Save Money on Your Winter Home-Heating Costs

Some people muse idly about the coming winter's fuel costs as if it were a storm over which they have no control. However, you do control your heat costs. Moreover, if everyone did these smart actions, lower demand would put downward pressure on fuel prices.

• Insulate: What would you think if someone left his/her front door wide open all winter and then complained about his/her heating costs? Lax insulation is like leaving your front door open in winter. First, inspect your current insulation. You can upgrade from minimum to average or from average to super-insulated. The roof is the most important because heat rises. Control air infiltration/leaks with caulk, etc. When it comes to heat retention, windows are only the next best thing to a hole in the wall, so use the best combination of storm windows, shutters, plastic films, thermal drapes, etc.
• Use Free Heat: Manage your windows to use free solar heat gain (insolation) through the glazed surfaces (eg, glass). Make a solar space to trap solar-heated air against your building (eg, cover the interior of a screen porch in black, fill it with thermal masses (water jugs, lawn mowers), and cover the exterior screens with clear plastic). Manage your yard to landscape for best solar gain on the whole house in winter. Basically, do the opposite of summer home-cooling techniques. Basements are free passive geothermal heat sources, when even their typical geothermal-heat 40-50F degrees are better than zero-degree (0F) outside air temperature (check radon gas if necessary). Earth-sheltered homes maximize free, passive, geothermal heat.
• Reduce Usage/Lower Demand: Conservation (not burning fuel) is the cheapest and easiest method to keep heating costs low. Insulation helps after you already have heated a space, but consider all the heating and fuel-burning that you do not need to do in the first place. Size/service/clean your furnace to peak efficiency, which is like raising the MPG on your car (otherwise, you are burning gallons without any heat benefit, simply burning money). Get a programmable thermostat that lowers heat while you are at work or sleeping under blankets. Lower your "standard" temperature a few degrees and wear a sweater (yes, the cliche actually works extremely well). Make "winter rooms," the old-fashioned method to keep the key part of the house at standard temperature (keep water-pipes above freezing or shut-off/drain the pipes from, say, an upstairs bathroom) and close-off unnecessary square footage (adjust heat registers/vents, close/add doors between rooms, etc.), such as the "exercise room" that is more of a junk room anyway. Winter rooms simulate the efficiency of studios, tiny homes, or other low-cost, efficient, simple-living lifestyles.

Let me know if I forgot anything.

Good luck.

Crossposted from Inexpensive Home Building

Girl Pregnancy Pact Gloucester MA High School: School Subsidizes Teen Pregnancy (Savers Are from Mars. Debtors Are from Venus. Episode 6)

School Subsidizes Teen Pregnancy

Media Reports Miss the Main Point on Spike in Teen Pregnancies

A large number of high-school girls intentionally got pregnant or were happy to get pregnant at Gloucester High School in Gloucester, Massachusetts.

Earlier reports of a formal group "pact" to get pregnant are now disputed to be a post-pregnancy pledge for the teen mothers to somehow support each other, although the point about the girls' enthusiasm to get pregnant appears undisputed:

"But at a press conference today, Gloucester Mayor Carolyn Kirk emerged from a closed-door meeting with city, school and health officials to say that there had been no independent confirmation of any teen pregnancy pact. She also said that the principal, who was not present at the meeting, is now "foggy in his memory" of how he heard about the pact.

[Gloucester High School, principal Dr. Joseph ] Sullivan has not spoken publicly about the teen pregnancies since he told TIME earlier this month that several girls repeatedly requested pregnancy tests at the school clinic and that some had reacted to positive test results with high fives and plans for baby showers. Pathways for Children CEO Sue Todd, whose organization runs the school's on-site daycare center, told TIME on June 13 that its social worker had heard of the girls' plan to get pregnant as early as last fall. She noted that some of the girls involved had been identified as being at risk of becoming teen mothers as early as sixth grade, when they began to request pregnancy tests in middle school." (TIME)

Various reports blame the depressed, working-class, blue-collar, fishing economy or a poor, anti-social home-life:

""What we've seen is the girls fit a certain profile," Todd said. "They're socially isolated, and they don't have the support of their families."

The Real Point

People with no job prospects and no family support should be trying to INCREASE income and DECREASE outgo. Teen, single, diploma-less mothers are DECREASING their income potential and INCREASING their outgo expenses.

The schools apparently utterly failed to teach math, logic, or home economics.

The schools apparently do manage to teach and subsidize teen pregnancy (according to public radio and other reports):

• The school(s) teaches sex to children: School-district health coordinator Ann-Marie Jordan blamed budget "cutbacks" for stopping sex education after the 9th grade, leaving 'only' the years of sex taught in middle school and freshman year: Exactly how many YEARS does it take to figure out? One pair of unfixed neighborhood dogs or cats should do it.
• The school(s) conducts "health surveys" that ask children to describe their sex lives: Behavioral experts know that people are more likely to do something when you make them discuss, imagine, and visualize doing it.
• The school(s) provides/conducts pregnancy tests on children: Children can see grown-ups' tacit acceptance and expectation of teen sex (and usually failing tests in school is bad).
• The school(s) provides a FREE in-school daycare center for teen mothers: "The high school has done perhaps too good a job of embracing young mothers. Sex-ed classes end freshman year at Gloucester, where teen parents are encouraged to take their children to a free on-site day-care center. Strollers mingle seamlessly in school hallways among cheerleaders and junior ROTC. "We're proud to help the mothers stay in school," says Sue Todd, CEO of Pathways for Children, which runs the day-care center." (TIME)

Gee, can anyone think of where the girls got the idea to get pregnant?

The school is one step away from providing wine coolers and a Jacuzzi.

"Experts" continue to miss the point:

"Dr. Joanne Cox, director of the Young Parents program at Children's Hospital in Boston, said that in-school programs for birth control are shown to be effective, as is education. Upon hearing of the situation in Gloucester, she said that considering birth control distribution in school would be wise. "When 10 are pregnant — that's the time to have the political courage to do it," she said. She added that the lack of easily available birth control — which, she said, pediatricians are often hesitant to prescribe — is "probably the No. 1 reason" for an increase in pregnancies." (Gloucester Daily Times)

1. Basic economics: Subsidize something and you get more of it.

2. Birth control is useless when the girls WANT to get pregnant, which is the reported case with the Gloucester girls.

Maybe there would be fewer teen pregnancies if the schools spent less time and money teaching and subsidizing sex -- and instead spent more time and money teaching math, logic, and economics.

Savers Are from Mars. Debtors Are from Venus. Episode 5

Turning Gold into Lead:
How To Lose $100k, and Your House, and Your Family

"Wendy's home had appreciated in value by about $100,000, only months after she and her husband bought it. So, they took out a second mortgage for almost $80,000 to enhance their new home. It was at 8% interest. When the housing bubble burst, that $100,000 in equity evaporated. But, the interest on that second adjustable rate mortgage by now had climbed from 8% to almost 16%, creating a monster of a monthly payment they couldn't handle. 'Then, it just gets pulled from right out underneath you.' Wendy says her marriage even broke-up over this. Now the couple faces possible foreclosure on the house" (KVOA).

Debtors often display this unfortunate tendency to turn even a $100k windfall into more debt, to eliminate increases in net worth, to eradicate any trace of even accidental equity.

Remember that the $100k was only a paper profit, not real wealth, because they did not sell the home at the high price (they ignored the basic, old "sell high" truism).

They ignored the chance to increase their income and instead increased their outgo (spending)--the opposite of basic financial advice to increase income and decrease outgo.

Avoid Holiday Travel Costs with Virtual Visits

Look Who's Coming to 21st-Century Dinner

National Public Radio (NPR) yesterday interviewed a woman who could not afford airfare to visit family. High fuel prices raise the cost of air and road travel.

Better than a card or phone call:

Use a webcam to virtually visit for almost free.

You might already own the computer, internet connection, and webcam needed to virtually visit distant family (and webcams are cheap now).

You can park the monitor like another seat at the dinner table (fun gimmick).

A large TV display beside the table might feel like another table.

Virtual visiting also can help when little Billy might be bored at Grandma's house but can play with his cousin across the country.

You Owe 9 Trillion Dollars

Congratulations, the United States gross national debt now exceeds $9 trillion.

You owe $30k. Your baby owes $30k. Your family of 4 owes $120k.

Your government put you in all this debt to make you richer, in case you were wondering why your life has felt so easy and virtually cost-free all these years.

Remember that when choosing a presidential candidate.

Why stop at $9 trillion?

Should the federal government make us all even richer by borrowing $18 trillion (so a family of 4 owes $240k) and leverage-investing it in the stock market for a higher return?

After all, Ben Stein recommended that you stay in debt to get rich: Payoff Mortgage v. Invest Stocks: Housing Myths Part 12

Home Decorating Costs: Housing Myths Part 11

Previous: Homeownership Cost Cliches: Housing Myths Part 10

The Million-Dollar Paint Job
Peculiar Priorities To Justify Spending a Million Dollars

Those who concede that homebuying is not always financially better than renting often switch the argument from financial bottom lines to unquantifiable personal preferences that cannot be tested by Excel spreadsheets.

One of the favorite intangibles that you “can’t put a price on” is the “freedom” to do no end of unpaid labor, such as painting walls.

Bone Is Freedom. Eggshell Is Slavery.

This obsession with painting houses is very strange:

• Others consider painting to be a chore, on par with having to empty the chamber pot if there was no indoor plumbing ("But if I rented I wouldn't be able to empty my chamber pot and the landlord would get to do it every time.").
• Few people confess to jealously resenting the landlord’s “freedom” to repair the plumbing or shovel the driveway yet we hear people eagerly protest the cruel fate that denies them the right to spend their free time spreading liquid on a wall.
• These color-minded people must be very highly accomplished in life to be able to say, “Darn it, I spend way too much time playing with my children. Spreading liquid on a wall is a much higher priority.”
• Few people express the same compulsion to change the color of their car yet we see people shake their fist against the tyranny that denies them the right to spread liquid on a wall.
• Few people express the same compulsion to trim the hedges in particular shapes yet we can imagine people pacing their floor while seething with burning resentment at the anti-artistic conspiracy that denies them the right to spread liquid on a wall.

Oh, the repressed self-actualization.
Oh, the humanity.

A House Is the World's Most Expensive Canvas

Customizing your home, whether rented or not, is understandable.

Less Expensive Solutions for Frustrated Artists:

• Even extremely customized/specialized decoration does not require paint at all: Most people would guess that a room with beige walls and pink drapes, pink sheets, a pink dresser, and a pink telephone is a girl's room.
• The fixation with hammering holes in walls, instead of the “tyranny” of placing your pictures on a mantel or bookcase, is equally perplexing. Given that houses often cost several times their “sticker price” (initial value) by the time they’re paid off, how many thousands of dollars per hole is that (more expensive than wildcat oil drilling?)?
• Compulsive painters could rent while changing professions to become house painters/remodelers to get paid for their hobby, or volunteer to paint walls at homeless shelters or Habitat for Humanity.
• Even if a landlord does not allow temporary color changes, the color-obsessed occupant might find that forfeiting the renter's security deposit is much cheaper than the million-dollar paint job of buying a house.

(Even a non-"jumbo loan" house can cost a million dollars after you add the mortage interest costs to the initial price: $400k @ 8% 30yr = over $1 million.)

Cheaper than a House:
Landscape painter Bob Ross' The Joy of Painting Basic Paint Set

The Myth of Landlord Color Tyranny

Some landlords let you paint and add picture holes. Some landlords let you repaint to a weird color as long as you return to a neutral color before you leave.

Homeowners Do Not Escape Color Tyranny

The irony is that homeowning is no different from renting and experts recommend that you the homeowner behave exactly like a landlord and repaint your purple kitchen to a neutral “landlord-approved” color if you wall to sell your home. This expert recommendation exposes the basic economic fact that color was never a landlord tyranny and always has been a customer tyranny.

Yes, the tyrant was YOU when you were the customer.

The homeseller is slave to the homebuyer.

The average American moves every 7 years (according to the real estate industry). The housing karma is that you were the tyrant when you were buying so you get to be on the receiving end when you try to sell.

Next: Payoff Mortgage v. Invest Stocks: Housing Myths Part 12

Birthdays without Presents?

Birthdays without Pressure claims,

"If you think children’s birthday parties are getting out of control, you’ve come to the right place."

What do you think?

See also: Is Your Baby Cost-Free?
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Hidden Burden of Overbuying: Housing Myths Part 6

Previous: Do Not Confuse Houses with Housing: Housing Myths Part 5

Would You Pay $250,000 for a Room?

The Housing Bubble: Historical Growth in Houses Square Feet per Person

4 Reasons People Overbuy Housing--and How To Avoid It

1. Expected Duration of Use: People who borrow, say, a lawnmower are not inclined to scour the city to borrow from the person who has a mower with all the exact, ideal features of the borrower's tastes. However, a decision to purchase often launches people on the slippery slope of pursued perfection to find a mower with the highest horspower and best cup-holder.
2. Timing of Use (Now V. Future): People who make small, instant-total-consumption purchases, such as buying lunch, are likely to buy just enough to do the job. That sizing job gets harder with longer time horizons and increasing risk or uncertainty of how much you will need years in the future. Imagine if you had to buy all your food for the next 30 years today.
3. Uncertainty and Insurance Premium: People tend to pay extra to overbuy as insurance against future unknowns, which is why long-term, fixed interest rates usually are higher than short-term adjustable interest rates over time (overpaying as insurance against future unknowns).
4. Infrequency and Information/Experience Deficit: People also tend to overpay when they do not buy an item frequently and therefore lack cost-benefit knowledge, so they overestimate both their needs and the value of the product, such as the case with choosing a college and buying a college degree.

House purchases are both infrequent and long-term (or at least many buyers treat them as such) and so people are prone to overbuy to compensate against future unknowns. Mission creep adds dens, offices, exercise rooms, decks, and saunas. House size doubles from 1,500 to 3,000 square feet—“just in case.”

Upsizing the house is like buying the $50k camper or boat that you use once every few years. People tend to imagine the temporary time of maximum needed space and then go into decades of debt for infrastructure that is rarely used.

Know Your Life-Cycle Needs

A newlywed couple might go 5 years with no children and even a baby does not require a new bedroom. It is not historically unusual for several children to share 1 bedroom (even boys and girls together). Teenagers tend to need more room but that is why they get drivers licenses and go away to work or college. Long life spans indicate decades of life as “empty nesters.” So, people tend to overbuy the largest purchase of their lifetime based on a brief 5-10 years of peak usage.

The Marginal Cost of an Extra Bedroom

The price difference between 1 house and another house with an extra bedroom might be $50-100k, which costs $100-250k for that 1 room after today's typical finance charges of a 30-year mortgage to pay for it (ballpark figures). If you only truly need the room for 10 years, you are paying maybe $10-25k per needed year for that 1 room (not counting the luxury use of the spare room before and after the peak).

Basic finance rules say that it might make sense to buy what you need daily for 50 years but to rent what you need briefly and occasionally. Another option is the pay-as-you-go method to add-on to a house as needed. Buying and selling houses is problematic both because of the high transaction costs and because of government regulations about public-school districts which can prevent families' smart housing choices.

Do Not Buy Too Early

Why borrow and pay interest for extra space over a decade before you need it? Why not save for over a decade and then pay cash for extra space exactly when the need arises? Do you borrow to finance an extra car when your baby is born because the baby will be driving age 16 years later?

The best financial choice is the opposite of what most people do.

The best financial choice for a lifetime house purchase would be a smaller house geared to the minimum points in the lifecycle (because you will have smaller needs many more years than you will have larger needs), with temporary conversions within the original house dimensions (no additions) to accommodate temporary needs for “increased” space. The Brady Bunch’s Greg Brady made an attic room for himself and today’s smaller families average only about 3 persons each (either 1 child or 1 parent) so that fleeting teenage bubble of demand for space will not require much change.

If you want to live in the “perfect”-size home at each stage in your lifecycle, renting might be the best choice for many of the years.

Your Choice Makes a Big Difference:

How much health insurance could you buy by not spending an extra quarter-million dollars for 1 extra room?

Next: Home Mortgage Tax Deduction Snake Oil: Housing Myths Part 7

Do Not Confuse Houses with Housing: Housing Myths Part 5

Why Housing Is NOT an Investment
Why Home Mortgages are BAD Debts

Previous: Homeowner Profits Ignore Huge Costs: Housing Myths Part 4

“You Have To Live Somewhere” and Getting Rich by Eating Twinkies

Some people try to close their eyes to the bad investment of a home mortgage by asserting that the bulk of the borrowing costs “don’t really count.”

The common “You have to live somewhere” argument confuses opportunity costs/benefits and confuses houses (durable goods) with housing (the use of the durable goods).

(UPDATE: Economists recognize the distinction between house (asset) and housing (consumption) by referring to housing as a "shelter" "service"--although government's misuse of this valid distinction in its statistics and policies is another matter; see the Bureau of Labor Statistics (BLS) Consumer Price Index's (CPI) Owner's Equivalent Rent (OER) controversy.)

Rental Opportunity Costs/Benefits Negate Each Other

If the house was an income-generating investment, you could offset your borrowing cost with rental income. Living there yourself instead of renting to others (“renting to yourself”) means that you save writing a rent check to a landlord only by foregoing the receipt of a rent from a potential tenant of your own.

Imagine if you rented a house from someone but you bought an identical house next door and collected rent from your new house next door; the rents would cancel each other and net zero (paying rent to a landlord, collecting rent from a tenant). Owning and occupying a single house has the same result, net zero (not paying rent, not collecting rent). Therefore, the entire cost of the house including purchase/interest/maintenace/etc. is still an extra cost and not defrayed by anything. In other words, your savings are “not paying rent” but your costs are “not collecting rent” so you have not avoided one cent of the additional cost of house price and mortgage interest and insurance and maintenance and taxes.

Housing Is Consumption, Not Investment

You do have to live somewhere. That is exactly why housing is consumption, not investment. Do not confuse the house with housing; housing is the use of the house (shelter service). Housing is the consumption of time in a place (the house). When you "rent to yourself," instead of selling the consumption to a renter, you are consuming your own inventory.

No Such Thing as a Free Lunch: You Cannot Have Your Cake and Eat It Too

“Renting to yourself” means that housing is consumption (not investment) because time is money and the value of living in your house yesterday is gone with yesterday, not saved for tomorrow. Further, only one person can use a particular space at any one time and even renting one of your house's rooms to someone or other "shared space" is a reduction in your own consumption of housing, a reduction in your use of your own house (zero-sum game). Do not double-count.

Get Rich by Eating Twinkies?

You constantly consume housing like you constantly consume food.

Buy and eat a Hostess cake without trying to claim that paying to eat the cake is making you wealthy. Likewise, pay to consume housing (time in space) without trying to claim that paying to sleep in a room is making you wealthy.

Borrowing for Consumption Is Bad Debt

A typical rule of thumb is that so-called “good debt” (actually, less bad) increases productivity or generates income more than it costs (e.g. a tractor increases crop yield). “Bad debt” is everything else. Most people would see danger in taking loans to pay rent yet borrowing for instantly-consumed housing via a mortgage is essentially the same type of debt.

A 30-year mortgage is (in principle) no better than taking a 30-year loan to borrow 3 decades of rent in advance.

Think about that. In the first year of a 30-year rent loan, you could invest 29 years of rent in the stock market (a stock asset instead of a real estate asset).

(In practice, the securitzed mortgage and tax subsidies make a mortgage loan cheaper than a rent loan, but the principle is the same.)

The marginal asset value of a house, over and above the consumption cost of housing, is a separate factor that you can treat as a distinct investment.

You can try to use the historically minimal real appreciation of real estate as an investment but the appreciation is often small potatoes compared to the consumption cost/value of the house-for-housing--and the appreciation often is largely cancelled by costs (taxes, insurance, inflation, and especially borrowing costs if leveraged).

Satisfy your housing consumption and then choose the best investment for your surplus money (real estate? stocks?).

Before you borrow a quarter-million or half-million dollars, know if you are borrowing for investment or consumption.

Next: Hidden Burden of Overbuying: Housing Myths Part 6

Homeowner Profits Ignore Huge Costs: Housing Myths Part 4

"You have to live somewhere"="Pay no attention to that man behind the curtain"
It is an incantation to evade close scrutiny of real estate accounting.

Part of a series of articles on housing myths.

Previous:
Home Mortgages Are Bad Investment Tools? Housing Myths Part 3

Some people make the “you have to live somewhere” argument to ignore most mortgage costs and make the home-as-investment accounting look better (hiding liabilities "off-book" a la Social Security). However, that argument backfires and incurs additional costs that still invalidate the arbitrage game of borrowing to invest in a home as an investment.

"You have to live somewhere" cuts both ways.

The Replacement House Cost: “You have to live somewhere” means that you cannot sell your house without buying a replacement house--or other accomodation, but the "housing ladder" ideal is to "trade-up" and most people do not transfer to a lesser market, smaller house, or rental (although if you had tried to rationalize by subtracting rent value from your house purchase, be consistent and add rent cost to your home-sale costs if you do not buy a replacement house). Therefore, the cost of your replacement house is part of your transaction costs to realize your gain on your first house—and many people would find the result to be a net loss if they accounted correctly.

The Deflator Negates the Appreciation: “You have to live somewhere” negates most or all house appreciation because most people will replace a house with another house that appreciated by a similar amount. The key to “real” appreciation or “beating inflation” is a differential price rate between 2 different classes of commodities (say, real estate v. the CPI’s non-house basket of general goods) or 2 different markets. i.e. when your item increased more than the item that you want to buy, you can trade at a favorable exchange rate (a basic idea most associated with, but not limited to, currency trades). By re-investing in the same asset class and market, you eliminate the arbitrage possibility; you eliminate the possibility of beating inflation. In other words, when you calculate your real appreciation from your house-sale as investment, the proper deflator for the first house is the replacement house’s appreciation over the time period that you lived in the first house (do not use a CPI deflator). Many people will learn that trading keys is like getting a 10% raise to buy items which cost 10% more--they realize no real net gain from appreciation. The profit truism is “Buy low. Sell high” but sell-high-then-buy-high makes no money. You are running yourself ragged on your hamster wheel.

$XX,XXX Transaction Costs to Middlemen: “You have to live somewhere” requires the transaction cost of buying replacement housing and can lower your house-sale net gains by tens of thousands of dollars (compared to the $10 transaction fee that you pay to Ameritrade to realize your stock gains). You (the re-buyer) pay the realtor costs, new loan origination costs (points), closing costs, moving costs, and any other costs plus the value of time and inconvenience to move. The seller pays the realtor with the buyer’s (your) money. The old joke is that the buyer is the only one bringing money to the table and everyone else is a taker. Various “cash-back” games or other incentives usually amount to additional debt heaped onto the buyer (such as your “free” granite countertops at $10,000 plus 6% interest).

No net appreciation + high transaction costs = real net loss

Certainly some people make money and you could avoid a replacement-house purchase by moving back in with your parents--but then you could have lived with parents all along and worked as landlord to your mortgaged property--but then you did not need a mortgaged property at all and your money could have earned more elsewhere debt-free.

Many happy "housing ladder" key-traders stay happy only by not looking too closely behind the accounting curtain.

Next: Why rent and the “You have to live somewhere” argument proves that your housing is NOT an investment: Do Not Confuse Houses with Housing: Housing Myths Part 5

Is Your Baby Cost-Free?

How much does a healthy baby or child cost?

Some new parents get carried away so it might be healthy (financially, physically, and psychologically) to remind yourself of the basics.

The true consumption items

• $1,250/yr formula, food, and diapers.
• $0 breast feeding
• $0 for CDC free child vaccinations, or nominal administrative cost.

You will have a US federal tax deduction of about $3k and a tax credit of $1k per child, which means that $1k-$2k of child costs will not lower your previous discretionary income at all. Even with a few pediatrician check-ups, depending upon your health insurance and tax brackets, you might make a profit off your baby.

Play time

Patty Cakes and mud pies are free.

Durable goods

Freecycle.org seems novel only if you are unaware that shared hand-me-downs are the normal way that an entire extended family would outfit new parents for generations.

• Furniture: It used to be normal to use “grandma’s crib,” the one possibly hand-built by your great-grandfather in 1900, the one in which your mother slept and you slept. In between, your aunts and cousins slept there. “A diaper-changing table” was known as “a table” or “a blanket on the floor.”
• Clothing: It used to be normal for children to wear their older cousins' outgrown clothes, and for a younger brother to inherit his older brother’s winter coat (that is 1 coat for 2 children, not 5 coats for each child). Your 2-year-old niece has absolutely no use for her 6-month-old-sized sneakers.
• Toys/books (including educational): It used to be normal to recycle toys, especially the very early baby ones that a more possessive toddler scarcely remembers as “mine.” Unless your family changed language, items such as an older, in-the-extended-family “Jack and Jill” book should be fine.

You might have some cost for new and replacement durable goods but spending a fortune is very often voluntary rather than necessary.

How to turn free or almost free into a $14k/yr loss

Musings on Personal Finance mentions that the average middle-class family spends $4-5k/yr on a baby's first 2 years but remember that is what is spent, not what is necessary. SureBaby.com claims $9-11k for the first year but that includes “baby furniture” and “baby gear.” MSN/Money claims $14k/yr (a quarter-million dollars to age 18) but that is for your “basic upscale baby.”

If you are determined to commercialize your child, you certainly can find ways to part with your money for all these services that the new Mom’s Mom and Grandma used to provide for free:

• $400 to learn how to give birth (Lamaze class).
• $80/hr to learn how to give milk (“lactation consultant”).
• $200-$400 to learn how to play/bond with your baby (“mommy and me yoga” class).
• $300 birth announcements.
• $60 Teletubbies cake.

Voluntary big-ticket items

• Daycare: One reason that the “traditional family” has been traditionally common is because it (including Mom, Dad, Auntie, Grandpa, cousin babysitter) does not need commercial daycare cost. However, people are free to choose non-traditional families and commercial daycare. Look at these 3 real families; one couple chose the stay-home-spouse method to avoid commercial daycare, another couple chose to stagger their 2-job work schedule to avoid commercial daycare (even 2 single parents could make a similar arrangement), and another couple decided that they both wanted to work “9-5” so they chose commercial daycare as a lifestyle choice.
• Education: You can do homeschooling relatively inexpensively (a good encyclopedia CD-ROM provides impressive bang-for-your-buck since even most parents know only a tiny fraction of its knowledge). Public education is expensive but you pay for it through taxes whether you have children or not so having a child does not change your cost much. You can choose to pay for private school in addition to public school. You can choose to pay for college, or not pay and let your new adult son or daughter decide how to spend his/her own money.
• Housing: It used to be normal for young children to share a room or to have a "girls' room" and a "boys' room." Even the affluent Brady Bunch had only 2 rooms and 1 bathroom for 6 children. You also can split a room into 2 rooms with affordable interior walls.
• Vehicles: It used to be normal for 2 families to fit inside a single mid-sized sedan for family outings. Even the extra space for baby-seat regulations does not require today’s smaller families to buy a $30k minivan or SUV—unless it is to fit the $10k of ski equipment and Gameboys.

The "Dog Food Effect": Who is the spending really for?

Spending to provide a healthy, happy child is different from spending to use a child as a billboard for the parents’ ostentation. Babies know when they are warm but not when they are fashionable. Many of us have seen the child who unwraps a present and throws the toy aside to play with the packaging. “Dollar store” toys can be just as astoundingly educational and fun as boutique toys when you are fresh out of the womb—it is all new to you.

Many baby products are examples of the "dog food effect," marketing slang for when a product must appeal to the buyer rather than to the actual user of the product. Choose safety and fun for the child over prestige for the adult.

By the time the child has been socialized to fashions and brands, the child can start thinking about getting a “job” to pay for wants: The “lemonade stand” stage is an important part of education and socialization.

Savers Are from Mars. Debtors Are from Venus. Episode 3

Mind-Boggling Personal Story

A middle-class husband and wife live on the razor's edge of deficit and seek advice from Get Rich Slowly (GRS) when their spending habits turn a wrecked car into a financial emergency.

GRS: “Well, what about the cable bill? You’re paying $60 a month for that. That’s an easy one. What about cutting back to basic cable?” [I would add, ". . . or no cable?"]

Debtor (wife): “Yeah, but we can’t cut cable. Tom would have a fit.”

It looks like Tom is going to be very fit from walking to work.

Take the quiz: Is cable a necessity? Answer in comments.

Take a Break from Car Ownership: Know Your Basic Transportation Options

Money Smart Life knows a guy who lost his car and is staring at 20% interest to finance an emergency replacement.

The burdens of automobile ownership are common enough that this guy's situation is a good invitation for all of us to reject the trapped mindset and remind ourselves of all the options we have. Problems like his are good opportunities to reevaluate monthly expenses and often provide a healthy jolt to put yourself on a better path.

Here was my initial reply:

One option is to take a break from car ownership (including insurance, unless he’d have a renewal problem later), get rides to work, and pay cash for a cheap car in a few months. Whether you can tell him is another matter.

"No car" often means that you spend less on other things by making fewer shopping trips and therefore fewer unnecessary purchases at stores or eating out. Whether you go car-less for a few weeks or for longer depends upon your situation. You might even grow to like it when you see your bank account.

Here are more-detailed options:

• Get rides from co-workers or friends or family (offer gas money; you still are saving a bundle).
• Take the bus (an extra hour to conform to the bus schedule might “pay better” than driving to a second job to pay 20% interest so you can drive to the second job).
• Bicycle to work while the weather’s nice (and no need for gym fees to stay healthy).
• Stay worknights at a friend’s or relative’s home if they are within walking distance of your work (offer grocery money).
• Now might be a good excuse to save housing money by downsizing to a cheaper home that is within walking distance of work (or within bicycle or bus distance of work).

As usual, you have many ways to save money if you stop to think.

Steps to Financial Freedom: How long a vacation can you take?

Previous: Give Yourself a Raise: Best Saving Is Not Spending

How long a vacation can you take?

Financial security or financial independence or being independently wealthy ultimately means being able to pay your bills without working. This might seem like a fantasy for people who today are behind the eightball but almost anyone should be able to achieve financial independence by taking one achievable step at a time (the sequence is not exact and steps can overlap):

• Stop the negative savings (reach the breakeven point of income=outgo).
• Pay off all debts.
• Build a financial buffer (have a week’s expenses set aside, then 2 weeks’, then a month’s, etc.). Do not stop when you have reached the “standard” 3-6-month buffer in savings. Keep going and extend how long you could go without “standard” income. You are on the right track when you can measure your buffer in years. After all, many people plan for a decades-long vacation and call it “retirement” but ignore the artificial barrier of “retirement age” and “retirement accounts.” Eventually, your buffer will extend into your golden years.
• Minimize and eliminate the need for active income (going to work)—although it is smart to work more than you need to build your savings. Meanwhile, use the resulting savings to build passive income (interest), although remember that future interest income is uncertain, such as a few years ago when the Federal Reserve slashed rates. You will be fairly comfortable if current passive income meets current regular expenses and you have the principal for emergencies. Although nothing is 100% certain, accumulate wages and interest into a lump of principal that will cover a lifetime’s expenses.

Give Yourself a Raise: Best Saving Is Not Spending

Previous: Best-Worst Financial Measures: How To Track Your Financial Independence and Security

How To Give Yourself a Raise: The Best Saving Is Not Spending

You generally have more control over decreasing your spending than you do over increasing your income, so lower spending is the best way to give yourself a raise.

Minimize Fixed Overhead, the 800lb Gorilla

The most important way to lower expenditures is to minimize your fixed overhead, i.e. regular expenses. Housing might be necessary but your current housing cost might not be necessary. Utilities might be necessary but your current cable and cellphone plans might not be necessary.

The magic part: lower spending (1) creates wealth and (2) reduces the need for wealth at the same time

Minimizing expenses is your most powerful tool because it has a double benefit and creates a virtuous cycle: Lower costs this year to increase your savings this year, so next year you have higher savings against the continued lower costs, so your financial buffer will last even longer if you do have an emergency. This type of “compounding” is as good or better than compound interest, especially since you pay taxes on interest earned but you do not pay taxes on money not spent.

Next: Steps to Financial Freedom: How long a vacation can you take?

Confusing Investment with Consumption: Emotional Attachment & Resale Value Transform Gold into Lead

"Practical Wealth V. Phantom Wealth" covered how to measure your financial wealth accurately by accounting for liquidity and stickiness (resistance to change). This article now covers how people reduce their liquidity without realizing it.

Consumerism Alchemy: Turning Assets into Consumption

Most people realize that some assets such as cars depreciate and the depreciation supposedly represents the consumption or usage of the asset in wear-and-tear. However, many people then assume that any retained or core value at any point in time is a positive asset (often for their supposed "net worth")--but people often behave in ways that turns an asset into additional ongoing consumption.

2 ways in which "retained" asset-value becomes consumption:

• The Resale Value Trap: Resale value is an "entry fee" surcharge and should be kept as low as possible. Resale value is a marketing trick to encourage overbuying. Never trading down (liquidating an expensive asset and buying a cheaper one) means that any core value is consumption, an expenditure never to be recouped. Some people fool themselves into thinking that they pay for car depreciation but “keep” the resale value, which is untrue, practically speaking. If you continually trade-in cars when they reach $10k value, that $10k (plus any interest) is forever lost as permanent consumption, an "entry fee" for "getting in the game."
• The Emotional Attachment Trap: Emotional attachment is a form of illiquid stickiness that turns an asset into ongoing consumption. Count your car only if you are willing to trade it for a junker. Otherwise, it is phantom wealth because you would never tap it. Instead of disaggregating the value of basic transportation from surplus conveniences (CD player, etc.), you are treating the whole, indivisible car as psychic consumption. Do not count your grandmother's wedding ring if you would never sell it despite defaulting on your mortgage.

Next: Best-Worst Financial Measures: How To Track Your Financial Independence and Security

Dropout Pays Cash for Home

So many people imitate the most popular but unhealthy ways of finance that it is important to know the full range of possibilities in order to make an informed decision. Here is a parable of a hypothetical Jack and Jill.

How to drop out of high school and pay cash for a house at 21 years old (legally and honestly)

Jack drops out of school at 16 and gets a GED by taking the test. He gets entry-level jobs totaling a modest 60 hours per week (still time to take a community-college course) and $25k per year. Living at his parents' home with free room and board (as a normal teenager would do anyway), it is possible to save $15k per year and still keep some pocket money. An after-tax 5% interest rate compounds to about $100k while age 21, mostly before he is old enough to legally drink his paycheck at bars.

Jack can buy a $100k home in cash, or marry Jill who did the same plan so they can buy a $200k home with no mortgage, or the interest alone will pay for most of a studio rental while about $10-15k per person per year continues to go into the bank.

Jack and Jill might have risen to assistant manager by 21 years old and, with no home mortgage, it is affordable to finish the college degree in cash.

There are many ways to reach your goals, as long as you have a good plan.

Wealth through Garbage: Your Garbage Never Lies

Garbage men can spot a recession before some economists.

Landfills see shrinking deposits as the economy declines, because of a “double whammy” of people using things longer before throwing them away and postponing new purchases which means less product packaging in the trash.

Your garbage is your financial planner.

What is your garbage telling you? Is it filled with plastic “clamshells” and Styrofoam padding from all your new toys? Is it filled with single-serving food wrappings or, even worse, bulky prepared-food, disposable containers? How much waste does your garbage audit reveal?

Your mission, should you choose to accept it . . .

You will find that wiser spending correlates with less trash. Several curb-side trash barrels per week could indicate a problem. Aim for one barrel per month.

How To Save Money: Make Patterns Work for You, Not against You

Spot Patterns.

Track Patterns.

Make Better Patterns.

Spending Awareness

Everyone should know that trying to save the leftover scraps of a paycheck never works.

Reverse that recipe for failure by 180 degrees.

Plan to save most of your paycheck and leave the leftover scraps for discretionary amusements.

• Each transaction can risk a “leak”: In olden days before direct deposit of paychecks, you cashed out each weekly paycheck before depositing anything (sometimes minutes before, sometimes a week before), so there was a risk to hold on to your pay as cash and then fritter away the money. If you visit the ATM more than you visit your family, there is a temptation to round-up your spending “needs” at each ATM visit and then fritter away the overestimate (plus maybe pay fees each time).
• The invisible minus: Credit and debit cards are even more tempting to spend than cash because you do not do an actual tit-for-tat physical exchange at the purchase. Instead of having to leave cash behind in the store, you get your card back plus the new stuff.

The solutions are:

• Minimize the number of transactions/handling.
• Make debits highly visible at the time of purchase and after the spending euphoria fades.

Be creative in how you do these solutions:

• Pay cash or record your shrinking account balance at time of purchase.
• Post every receipt on the refrigerator (a cluttered refrigerator should tell you something—no, not to buy a bigger fridge).
• Get cash once a month for the entire month and seal your weekly gifts to yourself in an envelope.

What method works for you?

Please share by posting a comment.

Savers Are from Mars. Debtors Are from Venus. Episode 1

Mind-Boggling True Story

Debtor: “I’m going to buy a new car.”

Saver: “Why? Your Honda Civic might go another 100,000 miles. What’s wrong with it?"

Debtor: “It’s going to be paid off soon.”

Take the quiz: Would you buy a new car or not? Answer in comments.