How Do You See High Spenders?


BoatdockWe had an interesting discussion today at breakfast.  My daughter was talking about one of her friends who was “really rich.”  She talked about how her father was a heart surgeon, that they lived in a big house, and how she was always bringing new things to school.  These are the types of things that people normally see and think that a family must be wealthy.

I wondered aloud, however, how wealthy they really were.  I told my daughter that sometimes people have a big income, and therefore spend a lot of money, but that really they aren’t that far away from a foreclosure should their income stop.  No one would see our lifestyle and think that we were wealthy.  We have a sufficient, but modest home in an average subdivision.  The place where we live is a neighborhood where many families buy their first home, then move away in a few years to one of the trendier subdivisions.  We’re therefore among the longest term residents of the subdivision.

                                

Three great books on how to build wealth with a modest income

We drive older cars – my Jeep Cherokee is approaching 20 years, but I don’t plan to get rid of it just because I like it so much and it would be hard to find one with similar reliability and ruggedness with all of the bells and whistles on today’s cars.  My wife’s car was about five years old when we bought it in 2008.  This year we’ll upgrade her to a 2014 Avalon or 2016 Camry.  This will be the most we’ve paid for a car since we bought the Jeep.  We’ve found that you can get a lot more car for a lot less each year by letting someone else take the depreciation hit, so we’re buying slightly used instead of new.  We realize that we’d be in the same position in a year or two if we bought a new car, but that we’d be $7,000 poorer.  There are a lot of other things we’d like to spend $7000 on.

But looks can be deceiving.  We’ve already saved up enough in our retirement accounts that we should have no issue funding our retirement.  We have also saved up a lot for our children’s college education.  In some ways that almost seems foolish, given that it seems like schools just take your money if you save by charging you more than other families who haven’t saved because they’ve blown their money on gadgets and stuff.  Still, a lot of families have their children coming out of college with lots of student debt.  I don’t think our children will need to worry about that unless they decide to go to an elite private school, which I doubt they will since they see that the value they receive at such a school is generally not worth the cost.

I’ve actually changed the way I see big spending individuals.  When I see someone with a fancy new car or designer clothes, I wonder how far away they are from the financial cliff.  I actually feel some pity for them.  If they lost their job today, how long would it be before that car got repossessed or the mortgage company started calling?  If they had a financial emergency like a broken leg or an air conditioner failure, would they have the cash to get them through or would they be taking out a loan?

I’ve found what to look for when I want to find people who are probably actually wealthy, in that they have a lot of money, as opposed to people who just make a lot, and then borrow and spend even more.  I look of the guy driving the older car despite having a decent paying job.  I look for the people in the older, modest homes but who have some nice features inside.  In general I just look for the people who don’t seem to be concerned about money or displaying wealth.

One thing my son asked is why it was useful to have money if you don’t use it?  Wouldn’t it be better to spend a lot more and enjoy it?  I tried to explain that having some wealth set aside provides something a new car or fancy clothes can’t – security.  It takes a lot of stress off when things happen because we have the resources needed to take care of things without going into debt.  We’re also getting to the point where we can start using some of the income generated by our wealth to add to our income from work.  We just started being able to do things like take special vacations each year or two like cruises because of the income generated.  As time passes, that income will grow and we’ll be able to do even more.

I’ve also found that I just don’t want to spend much money the way that some people do.  I really don’t want to overspend for clothing to impress other people.  I really don’t want a shiny new car that I need to worry about getting dinged in the parking lot.  And I generally feel sad for the people I see walking around with their pathetic paper cups who overpay for coffee every day.  In general I find Starbucks coffee to just taste burnt.  We have bought a modest piece of wooded land to use for hiking and camping, and maybe we’ll put a cabin on it as a retreat/vacation home someday.  The land is an investment of sorts, but also I don’t mind spending money for nicer things that are a good value.  It is just spending money where the value received doesn’t match the cost that bothers me.

So what do you think when you see someone with a new car or fancy clothes?  What about the guy at the office who always has the latest gadget or the woman who always wears the hottest styles and always has her nails done?  Do you feel envy and a desire to have what they have, or do you feel some degree of pity?  Do you think that they are wealthy, or maybe spending all of the money they have and then running up the credit cards and the home equity loan to get still more?  Do you wonder where they’ll be at retirement?  Do you wonder how much debt their children will have coming out of college?  Most importantly, are you going to follow their path, or blaze your own trail?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Lessons Learned from the Bank of Mom and Dad


img_0131When my son was five or six, we started The Bank of Mom and Dad, a.k.a. The Bank of MAD.  The Bank of MAD pays interest at five percent, compounded whenever I remember to add interest.  Since that point the number of accounts has expanded, where my son and daughter both have passbook savings accounts, in addition to investment accounts.  My daughter (now 12) also started a car fund where she is saving up for her first car.

I started the Bank of MAD to teach my children about how banking works and why it is important to save up money for things.  I have also recently added checking to the bank, both to teach them how to write checks and track a ledger, as well as to remind me to actually take money out of their account when we’re at the store and they ask for me to buy something for them “using their money from the Bank of MAD.”  I think my daughter has gotten a lot of freebies since we forgot to take the money out when we got home.

The experience of starting and running the bank, in addition to paying my children “on commission” for some of the jobs around the house (they also have regular chores like cleaning their room and helping to put their laundry away that they are just expected to do) has actually taught me a lot of things about how money works and how people think in an economy.  Here are some of the lessons:

1.  The banks really have the best deal.

At first, my son would do a chore, get a commission, hold onto the cash for a day or two, then deposit the money into The Bank of MAD. I would then put the money back into the drawer where I kept the cash from which I paid him for his chores.  I was essentially able to have him work for me without needing to actually pay anything for quite a while since he would just deposit the cash I was paying him, in the mean time allowing me to continue to use the same money.  Eventually he would skip the cash entirely and just write a deposit into The Bank of MAD when he did a chore.  Once in a great while he would finally buy something, at which point I would usually use a debit card to make the purchase then deduct the amount from The Bank of MAD.

I came to realize that this is what banks do in daily life.  We work and are paid, but then we deposit our money in the bank for “safe keeping.”  They then get to use our money to do things like lend money to businesses overnight so that they can make payroll, which is then deposited in the banks.  Banks only have assets because we let them borrow our money (nearly for free at this point since interest rates are so low).  If we weren’t so scared of being robbed, banks probably wouldn’t have this advantage.  Too bad there are so many regulations that make it difficult to start a bank today.

2.  There are boom and busts in employee enthusiasm.

An interesting thing would often happen.  Sometimes my son or daughter would want to make as much money as possible, looking for any sort of chore they could do.  At other times they would have made so much money and there was nothing they wanted to buy, so they would not want to do any chores.  At that point we had to tell them that they would lose their ability to do the jobs if they didn’t do them when they were needed (or we would stop paying them and just make them do chores).  This behavior reminded me of the behavior in some industries where some employees will stop coming to work during times when they felt like they really didn’t need the money.

3.  It’s surprising how much they save.

While there have been a couple of times where my son has cleaned out his account, first for an iPod and then for a laptop, he has really been pretty good at saving and has let the account build up.  My daughter has generally done the same, despite some raids sometimes for clothes or makeup.  I’ve really been surprised at how big both his and my daughter’s accounts have grown.   My son has actually said that there is often really nothing that he wants, so he is happy to let the money just earn interest (the 5% has helped).  As I said earlier, my daughter actually suggested opening up an account to save up for a car.  Once they started to learn that they could save up for bigger things if they put some money away and didn’t just let their money flow out through their fingers somehow on frivolous things, they started to set bigger goals.

Anyone out there set up a bank for their kids?  What about paying them on commissions instead of giving them an allowance?  What’s your experience?

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

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Buying a New Used Car


Avalon

Mrs. SmallIvy is truly wonderful and supportive when it comes to handling money.  One area where that really shows is in car purchases.  Early on in our marriage we made the stupid decision to buy a new Jeep Cherokee with payments for 72 months (they saw me coming) while I was still finishing grad school.  While I still drive that Jeep 18 years later, shortly after starting my first job I saw the light (and heard Dave Ramsey Show).  We decided to pay that car off as quickly as possible (I think we were done in about three years) and from then on we decided to only buy used cars that we could buy for cash.

The first one, which my wife drove for about five years (did I mention that she is wonderful), was an eight-year old Toyota Camry which we bought with about 175,000 miles on it.  We paid about $3500.  It was a very reliable, comfortable car.  When we sold it, it was crossing 300,000 miles, yet we still got about $1500 for it.  It actually still had some life in it, and I wouldn’t be surprised if it was still on the road for another 100,000 miles or more after we sold it.  So we were able to drive a comfortable, reliable car, for about $400 per year in depreciation plus maybe $500-$800 per year in repairs and maintenance.  Compare that with a car payment of $350 per month or depreciation of about $3,000 per year if we had bought a new Camry and driven it for those five years.  This gave us a couple of thousand dollars extra each year.  We put part of it away for retirement, and some of it away for the next new/used car.

For the next car, we also got a Camry.  (We decided we really like the way they drove and the extreme reliability).  This time we got a four-year old car with 76,000 miles on it for about $8,000 cash.  Because we had been saving that whole time (remember we were saving about $10,000 over that five years by not having car payments/new car depreciation), we had the cash ready.  Actually, we had been investing the money, so some of the cash that we had put away made more money, so we didn’t actually need to save up the whole $8,000.  It was kind of a neat/scary experience to withdraw $8,000 in $100 bills since the seller (a private party) wanted cash.  Interesting when you wonder if the credit union will even have that much cash on hand.

Reliable Used Luxury Cars Under $10,000: Secret Used Car Bargains

We’ve driven that car for about eight years.  The car has about 250,000 miles on it and a value of about $2200, so it has cost us about $6,000 in depreciation ($750 per month) and maybe $500-$800 in repairs and maintenance per year, so we’ve saved something like $12,000 over that period of time by avoiding new cars.  Some of that money went into college funds for our children.  This time we’ll probably keep the car a few more years since we have a teenager who just got his license today.  We are also finding that it might be nice to have an extra car around for when one is in the shop for maintenance or repairs (although it may be cheaper to just rent a car for the rare time when we really need one and a car is in the shop, but we’re getting to the point where we can afford the luxury of having an extra car around).

We’re now getting ready to get our next new/used car for my wife.  This time we’re trading way up and setting a budget of around $21,000.  We are also going through a dealer this time to save a bit of time and hassle (time is becoming more valuable than saving a thousand dollars or two by searching around for a private seller with just the right car.)

We first thought about  trading up in style to an Avalon.  Looking at local dealers, it looks like we could get a 2013 or 2014 Avalon for around our budget.  My wife has said that she may want a newer car than that, however (and she has been wonderful), so we may go for a 2015 or 2016 Camry for about $17,000.  Note that new Camry’s are around $24,000, so we are saving about $7,000 just by letting someone else drive the car for a year.  Many of the Avalons only have about 30,000 miles on them, and many of the Camrys only have 15,000 or less, so they are really very close to new, yet they would cost about $1,000 less per year in depreciation for the first few years.  Note that if we bought new, in a year we’d be in the same position but have $7,000 less in our pockets.  If we drive this next car for eight years, we’ll lose around $15,000 in depreciation (a little under $2,000 per year), versus about $22,000 if we bought new, or about  $3,000 per year.  If we bought new and traded in every four years, we’d be paying about $3750 per year in depreciation.  Even just buying a year-old car helps significantly reduce the price we’re paying.

If you’re thinking about doing the same thing, a good rule-of-thumb in figuring out depreciation is to assume that the car will lose about half of its value every four years.  A $20,000 car will be worth $10,000 in four years, so you’ll be spending about $25,000 per year in depreciation.  If you buy it with payments, figure you’ll lose another coupe thousands in interest as well, even with the 4% car loan rates we have today.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.