How Do You Guys Do It? Part II

January 25, 2013

 

All the money she's saving on cream cheese, she's blowing on haircuts.

All the money she’s saving on cream cheese, she’s blowing on haircuts.

Welcome to the latest installment in our series on how to avoid being poor – by adopting some of the easy and painless techniques we already did. Last time, we wrote about costs that provide negligible benefits, stuff like smoking and drinking. If you missed it, we said it’s dumb to ingest things that cost you money and compromise your health. Which either makes us sanctimonious, or richer than the people who think we’re sanctimonious. One, the other or both. We’re not sure, we can’t hear you over the endless cascade of silver dollars collecting on our kitchen floor (tiled with that $11-a-square-foot brown travertine medallion mosaic stuff, which can get really loud.)

Today, something additive instead of subtractive. It’s easy to tell you what not to do.

Leverage your time. If you’re going to be fanatical about anything in your financial life, let it be this.

We make fun of him weekly in this space, but that contradictory fat man Trent Hamm at The Simple Dollar deserves every last brickbat we throw his way. But he’s not the only one guilty of the practice of encouraging people to waste their precious time calculating returns that end up saving you far less than minimum wage. After hundreds of thousands of years of evolution, humans still don’t have an instinctive grasp on the idea of raw numbers being less important than those same numbers modified with respect to time.

What we mean is this: Would you like $100,000?

You’re going to answer yes, if you’re operating under the implicit assumption that we’re going to immediately hand you $100,000 in some negotiable instruments. Cash, a giant novelty check, whatever.

Okay, would you like $100,000 if you had to work for it for a year? The job is nothing awful. You’re not going to have to give foot massages to that fat actress on that TV show, or anything like that. Air-conditioned office, 9-to-5 workday, 2 weeks’ vacation, bagels in the break room every Monday, no ugly surprises.

Most of you presumably said yes, but a significant handful said no, why would I take a pay cut just to comply with the terms of Control Your Cash’s dopey hypothetical exercise?

How about $100,000 for 20 years of volunteering at a soup kitch—alright, you see where we’re going with this. Any commodity vital to existence that you take in (and in the case of money, give out) – food, water, whatever – has to be expressed in terms of time for it to have any meaning. Why? Because we’re mortal. The clock is always ticking. If you made it this far into the post you’re already that many minutes closer to death, and for what? We don’t want to waste your time, so let’s expand a little more on the importance of looking at dollars netted versus time expended.

An hour spent clipping coupons is a feel-good exercise, not a serious attempt to increase your wealth. Divide the penultimate line on your grocery bill (“You saved “$4.33 today, Smart Shopper”) by the time you spent going over your mailbox flyer with a jeweler’s loupe and an X-Acto knife, and it can be depressing. Don’t even get us started on the wisdom of receiving alerts from Gas Buddy. The reward is only worth the effort rendered if you think your time means nothing. It doesn’t. Rich people value their time. If that manifests itself as impatience on occasion, have sympathy. Those rich people have more important things to do. Warren Buffett may live in an old and modest house, but you can bet he takes a private jet everywhere. Does he do it because he wants to flaunt his wealth? Of course not. Hardly anyone can see him, and private jets don’t attract a lot of attention anyway, unless you happen to be hanging out at executive airports and general aviation facilities. Buffett flies a private jet because he doesn’t want to waste his time getting to the airport 2 hours early, taking his laptop out of its bag, or ensuring that his leave-in conditioner is in an approved bottle of less than 3 ounces.

When we say to be aware of what you’re spending your time on in lieu of spending your money, don’t go overboard. It doesn’t mean that every activity in your day has to have some economic justification. Watching TV is what you do after you’ve had a long day and just need to crash on the couch for a while. It earns you $0/hour, and that’s fine. Same goes for learning guitar, if that’s your thing, or trying to fix a leaky toilet. It’s when you’re doing a financially specious activity that you should step back and ask what it’s really costing you. For instance, cataloguing your 1000 used DVDs. Writing descriptions and taking photos of every single one so you can sell them on eBay. That’s an intensive project with miniscule rewards. Just spend 3 minutes putting them in a box, then drive them to your local library. And enjoy the time you saved.

Next up: Putting that time to worthwhile use.

Filed Under: Capitalism, Economics, Finance Tagged With: , ,

Don’t Drown In Sunk Costs

January 23, 2013
This activity makes no sense. Unless the guy in the Oxfords is placing the penny down to see what cheap soul picks it up.

This activity makes no sense. Unless the guy in the Oxfords is placing the penny down to see which cheap soul picks it up.

 

It’s amazing how many people will congratulate themselves for such money-saving machinations as calling the cable or phone company to get their monthly bills reduced by a buck or two, yet won’t expend similar effort to save themselves tens of thousands. Here’s an example:

You borrowed $200,000 to finance your house 5 years ago at 6.57%, after putting 20% down. Should you refinance?

Yes.

30-year rates are now 3.47%, 15-year rates 2.84%.

Your balance should now be $187,124.51. (That’s right. After 5 years, 94% of your balance remains. Pretty impressive, huh? Sorry, but this is how interest works. It’s why you should be a lender.)

You can pay 6.57% on the $187,124.51 for the next 25 years, continuing to make monthly $1,273.36 payments. But if you refinanced, you’d pay:

$1,277.90 a month for the next 15 years. For an extra 4½ bucks a month, you could burn your mortgage a decade quicker. Would that be worth it?

Depends on how much refinancing costs are.

We’re assuming that your credit is good. If your credit isn’t good, refer to page 33 in Control Your Cash: Making Money Make Sense and treat consumer debt like the hantavirus that it is. If you’re carrying balances on your credit cards, balances that you pay the minimum on and don’t expect to pay off for years, dig deeper. You’re an individual, not a government. You can’t do this indefinitely, and better you endure brief sharp pain than enduring dull pain. In fact, you shouldn’t even be wasting your time reading blog posts. Go out and get a second job, and stop spending money beyond the essentials. Once you’ve done that, and you’ve eliminated your consumer debt, come back.

(Good. With those folks out of the way we can get down to business.)

So what are the costs of refinancing, anyway?

The largest expense is the loan origination fee, which will almost always be 1% of the new loan. $1,871.24.

Appraisal fee. The lender doesn’t want to refinance your lean-to at Windsor Castle prices. Call it another $500.

Inspection fee. Even if it is a lean-to, it needs to be habitable. Pencil in another $225 or so. You’ll also need a pest inspection. Maybe $50 if you live somewhere like North Dakota, $75 if you’re in Florida, The Palmetto Bug State. You might also need a flood certification, $75, to prove you live (or don’t) in a flood zone.

There are also credit reporting fees at around $150. Plus recording – formalizing and registering the transaction documents with your county assessor’s office or whomever. Call that $35.

Depending on which state you live in, a reprobate lawyer might need to get his piece of the action. $750 for attorney review, because reading a series of boilerplate documents requires someone with an advanced degree and a goodly amount of self-loathing.

There may be other fees too. When you ask your lender to quote a rate, make sure they include a breakdown of all closing costs, including the costs charged by any closing agent. Compare the interest rates of any “no-cost” refinance to one with costs. Lenders will usually increase the loan’s interest rate by 25-50 basis points to cover the costs not collected up front.

Tally it up, and that’s $3,681 for the privilege of paying another $230,022 over the next 15 years, instead of paying $382,008 over the next 25 years. An investment that pays 41-fold, maybe minus a few multiples for the accelerated payoff. Hopefully you don’t need to be convinced further that that’s a fantastic deal.

Last week we wrote Part I of how we manage to remain liquid, comfortable, and reasonably affluent in Year 5, maybe 6 of The Recession That Politicians Wouldn’t Let Wither. Some people thanked us for and were inspired by the first-person perspective. Others decried us as out-of-touch and haughty with no understanding of the world beneath us, Mitt Romneys in a sea of 47-percenters.

The secret to building wealth is that you don’t need to shoot superlatively high. Sure, Sergey Brin and Larry Page beat you to the idea of creating a search engine that could metastasize into an entire online ecosystem, where hundreds of millions of people willingly share personal information that can be monetized. Brin and Page are billionaires several times over, while you aren’t and never will be unless Obamanian/Bernankite hyperinflation becomes reality. Does that mean you should look for the next cosmically resonant opportunity instead, which simple probability dictates that you’ll probably fail at?

NO. There are other choices beyond aiming that high, and aiming small. Taking a few hours to save $152,000 over the period of a home loan is what people with a wealthy mindset do. The ones who don’t, don’t because it:

  • Is more involved than just picking up the phone and calling Verizon Wireless’s billing department.
  • Involves using the services of other people, some of them experts who charge fairly for those services.
  • Requires a little math.
  • Might result in nothing. (If there were less of a difference between current mortgage rates and what you’d borrowed at originally, for instance.)

Cursing the darkness might make you feel briefly better, but that’s not what we do here at Control Your Cash. Instead, we prefer to take aggressive, intensive steps to significantly increasing revenue (or significantly reducing expenses.) If you’re going to chase pennies, chase them tens of thousands at a time.

Filed Under: Estate Planning, Finance, Real Estate Tagged With: , , ,

How Do You Guys Do It? Part I

January 18, 2013
We're so rich, we can hire people to portray us in our featured photos.

We’re so rich, we can hire people to portray us in our featured photos.

 

We try to keep things nice and impersonal on here, for several reasons. The primary one is that it’s 2013, and a resourceful person with patience and a vendetta can find out more about you than you might be comfortable disclosing, so why make it easier for them?

But without sharing too much with you, we’ve managed to position ourselves so that we don’t have to work. And believe us, we don’t. At least not at conventional jobs with a boss, and a workplace, and a regular schedule, and a break room (“This yogurt is Michelle’s. Please do not touch”), and a sexual harassment policy and an annual employee picnic. We can live off our passive income, and have no desire to go back to the real world. Those of you who have regular jobs and enjoy them, we might not understand you, but we salute you. Thanks for keeping our gross domestic product high.

We wouldn’t give up this lifestyle for anything. We get to travel extensively, live in a nice house, drive serviceable if not ostentatious cars, and never have to worry about creditors taking any of it away. So how do we do it?

That’s easy: we sponge off the government!

Kidding. Sure, there was some serendipity along the way, but the vast majority of our success can be credited to not doing stupid things. We could write a book (heck, we did) about all the stupid things you could build wealth by avoiding. Here are a few of the biggest culprits in this, the inaugural post in an irregular series:

Tobacco, alcohol, drugs. As best we can tell, the median price of a deck of smokes is around $7. We’re not going to do the math for you, as any idiot can multiply $7 by 365, but the good news for those of you who are scarfing down a pack a day is that you’re probably keeping the weight off. No wait, on further examination a lot of you are fat. Also, any weight you’re failing to gain is that of healthy pink lung tissue, and why would you want to cultivate that?

A “gram” of pot costs $15 to $20, given that your dealer probably isn’t arranging it on a scale calibrated in grams, nor operating under the purview of your state’s Bureau of Weights and Measures. That’ll get you one or two joints, but hey, none of you are serious pot smokers, right? Just once in a while, just to get a good buzz, I hardly ever smoke, only when there’s no beer around, it’s better for you than alcohol you know, etc.

So yeah. If you can put it in your mouth and emits smoke, it’s keeping you from being as rich as you’d otherwise be. Pointing that out hardly counts as thought.

Okay, fine. But you expect me to give up alcohol, too? That’s crazy talk.

We don’t “expect” you to give up anything. We wrote about this on Money Funk a couple years back and the commenters told us we were being judgmental, which is ludicrous. As if pointing out that alcohol purveyors expect money in exchange for their sweet brown liquids is somehow heresy.

The major booze trade organization’s own estimates say it’s close to a $400 billion industry. Divide that into the number of people who live in the United States (subtracting the kids and the people on dialysis, of course) and then try to determine which side of average your own alcohol expenses are on.

The catcalls are starting already, we can hear them. Fine, you need it to relax. Some of us don’t. You can’t imagine being in a social setting and not drinking. We don’t dispute that, but some of us have broader imaginations.

You know what’s funny? Even The Cheapest Man on the Planet, the guy who would rather do indoor craft projects 30 nights in a row with construction paper he dug out of his neighbor’s garbage than go to a movie once a month, can’t bring himself to say that drinking is about as unnecessary as expenses get. And it’s not as if our hero is some socially well-adjusted extrovert, either.

Education. “The Greatest Investment You Can Make”. An utter lie, and maybe the more we repeat this the faster it’ll sink in. Why is it a lie? Because formal college education is not uniform. Here’s where people love to cite studies showing that people with bachelor’s degrees earn more than high school dropouts, and people with advanced degrees earn more still.

Amassing college credits, without respect to what subject they’re in, is like consuming calories without respect to what food they’re coming from. That Bachelor of Arts in comparative literature will benefit you even less than eating a diet consisting exclusively of chocolate will. At least the chocolate doesn’t have to be financed to the tune of tens of thousands of dollars, nor does it take 4 years to eat.

The arts in general: bad, at least financially speaking. (Last we checked, while several universities promise significant non-financial rewards, their admissions offices still expect payment in legal tender.) Math and science: good. Marvel at the works of Degas and Milton all you want, but if you must, don’t spend years and (borrowed) money for the privilege. Because it’s not a privilege, it’s an expense.

That doesn’t mean you’ll be ready to take on the world with a high school diploma. You probably won’t. But you can learn a marketable, worthwhile trade without committing huge money nor huge time to the endeavor. Those studies referenced above? For some reason, they never specifically compare liberal arts graduates to steelworkers or machinists. To some effete people, there’s a stigma to working with your hands. To us, there’s a stigma to incurring pointless debt that you’ll take decades to pay off. Ceteris paribus, the $52,000-a-year electrician with a contractor’s license is a better human being than the $30,000-a-year retail clerk who can parse Noam Chomsky’s theory of universal grammar.

That wasn’t so hard, was it? None of that stuff is painful, or even inconvenient. It’s not like we’re telling you to go without sleeping or shaving. But it’s a start. More next time.

Filed Under: Education, Entrepreneurship, Estate Planning, Finance Tagged With:
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