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Monday, December 30, 2013

When making the wrong financial decision is the right thing to do

Every once in a while on the financial blogs and forums you will see somebody come in and pose the question "Should I pay off my house?"

Usually the people asking this question seem like they really want to, and anticipate the great freedom that would come with being 100% debt free. The next step is to do the math and find out if it is technically the 'right' thing to do.

The thing is, with rates as low as they are now, it is almost never mathematically beneficial to pay off your house early if you are investing that money instead.

At least on paper.

But that doesn't mean you shouldn't do it.

Technically working until we are 70 would give us more money too, but that doesn't mean it is the better option for us, because that is not going to maximize our personal utility and enjoyment of our lives.

There are many reasons why we want to achieve FIRE, but the two main reasons for most people are freedom and security. For a lot of people being completely debt free is going to maximize that sense of security to such an extent that it is totally worth sacrificing some extra money that may have been made over a period of 30 years if that money were invested instead. Just like the freedom gained from retiring early is totally worth the opportunity costs of not working for rest of our lives. Even though doing so would be the "right" thing to do from a purely mathematical perspective on accumulating financial assets.

For many people not having the house payment will make your living expenses so much lower, that even if something totally disastrous happened and you lost everything, MF global style, you would not need NEARLY as much to sustain your lifestyle. You could probably even make-do with a McDonald's job.

If you are the type of person would would be kept up at night thinking about how you could be earning 5% on money that you borrowed at 3.5%, then don't bother paying off your mortgage early. Technically the math is on your side, but again, it is really a matter of personal utility (which is why we are trying to retire early to begin with).

Personally I am torn on this issue. I don't like leaving basically free money on the table, but I really like the idea of having that kind of security. And paying off my house would drop my monthly expenses by a third. So I will really have a tough decision to make when my assets get to the amount that I owe on my house.

No matter what I decide to do at that point, it will be a nice decision to be able to make!

-The Money Monk

Friday, December 20, 2013

You REALLY need to buy your stuff used. Seriously.

I have been involved in reselling used goods for over 10 years. Through Garage sales, Craigslist, eBay, thrift store, and currently running a live auction company, I have seen a lot of stuff come and go. Never has stuff been cheaper to buy than right now. Because of the current economic climate there are a lot of people looking to sell their stuff, but nobody is willing (or able) to pay as much as they did a few years ago. So the combination of an surplus of supply and a simultaneous precipitous drop in demand is really squeezing market on used personal good.

Right now you can get used goods for literally pennies on the dollar. I have been buying and selling almost exclusively used items that I will occasionally get shocked by how expensive these things are to buy new. I just can't believe that people are paying these prices when you can get the EXACT Same thing used for many times less than 5 or 10% of cost of a brand new item.

I was in the grocery store and saw that a brand new basic plastic spatula was selling for $5.99!

Six Dollars?! That represents almost an entire hour of human labor at minimum wage! No more than a week earlier at one of my auctions an ENTIRE BOX of kitchen supplies and utensils sold for $2.50!  This was a box that office paper came in, so it wasn't a tiny box. It had spatulas and all manner of  other utensils, measuring cups, you name it.

Both my girlfriend's car and mine are going to need new brake pads soon, so instead of paying the $120 bucks an axle or whatever it is they charge these days, I planned on doing it myself. I just needed a pair of jack stands. The absolute bargain basement set I could find brand new were a sale of $15 from Harbor Freight for a no-name brand. Actually cheaper than I anticipated, but I figured I could do better, and I didn't need them right away anyway.

This past weekend at a garage sale I found a pair of Craftsman Brand (guaranteed for life) jack stands purchased them for $5. So I got a much higher quality set for 30% of the cost of the cheapest generic set I could find. And that is par for the course with used goods right now!

So if you have things that you need/want, do your self a favor and make a list, and carry it around to garage sales and auctions and thrift stores. Not only will delaying the purchase initially probably make you find out you don't need the item after all, but if you do buy it you will pay WAY WAY less!

The following categories are where you can get the most insane deals right now in my experience:

  • Clothing and shoes - as a seller it is hard to GIVE clothing away
  • Books - Same here. I scoff at sellers trying to get more than a dollar per book, and usually it's $0.25
  • DVDs - $1 each is totally common
  • Last-generation electronics - I'm not talking about VCRs and 8track players, but even stuff that is only a year or two old is hard to even give away - mp3 players, original ipods, cd players, dvd players, laptops and computers, tv's etc. 
  • kitchen and household goods - more stuff that is hard to give away. 
  • Tools - You won't usually find as insane deals on tools as you will on the above categories, but the difference between brand new and used is still so enormous you have to see it to believe it. You can usually expect to find quality brand name tools for less than the cost of new, inferior tools. and trust me, you don't need wrenches, screwdrivers and clamps to be brand new. Why pay twice as much for a tool that is inferior in every way except for how shiny it is?

I see no reason why this trend is going to reverse any time soon, so please don't waste hard-earned money paying the 'new stuff' premium! 

-The Money Monk

Thursday, December 19, 2013

It's time to change the way you think about what savings are worth

When discussing large amounts of money (tens or hundreds of thousands of dollars) you will often hear people refer to how many years' work it is. If somebody makes 30k a year, they would consider a 90k windfall to be worth three years wages. Not bad right?

But it's actually worth much more than that.

Consider the average savings rate in America: Personal savings have averaged 6.85 percent from from 1959 until 2013. So an American earning 30k a year and saving the average would have $2055.00 at the end of the year. At that rate It would actually take them about FIFTEEN YEARS to save 30 grand. So a windfall of that amount would replace the savings effect of HALF of their working life!!

So for most people a penny saved is worth about 15 times a penny earned!

Think about it!

-The Money Monk

Tuesday, December 10, 2013

It doesn't matter what you spend your money on!

        On every forum and blog about financial independence and early retirement (FIRE) and even other finance and frugality blogs that aren't specifically about FIRE, you will find copious lists and mentions of the worst ways to spend your money.

Premium cable TV, storage units, gambling, cars, and the notorious Starbucks coffee, are all among the items frequently mentioned on lists of some of the worst ways to spend your money.

There are a host of metrics by which you can judge whether something is 'good' to purchase or not (health implications, environmental impact, opportunity costs, etc), but when it comes to financial independence, I am going to tell you something a little different:


Yeah you heard me right. It doesn't matter if you are spending your money on coffee, cable, cars, maid services, or whatever. When it comes to FIRE, the only thing that matters is this:

The amount of time it takes to build up enough assets to support your current lifestyle is nothing more than a function of savings rate. What percentage of of your income you are able to save. That's it.

What affects your time to retirement is if you save 50% of your income, or 75%.

What does NOT affect your time to retirement is if you spend that money on pedicures, or beans and rice.

I often tell people that as an average American, you can have pretty much ANYTHING you want, but you can't have EVERYTHING you want, and this supports that theory. In terms of early retirement, you can choose to spend your money on whatever it is you want, as long as you are keeping your overall expenses low as a percentage of your income. This may mean sacrificing other things, but that's ok. Everybody is different, and what may be a pointless waste of money to one person can be a huge quality of life issue to somebody else. Just keep that savings rate high and you are on the path to FIRE!

-The Money Monk