Tag Archives: Frugality

How Much Does that Cost? (Part 2 of 2)

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If it has been a little while since you have read part one, go back and review first. The reason is that I am not going to give any background or explanations. I am just going to pick up where I left off, as if you had just turned the page.

What’s a Dollar?

My previous focus and examples were about monthly expenses. If you decide to take on a monthly commitment to spend money you have to weigh the true cost in order to make a truly informed decision. But what about those one-time decisions? An extra buck or two here or there can’t really make a difference, can it?

Let me give you an example of what I am talking about. When I was a newlywed and in college my wife and I would go grocery shopping together. We didn’t like to spend any time apart that we didn’t have to (and we still don’t). What we didn’t realize was that it was also an opportunity to learn about each other, our spending habits, and to grow in our ability to come to a consensus on what is worth spending money on, and what is not.

I grew up in a home where we always bought brand name foods. She grew up in a home of buying things that were a great deal or were on sale. I remember wanting to buy Kraft American Cheese. She couldn’t see why I would pay an extra dollar to buy Kraft instead of saving a dollar and buying the store brand. I insisted that it was “worth” it. She was wise enough at the time to let it go. I have since come to my senses on my own.

Often now, when I hear my mind whispering “it’s only a dollar,” I have a different train of thoughts come through my head. The first thing that comes to mind is: Is it really only a dollar? Going back to the illustrations in Part 1 let’s see what one dollar is worth if it is invested instead of spent.

  8% 10% 12% 18% Actual $ spent
10 years $2 $3 $3 $5 $1
30 years $10 $17 $30 $143 $1
60 years $101 $304 $898 $20,555 $1

The Years Have Now Passed

It is interesting for me to be writing this now. My wife and I will be celebrating our 11th anniversary this week. So, ten years have now passed since we were having these grocery store conversations. Looking at the chart, if I had taken the extra dollar home and invested it instead of buying Kraft, I would likely have about $3 now. Doesn’t sound like much, but it is THREE TIMES as much as ten years ago. Two questions begin to scream inside my head.

First, would I have bought Kraft if it cost $6 and the store brand was $3? Would I have been willing to pay twice as much? No. My wife would have had a much easier time convincing me. But the reality is that I did pay twice as much. And twenty years from now I will have paid 17 times as much. Fifty years from now I will have paid 300 times as much. I will be paying for that decision, more and more, for as long as I live!

The Most Important Part

The most important part of this is that we don’t make just one isolated decision to spend an extra dollar. The reality is that we make these decisions often. I would guess that if you will take time to honestly assess your spending habits, you will find many times when such a decision is made. My guess is that most people make such a decision more than once a day. Even if there are only two times in a week that you spend/waste an extra dollar, that would be $100 dollars in a year. Now look at the numbers in the chart above and multiply them by 100. Then multiply them by years of such decisions. Scary. Mind-boggling.

I will end by saying that there are many $1 decisions that I still think were worth it. Most have to do with experiences with my children and memories that were made. However, I know that there are innumerable $1 decisions that I have made that were not worth their true cost, and I will have tens or hundreds of thousands of dollars less in retirement because of them. Now that is expensive cheese!

How Much Does That Cost? (1 of 2)

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“We just got a subscription to Dish Network. We need a way to relax and we figured that it is only $33 per month out of our budget. We deserve it, and it’s really not much money.” I am confronted with a variation of this comment much more often than I would like to be. If it’s not satellite TV it’s high speed internet or cell phones or DVD rental programs or . . . you get the idea. I usually smile politely and nod my head. I don’t want to confront people with the thoughts that are passing through my mind. But I feel like I need to get at least one of those thoughts out there before it bursts out unexpectedly.

You have every right to spend your money

Before I go on, I want to make it clear that your budget is exactly that – your budget. I claim no right to decide or even influence how you spend your money. When clients come to me for help with their budget they often expect me to tell them what to cut. I won’t do that. All I do is help them organize their spending into categories, compare their spending to their net income, and then go through each category one by one. As we discuss each category I help them decide for themselves what is worthwhile and what is not. My opinions do not enter the conversation, at least as much as I can help it.

However…

That said, I do want people to really think about the true cost of each expense. When we spend our money we rarely think about the full cost of the item – we usually only notice what is on the price tag. Each dollar we spend is a dollar that we didn’t save. That is ok. We have to spend money to live, and we can spend money to live comfortably as well. The goal is not to be a miserable miser. (Have you ever noticed that those words have the same root?)

How much does it cost . . . really?

So, prepare yourself to hear from the financial planner/accountant that is inside me. I will now allow you into my brain to experience the thought processes that I go through in making a long term buying decision. In this example I will imagine that I am trying to decide if it is worth it to me to spend $33 per month on a Dish Network subscription.

Let’s start with the easy math. $33 per month x 12 months = $396 per year. When I am deciding to take on (or eliminate) a monthly expense, the first thing that I do is turn that monthly amount into a yearly price. For some reason $400 per year seems like a more significant decision than $33 per month, and so it makes me weigh the decision a little more carefully. (By the way, marketers know this as well, and have almost perfected the science of monthly pricing.)

Next I will sometimes turn that yearly amount into a multi-year amount, if that applies to the type of purchase I am considering. So, let’s say I get the subscription and become addicted to TV. In that case it might be a very long-term decision. Not counting price increases, I will have spent $4,000 over 10 years, $12,000 over 30 years, or even $24,000 over the next 60 years (my life expectancy). That’s a lot of money, but for 10, 30, or 60 years of daily entertainment, it honestly doesn’t seem that bad.

The scary part

Here is where it gets interesting. What if I decided to take that $33 and invest it instead? Here are the results:

  8% 10% 12% 18% Actual $ spent
10 years $6,057 $6,788 $7,629 $11,015 $3,960
30 years $49,346 $74,907 $115,910 $469,241 $11,880
60 years $588,978 $1,560,865 $4,282,851 $100,278,668 $23,760

I don’t know how much you think you can earn in the market if you have invested over a long period of time. But let’s say I get 10% – the lower end of overall market returns over a long hold period. Looking at these numbers I realize those 30 years of TV watching has actually cost me $74,907, not $11,880. That works out to be about $208 per month! That is significant. Here is the equivalent monthly cost of all the numbers above:

  8% 10% 12% 18% Actual $ spent
10 years $50 $57 $64 $92 $33
30 years $137 $208 $322 $1,303 $33
60 years $818 $2,168 $5,948 $139,276 $33

Now you can decide

I honestly believe that some things are worth the cost. But there are other things that are definitely. Do I go through this whole process each time I decide to spend money? No, but if it is a commitment to repeatedly spend I try to do this. If nothing else, having done it several times makes me realize that a $20 or $30 per month decision is really much more than that. My hope is that this glimpse into my thought process will help you stop and think about your spending choices. Are they worth the true cost? Some will be, and some will not.

Exercise Your Power Over the Bottom Line

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During the past two months we’ve had two significant and unexpected outflows of cash. These experiences have reaffirmed many things for me. First, a rainy day savings account is inestimably valuable and comforting. Second, initial bids from contractors and laborers are always high; don’t get suckered in. When it comes to negotiating with sales representatives — foster boldness, dash fears.

Our first unexpected outlay of cash occurred when a swarm of black, winged insects came pouring out of the wall by our back door. Termites. The first bid we got for treatment from Terminix came in at just under $1400. I’d been warned that extermination would be pricey, but that estimate knocked the wind out of me. By the time the Terminix man was walking out my front door, he had already lowered his estimate to about $1000, simply because I’d asked, “Now is that bid the lowest you’ll do this treatment for?” Satisfied with the $300 concession and horrified by the infestation of wood-eating-insects, I just wanted to sign the paperwork and get some poison pumped around our foundation ASAP.

However, at the insistence of my husband, I made three phone calls to different extermination outfits, and by the time I was done, we had our bid down to $849. With another couple of phone calls, pitting pest-control providers against each other, we had the bid down to $649 plus tax. We paid $703 (total) for the termite treatment. In other words, we kept six hundred dollars in our pockets just for making a few phone calls and holding a few salesmens’ feet to the fire. And we haven’t seen a single sugar ant, let alone a termite, since the service.

The second unexpected outlay of cash happened just last week when we took our car in for a ninety thousand mile inspection and discovered that we needed some extensive work done on our brakes. The first bid we got from the mechanic was almost two hundred dollars higher than what we ended up paying for the work we had done (by the same mechanic who gave us the initial bid.) The principle of dickering for deals is one I’m learning by repetition. And I’m saving our family hundreds of dollars in the process.

Here are a few take home points for negotiating with vendors:

Remember that initial bids are rarely (if ever) the bottom line. My husband and I both learned from personal sales experience that the initial quote you offer a customer is always high. The sad reality is that most people will willingly take that first quote sans questions. Don’t be one of those customers.

Don’t be afraid to make the situation slightly uncomfortable with a follow-up like: “This bid seems pretty high to me; is this the best you can do?”

Be upfront with the representative about the fact that you will be calling around to other service providers to compare cost. A lot of times an establishment will want your business badly enough to lower the bid right then, without any competing bids. Especially now with the economy in low gear, many vendors are willing to relax and play nice from the get-go.

Follow through with the threat to call around. Cost compare. And if it’s prudent, take your business elsewhere. Talk to friends and trusted associates about reputable establishments you can contact for alternate bids and start pitting providers against each other.

Almost everything is negotiable; dicker over the price of monthly cell phone rates, pest-control fees, utility rates (especially phone, internet and cable costs,) insurance premiums, car repair quotes, household repairs, etc.

And finally, keep the money you save stashed safely away in your emergency/rainy day fund; life has proven time and time again that you can always expect quite a bit of the unexpected. And whether it’s medical expenses or termite infestation, the resolution of the unexpecteds usually requires money.

Make Gas Prices Less Taxing

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How would you like to make your car get 220 miles to the gallon instead of 20? Or would you prefer, instead, to only pay $0.36 per gallon of gas? How about this: If your car gets good enough mileage then you get paid for putting gas in the car instead of paying? All of this is possible through some known, but sometimes unappreciated tax deductions.

For many of my clients, one of their biggest tax deductions is their car mileage. And yet this is also one of the least appreciated tax deductions, in my opinion. If you own a business, drive your own car for your employer, go to the doctor or even take boy scouts on campouts you could save money on your gas bill.

What About Bob?

To illustrate the possibilities, let’s imagine a man named Bob. Bob uses his own car to make some deliveries and visit some clients for his employer. For Bob this adds up to about 150 miles per month. Bob is currently paying $4.00 per gallon for gas and gets about 20 mpg in his Camry. Bob and his wife make a decent living and, between Fed & State, they are in a 36% marginal tax bracket.

At tax time Bob brings his records to his accountant:

1,800 miles driven for work

90 gallons of gas attributable to those miles

$4.00 per gallon average cost

Bob’s accountant prepares his taxes and shows Bob the following:

1,800 miles x $0.505 per mile = $909 in deductions x 36% = $327 tax savings

$360 gas expense – $327 tax savings = $33, or $0.36 per gallon

– or –

$33 net gas cost / $4.00 per gallon = 8.25 gallons

1,800 miles / 8.25 gallons = 220 miles per gallon

Needless to say, Bob is pretty happy he kept track of his miles. And get this: if Bob’s car was more fuel efficient and got 23+ mpg (or if gas prices went down to $3.60 per gallon) Bob would actually be getting more back in tax savings than he paid for the gas. He would be getting paid to put gas in his car!

You Don’t Drive Your Car for Work?

You may drive for work even if you don’t realize it. Many professions require some form of continuing education. If you use your vehicle for such a reason and are not reimbursed this would be qualified mileage. Even if you don’t use a vehicle for any work related reason there are still benefits to be had.

While the benefits are the greatest for business related mileage, there are deductions for other common things. Do you ever drive to the doctor, dentist, hospital, pharmacy, etc.? As long as these trips are for qualified medical reasons they are deductible at a rate of $0.19 per mile. Do you ever do volunteer work? If you drive your car for a qualified charitable organization (Boy Scouts, Church, etc) or to do volunteer work for such an organization, those miles are deductible at a rate of $0.14 per mile. So, to continue the idea of your effective mileage:

Reason for use MPG Adj. CostPersonal (actual cost) 20 $4.00

Business 220 $0.36

Medical 30 $2.63

Volunteer 27 $2.99

It is clear that the tax deduction is still worth taking note of, even if you don’t have business miles.

Is There a Catch?

No catch, but there are a lot of assumptions built into the scenario I have described – and a change in any of them would change the results to some extent. Some major assumptions are that Bob (or you) have enough deductions that you would itemize instead of taking the standard deduction. Also, this assumes that you have met the 2% of AGI limit for employee expenses or 7.5% limit for medical expenses. (However, if you own your own business the mileage deduction comes of 100% as a business expense, regardless of whether you itemize personal deductions).

The assumed tax bracket also affects the results. There are several other things to take into account as well. I recommend that you talk to a tax professional about your specific situation before assuming that these things apply to you.

I also run into two common misunderstandings when discussing this. The first is that commuting miles to and from your home and main place of business are not counted as business miles. These are personal miles in the eyes of the IRS. The second is that if your employer (or the volunteer organization) reimburses you for your mileage you may only deduct the difference between the employer’s reimbursement rate and the standard rate.

What Do I Need To Do To Claim My Gas Rebate?

In the event that the IRS wants to verify your figures (i.e. audit you) you will need to provide the following:

  • Date of each trip
  • Beginning and ending odometer readings for each trip
  • Reason for the trip
  • Beginning and ending odometer readings for the entire year

There are very inexpensive ($2-$5) record books at office stores and online. I would recommend getting one and keeping it in your car to make it easy to keep track of all the mileage that you may be able to write off at the end of the year.

The mileage rates in this article are for 2008 expenses and are adjusted each year. States may also deduct mileage at a different rate than the Federal Government.

* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.

Avoid The Summer Spending Itch: 8 Ideas for Frugal Family Fun

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For our family, discretionary time has proven to be the most temptation-laden for superfluous spending. Perhaps it’s boredom that breeds the itch to eat out, shop, and entertain ourselves in similarly costly ways? Whatever the cause, our frugal fortitude seems to shrivel on the weekends and when find ourselves with excessive free time.

There is undoubtedly a time for splurging, and the fast-approaching days of summer vacation should provide a few opportunities for indulgence, but the three months of freedom that lie ahead can also be perilous times for those of us trying to stick vigilantly to our budgeting/savings goals.

The good news for conservative consumers is that large amounts of surplus cash are not a necessary prerequisite for family fun. There are certain forms of entertainment which, no matter how clever or thrifty you are, will always be pricey — amusement parks, prime time movie tickets, exotic vacations and fine dining come to mind. But for the financially-minded family, summer fun that won’t drain the savings account can be just a few minutes of planning and a homemade costume away.

Here are some budget-friendly ideas for family fun to get you thinking about and planning for affordable summer entertainment:

Choose a foreign holiday to observe (Bastille Day happens to fall during the summer – July 14th,) learn a bit about the historical background of its origins, and celebrate with crepes, French music, and maybe even some Parisian costuming.

Make friends with your local library. Plan themed trips — i.e. select a place, person, natural phenomenon, or historical era, and check out books, music, and movies that will help educate you and your children about the chosen topic. Plan a craft or cooking project that could go along with your theme. For an underwater theme, check out picture books on aquatic life, rent Finding Nemo, check out The Little Mermaid soundtrack and bake and decorate fish-shaped sugar cookies.

Have a mid-week pajama party. Serve breakfast for dinner and invite guests to dine in their favorite pajamas. Continue the festivities with games and movies and finish the evening with a family bed time story.

Shift the focus: instead of worrying about how you’re going to amuse yourselves, spend a day cheering others. Make and deliver cookies and homemade cards. Visit a nursing home or hospital and read or sing to the elderly/infirm. Show up at a needy friend/neighbor’s door with buckets, rags, mops or yard tools and donate an hour or two of family labor.

For younger children, a trip to the local pet store can be as delightful as a trip to the zoo. For parents, it is more convenient and less expensive. Ask the resident reptile expert to tell you about the different species of frogs, lizards and snakes. Admire the colors and textures of the birds and fish. Some pet stores will let you hold the baby bunnies and puppies, ask an employee about store policy. Stop at McDonald’s on the way home for $.88 soft serve cones and you’ve had yourself an afternoon’s worth of fun for less than five dollars.

For a family twist on the traditional movie night, feature old home movies or a digital slideshow as the evening’s entertainment. Provide popcorn and familiar background music (if it’s a digital slideshow), and have fun reminiscing about vacations, sporting events, recitals and holidays past.

Let little ones explore their creative capacities. Visit the dollar store to purchase finger paint, feathers, sequins, and pipe cleaner. Tape a long strip of butcher paper to an exterior wall of your home (or the back fence) and let your children and their friends create a super-sized multi-media masterpiece.

Don’t forget about free public facilities (police/fire stations, and the local animal rescue shelters typically offer complimentary tours,) public pools, parks, sprinklers, picnics, playgroups and other inexpensive recreational venues.

Whether you’re feeling the financial pinch or not, the pressure of costly summer entertainment mounts quickly. With a little creativity and planing, you can create family fun and lasting memories without leaving a financial divot.

Do you and your family have any fun inexpensive summer-fun traditions? If so, share them in the comment thread.