Investment vs. Expense...Changing Your Mindset.

I watch a good amount of television. Not too much crazy reality shows (although I do have my guilty pleasures), but mostly lifestyle TV...like HGTV, and the Travel Channel, with a lot of Investigation Discovery (ID), CNBC,  and History Channel thrown in. Okay so unfortunately watching lifestyle channels, CNBC, and listening to Dave Ramsey is my only real glimpse into how wealthy people view things.

One thing I have picked up is that when wealthy people are interviewed for a particular show, whether it be buying a property or going on a vacation, then tend to describe it as either an  "investment" or an "expense".  As you would expect, they tend to "invest" more then just "expend", my assumption is because they want to stay wealthy...Maybe broke people "expend" more than "invest"... Is it that simple?

Dictionary.com defines the word invest (verb) as:"to put (money) to use, by purchase or expenditure, in something offering potential profitable returns, as interest, income, or appreciation in value". So in other words, people who do more of this tend to put their money into things that  will reap some sort of return (monetary or otherwise).  

Dictionary.com also defines the word expend (verb) as: "to use up".  So in order words, people who do more of this tend to put their money into things that use it up. Basically "expending" your money is like driving down the highway with $1 bills in your hand throwing them out of the window, its gone, its not going to generate anymore, its been expended!

I suspect that when wealthy people decide to "expend" they first determine if they can really afford to take the "hit", given the amount of their other money is going toward investments.  

For example, you take a $3,000 vacation which (for the sake of argument) is an "expense"; can someone with your net worth and income level really afford that vacation? Even if you don't go into debt and save up for it; can you really afford to take a $3,000 "hit" to your total financial world (net worth, etc.)? In other words, can you afford to drive down the street and throw 3,000 $1 bills out the window without batting a eye?


I think if we are going to be financially successful, we need to pay attention to how much of our money are we "investing" vs. how much we are "expending".

I know that in order to survive expenses are a very necessary part of our world, however I think we should consider them under these terms.  I don't know the "magic" formula of how much of your income should be going to expenses vs. investments...but I am (personally) trying to get my living expenses down to 50% of my income, with 30% to invest, and the remaining 20% to spend and enjoy. So that would leave me 70/30 in terms of expending vs. investing. Now if (when) I become wealthy those ratios will change, just because you make $10M, doesn't mean I must now live on $5M and spend $2M on crap.  Likewise a person making $30k per year, may not be able to live on $15k, invest $9k and spend $6k a year!


I would challenge you today to make a list of things you often spend money on and categorize them as either an investment or an expense...


Let me help you...



*Some of these items can be considered both an expense and an investment depending on the circumstances.

MsMoneyGuru

Having problems developing a plan to get out of debt? Want to know who we are doing our debt snowball? You may need a coach...MsMoneyGuru is here to help, contact me at msmoneyguru@gmail.com for a consultation.

"How We Saved $10,000 in Just One Year" (Article)

Check out this article!

Interesting story about "Wealth Watchers" a Money Diet (sorta like Weight Watchers).

"How We Saved $10,000 in Just One Year" - Your Money - MSN Living

The author of the story is married with two boys. She and her husband do not combine their inco me (they split bills), they tried this Money Diet separately and found relative success.

The Wealth Watchers program in short requires that you make a typical monthly budget, with income at the top subtract all fixed expenses, then take the remainder and divide by 30 to give yourself a daily discretionary  budget. The author had about $90 a day to spend. Of course if you spend more one day you can spend less the next day...you tally up your net spending every week and save the excess.  Psychologically, having only $90 a day to spend made her reevaluate her needs vs. wants therefore making her a better saver (like Weight Watchers does with its daily points system). After a year, she was able to save or pay down $10,000 worth of debt.

The only thing I didn't like about the story (example) is that she and her husband don't combine to any extent their finances... In my opinion, we were not put on this earth to go alone, so if you have a good healthy relationship and you utilize teamwork in everything else (raising kids, etc.) why not include your finances?  I think she would have been much more successful if she and her husband combined some things...

In an extreme case this is how you end up with one spouse that is a saver and has $30k in the bank with $300k in retirement savings and the other spouse with $30k in debt and no retirement savings...that's counterproductive in my opinion and makes for a hard choice when the skeletons are reveled.  When they retire will the responsible spouse (at the end of the day) be willing to share their hard earned money with the irresponsible spouse? Maybe your irresponsible spouse has a hard time with money and is not a natural saver, isn't the responsible one obligated to help them improve instead of leaving them to fend for themselves?  I just think its a recipe for disaster. 

I am personally a spreadsheet, category driven type of girl and would go crazy if I didn't know how my husband was managing the other side of the household, I need to balance my checkbook every day, and I don't buy anything without first consulting my budget.  However, this daily allowance thing is a little too much...I budget two weeks at a time (aligned with my paycheck schedule).

What do you think about the Wealth Watcher program as described in the story? Is it something you can see working for your family?

MsMoneyGuru

Having problems developing a plan to get out of debt? Want to know who we are doing our debt snowball? You may need a coach...MsMoneyGuru is here to help, contact me at msmoneyguru@gmail.com for a consultation.

New BMW 3 Series!

Hello! I am a wife and mother, hoping to have more kids, I drive a Toyota Highlander...last thing I need is a BMW 3 Series. But someone out there thinks I need one!  How exciting...for me (or them?).

I did some fishing around and the new 2012 BMW 3 Series (328i) starts at $34,900. Okay...a little rich for my blood, given I cant easily get a stroller in the truck...but I digress.

According to the brochure, the "Offers to get your (my) pulse racing" is a choice between $1,000 credit on select BMWs OR 2.9% APR financing!

Check it out!

Since I'm broke (still in debt), I'll most likely take the 2.9% financing please. After all the BMW company must know that I can afford it, or they wouldn't have sent me the offer, right?

Being a broke person, I will only consider the payments when determining if I can afford this car. Even though I am NOT maxing out my retirement, I have a negative net worth, and my kids DO NOT have a college fund. I'm going to take the plunge, you only live once and I'm sure I can pay it off quickly and get back to my goals in no time!

Lets see...

ASSUMING I qualify for a 2.9% APR:

A) If I pay the car off in 3 years, I will have $1,102 monthly payments and pay $1,721 in interest.

B) If I pay the car off in 5 years, I will have $680 monthly payments and pay  $2,864 in interest.

C) If I pay the car off in 7 years, I will have $499 monthly payments and pay $4,028 in interest.

Given that I'm broke and want the lowest payment possible...I most likely will take Option C!

Oops don't forget the opportunity cost of the BMW...it doesn't stop at just $4,028 in interest.  Let calculate how much money I would have saved if I had not bought a car and just paid myself...$499/month invested in a mutual fund (for college savings, investments, or retirement) would have yielded me $60,449 over 7 years. If at the end of 7 years, I leave that $60,449 alone and don't touch it for 20 more years, I will have $442,976...

Oh Darn! They don't mention that in the brochure!

MsMoneyGuru

Credit Card Offers, They Keep Trying!

So, my husband and I have been on our Debt Free Journey since August 2010, that's about 19 months.  Meaning that was the last time we used a credit card or loan or anything related to debt. When we started all of our credit cards were close to maxed.  Capital One was one of the first credit cards that we paid off, it had a low limit/balance.

As you may know, as you pay debt off, you start to look more desirable to banks, and they start sending you offers again. About 6 months ago, the offers started pouring in...

Here is an example of one:

In case the print is too small:  They are trying to convince my husband that he needs a little cash....

They say "Get 0% APR for 12 months with these checks!"  The checks are attached...

"There are times when you need a little extra cash. With your Capital One account ending in xxxx, you can get the cash you need at a low 0% APR for 12 months."

The offer goes on to mention that although the offer is for 0% APR, they will charge us a 3% transaction charge...TRANSLATION: Instead of charging you interest throughout the next year, we will just charge you up front (how convenient).

They also tell us that these checks are for necessary expenses.  I love how they draw a picture of how simple it is to get this FREE money! In case I can't read...LOL

Thank God, we started getting smart with our money! This use to be so tempting to me! I mean...0% for 12 months! Even 3% is cheap money--the old me might have borrowed it Just In Case (because you never know when an offer like this may come your way again). BUT because we changed the way we look at money, we have saved over the past 19 months an emergency fund.

So for the amount of money that is available for us to borrow with these checks at 3%, I have more then that amount sitting in my savings account ready for me to borrow at a true 0% interest rate, oh and I can take my time paying myself back...genius.

What's in your wallet?????

CASH

MsMoneyGuru

Gen Y's Retirement: $2 million...Not Impossible

Check this out!   Gen Y's retirement: $2 million

So, apparently according to this article, Generation Y-ers need around $2M in Retirement!  Seem impossible? It shouldn't, most of Generation Y (mostly those born in the 80's) are fully capable of saving at least $2M in retirement.

Perhaps my experience is limited, but almost everyone I know has financed a car, at one time or another.  If you can finance a car, you can save $2M by the time you are 65; plain and simple.

Check out the math:

Lets say the average car payment in America is $350/month, although I have read that it is higher then that!
And you invest that $350 a month in an IRA or 401k making at least 10% annual return a year (reasonable estimate), in 40 or 35 years from age 25-65 or 30-65, respectively. On your 65th year you should have $2,213,427.85 or $1,328,823.32.

The idea is to save enough, so when you are in retirement you can pull out the growth (interest) on an annual basis and live off of that. For example, if you have $2M in the bank, and you earn 10% a year (on average) you can pull $200k a year out for living expenses. 

Mind you these numbers are simple in that they don't include an employer match or inflation. My point is that it doesn't take much to re-set the trajectory of your financial plan.

Just something to think about...if you can afford a Tahoe or Camry payment you can afford retirement.


MsMoneyGuru