Two in the Bush

Next month is my condo closing (knock wood), which means that about a week from now I’ll be making my last mortgage payment on the place. Oh, and my last assessment, last tax escrow payment, last PMI payment… all told, that’s $2700/month that I’m paying now but won’t be paying come October. And as annoying as it’s been to be making these payments on a vacant condo, I’m fortunate to have a job that pays well enough for me to make that payment along with all my other bills and expenses.

So the thought of this money coming in is really seeming like quite a windfall, and I’ve been brainstorming fun ways to spend it. It really hits me that it’s a lot of money when I look at what else I could do with this money every month:

  • The nail salon near my home charges $35 for a pedicure. With a 20% tip, that’s $42. With $2700 every month I could get two pedicures a day, every day. A pedicure is the ultimate indulgence for me, so this actually sounds tempting!
  • A flight to Europe even in peak tourist season is under $1000. Add 6 nights in a hotel at $200/night and give me a $500 food/museum budget for the week and that’s a one-week vacation to Europe every month.  Of course, I wouldn’t have a job after a couple of months of doing this, and there goes the $2700.
  • Ever read a shelter magazine, like Martha Stewart Living or Architectural Digest and marvel at the flower arrangements in the rooms that look to comprise about 1000 roses and hydrangeas? I’ll bet $650 would buy a pretty nice flower arrangement every week.
  • How could I forget the “latte factor”? If a soy latte is around $4, let’s be generous and leave a tip for an even $5, I could have 17 lattes a day! (Better make some of those decaf.)

Well, you get the idea. But believe it or not, the point of this post isn’t to brag about how I’m going to be living large in a couple of months. Because, actually, I’m not going to be doing any of that stuff. The point of this post is that fantasizing about spending money is very different from actually having the money in hand and deciding where it will go.

My financial goals are longer-term. What I really would like to do is get my student loan debt paid off, so that I no longer feel locked into my well-paying, but unfulfilling, job. As much as I like the idea of endless flower arrangements, the appeal would wear off every time my student loan statement came in the mail.  So almost all of this “extra” money will go towards aggressively paying down my debt.

But it doesn’t have to be all-or-nothing. What if I set aside a few hundred dollars of the $2700 for smaller versions of the indulgences listed above? If I put $2000 to my student loan debt, I would still have money left over for one pedicure a week, a modest bouquet of fresh flowers every week, a latte a day, and, say, $350 to go in a savings account towards a vacation at the end of the year. And all that would still feel really luxurious, without all the guilt.

There’d still be some guilt, though; $700 is still a decent chunk of change. But it would allow me to pay down my debt quickly (if not as quickly as possible) while still retaining some of that “windfall” feeling. This is all still talk, at this point. We’ll see what I do when I have the bird in the hand.

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A taste of my own medicine

I used to work in tech support for a large company with retail outlets. The company’s retail employees would call in if they were having problems with their POS (that’s point-of-sale, you potty-mouth!) systems. Most of the time, the first thing we’d have the caller do would be to reboot the computer and/or make sure that everything was plugged in and powered on. The instructions were borderline insulting to most callers with any kind of technological prowess, but it would take care of the problem often enough to make it worthwhile to make them try.

A month or so ago, I started using an old Capital One card that had been dormant for a while. I went back to it because I travel internationally and make foreign currency transactions fairly regularly, and CapOne is, as far as I know, the only card issuer that does not levy a foreign currency transaction fee (in other words, not only do they not levy their own fee but they eat the fee that MasterCard or Visa charges them). I don’t like using a lot of separate cards, so I decided to use this as my primary card.

I tried to make a payment on it from my WaMu bank account about a week ago and the payment was returned. I tried again, waited a few days for the payment to clear, and in the meantime I called CapOne to ask them to waive the late payment fee, which they were kind enough to do. But the second payment attempt still hadn’t hit my WaMu account. Frustrated and a little concerned, this time I called WaMu.

The customer service rep at WaMu was incredibly nice, but the first thing he said was, “Go into your Capital One information and make sure you have the routing and account numbers correct.” It was the bank CSR equivalent of “verify that your computer is plugged in.” DUH, I was thinking, of COURSE I made sure that the numbers are–

Oh. Well, look at that. I never put in my WaMu information at all. CapOne still had my old, old bank account information from a (now closed) account at a totally different bank.

Never mind. Sorry! Thanks for your help!

(And now I feel bad about asking CapOne to waive the late fee, because it was pretty much totally my fault. There may still be finance charges, which I will pay if they show up on my bill.)

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“But it was 99% off!” and other personal finance fallacies

My mom was (and still is) a bargain hunter. She made a hobby out of shopping the bargain racks and clearance bins, trying to get the biggest discount she could. Even better if she could then talk the salesperson into taking off an additional 5% for a loose thread or missing product manual.

Like I said, it was a hobby of hers, so in that sense it was cheap entertainment. But it resulted in her bringing home a lot of stuff she really didn’t need. A familiar scene in the house on a Saturday would have her coming home from Sears with a couple bags full of clothes. The best part would be when she’d show my dad a blouse that was $50 originally, marked down to $20, and then she got another 40% off so it was only $12. My dad would say, “I could have saved you $12.”

My mom had fallen into a common trap–the allure of the bargain was so strong that it became irrelevant whether the discounted item was something she really needed or even wanted in the first place. I’ve found myself doing the same thing, contemplating a deal that was too good to be true before I realized that I would be just as happy walking away and spending $0. Stores capitalize on this behavior, which is why you’ll see boxes of facial tissues on an endcap in a store with a big “5 for $10″ sign, for example–even if the regular price of the tissues is $1.75/box, when it looks like they’re on sale people will buy them, and will buy them in the suggested quantity.

Some other personal finance fallacies:

  • Failing to consider an item’s useful life. Surprise, surprise: Mom had a habit of buying low-quality goods without thinking about whether this was the best bargain in the long run. I remember that we would go through a $10 toaster every few months. Had she instead paid $50 or even $100 for a high-end toaster, she would have come out ahead financially after a year or two. Buy nice or buy twice!
    • (This also holds true for items that you may tire of. You can buy the $200 wristwatch you really have your heart set on and will gladly keep forever, or settle for the $50 watch that you’ll want to replace because you just don’t like it.)
  • Giving too much weight to sunk costs. If you’ve already paid for something, you are not getting that money back, so there’s no sense going down with the ship. Here’s an example: a few months after I bought a brand-new car (okay, probably not the best choice financially), I got an unexpected job offer in Chicago. I moved, and realized that I didn’t need any kind of car in Chicago, much less a brand-new one that was just going to get dinged up from parking it on the street. But the car was worth far less than what I owed on it. As painful as it was to do, I sold the car, paying several thousand dollars out of pocket for the privilege. My reasoning? I owed the loan balance whether I kept the car or not. By selling the car, I cut my losses.
  • Failing to consider intrinsic value. This is a corollary to the “Look, it was only $12!” fallacy. Something with an artificially high mark-up may not be a bargain even at 75% off. Consider whether it would still look like a bargain if the tag itself said “Regular price: $25.” Keep in mind that brand names don’t always mean quality. Comparison shopping is important here: maybe a travel website is offering its usual $700 air + car + hotel package for only $500 next weekend; that’s a good sign that all travel is discounted and you may be able to put together your own package for less than $500.

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Carnival!

The new Carnival of Personal Finance is up at Broke-Ass Student and I am happy to see my recent post on Earning a High Happiness ROI included. There are tons of great submissions to this carnival, so check it out! Here are a few of my favorites:

  • Money and Such has a great post critical of the 401(k) system.  This really hit home for me as I’ve switched jobs a few times in the last 5 years and each time I rolled over my 401(k) into my new employer’s 401(k). This is a huge mistake, as leaving a job is a rare opportunity to roll your 401(k) into an IRA, with more options and the potential for much less cost. I’m still kicking myself.
  • Plus6 questions whether going on a purchasing fast is really helpful in the long run. The post offers useful suggestions for getting a handle on your finances without drastic measures. I have read about “buy nothing” experiments like the Compact and I think they can be useful for increasing awareness of materialism, but may be too drastic for most people for a steady length of time. I am always in favor of spending less on material goods and more on life-enhancing experiences.
  • Money Smart Life offers some tips on traveling with credit cards. Check out the comments too! Some excellent points there. I have a Capital One card for travel because CapOne charges no foreign currency transaction fee. The card also offers 1% cash back. Not a bad deal.
  • Searchlight Crusade speaks up for the often-maligned condo/townhouse/PUD. I am very happy in my condo and would probably have bought it even if single-family homes in my neighborhood were more affordable. There is a lot to be said for not having to mow the lawn!
  • Finally, here is a great post from Grad Money Matters on staying disciplined. I particularly liked how the author compromises on lunches out by brown-bagging it three days a week and dining out the other two. That is a great balance between saving like a miser and spending without a thought. I’d bet those two days a week are even more special because of it, too.

I could go on, but you really should check out the carnival for yourself–there’s a lot of great content there.

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Live a Little While Getting Out of Debt

Many people believe–and from what I understand, at least one finance guru recommends–that when digging yourself out of debt, you should eliminate all non-essential spending and put as much money as possible towards paying off your debt. I disagree.

To me, this plan is just like a strict diet where you can’t have so much as an ounce of chocolate until you’ve reached your goal weight. It might work for the most disciplined people, but for others it will be a miserable process and, at the end, it may result in a binge that negates a lot of hard work. Whenever you’re being careful about finances, living frugally, or paying down a significant indebtedness, it’s easy to start down the path of miserdom. A little bit of breathing room in your budget will go a long way towards staying happy and healthy even while you’re paying down your debt.

I have a huge amount of student loan debt and recently started paying it down (at least the higher-interest debt) aggressively. In order to have more money to throw at the loans, I’ve become very frugal in some areas–I’ll dutifully go out of my way to save a few bucks on groceries, and I haven’t turned on my air conditioner even though it’s been really hot and humid lately. But I won’t think twice about putting my sack lunch in the office fridge if my colleagues decide to go out. One way to look at it is that the economies I’m making elsewhere allow me to put more money on things that are really important to me; that’s kind of the theme of this blog, after all. But the bottom line is that I am willing to carry my debt load for a few extra months if it means staying sane during the whole process.

To keep your discretionary spending from getting out of control, it’s probably best to budget a modest amount and stick to it by withdrawing that amount, in cash, upfront. Obviously, if you’re trying to pay off your credit card debt, you should probably not be charging discretionary purchases.

If you do need to–or feel you need to–cut out all non-essentials while you’re paying down your debt, I would encourage you to make a double or triple effort to find activities that are free. Take advantage of the free day at the museum or the free seats at your local theater, meet friends for a picnic, join a book club, volunteer–there are so many ways to stay active without spending a dime that you never have to feel like you’re missing out. And you will probably find that even after your debt is paid off and you have more spending money, you’re still taking advantage of these budget opportunities. 

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Earn a High Happiness ROI

An important ratio in finance is the return on investment (ROI), which is, of course, the amount of money gained (or, sometimes, lost) relative to what you put in. When you’re talking about finance, you’re talking about exact dollars, and the formula is precise. But I think the concept behind ROI can be applied to spending that will yield intangible gains as well. (Now, I usually bristle when I hear people talking about “investing” in a depreciating asset like a high-end dishwasher or a nice pair of shoes, so I’m breaking my own rule here. Just this once. For now.)

The concept here is simple: Whenever you’re considering a purchase or expenditure, take a moment to consider whether it will make you a happier person or a better person or a more interesting person. If it won’t, that’s a strong argument for walking away. Unlike the finance ROI, what I’ll call the “Happiness ROI” is impossible to quantify, but you can break things down into rough categories:

  • High HROI: This, of course, would be things that don’t cost much (if anything) but improve your life a good measure. Examples might be an afternoon at a museum, happy hour with friends, a subscription to a news magazine. Everyone’s list will be different, but if you assess something as having a high HROI, don’t hesitate to spend the money.
  • Medium HROI: This category might include things like travel, tickets to the symphony, and gifts (including charitable donations). These things are also very good for you, but cost a lot more. Medium-HROI expenditures may have to go into the budget and you may even have to save up for them (I’ll detail my own means for saving for travel in a future post), but they’re probably worth it if you can make the room.
  • Low HROI: This speaks for itself. I think most consumer purchases–purchases of things rather than experiences–fall under this category. An unnecessary new gadget, a pretty dress, an HDTV–none of it is exactly character-building. That’s not to say that you should never buy these things (I confess I’ve bought all of the above within the last year), but these are the purchases you should think hardest about. This is the time to ask yourself what you’re giving up to make the purchase. Maybe you’ll have to give up something like a day of vacation or a bit of your retirement fund, or you’ll have to wait an additional month to be debt-free. Is it worth it?

Finally, there’s a whole other category of spending that doesn’t fit into the HROI analysis: Necessities. These you have to buy no matter what, and should budget for (and have an emergency fund available for the big stuff). It doesn’t give me a warm fuzzy feeling to buy toothpaste or write a check to the plumber, but it has to be done.

My philosophy about spending is not to scrimp and save every last dime, but to be mindful of what your spending is doing for you. Scrimping can be destructive, for instance, if you are continually turning down your friends’ invitations because you don’t want to spend $10 on a couple of drinks. Spending can also be destructive, if you are turning down your friends’ invitations because you spent your last $10 on lottery tickets. Sticking mostly to purchases with a higher HROI will allow you to live well and still meet your financial goals.

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The Antithesis of Rich

Today’s post from one of my very favorite columnists discusses the extreme case of people spending thousands of dollars every month on their personal appearance:

But something appears to be getting lost in this new, weirdly overblown mutation. Maybe it’s all just another example of that fantastic inverse relationship our popular culture is adept at perpetuating: The more we spend on externals, the more we scrape and inject and try to enhance every body part, the further away we get from, you know, true attractiveness.

I’m all for people spending their own money however they see fit. I fully understand that some people have so much of it that perhaps $50,000/year in Botox treatments and Creme de la Mer is really a drop in the bucket. And I also appreciate that in many professions that pay well, a bit of conspicuous consumption is expected, and personal upkeep required, so that some amount of outlay may actually be considered a sort of investment towards a higher salary. Fine.

But at a certain level, I think this crosses that line into some new territory of shallowness. And it also would seem to me that such spending just begets more spending, because the more you analyze (and try to remedy) what you perceive as your physical shortcomings, the more you’ll notice other faults, etc., etc., forever, until you’re fretting over every tiny wrinkle and freckle, no matter how imperceptible to others, and probably getting prematurely gray in the process! Talk about counterproductive.

These people may be financially well-off, but are they living a richer life? Quite the contrary, I would say.

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