Falling Off The Wagon

15 06 2008

Hi, my name is Daniel, and I… lost track of my finances. 

I write (what is for the most part) a personal finance blog, so you’d think that I would track every penney, but I don’t.  We budget to pay ourselves first (savings/retirement), pay all of our bills, and then everything else is give and take.  One month we might go over on eating out, but we won’t touch our clothing budget, so we call it even; but over the last month as we have moved I have learned a very valuable lesson.

Once you start spending, it’s hard to stop.  It’s like the floodgates of your bank account open, and the next thing you know, you’re asking how your credit card bill got that high!?

We realized this week that we have run our credit card bills up much more than we realized.  It’s not like we have purchased large items, it’s a great number of little things that we did not appropriately budget for.  For instance, the last two weekends we have been out of town, and we did not adequately budget for food for either weekend.  Plus being gone on the weekend messed up our schedule, so we didn’t go to the grocery store to stock up for the week as we usually do, so we ended up eating out.  Then we moved, there was no point in us buying tons of food when we would have to move it, so we ate out more.  

Our move was a beast by itself.  Thank goodness I have friends and family who were willing to come help when I offered free beer (which no one ended up drinking!).  I rented the largest Budget truck available, for 24 hours, found a coupon code online to nock off 10%, and then surprised myself when I was able to negotiate another 15% off at the truck rental place.

Somehow a great number of little things added up.  The only major things I can remember buying are drapes and blinds for the house (which we came in way under our budget for!…to bad we went over everything else!)

This will serve to be a very interesting month.  We will soon make our first mortgage payment (yikes!), and we’ll get to see how close we were in our estimates for our new utility bills!  Plus, we’ll map out a plan to pay off our credit card bills.  Which right now I’m thinking will involve pulling some funds out of savings and tightening the budget to replace the money over the next few months (and hoping for a decent raise soon!)

Also, allow me to apologize for this seeming rant.  As you know it’s been over two weeks since I’ve really posted anything of substance, so A. I’m a little rusty, and B. it helps to just start writing to get the wheels moving sometimes!

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Does The Size Of Your Image Equal The Size Of Your Debt?

31 03 2008

Our society has a perception complex. We are raised to judge and compare ourselves against others and our perceptions of other people become our own reality. We are trained from an early age in this regard. In school it didn’t matter if I got a “C” on a project as long as it was in line with the other students in class. Even on a set scale where everyone knows that an “A” is the best, we judge ourselves against our peers, not the scale. It only mattered that I was considered as smart or smarter than the other kids in the class.

By no means do I consider myself to be smart, but the fact that I am a clean cut, in shape, nerdy looking guy, who can carry a conversation on just about any topic, has really helped me out in life. My image allows other people to come up with their own realities of who I am, and I have found that for the most part, people consider me to be a mature young guy with a good head on his shoulders, though if you read young and frugal you already knew that (I kid). And for the most part I work at my image because I want people to walk away feeling that way about me.

Whether we like it or not, image is important in our society, and our society sees the things we appear to possess as extensions of who we are. Our friend who drives the BMW must be rich, and the guy down the street who drives a ’95 Civic with 225k miles on it must be poor (eww!).

Notice how I used the phrase “appear to possess,” I say this because if I’m leasing or I have financed a 3 series is it really mine? If it’s paid off like the ’95 Civic then of course it is, otherwise…? I don’t know, can you claim half a BMW?

All of this perception is human nature. As kids, we know that rich people drive nice cars, live in nice houses, and watch huge HDTV’s. As we grow up, and learn about money and responsibility we learn that just because we appear to possess these items doesn’t mean we are rich.

Mary and I listened to NPR on the way home from work today and we heard an interview with Moby. Moby grew up very poor, and he and his mother were on welfare and food stamps until he was 18. He knows and understands the merits of frugality, and that perception isn’t everything. He said on the radio today that earning a great deal of money hasn’t changed him and that he still shops at the same grocery store and does his laundry at the same laundromat. He says he still even has a little 13 inch TV.

When talking about his spending habits and his TV, Moby said “will watching Family Guy on a 42 or 50 inch TV make it funnier?” This practically stopped me dead in my tracks. For months I’ve been salivating over flat panel TV’s that I can’t really rationalize purchasing, but I always end up salivating and coming back around to wanting one. Mary and I even went shopping with her mother for one yesterday. I have had my dream home theater in my head for months (with a mac mini at the helm), and this one prompt by Moby made me question my motivations. Yes, Family Guy is hilarious, but A TV won’t make it funnier because it’s bigger, nor would Davidson have beaten Kansas had I watched in HD.

Why do I feel compelled to make such a big purchase? I could definitely put $1500 to better use somewhere else like an IRA/401(k) or paying down our car loan even faster.

I really can’t come up with a good reason as to why I want a new TV. We have two 20″ TV’s and they both work perfectly. Plus, I don’t really watch TV anymore! Yet, for some reason I want one that is newer/better.

Maybe I feel that our new and incredibly nice house is an extension of us and the TV is an an extension of the house that makes it that much nicer. Maybe I want people to perceive that we have made it, when we drive in our nice and practical new car to our nice new house and watch Nightly Business Report our big new LCD. But at the end of the day image is only as deep as the debt you (can) get yourself into.

Here is the anomaly on all of this, I don’t want my friends looking at our house and our car and being jealous. Sure it makes everyone feel good when other people are jealous of them, but Mary and I are in a unique situation where we are starting out in our lives and careers together. We are a dual income family with no kids (ok we practically treat our dogs like kids…but I digress). It is easier for us to afford this lifestyle. I don’t want any of my friends jumping into our lifestyle too quickly and getting in over their heads, I want them to understand that yes, we have nice things, nicer than we deserve, but we also have car payments, mortgage payments, insurance payments, property tax payments, Homeowners Association Dues, and various other things factored in.

Hey, at least we have no credit card debt! 





How Scouting Taught Me To Be A Smart Shopper

26 03 2008

While I was at my parent’s house over Easter, I was looking through some of my old stuff when I found a stack of Merit Badge books from Scouts.  Sitting perfectly on the top of the stack was the book for Personal Management, a merit badge designed to teach teens about managing time and money.

The book is filled with very good information on everything from budgeting, to living on your own and debt management, but I’d like to focus in on the section titled: Being a Smart Shopper.  (Keep in mind that as I go through and quote this that it was written in 1996 for teenage boys, but the lessons transcend age and date.)

 Suppose you have your eye on a really special skateboard.  How much does it cost? (Don’t forget to include the cost of protective gear if you don’t already own such items.)  You count your money and discover that you don’t have enough.  What do you do?  You Might:  

  • Shop around.  Maybe another store or a catalog has the identical skateboard at a cheaper price.  A telephone can make comparison shopping easy.  Call at least three stores.
  • Earn or save more money until you have enough to buy the skateboard.
  • Wait for a sale.  A store clerk might tell you if the skateboard will go on sale soon.
  • Look for discount coupons.  These can be found in newspapers, coupon books, or the mail.

What if you still don’t have enough money to buy the skateboard, or you decide you don’t want to spend that much money, even if it is on sale?  You have other choices.  Shoppers can’t always buy exactly what they want.  Sometimes they must compromise.  Thats part of being a good money manager – knowing when to say no to yourself. 

 Wow.  I’d say those last few sentences are something everyone needs to remember!  Mary and I are in this situation with our house right now.  We really want hardwood floors in our living room, but we know that we just don’t have the money for it.  We are forcing ourselves to say no, and it’s hard because we need want them.  It is very hard to say no to yourself, and it takes a great deal of self control, especially when (once you get older) it’s so easy to put a purchase on the credit card.  Luckily for Mary and I, we are able to hold each other accountable and it really helps.  

The Scouts are essentially saying, if you can’t afford something you have a few options: shop around, save more, wait for a sale, and look for coupons.  Very smart advice for anyone.  It also reminds us all to consider all of the costs we will encounter for this item, like having extra money for protective gear for the skateboard.

The passage goes on to recommend that you buy a less expensive skateboard with a different paint job, buy a used skateboard, check classified ads, and it even brings up building your own skateboard (which sounds fun and easy to me!)

The book then offers a checklist for smart shopping some of which are (my commentary in parentheses):

  • Be wary of advertising…(Always!)
  • Before buying a product, talk to…others who may already use [it]…  (Also seek reviews from consumer reports or on the internet)
  • Try before you buy/demo
  • Consider quality.  Price isn’t everything… Why buy something, even at a low price, if it falls apart quickly or doesn’t work properly.  (I am obsessed with quality products, if there is a difference in quality and price, I will buy the one that has better quality)
  • Consider Service. (I’m usually willing to pay more for something if I know that the service behind it will be worth it.  For instance, I’ll pay a bit more for something at Costco in order to get their service and extended warranty)
  • Don’t Impulse buy.
  • If there’s a problem, take a product back right away (be sure to keep your receipt).  Don’t toss the item aside and feel sorry for yourself….Most stores…[will]…probably fix the item or give you a new one.  (I am terrible at actually returning items to stores.  It always seems like too much of a hassle.  But I’m going to make a point to return a broken glass bowl we got as a wedding present (in June) this week.  We have the receipt.  I hope they take it back!)

It’s not always easy to be a smart shopper.  Most people, myself included, aren’t good at the waiting part.  We impulse buy, it’s what advertisers and marketers try to train us to do, but we need to always remember to stop and ask ourselves if we need the item, or if we just want it.  We also need to ask more important questions… Can I afford this?  How long with this take me to pay off?  How long will it take me to save for this?  Those are the types of questions that should be going through everyone’s head when they see something they want to impulse buy.

Writing this has been very beneficial for me today, because Mary and I did our Tax return yesterday and when I saw the amount we will be getting back I got very excited.  I even caught myself drooling over Mac mini’s online today.  But I slowly moved my mouse up to the corner of the screen and closed the window, because even though a Mac mini is on my list of things I want and need (yes I do need a new computer), I want to achieve other Goals first.  Most of our Tax return will hopefully be going directly into savings to help us achieve higher goals.





When Did Frugality Cease Being a Virtue?

24 03 2008

When Did Frugality Cease Being a Virtue in Our Society?  Really no matter how far you look back in history Frugality has always been a virtue.

 “He who gathers money little by little makes it grow” – Proverbs 13:11

Here the bible calls upon us to save where we can, even a little bit helps, and by doing so we can watch it grow. 

 “For age and want, save while you may; no morning sun lasts the whole day” – Benjamin Franklin

 Here, one of the greatest American’s to ever live writes that you need to have an emergency fund.  You can spend on your wants all day when times are good, but if you don’t save for a rainy day you’ll be in trouble later on.  Benjamin Franklin is documented in many occasions preaching the virtues of frugality, in Advice To A Young Tradesman, Benjamin Franklin writes:

“In short, the Way to Wealth, if you desire it, is as plain as the Way to Market. It depends chiefly on two Words, INDUSTRY and FRUGALITY; i. e. Waste neither Time nor Money, but make the best Use of both. He that gets all he can honestly, and saves all he gets (necessary Expences excepted) will certainly become RICH.”

More recently, some of our most brilliant minds preached and lived frugally.  Henry David Thoreau lived frugally and documented it in Walden Pond.  He removed himself from the pressures of society so he could clear his mind.

Warren Buffet, one of the best businessmen in the US, says, “If a business is worth a dollar, and I can buy it for 40 cents, something good may happen to me.”  In other words, look for bargains and buy low, that’s the way he has made over 30 billion dollars! 

As you can see frugality is in our history, but society has pushed back.  In most of the world if you don’t try and haggle with a salesman, you are considered stupid by the locals.  On the otherhand, when I haggle in America, people will look at me awkwardly and get confused.  

The surrounding world tells us that image is everything and that splurging makes us feel good. 

I prompted my dad with this question the other night, and I received a great response to why frugality is no longer considered a virtue.  This response allows you to connect all the dots.

It stems from the Great Depression.  The people who lived through the depression have known what it is like to be cash strapped, and to get the most out of every penny.   They know what it really means to have a “rainy day,” and they understand that, as Ben Franklin put it, “no morning sun lasts the whole day.”  The people that survived the Great Depression grew up knowing and understanding how important it is to save, but they also never wanted their children to go without like they had to do.

As a result, after the economy settled, there were great new inventions, and the wealthy began putting a TV in their living room.  Because one wanted to go without, the less wealthy followed.  However, no one wanted to drain their savings to purchase a TV, or Washing Machine, or Dryer, so payment plans began. 

Why drain all your savings when you can pay a cheap monthly payment?  What was there to understand?  For $30/ month, you could get what you couldn’t let your family go without, and at such a fair price!

Pretty soon, a ‘fair price’ became just the ‘price’ of an item, and haggling wasn’t needed because you could easily afford the monthly payment.  This increase in credit, made less people need to grasp the concept of frugality.

This is why I believe a generation grew up without learning to haggle or understand frugality.  And somewhere along the way, the term frugal got mixed up with the word “cheap.”

The United States is in the process of coming back around and understanding the perils of credit, and re-learning the virtue of frugality.  Right now, the US has a negative savings rate, and this will be hard to change, but I believe we are headed in the right direction.  A “frugal” search on Google will net you over 7.3 million hits, which is a sign that at least the internet community is getting it.  Hopefully our society is in the midst of realizing the error in our ideals, and will be working hard to get out of debt to become and continue to be financially free.





Life Tips From My Finance Professor: Part 1 – Purchases

18 03 2008

I took an investments class the during the Fall semester of my Senior year in college, and when I say “took” I mean that I dutifully attended every class, sat in the front row, and tried with all my heart to understand what the hell he was talking about.  It wasn’t that I didn’t understand the material, I just didn’t understand how our professor could brush over things so fast.  Most of the rest of the students never attended because the professor was one of the few that “recycled” his tests every year and didn’t change anything except for the numbers (ie: you did not need to attend class, you just needed to know someone who took him last semester).  

Dr. Chucky (as he preferred to be called) is one of the most peculiar people I have ever met.  And this is what you need to know about him… He probably smoked 2 packs a day, he sweated like a pig, and he spoke 6 languages.  He was a professor because it allowed him to play with his portfolio all day and use his summers to travel.  He is an incredibly smart person, but the type of smart person who didn’t relate very well to less smart people.  He has been on over 10 game shows and won a great deal of money from them.

I have previously written about things that should be mandatory for every college senior to learn (My Mandatory Class Proposal) and this series is about what Dr. Chucky rushed through on the last day of class when he handed out a sheet with many jumbled and incomplete sentences.  The thoughts were broken into 5 different categories.  We then talked about a 6th.  I will try and decode his thoughts in this series. 

Purchases:

1.  “1 hour search/study for each $1000 purchase”       

 What I believe he is saying here is don’t sweat the small stuff.  I write a great deal about frugality, and how I’m a bargain hunter, but usually what happens to me is that I over-research items and I don’t value my time enough.  If you spend 8 hours trying to figure out how to save 10% on a $1000 purchase is it really worth the time?   On the other hand, if you spend 20 hours researching a car and how to buy one it is probably a better use of time.  Or if you are looking to buy a house, spend as much time as you can, I don’t know if it’s possible to over-research a $200+ thousand purchase.

2.  “Think of all purchases in annual terms”       

 We live in a society that looks at things as “how much per month” without looking at the entire picture.  Sometimes it’s easier to finance things (not recommended) but we need to look at a bigger picture than just monthly, so look at how much you’ll be paying every year.  That should open your eyes, especially if you start to think about how much of that is interest and how much is principal.  Then look at how much you’ll be paying over the life of the loan…is it worth it?

 3. “Autos: go to fleet manager or internet managers”       

 Car salesmen are the pawns of the dealerships, the more they get you to pay, the more money they get.  Fleet/Internet Managers run the show.  They don’t get paid based on how much you pay, they get paid based on inventory turnover.  They don’t like to deal with haggling, they just want to get you in a car and out the door.  Mary and I did this when we bought our Volvo, it was a great experience, we got it for a great price, and we didn’t even need to haggle.  The internet manager agreed on our price, though the sales manager was royally pissed off (we heard him yelling at the internet manager).

 4. “Insurance, higher deductibles will lower premium rates”       

This pretty much speaks for itself.  Some people may say “but then I have to pay more if something happens,” true, but if you took the difference between the more expensive monthly payment, and the less expensive monthly payment you could be adding that difference to your emergency fund and earning interest on it in the meantime.  Pretty soon you’ll have saved enough to pay a higher deductible if something were to happen, and the rest is just more money saved.

 5. “Live below your means, save on : yard, car wash, cable TV, tipping”       

In other words, live below your means and don’t mindlessly spend.  There are plenty of luxuries that most people consider staples, Cable TV being at the forefront.  If you look for places to make cuts, you will find them.  You can wash your own car, you can take care of your own yard, and you don’t have to be known as a “big tipper.”

 6. “House purchase: Multiple Listing Service add-ons”      

  While I normally probably wouldn’t be able to decode this, I did jot down what he was talking about.  Multiple Listing Service (MLS) is the service that real estate agents use to search for houses.  What he meant by add-ons is to go to your real estate agents office early in the morning and map out which of the houses added to the list that morning you will go look at.  He was a big advocate of buy the cheapest/worst house on the best block, and he recommended that this was the only way to get it before someone trying to turn a profit by flipping it would.  Mary and I discovered that this really is the best way to do it.  When we were looking at houses we went by one that we really liked, on the day it was listed.  It was listed for what our agent believed was below market value, and the next day a contract was in on it for full asking price.  Two months later, it had been flipped and was back on the market for $100k more.

7.  “$1,000/month rent, buys a ~ $360,000 home after tax @ 5%”      

 This is one that I really can’t fully decode.  I believe he is essentially saying don’t throw away money on rent when you could be buying a house, but his math seems to be off.  By my math $1000/month buys a $225,000 house at 5% interest, if you put 20% down.  If you paid $1500 a month on mortgage you could do a $360,000 home after 20% down.  As someone in the process of buying/building a house, I’m still torn on the whole rent vs. buy thing.  There are tons of pros and cons to each, but I’m happy with our decision.  

As you can see, in Dr. Chucky’s list of incomplete sentences and thoughts on personal finances there is some great wealth of advice just waiting to be decoded and understood.  Stay tuned for more!





Is It Possible To Be Young And Frugal And Still Have A Vibrant Social Life?

14 03 2008

Mathematically being young and frugal makes a great deal of sense; save as much as you can now, and let the compounding interest build up over the course of your life. 

In theory if I were to invest $50,000 in a decent mutual fund at the age of 23, assuming it earns at least 10% a year (slightly less than the historical average of the stock market), I would have $2,262,962.00 by the time I’m 65.  That sounds great, and the numbers don’t lie, however it’s not that easy.

Achieving this goal, while feasible, means that we need to continue living the way we are now (very frugally) and save for over two more years before we would be back in good financial shape to buy a house.  We could do it, but it wouldn’t be fun, and we are already committed to the house.  

The fact of the matter is that being young and frugal comes with many opportunity costs; the biggest being a social life.  Personally, it’s in my nature to not be able to rationalize going out to bars and paying big bucks for a drink I can make at home for a fraction of the price.  Plus I’m not a big fan of loud crowded spaces.  I do however love hanging out with friends and meeting new people…who doesn’t?

In college I hated going out to bars, I would much rather have hung out with a few of my roommates or thrown a party at our house than go out.  As a bonus we would host the parties, charge a cover to get in, drink for free all night, and have money left over to pocket or pay the resulting tickets.  It was a pretty good setup :)…until we lost about 80% of our deposit when we moved out.  

I know there are always alternatives to going out to bars, but for the most part, when you are hanging out with friends, meeting new people, or even networking you will most likely be doing so while spending money.  Whether it be at a bar, a movie, the golf course, or over dinner, you’ll be spending money.  It’s called social spending, and it’s a fact of being social.

To be honest, this aspect of being young and frugal is less than fun.  It especially sucks in the office because everyone I work with goes out for lunch at least 3 times a week.  The frugal train of thought on this is to take your lunch to work and it will save you a ton of money, so this is what I do, and it does save a great deal of money.  On the flip side, I’m certain that I am missing out on a great deal of good networking (and the male bonding) that comes with going out to eat with the guys.  Also, I’m wondering if my being social with my bosses at lunch could have an effect on an increase in my salary, thus offsetting going out to lunch.

Mary and I have kept room in our food budget for us to each go out to lunch with our co-workers once a week.  At the time we set the budget it was a reasonable expectation, and while it is a reasonable expectation, it’s getting to the point where I feel bad telling them I won’t be going to lunch today.  I love that I am always invited, but I know that there becomes a point where you are turned down so much that you don’t ask anymore. I’m hoping that I am not approaching this point.

Outside of work it’s hard for us to make new friends right now because of our extreme frugality and location (both will hopefully only be around for the 2-3 more months).  We live 45 minutes away from work, and we are more than 45 minutes away from “uptown” where any sort of nightlife in Dallas occurs.  On top of that all of our childhood friends from the area no longer live here!

So with all this, is it possible to live frugal and still have a vibrant social life?  I’m sure it probably is, but for Mary and I, and our extreme situation, it seems that we have struck out.  Our saving for our house and preparing to be house poor is strike one, our current location is strike two, and being married seems to be strike three because all of our peers are still single. 

I am more than open to suggestions on how get our social lives back on track while still living frugally, so if you have any please post them in the comments section. I’d love to hear what you have to say!





My Mandatory Class Proposal

11 03 2008

In college I thought I had learned everything.  I learned finance in and out, I learned economics, marketing, advertising, managing, forecasting, social drinking, networking, and every other aspect of business that I could think of.  I was a badass. 

Nope.  As soon as I started work, I ate my piece of humble pie. 

Why is it that I spent four years in college, graduating with honors and a dual degree, to enter the workforce and immediately be slammed by something that I had never been taught? 

Literally, the first thing I encountered when starting my new job was benefits, and I have never been taught benefits.  What kind of medical coverage do I need?  Should I get the basic plan, or the premium plan? HMO? PPO? Extra life insurance?  Flexible Spending Account?  Use it or lose it? How much will all this cost me? It was a very overwhelming experience.  

Who do you turn to in a situation like this?  It seemed like the benefits lady who talked to me on my first day was in the same boat I was in.  She had no idea what she was doing!  Other people asked questions and she stated the coverage that she elected.  Great.  How is a 40 year old, single mother’s elected coverage supposed to relate to a guy directly out of college?  Thank God I had a week to submit my elected coverage, because that gave me time to research and talk to my Dad.  Now am I confident in my selections?…Absolutely not. 

Having had this experience, I propose a mandatory class for all college seniors, regardless of their major.  This class would be taught jointly between a few different departments and would touch on topics that everyone will face after college:

  1. Résumés and cover letters: writing and critiquing
  2. Interviews: How to sound like a better you
  3. Benefits: The pros and cons of certain coverage
  4. Insurance: Life, Car, Home
  5. Personal Finance: How to Budget, and Don’t let your ego use your wallet
  6. Retirement Planning: Yes, you’re 21, but you won’t be forever

I propose that this class be mandatory for all college seniors because regardless of major, everyone will face these issues after college, and not everyone will have someone close to them bail them out (Thanks Dad!). 

I realize that all of these topics vary by person, but having someone lay out some basic guidelines that you will be tested on is something that I think everyone can agree on.  For instance: If you start out saving/investing 10% in a 401k/IRA/Roth IRA when you are in your early 20’s, you will be set for 80% income replacement when you retire (USAA Magazine), and your housing expense should be a maximum of 30% of your take home pay (many financial professionals).  Basic guidelines like these can educate people and make them more aware of their situations. 

I had great professors in college, but unfortunately only two of them did any sort of rundown on personal finance, and both of them were hurried on the last day of class.  In a few of my classes we worked on our résumés, but everyone thinks their way is the best, and I ended up with a few different versions to appease a few different people.  Interview sessions were offered by Career Development Services.  The key word “offered.”  Few people took them up on it. And I know quite a few people who graduated college with a great deal of debt.  Why?  Because they could pay off all their cards when they got jobs. 

I think a mandatory class along these lines would have a great impact on the future leaders of our country.  And maybe, just maybe, it may help make frugality a virtue again.