How Much House Can You Afford?

Posted on March 30, 2008

Or maybe how large a car payment can I handle?

Every were you turn online calculators and salesman are always telling us the maximum we can spend on any given purchase.

It’s the wrong question!

So you can afford a $200,000 house that has the extra big yard that, but it is 50% of your take home pay. Or maybe you can afford the next size SUV that gets 15 - 18 miles per gallon for a mere $450 a month. What the salesman and free online calculator from a site that is is trying to lend you money forgot to mention is that we are being set up for financial failure. What there aren’t telling us is that the payment is probably more money than we can handle. What they forget to mention is what happens when the dual income family loses one of the incomes or some extra medical bills roll in.

It’s the wrong question, but what are the right questions?

» Filed Under Materialism, Psychology of Spending, Spending

Easter Spending Without A Plan

Posted on March 24, 2008

I have a small confession that I need to make. We spent almost $50 this month on Easter supplies and candy. That was just for our 2 year old, since the 2 month old isn’t old enough to partake. Some of you may laugh, saying “I spent way more”, but to me that is a large sum on items that have almost no lasting purpose.

What happened? Two things, lack of planning and lack of communication. This is the first year that The Rockette and I were forced to mesh our individual preferences into our own special tradition. This normally takes some intentionality or you end up avoided the issue or fighting. We didn’t fight, so we default to each of trying to accomplish our own separate goals. Even more The Happy Pebble was inundated with stuff to the point that I think he only saw a bunch of stuff rather than a few select special items.

If we had talked about Easter spending before hand we would have had a plan for our money. As it is, the spending will come out of the money we have been putting away for adoption lawyer fees. The key here is intentionality. Even though this is a tiny sum of money, if we aren’t being intention about these decision then we set the stage for problems on larger purchases like homes and cars.

So what do we do about it. First, since we can’t return the perishable items we need to let it go. Stewing and/or blaming really won’t help. Second, we will make sure that the we have a spending plan in place before the next Easter comes. With a plan in place, I will be able to avoid the $25 spent in the local Chocolate House and come out with the one Dark Chocolate Coconut Cream Egg with my son’s name on it as I had intended.

The key is to have a plan for your money. This intentionality may look different to each person, but it will really change your finances!

» Filed Under About Me, Planning, Psychology of Spending, Spending

Forget About Buying Stuff, People Matter

Posted on March 20, 2008

Think back. What are your fondest memories in life? One of my best was a 9 day white water rafting, hiking, and outdoor adventure down the Grand Canyon with my mom. A few other that come to mind are building snow forts with my Mom and friends, a little-league no-hitter, and the craziness that was my Freshman year at college. Take a few seconds and think about yours best memories…

If you are like most people the things that came to mind had little to do with stuff and a lot to do with people and experiences. We often go through so much trouble to make money or rack up debt just to get stuff. Billions of dollars in spending are finance through credit cards and debt each year, usually just to get that nicer TV or a new car. Are you going to care about that stuff in a few years?

The lesson is.. don’t go into debt for stuff, but go into debt for vacations. We’ll remember those!

Ok, so I am kidding, but question still remains “why do we get distracted by stuff?”.

» Filed Under Living with Purpose, Materialism, Psychology of Spending

The Lost Art Of Saving To Pay Cash For Purchases

Posted on March 16, 2008

Somewhere while I was digging out from $70,000 in debt, I learned that you had to be able to save and actually pay cash for purchases in order to avoid debt. Growing up this was not something that had been instilled into my thinking about money. It is something that doesn’t get much attention, but it is a needed tool in order to achieve financial success. So, let’s talk about it.

The whole system starts by extending your financial vision past the current day and thinking about purchases and bills that will be due months down the road. Then you just need to divide the bill/cost by the number of months until you need the money to come up with the monthly bill amount that will get you enough cash in hand.
For example, we know that we will need a new TV by Ferurary when US cable/antenna service switches from analog to digital. We expect to pay about $800 for a TV, so we divided that by the 12 months in the year and added that $66 dollar monthly bill to our list. Each month I transfer the money from our checking account to an ING Savings account labeled TV. When the time comes we should have all or most of the funds needed.

It really does feel good to have a plan for your money. I remember the feeling like we had really turned the proverbial financial corner when we started putting away $100 a month for auto insurance rather than paying the $3 a month service for so that we could do payments.

If you are still getting out of debt, the same strategy applies. If you don’t plan for future expenses, you will find yourself back in debt when these so called ‘unexpected’ expenses come up. With a little planning and discipline you start to realize that they aren’t unexpected at all, and that by having a plan for your money you can be in control rather than your bills.

» Filed Under Credit Cards, Financial Succes, Psychology of Spending

Cash Only Spending Experiment Analysis

Posted on January 9, 2008

Time to clean house. I have been carrying this dirty laundry around, since August.

In July I started an all cash experiment to test the Dave Ramsey argument that you can save 12-18% just by spending cash. View the cash only experiment details here and the benefits of spending cash here.

Some readers have asked me for the results of the experiment while back, but I admit I have none to offer. It took a few months, but I am finally willing to admit that the experiment was a failure. I apologize.

We didn’t fail to complete the actual experiment. We did go all of July without swiping plastic once, but what broke down was my ability to analyze the results. I still have an envelope with the receipts I was able to save from the experiment, but I don’t think I will be able to glean much from the incomplete set of data.

The truth is that the no cash month was such a radical change in my habits that I was beat down by the end of the month. I didn’t have the energy to stay on top of things during the month and I was so discouraged at the end of the month that didn’t complete the analysis. I think part of me didn’t want to see that it saved money, because I wasn’t ready for the change. Another part of me wasn’t sure that I had been diligent enough in my record keeping to make the data meaningful.

I have wrestled with it and tried to slide it under the rug, but the spirit in me that desires change won’t let it go any longer. The Happy Rockette also added some words of encouragement.

Yes it seems silly that a trivial change like spending only cash got the best of me, but it really did stress a large number of ingrained habits and required a lot of energy complete. I am OK with failure as long as it is a pathway to growth. With this admission, I think it will become just that. The time and energy was by no means a waste. The next time I try the experiment again or even different experiment I will have more insight, wisdom, discipline, and knowledge to bring to the table.

Sorry to disappoint anyone that was truly interested, but I hope to resurrect the experiment again with much better results. Is there anyone that would be willing to join me in the next effort? With a little more planning and discipline I think we could get some meaningful data out of it. Data that can help save money and improve lives!

» Filed Under Cash, Experiments, Psychology of Spending

Can We Buy Meaning During The Holidays?

Posted on December 16, 2007

Consumers planned holiday-related spending increased to $923.36” in 2007. Gift card spending alone was 24 billion dollars last year while the national spending average rises about 4.76% year after year.

The money that gets tossed around on Christmas is staggering. Debt keeps us paying for Christmas well into the New Year. Gifts are often relegated to impersonal gift cards, because we don’t know what else to buy. We keep on buying though. Stress and frantic running are hallmarks of the season. Sometimes you can’t wait until it’s all over, so you can rest and recover.

I often wonder if we don’t spend ourselves into a frenzy to cover over our lack for the deeper things in life. Do we buy more to cover the lack of depth in our relationships with friends, children, and spouses? Do we spend enough time telling and showing people how valuable they are the rest of the year or are we trying to recover from a deficit with gifts? Maybe we don’t feel like the holidays have much meaning, so we buy to try to imbue the holidays with meaning through consumerism. I am not saying all or any of this is true, but I think it might be worth asking the questions.

Does it have to be this way? For those that want something more, what can we do?

Sources :

» Filed Under Holiday Wishes, Living with Purpose, Psychology of Debt, Psychology of Spending

The ‘Cost Per’ Calculation Can Save You Money

Posted on November 4, 2007

Sometimes changing the criteria by which we assess the cast of a purchase can save us a lot of money. I like to use the trick of calculating the ‘Cost Per’ to see how much something will really cost. My favorite calculations are usually cost per use and cost per year, but the calculations can be modified to evaluate any type of purchase. $12 dollars per bottle of vitamins or 8 cents a capsule? $100 a year for the HashiTashi brand TV, or $50 a year for a Sony that lasts 10 years?

Let’s closely examine how we would use cost per year to evaluate the better buy on a new bedroom set. One bedroom set can be bought at IKEA for about $1200, while a second set costs $4,000 dollars at a high end furniture store. You like both sets equally, how do you decide which to buy?

On the surface the $1200 looks like a much better deal. We might arrive at a different conclusion if figure out cost per year. The $1200 set will last about ten years if you are lucky, for a cost of $120 per year. The $3,800 has the potential to last 40 years and be passed on to your children or friends, for a cost of $95 dollars a year. Now the more expensive outlay doesn’t hurt near as much.

Now the final deciding factors will probably need to account for many other factors too. Do you like to change you room designs often? Do you like to have heirlooms to pass down to your children? Do you take good care of your stuff? Don’t have the cash? All these types of questions will also factor into your decision too? After all, that is why finance is personal.

The main point is that sometimes changing the perspective through which we view purchases can often change how we feel about spending the money. Using the ‘Cost Per’ calculation is a great way to gain some new perspective. This new perspective can often lead to gems like “buying the cheaper item doesn’t always save you money”. When you factor in the need replace the item more frequently and the hassle of dealing with an inferior product, the cheaper item costs more.

» Filed Under Frugality, Money Savers, Psychology of Spending

Payments And Credit Aren’t Leading Us Anywhere Good

Posted on October 27, 2007

Often, a huge part of getting out debt and achieving financial security is removing the option of purchasing with payments and credit from our brains. See, payments set you up to stay in debt and spend more then you can afford. We end up looking at purchases through a short term lens rather then thinking about the long term impact. Breaking things down into small conquerable pieces is a great strategy for achieving goals that seem too big, but when we do that with purchases we are remove ourselves to far from the real impact of the decision.

The drawbacks of credit purchases in our lives are quite numerous, but I wanted to highlight a few.

Payments give salesman more room to create profit for themselves. We become so focused on the monthly payment that we miss the fact the loan car note was extended to 6 years, or 9% interest. Salesman would rather deal with payment people, rather than cash people.
Payments often mask the fact that we can’t afford what we are buying. $20,000 or $380 a month, which one sounds more feasible?
The items purchased with credit often go down in value faster than the principal on the loan. Negative equity is an ugly road, that isn’t going anywhere but towards disaster.
With the exception of 0% loans, payments mean you are spending money on interest. To put this into perspective, consider that on a $25,000 car loan at 6% you will pay about $30,000 for the car over five years. A $200,000 30 year mortgage @ 6% will cost you $231,667 just in interest.
Payments add stress and rob you of freedom. There was a correlation between the number of payments I had and the amount of stress that my finances caused me. Also, things like moving, changing jobs, moving to a profession you love, and spending more time with your family all become harder and more complicated. Shackles!
You don’t actually own the item you have payments on.
Each new payment makes the next one easier. You want more, because you can spread the pain out over years. In reality you can only diffuse the pain until the house of cards crumbles, or you wake up at 50 only to realize you don’t own anything.
It is quite depressing to know that the money you are earning now isn’t yours, it MUST go to someone else. Cash flow is one amazing benefits of being debt free. Think about the things you could do if you actually controlled your money and not financing companies.

I really could go on, but that is quite a list already! So, next time your discipline is wavering and you want to use credit, come back to this list and use it to renew your strength.

What problems have payments caused you over the years that I missed?

» Filed Under Chasing Dreams, Debt Elimination, Materialism, Psychology of Debt, Psychology of Spending

Why Personal Finance is Personal

Posted on October 24, 2007

The reason they call it personal finance is because there aren’t any right answers. That’s right, no right answers. If there were right answers, we could call it something like personal financial decision science. Everyone would be doing the same 20 step program and trying to achieve similar goals.

That isn’t how it works. It is our money. We are all different. We all have our own quirks, goals, personalities, and dreams. Personal finance can not escape that fact that it has to deal with humans, and that is where the personal side of equation comes into play.

Consider two families who just went through their house and de-cluttered. They are both left with a pile of junk, but they decide to do something different with that stuff. One family sells the items through eBay and Craigslist, while the other donates the items to the local children’s shelter. Did either family make a wrong decision? No, they both chose according to their own goals, desires, and values. One was willing to sacrifice income while the other willingly sacrificed the benefits of altruism. One of the tricks to learn to be aware of what our decisions are really costing us.

Sure, maybe the family who sold the stuff will have more money, but that isn’t the goal of personal finance, is it? If it were, we could move closer to a finance science since we have an empirical goal by which to judge all actions. The fact is our money goals are very personal and cover a broad range of topics.

Does that mean some choices aren’t better than others? Of course not. It is still possible to judge the value or helpfulness of a given choice, but it is hard to do without having some understanding of the personal and situational context within which the decision was made.

Ok, so why do I mention this? I honestly feel that we will only cause ourselves trouble without truly understanding the realm in which personal finance decisions are made. In order to make the best decisions and help others make wise decisions, we must be honest about imperfect nature of personal finance. We must be willing to judge actions by not only outside empirical evidence, but also how the decision relates to our goals, personality, and values.

» Filed Under Favorites, Personal Finance, Psychology of Debt, Psychology of Spending

Was Paying Cash For A Car Worth It?

Posted on September 25, 2007

Previously I shared how we paid off our $15,000 car loan and were able to pay cash for two more cars in the following years.

As I thought back through our story, I was left asking myself “Was it worth it?”.

We got a lemon of a car in the Ford Focus, so yes it was extra hassle dealing with that. The fact of the matter is that bad breaks happen sometimes, even if my research said the Focus should have been pretty reliable. I don’t think making choices based on a fear of low percentage what-ifs isn’t going to breed success.

The decision was close to being a wash in the strictest financial sense. If we purchased the Murano right out of the gate, we would have paid about $17,000 for a similar Murano. That would have left us with financing of $8,000 @ roughly 7%. Since we paid about $8,500 in cash after the Focus trade in, we would have had the loan paid off in a year. That would have wasted about $300 in interest, and about $150 in opportunity cost in savings interest.

The only other thing to factor in is that we would own a car with an extra 15,000 miles on it. Using a Kelley Blue Book estimate that is about $1,000 dollars or so in unrealized savings.

Most of the numbers were irrelevant though. We had spent 4 years digging out of debt, so going back into debt would have proved that we hadn’t learned any lessons. On the other hand, sacrificing the car we wanted for a year and paying cash continued to set the stage for us to win financially. Going into debt would have opened up the financing option again on all other subsequent purchases. This was a test, and we passed. We had the benefits of being debt free firmly implanted in our minds, and we were not about to give them up.

The intangible benefits we received from paying cash seem extremely worth it, what do you think?

» Filed Under Cars, Debt Elimination, Psychology of Spending

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