Stormy's Corner

How much allowance did you get?

There's an interesting blog post over on freemoneyfinance that is asking two serious financial questions:

• How much did you get for an allowance as a kid?
• How much did the tooth fairy leave you?

I answered:

I got $1/week allowance starting around first grade and $1/tooth from the tooth fairy. 

My seven year old stepson gets $1/week at both houses and $1/tooth from the tooth fairy. I think the tooth fairy is being a bit cheap since she gave me a $1/tooth over 25 years ago!

What about you?

What's your credit card number mean?

I have two credit cards from the same bank and I noticed that they were almost all the same number.  That seemed strange to me since I got them at very different times. 

Turns out that you can tell a lot just from your credit card number.  For example, the first number tells you what type of company issued it: a bank, an airline or an oil company.  The first six numbers will tell you exactly which company issued it (if you had the master sheet of companies.)  You can read all about your credit card number in Anatomy of Credit Card Numbers. 

Have fun!

Do you live well?

I keep pointing out how cheap things are these days and how much we have.  Most people look at me like I'm crazy and then try to point out how expensive things are.   Really, you can eat out for an hour's worth of work at minimum wage.  Groceries are even cheaper, if you buy the right stuff.  You can buy a t-shirt at Old Navy for $5!  You can buy an entire outfit in very good condition at my local thrift store for less than $10.  Toys are cheap - we consider a lot of them "disposable."  Looks like the author of Our high, high standard of living would agree with me.

as late as 1970 the median single-family home  was still less than 1400 square feet (versus over 2200 now).

I have a personal recollection of the 1960s and 1970s (I graduated from high school in 1977). My dad was a college professor and probably made a pretty good income, but we never had a standard of living as high as lots of "poor" folks seem to have now: We never had air conditioning. We didn't get a second car until I was in high school. We didn't get a color TV until I'd gone away to college. We never took vacations overseas. Eating out was for special occasions.

The only problem I've encountered with living inexpensively these days is that it's hard to find a new, small home these days.  All the new homes in good locations are huge homes.  So most homes are expensive, but it's because they are huge, not because the cost of living has gone up drastically.  It has gone up, but in general, we all live very well.

Money is social debt

I saw an interesting way to think about money in Steve Pavlina's post The Abundance Mindset:

Remember that money is social debt.  The size of your bank account is a measure of how much society owes you for the value you’ve already contributed.

He's not saying money is the only type of social debt, he's just saying that it is social debt.  People pay for things they value.  So what do you do that people value enough to pay for?

Yet another unlucky lottery winner

This guy won $5 million dollars and is now living off social security!  His problem?  Bad investment advice.  It sounds like he might have a case although he probably should have gotten multiple opinions!  He was getting $98000 a year when an investment company convinced him to:

sell the future annual payments off to a private firm for an immediate lump sum - in his case, about $2 million - that he could roll into investments. He'd just live off the earnings and interest.

All these stories of lottery winners going broke almost makes you afraid to win the lottery!

Money is not Evil

Money is not evil.  Having money is not wrong.  Spending money is not wrong. 

Steve Olson has a great post about Why People Believe Money is the Root of all Evil - both Steve Olson and Steve Pavlina take that one step further and explain why if you think money is evil you will never have any.  Steve Olson's post has a great list of things he grew up hearing that implied having money was bad.  Here's the ones on his list that I also heard a lot:

• He’s filthy rich
• That house is a waste of space, can you imagine the heat bill
• Whadda ya think money grows on trees
• He’s got money to burn
• How much money does a person need?

All of those are negative comments and imply that having money is evil, but money enables you to do things.  It's very hard to save the world or even yourself if you don't have any money. 

So, earn the money, make sure it doesn't ruin you, use it wisely and accomplish your goals.  You can use money to find a cure for autism or to hang out on the beach for the rest of your life or make sure everybody in your town makes it to college.  Without money any of those will be hard to accomplish.  It's even easier to stay in shape, eat healthy and live a longer life if you have money.   

Passing on having money won't make you a better person, it will just give you one less tool to accomplish what you'd like to do in life.

Photo by Big-E-Mr-G.

Quote of the Day

"Spend at least as much time researching
a stock as you would choosing a refrigerator."
                                                - Peter Lynch

Cash or Charge? How to spend less money.

Spending cash does help you to spend less money than when you pay with credit.

Numerous personal finance experts claim that spending strictly cash will not only help keep you on a budget but will also help you spend less.  The problem I have is that I hate spending cash.  As a 11 year old I left $40 in a purse in McDonalds and ever since I've been terrified I'll lose the money!  (We went back and found the $40.)  Also, I love credit cards because you never have to worry about how much cash you have, you never have to go to an ATM, and everything you spend is automatically tracked for you in a nice computerized report.  (And I pay it off every month so using credit cards is not a financial penalty.)  But I recently decided to try again for a couple of reasons:

• I wanted to keep a budget and it's easier to stick a couple of hundred dollars in your wallet and say "this is it for the week" than it is to track all the money you spend on gas, eating out, groceries, the coke from the vending machine, etc.
• I think I'm over my fear of losing cash.  I realized a while back that losing the money in my wallet might make me upset but it wouldn't really devastate me.  ($40 to that 11 year old was a lot more than $200 is to me now.)
• I was curious ... would sticking to cash make me spend less?  Would I treat money differently?

So I've been doing this for about a month - every Friday I put a certain amount of cash in my wallet and that's it for the week.  If I buy gas with my credit card, I actually take that much cash out of my wallet and put it aside.  (Buying gas with my credit card is too convenient to give up.)  And it works.  I'm spending less money!  I'm not sure what I'm spending less on since I tend to track overall numbers not all the details but I don't feel like I'm depriving myself of anything.  (If I had to guess it's lunches by myself, snacks and impulse purchases.)  Here's some of the reasons I think I'm spending less:

• I'm very aware of what everything costs.  With my credit card that I don't pay much attention to what anything costs.  Thirty seconds after I pay I couldn't tell you what I just paid.  (I saw it, I made sure it made sense, and then I didn't bother to store the information in my memory.)  With cash I pay attention to what things cost and I remember what I spent.
• I make tradeoffs.  Since I can see how much is left in my budget I can say, "I'd better not eat lunch out if I want to go to sushi on Friday night."  Using credit cards I'd just do both.  (Note that giving out the lunch out if it's by myself isn't really giving anything up.  I just need to remember to grab leftovers at home in the morning - Frank always has lots of great leftovers in lunch size containers in the fridge.  See My Man's Man for more on that.  I haven't given up any lunches or going out with friends - those events are high on my priority list!)
• Another theory that I don't think applies to me is one from freemoneyfinance that says that if you keep $100 bills in your wallet you are less likely to spend them because you don't want to break them.  I use $100s simply because they take up less room but I don't think I'm any less likely to spend them than $20s.  But who knows, maybe that can be my next experiment.

What do you think?  Do you spend less when you spend cash?  If so, why?

Photo by velo_city.

How long until your money doubles?

I wrote about calculating appreciation so now you can figure out how much your money is worth in n number of years, but what if you want to know how long your money will take to double?  Since I don't know how to embed an online calculator here, you are going to need a spreadsheet (use this one) or calculator unless you can do log's in your head.

n = ln(2) / ln(1+b)

where

n = number of years
b = interest (3% = .03)

and if you want to count for inflation

n = ln(2) / ln(1+b-f)

where

f = inflation (3% = .03)

Dad always said your money would double every 7 years.  Turns out he was figuring on 10% interest or appreciation.  At 7% your money will double every 10 years.  Add 3% inflation and it'll double every 18 years.

Here's a very simple Excel spreadsheet to run the calculations for you.

Calculating appreciation

If you just want to know what your savings account will be worth in 10 years at 3% interest, you're probably best off just using one of the online calculators for calculating appreciation. 

However, if for some reason, you want to know how it's calculated, here it is:

x(1+b)ⁿ

where:

x = original amount
b = interest (3% should be represented as .03)
n = number of years

I couldn't find this anywhere on the web and since it's the second time I've calculated it by hand, I thought I'd share.

The Rich Spend (Relatively) Little on Housing

People with average net worths of $6.8 million owns homes worth $545,000.  Since the average price of a home in the US is $264,540, I think we can safely say the rich don't necessarily spend lots of money (percentage wise) on their homes.   Maybe it's because they didn't want to spend all the money on the bills a big home generates - they wanted to save and invest their money.

On the other hand, I know several people with $500,000 homes that have no where near $6 million in net worth.  Those big homes are one of the reasons they will never have $6 million!

Cheap car with good gas mileage: Yaris

I'm not in the market for a car right now but I ran into this one and I was really happy to see a four door car with 40mpg that prices for less than $14,000 new!  Toyota.com : Vehicles : Yaris. 

If I got 40mpg, I think I'd save $150/month.  The car would be paid for in a year!

12/8/06: Somebody should have pointed out that my math was off by a factor of 10!  The car would be paid off in 10 years.

That said, we went and sat in a Yaris today.  It was a bit narrow for Frank's shoulders but had room for the car seat.  It had lots of cupholders but manual windows. 

Mortgages are not good financial investments

I think you should take out a mortgage to buy a house.  It's much better to be paying off a loan for a house you will eventually own than it is to be paying rent.  However, mortgages are not a "good deal."  Paying off your house is the smarter financial move!  Even if you can deduct the interest from your taxes, you still have to pay the interest first, and deducting it doesn't mean you get it all back, it just means you don't pay taxes on that amount of income. (And for people who says they like to borrow money that way and then invest it in something that returns more ... well, that's a risky strategy.  I prefer to invest money I have instead of money I don't have and would have to pay back if I lost it.)  This guy agrees with me: How Much of Your Car Should You Finance? Zero percent. - iTulip.com Forums.

"But there are tax advantages to holding a mortgage," you say. The government raises a tax on your current income via an income tax, then offers to partially reduce it if you accept a tax on your future income via interest on a government sponsored loan to buy a house that bearly keeps up with the rate of inflation–except during a housing bubble, such as we just experienced. This is what passes for good household finance? How long have North Americans been falling for this nonsense?

When you get to deduct the interest on your mortgage, you are not getting the interest money back!  (Say the top part of your income falls into a 30% tax bracket. If you deduct $10,000 in interest, you would pay $3300 less in taxes.  But you still paid $10,000 in interest, so you still have $6700 less than you would have had without the mortgage!)

$1 Coins Again ... and credit cards

The United States is trying dollar coins again: Presidential $1 Coin.  Personally, I think it's a good idea as one dollar bills get so worn out.  However, I'd rather just use my credit card everywhere.  I think it's easier (one swipe, never worry about running out of cash) and everything I spend is tracked for me so I can easily analyze my spending.

I do recognize that credit cards are not the best solution for everyone.  I have several friends that have a very hard time controlling their spending with them.  I've also read studies that say we spend more when we use credit cards.  I don't think I do.  I've tried spending only cash for a week or two and I think I eat, drink and shop just the same, but I could be wrong ... When I spend cash I always have this feeling that I've lost some or given too much to someone.   After reading Suze Orman's 9 Steps to Financial Freedom, I decided that my fear of losing cash might all have started with the time I was 11 and left $40 in a small purse on a table in McDonalds.  The whole ride back to McDonalds, I remember being terrified the money was gone.  It was still there, but I still don't like having lots of cash that I could lose.  I know with a credit card I can just call and cancel it if it's lost and I've lost nothing!

Monopoly uses credit cards instead of cash now

The latest version of Monopoly no longer comes with cash.  Instead it has a debit machine and a debit card for each player. 

So will it be teaching kids responsible credit card use?  Or will it no longer be teaching them how to count money, save and budget?  We've just started teaching our five year old about money (which brings up all sorts of issues and funny stories) and I hadn't even imagined a world where kids skip the whole cash step!  Here I was trying to make sure I pay cash (not my normal mode of operation) for everything in front of him so that he can see I'm spending "real money."  Maybe real money isn't cash anymore.

Gear Factor has a picture of the Monopoly debit machine.