Going back a few months now I have been thinking about trying to show statistically a more nuanced way to evaluate our purchases, particularly for large items that are relatively expensive and big portions of our budget. The idea basically struck me that people will spend a fairly large amount of money on what economists traditionally call “durable goods”, goods that take a long time to have their value used up. I also began to connect this with the idea of depreciation, a concept that says that a durable good depreciates slowly over time, but doesn’t use up all of its cost at once.
It struck me therefore that the true cost of a durable good might actually be somewhat less than what we pay for it. That’s because we get the value of the good as we use it, and therefore since we are getting a tangible benefit over a long period of time, it would make sense to discount this from the actual price of the purchase. For example, if one values the use of a laptop computer (and for the sake of this argument we are going to assume that there actually is a tangible value in each of the items) and the computer costs $1000 and is expected to be of use for 5 years; then the real cost must be something less than $1000 because we are getting actual use out of the machine on an ongoing basis. Although not meaning to cast value judgments on purchases and how one receives value, it would certainly make sense to spend money on a durable good versus a nondurable good, all things being equal. Once can continue to use and enjoy a durable good for a much longer number of hours and years than a good one must simply consume and discard.
It makes more sense to spend $1000 on a laptop than on a night in a suite or an expensive skybox ticket.
I tried to capture this by setting up a a simple spreadsheet and depreciating three classes of items at a steady rate. First, I chose to depreciate electronics at a 50% rate, based mainly on the notion that people say computing power doubles every five years, therefore to me it made sense to aggressively use up the value of the electronic device. I chose to depreciate appliances and furnishings at 20% each year, as often times those can last for at least five years and sometimes as long as a decade, so this number made sense to me. Finally, I chose to depreciate automobiles at 70% as this would put their lifespan in between your computer and your refrigerator. This numbers are most made up but seemed to feel good to me.
Then I went through and ran a spreadsheet for each item based on those rates, going to the end of six years with the “residual value” being whatever was left at the end of that time. Now we know the value that is left in those items at the end of that time.
That still doesn’t tell us, though, what the actual real cost of the item may have been from the start, if we factored in the use we got for it over the time. To calculate this, I simply added up each of the years’ values and divided by 6. This to me captured the total value usage over time, averaged out by year and gave me an idea of the total yearly value of the item. To figure out the true cost, with these yearly values included, I decided to next deduct this yearly average value from the original cost. I call this the “Total True Cost. Here is what my chart looked like:
I quite like this in that I think it turns conventional wisdom on its head a bit. The automobile is still an expensive purchase to be sure, but we should remember that the fact that it has a relatively high residual value (the used car market is enormous and someone will always pay a fairly significant amount of money for a 6 year old car) and that it does provide a real tangible thing of significant value (transportation) means that it is not quite the same insanely high purchase as we may think. This seems to reflect conventional wisdom as well, most middle class folks will gladly pay $15k for a car but not for a suit or a single vacation.
Similarly, the other items also have a relatively low real total cost, considering the value they provide over time.
Thoughts? Comments? I plan on trying to turn this into an online calculator of sorts with a little bit of coding work.
As a part of my yearly financial review (the one that saved me a lot of money on auto insurance which I discussed a week ago), I reevaluated all of the credit cards in my wallet. In general, you should never cancel a no-fee card as having it increases your length of credit/average account age and decreases your credit utilization rate, two key factors in a high credit score. You should also never cancel your oldest card as this keeps your credit history as long as possible. Remember, a high credit score is literally money in your pocket, in that you save big on any loans you have via lower interest rates, and the higher score qualifies you for the best signup bonuses for travel and cash back.
Anyway, I went out and cancelled a bunch that had yearly fees, and when possible tried to shift their credit lines to other cards from the same bank or financial institution. The cancelled cards included my Hawaiian Airlines Card (BofA), my British Airways Card (Chase), my United Explorer Card (Chase), my Premier Rewards Gold Card (AMEX), and my US Airways Card (Barclays). This saved me several hundred dollars and fees. These cards were great for the signup bonus (for instance I cancelled the BA card as soon as I hit $10k in yearly spend to trigger and additional 25000 avios miles), but do not have good spending multipliers or other benefits that make keeping the card worth it.
So that leaves me with:
FIA Card Services Fidelity Retirement Awards: This card gives 2% cash back on every single transaction. This can be transferred into any investment account. I plan on using this card often and investing the money. I am currently 32 years old, so if I leave the money in the account for decades, the return on this card could indeed be amazing. There is simply almost no better card, except that the rewards are a bit boring and require patience.
Chase Sapphire Preferred Card: This card is my go to for many occasions, especially for dining where the card gives me 2x points back. You can use these for cash back (which I recently did) or to transfer to travel partners like United Airlines. It is, simply, an amazing card.
American Express Platinum Business Card: I like this card even with the hefty fee. It gives you a nice $200 airline reimbursement for many incidental expenses (like baggage fees or food) and can often be used to buy gift cards. Also, I need to maintain one Membership Rewards earning card for its many options for shopping and travel transfers, even if most are now charging fuel surcharges. Its benefits are first rate and since I don’t do a lot of grocery spending and gas it made more sense to me than the Premier Rewards Gold Card. I think of it as only $75 more than the Premier Rewards Gold card, but that is worth it for the benefits.
Starwood Preferred Guest American Express: An amazing card. With a $65 annual fee it gives you effectively 1.25 points per mile to a lot of useful airline partners, as Starwood gives you 5k bonus points for every 20k you transfer. Its partners are mostly US airlines without whacky fuel charges.
Chase Freedom Card: A great card for small spending as the Chase Exclusives programs give you 10 bonus points per transaction along with 1.1 points. The points can be used for cash back, or with a Sapphire Preferred or INK Bold/Plus, transferred to airline partners. It has no fee and amazing 5% cash back in rotating categories each quarter that are really valuable.
Discover Card: I have had this since 1998 when I was just 18. It still has a great cash back program, especially in rotating 5% categories each quarter.
Citi Hilton Reserve: A great card for gold status with Hilton and a yearly free night certificate at any Hilton property after 10k spending. It also gives 3 Hilton points per dollar. The free nights, if used strategically, add value every year.
Citi AAdvantage Visa: I actually called to cancel this card, but they offered me a reimbursement on my annual fee and double points on each dollar spent up to $750 dollars a month. This week, they even sent an email bonusing me 3x points on Gas, Pharmacy, Groceries, and Restuarants. YMMV on this, but that was an offer too good to refuse.
Chase INK Bold: I put all my TV, internet, and wireless spending on this as it earns 5x points. I find this very valuable and to me is worth the $95 annual fee.
There you have it, my All-Star lineup of cards! Now if I can just keep it all straight…
Today is a day for a lot of retrospectives on the first term of Barack Obama. Since much of the first term dealt with economics and personal finance in some way or another (and I would obviously include health care reform as a key part of that), many of these retrospectives have interesting insight on your wallet and larger economic policy. Here is a roundup of good articles I noticed today.
- Paul Krugman on the significance of the first term and its accomplishments.
- What the choice of Bible on Inauguration Day says about a President.
- Fascinating series of interviews with ordinary Americans about their thoughts for President Obama going forward. Since historians often look to these kinds of primary sources for greater authentic insight into an era, it might be best that the media and politicians pay more attention to them as well. Moreover, the wisdom of ordinary people often exceeds that of the so-called elite. This particularly comes to mind with regards to mortgage relief (regular folks saw the significance of this before policy makers did) and the outsourcing phenomenon which now seems to have turned 180 degrees and is now seen as a moderately bad idea.
- My favoritest speech ever is Lincoln’s Second Inaugural Address. Here is an analysis of it.
- Obama’s legacy and second term strategy.
Happy Martin Luther King, Jr. Day to all.
One of the reasons I even write this blog is because of the inspiration I received, beginning in 2011, from reading various travel blogs. Over the past year or so I have accumulated a somewhat large cache of frequent flyer miles which I have detailed here. This weekend I began thinking in particular about my Ultimate Rewards points balance, and while swimming laps at the YMCA I had the following thought come into my head:
Should I just redeem these points for cash back? Since I have 120,000 points this would equal out to about $1,200.
But I then went to reconsider because I know how valuable these points can be for travel. I wanted to see exactly which side would be best by running the numbers.
So I went through the following little exercise and made the following assumptions.
- A) I would really only want to travel with my wife
- B) I do not place any value on business class or first class seats
- C) I typically can only travel during the summer, Christmas season, or Spring Break time; since I am a teacher. This makes it difficult to redeem awards during “off peak” times.
- D) I value the miles at a conservative $.01 each.
- E) The flight I was looking at was Chicago (ORD) to Paris (CDG), I found this on ITA Matrix for $1186.
|Save UR points for travel redemption|
|Ticket A on United||55000|
|Ticket B on United||55000|
|Opportunity Cost Ticket A||9304|
|Opportunity Cost Ticket B||9304|
|Total Cost In Miles||128608|
|Miles Value @.01 TOTAL COST||1286.08|
|Redeem UR Points for Cash|
|Cost for Ticket A||1186|
|Cost for Ticket B||1186|
|Cash Back Credit||-1200|
|Miles earned at .01 Credit||-186.08|
|Miles earned on credit card at .0214 Credit||-50.7608|
I think this spreadsheet makes a lot of sense, and as you can see the total cost is greater if I redeem my award miles for travel by transferring them to an airline partner.
Why is this the case? Well first let’s look at the “Save UR points for travel redemption side”. Obviously first is the cost of the award in miles itself with two awards at 55,000 x2 for each ticket. If award miles do have a value (in this case I valued them at $.01), then they should show up on the cost side at the top, because in redeeming an award I am costing myself the opportunity to get 9304 miles for each traveler. This is what would have been credited to my account had I actually flown the flight on a paid fare. Then we have to just value the points in some fashion, and I have chosen a conservative $.01 per point. Doing it this way actually makes the case for redeeming as an award closer than it would otherwise, for if points are really valuable the opportunity cost of using the award points and not getting miles for travel would only increase. The cost then is $1286.00
Now let’s look at the other side of the ledger. The miles I have earned by flying then go down as credit (in this spreadsheet a negative number) on the “Redeem UR points for cash” side of things as I will earn those when I just go out and buy the fare. Also showing as a credit on this side of the ledger are the points that I have redeemed for cash back purposes, both the original 120,000 points plus the cash back I will get from booking the fare on my credit card (I have a .0214 multiplier here as the Chase Sapphire Preferred card gives 2% cash back on travel and 7% yearly dividend bring the total to 2.14%). The total cost of my trip is now $935.
This of course ignores the fact that I could perhaps also earn interest on the cash in the form of a cash back award for some period of time, but I am leaving that out and just looking at this as a binary choice at a set moment in time.
The lesson to draw from this, I think, is that credit card award programs may not be quite the deal we think when we are transferring them to airline partners. If we agree with the notion that miles do have some kind of value, we cannot ignore the fact that we may pass up earning valuable miles by traveling on an award ticket. Another lesson, I think, is that the best way to really get a deal on airline miles is by actually flying in the program and then earning miles the old fashioned way. The “best deal” would come from scrounging for flights that are good deals and earn a lot of miles, and then redeeming those earned miles for expensive flights.
This of course explains the logic from the airline’s perspective in that it really does reward their customers who actually fly.
This dynamic, of course, would change dramatically if one truly does value premium cabin travel like business or first class. This would tip the costs much more towards the “redeeming UR points for travel” side of the ledger. On the other hand, though, we must remember that each time we place a greater emphasis on the value of the miles themselves (conceivably because we can redeem them for expensive tickets and therefore they are worth $.03 or even $.05 a mile), then the opportunity cost of not earning miles on the distance traveled goes up as well.
I fully realize I may not be saying anything revolutionary here, but nonetheless I thought this was an interesting intellectual exercise and the information may also be of value to many who approach travel with the same assumptions that I do.
If the fiscal cliff crisis wasn’t enough fun for everyone, in the next 6-8 weeks a much higher stakes game of riverboat Russian roulette will play out with the debt ceiling debate. To sum matters up quickly, Congress must authorize an increase in the amount of debt legally permissible and thereby enables the Treasury to issue new bonds to cover the debt. This might make sense except that Congress also already authorized the very spending programs that created the debt in the first place. So, our legislative branch is at fiscal war with itself, or at least its prior self. There are many legal and Constitutional considerations as to whether this is all even Constitutionally sound.
Right now, although the metaphor is tired, the Republicans and Democrats are in a high stakes game of chicken over the issue. President Obama refuses to negotiate over raising the limit and thinks it should happen as a matter of course, as was customary prior to 2011. House Republicans, smarting from their loss in the fiscal cliff negotiations over tax increases, are out for blood and demand large cuts to spending (particularly Medicare and Social Security). In short, things don’t look good. Here are the likely outcomes:
1. The debt ceiling is not raised, but temporarily. Markets go haywire. A recession is triggered. Congress then raises it in a moment of crisis, and things return mostly to normal, albeit with permanent damage to US credit rating and higher borrowing costs. Perhaps investors look elsewhere for a safe currency and our deficit becomes more unsustainable with higher interest costs over time.
2. A new currency becomes the world’s reserve currency, eroding US economic power, leadership, and even global strategic influence. The Council on Foreign Relations discusses this here.
3. To prevent these nasty things President Obama either unilaterally raises the limit or does something like mint a trillion dollar platinum coin.
So then we have the following scenarios: Obama is rapidly impeached by the House Republicans and then easily not convicted in the Democratically controlled Senate. I imagine his popularity would increase from this if he played his cards right and if his moves calmed the markets and the economy.
House Republicans know this and instead think their best gambit is to file an immediate case with the Supreme Court. Since the Supreme Court can more or less do whatever they want, they take the case. Now all eyes are on the Court, whomever’s side they take will almost instantly have a clear political advantage and the issue will be taken off as a bargaining chip going forward.
The Court, though, does risk looking equally silly if they have a very divided ruling. Thus, we have a massive Constitutional crisis on our hands.
So, in short, these all pretty much stink for everyone. The likely scenarios, I would suggest, then are that they go right up to the last day and make some sort of deal. Then, the House Republicans actually do shut the government down in a few months when they don’t get their way as this is less painful than a debt default.
Fun times ahead!
The Wall Street Journal has a highly interesting table showing the unemployment rate for various professions. Actors beware!
Forbes has an interesting article about GM and how it got its groove back.
Frugal Traveler says to save money in 2013 you should go retro.
This weekend I did a number of small little repairs around the house that are almost entirely uninteresting, but which I think may be instructive on broader principles on how to save money.
1. I fixed the flap on our toilet. This had been annoying me for some time and I noticed on our last water bill (which I rarely actually look at but thought was a bit high this month and noticed that we used more water in December than in the summer) that we had used quite a few more gallons than the prior year. I stared at the thing for a while and realized that there was just the slightest amount of underfit. The flap was allowing a minute, but steady, amount of water to trickle into the tank. This meant the toilet was almost constantly working, if every so slightly. So, I bought a $7.99 toilet bowl flap at Ace Hardware and fixed the thing in about ten minutes. Works like a charm.
2. With the help of my more plumbing proficient father in law, we added a bit of pipe to the ends of our washing machine. This effectively reduced a sometimes loud banging sound when the washing machine would suddenly stop the water flow and the force of the water would abruptly stop. I am not sure there was an actual cost to this, but it would have certainly cost more to have a professional repair the thing. It was simple once we knew what to do.
3. Finished my mudroom remodel. I both a couple of shelves and a TV stand from IKEA.com and fashioned them into a storage device in our small mudroom porch. I then hung up 6 somewhat fancy looking hooks from HouseofAntiqueHardware.com for coats and things. The result is pretty cool and the total cost was probably only around $400. It could have been cheaper still if I did not have the IKEA stuff shipped to my house, but going to visit IKEA is a 45 minute ride and a circle of hell that I will gladly pay shipping to avoid. Again, this was not strictly necessary or a need, but it provides a great deal of functionality and I figured out how to do all the work myself. Simple yet great changes can be made with a little bit of creativity, some trial and error, and a little bit of research online on how to do it.
4. Fashioned a shelf out of an old bit of porch swing that we did not use. I simply sawed part of a porch swing in half, glued and nailed a length of wood to make a new edge, and then glued bits of wood into the empty space to act as supports for this shelf. This allowed us to build a shelving unit in an empty space area of a built in cabinet and drawer unit in our pantry. This space was to have a garbage can slide into it, but it seemed dumb to constantly slide the can out and then back in again, so we always just left it out. With the space now having shelves, we opened up almost an entire cabinet in our kitchen. We are now more efficiently using space and making things look much more attractive and organized. I am not sure there is a value on this per se, but it may be small things like this that extend the life and functionality of a home as our family grows. While I am certainly stretching things a bit, I do believe if we focus on how we use our spaces most efficiently it might save us the moving expenses and constant search for larger and larger spaces.
Of course this is all very idiosyncratic, and particular to my own situation, but I hope my dozens of readers can take the larger lessons and apply it to their own situations. Tiny, simple things, and a little bit of curiosity and effort, can pay a big difference when it comes to the large carry costs of our homes.
A couple of days back I wrote about an amazing quote I had received from Geico after running through their self serve quote generator at Geico.com. In that post, I mentioned how the quote was so good, I actually thought it was too good to be true, so I wanted to wait to post more after investigating.
This Quote Is True!
I was paying $130 with American Family insurance. My wife and migrated to AmFam from Geico back in 2010 when we bought our house and American Family gave us by far the best rate on home insurance. At that time I was paying about $67 a month in insurance from Geico and my wife was paying around the same rate. With our switch to American Family we received a multi-policy discount, lowering our already great home insurance rate by 30%
Fast forward three years… I received a message on Mint.com (where I track our expenditures every month) that my insurance was higher than average. I thought nothing of it as, in my insurance I also have an umbrella policy which an agent persuaded me makes sense as it is a cheap way to get additional liability coverage. This Sunday, though, as a part of my New Years’ Resolution to maximize every single dollar I earn and be careful about every single dollar I spend, I sat down and laid out a spreadsheet for all of my specific fixed expenses, as well as my ongoing flexible expenses (those that change from month to month like a gas bill). In looking at the spreadsheet, I realized what a big component of my monthly expenses went to insurance. So, I decided to look around and stumbled on the amazing Geico quote of $44 a month vs the $130 for American Family. I did lose the umbrella coverage, but in doing a bit more research at this point this coverage is probably not a good value for me and my family. That is because our assets are not high enough to trigger the need for such coverage. In some time (hopefully) as we pay down student loans, property, and grow our incomes we will need it, but for now we are okay without it. We are paying for coverage we really didn’t need, even if umbrella policies are broadly a good idea in many cases.
I then also went out and got a quote from State Farm for a business policy for my rental unit and discovered their policy was about half as much as American Family was charging me. The effective savings on all of this is as roughly $1000.00 this year!
1. Shop around for the best rate. This should be obvious (obviously), but from my experience I was sold some additional policies that were not the best rate, even though American Family’s initial home policy was. No one company has the best rate on every product.
2. Re-evaluate your insurance on a regular basis. I am not sure why our Geico rates are so much lower, but since 2010 my wife and are older, married, and have had perfect driving records. Perhaps all of these, or a combination of them, moved us into the lowest risk actuarial tables,and therefore reduced our rate significantly.
3. Drive responsibly. Risk and accidents cannot be totally eliminated, but in a broad sense the odds of an accident are lower if you are a careful driver. This gives you leverage and opportunities for lower rates.
4. Sometimes it benefits to bundle your policies. Back in 2010, we paid about the same for auto insurance but saved a couple hundred bucks on our home by bundling. That made sense at the time.
5. Sometimes it makes sense not to bundle. The flip side of course is that now in 2013 it makes more sense for me not to bundle the policies. Run the numbers and be flexible.
6. Getting insurance quotes is ridiculously quick and easy, so don’t be afraid to do it regularly as the money you can save is real. In total this took me about 45 minutes to do.
7. Make sure you look at the total cost of the policy over 12 or 6 months, not the monthly rate. It gives a better sense of how much money you are really saving.
8. Only buy the insurance you really need. Seeking out safety in all matters can seem like a good idea but many Americans are over insured.
9. Mint.com is sweet. I would not have started this process without good old Mint.com
Sometime in the next 6 months I plan on getting a new laptop. I am hereby calling for proposals of what exactly I should get. Portability is key to me, but also power as this will be my "work horse" computer. I am intrigued by the Mac Air, but realize playing games with an external hard drive might be cumbersome as I have a lot of photos and music that would quickly fill up the relatively small storage on the Air’s drive. I am also intrigued by a refurbished computer as it seems to save a good amount of money and still provide the same warranty, particularly when bought from the manufacturer.
What about other brands? Samsug? Toshiba? Others?
I do love the Mac universe for my music, photos, and apps as I have found the iPhone to be my favorite smartphone. Should I stay in Apple-land for my laptop as well?
Any comments or thoughts would be appreciated!
I recently sat down and made a spreadsheet for my fixed and flexible expenses as part of my ongoing plan to try and reduce expenses in 2013. You can read more about in a previous post.
Anyway, I noticed that one of the largest recurring fixed expenses, as it is for most people, is on insurance. I currently use American Family Insurance, but decided to check out what some others have to offer. I originally switched to American Family Insurance in 2010 when we bought our home and they had by far the best rate on that policy at the time. We also liked their quotes on term life insurance and signed up for that.
Finally, they persuaded me to move away from Geico, which at the time came out to be about the same amount of money for our cars. We currently pay around $130 a month to insure a 2004 Mazda 3i and a 2010 Toyota Prius.
I plugged in the information on Geico and it seems as though they are offering me just $44 a month on this policy. To be fair, I decided not to have collision on the Mazda since the car is old and I probably would just replace it if I got in a major accident. Still, this is a massive savings that I need to investigate further.
Has anyone had an experience like this? How did it turn out?
Updates to come once I check into the specifics.