Happy Monday, Folks! Today’s post is not going to apply to everyone. The problem I’m going to address falls into the category of “good problems to have.” However, if it does affect you, it will cost you money if you don’t address it. The post applies to folks who A) max out their 401k contributions, and B) have variable income – commissions, bonuses, etc. For those who don’t fall into both of those categories, don’t feel bad and don’t underestimate what can happen in your life either. This is only the third year this information has applied to me and the year before the first, I never would have seen it coming. This method may seem complex, but it is actually really simple once you understand the concept.
In most employer sponsored 401k plans, employers match some
percentage of your contributions. The most common one I’ve seen is 3% if you
contribute 6% of your salary, or simply 3% of your salary to keep things simple.
Some are more generous than that, and many are less so. But let’s use that for
the sake of our example. Let’s say you have a set $100k a year salary and want
to max out your contributions for 2019. Since the limit is $19k this year, you
would simply need to contribute 19% of your salary, which would both easily
cover the 6% requirement to get the entire match and hit the contribution limit
exactly by the end of the year. If you did that, you would contribute $19k,
your employer would contribute an additional $3k, and your total would come to
But what if your income varies depending on performance and
other factors? Herein lies the problem. If you anticipate your income will end
up being roughly $100k, you want to max out your contributions for the year,
and you subsequently set them at 19% and forget it, one of two things is very
likely to happen. Either you’re going to undershoot and leave tax shelter on
the table (every dollar you contribute to a 401k reduces your tax liability) or
you’re going to overshoot and lose out on some of your potential employer
Here are some examples to illustrate the point. Let’s say
you end up making $80k. At the end of the year, you will have contributed
$15,200, missing out on $3800 of tax shelter. You can multiply your top
marginal tax rate by that number to determine how much that will wind up
costing you. But regardless, ouch! Now the opposite scenario. Instead of making
$100k, you wind up making $120k. You would have contributed more than the
maximum $19k at some point, except that whatever company administrates your
plan is likely to simply cut off your contributions when you hit the limit. So
instead, you would have finished making your $19k in contributions for the year
at some point before the end of the year. It’s good to be early, right? Not in
this case. Unless your employer “trues up” the match at the end of the year,
which I doubt most do, you would have left $600 in employer match on the table.
Why? Barring the “true up” exception, an employer matches check for check. In
other words, you wouldn’t be getting any match for the $20k you had left to
earn after you made the first $100k and had subsequently contributed 19k. Once
So how do I avoid either of these scenarios? I make
adjustments throughout the year. At the beginning of the year, I set my
contribution percentage as if I were only going to make my base salary. In
other words, it is much higher than it will be by the end of the year, but if I
don’t make a single dollar in bonus compensation throughout the year, I will
still max out my 401k. Then, each time I get a bonus, I calculate how much I
have left to contribute for the rest of the year, divide it by the amount of
base salary I have left to make, and make the result my new contribution percentage.
Admittedly, this is a conservative method. But that’s the way I prefer to
You can modify this system to your liking, and you may have
to if your base salary is a relatively small percentage of your total annual
income. It just requires a little “guess and check.” For example, if your base
salary is $40k and your total annual bonus is typically in the high five
figures, you’re not going to start the year contributing 47.5% of your salary. Not
only would that make for some very lean times until you got your first bonus,
but it would also very likely cause you to eat up way too much of your $19k way
too quickly, thus eventually defeating the purpose of the entire exercise once
you couldn’t contribute a large enough percentage to get the full employer
match without going over the annual limit. So in a situation like that, I would
probably just estimate, start out contributing around 15-20%, and adjust as
needed to stay on pace.
But one nice side advantage of doing things my way is that
as the year goes on, the paychecks get bigger. In my case, the result is that I
tend to do more of my after tax investing later in the year since I have more
cash coming in the door. But regardless of how you do this, the important thing
is that you not leave money on the table – either with your employer, or with
the bad guys. I know this may seem like overkill to some of you to save what
will likely amount to less than $1k a year, but this is a finance blog. And
besides, no one knows what the future holds. When you’re at retirement age, you
just might need that money and besides, it will almost certainly have grown
considerably by then. Plus, although this took a lot of words to explain, it only
takes me maybe fifteen minutes total of calculating and making adjustments
throughout the year, so in my opinion, it is well worth doing. Have a wonderful
week and go Cowboys!
Happy Tuesday, Folks! I took yesterday off since it was Columbus Day and I’ve decided to do more to make holidays special, even the more dubious ones. This post has been a long time in coming, since it happened about a month ago now, but after months of researching and deliberating, I bought my next car. As the picture shows, I replaced my 2014 Hyundai Sonata 2.0T Limited with a 2015 Infiniti Q60S. This was pretty out of character for me since I ended up buying a totally different car than I had planned to and I committed some car buying sins I never would have previously considered in the process. But at least so far, I’m very happy with my decision. I’ve been buying cars for almost two decades now, and while some aspects stay the same, every purchase is also a little different. So here are the specifics from this time.
What stayed the same?
I did a ton of research before I even stepped foot on a
In this case, I found what I thought was the perfect car for
me – on paper. I was going to buy a 2015 Lexus ES 350. In addition to having
the usual bulletproof Toyota reliability, it has a venerable, naturally
aspirated engine, meaning none of the turbo related issues so many of the cars
being sold today are likely to suffer from somewhere down the line. The gas
mileage is a solid 21/31 and it doesn’t require premium gas like most luxury
cars do. It is a big, smooth, comfortable car, which is important for someone
who drives a lot as I do. The main compromise I felt I would have to make is
that like most cars today, it is not very pretty. But that’s not terribly
important and other than that, the car checked all the boxes.
Doing the research is crucial. You need to know everything
about the car you’re looking at – the fair market value, the long term
reliability, any specific problems the year/make/model is known for, the
features in different trim packages, etc. Most salesman suck at their jobs and
will not know a lot of these things, especially with used cars. This doesn’t
mean they won’t answer any questions you have; it just means you shouldn’t rely
on the answers they give you. Keep their motivation in mind and go in armed
with information from unbiased sources.
I also had financing lined up before I went to any
I decided to finance this car instead of paying cash because my credit score has suffered some since I paid off my last car years ago as a result of having no current installment debt on it and I want it back where it was. No, there isn’t much practical difference between the mid 800s and the low 800s. But this stuff is literally what I do and yes, there is also some ego element to it. Anyway, another reason I got a loan is that at today’s interest rates, a small one (just over $10k in this case) costs basically nothing. I had a sub 3% rate ready to go at a local credit union.
I walked away from
two potential cars because the deal I wanted wasn’t there.
This is extremely important. Car salesmen know how to toy
with your emotions and if you aren’t careful, they will have you feeling that
you MUST have THIS car. Or that they’re such nice people that you owe them something.
Or any number of other psychological tricks that they might play depending on
what you respond to. Any time you start feeling yourself having an emotional
response to anything involving money, it is a good practice to walk away until
it has passed. And when buying a car, if you sense that you’re at the
salesman’s limit and the numbers aren’t where you want them, that is the
perfect time to walk away anyway. If he lets you leave, you know it really was
the best he had to offer. And don’t believe any bullshit he gives you about this
being “a one time, today only offer!” I promise he’s lying. And even if he’s
not, if he was willing to give it to you, someone else will be too. If you
remember nothing else, remember this: you will never lose money by not spending
it. Think about it.
Like many of my previous car purchases, I bought a late model used car and saved a ton.
My Sonata was actually the one new car I’ve bought so far. I only bought that one because it was a demo model (6000 miles or less on it but still legally a new car) and it was selling for about an $8k discount off of its retail price of $31k. But even though I got a deal that good on that “new” car, and even though this latest car was significantly more expensive when it was new, I still paid less for this one. With options, the Infiniti retailed at just shy of $50k. But five years old and with only about 30k miles on it, I got it for $21k. I wasn’t concerned about the year/mileage imbalance affecting my resale value since I put on a ton of miles and will quickly reverse it anyway. Considering this car has a long proven, naturally aspirated engine and the Hyundai had a turbo, you could make the argument that this car’s powertrain probably has as many trouble free miles in it as the Hyundai’s did when I bought it – but this powertrain is in a considerably nicer car. And in case you think this particular model depreciates unusually quickly, there were plenty of available ES 350 options at right around $20k for that same vintage as well. Keep in mind that the secret has been out on Lexus for some time so they depreciate slower than almost anything on the road. But even there, the late model used discount is alive and well.
What was different about this purchase?
I bought my car from a “no haggle” dealership.
Most people know that Carmax is a fantastic ripoff by now. If you still don’t, compare any car on their lot with other comparable options in your area. Even without factoring in that most dealers will negotiate some on their advertised pricing, thus making it even lower, Carmax is going to be at least 10% higher than the best available options on nearly anything. They make it simple for you…to pay them an enormous premium for a car. This time around, I found a lot of dealers that appeared to be copying that business model. However, upon further inspection, I noticed something surprising. Many of their prices are actually pretty competitive and some are even exceptional. The dealership I wound up going with happened to have the exact car I wanted at the lowest price available for hundreds of miles. Could I have found a similar car for a thousand or two less somewhere else? Possibly. But it probably wouldn’t have been worth the time and effort. I only buy black cars with black leather interiors and the Q60S is a fairly rare car to begin with. This is a preference that always costs me money but one that makes me happy and thus, that I’m willing to pay a little for.
Anyway, I ended up getting a pretty decent deal on the car without the fun of negotiating, which normal people don’t seem to enjoy anyway. So don’t ignore all the “no haggle” dealerships; not all of them are ripoffs. I will, however, note that this was not one of those “delivered to your door” dealerships. I would NEVER buy a car I couldn’t inspect in person first, whether new or used, although it is significantly more important with a used one. And yes, I know they offer return policies, albeit for very short time/mileage windows. Do you want to try returning a car? I can’t imagine any scenario where that would go smoothly. For example, there will already be a loan in your name. That will have to be zeroed out or paid off. I can’t imagine that will report cleanly on your credit report. The titling process will already have been started. Do you think they refund that money? Do you think you won’t also be paying to title the second vehicle? Those are just a couple of issues off the top of my head. If you can’t inspect a car in person, don’t buy it. These aren’t tv sets; no two are alike.
I actually wound up financing through the dealer.
This particular dealer only dealt with a selected group of finance companies. Ever the cynic, I figured this meant they were going to add one or more points into my deal, which is a very common practice at dealerships and one of the main reasons to line up financing before you go. Had they tried to do that, I would have simply bought the car with cash or walked away. However, they wound up getting me a loan within a quarter point of the one I had already lined up. And with a loan as small as the one I took, I will pay basically nothing in interest anyway and a rate difference that small means nothing. Why did I take such a small loan?
I actually wound up trading my car in.
I have always sold my own cars in the past and have been very successful with it. In my experience, I’ve gotten anywhere from 20 to a whopping 50% more than dealerships were offering by doing things this way. But in this case, the dealership actually made me a pretty fair offer. I know because I did my research in advance. If I had sold the car myself, I would most likely have gotten $1-3k more for it. However, that would have involved spending time I simply don’t have and dealing with at least some people I absolutely don’t want to deal with. When you’re dealing with the public, you’re usually going to meet some assholes, some weirdos, etc. But the bigger issue was the time factor. For me, at this stage of my life, I decided it wasn’t worth squeezing every last dollar out of my car. Plus, the $10k I got for it by trading reduced my sales tax by $625 (you are only taxed on the sale price that’s in excess of your trade and the rate is 6.25% here), further reducing my motivation to sell the car on my own.
I threw my research in the trash and started over.
Like I said above, the 2015 Lexus ES 350 would have been a
nearly perfect car in my situation. So why didn’t I buy one? Because I test
drove one. I can honestly say I have never been so disappointed with a car in
my life. The car was, in fact, nearly perfect – except for one little problem.
It was the most sterile driving experience I’ve ever had. Although the stats
were pretty similar to my existing car, the performance didn’t feel like it was.
And even if it had been, it wouldn’t have mattered. I could have been in a car
as fast as the heavily modified Supra I had back in the day (you know, when they
weren’t just BMWs marketed as Supras), but so what? I couldn’t feel anything.
It was like someone set out to create a car that felt like you were floating in
it rather than driving. The car is extremely good at what it does and I thought
I would like it. But I absolutely didn’t.
By the by, this is also a strong selling point for the Hyundai. I wanted to get out of that car for two reasons – the mediocre build quality (don’t get me wrong – it wasn’t a Chrysler product or anything, but it was starting to creak and groan way too much for a car its age) and the turbo engine that would inevitably start costing me money well before I wanted to get rid of the car. I drove a car that is significantly more expensive and objectively better in almost every way and yet, it didn’t feel like much of an upgrade at all. For anyone looking for a lower priced car that still offers an awful lot, you could do a lot worse than a Hyundai. And if you get a maxed out one like mine was, you might have a harder time noticing the differences between it and a luxury car than you would expect.
Anyway, after that colossal disappointment, I decided I’m at the point in life where I can compromise a little more between financial optimization and enjoyment. I do have to drive this thing after all. The car I bought is significantly faster, sportier, and more fun in every way than the Lexus. It will not be quite as reliable over time, although it should still hold up decently, especially for being a sports car. And while the gas mileage will rarely be north of 30, again, it’s not terrible for a car this fun to drive at 19/27. And like with most cars, I’ve already been finding that it does a little better than its EPA rating in real life since I don’t beat on it. So far I’m averaging a little north of 27 with probably 75% highway driving.
And I actually love the car. It is a few years “behind the
times” in terms of technology, but I think that’s great since I want a car, not
a computer. The reason I was looking at a 2015 Lexus in the first place instead
of a 2016 or newer is that after 2015, they started adding more and more of the
self driving features I have zero interest in, at least until further notice.
In the case of the Infiniti, 2015 was also my year because Nissan caved to the
turbo trend in the next model year. It’s no race car, but it’s a sporty, fun
little car with a very nice interior and everything I want in it. I’ll do
another post on the cost of ownership between the three cars (the Hyundai, the
Lexus, and this one) but for now, suffice it to say, while this one is the most
expensive of the three, I still consider it a reasonable compromise compared to
something very sporty like a Corvette. It is certainly well within my means and
as long as you stay there, at the end of the day, I think it’s ok to enjoy
yourself a little every now and again.
Happy Monday, folks! As I mentioned on Friday, I bought a car last week. So for the next few weeks, I’m going to be peppering in some posts about that process – both my general philosophy/methodology and how this latest purchase played out. Today I’m going to talk about why I like to buy used cars. The biggest reason to buy a used car versus a new one is obviously cost. But if you do it right, you can go beyond that and follow my core financial philosophy of keeping costs down WITHOUT sacrificing quality. When you think about cars, you want to think about the total cost per year. That includes, and typically in this order from largest to smallest, depreciation, gas, insurance, and maintenance/repairs.
Depreciation is your largest, most important cost. And the
larger your acquisition cost, the more you’re going to pay in depreciation in
most cases. But the depreciation curve almost always behaves in a fairly
predictable way. For example, a typical $40k car will lose about $20k of its
value in five years. But in the next five years, it will probably only lose
another $10k. And in the next five, probably only $5k. Obviously different years,
makes, models, etc depreciate differently. But that is the general pattern.
My favorite way to exploit this is to buy cars at about the five year mark, drive them another five to ten years, and take good care of them. You can usually still find one that age with 50k miles or less on it and with today’s cars, assuming the previous owner has taken care of a car reasonably well, that is basically the same as new. Just about any car, besides the crappy brands I simply don’t advise you to buy at all (I posted about the best and worst brands here), is going to go around 200k miles if it’s maintained decently and not driven excessively hard. And furthermore, I’ve done very little besides regular maintenance on vehicles with 50-150k miles on them. So to me, that is the range I want to own a vehicle for. By buying and selling when I do, instead of paying roughly $30k over 100k relatively trouble free miles for that $40k car, I pay half that for the same.
So by taking advantage of the differences between the depreciation
cost curve and the maintenance/repair cost curve, I save a ton of money and get
to drive essentially the same cars I otherwise would. But in order for that to
work, I have to be very confident I’m starting with a good car. That requires
first doing the proper research and then knowing and identifying the signs of a
car that has been taken care of versus a car that hasn’t been. I’ll get into
that plenty more before my series of car posts is complete. But that’s enough
for today. Stay tuned for more of these posts and I’ll work my way through the
entire process. And get your week off to a great start!
Happy Friday everyone! Here is the conclusion of Wednesday’s post.
Now let’s look at the high end. A six figure salary is yesterday’s news since everyone has one now, right? Wrong. An annual income of $100k puts you in about the 90th percentile as an individual or the 75th as a household. Keep in mind, we are back to US only numbers now. And I want you to see how steep things get from there. Want to be in the top 5% of earners? That’s about $150k. And that top 1% that is always being demonized by the media? Roughly $300k. Not nearly as much as you thought, I’ll wager. And that means everyone making any amount larger than $300k is in an increasingly smaller fraction of the top 1%. There really aren’t that many of these people.
Not quite the common perception, is it? The distortion is
caused by free and easy credit. Fifty years ago, if you were driving a Corvette,
it meant something. Today, you see them everywhere because any idiot with some
combination of a halfway decent income and a halfway decent credit score can
buy one brand new. You don’t necessarily even need both of those to qualify
anymore. Subprime auto loans are starting to blow up now that the recession is
most likely in progress, but they’ve been handing the damn things out like
candy on Halloween over the last several years.
The point is this: appearances mean nothing. Zilch. Most
people have been so busy maxing out their credit to show off how successful and
important they are for so long that they didn’t even notice when what they were
doing ceased to mean ANYTHING. Women, here’s a special PSA for you. That guy
driving the fancy car might be the hyper successful whatever that he claims to
be. But more likely than not, the story is a lot more ordinary than that and
he’s either borrowing Daddy’s car or he’s just maxed out his credit to sell you
something a little different. It’s called peacocking and it’s extremely common
– and a fairly logical response to a phenomenon called hypergamy. Women don’t
usually do it because most men don’t care about the finances/career success of
the women they date. They put on makeup and get breast implants to make
themselves more marketable. But that is a whole different topic for another
When I was growing up, there was a very exclusive
subdivision in our area where every single house was a million plus and living
there almost seemed to make you a celebrity. And in fact, there were some
living in there, even in lowly Wisconsin. A certain Green Bay Packer who once
got in the wrong hot tub and suffered some pretty serious consequences for it
was among them. Anyway, this was one small suburb of Milwaukee, Wisconsin.
Today I realize there aren’t enough jobs within fifty miles of that subdivision
that pay $300k or more for someone holding one to have been living in every one
of those houses, let alone every similar house in all the other similar “rich
people” enclaves in the metro area. Most of these people that I thought were
living fairy tale lives were in fact living in financial prisons they
themselves had built. I don’t need to know every one of their personal
stories. The statistics make what I just said an undeniable fact.
There is a wonderful book called The Millionaire Next Door
that I highly recommend to everyone. It goes into detail on this very thing and
I still remember specific parts of it to this day that just blew me away. The
summarizing message is that now that almost anyone can appear to be wealthy, it
has obscured the fact that most people who are actually wealthy don’t care very
much about appearances. The lesson? If you want to actually BE wealthy, you’re
pretty unlikely to get there by trying to LOOK wealthy. In fact, spending
everything you have on trying to keep up appearances will almost guarantee that
you will never actually have much of anything.
This is a seemingly obvious concept. But everywhere you
look, style is being valued more highly than the actual substance it supposedly
represents. Most of what you see is fool’s gold. And bringing it back full
circle, don’t let these peacockers fool you. Live your life reasonably and be
happy. Remember that a very tiny percentage of the people who have ever lived
on this earth have had things as good as you do. This is whether you make $30k
a year or a million or anywhere in between. Perspective is incredibly valuable.
It’s easy to lose it in a culture like ours where results are often valued more
than the principles and the processes that produced them. But fight back
against that. It’s only a feeling. The facts are much more relevant to your
success or failure in life. And I want every one of my readers to have the
In this crazy world we live in, everywhere you look, someone is showing off their wealth. Million dollar houses, hundred thousand dollar cars, exotic vacations, you name it – these things are all so commonplace that we barely even notice them anymore. Social media has only amplified this trend, with millions of people taking to the internet to post snapshots of their lives that have been carefully curated to show them only in the best light possible. Especially if you live a pretty typical life, and even if you don’t, you can be forgiven for getting the sinking feeling that you’re being left in the dust – especially financially. And that’s exactly the feeling I want to challenge today.
I’m going to use cold, hard facts – statistics in this case
– to do it. When you’re looking at statistics, it’s important to make sure you
understand the context. In the case of income statistics, you can start by
ignoring average (or mean) and going straight to median. Why? Average income
numbers are pulled way up by the highest earners. Median income is a much more
accurate concept of what is “normal.” For example, the average household income
in the United States is over $70k a year, while the median is roughly $60k. And
that brings me to my next point. Household income seems to be the most commonly
reported. And that’s fine. But if you’re a single person household like me, an
individual income number is a better means of making an “apples to apples”
comparison. And in this case, the median individual income is only a little
north of $30k a year, while the median household is nearly double that at $60k.
You can also drill down deeper using all sorts of other factors. The Bureau of
Labor and Statistics (BLS) collects tons of data and it is freely available to
Now that we’re starting from a realistic point, we can begin doing some comparisons. if you live in the United States, or any of numerous other countries with modern economies, you are already better off than a stunning percentage of people in the world. There is a really interesting website called Global Rich List that aims to bring awareness to poverty around the world. If you enter the $30k figure from above (again, this is someone dead in the middle here in the US), you find that this seemingly small income would put you in the top 1.23% of people worldwide. The federal poverty level in the US is roughly $12k a year for one person. But even a person making that little is in the top 14.5% worldwide. And roughly that same percent (14) of the US population lives at or below the poverty line. So if you live here, the odds are overwhelmingly likely that you have more to be thankful for than you might think. You could do the same type of analysis with net worth numbers instead of income and get similar results.
This is without even getting into a historical discussion.
If you started making comparisons with all the people who have ever lived on
earth, you’d be looking at almost infinitesimally tiny fractions of a percent
of people who have lived as well as even the poorest among us today. And that’s
without even factoring in all the technological advances humanity has made. For
example, air conditioning was invented in 1902, which means that before then,
even royalty didn’t have it. Airplanes were invented the very next year, so the
nobility of the past couldn’t travel anywhere nearly as fast as we can. And
don’t even get me started on being able to hold the knowledge of the entire
world in one’s hand. Before the printing press was invented in 1455, books
themselves were very rare because they had to be copied by hand. But today you
can carry thousands of them in your pocket – and they’re updated automatically
as knowledge progresses!
Happy Monday, ya’ll! Here is the latest post in my Annual Expenses series. If you didn’t see the introduction post that summarizes all of my expenses, you can check it out here. I’ve been going into detail on one category each Monday. Over 2017 and 2018, I spent an average of $12,600 per year on my housing expenses. Please note that this only includes rent – not utilities, maintenance (I pay zero since I rent), or any other associated expenses. And that is actually trending upwards. This is the largest annual expense for most people and I’ve made tons of financial progress over the years by being very conservative with it. I still am in some ways, but I’ve definitely moved a significant distance along the cost/quality spectrum in 2018 and 2019.
What does that look like? For the last two years, I’ve lived
in what I’d call medium-high end luxury apartment complexes. But I’ve also had
one bedroom apartments, as much to maintain the more minimalist lifestyle I’ve
learned I prefer as it is to save money. It’s hard to buy too much crap you don’t
need when you only have 700 square feet to put it in. So I avoid clutter but
also get to enjoy premium features in my unit, beautiful landscaping, great
amenities, and a safe, quiet location. But even in the relatively reasonable
Houston market, I’m spending more than I was in most of 2017 in the Milwaukee
suburbs, which skewed the average down.
This year, I’ll have spent over $15k when all is said and done.
I’ve allowed this form of lifestyle inflation to happen because I genuinely
enjoy where I’m living and because it is still at an extremely manageable level
relative to my total income. The conventional wisdom is to spend a maximum of 30%
of your gross income on rent. My preference is no more than 10%, and grudgingly
15% if you’re paying a mortgage instead of renting (more on that later). I
acknowledge this would be much more difficult with an income at or below the
average range. But there are ways to do it, and without compromising on
essentials like safety. And that is why I said I believe this expense can be reasonably
kept to $6-10k.
How? For starters, by viewing things from a more traditional
perspective. As individuals in today’s world, we are more isolated than at any
previous time in the short history of our species. Only a few generations ago,
someone living alone as I do was not only fairly rare, but seen as pretty
unfortunate and even embarrassing. I think humanity has lost a lot in the
process of abandoning our collectivist roots. And I say that as a man you can probably
correctly guess is a pretty strong fiscal conservative. Long story short, live
with someone. It requires careful relationship management, particularly if you
choose to live with a romantic partner, but it can be done. I believe there are
likely psychological advantages, even for someone like me who doesn’t need to
do things that way for financial reasons. And with two (or more) people kicking
in, it’s pretty easy to keep your annual rent expense below $10k in all but the
most ridiculous markets, like New York City or San Francisco.
From there, follow the same process I always talk about. Think about what your needs truly are. If you don’t have a fancy car, you probably don’t need to pay more for a place with a garage. If you aren’t going to use a fancy resort style pool area, a gym, a spa, etc, very often, don’t rent somewhere where you’re paying for those things. If you want to be a hardcore personal finance warrior like the legendary MMM, consider paying more to be close enough to work to walk, bike, etc, and see if you can cut car ownership, the second largest expense for most people, out of your life entirely for a year or two. If you don’t care about hardwood floors and granite countertops, well, I think you get the idea.
What if you own your home instead of renting? Theoretically,
it should be cheaper then, since with renting you’re paying for someone else to
do all the maintenance as well as to have the option to leave on short notice.
But in the reality of today’s hyper-inflated housing market, that’s often not
the case. So my first advice in this area is not to buy something overpriced. Mark
my words, eventually, even the mighty US housing market is going to get a dose
of painful reality. Those who have been patient will be the beneficiaries when
it finally happens. However, there is an argument for building equity (just don’t
overestimate this factor or try to have any financial discussion whatsoever
with your average real estate agent, who is desperate enough to say anything
and knows/cares very little about economics or your financial well being),
having a more permanent situation, fewer neighbors in close proximity, etc. So
to allow for that value, which is certainly real in some cases, I would sign
off on paying up to 15% of your income on a mortgage – preferably with a twenty
year max term so you aren’t paying a fortune in interest or buying way more
than you can truly afford. If you can’t do that, buy a less expensive house,
rent another year, or look into renting out a room in the house. There are
always options; never forget that.
Keeping your housing expenses well in check really only requires
thinking a little bit outside of the box. Just because other people do things a
certain way, that doesn’t mean you have to follow suit. There are way, way too
many people out there who are “house poor” – in other words, their finances are
unnecessarily constrained because they are paying way too much for their
residence. P.S. If you want to live in Silicon Valley, ask yourself if you can
get a job there that will pay you several times what a job in a reasonable housing
market will. Keep in mind that the higher the income, the greater the
diminishing return effect due to higher marginal tax rates. And spoiler alert,
unless you’re a CEO or something pretty close to that, and you couldn’t get
that kind of job anywhere else, the answer is going to be no.
You would have to be living under a rock to have completely missed the media frenzy over the recent Equifax settlement. It is still going strong, even though it is nothing but a basically meaningless parody of justice to show the rabble that “the bad guys are paying the consequences.” And as a result, I’ve been getting a lot of questions about the situation and credit reports in general. Here are my answers to some of the more common ones.
How do I claim my $125?
Unless you signed up for credit monitoring services,
nothing. Because that’s exactly what you’re eligible to get. If you did, you
can claim your pittance here:
If you had actual, quantifiable expenses resulting from it,
you can theoretically recover up to $20k. You probably won’t get nearly that much,
even if your expenses exceeded that amount. After all, there are hungry law
firms at the front of the line, tons of people who will make claims, and a
finite amount of money to cover it all. But again, if you want to make a claim,
go to the link above.
I never even gave Equifax permission to collect my data.
How did they get it?
Yes, you did. Any time you signed up for a credit card, auto
loan, mortgage, personal loan, or basically anything else that would show up on
a credit report, you most certainly agreed to let all three major credit bureaus
(Equifax, Transunion, and Experian) collect your data – and to allow many other
things to happen as well. However, like any normal human being, you didn’t read
it and like any human being who isn’t an attorney with an ass ton of time on
your hands, you wouldn’t have understood most of the terms and conditions even
if you had. Don’t like it? You can try “living off the grid.” As for me, I’ll keep
my electricity, internet, car, home with an address that can have mail
delivered to it, having living, breathing women willing to have sex with me
(and that’s really the only reason for any of that other stuff to exist in the
first place if you think about it), and so forth.
Should I sign up for credit monitoring?
Nope. Credit monitoring is just one more way the credit
bureaus, including the one that potentially lost your data in this case, profit
by selling the information you unwittingly gave them right back to you. It won’t
give you an ounce of data you can’t get for free but you will pay for it
anyway. Unless you’re determined to be part of the settlement. Then you can get
the information that is already available to you for free…for free. Long story
short, credit monitoring is bullshit.
Ok, then what SHOULD I be doing to stay on top of things?
1. The credit bureaus are each required to give you your
credit report for free once a year. Go to www.annualcreditreport.com to get
them. Get one every four months and keep track of which ones you’ve gotten and
when. This way, you can space it out over the course of the year and be as on
top of things as possible. They won’t have scores, but I have at least half a dozen
credit cards that give various versions of my credit score for free and you probably
have at least one. Besides, that isn’t the point. The point is to go through
everything on the report and make sure it’s correct (or more likely, that the
mistakes that are there aren’t materially adverse). Like any faithful churner,
my credit reports have dozens and dozens of accounts, active, historical, etc.
But even so, it takes me no more than ten or fifteen minutes to scan through
them (again, this is three times a year) and make sure there are no issues. The
point is, it’s not difficult, especially for someone with a more normal amount
of financial activity.
2. Know what to do if identity theft happens. You should
already be monitoring all your existing accounts weekly. So even if your
finances are absurdly complex like mine, you will quickly realize if something
happens that you were not a party to. Call your credit card company, bank, or
whatever entity issued the financing ASAP and ask to speak to someone in the
fraud department. It is a simple process from there. If you find an account you
didn’t know about on your credit report, you have a bigger problem. But you
just have to work through the process. First, make absolutely sure that you’ve
really been a victim of identity theft and this isn’t just something you did
when you were drunk and since forgot about or that is reporting differently
than you would have expected it to. Then, call the police. Not 911 obviously.
File a report with them. Go to www.identitytheft.gov
and file a complaint with the FTC. Report the issue to the credit bureau in
question. Freeze your credit with all three bureaus. This step will create
additional hassles any time you want to do anything financial, but it is almost
certainly necessary at this stage. You may even have to get an attorney involved.
But if you pay attention, you will almost certainly learn something from the
situation too. So at least it’s not a total loss.
I have the first form happen about once a year on average as
I would imagine most people with a ridiculous number of credit cards do in an era
where identity theft is so rampant that I once read that credit card skimmers
with a thousand numbers on them were going for about thirty bucks on the black
market. But thankfully, I have never dealt with the second. I’m sure I will
eventually and when I do, I will attack the situation with great vengeance and
furious anger (anyone else remember Pulp Fiction?) and maybe I will write a
post about it and turn it into a net positive. But until then, I will just keep
watching. And waiting. Keep that in mind, identity thieving assholes.
How worried should I be?
Not. This shit happens almost every single day. There are twelve
year old computer geniuses, in horrible countries where their gifts are being
tragically wasted, coming up with new ways to hack into the most secure
databases on the planet as we speak and many of them will succeed. It’s an
inevitability. But luckily, you live in a country where the consumer is
basically the only thing keeping our vastly overinflated economy afloat. No
one, and that includes most politicians, has any interest in seeing what would
happen if consumers lost that precious confidence that keeps them borrowing
money to buy shit they don’t need to impress people they don’t like (I believe
that one is a bastardized version of a George Carlin quote – that guy was a
genius and he was right about 89% of the time, which is way more often than
almost anyone, ever). The economy is basically the only thing keeping people
just happy enough to prevent them from realizing (or caring) how corrupt those
politician pieces of shit are and thus, consumer confidence is to be kept sky
high. And it follows that the laws are extremely in favor of consumers when it
comes to matters such as identity theft. Do your basic diligence and you will
Should I get identity theft insurance?
Probably not. Insurance is an industry run by a combination
of typically beautiful crooks and people who are extremely good at math. It
wouldn’t be so bad if insurance companies didn’t do all they could to screw the
marks customers out of the money they should be entitled to at literally
the only time they’re expected to do anything whatsoever in exchange for the
money they collect year after year in the form of premiums that consistently go
up for literally no fucking reason at all. But they do. Ever make a claim on
your car insurance or homeowner’s insurance? Remember the experience? Now
imagine trying to get those bastards to pay for something intangible. If I
recall correctly from the last time someone tried to upsell me on my insurance (talk
about barking up the wrong tree), it’s about a seven dollar a year premium
addition and there’s probably an excellent reason for that. It’s bullshit and
they will never pay you a dime, no matter what happens.
Why was this post so sarcastic and profane? My delicate
sensibilities are offended.
I don’t care. This is my blog. Get out. And to answer your
question, I’m not sure. I’m in a funny mood tonight. I hope I succeeded in providing
some worthwhile information and entertaining at the same time. Maybe more
people would read this blog if I could master that skill. I guess this post
will serve as a test.
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.” – Wilkins Micawber in David Copperfield, by Charles Dickens
Lately I’ve noticed a new trend in the media that I would
like to address. In most areas of life, it is generally accepted that you have
to walk before you can run. You don’t just walk into the gym one day, throw
four plates on each side of the bar, and start deadlifting it repeatedly. You
have to start with a much more manageable amount of weight and train your body
to handle more and more through sustained effort over time. And 405 is more
than many people will ever deadlift in their lives so there is the crucial
element of being realistic as well.
But with personal finance, there seems to be a backlash
against that concept. If anyone dares to repeat the totally valid, if tired,
advice that people replace $5 coffee drinks with $.10 ones they can make at
home and enjoy just as much, they’re met with ridicule or even the vicious
personal attacks that have sadly become commonplace in a world where so many
people seem to in an ongoing competition to be more outraged by seemingly
innocuous things than anyone else. Chase Bank, a bank I have mixed feelings
about at best, was crucified for posting simple, actionable advice of that sort
– advice that could help a lot of struggling people. And its CEO, again, a man
I have very mixed feelings about, has become a political punching bag for some
people who appear to have made it to adulthood without learning basic economics
at any point along the way.
The theme of these attacks seems to be that people in
general don’t make enough money, so giving them any financial advice that
doesn’t involve being paid more money (by someone else) is condescending and
insulting. In other words, it’s all someone else’s fault. It’s time for a
reality check. No one on this earth is entitled to anything. And no, this is
not political. I have to say that because the word “entitled” has been infused
with bullshit political implications to such an extent that its mere utterance
has become almost a war cry. In most of the world, people live in a reality
where if they themselves don’t make something happen, it won’t. The fact that
we live in the relative comfort of an incredibly prosperous place where life is
incredibly easy does not change this reality. We’re all adults here. The days
of someone else being responsible for us should have ended long ago.
If you want something, you have to earn it. If you want
someone to pay you a lot of money, you have to give them a reason to do so.
This typically involves using the infrastructure and resources of their
existing business to make them more money, some of which can subsequently be
paid to you. And outside of some very lucky folks, no one is exempt from this.
If the board of directors didn’t think Jamie Dimon was creating more value than
what he is being paid, I can assure you they would not be paying it to him.
If you don’t accept that concept, it’s going to be very
difficult for you to have a successful career. Even if you start your own
business, which is very difficult to do without experience, capital, or both, I
can’t see a path to prosperity for you if you don’t believe everything has to
be earned. It is imperative that many of us stop blaming our problems on others
and start taking an honest look in the mirror and changing the things that are
holding us back. It’s the only way anything is going to improve.
To that end, no, if you’re living paycheck to paycheck, you
can’t afford a $5 cup of coffee. Even a few of those per week could cause you
to pay a bill late and fall into a cycle of paying interest, late fees, etc,
that could become very difficult to get out of. And it doesn’t stop with the
paycheck to paycheck crowd. I very rarely buy a $5 cup of coffee. It is simply
too easy to enjoy not just drinking great coffee, but making it, at home – and
at quite literally 2% of the cost. This isn’t to say I never get coffee from a
coffee shop, because I occasionally do. But usually I’m meeting with a
customer, a friend, a date, etc, and the coffee itself isn’t the real reason
I’m there. Buying the coffee is just an expense I have to incur in order to
spend time in a particular place for a particular purpose. I’m already wealthier
than most people and I’m only in my early thirties, but I didn’t get here by
ignoring reality. In fact, I doubt almost anyone who is highly successful got
there by enjoying luxuries before they could afford them. The only way to
change reality is by first accepting it.
This is so much more than just coffee. No one is literally
saying that cutting out a coffee shop habit is going to make you a millionaire.
It is just an example of a very important concept that can be applied to many
different areas. The same applies to a restaurant meal, which if made even a
once a week routine, could easily turn into a $100 per month premium over
equivalent food that could be made and eaten at home. I’ve seen people using
Uber when they could drive to the same places and turning $10 worth of parking
and gas into a $50 round trip in the process. Again, even at once a week, this
costs over $100 a month over and above what it would cost to get the exact same
thing done. It all adds up – and usually pretty quickly.
I think most of the outcry over this very valid and
legitimate advice amounts to some bad actors trying to score points by telling
people they don’t actually have to deal with reality. It’s easy to make people
feel good telling them things like that. But it does them absolutely no favors.
Some people see a $5 cup of coffee, a $15 restaurant bill, etc, and don’t
realize what they represent. These are examples of doing things in wildly
inefficient ways and especially when you’re first starting out, expenses like
these can be the inches that make up the difference between winning and losing.
How important are the inches? Just look at the quote I
opened the post with. If you spend less than you earn over a sustained period of
time, even by just a little, you will build assets and life will get easier. If
you spend more than you earn, you’re doing the exact opposite. The average
person in this country has roughly $10k of credit card debt. Most of them
didn’t rack that up overnight. It usually happens when someone is living at or
close to the edge and gets hit with the inevitable unexpected expenses. If they
can’t cover them with either excess income or savings, then the only option is
to borrow. Too many people turn to credit cards, one of the worst forms of
borrowing. It’s so easy. Almost anyone who can fog a mirror can get a credit
card. And if you just pay a little bit each month towards the ever increasing
balance, you can have pretty much whatever you want.
But there is always a cost. In this case, it is that as the
interest grows, it becomes an expense of its own that does nothing for you and
increases each month unless you pay down the principal. Instead of living on
the edge, you’re now beyond it and gradually burying yourself deeper and deeper.
It doesn’t seem like a big deal at first. But over time, the situation will not
only get more and more difficult to dig out of; it will deprive you of
opportunities you won’t even know you’re missing out on. Those opportunities
come in many different forms, but the theme is the same. If you have money, you
can use it to make more. The more you have, the easier life gets. That, in
essence, is the American Dream – work, save, invest, prosper. What a tragedy
that marketing departments, and another kind of enablers with political
motivations, successfully turn so many people away from it before they even
know what they’re passing on by taking the path of least resistance.
But those people don’t control you. Only one person on this
earth does. You get to choose where you get your information, how you process
it, and how to proceed from there. This is both a privilege and a
responsibility, so take it seriously. The quality of your life depends on it.
If anyone is trying to feed you sugar – something that tastes sweet in the
short term but seems just a little too good to be true, ignore them. The
sweetness is gone as soon as you swallow; but the fat ass you’ll develop over
time is going to be with you much longer than that. Whether we’re talking about
food or finance, you want to be taking advice from the same people: the ones
who give you the tough love that doesn’t feel so good in the moment, but keeps
you on the path of true progress. They’re usually the same people who are
succeeding in their own lives – and these days, sometimes being demonized for
that very success. They can help you get there as well. In fact, paying it forward
is something many of them enjoy doing very much. But in order to benefit, you
have to ignore the yes men (and women) who peddle easy answers that never
deliver results. And then you have to listen to the proper advice and work your
ass off carrying it out.
At the end of the day, it’s about who you want to be. Mr Micawber was a tragic character in David Copperfield. He realized his folly, but not until it was too late. Don’t let that happen to you. You can join the masses of lazy people telling lies, pointing fingers, and bitching because they haven’t been handed the results they want in life. Or, you can admit you don’t know what you don’t know (there is power in that, NOT shame), learn what it takes to actually succeed, and then get to work. The latter will get you results. The former will keep you from getting any further than you already have. Reject that. Learn, grow, and live a better life. It all starts with taking responsibility for yourself.
My most faithful readers may have noticed that last week, I missed the Friday post in the Monday, Wednesday, Friday pattern I’ve been following for a while now. This was one of the results of a little adventure I had while on a trip to the oil country. I plan to write a post about that trip next week because I think there were some worthwhile things to mention about it. But for now, just know that I wound up spending an extra night in a hotel room there. For some reason, I decided to read through some emails and for a less mysterious reason, I decided to act on one of them.
Not too long ago, I wrote about my new SoFi checking account. I’m happy to report that it has been a great experience so far. I haven’t been charged any fees (not even for checks, which most banks do charge for now), the bill pay functionality has worked smoothly, transfers to other accounts have been likewise, and I’ve been paid 2.25% interest on the money I’ve run through the account. So I’m very happy. But like any company that truly finds a place in my heart, that wasn’t good enough for the people at SoFi. So they found a way to put a little more money in my pocket and emailed me their idea. And on a scorching evening in a west Texas hotel room, I read that email.
Simply put, SoFi will pay me $50 for everyone I refer to them who starts a checking account. But they didn’t just give me an incentive; they wanted to welcome new customers into the SoFi family in style. And they’re going to do that by depositing $50 into the new accounts of everyone I refer to SoFi who starts one. That’s right folks, everybody wins! And it gets better. Once you’ve gotten your free $50, you can turn around and make $50 more for everyone you sign up. This means that anyone with a spouse or significant other who also likes free money has just been handed $150…or more! You can multiply that $50 times as many friends as you have who are interested in having a free $50 of their own.
Up to this point, I have written this blog for zero compensation. No advertising, no referral links, nothing. Simply put, income is not my goal in doing this. That said, if you have enjoyed reading my blog to such an extent that you’d like to toss a little cash my way as a thank you, make a little for yourself in the process, and try out a checking account that comes recommended by someone who has had them at literally dozens of different banks, feel free to use this link – which will do all of those things. If not, I will probably still manage to survive and will definitely keep writing this blog as long as I continue to enjoy doing so. And either way, I wish you a wonderful Wednesday!
P.S. As an extra little bonus, if you click the link above, you will learn what the B in B. Money stands for.
Recently I was taking my routine, virtual stroll through all of my financial accounts when I noticed something funny – and I most certainly don’t mean “ha ha funny”. My CIT savings account was only returning 2.4% APY. That’s odd, I thought. I’m almost sure that had been at 2.45. I did a little checking and sure enough, I was right. Now I don’t want to miscommunicate here; I understand why this happened and I don’t blame CIT Bank for it. Our long overdue recession has started and not only have rates stopped rising, but they’re actually already coming down slightly. Futures traders have even priced in one to two decreases by the FED by the end of the year. So I’m far from the only one making this call and it doesn’t surprise me in the least to see CIT Bank, a for profit business, doing what management feels needs to be done to protect the bottom line in changing conditions.
That said, what’s good for the goose is good for the gander. When conditions change, I also re-evaluate what I’m doing to make sure it still makes sense. Here’s a recent example in case you think I’m making this up. So I spent a half hour or so on good ol’ Doctor of Credit doing a little research. It turns out that currently, the highest rate on online savings accounts that don’t require absurd shenanigans like 10+ debit card (yes, people apparently actually use the things; but they shouldn’t) transactions per month is currently 2.51%. However, interest rate isn’t the only consideration. Many bank accounts also pay bonuses up front, which can quickly shift the balance when we’re talking about such low numbers. After all, in the grand scheme of things, 2.51% is still an awful return on investment, even if I do feel that cash is king in current circumstances.
So ultimately, and somewhat coincidentally, I decided not to
move my savings account money very far, at least from an alphabetical
perspective. I’m moving it from CIT Bank to Citi Bank. Citi’s online savings
account pays 2.36%, even less than the 2.4% that started this whole conundrum
in the first place. However, by performing a little financial gymnastics, which
basically just involves making sure I stay within the rules of the promotion, I
can also get it to pay me a $400 bonus for keeping $15k in the account for
sixty days – more than the CIT account would have paid on that amount in an
entire year! And meanwhile, I’m collecting the 2.36%, virtually the same rate
as CIT was paying, on top of it.
How does the math work out on this? With $15k in the CIT account, I would have made $364 in interest over twelve months. But with that same $15k in the Citi account, I will make $459…in two months! If left in the account for the same twelve months as the CIT Bank account for the purposes of making an apples to apples comparison, that figure becomes $758. That, ladies and gentlemen, is what we call a win. The only downside here is that unlike credit card reward money, bank account bonuses are taxable income. But that’s more about credit card reward money being in an extremely privileged class of its own than it is about this being a bad deal; almost any income under the sun is taxable – even income that isn’t income at all in some cases (Ever hear of imputed interest? Look it up. It’s disgusting!).
The way I see it, there are two lessons here. One is that you should be regularly evaluating your available options, particularly when something changes with your current one. I preach that all day long. But the second lesson is one I need to be taking to heart myself going forward. Given our current economic circumstances, I’m not compromising on holding as much cash as possible until further notice. But with available interest rates on cash being as pathetic as they are, and with sign up bonuses being as large and plentiful, it could very well be worthwhile to move savings account money around two or three times a year. For example, if there were three options as good as the Citi bonus available (I don’t believe there are; but there are others that are close and again, conditions are always changing), I could make over $1500 in a year on $15k of cash – a damn good return considering it’s 100% risk free. Yes, it would be a little bit of work, but with emphasis on the “little” part. When all is said and done, I will have less than an hour into this little project. Would the extra $1200+ over and above what the CIT Bank account would have paid without any bonuses be worth three hours of my time? You bet your sweet ass it would! I do pretty well for myself (for now…) but I don’t make anywhere near $400 an hour…yet.