20 Saving Tips for the Lazy Single Man

March 3rd, 2009

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I think I am like most men in that shopping isn’t one of my favorite activities. If you are living out on your own, eventually you will need to get out there and buy some stuff. When you consider what it takes to be a good shopper (it’s a skill really), men are genrally outmatched. Even my 13 year old niece already has well developed shopping skills because she has the interest and also because she works at it.

The tips I have here will help you to shop better, save time, eat better, all the while saving money without actually having to make the investment in time that a Pro would make. You can use these tips immediately. That’s why I call them Saving Tips for the Lazy Single Man.

These tips are culled from my own experience as a lazy single man.  There are a mix of ideas here, some are typical recs that help you to lower costs. Others are not typical, because they help you to realize how you are wasting money on stuff after you buy it. For example, a lazy man is never going to return an item so these related tips fall into the category of ‘buy it right the first time’.

  1. Buy a George Forman Grill. The GFG (’George’) is one of those inventions that makes you wonder how single men lived without it. It will save you from starving in your apartment. It can cook almost anything quickly and easily (burgers, chicken, fish), and it will make you look like a Pro. This will save you money so you don’t have to go out to eat everyday.
  2. Buy Generic/Sale Items. When you are at the supermarket, you can save money simply by choosing different products in the aisle (no coupons required). Consider the generic versions of products or competitor products that are on sale.
  3. Buy the Large Size. For many items, particularly groceries, you can get a price break simply by buying the larger size. The tag on the aisle will indicate the ‘price per quart’ or ‘price per pound’. Use the tag to decide.
  4. Buy Clothing Out of Season. To buy clothes frugally, buy them at the right time just when they are about to go out of season. For summer clothes, this is typically after July 4th. For winter clothing, this is usually after Christmas. If you go to the store at this time, the clothes will be on sale without requiring any planning or action on your part.
  5. Mine the Dollar Store.  When you decide to clean the bathroom, you will need some cleaners. Or if you need a gift bag for your mother’s gift, the dollar store is a good place to get it cheaply. No sale required.
  6. Get a Grocery Store Card. Sign up for one of those savings cards at the grocery store. It will save you money at checkout without any action on your part when you flash it. You don’t want to be bothered with marketing mail, so give them your college room address. They don’t care. Really.
  7. Shop During the Week. Skilled shoppers know not only where to buy and how to buy but when to buy. Your time is valuable, you don’t want to spend the day fighting crowds and traffic particularly when you want to buy gifts during the holiday season. Go to the mall near the time it opens (yes, even on Saturday) and after work during the week. You will be surprised how quiet it is.
  8. Understand Store Types. There are different types of stores, know the difference to help steer you in the right direction. High Quality/Full Price (1), High Quality/Sale Price (2), Low Quality/Low Price (3), and High Quality/Outlets (4).  So, if you are looking for a pair of Levi’s you are generally better off going to TJ Maxx or Burlington Coat Factory (2) versus Macy’s (1) or Walmart(3). You may also find them at a Levi’s Outlet (4), but be suspicious. My sources tell me that outlets don’t always have the best prices.
  9. Host a Football Party. Going to a bar to get food and drinks can get expensive.  Pool with your friends to buy drinks and food and watch the game at home.
  10. Go Vintage. Here’s where you have one up on the women. At vintage and thrift shops you can find men’s clothing easily because men’s clothing doesn’t change that much over time, so it can still work today. While you are there, pick up that cheap nightstand that you need, too.
  11. Use Your Freezer. If you bought the bigger package of hamburgers to make on your George,  freeze some of it. It will last longer instead of going bad in the refrigerator. Meat/Poultry lasts for only a few days in the refrigerator.
  12. Get a Doggy Bag. When eating out save your waste line and get a doggy bag for half of your meal. I know your mother told you to clear the plate, but the meals that you eat outside are too large. Put the leftovers in the frig and eat it for lunch the next day at work.
  13. Learn to Cook. To eat economically, your best option is to make food versus eating out or even buying ‘ready’ meals at the supermarket. It’s not as hard as it sounds, if you start out using your microwave. Start off by cooking sides to go along with your hamburger you cooked on the George. Buy canned beans, green beans, corn, etc and heat them up in the microwave. Instant mashed potatoes are not much harder, mix in water/butter, then microwave. Next, try chili, it’s easy: microwave tomato sauce, can of beans and a chili seasoning pack (optional: add meat cooked on George).
  14. Go All Black. I’ve at times almost missed my train to work because I couldn’t match a pair of dress socks. Make it easy on yourself, just buy all black plain socks, they work with anything and also with each other. No matter how many of them you lose, you’ll always be able to find a match.
  15. Iron It Out. Take a look at your closet. A good look. Why don’t you wear that one pair of slacks? With women, they know exactly why they haven’t worn those well laundered slacks sitting in the closet: they are waiting for that day someday in the future when they will get to the right size to wear them. Since your weight doesn’t change that much, your excuse is simpler: you are too lazy to iron the pants. Admit it. I have a pair of nice slacks I wore once new. And then a second time when I was forced to iron them because I had nothing else clean to wear. Save yourself some time and money, buy shirts and slacks that are ‘no-iron’! A pair of slacks you never wear is wasted money.
  16. Check Expiration Dates. Check the expiration dates on the food and medicine you buy. If you buy a good that is stale you will be too lazy to take it back, so it’s lost money. I once found a bag of pretzels that was expired for 6 months. It’s a good thing I checked the date.
  17. Get A Discount. Retailers understand that there are a segment of customers who will pay full price as well as a segment that is always seeking a discount. You may be surprised that most retailers, even the high end ones, will give you a discount simply by signing up for a discount program. (Read why I recommend that you don’t sign up for a store credit card just to get a discount). Ask if they have one, you can then save every time you buy at the store. For a time, I paid retail price for clothes at Brooks Brothers until I found out that they have a discount program that saved me 10%.
  18. Hang It Up. If you really want to impress your girlfriend, don’t buy an Infiniti G37, learn how to use a clothes line. If you don’t have a clothes line hang them up spaced in your closet. First, try those heavy bulky items like jeans, slacks, and shirts. If you took my advice and bought the ‘no-iron’ clothes, then you are done! This will save you some quarters with the dryer.
  19. Automate Your Bills. It’s entirely too much work to buy stamps, write a check and mail payments. Use a bill pay service to automate your bills. I discuss how to do this here.
  20. Finally, Contact Your Seer. Sometimes, you need to ask someone close to you where to shop. Yea, I know, this is like asking for directions on the road: you don’t want to do it. Try it. In my case I go to my sister who is an excellent shopper, a confirmed Pro with decades of experience. She was the one who told me about the Marburn shops where you can get all the linens (sheet, blankets, and those covers you put on the pillows that nobody uses) you will need for your apartment at great prices. I never would have found such a store on my own.

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How To Assess Your Debt Situation

March 22nd, 2009

Do you have too much debt, or a manageable level of debt? How can you know? You can look at your debt level using quantitative as well as qualitative measures. This simply means that it really depends upon the amount of the debt, the reasons why you have the debt, as well as how you feel about it.

I know a few people who have racked up huge debts using unsecured credit cards that funded businesses. Or, you may know people who have many 10’s of thousands worth of debt incurred for education expenses. In these cases, the huge debts may not be viewed unfavorably because the debts were taken out for a specific purpose usually one with a long term payout potential.

A debt is a debt, so even one that is ‘good’ still has to be paid back and there may be situations where you may have difficulties paying it back. But, when people talk about ‘debt problems’ they are usually referring to unsecured credit card debt taken out for uncontrolled and unplanned spending. This debt may be in addition to other ‘good’ debt that may be on the balance sheet.

The Fixable Debtor

Some people have a debt level that is manageable or can otherwise be fixed by prudent changes in spending and saving habits. After reading many newspaper articles about real life people requesting financial advice, a very common trait is that people with generally good balance sheets (that have retirement savings, and taxable savings) still have some level of credit card debt. If you have the means to save money otherwise, you should not have credit card debt because this debt usually has the highest interest rate because it is unsecured by assets.

The question is why? Probably due to a lack of financial education about the perils of credit card debt. Fortunately, once you understand how bad this type of debt is, most will take the steps necessary to eliminate it.

The Problem Debtor

People at all income levels can be problem debtors. A problem debtor will spend more than she earns and some of the debt will be usually high interest unsecured credit cards. The debts are used to fund a higher level of standard of living than otherwise would be possible on her income.

If not controlled, the debt can get out of control. Over time the interest on the debt increases faster than income due to its higher interest rate. In order to maintain the same level of spending that the interest is grabbing, even more debt is required causing a kind of downward spiral.

To fix this kind of debt problem first requires an assessment of the level of debt to income. Depending upon the level of debt to income will determine what possible solutions to consider.

A Quantitative Analysis

In the attached spreadsheet, I offer a quick way to determine from a numbers point of view if your debt is too high. If you have created a budget, you are partly there already since both of these spreadsheets use income as an input.

This spreadsheet requires you to list out all your income sources as well as all your debt payments for each month. If any debt is to be retired in 6 months or less, leave it off, you want to consider debts that generally longer term. After inputting all the numbers, the debt to income ratio will be calculated. Here’s how to interpret the result using the following pie charts (credit: debtgoals.com).

Danger! This level of debt is unsustainable.
Warning! This level of debt is manageable, but seek to reduce your debt load.
Ideal level. This level of debt is ideal especially if it is well below 30%.

Download the following spreadsheet to calculate your debt to income ratio. The meaning of ‘debt’ is quite loose, in this spreadsheet it refers to any monthly obligation that you are required to pay. This means that alimony for example is include even though it technically is not a debt payment to pay back a loan.

Debt to Income

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Shortcut: Income Estimator

March 21st, 2009

If you know the hourly rate, it is easy to calculate the annual earnings. For each 10 dollars per hour, multiply by 20,000 to get the annual earnings estimate.

For example, if you earn $35 per hour:

Annual earnings equals: 3 * 20,000 + .5 * 20,000 = 70,000 per year.

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How Stock/Bond Investments Make Money

March 21st, 2009

In a previous post, I discussed why cash is not a good investment (due to inflation and and its inconsistency in its ability to generate reliable income). If you use your cash instead to invest in stocks or bonds what is it that you are getting and how does it make money?

First, Your Principal is at Risk

Holding cash in insured savings, checking accounts or in money market funds will give you virtual certainty of keeping your principal safe. So, even if interest rates go up or down at the very least you will still have your principal. When you make the transition to other investments, your principal is no longer safe. You can lose money or make money due to the change in value of the asset.

In exchange for risking your principal, you can get the potential benefits of consistent income or a higher return, and in some cases both.

How Bonds Make Money

Bonds are loans made to companies, governments, and other institutions that offer the ability to earn consistent returns through interest payments. Unlike cash investments, the interest that bonds offer is more consistent, though not all are at fixed rates but most bonds do pay interest at fixed rates. So, if you need a consistent earnings stream over a known period of time bonds are a good way to go.

If you buy quality bonds and hold them to maturity, you will have earned interest along the way as well as get the principal back at the end of the term. Bonds are thought as being ’safer’ investments compared to stocks, but you can lose money on bonds if you sell them before they mature. To understand why consider this example:

  1. Today, buy a 10 year U.S. Treasury bond, earning interest of 3% per year.
  2. The economy recovers, investors buy more corporate bonds and have less interest in U.S. Treasury bonds.
  3. U.S Treasury bonds are offered at auction at lower prices, so new bonds now pay 5% per year.

If you want to sell your U.S. Treasury bond today, you are competing with new bonds that offer a higher interest rates. So, to find a buyer you will have to sell at a loss of principal to compensate for the difference in the lower yield of your bonds. This is how you can lose money with even the highest quality bonds. Of course, if you never sell the bond, then you don’t lose any money.

In the example above, there is very low risk of default with U.S Treasury bonds. With other types of bonds, such as those issued by private companies, municipal bonds issued by governments there is some level of risk of default. This risk would manifest itself in a price change for the bond. Also, these bonds have the same interest rate risk as shown in the example above.

How Stocks Differ from Bonds

When you buy a bond from a publicly traded company, you are only asking for return of principal plus interest. When you buy a stock issued by a company, you are taking a direct stake in the success or failure of the firm.

This is riskier than buying the bonds from the company. A poorly run company can make a little money but still pay its bond holders leaving its shareholders with low valued paper. Also, debt issued by companies typically is higher up on the totem pole from a company obligation standpoint. Bondholders will get paid before shareholders when push comes to shove.

This has been demonstrated in the wreckage and fallout of many financial firms that trade on the public markets. The common shareholder has taken it on the chin both in stock price and dividend income. However, the bondholders and preferred stocks holders (special issue stock that really has characteristics of bonds) have generally fared better, they still are getting paid fully. But, like the common shareholder the value of the bonds has gone down.

How Stocks Make Money

The equivalent basis to compare stocks to bonds is with Return on Equity (ROE). The ROE is the income a company makes each year as a return for all the equity invested. Equity means all the money that shareholders invested over time  in the company. From the company’s point of view equity is cheap money, they don’t have to pay any interest on it. In exchange for the cheap money, the shareholder can claim ownership to all the companies assets and future earnings. Pretty cool?

Here is the ROE for a few very high quality companies:

  • Johnson & Johnson (JNJ):  30%
  • Microsoft (MSFT): 50%
  • Exxon Mobil (XOM): 38%

Don’t run out to buy these stocks just yet! You won’t earn 50% per year buying Microsoft because that’s the return for original invested equity, not what it is worth now. Because Microsoft has been quite successful at increasing its income over the years, investors have bid up its stock price and by definition the price of its equity. As an investor this is good.

So, What Will You Earn on Stocks?

In order to determine what your return on investment will be for a company, you need to consider the current price of its equity, or its stock price. If you use current values for the (3) companies above then investors who buy these stocks today would get the following annual return on investment. This is determined by dividing the yearly net income for the company by its stock price:

  • Johnson & Johnson (JNJ):  9%
  • Microsoft (MSFT): 11%
  • Exxon Mobil (XOM): 10%

Compared to bonds yields of current 10 year U.S. Treasury bonds (3%) , these returns look great. But, there is more risk here (maybe not for these 3 companies as much as others), whereas the bond is very secure.

This article was featured in the carnival, The Money Maniac Blog Carnival - March 2009

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The Simplest Strategy to Eliminate Your Debt

March 17th, 2009

There is one simple and effective strategy to eliminate your debt: pay more than the monthly minimum on your accounts. The reason is simple: paying extra money each month reduces the principal that will be used to calculate your interest costs in the future. The difference is quite dramatic as will be seen in a few charts below.

Getting Control

If you have large debts that you are trying to eliminate, paying the minimum monthly payment will seem like you never make headway in eliminating the debt. In some cases it may take many years or even a decade or more to pay off the debt. To get control of the debt and have a workable plan to eliminate it in a reasonable amount of time, free up cash each month to add in addition to the minimum monthly payment. Depending upon how much you add to the monthly payment, a debt that may take 7-8 or more years to pay off can be eliminated in just a few years.

An Example

Assume that you have a $5,000 credit card debt at an interest rate of 18%. Paying 2% of the original balance, or $100 each month, the debt will be eliminated in 93 months or almost 8 years. Paying just $25 more per month will reduce the payoff period by 1/3 to just over 5 years.

If you can scrounge up an additional $100/month (twice your normal payment), the debt will be eliminated in approximately 1/3 the time of the minimum payment, or in less than 3 years.

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How To Create A Budget

March 10th, 2009
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flickr image by the_brownhorse

One of the key tools you need to help you plan your finances is a budget. There is lots of good software out there that can help you in this area (Quicken, Mint, and YNAB are a few of the prominent examples). For many people, they start out using a spreadsheet because it easy to get started and customize for your own situation. In this article I will offer some tips as well as a pre-made  spreadsheet that will help you get started quickly.

Budgeting is conceptually simple. Whatever tool you use, it can be summed up as the following process: comparing how much you spend versus how much take home pay you have. The budget will tell you if you are spending more or less than you earn at any given point of time. Typical budgets are monthly.

There are Two Main Budget Categories

A budget contains two main spending categories: discretionary and non-discretionary spending. These are fancy words that describe how easily you can change the amount you spend on the area quickly. If you have a home mortgage, this non-discretionary expense is hard to change quickly since you would need to sell your house which typically does not occur quickly. Eating out at a restaurant is discretionary, you can decide immediately if you want to continue with this expense.

If you are looking to cut expenses, the discretionary category is the place to look first to get immediate results.

Trying to Get Everything

At first you may not account for every expense the first couple of months. This is OK, particularly since some expenses occur infrequently during the year. What you can do to help you try to account for all your expenses, is to list out your big expense categories, they list out all the expenses that you can think of.

For example, if you start with “home”, these immediately come to mind: mortgage, fire insurance, water bill, association fees, etc. A similar exercise could be done with other areas such as ‘cars’ or ‘entertainment’.

Also, don’t forget to include all the pocket money you spend. If necessary, pull your bank statements and track all of your ATM withdraws and debit card transactions to account for pocket money.

Putting the Circle in the Square

One of the first realizations with a budget is that your spending and sometimes your income does not neatly occur monthly as your budget would dictate. Here are some of the ways that these expenses or income can occur:

  • Monthly payments, such as a mortgage or water bill.
  • Quarterly payments, such as home sewer bill.
  • Yearly magazine subscription.
  • A yearly auto insurance policy, paid in 6 successive small payments.
  • Stocks dividends paid quarterly.
  • Income is paid twice a month.
  • Yearly mutual fund capital gains distributions.

How do you account for these different time frames? One way is to normalize the payments by simply summing up all the payments for one year then divide by 12 to get an equivalent monthly payment. The following charts show how this would be done for the expenses associated with a home.

In this example, the mortgage is $1000/month, the water bill is $50/month, the yearly fire insurance policy is $800, and the quarterly sewer bill is $90. After adjusting the sewer bill ( $90 * 4 /12 = $30) and the fire insurance ($800 / 12 == $67), the total monthly payment comes out to $1,137. This would be the amount you would budget each month for all these expenses. Here is how the chart looks below. Keep in mind that it will take time for you to ‘catch up’ with all your expenses. For example, if you start your budget 2 months before the yearly fire insurance bill is due, you can’t budget it all in just two months.

Planning for Uneven Non-Discretionary Expenses

Many of your expenses may not be predictable. The hardest ones are the non-discretionary bills that are harder to make adjustments to (e.g., a larger heating bill due to a cold winter). Some of these bills can be made into relatively fixed monthly bills by signing up for a payment plan with your biller. This is a very common practice for utility bills. If you are unsure, ask. Even the IRS will make a payment plan for tax bills!

Filling Out the Spreadsheet

Attached below is a sample budget spreadsheet that covers a lot of common budgeting items, though, you may need to adjust it to your own taste.

First, I recommend filling out just the ‘actual’ side for a few months to get an idea of where you stand (are you overspending? underspending?). Once you get a good idea of where you are spending your money, the ‘projected’ side can then be used to help you control your expenses, particularly your discretionary expenses.

Personal Monthly Budget Worksheet (download spreadsheet)

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An Investors View of Social Security

March 8th, 2009

There is quite a lot of controversy and politics concerning Social Security. In this post, I take on some issues concerning Social Security (SS) with a balanced take and from an investor point of view.

Myth or Truth: Is SS an Investment?

The supporters of SS generally claim that the program is an insurance policy and not an investment. Critics would generally agree it’s not an investment. Therefore, participants should not expect a ‘return on investment’ in the same way one would on a stock/bond portfolio or even a savings account. The structure of the program suggests that it in fact has components of an investment when it concerns the determination and funding of the retirement benefits.

Here’s how it works, with an indicator to each point as to whether or not it qualifies as an investment:

  1. You earn credits each year that eventually count towards your retirement benefit. These credits are based upon your earnings, not your taxes paid. So, increases in the payroll tax rate that have occurred do not offer a higher benefit because it’s not based upon a direct link to taxes paid. (Investors normally like to calculate an investment return based upon actual money contributed). Not an investment.
  2. To determine your initial retirement benefit, your historical earnings are brought forward using the historical growth rate of average wages. Wages tend to increase faster than inflation so this calculation offers a real rate of return. It’s an investment.
  3. Once in retirement, your benefit level increases each year at the inflation rate. This is unique, nearly all investments do not have this feature.
  4. An investment has a few basic features, including an asset value that can be measured and a legal right to ownership by the holder. SS benefits do not have an asset value and citizens do not have any legal ownership to an asset or benefits for that matter. Not an investment.

Myth or Truth: Is the SS Trust Fund Real?

Payroll taxes collected are immediately used to pay benefits for current retirees. For the past 25 years or more, the payroll taxes collected have been greater than benefits paid. This surplus has been invested in a Trust Fund that contains special issue Treasury Bonds that SS can use to pay for future benefits. Supporters of SS point out that the trust fund contains real assets that can be used to pay future benefits. Detractors note that the Trust Fund is a fiction because its claim against the Treasury is simply the money it owes itself, which does nothing to insure future benefits. Who is right?

It depends upon your point of view.

All sorts of people and institutions all over the world lend the U.S Treasury money. If you believe that lending the U.S. government is a worthwhile investment (meaning that they can spend the money efficiently to create future economic growth and opportunities), then the money that is lent through the Trust Fund could improve the ability to pay future SS benefits by higher taxes collected from future economic growth. If you do not believe that this a worthwhile investment, then you likely believe that this spending won’t improve future growth and therefore the Trust Fund may seem like a fiction.

Regardless of where you come across on this question, it is more important to realize that the existence of the Trust Fund (whether real or fictional) does not tie directly to your benefits. Congress can decide to change benefit levels independent of the Trust Fund; its existence does not insure your benefits. Far more important is the near and long term expected cash flow of the U.S Treasury.

Myth or Truth: Will You Get SS Benefits At All?

Most people can probably agree that it is unlikely you won’t get any benefit. The program is too large and has a large enough of a support base that would prevent the program from being dismantled.

The real question is how much will you pay in taxes during your working years and how much will future retirement benefits be reduced. Getting any benefit does not mean it will be a benefit at the same level of past generations. It is safe to say that taxes will likely go up and benefits will be reduced in the future to bring the system into balance.

A very rough estimate for SS retirement benefits for middle income workers is to multiply your income from your final working years by .25. This means that you will likely get about 25% of your working income in retirement benefits. There are rules that can further reduce your benefits (e.g., if you work prior to normal retirement age your benefits can be reduced).

It is prudent to add in a margin of safety to your expected benefits, depending on how far in the future you expect to get benefits. People who are perhaps less than 10 years away from retirement age will likely get their expected benefits in full. If you have more than 10 years to go, I would apply a discount of 25% or more.

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Timeshares: Advice From the Godfather

March 5th, 2009

Are timeshares a good financial move? In this post I offer some advice.

I went to a timeshare seminar in Puerto Rico while on vacation. This was not the first time I went to one, about 5 years ago while in Vegas I endured the same sales pitch. Then as now, my instinctual reaction is to question why anyone would want to buy a vacation 3,5 or more years ahead of time. With all the options that exist today to plan and buy vacations this does not seem like a good idea to me. My opinion can be summed up as follows. It’s an allusion to that famous line in the movie, The Godfather II (”keep your friends close, but your enemies closer’):

“Be cautious about paying for a future expense today. Be extra cautious if you also borrow money to do it”.

Borrowing money is your enemy, and you should have a good reason whenever you do it.

When timeshares first appeared, they were little more than a prepayment plan for future vacations. The industry has evolved, the timeshare that was offered at the seminar was a deeded property with title. They also provide the ability to use your account (with a point system) to pay for other vacation expenses such as rental cars and airfare. This is not unlike a condominium or townhome, the only difference is ownership is split up into multiple pieces instead of having a single owner for all 52 weeks of the year.

The Sales Pitch

The salesman was no ordinary rep, he was an executive of the company. A good salesman always impresses me because it’s a skill that I have struggled to develop. He talked about all the traveling he did in his life, visiting and living in places all over the world.  I was drawn into his stories not only because of everywhere he has visited, but also his spirit of adventure and how he made his love of travel into a career. I was thinking:

“Forget the timeshare. How much will it cost to rent YOU as my travel guide for the next 20 years?”

Then reality set in. How can I be a free spirited traveler if I have to earn enough money to pay off this timeshare? I bet he didn’t own a timeshare when he did all of his traveling in his younger days. Nope, timeshares are for working people not unemployed folks who buy travel cheap.

The Offer

The first timeshare contract offered was for a two bedroom unit, one week a year. There is a lot of flexibility here, so if you decide to take your vacation during the ‘off season’ you may be able to get a 3 bedroom unit instead. (If you think that you can get Hawaii cheap by going during the ‘off season’ keep in mind that all the great places you would want to go (like Hawaii) don’t have an off season.) The total cost: about $20,000. What would it cost to buy the whole unit for a year? This will give you a rough idea of the equivalent value. The whole unit value is:

Cost to buy whole unit: $20,000 X 52 weeks = $1,040,000

A million dollars for a vacation property is a lot of money. Is it worth it?

Evaluating the Offer

The sales pitch for the timeshare was about 3 parts dream/motivation and 1 part financial. The main financial argument that was made as to why a timeshare is a good value was a calculation that compared the cost of buying a hotel room for 30 years versus buying the timeshare now. The hotel room cost was as follows:

(7 nights * $100 hotel room * 10 % taxes) added up over 30 years with 5% inflation.

If you run this calculation in a spreadsheet, you will get a figure around $50,000. So, the argument goes, you can buy $50,000 worth of vacation for only $20,000. Sounds good, right?

Adding in the Discount

The problem with this financial argument is that no discount has been applied. Discounting is a commonly used business calculation that has application in personal finance. In fact you already use it but may not realize it. Here is a simple example. When you buy a magazine once at a news stand you pay full price. If you buy the same magazine 24 months in a row you are still paying full price. If you chose to buy the same 24 months worth of the magazine through the publisher (paying upfront) they won’t charge full price they will give you a discount, perhaps 50% or more off the retail price.

There is a practical as well as a financial benefit here. The magazine publisher wants you to pay up front because it guarantees revenue as well as strengthening their case with advertisers. As a consumer, you might not be sure that you will want the magazine all 24 months, so why pay full price now for 24 months? The discount helps to mollify your uncertainty.

From a purely financial angle, money you hold onto now can earn interest (or in the case where you borrow the money, you save interest costs). If you were very certain that you would use the timeshare every year, a discount of 3% would be appropriate. If you borrowed money at 8% to buy the timeshare, then 8% would be an appropriate number. Any number can work, a lower discount value implies a high certainty of use whereas a higher number implies a lower amount of certainty of use.

Here is the total cost of the hotel room discounted back:

$50,000 at 3% discount ==> $30,000

$50,000 at 8% discount ==> $14,000

The 3% discount implies some savings would be realized with the timeshare, whereas the 8% discount you lose money.

Advantages to a Timeshare

There are advantages to timeshare that may make them worthwhile for some people. Here are some that I came up with.

  • The timeshare gives you a strong incentive to plan and take vacations.
  • Your vacations typically include many other family members and you prefer the ability to get a larger unit instead of a bunch of hotel rooms. These units are worth more than a normal hotel room. Also, the accommodations of the unit will typically be closer to a condominium and not a hotel room.
  • When buying the timeshare you are also buying “service” as well as a unit and an implied level of consistency all over the world. This could come in handy when travelling overseas and you want some certainty of your accommodations.
  • Since the timeshare offers titled ownership, it is an asset that can be sold, rented, or passed on to your heirs.

Should You Buy One?

Timeshares don’t work for me, but that doesn’t mean they are not right for you. I know a few very savvy people who are skilled at their own personal finances who own timeshares. If you do want to purchase one, carefully consider the cost versus a realistic assessment of how much you will use it.

This article was featured at the Carnival of Financial Planning at TheSkilledInvestor.

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4 Ingredients to a Successful Financial Plan

March 2nd, 2009

How can you succeed with your financial plan? Consider these four ingredients below.

For many people, planning their finances can seem complicated, daunting and just plain boring. No one wants to spend too much time on it. It’s like asking: do you want to spend your vacation time on the beach or time in the car or plane getting there? Obviously, you would want to be on the beach. But, traveling to get there is still required nonetheless.

In the same way, your financial goals can be realized more successfully if you spend some time planning them. All of this advice can be summed up with a simple idea: become your own Chief Financial Officer (CFO). As an executive, you will not be expected to know all the details or even know what the answers are, but more importantly, knowing what questions you need to ask. One of the main goals of this site is to help you learn about what you need to ask so that when you do seek professional advice you can be a better executive.

Here is a story about a past governor of Minnesota which demonstrates this concept well. Jesse Ventura was elected governor of Minnesota in 1998 in an improbable election as a third party candidate. There were many skeptics that questioned his ability to lead the state - he previously was a professional wrestler (these skeptics sometimes left out his years as a state legislator). In many interviews that he gave after the election he was often asked why he felt he was qualified to be governor. He gave this answer (paraphased):

“As governor, I serve as the CEO of the state, I will hire the best people to run state agencies and give them the authority to carry out my policies.”

This is good advice not only if you are a governor. Details are important, but as the executive you need to set out what your “policies”  or goals are.

Creating The Plan

This is the most important ingredient, creating the plan. A plan that is never explicitly stated and quantified is less likely to succeed. First, write down what your goals are. It does not have to be detailed with numbers, it can be a dream like, “I want to live at the beach full time when I am 50 years old”. Next, write down all the components of the goal that you believe will require some attention in your plan. If, e.g., you need to fund a college education this might include things like access to financial aid, scholarship opportunities, investment accounts, and the likely type of education (college, trade school, university) expected.

Next create an action plan for each component. Some details of your components may seem daunting (navigating the web of college financial aid options is complicated enough by itself). Just because one aspect is complicated or overwhelming is not an excuse to ditch the plan. Seek out advice either through books or the many online resources (many are free). Or, if you are still overwhelmed seek out professional advice for those areas where you need the help.

Discipline

What’s the secret to financing your future goals? You may think it’s some of the following. These are important, but not the most critical ingredients.

  • Being at least knowledgeable or an expert at the details.
  • Asset allocation.
  • Return on investment.
  • Type of investment account (Taxable Brokerage/IRA/529 plan/401K).
  • Tax Benefits.
  • How smart your Financial Planner, Mutual Fund Manager, etc. is.

One of the unfortunate statistics that investment professionals know too well, is that investors typically do not earn the stated returns on their mutual fund investments. This is primarily due to a lack of discipline; investors may stop investing consistently along the way, or they may make rash decisions about buying and selling at inappropriate times.

One investment professional has written extensively about this issue on his blog, the Behavioral Gap. After some years as an investment professional seeing what investors actually do with their money, he documents that extent of the gap: an average 7% difference!

Once you have embarked on your plan, stick to it. Fortunately, discipline can be automated today using many financial tools that can help you stick to your plan.

Margin of Safety

Borrowing an idea from the great value investor Benjamin Graham, always factor in a margin of safety. When looking for investments, Graham would determine a fair market price based upon past performance and his assumptions about the business going forward. After all the calculations were completed, he added in a margin of safety (a lower buying price - perhaps 25-50%). This concept can be used for other financial plans, not only investments.

After your have done your research, made your assumptions and estimated all the numbers, add a margin of safety. There will be things that you can’t know or predict easily as well as changes in your assumptions that will occur long the way. A margin of safety will help to temper your expectations and provide a more realistic outlook. And if the plan eventually succeeds more than you expected, all the better.

Don’t Try To Be Perfect

If you have followed how the political bodies study issues and how their proposals become bills and eventually law, it is quite messy. It often times has been compared to how sausage is created. The point to take away from this is that if you wait for the perfect time to save, to invest, and plan your finances it will never happen because there is never a perfect time.

You probably have short term issues to deal with as well as many different goals each requiring your attention and resources. Even if you can only satisfy 20% of a goal because that’s all you can manage right now, this is still better than doing nothing.

Also, there are fairly well known rates of return on investment for different types of instruments. You might be tempted to look for that ‘perfect investment’ which may offer the opportunity to juice your returns. Instead of taking additional risks, follow more conservative strategies that have a high success rate - take risks using other funds that you can afford to lose.

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