Thursday, May 31, 2007

Wandering Reading #3

Welcome to my weekly summary of links. I hope you enjoy a few of the following items.

  1. Investoid looks at the implications of the Bank of Canada raising interest rates soon and he also has a contest for anyone who wants to win a subscription to the National Post online (deadline to enter is Friday).
  2. JD over at Get Rich Slowly found a great tool about determining your class (lower, middle, upper) which I found very amusing, since according to it I'm in the upper class. So where's my maid then?
  3. The Money Gardener takes a look at his saving rate and is off to a great start.
  4. The Canadian Capitalist is again rolling out another list of new blogs and has a great post on the research on the financial circumstances of retirees which is just full of interesting information.
  5. The Dividend Guy has a great post of the implications of Walmart offering brokerage services.

Wednesday, May 30, 2007

Emotional Retirement

Retirement itself can be a funny thing emotionally. Suddenly your entire world is turn upside down and shook a few times. For some people it's a great feeling like riding a roller coaster, for others it makes them feel a bit sick or detached from it all. Overall retirees actually share quiet a bit in common emotionally with high school students leaving their final year (as a reference point for anyone who isn't retired).

I've spend a few weeks digging around message boards to see how everyone reacts to it all, as well as talk to several people my parents age about people who have recently retired and how they feel about it. In general there appears to be a few different patterns around it.

First it is very common to actually miss your co-workers a bit. After all these are the people whom you spent most of your days with for years and depending what you do in retirement you will have very little contact with them and suddenly a lot less in common if you retire early and they remain working.

Then there is the decompression stage where waking up each morning is like a vacation. Your end up drunk on the absolute freedom to do what you want. Many early retirees’ caution about making any series decisions at this stage since you are still evolving into your retirement lifestyle for the first six months to a year.

After that two main profiles of people tend to emerge. Type 1 tends to have issues adapting to retirement. They often can feel bored by it all and often have feelings of regret around their retirement. This type is much more common in those who were forced into a retirement by a company downsizing or medical reason.

Type 2 tends to take to retirement like a fish to water. They are happy and engaged in the community and/or their families and almost never feel bored or regret their decision to retire.

Strangely enough between these two types income doesn't seem to be a huge factor. I've never really noticed a pattern of type 2 having more money than type 1. So what's the difference? Type 2 people tend to have a wide range of interests and set themselves specific goals or focuses in retirement. In the end they just prepared to fill in that suddenly huge block of 40 hours (or more) of your week with other things to do than work.

If you end up being a type 1 don't panic you can still turn into a type 2. I've personally seen someone pull this off. To change over you just have to sit back and develop some more interests and expand your hobbies a bit. Also setting a few goals or a focus to your retirement can help. Some examples include focuses in on the grandkids, learning a new language, visit family/friends around the world or even just in your own city/town. Most important of all is to do what you like. After all retirement is all about the freedom.

Tuesday, May 29, 2007

The Water War - Part I

As I mentioned a while back I'm currently updating some items in my house to see how much money I can save on my water bill. My average bill use to be about $50/month. Last month my bill came in at $43.48, so what changed? Nothing but my attitude and a few minor habits.

I basically just became aware of when I was using water in the day and trying to reduce that amount. So when brushing my teeth I fill up my rinse cup with 1/3 full of water and that's all I use to brush my teeth. I also stopped running the water while washing my hands. I just fill the sink with a bit of water and then proceed to wash my hands and then let the water out. I'm down to perhaps two cups of water to wash my hands now. Then when washing the dishes I start with a small amount in the sink and during rinsing of objects I end up with a larger volume at the end to wash the big dirty pots and pans. I'm also letting my grass grow longer so it needs less frequent watering over the summer. That's all I changed during that time.

I've also picked up a few new things just this last weekend so I will get to see the results on the next bill. I bought a few sink aerators to reduce the flow at my taps from 2.2 gal per minute to 1.7 gal per minute. These things are a good deal. I spend about $4 on the item and install it in two minutes with no tools. For the one tap I've put in I estimated it will save me $0.47/month just on my water bill. That doesn't include the natural gas savings for using less hot water. So I will have a pay back period of around 8 months.

Another project I'm starting in the next week or two is making some rain barrels. I've picked up two 98L-garbage cans, which I'm going to convert over to rain barrels. I still need to pick up a few items to finish the project, but I'm hoping to be able to do it for about $50 for two barrels. I'll let you know the final cost and how to build your own once I'm done.

Monday, May 28, 2007

The Early Retirement Portfolio

It occurs to me that I need to do some more planning about how my portfolio is going to look in early retirement. I specifically need to be conservative with that money that is going to bridge the gap between 45 to 65.

Currently most of this money is in index funds with the following allocation:

25% Bond index
25% TSX index (Canada)
25% SP 500 index (US)
25% International index

This is what I'm thinking about using when I turn 45:

60% bond index or other fixed income
15% Real Estate Income Trust or similar
10% TSX index (Canada)
10% S&P 500 index (US)
5% Cash

At the same time I'm unsure about dropping the international portion of the portfolio. Despite being subject shifts in the currency exchange international markets does offer some diversification outside of North America just in case there is an economic slow down just in our local markets.

Another issue I'm a bit unsure on is how do I convert the one portfolio over to the other? Do I just wait until I'm a few years out and start to slowly pull back from the markets into bonds? Or do you just wait until I'm three or two years out and change over the entire thing?

I'm still a bit unsure on the international idea, but I think I've got a way to handle the portfolio conversion. I would use that old rule of thumb of having your age as your percentage of bonds in your portfolio. Therefore on Jan 1, 2008 I should rebalance my current portfolio to have 29% bond index.

I'm still working all this out so any ideas on how to handle all this would be appreciated.

Friday, May 25, 2007

70 Is The New 50

I was reading this interesting article the other day on 70 is the new 50 for retirees. It was a great read because it pointed out a few interesting facts like of those in retirement only 16% over 60 actually retired early. Perhaps what is more interesting is a fifth to a half of the population still works in their sixties with a huge amount (71%) saying they are because they want to, not because they have to.

Beyond anything that just shows me that the old idea of retirement is time to just sit and relax is long dead with more Canadian retirees doing work or volunteer work which combined contribute a staggering $5.3 billion dollars to our economy. Also Canadians on average are a healthy group with most reporting good or very good health in their seventies.

So semi-retirement seems to be a poplar option overall which is a nice blend of paid work and still having the time to chase your own interests. This agrees a bit with my own views. I'm planning on a early retirement, but I would be willing to do a semi-early retirement as well.

Have a good weekend,

Thursday, May 24, 2007

Wander Reading #2

It's been a busy week of reading for me. I've been having a bit of a problem narrowing down the field, but here is what I like this week. Enjoy.

  1. Canadian Capitalist has a great post on spending habits in retirement which shows it actually goes down.
  2. Crunch Money has an interesting idea on creating a social network for us personal finance addicts.
  3. Here is a great article on why my house price keeps going up.
  4. The Money Diva talks about how to deal with a huge expense (like an over sized tax bill).
  5. Financial Jungle talks about Exotic Retirements and their cheap price tag.
  6. JD over at Get Rich Slowly takes a look at a rain barrel and if it will save you money, which I've been thinking about installing myself.

Wednesday, May 23, 2007

Juggling Priorities

Let's face it saving money itself is fairly easy to do, the problem is what am I going to do with those savings? You can pay down debts, invest in your kid's future, save for retirement, save for buying/starting a small business, save for a second property or save to buy something you REALLY want (car, trip, shoes, TV, computer...).

So how do you balance all those issues or juggle those priorities? You have to have a plan and then stick to it. Here's how I do it.

1) Pay off all non mortgage debts - Debt is just a dead weight you have to carry around so the sooner you get rid of it the easy things become for the rest of your savings.

2) Save for a rainy day - Once you are out of debt having a small amount of savings for when things go wrong is typically a good idea. Start small like $1000 and then play around to find the amount that works for you. (I personally don't do this, but I run my finances with a large amount of spare cash).

3) Save for retirement - You know the best thing you can do for your kids beyond loving them is making sure you are not a dead weight to them when you are older. So save the base amount for your regular retirement first.

4) Save for the kid's future - Now you can save something for those RESP accounts. It doesn't have to be a huge amount, but try to save at least $2000/year to get the maximum education savings grant from the federal government.

5) Save for yourself - Now this doesn't have to be the last thing you save for. It depends on what you are saving for and how good you have been about everything else. I tend to treat myself once in a while if nothing else to keep the rest of my saving in perspective. I would also classify my early retirement savings as saving for myself since it is more of a personal goal than a socially responsible thing to do for my kid.

So what would your savings order be? If you feel like sharing leave a comment.

Tuesday, May 22, 2007

Planning Plan B

Despite my best planning and research I am aware that my plan to retire at 45 can go up in smoke due to any number of different variables such as inflation or investment performance. So it occurs to me that perhaps a Plan B would be in order. So let's look at my options.

1) Push off retirement

This is the easiest of the options to put into place. If I'm checking my numbers when I'm five years out and things are not looking good I can always push back the date by a year or two. This would allow for some additional savings and if I'm lucky a bit more time to get the kid out the front door for good.

2) Scale back retirement

In my particular case I'm not putting a lot of fat into my retirement plans anyways so I'm not comfortable cutting back on anything. Yet this is an option for some people if you are close to your goal and you have a fair amount of padding in your retirement plan calculations (for example you have 10% extra spending per year and you are using a 4% inflation rate).

3) Change plans to a semi-early retirement

In this case I would do the calculations to determine my absolute minimum required for basic living and then pick up any work I would like to fund the extras like a trip. This option has the most appeal personally, since I was thinking of doing something like 'work' when I'm retired anyways. In this case, the extra money I would earn would just be targeted towards the luxury items. The draw back to this option is the increased requirement for doing something to earn some extra income rather than being able to do work without any requirement for extra income in a true early retirement.

Those are perhaps the more obvious options, but if you have another idea please share by leaving a comment.

Friday, May 18, 2007

Long Weekend Plans

Today finally marks the start of the long weekend here in Canada. More importantly it marks the beginning of gardening season. So this weekend I'll start planting the garden in hopes of getting lots of nearly free organic food starting in a month or so. Afterward I intend to sit down and do a lot of nothing for at least one day this long weekend (with the exception of turning on the BBQ and finding a cold beer).

So regardless of what you have planned I highly recommend you put down that calculator and make sure you get outside and enjoy yourself. After all we spend so much time here discussing money that at times I think we forget about making sure we have some fun too.

A quick reminder that I will not be posting on Monday due to the holiday. Have a great long weekend.


Thursday, May 17, 2007

Wandering Reading #1

Today marks our first Wandering Reading post. I was thinking about posting the entire Problogger Top 5 list, but instead I've included a summary list (from Grad Money Matters) and here is the main list if you would like to keep busy for the entire long weekend.

  1. The Top 5 Ways to Become a Millionaire by Jeremy

  2. The Top Five Steps to Grow Your Net Worth by FMF

  3. Top 5 Ways To Save Money Without Noticing by jim

  4. Top 5 Reasons Personal Finance Blogs Are Better Than The Media by Canadian Dream

  5. Top 5 Reasons To Save For Retirement Now! by Retire Happy

  6. Top 5 Reasons I Started and Continue A Personal Finance Blog by Sun

  7. Top 5 Good Reasons to Sell a Stock by Q

  8. Why Your Mom is the Engine of Growth in the Global Economy by Ben

  9. Top 5 Financial Tips for Recent Graduates by Elizabeth

  10. Five Reasons That Credit Cards Rock and Debit Cards Suck by nickel

  11. 5 ways to reduce your car’s fuel consumption (and save you money) by Scott Bird

  12. Top 5 Obsessions Of A Finance Blogger: Stuff I Like And How It Affects My Wallet by Silicon Valley Blogger

  13. How to Budget for a New Baby - 5 Top Tips by Maria Crickett

  14. Top 5 Ways to Save Money While in School by Brett McKay

  15. Top five ways to kill your retirement dreams by mbhunter

  16. More Money: 5 Ways to Earn Extra Cash in Your Spare Time by J.D. Roth

  17. 5 Steps To Improve Your Credit Score by derek

  18. Top Five Reasons to Index Your Portfolio by Canadian Capitalist

  19. The 5 Smart Things To Do When You Purchase An Item With A Warranty by Dana

  20. Top 5 Paths to a Million Dollars by Lazy Man and Money

  21. Top 5 Mistakes Made By Real Estate Investors During the Housing Bubble by Joshua Dorkin

  22. Top 5 Ways To Go Broke by Nirav Desai

  23. A simple Top 5 trading/investing checklist by Falkor

  24. Top 5 Wealth Secrets by Chee Kui

  25. Top 5 Tips for the College Grad by Kim Roach (Not really “personal finance”, but great advice for recent grads!)

Wednesday, May 16, 2007

Living Below Your Means (LBYM)

Getting rich is very easy to do. It involves the simplest math and the most fundamental rules of the universe: conservation of mass and energy (or in this case money).

It basically works like this, if money in equals money out then you are getting by. If money in is less than money out, you are going to be in trouble since your living beyond your means. Yet is money in is more than money out you are on the right path since you can now accumulating more money.

The problem with this idea is it is so simple that sometimes it doesn't sink in how easy it is to use it. So let's give an example. Suppose your a middle class family taking in $64,000/year, so after tax/CPP/EI in SK they would have $45,657 (use this handy calculator from to find out your after tax income). If you are only spending $31,635/year, that means you are living on a pretax income of approximately $43,000. So on a before tax and deductions basis you are saving $21,000/year or 33% of your income.

Now beyond the obvious cash flow for savings benefit of living this way there are a few additional benefits. First off you usually have cash saved up so what someone just getting by would consider an emergency, such as a furnace needing to be replaced, would be easy to deal with. Also if your find yourself on Employment Insurance between jobs some time you should be easily be able to maintain your standard of living even on lower income.

Yet the real crown jewel to LBYM is retirement planning. Since if your use to living on $31,635/year after tax and then you pay off your mortgage you would then be living off $21,495/year after tax. You can generate that kind of income in retirement a lot easier than someone else who is use to living off of the full $45,657, which in return means you can retire a lot earlier than someone that is just getting by.

Tuesday, May 15, 2007

Composting - Is it worth it?

Composting is often presented as once of those things good environmentalists or serious gardeners do in their backyard . But from the purely economic perspective does it really pay?

Composting contrary to popular belief doesn't have to be hard. In is basic form you putting your vegetables/fruits/coffee grounds and some yard waste into a pile with some dirt and then you let the entire thing decay into a black/brown mess which is just full of nutrients for your soil. You can take the lazy route where you just pile it up and ignore it except for the occasional turn with a pitch fork and wait up to a year to get your compost. Or you can give it some more attention and balance nitrogen/carbon/moisture and air flow to get your compost in as little as three months (for more details see here).

On the economic side you are spending around $20 for a small pitch fork as all the basic equipment you need. Then after that your spending your time to turn the pile to produce a bag or two of composted material per year (at least) saving yourself perhaps at most $8 per year. So yes you can save a tiny amount of money, but if you value your time at all you are likely losing money on the deal.

So if you aren't doing it for money, you are basically just doing it for environmental reasons. I personally do it because it is fairly easy to do and it makes my wife's garden produce veggies like mad. Who said you can't save the planet and still be selfish?

Monday, May 14, 2007

Passive Income

During some point in every retirement plan someone comes up with the idea that passive income is king and it should be strive to the exclusion of everything else. The unfortunate thing about this is it often doesn't work for most retirement plans without some series drawbacks.

Passive income classically comes from the following main sources: investment income (interest, dividends and income trust distributions), real estate (a rental apartment or house), and a business in which you own a portion or completely (yet you don't handle the day to day operations of).

Generally I do believe passive income can be a significant portion of your retirement savings, but I don't typically suggest you plan your entire retirement around it. Why? It ties up a significant amount of capital to generate its cash flow which often results in people saving too much money for retirement. Yes if your truly paranoid about dying broke or wanting to pass along your entire savings to your children it can be useful. The other obvious exception to this guideline is if you have a low income and your all your investment income from dividends. In this case you have a significant tax advantage that makes it worth while to use.

To demonstrate what I'm getting at I'm going to use an example. Let's say I've got two people, A and B, who both want to retire 10 years early at 55 and need an income of $25,000/year. Person A wants to use passive income to pay for those years while person B isn't going to.

Person A is a adequate investor and manages to assemble a portfolio that pays a 5% yield to generate his $25,000/year (which is actually a fairly high amount of yield given the current dividend yield of most blue chip stocks). So total portfolio value should be $500,000 ($25,000 x 20).

Person B on the other hand is going to draw down his savings to cover those ten years. After that a combination of government benefits and pension income should cover the rest of his retirement. In his case he earns a 6% yield on his portfolio but his is also drawing down on the principle. So using this calculator he plays around and determines how much he needs to generate that savings by inputing a negative monthly savings rate of $2083.33 (or $25,000 per year). Overall $200,000 should provide 10 years of income and still have about $22,500 left over to cover an poor investment return years.

So overall person B can do the same thing as person A (ie: leave work ten years early) on $300,000 less in savings. Obviously more detailed analysis is required to account for taxes and changes to other parameters like yield, but generally I think more people are planning something like person B rather than person A.

Friday, May 11, 2007

Procrastination Pays?

Most of the time in personal finance issues it doesn't pay to procrastinate on anything. If you want to pay down your debt, save for your child's future or even save for a vacation it is almost always better to start right now rather than waiting.

I recently had an experience where it paid to procrastinate. Literally. I mentioned earlier this week that I had started transferring my old pension over to a locked in RRSP. What I didn't touch on was the fact that my estimated worth of the transfer amount was dead wrong. The original amount of the pension transfer was around $10,000, so I had estimated about a 5% rate of return for the last 3/4 of a year (so hence the $10,500 estimate in my net worth). When I called to get the new amount I almost dropped the phone. My rate of return for the last 3/4 of a year was 17% (or 25.5% in an annualized rate).

So the point of all this is for every 'rule' in personal finance, there is always going to be exceptions where it either doesn't apply to your specific circumstances or you just get lucky. The trick of coarse is to being able to recognize dumb luck over a shrewd decision. In my case, it was merely dumb luck.

Have a good weekend,

Thursday, May 10, 2007

New Schedule

First off thanks for everyone's comments yesterday. The advice was good and the words of support were most welcome. Thank you I needed that.

I've decided to make a few changes around here. The good news is most weeks you will still have five posts a week. Here is the new format I'll start using:

Monday- Regular Post
Tuesday -Wildcard Post
Wednesday - Regular Post
Thursday -Link Post
Friday- Regular Post

The link post starting next week will be similar to some of the other PF link posts you normally see like Canadian Capitalist's This and That posts or Million Dollar Journey's Weekend Reading posts. The wildcard post on Tuesday will be just what the title suggests an outstanding wildcard. Some days it will be a guest post, others a special feature, others a off topic post, others a humour post and sometimes just nothing at all.

The above structure is two fold. First it will provide some order to my regular postings and second it will introduce two important outlets for me. The link post will provide you with some interesting items from around the net and any new blogs that I'm reading. While the wildcard post will provide an outlet for my creative side and yours. Yes that's right, I want you the reader to provide input on topic ideas, jokes, or a guest post about anything. So I don't care if you have never had a blog before or even if you failed your high school English class if you have a topic you want some feedback on send me an email ( I'll be happy to be your editor for your guest post (by the way I'm about 100% better editor of other people's material than my own).

So everyone what do you think?

Wednesday, May 09, 2007

Blogging Burnout

Perhaps it is just me, but lately I'm seeing signs of burnout in myself with this blog. My post quality is dropping off and my attention to my usual topics is wandering. My passion for my writing is getting weaker and I'm finding the mornings harder to face when I get up to write a post. I've had mini-burnouts before this, but they don't really compare to what I'm seeing this time.

So what I need from everyone is some advice. For those bloggers that have been going for a year or two how often did you face this? Does it just come and go? For everyone else, any ideas on facing burnout in general?

Basically I don't want to stop blogging at this point, but I am considering a cut back in posts.

Thanks for your help,

Tuesday, May 08, 2007

Top 5 Reasons Personal Finance Blogs Are Better Than The Media

Over at Problogger they are having a little contest where you can win $1001 in cash for posting your own top five list. Since I won't mind winning and I already had an idea on this post I put together this list on the top 5 reasons personal finance blogs are better than the media.

Reason #5: Reading Level

Most newspapers and magazines are unfortunately written to a grade 6 to grade 8 reading level, meaning that your supposed to avoid big words and break down somewhat complicated ideas into tiny little pieces so your children can understand them. Blogs are not chained to this level and can tackle more complicated issues and provide a deeper analysis of the issues.

Reason #4: Objectivity

Unfortunately in the personal finance world many newspaper and magazine ads are thinly dressed advertisements for products or services. How often have you read an article about retirement where all the people quoted in the story sell mutual funds? How can that possibly be objective? Bloggers are a different breed, we often don't have anything to sell you other than the post you are reading. Also since we are not chained to our advertisers we can be totally objectivity on an issue without fear of costing ourselves revenue.

Reason #3: Discussion

In traditional media it takes days if not weeks for letters to the editor to be posted providing a painfully slow forum for discussion on an issue. Blogs can provide feedback within hours and can take a post in entirely new directions which can lead to new posts by the next day. This provides a truly interactive method of discussing an issue.

Reason#2: Details

Typically in the traditional media you will never see anyone publish their net worth of tell you what they spent last month. Personal finance bloggers can be different. By using a pseudonym a blogger is free to discuss their real numbers so you can really understand the choices being faced by other people just like you.

Reason#1: Making Personal Finance Truly Personal

The best reason by far on why personal finance bloggers are better than the media is they make it personal. They discuss what they are feeling and all the other irrational thoughts that go through their heads about money. A debt blogger will show their progress and discuss their temptations and failures. A investment blogger can provide technical analysis and still post their gut feeling on something. This allows them to truly connect with their readers who can often see bits of themselves in what they are reading.

Monday, May 07, 2007

Analyzing my Current Asset Allocation

Welcome readers to the second Canadian Tour of PF Blogs. I hope you enjoy this post and I encourage you to check out the other blogs. For a complete list head over to the Money Diva's blog.

I know I've been guilty of this myself for a number of years. I tend to focus on each account separately rather than looking at the macro or big picture of all the accounts. I for some reason have a hard time seeing the forest because I'm staring at the trees.

So out of my most recent net worth ($131,500) let me break down where it all is:

1) Primary Residence Equity $91,600 or 70%
2) Canadian Equity $13,950 or 11%
3) Canadian Bonds $3200 or 2%
4) US Equity $3200 or 2%
4) International Funds $3250 or 2%
5) Old Work Pension (?) $10,500 or 8%
6) Cash $5800 or 5%

Well that was an useful exercise I had no idea I was that heavy into Canadian equities. Also it looks like I'm very heavy into a real estate with a huge 70% of my net worth tied up in my house. I'm also a bit embarrassed to say I have no idea where my old work pension is invested. There is a good reason I'm going to the bank soon to get that transfered into a Lock In RRSP.

What is interesting about this was I just broke this up into broad categories, but if I break it down further I suspect I'm holding onto a lot Canadian bank shares since they seem to be a big favorite of most mutual funds.

Now the issue stands, how do I fix this mess of accounts into a bit of order. I'm not sure how I'm going to do it yet, but if you have an idea please share.

Friday, May 04, 2007

Don't Retire Early?

During my usual tour of blog posts last night I came across a post by Saving Journey entitled "Don't retire early!" Of coarse the title got me so I had to read on. Here is a taste of the post:

Personally, I find that my work is enthralling and rewarding. I am very passionate about what I do and I keep very abreast in my industry. I participate in conferences, and I basically look forward to the work that I do nearly each and every day. I've always enjoyed my work for the 10 or so years that I've been doing it. So why the heck would I want to retire early? Consider this:
  • Early retirement is a risk to your future earnings - what if you retire at 45 then decide 5 years into your retirement hiatus that you want to work? Will you be happy with that Wal-Mart greeter job? ;) You greatly risk your future earnings potential
  • Early retirement likely means a decrease in your disposable income both in retirement and today
Overall it is not a bad argument. If you love what you do why stop working. My counter argument is simple. Most people don't love their jobs. If you want to find out if you love your job here is a simple test: If you were not paid to do you job, would you still go to work tomorrow? If you can truly answer yes, congratulations you do love your job and you are part of the 5% of the population that does love their job. For the rest of us, it's a bit different.

Don't get me wrong I do like my job. Some days I would even say I love it, but I find my life so limiting being stuck in that job for 40 hours a week. Also I don't buy into the idea I will want to go back to 'work' after I retire, because who said anything about me not doing something that earns money in retirement. I just don't have to be worried about working a set schedule and I do the jobs I want to rather than needing to.

So I do find happiness in most of my life, most of the time. I don't expect early retirement to be a silver bullet, but rather the freedom to purse anything I want for as long as I want without being tied to the wage that goes with it. That is what I'm buying in my mind with that 'decrease of disposable income.'

Thursday, May 03, 2007

Saving Money and the Environment

Ok, I'll admit it. I'm a bit of eco-nut under all this talk of personal finance. I like to save money, but if I can save the world too, better yet! In fairness to you the reader I do try to keep those posts that edge on the environment some what tied to personal finance.

Well a few weeks back I came across this blog called No Impact Man and from the environmental side it was a great read. The idea of the blog is simple, can a family live in the middle of New York city with no net impact to the environment for one full year. My only problem about sharing this blog was the fact he never talked about his finances. So at last the blogger finally made a post to this regard, which you can read here.

Granted his methods are a bit extreme (like not using toilet paper) but it got me thinking. Beyond the entire save the world thing is there a significant economic benefit to living a green lifestyle. So far in my life and that of the No Impact Blog I would have to say YES. By reducing your ecological footprint you also reduce your economic footprint. Granted it going green often takes some investments to get going (like a low flow shower head or compact fluorescent light bulb), but in the long haul you also can live with less money which also allows you to retire earlier since you need a reduced cash flow.

So with this in mind and my tax return in my ING account I'm going to go shopping to reduce my water bill. I've got some old 13L/flush toilets I have to replace anyways and some old taps in the sinks which are just starting to leak a bit. I'm currently spending $50/month on water and I'm curious with a few changes how far I can get it to drop. I'm going to try and keep track of my the cost differences to go green and the amount of money I save and let you know how the economics all turn out. This should be interesting.

Wednesday, May 02, 2007

How I Feel About Money

It occurs to me that despite me writing about personal finance and retirement every week day for almost six months I have yet to give you an idea of how I think about money. So in the interest of getting to know the inside of my head here we go.

Money to me isn't a status symbol or a motivation to do much of anything. Rather I think of money as a tool to exchange my time for something I want/need. I also manage to keep myself very grounded by firmly separating my wants from my needs. Needs are only food, water, shelter, safety and love. The rest of the world could blow up and vanish and as long as I had those things I could still be happy.

Wants are a bit more tricky in the regards they come in two main forms: the 'I want it now' and 'I still want it later.' The most dangerous want is the 'I want it now' since it comes up in the middle of the mall when you looking at an item. I find this want is just a temporary reaction to the item in question. I really don't even want the item beyond the moment when I think I want it. So most of the time, unless its a great deal, I walk away from the want and see if in a week it has turned into 'I still want it later.' Then I will often go buy the item.

The other weird thing I noticed about wants after I started to take better control of my finances is that some of them are just a habit rather than a real want. For example, I used to always stop and buy a drink when I bought gas for a road trip. Why? I don't know, but I used to do it even if I really didn't want the drink. I would buy one just because of the habit. Now I solve that issue by taking along a container of water and sometimes a coffee from home on a road trip.

The other thing I've learned about getting your finances into shape is after a while you start to have to let go of things. I used to check my bank balance/investments on a daily basis. Now I find it a waste of time. I already know roughly want is going to be in my bank account on any given day, so why check it? Then the investments, since changing over to index funds, I know that the markets swing up/down so I don't care as much how I'm doing on any given day, but rather the longer term trend. I'll learning to let go and just live the rest of my life.

The strangest thing I've learned about money is how yes it touches most of your life, but in the end it doesn't produce any long lasting happiness. I remember the effort I put into something far better than the money I spent on it. I remember the company of great meal more than the food I bought. It's never really about the money I spend in the end, but rather what I'm doing and if I'm enjoying myself that matters.

So that's my little rambling tour of how I think about money. What are your thoughts?

Tuesday, May 01, 2007

Overextending Yourself and Facing Reality

Recently I had a call from a friend who is trying to buy his first home. He is currently buying into a very hot real estate market and has so far had no luck getting a house. The major reason he hasn't got a a house is the market is so hot he has to overbidding the asking price by at least $20,000 with no conditions just to get a shot at a house.

During the discussion it came out that he is trying to get a house near the top of his range given to him by the bank. He knows that he would end up house poor if he did it, but he is still shopping in that range. Why would anyone over extend themselves like that? Simple, he thinks he deserves a single detached house regardless of the consequences.

At times like these I hate to do it, but at the same time someone has to point out what he wants and what he can really afford at this time are two different things. It is time to face reality that overextending yourself is never a good idea. Your cash flow situation ends up so tight that you end up frustrated and often tempted by credit to buy all those things you need for your first house like a lawnmower and appliances. I know this can happen because I ran the numbers myself when I bought my first home. I could afford the over $250,000 the bank approved me for, but I wouldn't have money for anything else. I've seen the pain this causes for people when they get into this situation a few times now, it isn't very nice.

So what's the solution? If the plan isn't working perhaps it is time to change the plan. Perhaps my friend should start out in an apartment condo and keep saving for a few more years. Then when the market isn't so hot go shopping for want he really wants with a larger down payment and hopefully a larger income.

Shopping in a hot real estate market is a brutal thing to have to go through and I don't wish it on anyone. Yet markets like that tend to produce bad decisions based on emotion rather than facts. If you are in a hot market take care to avoid overextending yourself otherwise you might find yourself selling your beloved house when interest rates go up because you can no longer afford it.