Entries Tagged 'Spending' ↓

Buying vs renting is one of the oldest dilemmas around. Financial gurus are very fond of saying something along the lines of “Homeowners get rich while renters stay poor.” Granted, there is much truth in this saying. Part of your house payment every month goes to paying down your mortgage. Add in home appreciation and you’re growing your net worth every month. Why wouldn’t everyone want to own a home then, you ask? Well, here’s a list of reasons off the top of my head:

• Buying costs much more every month ( mortgage + insurance + property taxes )
• Fluctuations in the housing market means your home may lose value short-term
• Repair costs can be significant in the event of a major problem
• Lawn & yardcare costs / extra work
• Energy costs will be significantly more than an apartment

In my current market, renting a nice 2 bedroom apartment runs a bit over a grand every month. To get a home that has similar features ( still have to give up some goodies, such as the gym & pool ) would cost more. Figuring in property taxes and insurance, we’d be looking at right around $1500 per month on a 30 year note - that’s a $500 per month difference. For the time being, we’ve decided to rent rather than buy - and here’s why.

I’m saving $500 every single month - and that’s just for starters. I estimate another $100 at least, in energy savings. That’s $600 per month in my pocket. Add it up, and I’m looking at $7200 per year, free and clear. And of course, if my water heater explodes, I simply call the apartment maintenance staff. They come in and take care of things while I’m off at work, and it doesn’t cost me a penny. I needn’t worry about spending my weekends mowing the lawn, trimming, edging, or shoveling snow in the winter. Granted, I’m not building any equity, and I’m not getting a big tax break due to mortgage interest, but that’s ok. I enjoy having less stress than I would as a homeowner, at least for right now in my life. I’m sure I’ll join the ranks of happy homeowners one day, but it will not be today.

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A post over at Free Money Finance caught my attention recently. The post references an article in Kiplingers Personal Finance Magazine called The Invisible Rich.

The concept is very simple - people live above their means, and it costs them in the future. Many young adults drive more expensive cars than they need, and live in a bit nicer apartment than they probably should. Chances are they’ve got an awfully nice ( and expensive, of course ) television sitting in their living room, and tons of gadgets here and their. Their closet is likely filled with clothes that cost too much as well. These same people complain that they won’t be able to own a home - they wouldn’t be able to save enough for a significant down payment, let alone stroke the big mortgage payment every month.

These people live in stark contrast to ‘the invisible rich’ - the people who simply live below their means, and save money. They have a smaller apartment when they’re younger, they don’t drive fancy cars, and they keep their electronics purchases to a minimum. When they do purchase a home, it’s more modest than many, and the down payment will be sizeable. These are the people who grow their net worth every single month - not because they are ‘rich’ per se, but because they live within their means.

Where do I fall between these two groups of people? Well, I started in the first and I’m transitioning towards the second. I have tons of electronic gadgets; though I have thankfully restrained myself from purchasing a big-screen TV and home theater system. I recently sold a V-8 high-dollar sports car and bought a Honda Accord. My other vehicle is a leased Lincoln Navigator, which will be returned to Lincoln in about a year and a half once the 3-year lease is up. At that time I’ll buy something smaller, and powered by a 4-cylinder engine. Likely a Honda Civic, maybe another Accord, or possibly an Altima Coupe. I still have time, and I’m sure there will be some good, reliable, economic choices available then. Financially speaking, I should buy a used car, but I can’t bring myself to do that anymore. The risk of mechanical failure simply aren’t acceptable to me. If my car fails and I can’t get to work reliably, then I’ll sure wish I bought something newer. And I would never risk my wife in a car that had excessive miles, and I didn’t know the history of.

As far as apartments go, I live in a nice, but not extravagant apartment. I could live in a less expensive place, but it would be too crowded, and in a much less safe area. Again, not a risk I’m willing to take. My furniture is nice, and should last for quite some time. I don’t plan on making any major purchases for the next couple years ( new car aside ) , so I don’t have any big foreseeable expenses. I’m working hard to live more frugally, and put money away each month. When it’s time for me to buy a home, I certainly want to have a sizeable down payment, so I can keep my mortgage very reasonable, and continue to build savings for the future.

How about you - what category do you fit in?

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John Chow made a very hard-hitting point recently, when he decided not to purchase a new Corvette Z06. And I quote -

‘This doesn’t mean I can’t spend $100,000 on a new car. I certainly can and she wouldn’t get mad at me for doing so. However, my financial planning background says $100,000 invested at 12% for 10 years equals $310,584.82, where as the $100,000 car is worth $10,000 in 10 years (if even that).’

That really is a novel way to look at a car. If you’re fortunate enough to be in a situation where you can afford a 100k car ( A Z06 is actually 85k ish if memory serves correctly, but we’ll go with 100k because it’s round ) , then good for you. You should ask yourself though, is the car I’m about to purchase worth $300,000? Chances are, you’ll say no way, it’s not worth nearly that much.  And if that’s the case, you really should rethink that purchase.  Having $300k in the bank is a much wiser financial choice than having a money-burning supercar sitting in your driveway, don’t you think?

I bet you don’t know.  What’s more, I bet you’d be very afraid if you took the time to find out.  Go ahead, look over the past month’s receipts and find out.  Add up your groceries, fast food, dining out, and even the Starbucks or Seattle’s Best coffee that you enjoy.  Add that up, hit total, and feel your jaw drop.  All of us could stand to spend less on food than we currently do.  Where do you start?

• Eat out less - This is the biggest killer to your food budget.  It’s simply cheaper to eat at home - by far!
• Skip the fancy coffee - $4 per cup is brutal - that’s $120/mo if you have one daily.  Go to 7-Eleven and spend $1 instead
• Create a monthly budget - Stick to your food budget each month, even if it means Ramen noodles the last week.  You’ll learn to spend more wisely

What other ideas do you have to save money on food?

I found this gem over at Birds & Bills. Stacy’s sister found a great way to keep herself from spending - she froze her credit card. In a block of ice. This way, whenever she wants to use it, she has to let it thaw for a couple hours. By the time it’s ready to use, she’s probably already realized she doesn’t need whatever it was that she wanted.

• Replace all your light bulbs with fluorescent bulbs.  Fluorescent bulbs are 4-6 times more efficient than regular light bulbs.  Sure, they cost more up front - but they pay for themselves over and over again.  Remember, replace ALL your bulbs.
• Turn off your A/C and use the ceiling fan!  This is one of the biggest wastes of electricity around.
• Weatherstripping.  This keeps all your doors and windows sealed, so if you do have the A/C on, you’re not wasting more energy than you need to.
• Turn off lights and TV’s when you’re not in the room.  I know, I know, do I really need to say that?  Well yes, I probably do.  Pay attention over the next couple days and you’ll see what I mean.

Simple things, to be sure, but we can all use a lower electricity bill, can’t we?  After all, we’re trying to save as much money as we can!