Fortunately, I don't have a car that I can trade in. A fuel efficient vehicle has always been cool with me.
I'm not as concerned about the government bailing out the auto industry as I am about individuals making potentially bad financial decisions in order to take advantage of a coupon.
In the long run, this could end up costing consumers. Most people are probably better off holding on to their clunker if it's paid for and runs well.
This reminds me of the time when people justified trading in their SUVs for an expensive hybrid to save on gas. It wasn't that long ago. Even if gas prices stayed at $4 per gallon, which they haven't, it'd take some people over 20 years to recoup the cost of buying a new hybrid.
On the plus side, more fuel efficient vehicles are better for the environment.
Rent is my largest expense. It increased when I moved out of my former roommate's house. However, the additional cost of $225 is worth it to live on my own. Although I live in an area with a fairly high cost of living, my apartment is very reasonable. It's only about 2 miles away from my job, so I take the bus to work which saves me money on gas and car insurance. Reducing the size of my carbon footprint is a pretty cool bonus too.
"Fixed" expenses must be carefully managed. They're often a hassle to reduce. You can refinance your car if you owe less than it's worth. How many people aren't underwater on their vehicle? Should your landlord refuse to lower your rent, you'll have to move in order to save money. How annoying is that?
It's also easy to stash away savings when your fixed expenses are relatively low. If you want to save up for a down payment on a house or to replace your living room furniture, you just cut back on [fill in vice here].
You're absolutely right in that people should focus on the expenses that are draining their bank accounts. But I have to admit, I scrimp on the paper towels as well.
Student loans are unsecured in that there is no collateral supporting the loan. The US backing is a loan guarantee to the lender to induce them to lend to a (usually) impoverished student at a very low rate. The guarantee simply means if the student defaults, the the government will pay off the loan. (The gov't doesn't want to pay off many loans, so rarely are these loans discharged.)
Rob Cockerham over at cockeyed.com does a great series of scientific "experiments". One set involved eating out every single meal for one month, and then spend one month eating every single meal prepared at home. He compared the time spent, cost, and weight gain. It makes for enjoyable reading (and there are data in spreadsheets for you fellow nubmer-geeks):
Now, Rob was still a single guy at this point - so his eating at home menu included top ramen and other pre-packaged timesavers. Still he tried to cook too.
The month of eating out he spent a total of $622.43 ($20.08/day) including $34.55 in tips. Data is on the Mar28 page.
The big surprise, he says, was how long it took to eat out -- it was almost impossible to get food in under 8 min when eating out.
I'm surprised he didn't gain or lose any weight but stayed the same across the two months.
However, Rob concluded that it was way more fun to eat out. Given the description of what he ate at home (lots of tuna pasta) I can only guess that eating out tasted better too.
Being a better cook definitely would have helped improve the eating at home experience.
Should have changed the rules to "Not so bad jobs that upper middle class yuppies had to 'endure' for one summer when they were 16 years old." Meanwhile, in the rest of America...
I agree that there is nothing wrong with having a nice home and nice car, but if the cost of those things are giving you stress then there needs to be some adjustment. It's all about striking a balance, and I don't think it is worthwhile for someone to eat noodles everyday and skimping on toilet paper just to afford a very expensive car that he or she cannot comfortably afford, but I understand everyone's preference is different.
Also another point is that saving strategies such as renegotiating your rent or refinancing your mortgage do not reduce your living standards at all. You would still be in your home, but it is just a little cheaper.
Remember, we own our money, not the other way around. The number one priority people should have is to live a comfortable and fulfilling life, not saving money for the sake of saving money. The reason we save is to be able to afford to live better. If a nice car and a nice home are important to me, I shouldn't be judged on that preference.
It's certainly true that the big expense are where the money is. Saving 10% off your rent is likely to save you a lot more money than saving 50% off your fitness center membership, lawn care service, or subscription to the local paper.
On the other hand, spending your money where it gives you the most value has always been my central message. If, after careful consideration, you decide that a new $30,000 car every two years is the way to maximize your satisfaction, go for it. (Personally, I'd rather have the extra $439,000 I'd end up with if I buy just one $10,000 car and make it last 20 years. But that's just me.)
Two other points:
1) Most people's biggest expense is actually taxes. People forget that--it's hard to cut your taxes without cutting your income, and most people just automatically figure their budget in after-tax dollars. But it's worth remembering that taxes are (for most people) actually more money than rent or the mortgage. For one thing, it makes a big difference if you're trying to figure out if you can live off less money--the drop in the tax expense provides a much bigger cushion than you'd imagine if your income drops.
2) It's a mistake to think of debt repayment as an expense. Properly speaking, only the interest is a current expense. The principle payment is an internal transfer, no different from moving the money from a checking account to a savings account. I talked about that in an article a while back called Debt repayment is not an expense.
We moved and bought a house in a small city for less than a lot of people spend on a car. It takes a whole lot of taxi rides to add up to the price of buying, maintaining, repairing and fueling a car, so we never bought one.
Cutting back on the lattes is a good step in the right direction towards only spending money on what you really value, but it's hard to retire on the money you save there alone.
Leaving Toronto for the middle of nowhere and buying only a house we could afford in cash was the best financial decision we ever made. It was instrumental in creating financial freedom.
My husband and I currently live in a 1 bedroom (crappy) apartment in Florida. It costs us $650/month with no utilities. Our lease is up at the end of July, at which time our rent would increase to $850/month (I think it's because there are so many people needing apartments now that they've been foreclosed on). We're having a baby at around the same time, and to move to a decent 2 bedroom apt within a reasonable distance of hubby's work would cost us well over $1000/month.
After we heard about this $8000 refund thing, we started casually looking at houses. Next week we are closing on an $80,000, 1200 sq foot, 3 bedroom, 2 bath, beautiful house. Our 30 year fixed mortgage = $700/month (including property taxes!) We used an FHA loan with 3.5% down to buy the house.
No one can tell me that we're not being frugal when we'll be saving money every month AND getting back more than our down payment come tax time next year.
To add to my previous post, my apartment complex in Mountain View is managed by a country-wide corporation, and when I talked to the apartment manager, it seemed as if she was unable to lower the rent without talking to corporate first (or maybe she is just unwilling to do it for me).
Also, although they will automatically transfer my lease to a month-to-month, there's an extra $300 per month they will charge for it.
My apartment is on the top floor of the complex (it's pretty much the tallest building in the area), and they claimed that the rent (with the increase) they offered is "market price" because of that. Does a top floor apartment really fetch $300-$400 more? I doubt it.
I was lucky enough to interview at IngDirect when they were still a quite young entity here in the US. This was in their treasury department and the people were frankly, brilliant, and I respect them even more as they didn't hire me, Haha!
What is interesting to note, they were interviewing me because of my experience within the mortgage backed securities market, and at the time were getting more heavily into that area, and ING, as far as I can tell has not needed to take a big write down Of course that was 5 years ago, so they might have stopped buying whole loans as they made their own loans with their own underwriting critera.
What is also interesting, IngDirect was started in Canada first, with its notoriously strict banking regulations.
One of my favorite sites is www.foodwishes.com run by Chef John. He gives 5 minute cooking videos that are both humorous, quick and quite good. He does videos on about.com as well. I have been cooking since before I was legally able to work but absolutely enjoy his cooking shows.
You guys are so ridiculous. NetSpend is the best option for those "underbanked" people like me! and it's great!
They don't even do a credit check because they know that poor people like me is having a hard time getting a bank account! so you people shut up!
I have had good success with the $9 fare club; maybe 6 RT FLL-LGA and 2 RT to DC. It is not complicated - you just have to jump on it quickly and book normally (while logged in) with the dates indicated. The taxes are not Spirit's doing, they are regular standard gov't fees. It is great if you have flexibility.
I am not sure if I would consider most student loans to be un-secured given that many are backed by the US government in one form or another. In addition, you are not allowed to discharge your student loans except in exceptional hardship circumstances. In addition, if it is backed by the US government, you are not allowed to discharge it. It is important point to understand.
To get really obscure, most large banks look at funding as both secured and unsecured. A large credit card bank for example has an unsecured desk that purchases and sells fed funds, issues CD's and issued commercial paper.
The secured desk issues collateralized paper like asset backed securities backed by your credit card receivable, auto loan and yes, mortgage.
In Toronto, there are some large supermarkets and department stores (in Housewares) that provide free cooking lessons by excellent chefs on weekdays. They cook enough to make a very small but delicious meal for everyone present, and they help people to learn to cook at home at the same time. Well worth attending if you are free during the day.
My colleague was a nutcase. She sang to herself, wrote curses and talked about UFOs. But she seemed very sane at times so it freaked me out and I left the job.
Since this has come up a couple of times, I thought I ought to clear up some issues here. (All the following applies to the United States. The situation will be completely different in other countries.)
First, it's never illegal to refuse to accept money that you think might be counterfeit. In fact, it's the only sensible thing to do--if you accept it, you lose: you can't pass it on (passing counterfeit money is a crime) and nobody is going to replace it with good money.
Second, it's entirely legal to insist that payment be made in some specific form--almost any form you want--during the transaction. You can say "No $50s or $100s." You can say, "Exact change only." You can say "Checks only" (my apartment office does, so they're not in the position of having large sums of cash in the office on the day that rent is due). Those are all common, but you can legally make any restrictions you want how how people pay you. You could insist that people pay in quarters, or in $2 bills--or in anything except quarters or $2 bills. You'd probably lose some customers, but it would be perfectly legal.
This all follows from the fact that you're not required to do business with any particular customer, so refusing to serve a guy who wants to pay with a $100 bill is no different from refusing to serve a guy who's not wearing shoes or who's smoking a stinky cigar or who's talking on a cell phone.
The only place where any of this gets at all tricky is when someone offers cash to settle a debt. The "legal tender" verbage on bank notes dates from the days when some money was backed by gold or silver and other money wasn't. The legal tender laws said that you couldn't insist on customers paying with actual gold or silver: if they offered payment in "lawful money" of the United States, you had to take it. (But only, of course, for an actual debt--if the transaction hadn't occured yet, there wasn't any debt. As part of the transaction you could establish any payment terms you wanted. You could insist on payment in beaver pelts, if you wanted.) The law was changed in 1974 and you can once again write contracts that require payment in actual gold or silver.
If there's a debt, and if the debt is in dollars, then the debtor can insist that you accept payment in dollars. However, you are entirely within your rights to insist that the dollars be genuine. You can also insist that the payment be made in reasonable form, place, and manner. If someone who owes you a large sum of money stops you on the street and offers to settle the debt with a wheelbarrel full of $1 bills, you can safely refuse to accept the money without losing your right to collect. (Just possibly you might lose the right to impose late fees for the period between when he offered you the wheelbarrel full of cash and some time a day or two later when you're willing to accept payment at your office or at the bank.)
It's generally bad business, of course, to refuse to take your customer's money--but businesses are in a better position to deal with this risk than their customers. If they large volumes of business in cash, they can give their cashiers the ultraviolet lights and magnetic ink detectors that will let them check the bills they receive. But the ordinary guy on the street doesn't have such tools. He's forced to rely on the security features described above--which is why I think it's perfectly reasonable for him to start refusing to accept old bills. The guy who has old bills can easily enough take them to his bank, which can verify their authenticity and replace them with new bills.
Fortunately, I don't have a car that I can trade in. A fuel efficient vehicle has always been cool with me.
I'm not as concerned about the government bailing out the auto industry as I am about individuals making potentially bad financial decisions in order to take advantage of a coupon.
In the long run, this could end up costing consumers. Most people are probably better off holding on to their clunker if it's paid for and runs well.
This reminds me of the time when people justified trading in their SUVs for an expensive hybrid to save on gas. It wasn't that long ago. Even if gas prices stayed at $4 per gallon, which they haven't, it'd take some people over 20 years to recoup the cost of buying a new hybrid.
On the plus side, more fuel efficient vehicles are better for the environment.
...me as I drive used Camry's that get 35-40 mpg depending on how well I am doing with my hypermiling.
It won't help the poor or lower middle class. It will help the upper middle & rich as per normal.
typical feds. blowing money on feel-good programs.
Interesting article. Thanks for sharing.
You've gone too gar when you invite guests and they're all miserable because you refuse to turn on the AC to save money.
Rent is my largest expense. It increased when I moved out of my former roommate's house. However, the additional cost of $225 is worth it to live on my own. Although I live in an area with a fairly high cost of living, my apartment is very reasonable. It's only about 2 miles away from my job, so I take the bus to work which saves me money on gas and car insurance. Reducing the size of my carbon footprint is a pretty cool bonus too.
"Fixed" expenses must be carefully managed. They're often a hassle to reduce. You can refinance your car if you owe less than it's worth. How many people aren't underwater on their vehicle? Should your landlord refuse to lower your rent, you'll have to move in order to save money. How annoying is that?
It's also easy to stash away savings when your fixed expenses are relatively low. If you want to save up for a down payment on a house or to replace your living room furniture, you just cut back on [fill in vice here].
You're absolutely right in that people should focus on the expenses that are draining their bank accounts. But I have to admit, I scrimp on the paper towels as well.
Student loans are unsecured in that there is no collateral supporting the loan. The US backing is a loan guarantee to the lender to induce them to lend to a (usually) impoverished student at a very low rate. The guarantee simply means if the student defaults, the the government will pay off the loan. (The gov't doesn't want to pay off many loans, so rarely are these loans discharged.)
Rob Cockerham over at cockeyed.com does a great series of scientific "experiments". One set involved eating out every single meal for one month, and then spend one month eating every single meal prepared at home. He compared the time spent, cost, and weight gain. It makes for enjoyable reading (and there are data in spreadsheets for you fellow nubmer-geeks):
http://www.cockeyed.com/science/eating_out/mar1.html
http://www.cockeyed.com/science/eating_in/feb1.html
Now, Rob was still a single guy at this point - so his eating at home menu included top ramen and other pre-packaged timesavers. Still he tried to cook too.
The month of eating at home, he spent $335 on food and drink, or $11.55 per day, including some booze. He went shopping 17 times and spent an average of 32 min cooking each day. Cleaning up added an avg 6.5 min per day.
Data: http://www.cockeyed.com/science/eating_in/feb_store_table.html
http://www.cockeyed.com/science/eating_in/feb_timetable.html
The month of eating out he spent a total of $622.43 ($20.08/day) including $34.55 in tips. Data is on the Mar28 page.
The big surprise, he says, was how long it took to eat out -- it was almost impossible to get food in under 8 min when eating out.
I'm surprised he didn't gain or lose any weight but stayed the same across the two months.
However, Rob concluded that it was way more fun to eat out. Given the description of what he ate at home (lots of tuna pasta) I can only guess that eating out tasted better too.
Being a better cook definitely would have helped improve the eating at home experience.
Should have changed the rules to "Not so bad jobs that upper middle class yuppies had to 'endure' for one summer when they were 16 years old." Meanwhile, in the rest of America...
I agree that there is nothing wrong with having a nice home and nice car, but if the cost of those things are giving you stress then there needs to be some adjustment. It's all about striking a balance, and I don't think it is worthwhile for someone to eat noodles everyday and skimping on toilet paper just to afford a very expensive car that he or she cannot comfortably afford, but I understand everyone's preference is different.
Also another point is that saving strategies such as renegotiating your rent or refinancing your mortgage do not reduce your living standards at all. You would still be in your home, but it is just a little cheaper.
I agree with Philip Brewer.
Remember, we own our money, not the other way around. The number one priority people should have is to live a comfortable and fulfilling life, not saving money for the sake of saving money. The reason we save is to be able to afford to live better. If a nice car and a nice home are important to me, I shouldn't be judged on that preference.
It's certainly true that the big expense are where the money is. Saving 10% off your rent is likely to save you a lot more money than saving 50% off your fitness center membership, lawn care service, or subscription to the local paper.
On the other hand, spending your money where it gives you the most value has always been my central message. If, after careful consideration, you decide that a new $30,000 car every two years is the way to maximize your satisfaction, go for it. (Personally, I'd rather have the extra $439,000 I'd end up with if I buy just one $10,000 car and make it last 20 years. But that's just me.)
Two other points:
1) Most people's biggest expense is actually taxes. People forget that--it's hard to cut your taxes without cutting your income, and most people just automatically figure their budget in after-tax dollars. But it's worth remembering that taxes are (for most people) actually more money than rent or the mortgage. For one thing, it makes a big difference if you're trying to figure out if you can live off less money--the drop in the tax expense provides a much bigger cushion than you'd imagine if your income drops.
2) It's a mistake to think of debt repayment as an expense. Properly speaking, only the interest is a current expense. The principle payment is an internal transfer, no different from moving the money from a checking account to a savings account. I talked about that in an article a while back called Debt repayment is not an expense.
We moved and bought a house in a small city for less than a lot of people spend on a car. It takes a whole lot of taxi rides to add up to the price of buying, maintaining, repairing and fueling a car, so we never bought one.
Cutting back on the lattes is a good step in the right direction towards only spending money on what you really value, but it's hard to retire on the money you save there alone.
Leaving Toronto for the middle of nowhere and buying only a house we could afford in cash was the best financial decision we ever made. It was instrumental in creating financial freedom.
A nice post and well put. I totally agree with you in dealing with the biggest debts first.
My husband and I currently live in a 1 bedroom (crappy) apartment in Florida. It costs us $650/month with no utilities. Our lease is up at the end of July, at which time our rent would increase to $850/month (I think it's because there are so many people needing apartments now that they've been foreclosed on). We're having a baby at around the same time, and to move to a decent 2 bedroom apt within a reasonable distance of hubby's work would cost us well over $1000/month.
After we heard about this $8000 refund thing, we started casually looking at houses. Next week we are closing on an $80,000, 1200 sq foot, 3 bedroom, 2 bath, beautiful house. Our 30 year fixed mortgage = $700/month (including property taxes!) We used an FHA loan with 3.5% down to buy the house.
No one can tell me that we're not being frugal when we'll be saving money every month AND getting back more than our down payment come tax time next year.
To add to my previous post, my apartment complex in Mountain View is managed by a country-wide corporation, and when I talked to the apartment manager, it seemed as if she was unable to lower the rent without talking to corporate first (or maybe she is just unwilling to do it for me).
Also, although they will automatically transfer my lease to a month-to-month, there's an extra $300 per month they will charge for it.
My apartment is on the top floor of the complex (it's pretty much the tallest building in the area), and they claimed that the rent (with the increase) they offered is "market price" because of that. Does a top floor apartment really fetch $300-$400 more? I doubt it.
I was lucky enough to interview at IngDirect when they were still a quite young entity here in the US. This was in their treasury department and the people were frankly, brilliant, and I respect them even more as they didn't hire me, Haha!
What is interesting to note, they were interviewing me because of my experience within the mortgage backed securities market, and at the time were getting more heavily into that area, and ING, as far as I can tell has not needed to take a big write down Of course that was 5 years ago, so they might have stopped buying whole loans as they made their own loans with their own underwriting critera.
What is also interesting, IngDirect was started in Canada first, with its notoriously strict banking regulations.
Thanks Philip!
One of my favorite sites is www.foodwishes.com run by Chef John. He gives 5 minute cooking videos that are both humorous, quick and quite good. He does videos on about.com as well. I have been cooking since before I was legally able to work but absolutely enjoy his cooking shows.
You guys are so ridiculous. NetSpend is the best option for those "underbanked" people like me! and it's great!
They don't even do a credit check because they know that poor people like me is having a hard time getting a bank account! so you people shut up!
I have had good success with the $9 fare club; maybe 6 RT FLL-LGA and 2 RT to DC. It is not complicated - you just have to jump on it quickly and book normally (while logged in) with the dates indicated. The taxes are not Spirit's doing, they are regular standard gov't fees. It is great if you have flexibility.
I am not sure if I would consider most student loans to be un-secured given that many are backed by the US government in one form or another. In addition, you are not allowed to discharge your student loans except in exceptional hardship circumstances. In addition, if it is backed by the US government, you are not allowed to discharge it. It is important point to understand.
To get really obscure, most large banks look at funding as both secured and unsecured. A large credit card bank for example has an unsecured desk that purchases and sells fed funds, issues CD's and issued commercial paper.
The secured desk issues collateralized paper like asset backed securities backed by your credit card receivable, auto loan and yes, mortgage.
In Toronto, there are some large supermarkets and department stores (in Housewares) that provide free cooking lessons by excellent chefs on weekdays. They cook enough to make a very small but delicious meal for everyone present, and they help people to learn to cook at home at the same time. Well worth attending if you are free during the day.
My colleague was a nutcase. She sang to herself, wrote curses and talked about UFOs. But she seemed very sane at times so it freaked me out and I left the job.
I haven't made French dips in years. Guess what will be on the next menu plan?? Great reminder!
Since this has come up a couple of times, I thought I ought to clear up some issues here. (All the following applies to the United States. The situation will be completely different in other countries.)
First, it's never illegal to refuse to accept money that you think might be counterfeit. In fact, it's the only sensible thing to do--if you accept it, you lose: you can't pass it on (passing counterfeit money is a crime) and nobody is going to replace it with good money.
Second, it's entirely legal to insist that payment be made in some specific form--almost any form you want--during the transaction. You can say "No $50s or $100s." You can say, "Exact change only." You can say "Checks only" (my apartment office does, so they're not in the position of having large sums of cash in the office on the day that rent is due). Those are all common, but you can legally make any restrictions you want how how people pay you. You could insist that people pay in quarters, or in $2 bills--or in anything except quarters or $2 bills. You'd probably lose some customers, but it would be perfectly legal.
This all follows from the fact that you're not required to do business with any particular customer, so refusing to serve a guy who wants to pay with a $100 bill is no different from refusing to serve a guy who's not wearing shoes or who's smoking a stinky cigar or who's talking on a cell phone.
The only place where any of this gets at all tricky is when someone offers cash to settle a debt. The "legal tender" verbage on bank notes dates from the days when some money was backed by gold or silver and other money wasn't. The legal tender laws said that you couldn't insist on customers paying with actual gold or silver: if they offered payment in "lawful money" of the United States, you had to take it. (But only, of course, for an actual debt--if the transaction hadn't occured yet, there wasn't any debt. As part of the transaction you could establish any payment terms you wanted. You could insist on payment in beaver pelts, if you wanted.) The law was changed in 1974 and you can once again write contracts that require payment in actual gold or silver.
If there's a debt, and if the debt is in dollars, then the debtor can insist that you accept payment in dollars. However, you are entirely within your rights to insist that the dollars be genuine. You can also insist that the payment be made in reasonable form, place, and manner. If someone who owes you a large sum of money stops you on the street and offers to settle the debt with a wheelbarrel full of $1 bills, you can safely refuse to accept the money without losing your right to collect. (Just possibly you might lose the right to impose late fees for the period between when he offered you the wheelbarrel full of cash and some time a day or two later when you're willing to accept payment at your office or at the bank.)
It's generally bad business, of course, to refuse to take your customer's money--but businesses are in a better position to deal with this risk than their customers. If they large volumes of business in cash, they can give their cashiers the ultraviolet lights and magnetic ink detectors that will let them check the bills they receive. But the ordinary guy on the street doesn't have such tools. He's forced to rely on the security features described above--which is why I think it's perfectly reasonable for him to start refusing to accept old bills. The guy who has old bills can easily enough take them to his bank, which can verify their authenticity and replace them with new bills.