclosure and real-estate listing service that I use, called RealtyTrac.

This particular article caught my eye, because I love anything that shows that real money is made when you ignore conventional wisdom; the headline read:

Investor Finds Bank-Owned Bargains Galore

“I just bought two brand new homes as REO from the bank,” said a Tennessee-based investor [Kirk Leipzig] in December. “I am buying five more new homes next week from the bank. I am buying $750,000 homes for $450,000 … This is the time to buy, and to make a killing out there,” continued Leipzig, who’s been a RealtyTrac subscriber for about nine months. “But you need to totally understand your market and educate yourself daily on your market. Then go buy, buy, buy.”

What’s most surprising about Leipzig is that he is not buying and holding – as many experts recommend in a down market – but buying and flipping.Now this really goes against conventional wisdom i.e. “housing prices are low … they can only go down … nobody is buying … you will be stuck with real-estate” …Maybe all true … maybe not … who knows? But, this guy has an answer for all of that:

“All the properties I currently buy are for flipping only,” he said, acknowledging that he always has a backup plan because of the difficulty selling in the current market. “I always buy a property now to flip, but in the back of my mind I know I can lease-option it, or rent it if it does not sell as quickly as I would like.”

I have to admit that ‘flipping’ real-estate is not in my particular comfort zone – I have never flipped anything (unless you call ‘buying’ majority share in a business for $0 down and ‘flipping’ it 18 months later for $6 million … but, that’s another story) …

However, for those of you looking to take some risk in what I would call The Business of Flipping Homes” as a somewhat risky way to make money in the short term (i.e. with a possible very large reward if you can replicate what this guy is doing) in order to then INVEST the excess proceeds into your long-term INVESTING (i.e. buy and hold) strategy, this just may be worth considering?

Whether you try and replicate what this guy does, in your own market, or try something else entirely different in the real-estate field “you need to totally understand your market and educate yourself daily on your market” …

… then, don’t just sit on your thumbs along with the rest of the herd … do as this successful business person does: go buy, buy, buy!

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