It should be a mere funny coincidence, but it’s not. An article in the Business section of the Washington Post talks about how the new iPhones will cost half what the old ones did and are expected to bring in a new tier of customers. Meanwhile, an op-ed piece in the New York Times excoriates the American people for not saving. We spend too much, it says, unlike our thrifty forebears. I found it ironic that the op-ed piece quotes Ben Franklin more than once as an avatar of thriftiness. Ben was a shrewd businessman, but his thrift came in having a hardworking wife who managed his business affairs. He himself spent decades living it up in the salons of London and Paris on OPM (other people’s money). He liked to tell other people how to live, but did he himself live that way? Not really. True, Ben Franklin was a self-made man and he lived on sparing rations in his early years. But that’s my point. He was willing to sacrifice to make a fortune. But he was not the type of person who made his fortune by saving up money one day at a time for years. He made it by creating businesses that were successful. And then his wife kept the money flowing.
It’s the middle of June now, and half of the people entitled to Stimulus Rebates have received theirs. Did you? Is it spent yet? What did you do with the money? I have spent $400 of mine. I spent $300 on a piece of electronics that I had been planning on buying for about five years. The other $100 was on a friend’s new hardcover book and some DVDs, one of which is a present for someone. Modest enough, you say. Maybe I’ll save the remaining $200.
Meanwhile, I just spent $10,000 that I do not have to get my driveway paved. Cash advance, 3% transaction fee, no interest for over one year. I figure that I saved a minimum of $525 on gravel per year. I’ll probably break even on the driveway, assuming the cost of gravel goes up, after maybe 15 years. Will I actually live in this house for another 15 years? Not according to national statistics. I’ll be long gone before this driveway earns out.
Or will I? A house with a paved driveway is a cut above one with a mere gravel driveway. Whereas asphalt is the basic in a suburb, in the boondocks where I live, it’s a luxury. So let’s say that I get an additional $5,000 on the sale price of my home because I had the driveway paved. That means my investment amortizes after something like 10 years. Or maybe less, depending on the rising price of replacement gravel. Will I still be living here in 10 years? Better odds, but still not good.
In this economy, with so many people strapped for cash (including me) and credit (not including me), I got a very good deal on the paving price. Businesses are hungry for customers. But still, I financed the paving with borrowed money. I leveraged my good credit to get an immediate, no-questions-asked loan on very favorable terms. I have reason to believe that I can pay it all back in the time required. (We waited until a car payment dropped off our monthly nut, plus somebody got a raise.) And for another 3%, I can probably transfer the remaining balance a year from now to another credit card and ride for another year if I need to. And then I can do it again.
So, was my action part and parcel of the folly of Americans who live on credit and who aren’t thrifty? Or was it thrifty because I spent as little money possible now to get what I needed now? At today’s prices?
And here’s another angle to ponder. I had $10,000 in a CD at the bank, and it would have matured and have been available in two weeks with no penalty. So I could have taken savings out of the bank to pay for the driveway. But I didn’t. I feel more comfortable keeping the $10,000 in savings, while taking on $10,000 as debt owed to a credit card. Why? Because it’s hard to save up $10,000 and stick it in a bank. It’s a lot easier to spend $10,000 and then slowly pay it off. And if I suddenly had no income, I could stop paying on the $10,000 debt, and live on the $10,000 savings. And meanwhile, I have a paved driveway and the paving company has been fully paid, which meant that eight men could feed their families or pay their rent this week.. Sounds like a win/win to me.
Finally, lest you think I was extravagant to have my driveway paved at all, consider this: Delivery trucks and rainstorms kept creating enormous potholes in the gravel. Huge ones that cost a lot to repair, in time and effort and in the purchase of new gravel. Meanwhile, the potholes were a lawsuit liability. What if someone broke an axle on their car on my driveway and sued me? Or fell and broke a leg? I’d be out much more than $10,000 when all was said and done. So have I been thrifty after all, by improving my property now and averting the likelihood of future catastrophes?
One thing I know for sure. I’m not living it up in London and Paris on government money.
Wednesday, June 11, 2008
Thursday, June 5, 2008
Trapped in a Mistake
A recent Carolyn Hax syndicated advice column gave an interesting answer to the question of what to do if you hate your job but can’t leave it. She asked the person to consider whether thinking you can’t leave a job is the truth or just a limited view of it.
This is exactly what I realized a while back when I took the time to seriously ask myself why we had had such terrible times with money. Instead of reiterating the usual excuses, “It’s all the fault of the grasping credit card companies,” and “The mortgage lender is gouging us,” I asked myself what actually happened to get us into a bind that lasted for a number of very unpleasant years.
And here’s what I figured out: We couldn’t afford our new house.
It doesn’t take long to realize that you can’t afford your house. Is every month’s mortgage bill taking all your cash? Are you running a balance on your credit cards that you never ran before? Is it impossible to save? Leaving out other possible factors (such as major medical bills or unemployment), the answer probably is that your new house is keeping you poor.
People hate to admit mistakes and that’s what catches us. Having made that mistake, we simply can not accept that we can and should fix it. We dig in and bend all our efforts to keeping that house instead. Yes, in the long term, there are good financial reasons to hang in there. A house is a major capital investment than can pay off big over time. But I’ve often wondered if those good financial reasons ever outweigh the amount of pain caused by being chronically broke and constantly under extreme financial pressure. There’s nothing sacred about a house. It’s just a box to protect you from the elements, and as comedian George Carlin says, “a place to keep your stuff.”
It’s the same with a job. You can quit. There will be consequences, and they should be considered seriously, especially if you might face difficulty finding another job. But we none of us are shackled to our work the way people have been throughout history by feudal systems, indentured servitude, slavery, or the like. Today, a lot of people are facing financial pressure because they bought too much house. But even so, they think they must keep the house. But is keeping a particular house a dire necessity? Or is it simply desirable, for various emotional or social reasons? I can understand a family wanting to stay in a good school district, for instance. But being the poorest person in your excellent school is no fun. So count the real price of staying, not only the supposed benefits.
Friends of mine inherited a share of a house in an affluent neighborhood and debated moving the family to it. But they realized that they could afford to buy the house, but not to live the lifestyle of that neighborhood. So instead they cashed out their share in the house and bought a much more reasonably priced house in a less expensive area. And then had plenty of cash left to furnish their new house comfortably, go on family vacations, and live in financial ease on a daily basis. It was the smart decision.
In the current real estate market, getting out of the trap of a too-expensive house is not easy. There are programs that offer various kinds of assistance, but it has been widely reported that these are difficult to access or to get to work. Still, if the result is a mortgage that has been re-sized to what you can afford, or a house sale that leaves you free and clear of debt, then it’s worth the aggravation and effort.
The idea is not to box yourself in. Not in a job, and not in a box that’s just a place to keep your stuff. Yes, we love our homes, but they shouldn’t own us. When times get tough, whatever the cause, we need to change our limited view of our choices.
This is exactly what I realized a while back when I took the time to seriously ask myself why we had had such terrible times with money. Instead of reiterating the usual excuses, “It’s all the fault of the grasping credit card companies,” and “The mortgage lender is gouging us,” I asked myself what actually happened to get us into a bind that lasted for a number of very unpleasant years.
And here’s what I figured out: We couldn’t afford our new house.
It doesn’t take long to realize that you can’t afford your house. Is every month’s mortgage bill taking all your cash? Are you running a balance on your credit cards that you never ran before? Is it impossible to save? Leaving out other possible factors (such as major medical bills or unemployment), the answer probably is that your new house is keeping you poor.
People hate to admit mistakes and that’s what catches us. Having made that mistake, we simply can not accept that we can and should fix it. We dig in and bend all our efforts to keeping that house instead. Yes, in the long term, there are good financial reasons to hang in there. A house is a major capital investment than can pay off big over time. But I’ve often wondered if those good financial reasons ever outweigh the amount of pain caused by being chronically broke and constantly under extreme financial pressure. There’s nothing sacred about a house. It’s just a box to protect you from the elements, and as comedian George Carlin says, “a place to keep your stuff.”
It’s the same with a job. You can quit. There will be consequences, and they should be considered seriously, especially if you might face difficulty finding another job. But we none of us are shackled to our work the way people have been throughout history by feudal systems, indentured servitude, slavery, or the like. Today, a lot of people are facing financial pressure because they bought too much house. But even so, they think they must keep the house. But is keeping a particular house a dire necessity? Or is it simply desirable, for various emotional or social reasons? I can understand a family wanting to stay in a good school district, for instance. But being the poorest person in your excellent school is no fun. So count the real price of staying, not only the supposed benefits.
Friends of mine inherited a share of a house in an affluent neighborhood and debated moving the family to it. But they realized that they could afford to buy the house, but not to live the lifestyle of that neighborhood. So instead they cashed out their share in the house and bought a much more reasonably priced house in a less expensive area. And then had plenty of cash left to furnish their new house comfortably, go on family vacations, and live in financial ease on a daily basis. It was the smart decision.
In the current real estate market, getting out of the trap of a too-expensive house is not easy. There are programs that offer various kinds of assistance, but it has been widely reported that these are difficult to access or to get to work. Still, if the result is a mortgage that has been re-sized to what you can afford, or a house sale that leaves you free and clear of debt, then it’s worth the aggravation and effort.
The idea is not to box yourself in. Not in a job, and not in a box that’s just a place to keep your stuff. Yes, we love our homes, but they shouldn’t own us. When times get tough, whatever the cause, we need to change our limited view of our choices.
Thursday, May 22, 2008
Why are people homeless?
Why are people homeless? Is it the economy? Bad luck? Illness? A series of stupid decisions? The selfishness of relatives who won’t take them in? The greed of corporations who lay them off from good jobs? Landlords who are quick to evict tenants in order to raise rents even higher?
Friends and I have been debating the situation in Santa Barbara, where homelessness is so bad that the city has 12 overnight parking lot shelters for people reduced to living in their cars. Including one for women only.
It seems that some people in our society have no support system that can come through for them in bad times. Or maybe they are constitutionally unable to get along with others. Otherwise, why is a 67-year-old mother of several grown children living in a car? What’s wrong with this picture?
Homeless people living in cars usually have jobs. But what they don’t have is enough cash in reserve to rent an apartment, or enough steady income to keep it. Shared living situations are the obvious solution for homelessness. They shouldn’t even be so difficult, given that most homeless people have pared down their possessions and thus could easily fit them into one bedroom of a shared home. (Some have more possessions stored with friends, but they’re able to live without them and can continue to do so.) But for various reasons, shared living conditions are pretty much intolerable to many Americans. The successful TV series “Kate and Allie,” in which two divorced women with children shared a New York City brownstone (a town house), ran from 1984 to 1989. But it apparently did not spark a national movement of house-sharing by single mothers. Which is a shame, because blending families to acquire larger and better housing and reduce each family’s costs makes great economic sense.
But can people live together anymore? Today we’re seeing stories about how college students no longer know how to share dorm rooms because they were all raised to have their own enormous rooms at home instead of sharing a bedroom with a sibling. Siblings sharing rooms was an improvement over sharing a bed, which was common for centuries. Today, that’s almost unheard of. The question about adults sharing living space is a real one. Do people know how to share anymore? Yes, we hear about immigrants and gypsies living ten to a room. But if your family got off the boat a century or more ago, are you predisposed to expect vast private living space? Even despite the reality that you cannot afford it?
There is plenty of statistical information available about homelessness. We know that it usually occurs because of health issues or job loss. What interests me most about this particular report is how violently my friends responded to the article about these homeless women in Santa Barbara, a very expensive town in which to live, but one which, nevertheless, they won’t leave. Some said these women were being stupid, that they should move to Nebraska or somewhere else where accommodations are cheaper. Housing in California is historically very expensive, thus making this a situation in which the homeless have very little likelihood of recovering if they stay. Others said the relatives of these women were neglecting their duty. Why else would a mother of three grown children have no couch to sleep on? And all of us showed our fear that homelessness could happen to us.
One of my friends has been homeless, and that friend had the least patience with the woman who kept two big dogs in her car all day. That friend felt that stupid decisions led the woman to an even more stupid life in a car, when presumably the dogs could have gone to a better home, possibly even been sold, thus providing income for the woman (or at least less outlay on dog food) and stability and humane conditions for the dogs. And meanwhile the woman herself is living in an unstable situation under conditions that aren’t good. But another friend pointed out that big dogs sent to shelters are the most likely to be euthanized. Selling one isn’t very likely, either, given the sheer cost of feeding a large dog. The woman would have to give the dogs away, and friends with limited income or living space themselves would find it hard to accept such a gift. But why have two big dogs in the first place?
People make stupid decisions every day (and certainly on the face of it, owning multiple expensive pets is one of them), but don't end up paying for them in this extreme way by losing the very roof over our heads. But we fear it could come to that. Still, do we change anything about our lifestyle, hold back anything in reserve in case of bad times, resist spending up to and over the limit? Not usually. Even the dog issue is increasingly an example of bad judgment. How many people in economic trouble also have multiple pets? Not just one, but many? Where’s the good sense in acquiring them? Where’s the true kindness?
Our country used to be full of miserable little shanties, tiny shacks where poor people lived. Dogs weren’t pets there. They were warning systems and blankets for cold nights who got rewarded with scraps or had to feed themselves by scavenging. Life in shanties was unsafe and unpleasant. But at least people had a roof over their heads. Today, zoning laws have forced most of those shacks to disappear. In most states, you must at least have a trailer and running water and so on, and many localities have banned trailers. So poor people face a very uphill battle to attain housing, because its cost is so disproportionately high compared to their income. But then, most everybody from limited financial circumstances faces this challenge. I'd agree that paying too much for rent was crazy, except that that is exactly what people always do unless they are wealthy. The rent on my first apartment in New York City was more than 50% of my take-home pay, for instance. I’m not even sure why the landlord rented to me, except that I was young, just getting my start, and probably would increase my income soon enough. Which I did. Apartments in New York City are notoriously expensive, and there are no rules about the percentage of income rent can be the way there are about mortgages (not that those rules mattered during the recent real estate greed party, where people bought houses on which they couldn’t even afford to make the first payments). People insist on living under these conditions anyway, because it’s a city of great opportunity. I am not sure why Santa Barbara has a similar hold on Californians.
In discussing the plight of these women, we obviously veered into blaming them. That’s typical of our country, the “can do” nation full of energy and opportunity. We always wonder why people can’t get themselves out of a jam. The question is, are we showing heartlessness by blaming them, or are we trying to show the way out of their fix? Getting rid of the expensive dogs is a fix. Moving to a less expensive locale is a fix. Making nice with friends or relatives who might take you in is a fix. But once life moves you into your car, can you ever move out?
Friends and I have been debating the situation in Santa Barbara, where homelessness is so bad that the city has 12 overnight parking lot shelters for people reduced to living in their cars. Including one for women only.
It seems that some people in our society have no support system that can come through for them in bad times. Or maybe they are constitutionally unable to get along with others. Otherwise, why is a 67-year-old mother of several grown children living in a car? What’s wrong with this picture?
Homeless people living in cars usually have jobs. But what they don’t have is enough cash in reserve to rent an apartment, or enough steady income to keep it. Shared living situations are the obvious solution for homelessness. They shouldn’t even be so difficult, given that most homeless people have pared down their possessions and thus could easily fit them into one bedroom of a shared home. (Some have more possessions stored with friends, but they’re able to live without them and can continue to do so.) But for various reasons, shared living conditions are pretty much intolerable to many Americans. The successful TV series “Kate and Allie,” in which two divorced women with children shared a New York City brownstone (a town house), ran from 1984 to 1989. But it apparently did not spark a national movement of house-sharing by single mothers. Which is a shame, because blending families to acquire larger and better housing and reduce each family’s costs makes great economic sense.
But can people live together anymore? Today we’re seeing stories about how college students no longer know how to share dorm rooms because they were all raised to have their own enormous rooms at home instead of sharing a bedroom with a sibling. Siblings sharing rooms was an improvement over sharing a bed, which was common for centuries. Today, that’s almost unheard of. The question about adults sharing living space is a real one. Do people know how to share anymore? Yes, we hear about immigrants and gypsies living ten to a room. But if your family got off the boat a century or more ago, are you predisposed to expect vast private living space? Even despite the reality that you cannot afford it?
There is plenty of statistical information available about homelessness. We know that it usually occurs because of health issues or job loss. What interests me most about this particular report is how violently my friends responded to the article about these homeless women in Santa Barbara, a very expensive town in which to live, but one which, nevertheless, they won’t leave. Some said these women were being stupid, that they should move to Nebraska or somewhere else where accommodations are cheaper. Housing in California is historically very expensive, thus making this a situation in which the homeless have very little likelihood of recovering if they stay. Others said the relatives of these women were neglecting their duty. Why else would a mother of three grown children have no couch to sleep on? And all of us showed our fear that homelessness could happen to us.
One of my friends has been homeless, and that friend had the least patience with the woman who kept two big dogs in her car all day. That friend felt that stupid decisions led the woman to an even more stupid life in a car, when presumably the dogs could have gone to a better home, possibly even been sold, thus providing income for the woman (or at least less outlay on dog food) and stability and humane conditions for the dogs. And meanwhile the woman herself is living in an unstable situation under conditions that aren’t good. But another friend pointed out that big dogs sent to shelters are the most likely to be euthanized. Selling one isn’t very likely, either, given the sheer cost of feeding a large dog. The woman would have to give the dogs away, and friends with limited income or living space themselves would find it hard to accept such a gift. But why have two big dogs in the first place?
People make stupid decisions every day (and certainly on the face of it, owning multiple expensive pets is one of them), but don't end up paying for them in this extreme way by losing the very roof over our heads. But we fear it could come to that. Still, do we change anything about our lifestyle, hold back anything in reserve in case of bad times, resist spending up to and over the limit? Not usually. Even the dog issue is increasingly an example of bad judgment. How many people in economic trouble also have multiple pets? Not just one, but many? Where’s the good sense in acquiring them? Where’s the true kindness?
Our country used to be full of miserable little shanties, tiny shacks where poor people lived. Dogs weren’t pets there. They were warning systems and blankets for cold nights who got rewarded with scraps or had to feed themselves by scavenging. Life in shanties was unsafe and unpleasant. But at least people had a roof over their heads. Today, zoning laws have forced most of those shacks to disappear. In most states, you must at least have a trailer and running water and so on, and many localities have banned trailers. So poor people face a very uphill battle to attain housing, because its cost is so disproportionately high compared to their income. But then, most everybody from limited financial circumstances faces this challenge. I'd agree that paying too much for rent was crazy, except that that is exactly what people always do unless they are wealthy. The rent on my first apartment in New York City was more than 50% of my take-home pay, for instance. I’m not even sure why the landlord rented to me, except that I was young, just getting my start, and probably would increase my income soon enough. Which I did. Apartments in New York City are notoriously expensive, and there are no rules about the percentage of income rent can be the way there are about mortgages (not that those rules mattered during the recent real estate greed party, where people bought houses on which they couldn’t even afford to make the first payments). People insist on living under these conditions anyway, because it’s a city of great opportunity. I am not sure why Santa Barbara has a similar hold on Californians.
In discussing the plight of these women, we obviously veered into blaming them. That’s typical of our country, the “can do” nation full of energy and opportunity. We always wonder why people can’t get themselves out of a jam. The question is, are we showing heartlessness by blaming them, or are we trying to show the way out of their fix? Getting rid of the expensive dogs is a fix. Moving to a less expensive locale is a fix. Making nice with friends or relatives who might take you in is a fix. But once life moves you into your car, can you ever move out?
Tuesday, May 13, 2008
Cheap Gas Opportunity Cost
Should people drive out of their way by several miles in order to buy cheaper gas? I recently drove 10 miles to get gas that was 22 cents a gallon cheaper than what was available at any of the five gas stations in the town closest to me. (Which is a 12 mile drive to begin with. I live in the boondocks.) By pump price comparison, I saved $3.05 on the gas I bought. Since I get 22 miles per gallon, I figure I spent $1.65 in gas to get this savings. Was saving a net of $1.40 worth the additional wear and tear on my vehicle? Or worth the extra time it took me to drive somewhere I otherwise had no reason to go?
Here are a couple of ways to calculate it. The Internal Revenue Service allows self-employed persons to deduct mileage costs. So let’s suppose I went to that gas station on business. How much could I have deducted? In late November, 2007, the IRS issued the 2008 standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. These figures include insurance, maintenance, and depreciation, operating costs that many of us do not consider when driving a little out of our way to obtain a bargain:
• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.
(In a moment of irony, considering how medical costs keep going up, the IRS actually dropped the rate for medical miles from last year. But let’s just talk business miles. ) At some point later this year, the IRS might be pressured to raise this number as not realistically reflecting rising gas prices. It has happened before, so it might happen again. Meanwhile, take 50.5 cents per mile as a plausible figure for the cost of running my car. Multiply it by the 10 extra miles I drove, and the cost to my car was $5.05, not the $1.65 in straight gasoline cost I came up with above. And it far exceeds the dollar savings at the pump. In fact, by driving 10 miles out of my way to obtain cheaper gasoline, I just lost $3.65. Ouch.
The second part of the calculation is how much time I lost by stretching out this mundane errand, time out of my life that can never be regained. Let’s say it took me a half an hour, including time spent pumping the gas as well as driving to and from the gas station. I won’t include the time I wasted going inside and looking for a newspaper, which I gave up on when I saw a line at the cash register. And I was lucky, because I only had to wait behind one car before pulling up to a pump.
What is my time worth? There are a lot of ways to calculate this one. But let’s suppose that instead of being a writer who sometimes barely clears a profit each year, I am a person who is employed. And then let’s further suppose that if I hadn’t spent a half an hour getting gasoline, I would have had the opportunity to be paid for an additional half an hour at my job. A big local employer is Wal-Mart, which claims to pay $10.40 per hour on average. Part-time employees don’t get that much, but the $10.40 figure is easily halved to show that if I could have worked an extra half hour, I could have earned an additional $5.20. Far more than the imagined gas savings of $1.40, and also more than the cost of wear and tear on my car.
To be fair, to figure my true half hour earnings, I’d also have to subtract the commuting cost of getting to my Wal-Mart job, which in my case would be 34 miles round trip, and prorate it against the number of hours I worked that day. But to keep the calculation simple, I’ll just consider the gross cost of working. Using the IRS figures, it costs me $17.17 merely to show up at Wal-Mart to work, or $85.85 per five-day work week, or $171 per two weeks, which if I drove nowhere else would be the time between fills at the gas station, or 340 miles. Do I want to add another $5.05, the cost of getting the supposedly cheaper gas, to my commuting cost? No, but it’s not much by comparison to the commuting cost itself. And that is why Americans will continue to drive to work, because there aren’t many alternatives and even Wal-Mart wages will cover the outlay for the gas. Still, paying more for supposedly cheaper gas makes no sense.
Now let’s say that I earn roughly $50 per hour or $104,000 per year. Lots of families and individuals earn that much. It still costs me the same to get the gas. But compared to a gross weekly income of $2,000, the difference in the gas price is too small a percentage to be worth calculating. What the well-paid individual needs to consider is how to avoid wasting time seeking a phantom bargain. But then, so does the poorly paid person, since my calculations above clearly show that driving 10 miles to save 22 cents per gallon on gas does not save any money at all.
Clear as mud?
There’s one other angle to consider. The reason I drove the extra 10 miles today was not just to test this theory. It was also because I really could not face the newest high numbers at the local gas stations. I needed to feel that I had outsmarted the international oil machine. But all I did was spend my money differently by putting more miles on my car and denying myself a half-hour of working time. Time out of my life. Think about your time, not just the money, when you consider what a bargain costs.
Here are a couple of ways to calculate it. The Internal Revenue Service allows self-employed persons to deduct mileage costs. So let’s suppose I went to that gas station on business. How much could I have deducted? In late November, 2007, the IRS issued the 2008 standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. These figures include insurance, maintenance, and depreciation, operating costs that many of us do not consider when driving a little out of our way to obtain a bargain:
• 50.5 cents per mile for business miles driven;
• 19 cents per mile driven for medical or moving purposes; and
• 14 cents per mile driven in service of charitable organizations.
(In a moment of irony, considering how medical costs keep going up, the IRS actually dropped the rate for medical miles from last year. But let’s just talk business miles. ) At some point later this year, the IRS might be pressured to raise this number as not realistically reflecting rising gas prices. It has happened before, so it might happen again. Meanwhile, take 50.5 cents per mile as a plausible figure for the cost of running my car. Multiply it by the 10 extra miles I drove, and the cost to my car was $5.05, not the $1.65 in straight gasoline cost I came up with above. And it far exceeds the dollar savings at the pump. In fact, by driving 10 miles out of my way to obtain cheaper gasoline, I just lost $3.65. Ouch.
The second part of the calculation is how much time I lost by stretching out this mundane errand, time out of my life that can never be regained. Let’s say it took me a half an hour, including time spent pumping the gas as well as driving to and from the gas station. I won’t include the time I wasted going inside and looking for a newspaper, which I gave up on when I saw a line at the cash register. And I was lucky, because I only had to wait behind one car before pulling up to a pump.
What is my time worth? There are a lot of ways to calculate this one. But let’s suppose that instead of being a writer who sometimes barely clears a profit each year, I am a person who is employed. And then let’s further suppose that if I hadn’t spent a half an hour getting gasoline, I would have had the opportunity to be paid for an additional half an hour at my job. A big local employer is Wal-Mart, which claims to pay $10.40 per hour on average. Part-time employees don’t get that much, but the $10.40 figure is easily halved to show that if I could have worked an extra half hour, I could have earned an additional $5.20. Far more than the imagined gas savings of $1.40, and also more than the cost of wear and tear on my car.
To be fair, to figure my true half hour earnings, I’d also have to subtract the commuting cost of getting to my Wal-Mart job, which in my case would be 34 miles round trip, and prorate it against the number of hours I worked that day. But to keep the calculation simple, I’ll just consider the gross cost of working. Using the IRS figures, it costs me $17.17 merely to show up at Wal-Mart to work, or $85.85 per five-day work week, or $171 per two weeks, which if I drove nowhere else would be the time between fills at the gas station, or 340 miles. Do I want to add another $5.05, the cost of getting the supposedly cheaper gas, to my commuting cost? No, but it’s not much by comparison to the commuting cost itself. And that is why Americans will continue to drive to work, because there aren’t many alternatives and even Wal-Mart wages will cover the outlay for the gas. Still, paying more for supposedly cheaper gas makes no sense.
Now let’s say that I earn roughly $50 per hour or $104,000 per year. Lots of families and individuals earn that much. It still costs me the same to get the gas. But compared to a gross weekly income of $2,000, the difference in the gas price is too small a percentage to be worth calculating. What the well-paid individual needs to consider is how to avoid wasting time seeking a phantom bargain. But then, so does the poorly paid person, since my calculations above clearly show that driving 10 miles to save 22 cents per gallon on gas does not save any money at all.
Clear as mud?
There’s one other angle to consider. The reason I drove the extra 10 miles today was not just to test this theory. It was also because I really could not face the newest high numbers at the local gas stations. I needed to feel that I had outsmarted the international oil machine. But all I did was spend my money differently by putting more miles on my car and denying myself a half-hour of working time. Time out of my life. Think about your time, not just the money, when you consider what a bargain costs.
Wednesday, April 30, 2008
Save Your Teeth
There’s a cable TV show in which cosmetic dentistry is the major method the host uses to turn discouraged, old-before-their-time people into hotties. The show promises to make them look at least ten years younger. True, these people get a small wardrobe makeover, a bunch of new makeup techniques, maybe a skin peel or Botox, and a really good haircut. It makes for fun television to watch these parts of the show. But the big boost in their confidence actually comes because a skilled dentist fixes their teeth. And they end up looking younger because they are smiling and happy. Like Adrian Grenier, pictured above.Without a toothy smile, most Americans are ashamed of their appearance. This country has the best teeth in the world, so if you don’t have good teeth, you are visibly labeling yourself as poor and possibly self-abusing. Or foreign. I knew a girl who was very pretty until she smiled and revealed her terrible buck teeth. Even as an adult with plenty of discretionary income, she did not get the braces she needed. Although she had lived in the US all her life, her family was from the UK, and she still maintained an English culture aversion to the US standard of straight, attractive teeth. This aspect of her appearance simply was not important to her. She stigmatized herself by refusing to adhere to the standards of the middle-class society in which she lived. Last I heard of her she had moved to the backwoods. So I guess she fits in now, because having bad teeth is downwardly mobile in this country.
Most people understand this. I’ve known a couple writers who spent their entire advance and more from their first books on having their teeth straightened. They wore braces for years as adults in their thirties. They knew that if they achieved any kind of writing success, they’d need to make public appearances at bookstores and even on television. And they wanted to look at least as good as any other middle-class American. Smart move.
You may wonder why I am talking about teeth. This blog is about personal finance, isn’t it? Yes. But teeth are often neglected when people are too short of cash to cover more than the necessities of life. You can skip going to doctors and it probably won’t hurt you unless you happen to be sick. But if you skip going to dentists, it shows. And worse, it shows the first time you open your mouth. Dental hygiene simply is not a good idea to put at the bottom of your list if you are short of cash.
There are alternatives that many people do not know about. There are schools of dentistry that perform supervised, very low cost work. That’s how we found our family dentist, when he was still in school and hit it off with a relative who had very low income and made the smart choice of finding inexpensive dental care. There also are dentists in some free clinics. There are free dental screenings in major urban areas. State medicaid programs include free dental care, depending on your state. And so on. And if dental care is not available free or cheaply near you, you can find dentists who are willing to deal with patients who don’t have insurance or a lot of cash. Dentists who will allow patients to pay over a long period of time. These dentists are not rare. Another relative needed significant dental work—a case of putting dental work last because of having no cash—and found a dentist who happily did the work and accepted monthly payments for up to a year with no interest. After a year, the dentist charged interest on whatever balance was left. This is very decent and not at all unusual these days. Anyone who has gotten braces for their child knows that no sane dentist expects you to fork over $4,000 or more in one day. They have you sign a contract, and you make regular payments during the period when your child is making regular visits, and soon it’s all paid for. Not financially painful at all. The pay-over-time style of dentistry is available for complex dental work, not just routine care. But don’t let it get to that. Having just one tooth worked on that has been seriously neglected could easily cost you $600 or more.
No matter how poor you think you are, you can find care for your teeth. I urge you to do so, because your teeth go to your job interviews, your loan interviews, your everyday encounters with people of all sorts. And here in the US, a nice toothy smile is a standard. Fortunately, baseline dental care is as simple as using a toothbrush regularly. Toothpaste helps, of course. If you use them consistently, you will stave off most severe dental issues. But not all. So visit a dentist regularly. Save your teeth.
An update: Not only are free dental clinics to be found, but they actively try to find customers. We just received a notice for one that was in a Valpak envelope full of coupons, the type that all households get mailed. So even if you're not the type to find the flyer at the public library (which I saw just after the initial discussion that sparked this topic), the flyer will find you. No excuses, folks.
Sunday, April 13, 2008
Mortgages, Part 2: Gimme Shelter
I was thinking about how easy it is for me to hand out financial advice—or at least it seems that way. In reality, I’m prone to the same kinds of mistakes that we all make. And the same stupid impulses, too. Which is why I have a seemingly inexhaustible list of financial wrong turns to talk about. I’ve made most of them myself.
Take mortgages, for instance. Remember the conventional wisdom that you should buy as much house as you can afford? The theory is that it’ll be a stretch for the first couple of years, but then your income will improve, and the mortgage payment will begin to seem like peanuts. The popular but unconventional version of this until the subprime crash was to buy a house in a rising market with the intention of refinancing the mortgage as its market value increased and created free equity. All well and good, in both scenarios, as long as employment is steady and you’re getting raises. And as long as the housing market is going up. Sadly, incomes for the American middle class are not increasing; in fact, they have slightly decreased in recent years, yet the cost of living has gone up. And we all know that the housing bubble finally burst, and real estate is losing value and hasn’t bottomed out yet.
So much for both conventional wisdom and unconventional plotting and scheming. The action taken was the same: we bought houses we could not afford and we knew it at the time. Well, we sort of did. Until I bought a house, I knew nothing about the real cost of owning one. Only now, many years later, does it occur to me that I could have researched the topic. Libraries and bookstores have plenty of books that explain all aspects of home ownership. And today the Internet offers easy access to a wide range of real estate advice. But I went into it blindly, as so many people do, taking a risk and hoping it would turn out all right. It almost didn’t.
Home ownership isn’t just the mortgage payment, after all. There are many other costs on top of it, such as real estate taxes, fire and ambulance fees, hazard and flood insurance, homeowners’ association fees, and more. And there are lawnmowers to buy, and cars needed for transportation, and furniture and appliances to purchase, maintain, or replace. I never thought of those things before buying more house than I could afford. Sadly, it was much later that I heard Suze Orman talk about the necessity of doing a trial run and living as if you already have a mortgage before you actually take the plunge. It’s a great idea. You put away the monthly mortgage payment that you believe you can afford each month for three to six months, plus an additional 30% for other ordinary house-related expenses, and never touch it to live. Then you take stock and see if you are hurting financially on a day-to-day basis. Can you pay your bills? Is there leftover money for fun? Can you still cover life’s inevitable unexpected expenses? Or is paying the proposed mortgage and its attendant other costs a miserable stretch? Suze has come up with a great way to test. Too bad I never heard of it when I was looking to buy my first house.
You live and you learn. Or do you? I can’t say that my current house makes any more sense than my previous one. Why? Oh, this time the math was done in advance. On a month-to-month basis, there’s enough cash coming in to support the household. But there’s something else to take into account that nobody ever talks about. Taking out a 30-year fixed mortgage is a huge risk when continued employment for 30 years is no longer the typical American paradigm.
Yeah, I know. It’s really a huge joke. All the people who got ARMs (adjustable rate mortgages) are being told they were acting in a risky manner. But if fact, unless you have the money in an FDIC insured bank to pay off your mortgage entirely, then taking out a mortgage of any duration or on any terms is a huge risk. Yes, the subprime mortgage market dupes and scammers are the first ones to be hurting. But even at this moment, someone is being laid off from a good job that paid the mortgage, and will never be able to find a job that paid as well. And eventually, in a year or two or three, that person is going to lose that house. Without ever doing anything more risky than getting a job and then getting a house with a conventional fixed-rate mortgage.
So, what can we do to guard against the catastrophe of facing foreclosure? Not a lot. Always have a new career in the offing? That takes a lot of energy. Keep enough savings in FDIC insured bank accounts to pay the mortgage for a couple of years while you find a new good job or launch a new career? Maybe that will work, since the value of such money in relation to the mortgage payment does not change, unlike the value of stocks. But that means buying a house well under what you could afford in the first place, so you have extra income to put aside in savings each month. Are most of us doing this? No. The US savings rate is hovering around 1% these days, and was even in negative numbers in 2006.
So expect to sell the house if you lose your job. Expect to sell it if anything significant changes in your personal or financial situation. Don't get so attached to a house that you let it drag you into a crisis. A house may be the American dream, but it's just shelter. It should shield you from harsh weather, not keep you sleepless at night wondering how you will pay the mortgage.
Take mortgages, for instance. Remember the conventional wisdom that you should buy as much house as you can afford? The theory is that it’ll be a stretch for the first couple of years, but then your income will improve, and the mortgage payment will begin to seem like peanuts. The popular but unconventional version of this until the subprime crash was to buy a house in a rising market with the intention of refinancing the mortgage as its market value increased and created free equity. All well and good, in both scenarios, as long as employment is steady and you’re getting raises. And as long as the housing market is going up. Sadly, incomes for the American middle class are not increasing; in fact, they have slightly decreased in recent years, yet the cost of living has gone up. And we all know that the housing bubble finally burst, and real estate is losing value and hasn’t bottomed out yet.
So much for both conventional wisdom and unconventional plotting and scheming. The action taken was the same: we bought houses we could not afford and we knew it at the time. Well, we sort of did. Until I bought a house, I knew nothing about the real cost of owning one. Only now, many years later, does it occur to me that I could have researched the topic. Libraries and bookstores have plenty of books that explain all aspects of home ownership. And today the Internet offers easy access to a wide range of real estate advice. But I went into it blindly, as so many people do, taking a risk and hoping it would turn out all right. It almost didn’t.
Home ownership isn’t just the mortgage payment, after all. There are many other costs on top of it, such as real estate taxes, fire and ambulance fees, hazard and flood insurance, homeowners’ association fees, and more. And there are lawnmowers to buy, and cars needed for transportation, and furniture and appliances to purchase, maintain, or replace. I never thought of those things before buying more house than I could afford. Sadly, it was much later that I heard Suze Orman talk about the necessity of doing a trial run and living as if you already have a mortgage before you actually take the plunge. It’s a great idea. You put away the monthly mortgage payment that you believe you can afford each month for three to six months, plus an additional 30% for other ordinary house-related expenses, and never touch it to live. Then you take stock and see if you are hurting financially on a day-to-day basis. Can you pay your bills? Is there leftover money for fun? Can you still cover life’s inevitable unexpected expenses? Or is paying the proposed mortgage and its attendant other costs a miserable stretch? Suze has come up with a great way to test. Too bad I never heard of it when I was looking to buy my first house.
You live and you learn. Or do you? I can’t say that my current house makes any more sense than my previous one. Why? Oh, this time the math was done in advance. On a month-to-month basis, there’s enough cash coming in to support the household. But there’s something else to take into account that nobody ever talks about. Taking out a 30-year fixed mortgage is a huge risk when continued employment for 30 years is no longer the typical American paradigm.
Yeah, I know. It’s really a huge joke. All the people who got ARMs (adjustable rate mortgages) are being told they were acting in a risky manner. But if fact, unless you have the money in an FDIC insured bank to pay off your mortgage entirely, then taking out a mortgage of any duration or on any terms is a huge risk. Yes, the subprime mortgage market dupes and scammers are the first ones to be hurting. But even at this moment, someone is being laid off from a good job that paid the mortgage, and will never be able to find a job that paid as well. And eventually, in a year or two or three, that person is going to lose that house. Without ever doing anything more risky than getting a job and then getting a house with a conventional fixed-rate mortgage.
So, what can we do to guard against the catastrophe of facing foreclosure? Not a lot. Always have a new career in the offing? That takes a lot of energy. Keep enough savings in FDIC insured bank accounts to pay the mortgage for a couple of years while you find a new good job or launch a new career? Maybe that will work, since the value of such money in relation to the mortgage payment does not change, unlike the value of stocks. But that means buying a house well under what you could afford in the first place, so you have extra income to put aside in savings each month. Are most of us doing this? No. The US savings rate is hovering around 1% these days, and was even in negative numbers in 2006.
So expect to sell the house if you lose your job. Expect to sell it if anything significant changes in your personal or financial situation. Don't get so attached to a house that you let it drag you into a crisis. A house may be the American dream, but it's just shelter. It should shield you from harsh weather, not keep you sleepless at night wondering how you will pay the mortgage.
Tuesday, April 8, 2008
Unconventional Wisdom About Home Mortgage Contracts
We think we know a lot more about mortgages today than we used to. The subprime mortgage collapse has been covered in the media exhaustively, and we’re all watching the ripples fan out across the global economy. But we don’t know the full extent of the damage yet. We wonder if our government will bail out individual homeowners and stop cascading foreclosures. Or will the situation get worse and lead to record numbers of bankruptcies and new additions to the ranks of the homeless? Unfortunately, we don’t know.
Meanwhile, here are some things I do know and you should know, too: You don’t sign a contract that you don’t understand. You don’t sign a contract that isn’t the deal you agreed to. And you absolutely do not sign a contract based on lies about your financial situation.
You don’t sign a contract that you don’t understand. I’m sorry, truly, for the elderly people who have been defrauded by confidence men whose intention all along was to steal their homes. But please. By the time you are 70 years old, you have a pretty good idea of what your smarts are. Your house is usually your main asset. Take care of it by exercising some reasonable shrewdness. Take care of yourself by putting your affairs into the hands of genuinely trustworthy relatives or a conservator if you sense that your grasp of your finances isn’t what it used to be. As you get old, you know things are going to become more difficult for you. So prepare. Then the confidence men can’t get at you.
That goes for all you people who don’t speak English, too. This country was built on immigrants and my father was one and I have nothing against people leaving a lousy situation in their original country and coming here to better themselves. But would you please learn the language? For your own sake? You should never sign a contract that you do not understand. Never. Get a neutral party—not the friend of the guy who’s selling you the mortgage deal—to translate for you at least. Don’t just sign documents blindly.
And by the way, this includes native-born Americans who can’t be bothered to learn their own language. Being ignorant is not a permanent condition or a constitutional right. You can educate yourself to understand every word in a contract, and you should. You can also bring trusted friends with you to advocate for you when there is a document to sign. It’s not you against the world. It’s you against you if you choose to remain ignorant.
You don’t sign a contract that isn’t the deal you agreed to. We’ve all heard about surprises at the table when you’re closing on a house, and we’ve all had moments when we’ve had to accede to a deal that isn’t what we expected, negotiate for something different, or walk away. Guess what? The most desperate person always gets the worst of the bargain. Don’t be the most desperate person. If the contract doesn’t spell out the exact deal you thought you were getting, don’t sign it. Fight for your original deal or a better one, or walk away. So you don’t get the house. So what? At least you won’t have sold yourself into financial slavery on credit terms you have no hope of meeting.
You absolutely do not sign a contract based on lies about your financial situation. Yes, I know you are desperate to get this house or this money. Yes, I know you come from a crooked country where everything is done by bribes and corruption. Yes, I know your life experience has made you believe that much about our financial system is dishonest. And yes, I know you really intend to make good on this loan you haven’t the income or assets to pay off. But you are being dishonest if you sign a contract based on lies about your finances. You are committing fraud. Forget about the other guys at the table and think about you. When you knowingly engage in a financial transaction based on lies, you are the con man. You are the criminal. We’re hearing a lot of sob stories right now from people who knew better but turned a blind eye to honor. Don’t be one of those people. And if you were once, don’t be again.
You may wonder if this advice is closing the barn door after the horse has escaped, or whatever the metaphor is. But the truth is that we usually get many opportunities to be foolish, to be ignorant, and to be crooked in our lives. Sometimes, as in this recent crazy real estate bubble, we get what amount to engraved invitations. But we always have choices. We can refuse to act foolishly, we can refuse to get rooked, and we can refuse to be cheaters ourselves.
Meanwhile, here are some things I do know and you should know, too: You don’t sign a contract that you don’t understand. You don’t sign a contract that isn’t the deal you agreed to. And you absolutely do not sign a contract based on lies about your financial situation.
You don’t sign a contract that you don’t understand. I’m sorry, truly, for the elderly people who have been defrauded by confidence men whose intention all along was to steal their homes. But please. By the time you are 70 years old, you have a pretty good idea of what your smarts are. Your house is usually your main asset. Take care of it by exercising some reasonable shrewdness. Take care of yourself by putting your affairs into the hands of genuinely trustworthy relatives or a conservator if you sense that your grasp of your finances isn’t what it used to be. As you get old, you know things are going to become more difficult for you. So prepare. Then the confidence men can’t get at you.
That goes for all you people who don’t speak English, too. This country was built on immigrants and my father was one and I have nothing against people leaving a lousy situation in their original country and coming here to better themselves. But would you please learn the language? For your own sake? You should never sign a contract that you do not understand. Never. Get a neutral party—not the friend of the guy who’s selling you the mortgage deal—to translate for you at least. Don’t just sign documents blindly.
And by the way, this includes native-born Americans who can’t be bothered to learn their own language. Being ignorant is not a permanent condition or a constitutional right. You can educate yourself to understand every word in a contract, and you should. You can also bring trusted friends with you to advocate for you when there is a document to sign. It’s not you against the world. It’s you against you if you choose to remain ignorant.
You don’t sign a contract that isn’t the deal you agreed to. We’ve all heard about surprises at the table when you’re closing on a house, and we’ve all had moments when we’ve had to accede to a deal that isn’t what we expected, negotiate for something different, or walk away. Guess what? The most desperate person always gets the worst of the bargain. Don’t be the most desperate person. If the contract doesn’t spell out the exact deal you thought you were getting, don’t sign it. Fight for your original deal or a better one, or walk away. So you don’t get the house. So what? At least you won’t have sold yourself into financial slavery on credit terms you have no hope of meeting.
You absolutely do not sign a contract based on lies about your financial situation. Yes, I know you are desperate to get this house or this money. Yes, I know you come from a crooked country where everything is done by bribes and corruption. Yes, I know your life experience has made you believe that much about our financial system is dishonest. And yes, I know you really intend to make good on this loan you haven’t the income or assets to pay off. But you are being dishonest if you sign a contract based on lies about your finances. You are committing fraud. Forget about the other guys at the table and think about you. When you knowingly engage in a financial transaction based on lies, you are the con man. You are the criminal. We’re hearing a lot of sob stories right now from people who knew better but turned a blind eye to honor. Don’t be one of those people. And if you were once, don’t be again.
You may wonder if this advice is closing the barn door after the horse has escaped, or whatever the metaphor is. But the truth is that we usually get many opportunities to be foolish, to be ignorant, and to be crooked in our lives. Sometimes, as in this recent crazy real estate bubble, we get what amount to engraved invitations. But we always have choices. We can refuse to act foolishly, we can refuse to get rooked, and we can refuse to be cheaters ourselves.
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