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

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

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

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:


IT DOESN'T MATTER WHAT YOU SPEND YOUR MONEY ON!!


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

How to make money with your junk mail

You may be getting money every month in your mailbox, and throwing it away without even realizing it!

Now it's not a lot of money, but it is free with only a little bit of time investment. What am I talking about? Coupons. And not just using them, but selling them on eBay.

This is something I have been doing for a while, and I occasionally buy coupons online too. You aren't going to get rich, since the coupons usually only sell for a couple bucks, but it is a great way to make an extra 10 or 20 bucks a month fairly easily. And occasionally you get a rare or useful coupon that sells for a lot more.

The key is to become adept at using eBay and develop systems or templates where it takes less than 5 minutes to list a coupon. This isn't too hard, and since you will usually be selling the same kinds of coupons over and over, so you can use stock images, and saved listing templates. And you can ship by home by simply using a stamped envelope, so you don't have to spend any time going to the post office.

Something to look into for those who are looking for ANY ways to increase their income!




-The Money Monk

Don't go on a financial diet

The lifestyle necessary to attaining financial independence without a huge salary or windfall can be related to trying to lose weight. Think of the way the word "diet' is used. Most times when somebody says 'diet' they mean temporarily restricting themselves to certain types or amounts of food, in the attempt to reach a specific goal, like losing 30 lbs.

The personal finance equivalent of this is for somebody to make a goal of getting to a certain amount of money, like 100k, and make certain cuts to their lifestyle to reach this goal.

The problem with this method is you are putting yourself in a position of continual sacrifice.

Compare it to the real meaning of the word diet, as in "a Koala bear's diet consists of mainly Eucalyptus leaves." The Koala bear isn't going ON a diet, it just has a diet. It's not sacrificing, that is just what it is designed to eat to be healthy.

Same with a person. If instead of going ON a diet, they change their diet to what it is supposed to be, they will be healthier automatically. The main difference is that it is a permanent thing, and realizing that instead of the modern american diet being the stauts quo, and being ON a diet a temporary deviation, the proper diet is instead the status quo, and the junk food is a drug that can be indulged in carefully from time to time.

This is important for a couple reasons:

1. It causes a permanent lifestyle change, instead of just a temporary deviation from the norm to achieve a specific goal.

2. It eliminates the idea that life is a constant sacrifice waiting for a payoff.

3. The process becomes the goal in stead of specific benchmarks.



This works just as well with personal finance. When you realize that most of the spending in your life is the equivalent of 'junk food' and revert back to the proper financial 'diet' of you will automatically accumulate wealth. And you will no longer be feeling that you are constantly sacrificing and waiting until you have enough to get off your 'diet', in stead you will adjust to the new status quo and appreciate the luxuries we have access too, instead of seeing them as necessities you are being forced to do without.

It's not an easy change to make, and it is mostly a perspective thing, but it is important.



-The Money Monk

Build resiliency with diverse income streams

No matter what your financial goals are, they will be served well by creating for yourself diverse sources of income. Most people in America have a normal job as their main source of income, bringing in thousands of dollars a year, even on the lower end of the scale. However these people's next highest source of income may only bring in only $25 or $50 dollars a year.

This means that they are completely dependent on their primary source of income. This is a totally rigid system that leaves no room for variance of any kind. You are basically a slave to the job since you can't continue your lifestyle without it.

Consider two individuals with identical monthly expenses:

A. Guy A makes $2000 a month working 40 hours a week in a cubicle. Other than the occasional gift and similar small windfalls, this is his only source of income.

B. Guy B makes $1000 a month working a part time job at a local business. He also makes $150 a month from online ad revenue and affiliate sales from a blog, $350 reselling on eBay and Craigslist, and $200 a month doing odd jobs.


Guy A makes slightly more money, but he is totally dependent on his single source of income, and can't do anything to jeopardize it. He is a slave to it.

Guy B has income from various sources, so a disruption in any of them is not catastrophic. Even if the biggest source of income (the job) goes away, it is much easier to find another part time job making $1k a month. And he still has some income in the meantime. He may even be able to expand his efforts in the other areas to make up the slack.

Obviously if you can combine Guy A and Guy B, then you are really going to be on the fast track to financial independence. But whatever you are doing, and whatever situation you are in, you should seek additional sources of income. It will make you much more resilient.



-The Money Monk

2 week no purchase challenge update!

This post is long overdue, but at the beginning of February I started a '2 week no purchase challenge'. I was spending too much on food so I decided to not buy any for 2 weeks. Because of my interests in preparedness I always have a bunch of food in the house and so it was easy logistically for me to just eat what I already had for those 2 weeks.

It went very well and wasn't altogether difficult. I did have one outing that I paid for at a restaurant, but it was a pre-scheduled event with friends so I consider it more entertainment than food.

This challenge went so well for me and had such a great impact on my food spending for the month that I think I am going to work this type of food spending moratorium into my monthly food budgeting.

Every month I will stop spending any money on food when I reach my predetermined spending limit. From that point on for the rest of the month I will eat only what I already have in the house.

Not only will this help me control my food spending, but it will also help cycle through the food supplies I have stored in my house.




-The Money Monk

Don't just do things CHEAPER, do them BETTER!

A lot of people on a quest for early retirement and financial independence will get very zealous about saving money, at least in the beginning. This drive is a good thing, but if not controlled and directed in a useful manner it can result in a lot of 'cheapness' that isn't necessarily helpful in the long term and may not even really be saving you that much money.

I have written before about the difference between being frugal and being cheap. What's interesting is that most of the people who are super 'cheap' continue to be poor, and everybody can tell too. The true "Mustachians" are often living off just as little money, many times LESS money, yet they appear to be the same as everybody else from the surface. They still have decent houses and decent cars, clothes aren't rags, they still have vacations, etc.

So what is the difference? how can the 'cheapskates' be spending so much time and effort to do everything as cheap as possible and still come out behind the real experts?

Because you need to do things BETTER, not just CHEAPER.

The cheapskate is only concerned on paying less right now. They often buy things simply because they it is way below retail, like at a garage sale, regardless of if it will save them money in the long term, or if they even need it.

The 'mustachian' buys less, but buys smart, so they actually usually have nice stuff that lasts forever and actually works. They can often resell their items for as much as they paid for it, or almost as much.

One example I often think of is people who wash out their Ziplocs. instead of buying expensive plastic bags and going to great and unseemly lengths to reuse them and make them last, buy 1 Tupperware for the same price as a box of Ziplocs and use it for 20 years. No body will think you are a weird cheap hobo for washing it out and reusing it either.

If you look at thrift stores and garage sales you can even get that Tupperware for .50 or so, maybe less. Anything you can put in a Ziploc you can put in a Tupperware.

As a student, i remember one substitute teacher talking about how he stripped his car of all the seats but the drivers seat to save weight and thus gas.  Why do all that work, remove functionality from your car, and look like a crazy person, when instead you can use simply drive less, and use hyper-miling techniques when you do drive and get 20% or more increase in MPG?

So remember, focus on doing things BETTER. not just CHEAPER. You'll save more time and money, and increase your quality of life.





-The Money Monk

Support The Money Monk! And Yourself!

In my quest for financial independence and early retirement I aim to seek out any possible sources of income to take advantage of. I don't want people to just give me money, but there are certain ways to help me out on my goals, if you are interested, that won't cost you anything! One good tactic that I use, (and that you should use too if you have a blog) is to have an Amazon affiliate account.

Now, I know we all are aiming to spend as little as possible, so we should't be buying a bunch of frivolous shit, but even the most frugal among us have to buy SOME things. When you do, Amazon.com is a great place to get it at market price. If you are going to buy something on Amazon anyway, I'd appreciate it if you could use the link in the upper left side of this blog. It won't cost you a penny more, but I will still get a piece of the pie.

just click on the link that says "Buy anything you need from Amazon.com" and then use the site like you normally would.

If you have a blog, put up your own link and let me know! I can't use my own affiliate account, so I will use somebody else's when I have to buy something.

Let's take advantage of this opportunity while it still lasts (before Amazon goes under due to their unsustainable method of operations and razor-thin profit margins!

Thanks!


-The Money Monk

My 2 week No-Purchase Challenge

I spent way too much on food last month so I have given myself a challenge: I am not going to spend any money on food for the first two weeks of this month. Not directly anyway. I will be eating only food that I already have in my house.

One of my interests is preparedness, so that won't be quite as difficult as it seems, and it will serve the dual purpose of rotating through some of my supplies so that I can refresh them.  It will keep me eating decent food that is not expensive (canned veggies, frozen meats, etc).

I will be keeping track of what I use and replacing it on Feb 15th, so while the food won't be free it will keep me from buying junk food, fast food, etc.

We'll see if I can do it!

-The Money Monk

Cash Emergency Fund - Yea or nay?

There is some debate in the personal finance community about the use and utility of emergency funds.

Some people advocate not even having a dedicated emergency fund, and argue instead for relying on various lines of credit for actual emergencies (credit cards, HELOCs, etc). Their arguments are usually that the the need to use emergency funds are mercifully rare, so it's better to have that money working for you in the meantime. And in the event that you do have to use a line of credit, it is available right away, and you can then sell off some stocks or other assets to pay it off but in the meantime that money was at least earning you interest.

If we are talking about somebody with $50k or $100k worth of savings sitting in a band account earning a quarter of a percent, then they are definitely right. While I understand the feeling of security that comes from having that much money on hand, there is no reason to have that kind of earning potential just sitting on the sidelines. Especially since, in the event of a real emergency, you could liquidate most assets in a matter of days or a week or two if you really needed a lot of cash, and having a charge on a credit card or HELOC for a short amount of time like that isn't a big deal.

Where I disagree is with small, actual cash emergency funds.  One of my interests / hobbies is preparedness, and I think there are a lot of good reasons why everybody should have anywhere from $500 to $2000 on hand in actual, physical cash. The supposed interest you would be missing out on is minimal on an amount that small, and the risk of losing it to fire or burglary is also overblown by most people. If you put it in a safe secure spot, it is very unlikely that you would lose that money, even in the event of a burglary. And there are plenty of reasons to have actual cash on hand.

In many times of emergency or disaster, a lot of businesses will only accept cash. In today's technological climate, if there is any economic turbulence, electronic banking /atms are usually the first thing to get disrupted. These problems are usually short-lived, but not being able to buy anything for a week or more could be problematic, so it is useful to have cash on hand.

Having cash is also great for good opportunities, not just disasters. If you are a reseller, picker, or just have an entrepreneurial spirit in general, having cash on hand can allow you to take advantage of a lot of opportunities quickly.

Remember this applies to relatively small amounts of money. I am not suggesting you keep $20K in cash in your house, but having $1000 or so in cash in your possession maximizes the benefits while reducing the downsides to the point of being almost negligible.


For a larger emergency fund I would follow the advice I outlined above: have a line of credit that can be accessed quickly and is equal to 6 months or so of expenses, and don't use it unless you have assets to back it. Then you can use the credit to deal with the expense right away, and pay it off in a few days/weeks when you have liquidated assets (where the rest of your money should be, to make you money).



-The Money Monk

TRACK YOUR SPENDING!

I have never been a big fan of trying to keep a strict budget; my strategy when I really needed to save was always just to NEVER spend money unless I absolutely had to. Then I would track my spending and look back at the past month to see if there were any areas I feel had some fat to trim.

I still feel like this is the best strategy for me personally. Some people may be more comfortable with a strict budget, but not me. I am also self employed so I don't get the exact same amount of money at regular intervals like some people which makes it hard to set aside certain amounts or even percentages at a regular basis.

I just recently had a much better spreadsheet constructed for tracking my finances, and it helps alot. Just knowing that after you spend any money you have to go home and enter it in the spreadsheet is a great psychological help with avoiding spending it in the first place, because you can't hide it from yourself.

If you are just spending money haphazardly without tracking it, a Mcdonald's meal here and there doesn't seem like much. But when you are tracking it and see that you have spent $1000 in the past year on fast food meals, it is easier to skip next time you get the urge to be lazy and not cook for yourself.

Not only that, but tracking income and spending will show your progress, which is very motivating. Day to day changes are usually small and can go unnoticed, but when you can look back over the past few months or years, you can see just far you have come.

So track it!


- The Money Monk

If you will it, it will come - extreme actions get extreme results

I just read two articles on the Mr. Money Mustache forums that really got me thinking.

The first was from a guy who decided to still bike into work even though the temperature was 20 degrees below zero!!

Another was from a guy from in Slovenia who got a parking ticket. Apparently the parking tickets there are shockingly high, about a weeks pay at minimum wage. He decided he still would not go over budget for that month,  even though he was already sticking to a very strict budget with little fat to cut. At the time of the writing he only had 3 days to go, and was running low on food in the house but was determined to make it even if he had to fast

Most people today aren't even willing to skip a meal when their lives are endangered with obesity, or skip a night out when they are about to lose everything to debts. Let alone do it simply to accomplish their goals even though they could afford it.

The discipline and motivation exhibited by these individuals is something you don't see too often these days. If you have this kind of intensity and uncompromising attitude toward ANY goal, it WILL happen. And financial independence is no exception. The biker would have been totally justified in driving to work that day, and nobody would have begrudged him that, even on the MM forums. But instead he stuck to the plan and went "extreme".

The parking ticket recipient could have easily chalked it up as an unfortunate unplanned expense and moved on, but instead he got EXTREME and decided this was not going to negatively affect his goals.

At the end of the year all the people who said these are extreme actions would be right; but they will have less money and will be farther from FI than these two.

Extreme actions get extreme results.

Keep your eyes on the prize!



-The Money Monk

The "Minimum Wage" Problem

Numerous times I have come across frugal bloggers' and commenters' calculations they have done to determine whether something is a worthwhile activity for them to engage in, based solely on the amount of money it would bring them on an hourly basis. Usually 'minimum wage' is chosen as an arbitrary benchmark.

They may say something like "That isn't worth my time because it would take me 5 hours and I would only get 30 bucks, that's not even minimum wage!"

In my opinion, until McDonald's lets you come in and work an hour or two here or there for minimum wage whenever you feel like it, this is not a valid argument. There is no way to automatically convert your free hour(s) into minimum wage pay, so limiting yourself by avoiding anything that 'pays' less than minimum wage is leaving money on the table.

I wrote before about how you should try to fill your time with activities that make you money or are at least cost neutral. So many of the things people spend their time on actually COST money, that switching to activities that bring in money, regardless of how little, is a huge benefit.

The way you should think about it is not in terms of minimum wage, but in terms of opportunity cost. If there is another activity you could do instead that would get you MORE money, then by all means do that instead.

But if there isn't, it doesn't really matter if you could technically get more for an hours work at McDonald's, because you can't just go work an hour there whenever you have free time. But you can spend an hour clipping coupons instead of watching TV, for example, even if that hour of activity only nets you 6 dollars. Remember, that is an after-tax 'earnings' as well.

And if you did that 2 hours a week, at the end of the month you would have $48 more than if you decided not to do that simply because it was 'paying' less than minimum wage.

Of course I would suggest trying to find ways to spend your time that get you much more than that, but don't avoid something solely because it gets you less than minimum wage.


-The Money Monk