Live Richly

7 + 1 Life Lessons from the Very (and Not So Very) Wealthy

June 20th, 2011

Over the weekend Barry Ritholtz published an excellent column in the Washington Post listing 7 lessons he’s learned through his interactions with high net-worth clients.  The lessons reflected a number of the values we have at Below Your Means.  Under #3 – Memories are better than material objects, he writes:

The rule of diminishing returns is a harsh mistress with luxury goods. Do you really think $100,000 audio speakers sound 20 times better than a pair of $5,000 speakers? (They don’t). Is a $250,000 sports car five times faster than a $50,000? (It is not). These days, you can buy quite a lovely home for $1,000,000 (and much less in the country’s interior). Those $10,000,000 manses are not 10 times roomier. Anyone who has owned a $10,000 Rolex will tell you that a $39 Casio keeps better time.

We like this one a lot – and it’s a common problem.  As your income increases, there is no requirement to increase your spending!

Ritholz continues (emphasis ours):

When discussing the benefits of wealth, I have heard again and again about amazing experiences, family get-togethers, vacations, shows, sporting events, weddings and other events as these people’s most important life experiences. While these things cost money, nearly every family can afford reasonable versions of them.

This leads to our addition to the list:

8.  Don’t think you have to have money already to start living richly

As with anything that requires discipline (losing weight & getting in shape, for example), too many people make the mistake of thinking “this would be so much easier if I already had X”, where X is being at a certain weight, or fitness level, or having a certain income.  It is just as easy to blow through a $100K/year salary as it is to blow through a $50K/year salary.  Now, if you are reading this and trying to make ends meet on a $50K/year salary, this statement may make you angry.  But trust me (and the experience of many people who have seen their expenses grow as their income grows) – it is just a matter of making a decision to live within your means.  Of course, if you are dealing with large medical bills or a house that you can’t afford after a job loss, you have an immeidate problem that requires more complex solutions than we are offering here.  But for a large portion of the population, the issue is more choosing to start living within your means, finding ways to increase your means, and growing your net worth than it is one of mere survival.  We’re not saying money doesn’t help, but it isn’t a requirement.  The authors of this blog certainly started before they had the incomes that they enjoy now.

Another point Ritholz makes that we love (emphasis added):

I am struck by how many very wealthy people I know — especially tech entrepreneurs – have expressed being grateful for their good luck. Again and again, I have heard the phrase: “Being smart is good, but being lucky is better.” Rather than leave you with the impression that success is simply a roll of the dice, I am compelled to remind you what the Roman philosopher Seneca the Younger was reputed to have said: “Luck is where preparation meets opportunity.” I don’t know whether it’s better to be smart or lucky, but I would suggest that making the most of the opportunities takes more than just dumb luck.

Opportunities will come your way all the time.  Living within your means is one way to ensure that you have the freedom to take advantage of those opportunites.  The second – don’t be too proud.  The most successful people we know will do everything from negotiate a seven-figure deal to dig a ditch, if that is what it takes to sieze the opportunity in front of them.

Over to the Washington Post for more…

7 Life Lessons from the Very Wealthy | The Washington Post

The Value of a Degree

June 14th, 2011

Last week, Five Cent Nickel had a post about What’s Your College Degree Worth? Which was a report on a study by Georgetown University Center.  The article and study of course throw out a variation of every schools favorite statistic:

One of the big takeaways from this study is that college graduates can expect to earn 84% more over their lifetime (on average, of course) than someone with nothing more than a high school diploma. But what about difference between majors. Surely some degrees result in higher earnings than others.

This 84% statistic is similar to the oft mentioned “$1 million dollars more over a lifetime” statistic.  I haven’t personally done the research on either of these, but I am skeptical.  You can see why by reading this post and watching this video.  I have no doubt that the average person with a degree will earn more than the average person without one, but I think there are many exceptions to the rule and that the advantage is nowhere near as large as it once was.

The Five Cent Nickel calls out the top and bottom 10, but here are the top and bottom:

Ten highest earning majors

  1. Petroleum Engineer ($120,000)
  2. Pharmacy/Pharmaceutical Sciences and Administration ($105,000)
  3. Math and Computer Science ($98,000)

Ten lowest earning majors

  1. Counseling/Psychology ($29,000)
  2. Early Childhood Education ($36,000)
  3. Theology and Religious Vocations ($38,000)

Here is a graph breaking down the findings:

Degree value chart - Provided by Georgetown Education Center

 

This latest research doesn’t change my opinion of higher education and I think only furthers my point that the decision to take on student loan debt and get a degree needs to be treated entirely like a business decision.  Will you get a return on your investment (ROI)?  That is to say, will the time and money you put into the degree repeat you and equal amount or more in future compensation and happiness?   If the answer is no, you need to consider a different career choice, spending less on education or both.  For example, if you plan is to take on $120k of student loan debt to get a $29,000 a job as a counselor, I think you probably need to consider getting yourself some financial counseling.  This just doesn’t make sense.

 

What’s Your College Degree Worth? | Five Cent Nickle

 

Image Credit: Georgetown Education Center

 

One’s Frugal Fail is Another’s Frugal Success

June 9th, 2011

Confused?A tricky part of living below your means is knowing a good value when you see one.  Recently we ran a Frugal Fail about McDonald’s $1 Sweet Tea, and how buying drinks out daily was a great way to spend a lot of money on something that didn’t have much worth.  Of course, just a few weeks earlier, we had posted that McDonald’s $1 sodas were a good value relative to buying a soda at a convenience store.

What gives?  Are we hypocrites?  Contradicting ourselves?

Not really.  Our philosophy is that money is a tool that one uses to achieve happiness, and you have to know what makes you happy in order to use it properly.  Otherwise, living within a budget is just a grind.  In other words, something is only a good value if it is worth it TO YOU.

If 95% of the time you don’t spend a lot of money on drinks, then the $1 McDonald’s soda is a pretty good deal, especially if you compare it to the $1.69 to $2.99 that you’re going to pay in a convenience store.  The $3-$4 drink at coffee shop with a few friends on a Saturday afternoon is a great way to spend some time in a pleasant atmosphere (especially if you consider the number of hours of enjoyment you are getting from the experience).  But if you’re spending that kind of money most days on drinks — especially the kind you bring back to your desk and hardly notice that you’re drinking — then it’s likely you’ve gone from spending your money on something that makes you truly happy, and paying an awful lot of money to avoid brewing your own coffee or tea and putting it in a thermos in the morning, or remembering to grab a soda out of the fridge to drink later in the day.

Now, there is also the argument to be made that you are paying for convenience.  Understanding the value of convenience is a great subject for living richly, and we’ll be exploring that question next week.

 

Photo Credit: San Drino

Quick 8 and 18 month review of the BMW 335d

June 8th, 2011

BMW 335d 2011 Review

The Diesel Driver recently ran an 18-month review of the BMW 335d.  The review is pretty much all positive.  They call out that few people have even noticed its a diesel, meaning that anecdotal “average Joe” can’t see any of the classic diesel concerns such as smell, noise, etc.

Few if any passengers have guessed it’s a diesel although many have commented on the car’s power. The 425 pound-feet of torque is not only fun but has come in handy many times over.

And on fuel economy they note:

The best sustained fuel economy we’ve recorded was 40 mpg (5.9 l/100 km), although we’ve seen as high as 42 mpg (5.6 l/100 km) for brief periods of time. On a drive from Philadelphia to New York, the 335d used 6.0 l/100 km (39.2 mpg) with an average speed of 65 mph (105 km/h).

I have had the car for about 8 months now and have driven approximately 3,500 miles.  To put it plainly, I absolutely love this car.  On the highway, I have been able to get 40+ MPG, and my average city/highway driving has given me with an average of 31-33 MPG.  The car is fun to drive, handles great and has excellent pickup (especially at higher speeds).

My only complaints with the car so far are:

  • When I first took delivery of the car, there was definitely a noticeable smell.  I did some research and this apparently due to “Particulate Filter Regeneration“.  After about 2500 miles though, I haven’t noticed the smell.
  • The HD radio reception is spotty.  This seems to be a common issue with BMW’s and is not limited to the 3-series.
  • I still miss the old “wrap around the driver” feeling of the old E46 style BMW 3-series seats and dashboard.

You can read our other diesel articles here:

More of 18 month review at the source…

BMW 335d 18-Month Report and Review | The Diesel Driver

Below Your Means Basics: 3 Principles for Budgeting & Tracking, Pt 2

June 8th, 2011

Yesterday we discussed our 3 Principles for Budgeting and Tracking.  To recap:

Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values.  Only then can you tell if a purchase is worth the money.
Principle 2: Organize your categories based on how easily they are controlled.
Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfect

Today we’d like to touch on a handful of special circumstances that warrant some additional attention.  Tomorrow we’ll start moving more into the mechanics of building a budget.

Special Circumstances

DetourBudgeting with a Spouse

Remember Principle 1?  That tracking and budgeting are all about measuring your values against your resources?  Here’s why money can be a huge source of friction for couples.  You’re not talking about your spending, either individually or as a family.  You are talking about your values, as individuals and as a family.  That’s difficult.  So go easy on yourselves.  People’s sense of self-worth, upbringing, status, personal reward systems and more are all bound up in discussions about what spending is reasonable.  Take the time to understand the why behind the decisions.

There are as many ways to divide up financial resources and financial responsibilities as there are couples, but one thing that generally correlates with happiness is to have three major budget buckets: your money, my money and our money.  Everybody needs a space to do what they want, even if it’s a small space.  Give yourselves room to breathe and, especially, to not have to agree on everything — even if it’s just $20 a week or a month.

Note that the yours/mine/ours buckets do NOT need to directly match up with income.  How big you decide to make the pots depends on your attitude about money as a couple, and you should tread lightly and carefully while discussing this subject.  More on this subject when we discuss the mechanics.

Budgeting with Kids

We can’t say it enough: include your kids in this process.  Especially if there haven’t been any real spending controls in your household, your kids are going to know something’s afoot.  Either you are going to have to say “no” more, or you’re going to be talking money with your spouse.  There’s a good chance they’ll notice you paying attention and want to know more.  So include them!  Some ideas:

  • Give them a fixed spending amount for a family vacation.
  • Pay them an allowance (either based on completion of chores or just time-based) and, except for birthdays and other holidays, don’t buy them toys
  • Have them help cut coupons or comparison shop at the grocery store with you
  • Have them save up for a more expensive toy and go through a budgeting process themselves.

Budgeting for the Self-Employed

If you’re self employed you have two major issues:

  • You can sometimes wind up with a ‘big check’ that makes everything seem different
  • You can sometimes go without income, especially if a customer doesn’t pay

In other words, your income stream will be highly variable, which creates a difference between your income (how much money you make over time) and your cash flow (when the money actually shows up).  Your mortgage company will not want to hear that you just closed a big deal and you’ll be able to pay them in 45 days.  They will still charge you late fees and hit you with other penalties.

The first thing you need to do is get a decent, realistic projection of your income.  If you’ve been in business for at least a year, you can do this by averaging the past 12 months.  But pay close attention to trends — ask yourself if your income rising or dropping compared to last month, or the same month last year?  If you don’t have that kind of history, you’ll need to make a very conservative estimate.  Remember you can always adjust upwards in the future if you want to, but if you overspend now it will likely turn into long term credit card debt at very high interest rates.

Once you have a realistic projection of your income, start “paying yourself” that amount once per month.  If you have an LLC in place this should be easy, since you probably set up a company bank account for the business.  If you don’t have a separate checking account, now is a good time to set one up (and to set up a budget for the business, too).  Transfer your monthly pay from your business account to your personal account every month, like a paycheck.

Budgeting for Higher Income and Net Worth

If you’ve already achieved the magic income level, or net worth level, where you thought you would effortlessly breeze through your financial life, then you’ve probably realized that it just doesn’t happen that way.  With luck you haven’t been spending too much money keeping up with other people’s lifestyles, but there’s a good chance you’ve found yourself in a car or house that is more than you really want to spend.  You may be spending your money as fast as you are earning it, leaving yourself vulnerable to emergencies and changes in fortune, and unable to seize new opportunities you uncover.  If that’s the case, the same principles apply to you, but you’ll have more flexibility and more challenges.

For one, it will be easier for you to implement your/my/our money if you have a bit more disposable income.  The risk is that you overdo it, but be grateful that you have the chance.  Second, housing and auto payments may not really make sense in terms of your budget.  This is because past a certain income or net worth, you don’t need to finance larger purchases as much as you did in the past.  So the idea that a mortgage or a car payment shouldn’t exceed X% of your income doesn’t make sense – especially if you don’t want the cost of your house or car to rise proportionally to your earnings.  Also, you may find that your earnings are highly variable due to business conditions, and so budgeting based on your monthly take-home pay don’t apply to you.

In these cases it’s important to have a clear idea of what your current goals are, so you can allocate your resources wisely.  We’ve noted in the past that a high income doesn’t necessarily lead to happiness.  Get a good handle on what you think is reasonable to spend, and build your budget from there.

Next week, the mechanics of building a budget.

Helpful Links

Don’t Spend Any Money… Establishing a baseline for spending | Super Frugalette | interesting take on the difference between what you have to spend, and what your budget is

Honey, We Need to Talk … About Money | MintLife | On the value of discussing money in a relationship, with some conversation starters.

Five Budgeting Myths | FiveCentNickel | Budgeting excuses removed

My Self-Employed Monthly Paycheck | BudgetsAre$exy | Dealing with the ups and downs of self-employment

 

Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo: Detour by F Delventhal

Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values.  Only then can you tell if a purchase is worth the money.

 

 

 

 

 

 

 

 

Principle 2: Organize your categories based on how easily they are controlled.

Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfec

Coupons, with a Side of Obsession and Fraud

June 7th, 2011

Coupon Crazy

Extreme Couponing is on the rise. TLC even has a TV show about it:

For those in the mood for a great review and entertaining rant about TLC’s Extreme Couponing, I recommend this post over at Scratchbomb.com: Extreme Couponing Induces Extreme Vomiting.  Matthew makes excellent points and I agree almost everything he has to say.  I particularly agree with the following:

  1. There is virtually no such thing as a coupon for decent food. There are no coupons for “bananas” or “organic chicken” or “fresh vegetables”. These extreme couponers are stocking up almost exclusively on packaged or frozen food, loaded with preservatives, salt, hormones, and a billion other horrible things. It’s all Franken-food, the absolute worst shit imaginable. Not a lot of salad in these people’s shopping carts, but a whole lot of things stuffed with cheese and/or skewered on sticks.
  2. The goal for most of these people appears to be not feeding/supplying their families, but accumulating the most stuff for as little money as possible, then shoving those things into every corner of their house, then building more corners in their house into which things can be stuffed. The line between “extreme couponer” and “hoarder” is extremely thin–if such a line exists.

Unfortunately, like many fast growing national obsessions, Extreme Couponing has its cases of scams and frauds.  Frugal Confessions has a interesting article on how relatively widespread coupon fraud has become.

Once I began researching, I was very surprised to find the problem is more widespread and costly than just a few consumers getting away with free products. Just in the month of May 2011 there were 25 counterfeit coupons posted on the Coupon Information Corporation (CIC) website with various rewards being offered from the manufacturing companies for the successful prosecution of individuals responsible for producing the counterfeit coupon.

For those that are new to being frugal at the grocery store, consider reading: 5 Sneaky Price Tricks Your Grocer Doesn’t Want You To Know.

Before you start going crazy with the coupons, you might want to consider Extreme Couponing? 5 Reasons Why I’ll Pass.  Here Paul, explains 5 big issues with the practice.  Of his five reasons, 3 out of the 5 have to do with time:

1. It’s a Full-Time Commitment

3. You Become a Slave to Coupons

4. You Spend Hours at the Grocery Store

I use coupons all the time, but I take a basic time/value equation into account when I do.  For example, if I spend 2 minutes finding a coupon that can save me $3 off something I was going to buy anyway, this is effectively like earning $90 an hour.  Or perhaps I spend 20 minutes digging for a 10% off coupon for a on a major purchase — if this saves me $150 off a $1000 purchase, my effective hourly rate is now $450 an hour.  It works for small purchases too.  For example, Redbox always has codes available at sites like Inside Redbox; here it will literally take less than 60 seconds to find a coupon that could save you a $1.  This works out to $60 an hour, which is definitely worth the time.

So please, go find those discounts, but don’t make it your full time job or obsession and be sure you make a time/value calculation when you do it.  Perhaps your time is better spend learning something new or working to get a promotion or better career or maybe even spending more time with your family.

 

Photo Credit: Dmdonahoo

 

Below Your Means Basics: 3 Principles for Tracking & Budgeting

June 7th, 2011

 

Everything should be as simple as possible, but not simpler - Albert EinsteinUnless your means are very large and your tastes are very modest, it will be difficult to live below your means without tracking your spending and creating a budget.  You may entertain a fantasy that, if you just hit some income goal, everything would fall in to place.  You’ll have to let that go.  As your income grows, the possibilities of what you can and can’t buy change.  Before you know it, you’re spending more on everything – food, eating out, clothing, travel, your car, your home, whatever.  The best way to handle your finances is to handle them with purpose, and in order to know what you’re doing you’re going to have to, well, know what you’re doing.  And that means tracking it. Once you’re tracking your spending, you’ll need to know where your limits are in order to avoid exceed them.  And that means budgeting.  Don’t worry – while this task can be tedious, it doesn’t have to be, and you also don’t need to overdo it.

Like Einstein said, you need a system that will be as simple as possible, but not simpler. In this post we’re going to talk about the overall process of tracking your finances and building a budget, and point you to as many sources for ideas as we can.  As we are fond of repeating, money is a tool that you can use to advance your goals, and the best way to manage it is knowing what those goals are.  This article should help you put the whole process of tracking and budgeting into perspective.

Note: If you are in a credit crisis and facing bankruptcy, repossession, wage-garnishment, or other major financial consequences, then as much as we wish we could help, we’re not really the right place for you to get the information you need.  While we will be addressing debt reduction strategies in this series of posts, you may be in need of legal assistance that we are not able to provide.  Our favorite online legal resource is Nolo.com.  Nolo’s Bankruptcy Center has plenty of good, free information and they also offer a variety of for-fee products to help those with serious credit and debt problems. 

3 Principles for Tracking & Budgeting

When you start tracking your spending (especially if you have joint finances with a spouse) you can drive yourself crazy in a hurry.  You gave your kid 50 cents to buy a toy from a vending machine at the mall.  Where should that go?  Your partner buys lunch at work and you make yours from the grocery budget.  Should you pay for the groceries that really go to your lunches?  You took out money from the ATM but you can’t remember what you spent it on.  You went to Target, Wal-Mart, or Amazon and bought groceries, medicine, toiletries and clothes on the same order.  Should you break them up?

These kinds of questions can get out of control in a hurry.  Tracking everything really isn’t the point though.  Remember that the point is to understand if your spending is in line with your values.  Which leads us to…

Principle 1: The purpose of tracking and budgeting is to help you understand if your spending is in line with your goals and values.  Only then can you tell if a purchase is worth the money.

As an example, consider two single men with incomes of $50,000 per year.  The first is very extroverted and finds much fulfillment in spending time with friends and meeting new people.  Three to four nights a week you can find him in a restaurant or a bar, where he typically spends somewhere around $40 on food and drinks.  He also spends $30/month on a gym membership where he works out and plays basketball with an informal group that is constantly adding and losing members.  Our second man is fairly introverted and has a small group of close friends.  He loves to cook, and a few nights a week he has his friends over for dinner.  He doesn’t belong to a gym, but has a cleaning service that keeps his condo looking good for $100/month.

Our extrovert would find our introvert’s grocery bills silly, and he has no problem cleaning his apartment once a month himself (give or take a few weeks).  Our introvert would find our extrovert’s restaurant and bar expenses shockingly high, and is happy to work out alone in his building’s small gym.  But, they both are enjoying spending time with friends and are exercising.

The obvious corollary to Principle 1 is that you need to have some idea of what your goals are and what things are important to you.

Principle 2: Organize your categories based on how easily they are controlled.

The whole reason you’re tracking your spending is so you can control it better.  So, it makes sense to group items in terms of your level of control.  When businesses do this, they refer to fixed costs and variable costs – meaning the things they have to spend every month regardless of what they do, and the things that vary depending on what they do.  For example, your rent/mortgage and current car payments will take serious work to change; you can’t just decide tomorrow to live in a cheaper apartment and have your rent change.  A second group are things that still take work to lower, but aren’t going to change overnight.  For example, your grocery bill, toiletries, regular medicines, insurance, etc. are probably places where you could save money but that won’t go away entirely.  Entertainment, eating out, etc are pretty much discretionary and, if you really wanted to, you could stop them within days.

Once you have these groupings in place, you can use them to help you understand the level of detail you should use in your tracking system.  I have found that it doesn’t really matter very much for me to track all the details of my entertainment spending.  I just know that I have a fixed amount of discretionary spending each month, and I need to stay within that.  If I spend it on movies, or drinks, or dinner, or taking my kids out to lunch, it’s all the same – discretionary spending.  No real value to budgeting it.  For my mortgage, mortgage interest, car payments, and other large fixed expenses, tracking them individually is pretty simple to do and helps me understand if I’m spending too much in those areas (or could afford more if it’s important to me).  The rest – groceries & toiletries, clothing for the kids, clothing for myself, repairs on the house, professional services like haircuts and dry cleaning – are all in a grey area, and for me, are a great place to focus.

Also, don’t forget your savings goals.  You can take a number of different approaches to this, but they boil down to ‘spending as little as possible and saving the rest’ or ‘setting a savings goal and then spending the rest’.  Which you choose has everything to do with your appetite for living frugally, your desire to increase your earning potential, and when you want to retire.

Principle 3: Your budget is a living thing that you will revisit on a regular basis, so don’t stress about making it perfect

This principle speaks for itself.  As you achieve your goals and new opportunities present themselves, you’ll want to re-arrange your savings and spending habits.  The activity of tracking and analyzing your spending will, in and of itself, lead to changes.  So don’t stress, and don’t fear.  Whatever reasons you have for procrastinating aren’t valid.  Whether you are earning a six figure salary and want to make the most of your income, or you are stuck on a credit-card treadmill and trying to figure out how to get off, the first step is getting the information in one place.

Tomorrow we will discuss some special circumstances, including dealing with spouses and families.

Helpful Links

Track Your Spending.  Or Not. |  Wisebread  |  An interesting take on value-based tracking and budgeting

How to Budget if You Hate Budgeting | FiveCentNickel | A great broad-brush way to budget for those who hate getting into the details

 

Thumbnail Photo: Blocks 1 by Crissy Alright

Story Photo: Simple 2 by Kristian Bjornar