Friday, February 6, 2009

The Problem with Eating Out

This probably has a lot to do with how my wife and I were raised but we very rarely eat out. Maybe once every two weeks or so. I believe that we are on the very low end of the spectrum when it comes to eating out. On the high end of the spectrum you could have a couple who eats out every meal for lunch and dinner. It stands to reason that most people are somewhere in between the two, so we will say they eat out 7 times a week.

You may be asking, I have to eat anyway, why shouldn’t I pay to have someone cook for me. Or maybe you are saying it saves time. Well it does not save time unless you are getting fast food, in which case you are also probably wondering why your clothes don’t fit as well as they used to. As for paying for someone else to cook for you, if that was the only case it wouldn’t be that bad. The fact of the matter is that you need to look at it from more of an accounting perspective. The restaurant is a business that needs to make its owners money. From the meal it sells you it needs to pay for:

  • Cooks
  • Servers
  • Food
  • Works to wash dishes and keep everything clean
  • Electricity
  • Rent
  • Interest on the loans to start the business
  • Repay loans on all of the equipment and furnishings
  • Fix broken equipment
  • Advertising
  • Possible franchise fees
  • Insurance
  • Water
  • Possibly Cable
  • Taxes
  • Tips
  • Accountant
  • Lawyer
  • Other expenses I couldn’t think of
  • And finally profit for the owners

You could sit down and look at your plate, and look at the bill and divide the bill into tiny chunks and realize: Less that 50% of what I am paying is actually going to food and preparation. The rest is going to other stuff that doesn’t benefit me at all, a lot of it doesn’t even benefit anyone in my community, its benefiting some fat cat banker, or a franchise owner in palm beach. I would implore you, stop paying for things that don’t benefit you, and make your own food. Here is the math part of the equation:

My wife and I spend 100 dollars on food every 2 weeks. I would estimate the average lunch bill is about 12 dollars per meal, and the average dinner across the nation at a restaurant according to CNN Money is around 32 dollars a plate. So for a couple that eats out 7 times a week for lunch and 7 times a week for dinner that is 616 = ((7 X 12)+(7 X 32)) X 2. Now this is an extreme case, but you get the point. For someone a bit more moderate we can cut this in half and say they spend 308 dollars a week. So for the whole year you have:

  • My Wife and I : 2,500 Total for all food
  • Moderate : 15,400 just for eating out (not including at home food)
  • Extreme: 30,800 just for eating out (not including at home food)

Even at eating out a moderate amount it really adds up in a hurry. And this doesn’t include those families who have kids, or drinking any alcohol.

Compared to an extremist my wife and I are saving 28,300 dollars a year. Compared to a moderate, we are saving 12,900 dollars a year. Using my handy excel or spreadsheet, in 30 years we will have 4,655,181 dollars more than the extreme or 2,121,973 more than the moderate.

Having 2,121,973 dollars more when I retire when I’m 55 means that I will have about 170,000 dollars more a year to spend on food. I would think that is enough. This is 170,000 dollars a year closer to saying screw you to your boss, and no thanks to social insecurity.

Thursday, February 5, 2009

Retirement Problems

Definition of a Pyramid Scheme from the Securities and Exchange Commission website

Pyramid Schemes

In the classic "pyramid" scheme, participants attempt to make money solely by recruiting new participants into the program. The hallmark of these schemes is the promise of sky-high returns in a short period of time for doing nothing other than handing over your money and getting others to do the same.

The fraudsters behind a pyramid scheme may go to great lengths to make the program look like a legitimate multi-level marketing program. But despite their claims to have legitimate products or services to sell, these fraudsters simply use money coming in from new recruits to pay off early stage investors. But eventually the pyramid will collapse. At some point the schemes get too big, the promoter cannot raise enough money from new investors to pay earlier investors, and many people lose their money. The chart below shows how pyramid schemes can become impossible to sustain:

Lets compare this to Social Security. Social Security works by taking the money put into it today, and using it to pay those who put money into it a long time ago. For instance, I, as a 25 year old am paying social security. This is not going into an account an earning interest. It is going to pay for retirement benefits of people that are already retired. This looks strikingly similar to the line where "fraudsters simply use money coming in from new recruits to pay off early stage investors" I am a new recruit in this, and I would like out, but I am legally obligated not to leave. The government is legally forcing us to be a part of its pyramid scheme. The amount of return on investment is also dismal. It is something like 1% or somewhere along those lines, however, for a lot of people who don't have the self control to save, this 1% roi is better than having nothing, so a forced savings account isn't that bad of an idea for them. But we are different, we understand that someday we wont be able to earn a living, so we are preparing.

Don't depend on social security for anything. Mostly likely you will have made enough money, and will have enough money, that by the time you retire you wont be able to have access to it anyway. And what do I ask is there to access, a few hundred bucks a month? That isn't the style that we want to retire in. We want to be able to do cool things, and help people, retireing and depending on social security means you are the person that needs to be helped. You don't want that, that is not security.

Wednesday, February 4, 2009

My Budget

Every one's budget is different. Mine is a lot different than most of yours because I don't have a house payment, or rent, or any other debt payments. Because of that I have a lot less to pay, and I get to save all that money for stuff like a car, or a better house, or backpacking equipment.

When I do my budgeting I do it in excel, and they are getting to look more and more the same so the time I spend on it is very small after the initial setup. I do my budgeting for each paycheck, so here is a typical paycheck budget:

  • Gross Pay : 2375
  • Taxes: -237.71
  • Black Hole -175.57 (social security)
  • Medical - 99.72
  • 401k - 95.00 (I get up to 4% matching)
  • Take Home 1777.52
  • Savings
  • Roth IRA 250.00
  • Car 500.00
  • House 200.00
  • Other 116.00
  • Total 1066.00

  • Cash out each Paycheck
  • Food 100.00
  • Gas 80.00
  • Entertainment 20.00
  • Household 20.00
  • Clothes 20.00
  • Total 240.00
  • AutoPay Monthly
  • Auto Insurance 48.50
  • Utilities 25.00
  • Cell Phone 23.00
  • Water 23.00
  • Phone/Internet 21.00
  • Garbage 15.00
  • Therapy 15.00
  • Meds 15.00
  • Netflix 7.50
  • Total Autopay 433.00
  • Checks Paid
  • Tithing 237.50
  • Offerings 15.00
  • Total Checks 253.50
This leaves in between 20 - 25 dollars a paycheck as cushion in case we forget anything or want to splurge on something. We do our best to follow the pay yourself first principle. I am certainly doing that with my 401k, my Roth, and the car. The house is a little more flexible. This budget has served us well for the last year, and we have gone over our budget only a handful of times on a few accounts.

For those of you who say we are living on practically nothing, you are partially true. We don't go out to eat hardly ever, we rarely go to the movies, but we do have a lot of fun with our hobbies. We also don't have any kids, which makes this time the best time to pile up on cash. Later on I will talk about the magic of compounding interest but we are taking as much advantage as we can.

For having a budget like this and paying our self first, I estimate we are on a monthly basis coming 1500.00 dollars closer to being wealthy. If we keep this up and even if we save nothing else by the time I'm 55 that will mean 3,390,732 dollars ahead of someone who is not following this plan. I will be able to perpetually take out an average of 8% a year which means about 270,000 a year closer to saying screw you to your boss and saying no thanks to social insecurity.

How I am going to buy a car

My wife and I are currently saving up for a car. The reason for this is that our Jeep is a '97 and although it has been a great car, it is getting old, uses up a lot of gas, and one of the windows no longer works. It still drives, but I don't think it is long for this world.

So in preparation for this sad day, my wife and I are saving up for a new car. Yes that's right, saving up, just like you did when you were a kid and you wanted that bike, or watch, or video game. At least I hope that you needed to save up for something. Your parents didn't give you everything did they?. . .

Currently we have the ability to save for a car $1000 dollars a month, that is $500 out of every paycheck. We are looking to spend around 10,000, and as an added bonus I was able to cash in some of my unused vacation days so we got a little head start. We now have 2,500, so we are 25% there!!

I always try to buy US or USed. Why we try to buy US is that we are keeping as much money in our economy as possible. It is basic economics back to the book Wealth of Nations, that you should be self sufficient as a nation first and keep as much currency in the country, and then you export to gain their currency, and that you only export currency when it is necessary. Now there are some instances when it just isn't possible or practical to buy US and I understand that, but when I can, I try to keep my money in the US.

Now with cars we are looking to buy used. The reason for this is completely economical. Within the first 4 years, a new car loses about 40%. So lets say you buy a new Mini Cooper. A good car to be sure. New for the base model is around 19,500, we'll round up to 20,000. This means that after 4 years, if you don't crash the car, you should be able to sell it for 60% of its new value, so 12,000. This means the cost of the car 2,000 a year, plus gas, insurance, fixing, etc.

If I buy a used car, we can even say the same Mini Cooper, and if it looses the same amount of value in 4 years, so 40%. I buy the used Mini for 12,000 dollars, in 4 years I can resell it at 60% so 7,200. So it has lost 4,800 in value. This translates to 1,200 a year, so you have saved 800 dollars a year, or a total of 3,200 dollars.

Now you may say, buying the new car you can be sure it wont break down. Well, a new car can still break down. And really, how much in repairs can you get for 3,200 dollars. That's a major car overhaul. You are saving money. Plus when you buy used, you aren't sending any of your hard earned money overseas, and you get to save a bunch of money on sales tax. It keeps adding up and getting better and better.

Why are we saving up you ask? This is not just an exercise in futility or to show our willpower, although it does take some. I want to be debt free. I will discuss why later, but number one reason is debt freeness. Also lets look at this logically. In my online savings account I get about 3% interest. This means that at the end of my saving up I wont have 10,000, I'll have about 10,150 ((0 + 10,000)/2 * 1.03) That means I'll have 150 extra bucks for anything, the car, gas, candy bars, backpacking equipment. Its great. Now if you buy a car on a 5 year loan, and you spend the same 10,000 and get a loan, there will be an origination fee, of about 500 dollars, then interest for 5 years. Using excel this ends up being a total spending of 12,463. That is a difference of 2,713 if you take into account my interest.

So by buying used, and saving up we are saving 2713 on interest, and 3200 on the depreciation of the car. That gives us 5813. What could you do with an extra 5813? You could buy a crappy car just with that. This doesn't take into account lower insurance because you own the car, and because the car is older, and registration costs less. You saving closer to 6,500 at that point.

If you perform this car exercise about ever 5 years for the next 40 years, that means you'll do this 8 times. 8 X 6,500 = 52,000. That is a whole years worth of wages, or if you invested it, it would make you about 5,000 dollars a year, and that is 5,000 dollars a year closer to our goal of being able to say screw you to your boss and no thanks to social insecurity.

Look at our Budget
Reason for the Blog

Personal Finance in a Different Way

There are several levels which my blog is going to address as far as personal Finance is Concerned. These are Personal Level, Community Level, and Nation Level. True, we are going more and more towards a global economy, but until we are all using the same currency, these three levels will suffice.
The level in which You and I have the most control over is our personal finance. This is what I will focus on the most. We make decisions every day that affect our personal finance. Not only do we have the most control over this but we also have to use up the most time. Topics involved in personal finance include but are not limited to:
Ability to earn
Saving for Big Ticket Items
Pre - Debt
Side Income
The next level is Community Finance. That is the finances of your city/county and how it is affected by your involvement and your spending. The more money your community has, the more likely there are going to be more members of your community as well as increased opportunity to make money. Topics involved with this are:
Involvement in a Church/Organization
Involvement in City Council
Personal habits in and around your Home
Voting with your Dollars
Participating in Local Events
The last, largest, and least time consuming level is that of our nation. It is true, the wealth of our nation trickles down into our pockets. Our country is in a tremendous amount of debt. If this was not the case, taxes would be lower, thus increasing the money in your pocket. There are other ways that you can help our nation economically. This involve:
Make contact with your Elected Representatives
Vote with your Dollars
Buy US or Buy USed
Be Self sufficient now and when you retire
In my next post I will talk about my personal Financial Position as well as what My goals are. I hope you will join me on our journey to MAKE US RICH.