Our lives are a work in progress
No, this isn’t an unfinished post, accidently published. Instead, it’s a reminder that our financial lives always are a work in progress as we earn, spend, and save to maximize our happiness.
Our every-day decisions involve balancing current desires with the future rewards that come from delayed gratification. But at what point does trading our time for the future stop making sense? How do we know what decision will be best for us?
Questions of whether a spouse should work, where to work, and when to retire all involve these bigger questions.
Different definitions result in different paths
We all define success differently. Sometimes following our dreams involves following the herd, other times our goals involve forging our own path.
Last week, Pinyo and I disagreed about the definition of flexibility. We agreed on it’s importance, but our different
- feelings on risk
- lifestyle choices (where to work and live)
- goals in life
led us to define flexibility differently. Conventional wisdom recommends investing more heavily in the stock market instead of rapidly paying down potentially tax deductible, low-interest debts like a mortgage.
Pinyo seems to be more comfortable holding stocks (with their higher expected returns) than paying his mortgage off early. This decision probably makes perfect sense given his immediate and long-term goals, however, this path isn’t right for us.
Why we’re attacking our mortgage
Of course, we’d like to reach our golden years with the biggest nest egg possible. But our main goal is to have the time to treasure our children’s childhood years in the home of our choosing.
We already have the kids and the home on acreage, but not the flexibility we crave. Our mortgage payment means higher fixed costs. In our case, that means one of us has to commute to work. Which translates into extra time spent away from home.
One option would be to move closer to work, but we’ve already built our dream house on family land and grandparents will be retiring next door soon!
Another option would be to focus on accumulating assets, investing for the future. But not doing anything drastic.
We’ve decided that we prefer the third option. Spending more time with our family, in a home that we love, and working when and where we want to.
Paying off our mortgage is going to require most of a decade and a lot of dedication, but we’ll be much better off in the end. We’ll have the flexibility to save even more aggressively for retirement, to work when, where, and how we want, and to spend even more time with our family.
We may end up with less money in the end, but we’re comfortable with that trade.
Are you following the conventional wisdom in your financial dealings, or are breaking the rules, blazing your own path?
Our neighborhood—and no, we don’t live on or close to the water, unless you count a muddy pond as waterfront property.
Photo by Jeremy Mates
Eating out added 10 years to my mortgage
Eating out can be dangerous for your waistline—and your bottom line.
Now I don’t dine out much (sorry about the deceptive title), but many people do. Most people also borrow money to buy a house or condo at some point. And most people, unfortunately, are unaware just how much dining out affects the length of their mortgage.
Spending as little as $200 a month on shoes, gadgets, or eating out is an expensive decision if the alternative is paying down debt. Putting the $200 towards a mortgage would trim 9 years and 5 months off of a $200k mortgage at 7%.
That money would also save $101,014 in interest, eliminating the final 113 payments of $1,330.
Now people generally do not enjoy thinking about their decisions in this way, but closing our eyes will cost us.
Economists have a useful term for counting the costs of our actions. Every time we spend our time or money, we forgo other opportunities. The next best thing we could have done with our time or money is our opportunity cost.
In the example, spending $200 on dining provides us with tasty meals and no dirty dishes—on the other hand that same $200 cannot be spent paying down our mortgage, on entertainment, or perhaps providing our children with music lessons.
Life is about more than money
The best way to mathematically spend our money isn’t always the best for us, so you might prefer dining to owning your house sooner. The decision is up to you. But you should remember to think about the opportunities you’re passing on when you spend your time and money.
note: a $200,000 mortgage at 7% APR will cost $1,330.60 a month for 30 years. Simply putting an extra $200 a month towards principal will trim 9 years and 5 months off the mortgage.
How I shaved $92.32 off a $121.66 grocery bill
It all started innocently enough…
I just stopped in for soda, for my long drive home.
But as I entered, I was confronted with shelf after shelf stripped bare. Did I unknowingly step across a border? This wasn’t the type of store I was accustomed to seeing in America.
As I looked to my right, I saw a sign. It seems this Albertsons was moving on to a better place; whether that was in the sky or in a more accommodating location, it did not specify.
What the sign did say was that every item was 75% off. It seems it was my lucky day, if I could find something left in the store. I certainly didn’t expect to find the caffeinated soda I so desperately needed.
As I passed the empty isles, I began to seriously question if I was wasting my time. There were still a few customers and employees around, so I continued searching for bargains.
At first, my mind didn’t register the significance of the cans off in the distance. I was far from the grocery portion of the store. What could be in those cans?
As I walked towards the cans, my eyes lit up. Before me was a feast—a feast for my dog. After loading 142 cans into my cart, I glanced down the remaining isles for more supplies to stock up on. Nothing of value seemed to be left, so I checked out and returned to my car to show my trusty travel companion her gift.
In the end, I only spent $31.75, saving $92.32 ($100 with tax). If I’d encountered this store before it was stripped bare, my savings and cost could have been astronomical. But since we spend less than we earn, we have the flexibility to take advantage of unexpected opportunities.
This article was featured in the Festival of Frugality hosted by Sound Money Matters.
How to Ruin Your Financial Life (Book Review)
Ben Stein’s latest book offers a different, destructive take on one’s personal finances. How to Ruin Your Financial Life contains over fifty popular ways people sabotage their financial lives.
With each lesson taking no more than a couple of minutes, the book is a quick read. It’s also a funny book; Ben’s trademarked dry humor abounds, reaching Saharan levels as he explains why and how you should ruin your financial life.
Each rule is designed to shock readers from their complacency. Although most of the rules might sound like bad ideas, Ben assures us that things will be different for us. So, you see, there really is no reason to be afraid.
Now while we might not spend as much as we want, bravely going into debt (rule 6) and we probably don’t believe that we are not responsible for our financial well-being (rule 16), we still might be making a few of the mistakes described.
If you do see a little of yourself in this book, changing your financial habits should be a little easier after reading about the company you keep.
Paying your mortgage off early is like traveling through time
Notes:
Amortization - Regular payments over a specified period of time to repay a debt like a mortgage. The payments cover both principal and interest. You can request an amortization schedule from your mortgage lender or calculate your own with an online amortization calculator.
The photo in the comic was taken by Marcin Wichary.
This article was featured in the Carnival of Personal Finance hosted by Lazy Man & Money.
Photo by E l i o
Investing is like good intentions
Have you heard that advertising campaign about people almost helping their neighbors? It’s a powerful message. Sometimes we think about doing good, but we fail to follow through.
The thought is either pushed aside or we fool ourselves into thinking that it’s the thought that counts. We’ll just do that later.
With investing, like doing good, the thought or intention is not good enough. We can intend to start saving for retirement all we want, but our problem is only going to grow bigger and bigger. It will continue to grow until we actually come up with an investing plan and a written game plan (budget) for setting aside money for our future.
I could list statistics and facts like the amount we must save doubles for every decade we delay, but statistics won’t change most people’s minds. Just as we have to want to do good, we have to want to be responsible in order to be financially successful.
Do you have any plans, dreams, or good intentions lying around gathering dust? Today could be the day to make the leap, plunge, or effort. No one is stopping you, but yourself.
Photo by Dimitry B.
Can we afford college
Q: We have one daughter heading to college next fall with another likely to attend in a couple of years. We don’t have any college funds or savings, so how should we go about paying the bills?
A: You should be commended for your desire to help your children start life with a strong education. Although many parents cannot afford to pay for college, most can at least help. Here’s a checklist to determine how prepared you are to cover your children’s expenses.
- You have no credit card debt
- You invest enough in your 401k to receive the maximum company match
- You have no car loans
- Your retirement accounts (IRAs, 401ks, pensions) are growing at the pace required to retire someday
If the first three statements are true, you may be in a position to help with tuition or their living expenses. Otherwise, you probably should focus on creating and following a written budget, paying down your debts, and investing for retirement. There are many ways to pay for college, but only two options in your golden years: live off a nest egg, or keep working to pay the bills.
College doesn’t have to be expensive
A college degree is one of the surest ways to raise your children’s income potential, but that doesn’t mean a degree has to cost a lot. Here’s the three biggest costs you need to discuss with your children.
Moving out vs living at home. The decision to live at home or flee the nest will probably have the biggest impact on your children’s expenses. Walk them through the bills they’ll be responsible for if they choose to move out on their own. Rent, food, utilities, and internet access will cost them thousands—month after month. Living on campus might be cheaper, but room and board will still cost eight to nine grand a year.
Community college or straight to university. Community colleges are a wonderful option. There’s often one near home, the tuition is affordable, and many students find the transition easier than heading straight to a university. With an average annual tuition cost of $2,361, community college tuition is almost four thousand dollars less than the average public university’s tuition.
Private vs public university. The decision to attend a private university or an out-of-state university can add thousands to the bill. At $6,185, a hard working student could pay for his or her public university tuition with a good part-time job. But, out-of-state tuition at an average cost of $16,640 is probably beyond most students’ reach. Even more expensive, the cost of an average private university comes in at $23,712 a year—before considering room and board!
Choices, choices, choices
Although college will be expensive, your children’s decisions will determine how expensive. Keep in mind that almost two-thirds of full-time undergrads receive grants and/or tuition wavers.
Pursuing scholarships is another option. Make sure you don’t overlook the smaller scholarships because they often only receive a handful of applications.
You’ll also want to include your second child in your college discussions. The sooner children start thinking about college and it’s implications, the better prepared they will be.
And finally, don’t sacrifice your financial health by helping more than you can afford to. You won’t be doing your children any favors by spending money you either don’t have or can’t afford to spend.
Source: College Board
This article was featured in the Carnival of Personal Finance hosted by MoneyNing.
Photo by Anita Martinz
Exhaustion is financial success’ kryptonite
I am most likely to spend money when I am stressed or exhausted.
For this reason, I hate working.
But seriously, I am naturally very serious and analytical. I see potential hurdles as challenges, not problems. However, building our first house stretched the limits of my patience as we encountered roadblock after roadblock.
As the months rolled by, our costs kept rising, and our general contractor’s incompetence multiplied, I lost the will to focus on reducing expenses on the “little things”. Staying frugal seemed pointless after we discovered we couldn’t build as affordably as we’d planned.
Ironically, tightening our belts is exactly what we should have done.
We eventually finished the house, but we had to live five months without power and six months without potable water. We took solar showers, cooked on a camp stove, and even totaled our car driving through a falling tree before we reached the end.
But when our house was eventually finished, the pressure eased off. Our energy levels rose. We were motivated again—motivated to get the mortgage off our back.
It doesn’t always turn out that way
But for others, the stress can lead to surrendered control which almost always leads to more stress, often resulting in ruined relationships and a financial mess.
The best strategy is to avoid prolonged exposure to stressful situations that might cause you to let things slip. If that’s not possible, at least be aware of how your exhaustion will impact your decisions.
Have you ever been in a stressful situation or exhausted to the point where you don’t care about money?
Flying Rats! by Chris Latham
How to win the rat race
Don’t play the game.
The rat race is voluntary. You can choose to subject yourself to meaningless, futile competition for stuff that cannot make you happy.
Or you can choose to set your own goals, milestones, and paths to get there. You’ll be happier if you do.
Money is only a tool
When money is your goal, you’re setting yourself up for failure. Most people who seek money usually discover they never have enough. Entire lives have been wasted in pursuit of money.
Instead, you should focus on the most important things in life and use money as a tool to get there.
Remember that your options are constrained by your time, energy, and money. Earning the big bucks is pointless if you don’t have the energy to enjoy your time away from work. And a large nest egg is pointless if you don’t enjoy life along the way.
Goals first, then work
There are lots of strategies on how to save money, but the key is to spend less than you earn. Earning more is always a great strategy, but you must spend less than you earn to make progress.
Once you’ve resolved to get ahead, don’t delay because time will be your enemy or your ally.
Here’s three steps to stretching your paycheck further:
- Re-evaluate all of your expenses, you may find some needs are really wants
- Live by a written budget, so you can guarantee you’ll reach your goals
- Be honest with yourself, don’t pretend the numbers add up when your spending is out of line
What are some of your favorite strategies for directing your spending?
