Archives For Frugality

How Much House Do You Really Need?

Corey —  October 20, 2009 — 1 Comment

A. H. Allyn Mansion by cliff1066TM on Flickr
       The median size of a new home in America has grown from 1,200 square feet in 1940 to over 2,200 square feet in 2008. And it’s not because our families are getting bigger – the average household size has shrunk from 3.7 to 2.6 in that same time period. Discontentment has fueled the false need for more space. Larger families thrived in smaller homes in the old days. And most families around the world live in small homes today. It’s not that we need all this extra space. We just want it.

       The problem with our imaginary need for bigger houses is that it artificially inflates home and land prices. These increased prices and our “need” for bigger homes stretches our finances far beyond the amount we can afford.

But It’s a Good Investment!

       The myth of a home as a good investment has also led us to believe that more is better. First, look at the costs. What other “investment” can you buy that has maintenance costs of 1-3% a year, is taxed every year, needs to be insured, and needs to be filled with furniture all while appreciating at about the rate of inflation? Yes, mortgage interest and real estate taxes are tax deductible, but the deduction is not as good as you think. Homes have the highest costs for some of the lowest returns of any investment option out there.

       Second, for a home to really be an “investment” you have to be able to get your money back out of it. Otherwise, it doesn’t really matter how much it has appreciated – that growth does you no good if you can’t touch it. So let’s look at your options. You can sell your home and downsize, you can get a home equity line of credit, or you could get a reverse mortgage (if you qualify). The HELOC and reverse mortgage are terrible ideas and only detract from the idea of your home being a good investment. The costs for those options far outweigh any benefits of owning a home as an investment.

       As for the other option, how many people do you know that have actually sold their home and downsized to access the growth of their “investment”? Some do, but most people look at that option as constricting and undesirable. They’ve built their life around that home and created many memories there. They don’t want to leave if they don’t absolutely have to.

       The truth is we only think of a home as a good investment because we fail to track all the costs accurately. If we kept good records, most of us would probably find that it’s pretty much a wash. A home is not an investment. It’s a liability and expense. You’ll save yourself a ton of money if you learn to look at it that way.

The Issue of Space

       Once we can stop looking at a home as an “investment” (and stop using that as an excuse to buy more house), the next thing we need to consider is just how much space we really need. If you’re struggling to figure out how you can afford to buy a house, going through this thought process could help you determine that a smaller house would meet your needs just as well.

       My wife and I rent a house with about 1,500 square feet of livable space. Based on how we’re using this space, I know we could live in 1,000 square feet or less quite easily. Yes, the extra space is nice, but we don’t need it. If we needed to make cuts in our budget, we could try moving to a smaller place. (Though it would be difficult to find anything for much less than what we’re paying to rent this place!)

       Consider your actual space needs before deciding you must have a certain house. Take bedrooms for example. How much time will you actually spend using your bedroom while you’re awake? Unless it’s extremely cramped, you’re not going to care much about how big your bedroom is while you’re sleeping in there. If you have children, can they share a room? Although most kids in our culture today have their own room, it’s not a necessity.

       If you feel like you need more space because you have so much stuff you need to store, consider selling or donating the things you don’t really use. The extra space you free up can help you downsize or just give you extra space you can do something useful with.

       I’m not saying you should make yourself miserable, but you should carefully consider your needs before stretching yourself to buy more house than you can afford. Just because a bank is willing to loan you a certain amount of money doesn’t mean you should use all of it to buy your house. Just because a Realtor suggests that you can afford a bigger house doesn’t mean you should believe them. They have a conflict of interest in convincing you to buy more house than you really need.

       The point is this – don’t convince yourself or let someone else convince you that you need to buy a bigger house than you really need. If you’re going to be pushing the limits of your budget, back off for a bit and consider your true needs. Reevaluate your situation and see if a smaller house would do just as well. Then look for the house that matches your needs rather than the house that’s just under the maximum amount you can borrow.

       Housing is by far the biggest cost in most budgets. If you can save a good chunk of money in this one area, you’ll have a much easier time staying on top of your finances and reaching your goals.

       J.D. Roth at Get Rich Slowly has some good articles on how to figure out your real hourly wage. The first one titled “How to Compute Your REAL Hourly Wage” is a good start to calculating this number, but it leaves out taxes. The second article titled “Beyond “Real Hourly Wage”: How Much Time Does Stuff Actually Cost?” gets closer to a more accurate number, but I personally think you should do it a little differently.

We Still Work by furryscaly on Flickr       J.D. talks about deducting your fixed expenses to calculate your real hourly wage to figure out how many hours things cost in terms of your disposable income. I think this is a good number to keep in mind, but you should also consider your hourly wage in terms of net income as well (income minus work related expenses and taxes). This net income hourly wage can help you see how much of your time is spent paying for your necessities and put those costs in perspective. This is mostly just an interesting experiment, but it can help you realize that your time is worth something and spending money means giving up your time.

       However, what I really want to talk about is the discussion that came up following J.D.’s article about Things It’s Cheaper to Do Yourself. Some commenters contend that if a task would cost less per hour to outsource than you can earn in an hour then you’re better off paying someone else to do it for you. However, this logic is often flawed once you consider reality. This is a topic that’s been on my mind for a while, but J.D.’s article and the discussion prompted me to go ahead with my post.

What Are You Doing Instead?

       When I pay someone to change my oil what do I do while I wait? I’m usually stuck sitting in a waiting room or browsing through the store (if I’m at Pep Boys or Walmart). I don’t earn any money while I’m waiting, so I can’t say I’m saving money or time by paying someone else to change my oil for me. If I can drop my car off and go do some income-producing activity, then it might be better for me to outsource the oil change. Even then, I need to make sure that my net after-tax hourly rate is going to be large enough to offset the cost of paying someone else to change my oil. If it’s not, then I’m better off changing the oil myself.

       The same can be said of many other activities we outsource. It’s easy to say, “Yeah, I’ll pay Jim $30 to mow my yard because it would take me 3 hours and I can earn $10/hour.” But this logic only works out if we take the time we would have spent mowing the yard and use it to earn money or provide ourselves with some other sort of value. This could mean enjoying a leisure activity or spending time with family. If mowing the yard would have prevented us from those (non-income producing) activities, then paying someone else to mow our yard might make sense depending on how much we value that time.

Sometimes It’s Better to Hire a Professional

Beautiful Tools by geishaboy500 on Flickr       Another exception would be projects that are better completed by a professional. If you do not have the ability to complete a project, then it’s probably best to pay a professional. You’ll save more money by having someone do it right the first time than having to go back and fix the mistakes you made trying to do it yourself. This can also be true if a project requires very specialized tools that we may never use again. This is the same logic we apply when we realize it’s better to rent a bulldozer to dig a hole than to buy it if we’re probably not going to use it again.

       However, it’s sometimes better to do a job yourself because you’ll know the quality of your work. When you hire someone else, you can get unlucky and end up with a “professional” who does shoddy work. With careful research and good referrals, you can usually avoid such misfortune. But if you know how to do a project and can do it well, you’re likely to get better results by doing it yourself than by hiring a “professional”. It also might be worthwhile to do it yourself because you’ll learn new skills you can use again in the future – thus allowing you to do even more yourself and save more money.

What’s It Worth to You?

DoItYourself.com       My point is that most of the time it makes sense to do it yourself. There are a few exceptions where this is not true, but simply valuing our time based on our gross hourly wage is flawed. We have to look at the value of our time spent in the replacement activity (the thing we’re doing instead of the DIY project). If the value of our replacement activity outweighs the cost of outsourcing, then we can safely say it’s better to outsource. This still neglects the benefits of learning new skills and the satisfaction that many people experience when they do something themselves, but that’s a very subjective benefit.

       Just as every other personal finance decision needs to be considered in light of your personal situation, so does weighing the option of doing something yourself or paying someone else to do it. Depending on the value of your time, the activity you’ll do instead of doing it yourself, your skill set, and your desire to do it yourself, it may or may not make sense to outsource a project. Be sure you consider these factors before you say you’re saving yourself money or time by outsourcing.

Use it up, wear it out, make it do, or do without!
       ”Use it up, wear it out, make it do, or do without!” This saying from the Great Depression shows the way to true frugality. If you want to get the most out of your money, follow the steps outlined in this little rhyme.

Use It Up

       Don’t let anything go to waste. Before you throw something out ask yourself if there’s anything else you could use it for. Many frugality tips revolve around repurposing materials for new uses. Bread bags can be cut in half to use as sandwich bags. Old towels can be cut into washcloths. With a little thought and creativity, you can reuse the things you’ve bought and save yourself from buying again.

       I’d also apply to this to food. Don’t let your leftovers go to waste. Plan your meals well so you use up leftovers before fixing another meal. Or create a new meal from your leftovers. Many leftover items can be combined to make a soup, stew, or casserole with just a few additions.

       On your next trip to the trash can, ask yourself, “What else could I do with this?”

Wear It Out

       Make sure you get the full use out of anything you have. This is a lot like the first step above, but we should also include maintenance in this category. Take good care of the things you own so you can get the full use out of it. This especially applies to appliances and automobiles. Find out how to properly take care of these items. Then make sure you do the things necessary to keep your stuff in good shape. Don’t skimp on maintenance, but try to see if you can save money by doing some things yourself.

       This also means you shouldn’t buy cheap just for the sake of getting a bargain. Quality items will last much longer making them worth the extra cost. You’ll also save time by not having to shop for a replacement as often. Getting the most value for your dollar doesn’t necessarily mean paying the lowest price.

Make It Do

       Before throwing something out, see if you can fix it. Many things that wear out or break can often be repaired for a fraction of what it costs to buy new. Do a little research or ask someone you know who is knowledgeable and find out if it can be fixed. If you can, fix it yourself. You’ll learn valuable skills and likely save money over paying someone else to do it. If not, find a trustworthy person to do the repairs for you.

       Other strategies you can use to “make it do” include buying it cheaper, making it last longer, and using less of it. Combine those three strategies to get the most savings possible. We can often use less of something and still be just as happy. Take toothpaste for example. Do you put enough on to cover all the bristles? Try using half as much. If your teeth and mouth still feel clean and refreshed, then you don’t need to use any more than that. If not, bump it up a little. Little steps like this require no extra time on your part, but they can reap you significant savings when applied over many areas of life. And that’s all with no decline in quality of life.

Do Without!

       Contentment is the key to the final aspect of this wise saying. Knowing how to separate your needs and wants gives you powerful control over your finances. Learning what is “good enough” for you will help you delay purchases and get the maximum use out of the stuff you already have. Ignoring the cultural expectations to keep up with the latest fads will save you more money than you can imagine.

       This instruction has a hidden benefit as well. When you learn contentment, you break free of materialism and consumerism. You can choose to stop serving Money and start serving God. You can increase your giving because you’ve learned to spend less on yourself. The truth is – contentment is wealth. It’s the most powerful way you can combat the blatant attempts by the media and corporations to control your mind and your wallet. Finding your satisfaction in Christ will help you value things appropriately in this life so you can make the right decisions for the next one.

How Do You Follow This Slogan?

       How do you “use it up, wear it out, make it do, or do without” in your own life? Share your examples in the comments!

Make Money by Selling Your Stuff

Corey —  August 25, 2009 — 1 Comment

       You know all that extra Stuff you have? The Stuff that’s piled in corners, packed in boxes, gathering dust in the garage, or sitting in a storage unit could mean lots of extra cash for you if you’re willing to sell it. Either it’s worth something or it’s just costing you money by taking up space. Here’s how you can make some space and some money by getting rid of your Stuff.

Ignore Your Inner Pack Rat

       Your inner pack rat is telling you that you’ll use all that Stuff someday. Or maybe it’s whispering sweet nothings about sentimental value. The first thing you need to realize before you can make money by selling your Stuff is that you must ignore your inner pack rat! He’s what got you into this mess in the first place!!!

       To really cash in on your Stuff, you’re going to have to get rid of all the junk that you never use. Then you need to go through the rest and figure out if you really need it or not. Be ruthless! If it’s something you haven’t used in the past 3 months, plan on selling it. Of course, you don’t have to sell everything to make some money. But you’ll make a lot more if you’re willing to part with all that extra Stuff you never use.

eBay

       Your first stop for selling your Stuff should be eBay. It’s a great way to sell items for much more than you’d get by having a garage/yard sale – and you don’t have to sit outside at home all day on a weekend either. Not everything will sell very well on eBay, so think about it before you start listing items. There is a cost to this, but the higher prices you’re likely to get will outweigh that. Take quality pictures, use a good title, and write a detailed description to make sure you have the best chance of selling your Stuff at a good price.

Craigslist

       For larger items that don’t ship easily, you’re better off using your local Craigslist classifieds. It’s absolutely free and requires little effort on your part. Just make sure to include a good picture, use a good title, and write a detailed description. Be prompt about responding to inquiries, and be courteous by deleting your posting when you’ve sold the item. Be careful about setting up meetings with potential buyers, and be prepared to deal with no-shows. Your best bet is to deal only in cash as checks could easily bounce.

Have a Garage or Yard Sale

       This will take a bit more work than the other two options because you’ll need to organize all the stuff you want to sell, indicate prices somehow, and sit out with your Stuff all day while you wait for potential buyers. You’ll want to advertise by putting up signs along major roads near your house the week before and using any free resources like community newspapers and bulletin boards. Be prepared to negotiate with buyers, and don’t overvalue your items. The best way to sell nothing is to price everything too high.

Donate to Charity

       Finally, donate whatever you’re unable to sell to charity. The Salvation Army and Goodwill are easy places to make donations of a wide variety of Stuff as well as church yard sales. If you itemize deductions on your tax return, you can deduct your donation and possibly reduce your taxes or get a larger refund. Even if you don’t itemize, you’ll have done something good while getting rid of your Stuff. You’ll get a warm fuzzy feeling, and you’ll have more space so you don’t have to pay for a storage unit. You might even decide to downsize your home and save even more money!

Don’t Waste the Money

       Now that you’ve cashed in on your Stuff, be careful you don’t waste all that money. Build up your emergency fund, pay off debt, save for retirement, or give it to the needy. Just make sure you don’t go out and buy more Stuff that will start piling up again in all that space you cleared out!

Stop the Stuff from Taking Over Again

       Now that you’ve cashed in on all that Stuff you accumulated before, take time to figure out how you can stop Stuff from taking over your space again. Why did you buy all that Stuff in the first place? Learn your weaknesses, then find ways to avoid the temptation to buy useless Stuff in the future. You’ll save money, time, and the hassle of having to purge all that Stuff again in another few years.

       We’re bombarded with sales pitches and advertisements all day long. But there’s one very easy way to conquer any sales pitch with little effort or time. Corporate America has no power over someone who has “enough”. The power of that little word will help you overcome any attempt to part you from your money.

“That’s OK. I have enough already.”

       Whether it’s clothes, food, gadgets, tools, or any other stuff someone might try to sell you, telling them you have enough already will stop them cold. You can’t sell to someone who is content and has “enough”. Telemarketers don’t have a scripted response for “I have enough already.” Salesmen haven’t perfected their pitch so much that they can sell to someone who’s happy with what they already have.

       It may be important to add the fact that you’re already satisfied with what you have. Maybe a better response would be “Thanks. But I have enough _______ , and more _______ won’t make me any happier.” There will be some salespeople who will attempt to continue their sales pitch, but if you repeat that response a few times they’ll give up quickly.

       You can use that statement in a variety of ways. Here are a few that come to my mind:

  1. I have a big enough house, and a bigger house won’t make me any happier.
  2. I have a good enough car, and a newer car won’t make me any happier.
  3. I have clothes that are warm enough and good enough, and more clothes or fancier clothes won’t make me any happier.

       When we find satisfaction in what we have already, we break the power of consumerism in our lives. When we realize that what we have is enough, and more can’t make us any happier, we’ll learn to look to the true source of happiness. We’ll find that once we have Jesus we no longer need more of what the world has to offer. We’ll find our full joy, contentment, and purpose in following Him.

       The power of enough has exciting implications for our personal finances. By learning to be content and knowing what our “enough” is, we can have much better control over our spending and habits. We’ll be able to handle our money much better and use it more wisely. Contentment is so powerful that I’m going to spend some time looking at how we can be more content in many areas of our lives – our homes, cars, clothes, food, and even our taxes and savings among other things. So be sure to sign up for free updates to Provident Planning if you’re interested in gaining more control over your finances and finding contentment in your life!

       Looking for ways to save money on your food costs? Try these 10 ideas for minimizing your stomach’s impact on your budget:

1. Stop dining out! Cook at home instead.

       Paying someone else to fix your meals gets very expensive very quickly. Forget the argument that you save time by dining out. That only works for fast food – and you know better than that, right? Even if your kitchen skills are a little dull, you’ll be able to prepare a tasty meal in no time after a little practice. Make dining out a rare treat and your budget will thank you.

2. Create a meal menu for the week. Then make a grocery list and stick to it.

       Don’t let your refrigerator dictate your diet. Plan your meals for the week by looking at what’s on sale (without violating any of the remaining tips). Make your meals work together by planning for dishes that use the same ingredients. Then create your grocery list around that menu. Stick to your list when you’re shopping for groceries. You’ll save money two ways here. First, you’ll waste less food because your meals are planned out and work together. And second, you’ll spend less on impulse purchases because you’re sticking to your list. Oh, and make sure you eat before go shopping!

3. Buy unprocessed foods.

       Lay off the Cheez Whiz, soda, junk food, and prepared meals. These foods cost more than they’re worth, and they’re not healthy at all. Poor quality ingredients, additives, and way too much sodium mean you’re getting ripped off while destroying your health. Instead, stick to unprocessed foods. The less it’s been processed the better. Buy basic ingredients (like raw vegetables) and turn them into meals in your kitchen. You’ll be healthier and save a ton of money.

4. Buy produce in season.

       When you buy produce out of its regular harvest season you’ll pay more for a lower quality product. Buying in season means you’ll get a lower price and fresher fruits and vegetables. You’re also more likely to get locally grown produce than something that’s been shipped across the nation or world.

5. Buy in bulk.

       When buying staples consider buying in bulk. You’ll often get the exact same product for a lower cost per unit (ounce, pound, etc.). However, be careful to compare costs on the various sizes available. The biggest package may not always be the best buy.

6. Stock up when you find a good bargain.

       If a store has a great sale on an item you regularly use and can store, you can save a good bit of money by stocking up. Just make sure it won’t go bad before you can actually use it. And don’t buy stuff just because it’s on sale – be certain it’s something you’ll eat!

7. Reduce your meat intake.

       Meats are the most expensive parts of nearly any meal. By cutting back on the amount of meat you eat, you’ll save money and improve your health. Don’t worry about not getting enough protein. Americans eat much more protein than we actually need for a healthy diet. Less protein means better calcium absorption, which leads to stronger bones.

8. Don’t eat too much.

       Not only is it bad for your waist size, but it’s also bad for your budget. When you eat too much your body doesn’t efficiently turn the food into energy. All you get is a stuffed belly and money down the toilet (literally). Eat moderate portions and you’ll feel better and save money.

9. Don’t waste leftovers.

       If you planned your meals well in tip #2, you shouldn’t have to deal with this problem. But in case you didn’t do that, don’t forget to use all your leftovers. Anything you throw away is like throwing cash in the trash.

10. Price your recipes to find the cheapest recipes.

       By figuring out the cost per serving for the recipes you prepare the most, you’ll find the most affordable meals. If you want to see a true cost, add in the time you spent on preparation (less the time you would have spent driving and waiting to eat out). If you can’t remember what you paid for the ingredients, you can estimate prices from an online comparison. I use Safeway’s “Grocery Delivery” section on their website when pricing my own recipes. You can see the price and size for almost any item. You just need to enter a zip code where a store is located. If you don’t have a Safeway near you, try “22044″ for a zip code. It’ll take you a little time to price your recipes, but it’s something you won’t need to do very often. If you find yourself needing to save a little more money, it’ll help to know which recipes are the cheapest. Finally, don’t focus on cost to the detriment of your health.