Archives For October 2009

Raising a Cow for Beef: Month 2

Corey —  October 21, 2009

Paul & Bambi - 2 Months Old

       Meet Bambi, our two month old steer. My wife and I are raising him for beef. I highly doubt we’re going to save much money by raising him ourselves. Looking at the feed costs alone, we might end up ahead. But it’s the time spent feeding and caring for him that will ultimately make this a break-even or money-losing experiment. I’m going to track the costs and time that go into raising Bambi and share that information with you all in monthly updates until he goes to the butcher (probably in Spring 2011).

How We Got Bambi

       My wife and I live in the southern part of Lancaster County, Pennsylvania, which is home to many dairy farms. I’d say that well over half of the families in our church either currently are or were once connected to the dairy industry (either working on the family farm, selling feed, trucking milk, or doing custom farm work). It’s through one of the families at church that we received Bambi.

       Konrad, the youngest of the family and the one in charge of breeding and feeding the family’s herd, had been trying to breed a Jersey heifer into the herd. He bred one of their small Holstein cows to a Jersey bull and got a heifer a while back. Once she was old enough, he bred her to another Jersey bull but this time he got a bull – Bambi.

       Bambi was a bit premature so he was rather small when he was born. Dairy farms rarely keep bull calves, especially small ones, unless they’re going to raise them for beef or use them for breeding. Bambi was destined to go off on the truck and he faced a grim future. Because he was so small, he probably wouldn’t bring much money and the farm would end up with a bill because of the transportation costs. Konrad offered to let us have Bambi for free if we wanted him. I thought it would be fun, and Michelle couldn’t say no after she met Bambi.

       Konrad kept Bambi long enough to get him dehorned and castrated when the vet (another member of our church) came by the farm. We got Bambi on August 31st, a week and a half after he was born (on August 21st). He’s two months old today, and he’s finally off milk replacer (powdered milk designed especially for calves). Here’s a picture of me with Bambi on the night Konrad dropped him off:

Paul with Bambi at one and a half weeks old

The Costs and Time

       I’ve been tracking the costs and the time spent on Bambi so far, not including recreational time. (We sometimes take him on walks around the yard or through the corn fields surrounding our house. Yes, that does sound weird.) It has been taking about 10 minutes each time to feed Bambi while he’s been on milk, and we’ve had to do that twice a day since we got him. Plus, I had to spend some extra time getting things ready for him. I expect the time commitment to go down a bit now that he’s off milk, but we’ll see. Here’s what we’ve spent so far:

  • Cost of Bambi – Free, my favorite price!
  •        

  • Castration & Dehorning – $16.00
  •        

  • Milk Replacer – $45.54 (You’d technically only need half that for one calf, but since we only have one calf we fed it all to him. I guess we could have sold the extra to a farmer, but then we would have needed to buy more calf feed.)
  •        

  • Calf Feed – $10.84
  •        

  • Miscellaneous – $39.90 (This was for stuff like buckets, a collar, a chain and connectors, some medicine, etc. We shouldn’t need to spend much more in this category for a while.)

       So far we’ve spent a total of $112.28 and 30 hours of time. The next thing we’ll need to buy is some hay for the winter, more calf feed, and eventually some corn. I’ll be gleaning some fields around here for corn, and there’s a family at church with a machine that can grind it to the right size for Bambi. But eventually I’ll need to buy some corn.

       This is not an experiment in exactly how much it costs to raise a cow for beef. We have a unique situation, and we’ll probably have some options that others won’t. For example, we happen to have a barn on the property we rent and our landlord (who happens to be my father-in-law) is OK with us keeping Bambi in the barn. We’ll also have access to some equipment and resources that others may not, which will help us keep our costs low. So keep that in mind when looking at the money and time we spend on Bambi. This is just a record of our experience and results.

Get Free Updates!

       If you’re interested in tracking Bambi’s progress and our results, sign up for free updates to Provident Planning. I’ll be providing updates on Bambi every month until it’s time to butcher him. In the meantime you’ll get great, free content about ways to save money, manage your personal finances, and learn about personal finance in the Bible. This offer comes with a 400% money back guarantee and you can always unsubscribe at any time. (And don’t worry about spam. Your email will never be sold or given to anyone else for any reason at all.) You can’t lose!

How Much House Do You Really Need?

Corey —  October 20, 2009

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.

How Long is Long Term?

Corey —  October 16, 2009

       Two good questions when we invest money are:

  1. How long until I’m likely to get a positive return?
  2. How long until I’ll get close to the average return?

       Since we can’t predict the future, the easiest way to answer these questions is to look at what happened in the past. Keep in mind we’re looking at the worst case scenarios for each of these questions.

How Are You Invested?

       Your investment returns and risk (volatility) greatly depend on your asset allocation. The more of your portfolio that’s invested in stocks, the higher your risk will be. Higher risk means it will take longer to know for certain you’ll have a positive return over any given time frame. It also means it will take longer to know for certain that you’ll get your required return over any given time frame.

       To answer these questions accurately, we have to look at the mix of stocks and bonds in your portfolio. Assuming you’re invested in a diversified portfolio, the answers to your questions are given below.

How Long Until I’m Likely to Get a Positive Return?

       Put another way, this question is: “What’s the minimum amount of time I need to be invested in a specific portfolio to be fairly certain I won’t get a negative return?”. Here are the answers based on historical investment results since 1927.

  • 0% in Stocks (100% in Bonds): 3 Years
  • 10% in Stocks: 5 Years
  • 20-50% in Stocks: 7 Years
  • 60-80% in Stocks: 10 Years
  • 90-100% in Stocks: 15 Years

       Again, these answers assume you’re using a diversified portfolio as recommended here.

How Long Until I’ll Get Close to the Average Return?

       This question can also be posed as: “How long do I need to be invested so I can be reasonably sure I’ll get a return somewhere close to the historical average?”. The first step to answering this question is to define “close to the historical average”. For the purposes of this article, we’ll define close to the historical average as 75% of the historical average. For example, if the historical average for a given portfolio is 10%, then we’d consider 7.5% as being “close to” that average. We’re looking at the longest historical time period that it took to get close to the average return. So what’s the maximum amount of time we would have to stay invested in order to get close to the average?

  • 0-10% in Stocks: 55 Years
  • 20% in Stocks: 50 Years
  • 30% in Stocks: 45 Years
  • 40% in Stocks: 35 Years
  • 50-100% in Stocks: 30 Years

       Now, it’s important to remember we’re looking at the worst case scenario in both of these analyses. In reality, we’re likely to experience better results than these worst case scenarios. Most of these worst case scenarios occurred during the Great Depression.

       Historically speaking, a 100% Stock portfolio only experienced single digit returns twice over any 30 year period. Both of those single digit periods were during the 30 year periods beginning in 1928 and 1929—the worst times in history to begin investing.

       These time periods are good to keep in mind especially when we’re experiencing difficult times. When it feels like your investments aren’t performing as they should, just remember that it can take many years before you can expect to get a positive or average return in the worst case scenario.

Civil War gravestones at Vicksburg by Matito on Flickr       Estate planning is probably the most neglected aspect of personal finance because we don’t like to deal with the reality of our own death. Making decisions about who will get what when we die and medical treatments we do or don’t want while dying are not exactly at the top of our “fun” list. But taking the time to deal with these critical issues can save your family and friends a lot of heartache, stress, and even money. There are four main estate documents you’re likely to need: a will, a durable power of attorney, an advance medical directive or living will, and a health care power of attorney.

Will

       A will simply states who you want to handle your estate (file the paperwork and make sure things are distributed properly) and how you want your property distributed. Everyone should have a will. Without a will, your estate will be distributed according to the laws of your state and the court will appoint someone to administer your estate. The handling and distribution of your estate could cost much more this way and go against your wishes.

       While there are ways to create your own will (like www.nolo.com or Quicken WillMaker), these tools should only be used in very straightforward situations. If your estate exceeds the estate tax exemption amounts, you have a complicated family situation, or you want to distribute your assets in a complex manner, you should consult with an estate attorney. If you even think you have a complicated situation, you should meet with an estate attorney to talk about it.

Durable Power of Attorney

       A durable power of attorney gives someone else the power to act on your behalf in a legal or business matter. That person is called your “attorney-in-fact”, and they are required by law to act in your best interest at all times. However, you must still be careful whom you choose for this position as any action they take will be treated as if you had done it yourself. The “durable” part simply means that it remains in effect even if you are incapacitated (e.g., in a coma). This document is useful when you are unable to act on legal or business matters for yourself either because you’re incapacitated or you’re just not available (e.g., out of the country).

       It’s a good idea to have a durable power of attorney regardless of your situation. This enables your attorney-in-fact to handle your affairs and sign on your behalf. Having one will make difficult situations a little easier to deal with. These documents can give very broad ranging powers to your attorney-in-fact, so you’ll want to consult an attorney before signing one and carefully consider who you will appoint as your attorney-in-fact.

Advance Medical Directive or Living Will and a Health Care Power of Attorney

       All of these documents deal with the health care decisions that must be made when you are unable to make them for yourself. If you’re in a coma or too sick to respond, these documents can guide your family members and physicians in determining your wishes.

       An advance medical directive or living will (depending on where you live) will provide specific instructions about the health care treatments you want or don’t want when you’re facing a terminal illness or condition. These can be very specific or very general, depending on what you include. However, they don’t usually address all possible situations and may not be clear enough to provide guidance for critical decisions. They do not give anyone the power to make decisions for you. They just make your wishes known.

       A health care power of attorney works just like a durable power of attorney except it is only for health care decisions. You appoint an attorney-in-fact and give them the power to make health card decisions on your behalf. You can include your wishes in this document as well, but unless you’re clear you can run into the same problems as the living will. While this won’t eliminate all possible problems (like family disputes), it does make clear who you want to have the final say about your health care decisions.

       The best strategy is to have both of these documents in place. This way you provide some guidance on your wishes but you also give someone else the power to make decisions in scenarios you may not have considered. Be as clear and straightforward as possible so there is no question about your desires.

       Again, you can use do-it-yourself tools to accomplish this, but you must be careful to ensure that your documents will comply with state laws. The counsel of an estate attorney will help you consider all possible scenarios. Some states provide free example documents you can use. Pennsylvania offers a combined living will and health care power of attorney that you can fill out. Search for similar resources for your own state.

Review and Update!

       The nice thing about getting your estate documents drafted and signed is that you don’t have to do it every year. Once you’ve completed them, you’ll just need to get them reviewed and updated as your situation or state laws change. If you get married, divorced, have children, or experience other major changes, you’ll want to meet with your estate attorney to review and update your documents. Don’t neglect this or you (or your family) could end up regretting it!

       Again, if you’re going to use an estate attorney, shop around. Don’t settle for the first quote you get. Talk to several attorneys, stick with the ones who specialize in estate planning, and ask for referrals from your family and friends. You may also be able to get a good referral from your accountant, financial planner, real estate agent, or banker. The most expensive attorney is not necessarily the best, but do your research before you go with the cheapest option.

       Finally, don’t put off this important but very unexciting task! It doesn’t sound like fun, but it is essential to having an organized and efficient financial plan. It will also help to ease the stress your family will endure during those painful situations. So get to work and get those estate documents ASAP!

       If you’ve determined that you need life insurance, your next step is to figure out how much coverage you should buy. You don’t need a complicated calculator to figure this out. You only need to know how much income you’ll need to replace if you die and how many years until you’ll retire.

Replacement Income

       Life insurance’s primary function is income replacement in case you die prematurely. How much income you replace will be up to you. You can choose to replace your entire income. Or you could assume you personally spend about 20% of your income and just replace 80% of your income. Finally, you could choose just to cover essential expenses for your survivors (like shelter, food, clothing, utilities, etc.).

       If you have children, you’ll most likely want to plan on replacing your entire income. If you don’t have children, you’ll need to decide what purpose you want your life insurance to serve. Is it to fully replace the income you would have earned or just to cover the essentials? Once you’ve figured out how much income you want to replace, you just need to determine how much insurance coverage you’ll need.

How Much Life Insurance?

       Now you need to figure out how many years you’ll need to replace your income. Generally, you’ll use the number of years until you retire. (But you should adapt the calculation to your situation if necessary.) Then use this chart to find out what factor you should multiply your replacement income by:

Life Insurance Factors

       So if you need to replace an income of $40,000/year and you have 40 years until retirement, you’ll multiply $40,000 by 25 to get $1,000,000 of insurance coverage needed.

       Next, subtract any savings you have that could be used instead of insurance. (Don’t count retirement savings because your spouse will need that for retirement.) That will leave you with the total amount of insurance coverage you need to buy. If you’re married, just repeat this process for your spouse.

That’s It!

       That’s all you need to do to figure out how much life insurance you need. Just make sure you’re very careful about deciding how much income you’ll need to replace as that’s the biggest factor in this calculation.

Selfish or Selfless?

Corey —  October 13, 2009

       Jesus did not call His followers to lead selfish lives. He taught about selfless living. He told us to forgive an unlimited number of times. He told us to give generously to the needy from our own abundance. He told us to love our enemies. He told us to repay evil with good. In every case of justified judging, keeping what we deserve and earned, hating, and revenge, Jesus taught us to choose love instead.

       Why does this matter for our personal finances? Jesus spoke often about wealth and the dangers of loving money. In every case, he told us we must not submit ourselves to the service of money or the lusts of riches. If we do, we cannot serve God. He did not leave us a middle ground. Jesus told us to sell what we have and give it to the poor. He didn’t say keep some extra wealth back for yourself to enjoy because you worked so hard for it. He called us to lovingly give to the needy out of our abundance.

       What’s an abundance? It’s having much more than we need. Not the kind of “I need a million dollar home” need. These are the basics we need for a comfortable (not luxurious) life. Jesus calls His followers to live simply so they can meet the needs of the poor and so they will not become slaves to money.

       Jesus didn’t tell us we should not work to meet our needs. But He did call us to avoid seeking wealth as our main pursuit in life. He told us that we should instead seek the Kingdom of God. Those who choose to follow Jesus must give up the selfish life and seek the selfless life.

       But how well are we doing this? American Christians as a whole (including me) have done a terrible job of following Jesus’ teachings about wealth and giving. We choose to satisfy our selfish desires (early retirement, vacation homes, frivolous luxuries, and other unnecessary wants) instead of meeting the basic needs of the millions of starving, homeless, hurting, and sick around the world. And it’s not that we just do these things once or twice in our lives. We have made an entire lifestyle – developed an entire culture – around it.

       As Christians we often try to justify it by saying we tithe or give to this charity or that mission. Or we claim that God has blessed us, so He must want us to enjoy at least some of it. But I’ve never found any justification for our selfish behavior anywhere in Jesus’ teaching at all. If I’m wrong, please show me.

       Jesus called us to live generously and sacrificially. He told us to put our desires and rights aside and put the needs of others first. I cannot see how Jesus could want me to buy a big screen TV when people are starving. I cannot see how it is loving of me to want a fancier house when people will sleep out in the rain tonight. I am blessed by God with everything I need to enjoy each day and do His work. I have not completely mastered these ideas – I still struggle with similar choices all the time. But God is opening my heart to the needs of others and showing me just how greatly blessed I really am.

       We have found too many reasons to push Jesus’ words aside to justify our own selfishness. We claim to follow Him, but we don’t do what He taught. Instead, we work so hard to get all the things we want (and don’t need). We are blind to how Satan has gained control of our hearts through our culture and money. We are not serving God when we spend on our extravagant wants. We are serving money (and Satan).

       There’s no secret to living a selfless life. There’s no formula. And I can’t set guidelines for what you should and shouldn’t do. You must choose to look at Jesus’ life for your example. You must choose to listen to His teaching for guidance. You must love Him, and He will teach you what it means to love others.

       Are we really willing to follow Jesus’ teaching? Are we ready to forsake the world, set aside our desires, and give generously to the needy in the name of Jesus? Are we going to take up His cross? Or are we going to close our eyes and shut our ears to the needs of the poor while we justify our selfish actions?