How Not to Support Spending

What’s one way that you can stretch your spending beyond your means? By financing it. What used to be bought entirely with cash has turned into longer and longer payment schemes. From 10 to 30 and even longer mortgages, and ever increasing auto loan durations, it’s one more way for cash strapped modern families whose wages haven’t grown to keep up with their neighbours.

I can understand doing it for housing – it’s generally a productive asset that will increase in value or at least hold its own. Many may say cars are a necessity for modern life, so that’s fine, but do try to be frugal with how luxurious a car you get. What’s inexcusable though is financing every aspect of your life including luxury spending and consumption. That’s just asking for debt trouble. Live by the old mantra that if you have to go into debt to buy a depreciating asset, it’s probably not a good decision.

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How to Buy a Car (From an Expert)

I somehow got subscribed to the daily Quora mailing list with interesting questions and answers. The one for today was about how to get a good deal when buying a car. Pasted here is the entirety of the response:

Let me make your life easy (I own a few dealerships). It takes 5 minutes. Once you know exactly what kind of car you want, simply go to the dealer, a salesmen will greet you. Tell him you’d like to go inside and talk about the car your interested in. Go inside, tell him you’re comparing with two other brands but you like this one the best. Tell him, I’d like to buy this car now if you can match the other dealers’ offers which is $100 over invoice. Tell him kindly, “Please let your manager know my offer is $100 over invoice, which is what the other dealers offered me, and if he accepts, I’d like to see a copy of the invoice (which they must do legally – you’re welcome), and then we can wrap this up now and I’ll buy you lunch for your great service.” That’s it. Unless it’s a specialty car, it will go down just like that. If you’re paying cash, it’s a done deal 99.9%. If that doesn’t work, call the next town over, tell them you were offered $100 over invoice but you don’t like how they do business so want to go to the competitor. If they agree (which they will because the car biz is super competitive) ask them to email a copy of the invoice. Once they do, call them and tell them you’re on your way. Side note- best time to buy a car is New Years Eve, 2 hours before closing using this method….just tell them “Come on guys, let’s wrap this up quickly so we can all go spend time with our families.” It’s not as hard as people think. Believe me, the salesman just wants to sell a car, he cares more about closing the deals than anything else because if he doesn’t, he doesn’t get paid. Another note, the faster the deal, the better. And be POLITE, good salesman ARE expert salespeople and they’ll rip your head off without you knowing if you’re an ass. Oh, and all your friends who think they’re experts…are not! Even if you buy the car for 50 cents they’ll tell you that you’ve been screwed, lol. Buy a decent car for $100 over invoice and go home happy. And don’t over spend on cars, they all have four wheels….just get a good running car. The more you spend, the more they depreciate and they’re all worth $2500 in 10–15 years. This is advice for new cars. Used cars….offer 3k less than the asking price OR 500 over wholesale book whichever is less (use blue book online between trade-in & private party value)(pay cash)…also 5 minutes. But only do these if you’re ready to buy in that moment. Test drive all first. If you don’t have cash, get pre-approved at a credit union and take the letter to the dealer to solidify your seriousness. If you have bad credit….it’s the bank that will screw you, not the dealer. Also with bad credit, the dealer had to pay bank fees so they can’t come down as much on the price. Bank fees range from $500–$3000! depending on how bad your credit is. My thumb is tired now…good luck!

All I can say is that these recommendations make sense. I usually go through Costco Auto which gives a pre-fixed price, but direct bargaining with a dealer can work as well. Go in with a no nonsense attitude, have an anchoring price, and come prepared with a preapproved loan (or cash). That takes away the multiple possible ways that the dealer can screw you over. Be prepared to walk away if the dealer can’t meet your pre-established price though.

It also helps to go in at certain times of the year (4th of July sale, Christmas sale) at the end of the season when sales reps are trying to meet quotas. Also what can help is buying a model that is not that popular that the dealer is trying to move off the lot. Sedans right now are losing ground relative to SUVs and light trucks, so it’s a good time to scoop up one and go against the grain.

Of course, going for a slightly used car instead of a new one can save you money, as this post shows.

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Broke at Half A Million

Marketwatch ran an article about how one can still be broke despite earning half a million a year. Preposterous, you say? They do show the breakdown of sample spending for the rich family compared to an average family with $80,000 in yearly income.

Let’s break this down in an itemized manner:

  1. 401k contributions: a good thing, especially given the tax bracket
  2. Taxes: unavoidable, but the rich family should be looking to diversify more into legal tax shelters like mortgage interest deductions and maximizing HSAs
  3. Child care: I can’t explain this discrepancy. Does the wealthy family choose to use a premium service as opposed to the McDonalds of child care? Does that really provide any benefit? Both families have the same number of kids, so there’s no reason for spending to be any different. And besides, those in the know opt for live in Hispanic au-pairs so their kids can get a head start in life
  4. Food: both families eat way too much. I spend $40 per week on groceries (that includes household items like detergent) for myself. Multiply that by 4 gives you $8480 for a whole year. Even if you spend a bit more on eating out, you will still may just top out at what the average family spends. What does the rich family get by spending more? More calories? Whole grain organic quinoa?
  5. Housing: this is a big opportunity to cut back by living in a smaller house for less. A bigger house just adds to the housework, not necessarily truly improving happiness. Likewise, this allows for a corresponding reduction in property tax and insurance
  6. Gas: no reason that this needs to be different between the two families
  7. Life insurance: just self-insure by saving more. This is one of the biggest cons out there
  8. Clothes: do you really need to wear better clothes than the average family? If anything, standing out more in this era of Occupy Wall Street just makes you more of a target
  9. Children’s lessons: I’ll admit, probably a good investment. If anything, Asian families in the Bay Area spend much more in this category
  10. Charity: cut back on this, especially if you’re living on the edge
  11. Debt repayment: probably unavoidable, but you can save on this by studying overseas or in state schools
  12. Miscellaneous: I don’t even know what this means

Notice how I didn’t include vacations on this list? Generally, I will allow one budget busting “splurge”, either in clothing, house, car, or vacations. Among those, the one that gives the most lasting happiness is vacations.

 

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Your Personal Inflation Rate May Vary

Inflation? The official figures have total CPI for September (measured year over year) as 2.1%, roughly at the Fed’s preferred target. However, for individuals, each household’s perception of true inflation is different, thanks to a different mix of goods and services consumed. As Morningstar wrote: “If consumers rent, use a lot of medical care, and use a lot of energy, inflation could look pretty nasty, as much as 4% or 5%. If someone uses a lot of food, buys a lot of apparel, uses a lot of imported goods, and owns their own home, their inflation rate could be closer to 1%. So one-size inflation rates aren’t always very helpful or descriptive on an individual level.”

Here’s the accompanying graph:

As you can see, inflation rates on goods are generally low. To avoid being hit by high inflation, we should seek to limit our spending in the categories of energy, housing, medical care, and transportation (closely linked to energy).

My book on wealth has many tips on how to save in each of these areas. Some highlights include:

  • Live close to where you work to minimize the commute
  • Consider biking or walking to work
  • Stick to being a one car household, with that one car being a cheap used one
  • Bundle up with more layers instead of turning up the heat
  • Buy a house you can afford, move, or shack up with roommates
  • Stay healthy and practice good habits to minimize sudden unexpected medical bills

The last one can be hard to do, which is why I’m working on a book on health as a follow-up to my Evidence Based Approach to Wealth. Stay tuned.

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Data: Recession Led to Shift Towards Minimalism

In my book on wealth, I espouse minimalism as the correct way to live life. It seems that many people around the world are starting to come around to that view. Take this article from the Guardian as evidence. The gist is that in the current environment with low interest rates and pent up demand from years of belt tightening, consumers should be flinging their wallets wide open.

On the face of it, the economic superpower that is the American consumer should be having a party. Low interest rates and unemployment rates, low oil prices, a high stock market, healthy property prices – nothing it would seem, to put off doing what comes most naturally to them – shopping.

Yet they’re stubbornly refusing to do it – or at least refusing to do it in predictable ways – leaving consumer experts to wonder, as fashion bible Women’s Wear Daily recently did, if the consumer psyche, “bombarded by digital messages, stressed financially and overwrought emotionally”, has “finally exploded”.

That’s the party line. Consumers, it is thought, have abandoned existing brands and are infatuated with the new, which retailers are failing to provide.

“The recession was the first step toward the complete shift in shopping,” says Yarrow. “Consumers are more wary and self-protective about finances, and they’ve never dominated the market the way they do today. They’re informed and wary, and determined to be in control.”

The unpredictability has caused chaos for retailers, which have seen their power over consumers begin to slip away. “Technology means they can shop however and whenever they want, or they can shop all over the world, and that’s why we see retailers collapsing and relying completely on price reductions,” Yarrow said.

“It’s taking retailers forever to realise that when people go shopping they want to see new things all the time. This is what technology has done to our brains. We want a lot more excitement and product turnover in our lives. If we don’t see new product, we won’t go there any more.”

But really, what’s happening is that consumers are finally realizing that buying all that stuff, whether it was spurred by advertising, impulse, or keeping up with the Joneses, didn’t really make them happier. Instead, they’re choosing to spend less, make existing products (which work fine, mind you) last longer. After all, there are so many other aspects of life (rent, medical bills, tuition) that are rising faster than incomes. There has to be a give from somewhere and discretionary purchases have taken the hit.

At the same time, people are spending more time and money on experiences, whether that’s a vacation, continued learning opportunity, sporting events, or dining out with friends. These are things that add lasting happiness.

But there are other factors feeding into consumers’ shattered psyches. For many consumers buying “stuff” just isn’t what it used to be. People are looking toward more “experiential” spending – holidays, concerts, plays – experiences that they can then share on social media.

Laurent Vernhes, co-founder and CEO of Tablethotels, a consumer website that specialises in high-end travel, told the Guardian “the more jaded you are the more you will seek experiential travel and beyond what you know.” And it’s not just holidaymakers – business people, too, want experiences.

This trend doesn’t seem to be abating. Instead, the children of the Great Recession who grow up may continue to live the frugal lives that were instilled in them during a time of scarcity.

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