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.
“I deserve it” thinking
Have you ever rationalized a purchase by thinking to yourself: I deserve it? I think we all have, or at least those of us who still feel the need to occasionally rationalize purchases.
The belief that I deserve something is very attractive. It sets the stage for a story of injustice. If I do not possess this object or enjoy this experience, I have been wronged.
Although we share a few inalienable rights, we all live under the reality that most things in life are scarce. In a market system, prices convey important information about scarcity. And so, we might very well need something or even deserve it, but someone must pay for it.
Insisting that we deserve things we cannot afford gives birth to a sense of entitlement which begets reckless spending. A belief which pushes us further from reality and ignores the core issue. To acquire something, we must pay the associated costs.
When costs are ignored, years of sacrifice are often required to remedy the situation. If the problem is ignored for too long, occasionally, bankruptcy is inevitable.
The current foreclosure mess is just one example of the spread of I deserve it thinking. The American dream was treated as a right and the true costs and sacrifices of homeownership were not counted. Dreams lie shattered and families are relocating—all because people felt they deserved a house or a piece of the rapidly appreciating housing market. They simply didn’t weigh the costs of homeownership.
Are you focusing today on something you want or need, instead of how to get there? How do you remind yourself to focus on how to accomplish your goals instead of fixating on wants and “needs”?
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.
The Paragraph Edition | Festival of Frugality 122
I would like to thank my friend Kyle @ Rather Be Shopping for hosting last week. Make sure to visit Sound Money Matters next week for the latest edition. And check out the Festival of Frugality’s homepage to learn how to participate in next week’s festival!
The internet is full of advice and stories about personal finances. The Festival of Frugality is one such resource. Often, festivals are brimming with great posts, crammed into lists—lists that can be overwhelming to read. This week I wanted to experiment with a different format for the fifty-five submissions that were accepted.
Definitions differ, but the goal is still the same
The quest to define frugal is an old one, but is still very relevant to modern life. One stay at home mom discovered living a frugal life allowed her to remain home with their son. Others seek to trim costs, but also focus on their ability to earn more.
In the end, defining what is and what isn’t frugal is a very personal decision. It’s relative to our situation and our society’s level of wealth. While some efforts might seem like it isn’t worth our gas money, it might be worthwhile to someone else. Similarly, some people consider pets expensive, while others find them a valuable addition to the family.
Keeping things in perspective seems to be a challenge for many of us today with fears of recessions and housing market crashes. When we find ourselves losing perspective, looking to our elders for advice is always a good strategy. Everyone should read the Great Depression reminisces Save and Conquer secured from his Grandfather in-law. They are eye opening for anyone who thinks times are rough.
Frugal wisdom abounds with an energizing post on “decent” Lifestyles. Living a frugal life doesn’t mean we have to give up our dreams, instead, it can be a way to achieve our dreams. But we only get out what we put in. We are all faced with the choice between living a debt lifestyle or a frugal lifestyle that can open doors in the future.
That’s not to say frugal decisions are straight forward. Sometimes math is involved if we want to avoid ending up with a pile of stamps! Keeping track of our purchases in a spending log is a great way to make the most out of each dollar spent. But we also have to be careful not so save money only to hurt ourselves by eating in bulk!
When we spend our money wisely
We’re on the right path when we count the costs of our purchases, but there are some things you simply never should buy used or sell. Sometimes going with the cheap option isn’t wise, it’s dangerous.
Fortunately, there are a lot of shopping tips out there. So there are a lot of options about how and when to spend your money. Some companies will even lower their prices if you ask them the right way!
If you are one of the few who have managed to avoid a frozen yogurt addiction, you’ll probably be interested in saving money on groceries with your stimulus check. Frugal shoppers need to be careful not to spend more with rewards credit cards (stocking up on pizza) and to take care to avoid stealth prices as you seek out bargains. Sometimes companies do deceptive things to make their products look like bargains. On the other hand, if you comb through the ethnic sections of your grocery stores, you may find the lowest prices in the store.
If food doesn’t excite you and you’re still depressed about paying too much for your new TV’s electronic cables, then you might want to consider a night on the town. If you remember to bring your entertainment book, you won’t have to pay as much as everyone else.
If you’re more of a homebody like me or a recovering shop-a-holic, now might be a good time to open the phone book or get on the internet to research that big purchase you need for the shop, office, or kitchen. Or if you’re in the mood for something free, check out some new free online data storage services.
If find that you really must spend money now, then make sure your impulse purchase is a frugal one.
Frugality encompasses more than just money
Although most of us mind our pennies well enough, watching what we eat is a bit more difficult. Which is a shame because our diet can affect us as much as our spending. What’s the point of seeking out cheaper ground beef for our hamburgers if we’re not going to eat the other healthy foods our body needs?
You won’t end up smelling like a salad, unless you use one too many frugal hygiene products! So create a weekly menu planner and take control of your diet. There are over one hundred cheap, health salad dressings to choose from. If you’re not a fan of salad, other options include things like a cauliflower omelet which will cost you less than a buck!
The frugal super-stars among us combine their interest in thrift with a green thumb because growing your own greens saves you money and protects your health at the same time. You can grow potatoes in old tires or install a professional greenhouse, but everyone will benefit from collecting their rain water for irrigation which can be done quite simply. To learn more about gardening, just make a trip to your local library which is also another popular way to avoid spending money.
Frugal adventures—who said fun had to be expensive?
After a hard year of work planting crops and hunting down bargains in the woods, what better way to relax than a frugal adventure?! Renting a cabin in the woods can be an affordable option, but traveling abroad doesn’t have to be expensive anymore either. Especially if you know how to find Southwest airline bargains.
Just remember that sometimes the best souvenirs are inexpensive or even free. It also helps to choose the right location. One blogger recently discovered two people could visit Barcelona on as little as 10 Euro a day. If you decide to travel abroad, keep these tips in mind to keep your valuables safe.
In the unfortunate event that you are separated from loved ones, you could express your love with flowers. National boundaries do not have to make flowers expensive if you know how to arrange a frugal flower delivery.
If you find yourself closer to home, perhaps your town has a variety of free admission events like you’ll find in Atlanta. If the whole family is going, it might be tempting to cut costs by pulling a stunt like this (video), but a trip to the zoo is probably a better idea. Unfortunately, trips to the zoo can get messy if it’s a rainy day, in which case you should stay home and make frugal, homemade pasta with the kids. That can’t be any messier than the zoo, can it?
Let’s not forget that living frugally comes with some challenges
If you can find the time and money to take a frugal adventure, you might have more energy to deal with the challenges life throws at you. Like your latest surprise budget busters or finding a convenient and affordable place to do laundry.
Or your challenge might be more serious like having a spouse who’s financial goals and comfort with debt differs from you. Or perhaps you’re facing the reality of sunk costs which is also very difficult; it’s hard to admit when we’ve made a mistake or that we’re never going to get our money back.
The reality is that we’re going to make mistakes occasionally, which is why we need to make the most out of every dollar spent. But saving money isn’t necessarily the end of the road.
We can also save money by being a better steward of our natural resources. Whether you’re following energy saving tips for the summer or thinking about your impact on the environment, consuming less is a great way to get ahead.
If you’ve found this collection of resources useful, please make sure to stumble, digg, or bookmark it below.
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.
“I need it” thinking
“I need it” thinking can be dangerous.
Dangerous because it is occasionally true. But more often, we’ve simply confused our wants with our needs, resulting in more money flowing out and new “needs” sprouting up.
Needs usually fall along a scale. Food can be a matter of life or death, but usually the choice is between dining out and preparing food at home. That new tool or gadget might make your job easier, but you could probably make do just as well without it.
Sometimes the truth is dangerous
“I need it” thinking is most dangerous when it’s actually true. Sometimes we really do need something like parts for an unreliable car and the money isn’t there to buy it. Sometimes the solution is to buy it on credit, but that is a dangerous strategy.
More often, the wiser route is to:
- find the money (extra job)
- alleviate the need (borrow it, or find a substitute)
- eliminate the need (sell the unreliable car and take the bus)
Rationalizing a purchase is always dangerous if we’re spending money we don’t have. The real issue is “can I afford this,” not “do I need it.”
Have you ever fallen for “I need it” thinking? I did yesterday. Even though I could afford it, my visit to Half Price Books cost me dearly, falling just shy of three hundred bucks!
If you make a habit of ignoring “I need it” thinking, you’ll make better decisions and end up with your money working for you which is one example of good financial sense.
