In order to prevent mental pollution, I now watch YouTube videos on my television. This means I am in control of what I watch rather than being subject to the whims of whatever is on television. I have been doing this for a while now, and I have noticed that when watching YouTube videos I tend to watch documentaries.
Every now and then I go back to mainstream TV and catch a glimpse of the programs that are on television. I also have a subscription to Quickflix and have about two DVDs sent to me via mail every month. What I have noticed when I watch mainstream TV and films on DVD is that there is a lot of film, TV shows, and advertising that glamorises not just the "immoral" sexual desires but also a lot of media that glamorises "moral" sexual desires, that is, romantic love, e.g. dating, courtship, and marriage.
I am not popular with females. I am 28 now and have only been on short dates with two females. I am currently able to live on about $400 per fortnight, but when I was dating I noticed that my rate of spending doubled to about $800 per fortnight. There is a lot that you must pay for when you are dating. If you take things further, you may end up with a huge mortgage, wedding expenses, and then children. The bottom line is that romantic love is expensive. Even sinful love, e.g. visiting prostitutes, is expensive and potentially dangerous.
My point is that the desires of love and sex create significant consumer demand in an economy, so much so that it would make sense for all the businesses that benefit from increase in consumer demand for love and sex, e.g. wedding organisers, brothels, flower shops, condom producers, and so forth, to pool their money into an organisation that gives grants to films and TV shows that promote or further glamorise love and sex.
Showing posts with label thrift. Show all posts
Showing posts with label thrift. Show all posts
08 September 2012
24 July 2012
Holidaying Cheaper than Staying at Home?
I have started taking two weeks off from work. In a bid to save money, I have decided not to go on holidays. Rather, I will just stay at home. However, I am quickly finding that staying in Australia can be quite expensive and that perhaps a trip to Asia might have been cheaper.
I have only just started my two-week holiday, but already I have been invited by other people to eat out and watch movies. Watching a movie in Australia sets you back about $20. Eating out can vary between $15 to $30. I remember during one day I ate out during lunch and dinner and then watched a movie afterwards. I spent $70 that day.
Return tickets for flights from Australia to a country like Thailand or Cambodia can be purchased for around $500 to $800. The cost of living e.g. in Cambodia is significantly lower. Meals are only around $5 and you can sleep at a guest house for $10 a night. Of course, it all depends on what you do. I am starting to think that if I go to Asia, rent a cheap hotel, and then do what I normally do during a holiday (i.e. surf the Internet) then it might be cheaper to go to Asia.
Another benefit of going to Asia is that I can detach myself from my family and friends at home. When you take a holiday, you are looking not only for a change in scenery but also to get away from your annoying friends and family for a few weeks. I really ought to consider this next time.
I have only just started my two-week holiday, but already I have been invited by other people to eat out and watch movies. Watching a movie in Australia sets you back about $20. Eating out can vary between $15 to $30. I remember during one day I ate out during lunch and dinner and then watched a movie afterwards. I spent $70 that day.
Return tickets for flights from Australia to a country like Thailand or Cambodia can be purchased for around $500 to $800. The cost of living e.g. in Cambodia is significantly lower. Meals are only around $5 and you can sleep at a guest house for $10 a night. Of course, it all depends on what you do. I am starting to think that if I go to Asia, rent a cheap hotel, and then do what I normally do during a holiday (i.e. surf the Internet) then it might be cheaper to go to Asia.
Another benefit of going to Asia is that I can detach myself from my family and friends at home. When you take a holiday, you are looking not only for a change in scenery but also to get away from your annoying friends and family for a few weeks. I really ought to consider this next time.
28 November 2010
Helping Friends Spend Less - Don't Do It!
I was having lunch with a friend of mine who I used to work with. His name is Harper. We went to Nando's and while there he started criticizing me for eating out all the time, saying that it is bad for my health. I told him that it is possible to buy food that is healthy, e.g. salads and sandwiches. He then claimed that I should not eat out because it is a waste of money.
When my friend tried to lecture me about how I should spend my money, it made me feel really wrong. I admit I used to do it in the past. I would tell people that they should not spend money on luxury items and that they should spend it instead on necessities so that they can save money. I even went so far as to criticize people for having children since I believed that children are expensive luxury goods. But since then I have learned that it is best to let people spend their own money on whatever they want to spend it on. Other people have different values and different goals in life, and unless you are walking in their shoes, you don't really understand and you are in no position to lecture.
I do admit I eat out whenever I am at work simply because I don't like to prepare food and I don't like to make my own food or have a family member make it for me (because it tastes bad). When you're busy dealing with the stress of work, the last thing you want is to have to deal with bad quality food that stinks up the office. In addition to eating out at work I also drink coffee. On some days I drink one cup and on other days I have two. All this eating out and coffee adds up to maybe $3000 to $4000 per year. It's a lot of money, I admit, but I kept records of how much I have spent for many years now and according to calculations that I did today I found that I only spend about 15 per cent of my gross income from work. Some people may be able to achieve better savings rates than that but this is what I am comfortable with. My friend Harper, on the other hand, had a girlfriend who he spends bucketloads of money on. I also remember him going on about a $1000 wristwatch he purchased. He wears fairly trendy clothing and even wears men's jewellery. Based on his history of spending on luxury goods, I am surprised he is lecturing me on the differences between needs and wants and how eating out and drinking coffee are expensive habits!
The lesson from this story is that in your interactions with people it is, in my opinion, a good idea to have a non-interventionist policy whereby you let other people decide for themselves what they want to do with their lives. This doesn't mean you should not help a friend in need, but there is a fine line between helping a friend and imposing your values on him.
When my friend tried to lecture me about how I should spend my money, it made me feel really wrong. I admit I used to do it in the past. I would tell people that they should not spend money on luxury items and that they should spend it instead on necessities so that they can save money. I even went so far as to criticize people for having children since I believed that children are expensive luxury goods. But since then I have learned that it is best to let people spend their own money on whatever they want to spend it on. Other people have different values and different goals in life, and unless you are walking in their shoes, you don't really understand and you are in no position to lecture.
I do admit I eat out whenever I am at work simply because I don't like to prepare food and I don't like to make my own food or have a family member make it for me (because it tastes bad). When you're busy dealing with the stress of work, the last thing you want is to have to deal with bad quality food that stinks up the office. In addition to eating out at work I also drink coffee. On some days I drink one cup and on other days I have two. All this eating out and coffee adds up to maybe $3000 to $4000 per year. It's a lot of money, I admit, but I kept records of how much I have spent for many years now and according to calculations that I did today I found that I only spend about 15 per cent of my gross income from work. Some people may be able to achieve better savings rates than that but this is what I am comfortable with. My friend Harper, on the other hand, had a girlfriend who he spends bucketloads of money on. I also remember him going on about a $1000 wristwatch he purchased. He wears fairly trendy clothing and even wears men's jewellery. Based on his history of spending on luxury goods, I am surprised he is lecturing me on the differences between needs and wants and how eating out and drinking coffee are expensive habits!
The lesson from this story is that in your interactions with people it is, in my opinion, a good idea to have a non-interventionist policy whereby you let other people decide for themselves what they want to do with their lives. This doesn't mean you should not help a friend in need, but there is a fine line between helping a friend and imposing your values on him.
04 September 2010
Saving Money by Collecting Coins
There are many benefits of credit cards. There are credit cards out there that have no annual cost. You don't pay anything for them but when you buy things with them you get automatic insurance as well as other benefits, such as cheaper petrol. So long as you pay off any debt you have every month, you will not have to pay any interest. Examples of free credit cards that allow this include the Bankwest Zero credit cards and the Coles Group Source credit cards. I highly recommend both of these credit cards. In fact, I have both.
There is one major problem with credit cards and it is not really an economic argument but rather a psychological argument. The problem with credit cards is that is that they make it easy for you to spend money. It is so easy to be walking in the mall and all a sudden you see something you like. It is so easy for you to whip out your credit card and then buy it. Because it is so easy to use a credit card, most people (me included) tend to overuse it.
Debit Cards Don't Help
Many people think that they can replace their credit cards with a debit card and the problem is solved. It is believed that debit cards are better because you are spending your own money and therefore you will be careful with it. If you spend someone else's money, you won't be careful with it. I think this is illogical. In fact, I think debit cards are quite bad. The problem with debit cards is that it is linked to your transaction account and if your balance becomes zero, the bank will charge you a penalty (maybe $40 or so). It is much safer to simply fill up your credit card with lots of cash so that your credit card account is in surplus. Then you use your credit card as if it were a debit card. If for some reason you make a mistake an go under, it doesn't matter because you will just be using a credit card as if it were a normal credit card. It is true that the bank can slap a penalty on you if you go over the credit limit on a credit card, but having a debit card does not fix that problem.
Using Cash Helps
For small purchases, using cash is good. Cash is good because it allows you to spend a set amount and you cannot go under. With debit cards and credit cards you can spend more than you have. With cash, it is impossible to spend more than you have. If you have only $10 in cash in your hands, you cannot buy something worth $20 with cash.
However, there is a problem with cash. If you carry around a large amount of cash, it is too easy to spend it all. If you carry around $5000 worth of cash in a mall, apart from the fact that there exists the risk of theft (assume you keep your cash in the bank and take it out via the ATM) it is still very easy to spend the money. It is easy to spend using credit card, but it is almost as easy to spend cash. In practice, any cash you have in your wallet is as good as gone. It is so easy to spend that you will find yourself spending it on lattes or sandwiches. Using a credit card at a cafe is frowned upon because it slows things down, but every shop or restaurant loves receiving cash. It is so quick and easy to hand over cash and if you carry high denominations of cash, you could lose money very quickly.
The way to fix this problem is to leave in your transaction account or wallet only the amount you need for the week and then put aside the rest. E.g. if you are paid $1500 per fortnight, you can estimate that one meal will cost $10 and you will have one meal per day for 10 days, which comes to a total of $100. You leave $100 in your transaction account and put the remaining $1400 away where it is difficult to access it, e.g. a term deposit. This is a good idea because it ensures you will only spend $100 for the forthnight. Assuming you have no credit card and only use your ATM card to withdraw money before you spend it and don't withdraw more than you have, then you will only spend $100 per fortnight, which is quite little. The problem with this is that you may be in an emergency situation in which you need money. Suppose you only have $20 in your transaction account and you are in the city on a Friday night with your friends. You have a meal and then all of a sudden you have no money in your bank account. Suppose you are driving home and all of a sudden you need to fill up on petrol. If you have no money, you may be stranded. This is why so many people carry credit cards. A credit card is useful in case of an emergency, but like a double-edged sword although the credit card can help you during emergencies, it can hurt you because it is easy to spend money. I have found a solution to this problem. It involves collecting coins.
Collect Coins
I carry around credit cards, but during periods in my life when I want to save money, I keep my credit cards locked away in my bedroom. Whenever I buy something with cash, I put all the notes in my wallet and put all the coins in a special zip pockets on my jacket. When I get home, I put the coins into a jar. Once this jar has got enough coins, I put some of those coins inside my car--in the cigarette box, in the glove box, etc. I also put coins in drawers in my desk at work. There is a risk that the coins will be stolen, which is why I tend to only keep silver coins in my car and at work, and I only keep in total about $20 to $40 worth of silver coins both at work and in my car. This means that if some thief steals the money, they won't steal much and it simply won't be worth the hassle to carry all those silver coins just to steal a small amount. I keep the gold coins locked up in my house--but I don't have much.
Why is it a good idea to do this? If I wanted to save money, I could lock up my credit cards and then use cash all the time. If in the event I run out of cash, I can simply tap into my coin stash. For example, if I am driving and I have no paper money in my wallet and all of a sudden my car needs petrol, I can simply collect silver coins in my cigarette box in my car and use that to buy petrol at the petrol station. It is true that using silver coins to buy petrol is slow and embarrassing--but that is the point! Because it is so embarrasing and slow to use silver coins to buy something, you are less likely to spend money (unlike if you have a credit card or paper cash). However, although silver coins are slow and embarrasing to spend, in the event of an emergency, you can use it.
There is one major problem with credit cards and it is not really an economic argument but rather a psychological argument. The problem with credit cards is that is that they make it easy for you to spend money. It is so easy to be walking in the mall and all a sudden you see something you like. It is so easy for you to whip out your credit card and then buy it. Because it is so easy to use a credit card, most people (me included) tend to overuse it.
Debit Cards Don't Help
Many people think that they can replace their credit cards with a debit card and the problem is solved. It is believed that debit cards are better because you are spending your own money and therefore you will be careful with it. If you spend someone else's money, you won't be careful with it. I think this is illogical. In fact, I think debit cards are quite bad. The problem with debit cards is that it is linked to your transaction account and if your balance becomes zero, the bank will charge you a penalty (maybe $40 or so). It is much safer to simply fill up your credit card with lots of cash so that your credit card account is in surplus. Then you use your credit card as if it were a debit card. If for some reason you make a mistake an go under, it doesn't matter because you will just be using a credit card as if it were a normal credit card. It is true that the bank can slap a penalty on you if you go over the credit limit on a credit card, but having a debit card does not fix that problem.
Using Cash Helps
For small purchases, using cash is good. Cash is good because it allows you to spend a set amount and you cannot go under. With debit cards and credit cards you can spend more than you have. With cash, it is impossible to spend more than you have. If you have only $10 in cash in your hands, you cannot buy something worth $20 with cash.
However, there is a problem with cash. If you carry around a large amount of cash, it is too easy to spend it all. If you carry around $5000 worth of cash in a mall, apart from the fact that there exists the risk of theft (assume you keep your cash in the bank and take it out via the ATM) it is still very easy to spend the money. It is easy to spend using credit card, but it is almost as easy to spend cash. In practice, any cash you have in your wallet is as good as gone. It is so easy to spend that you will find yourself spending it on lattes or sandwiches. Using a credit card at a cafe is frowned upon because it slows things down, but every shop or restaurant loves receiving cash. It is so quick and easy to hand over cash and if you carry high denominations of cash, you could lose money very quickly.
The way to fix this problem is to leave in your transaction account or wallet only the amount you need for the week and then put aside the rest. E.g. if you are paid $1500 per fortnight, you can estimate that one meal will cost $10 and you will have one meal per day for 10 days, which comes to a total of $100. You leave $100 in your transaction account and put the remaining $1400 away where it is difficult to access it, e.g. a term deposit. This is a good idea because it ensures you will only spend $100 for the forthnight. Assuming you have no credit card and only use your ATM card to withdraw money before you spend it and don't withdraw more than you have, then you will only spend $100 per fortnight, which is quite little. The problem with this is that you may be in an emergency situation in which you need money. Suppose you only have $20 in your transaction account and you are in the city on a Friday night with your friends. You have a meal and then all of a sudden you have no money in your bank account. Suppose you are driving home and all of a sudden you need to fill up on petrol. If you have no money, you may be stranded. This is why so many people carry credit cards. A credit card is useful in case of an emergency, but like a double-edged sword although the credit card can help you during emergencies, it can hurt you because it is easy to spend money. I have found a solution to this problem. It involves collecting coins.
Collect Coins
I carry around credit cards, but during periods in my life when I want to save money, I keep my credit cards locked away in my bedroom. Whenever I buy something with cash, I put all the notes in my wallet and put all the coins in a special zip pockets on my jacket. When I get home, I put the coins into a jar. Once this jar has got enough coins, I put some of those coins inside my car--in the cigarette box, in the glove box, etc. I also put coins in drawers in my desk at work. There is a risk that the coins will be stolen, which is why I tend to only keep silver coins in my car and at work, and I only keep in total about $20 to $40 worth of silver coins both at work and in my car. This means that if some thief steals the money, they won't steal much and it simply won't be worth the hassle to carry all those silver coins just to steal a small amount. I keep the gold coins locked up in my house--but I don't have much.
Why is it a good idea to do this? If I wanted to save money, I could lock up my credit cards and then use cash all the time. If in the event I run out of cash, I can simply tap into my coin stash. For example, if I am driving and I have no paper money in my wallet and all of a sudden my car needs petrol, I can simply collect silver coins in my cigarette box in my car and use that to buy petrol at the petrol station. It is true that using silver coins to buy petrol is slow and embarrassing--but that is the point! Because it is so embarrasing and slow to use silver coins to buy something, you are less likely to spend money (unlike if you have a credit card or paper cash). However, although silver coins are slow and embarrasing to spend, in the event of an emergency, you can use it.
05 June 2010
Budget Your Savings, Not Your Spending
The result is that I figured out that I spend about $600 per month. That is very nice to know, but did I really need to track where all my cents went?
Keeping track of my spending was difficult. It's not practical to carry around a notebook everywhere you go, so in order to track my spending I used my mobile phone camera to take pictures of things I purchased. If there was no price tag I could take a picture of, I made a voice recording in my mobile phone. In the voice recording I detailed when I purchased the item, what the item is, how much it costs, etc. About once a week or more I went through my mobile phone and entered all this data into the Google spreadsheet. It was a lot of work!
I have now stopped tracking my spending. The reason why is because it is so tedious. It is good to be able to figure out how much you spend, but there is an easier way to do this. Quite simply, you follow this formula:
Savings or Investments = Income - Spending
In other words, how much you save or invest is equal to how much money you get in the form of income subtract how much you spend. If we rearrange this formula, we get the following:
Spending = Income - Savings or Investments
In other words, in order to figure out how much you spend, take your income and then subtract your investments or savings. This is much easier because your income (I'm talking about take-home pay here, which is how much actually goes into your bank account every fortnight) is usually fixed and it's easy to figure out what your income is. Investments or savings is also easy to figure out for me because I usually buy shares in increments of thousands of dollars. That is, I buy shares thousands of dollars at a time. Therefore, when I invest I do it not very regularly and it's easy and simple to keep track of.
I spend money on a lot of small things, for example, coffee, mints, and restaurant meals. When I buy non-investment goods, I tend to buy cheap things very frequently. However, when I buy investments, I tend to buy expensive things infrequently. It therefore made sense to ignore spending and focus instead on savings.
11 April 2010
The Stigma of Living with Parents
I was browsing through Yahoo! and stumbled upon something in Yahoo! Answers about a 28-year-old guy who lives with his parents and is annoyed at all the criticism he gets from other people.
The criticism this person gets reminds me of me. I too am a male who lives with my parents and many people criticize me. I remember last week I was talking to a bunch of friends about the Melbourne property market. My friends were all desperate to save up to buy a house. One was renting and the other two were living with their parents as well. Anyway, one of them said, "I plan to live with my parents for about two or three more years so that I can save for a deposit for a home, and then I will buy. Paying rent is a waste because you get no asset at the end. If you get a mortgage you get an asset at the end."
I actually think my friend is wrong because when you rent a house you pay less than if you borrow money to buy a house. If you took an interest-only loan from a bank then the mortgage repayments you make will be approximately equal to rent you would have paid for the house.
I told my friends that I personally do not plan to buy a house because I fear that Melbourne house prices are too expensive. Median house prices in Melbourne are around $500,000 now, so if I get an average house I would need to go into massive debt. The thought of paying off massive debt for the next few decades of my life is not appealing to me. I actually think the best move for me to make is to simply live with my parents and with the money I save I can invest. If I think house prices will continue to go up then I can invest in companies that are likely to profit from rising house prices, e.g. Commonwealth Bank and Stockland.
Even though my friend (let's call him Clive) is actually living with his parents at the moment, he then decided to criticize me. He said, "Oh, so you're just going to leech off your parents! How shameful!"
My response was as follows: "I am not a parasite. Every month I estimate my cost and then pay it to them plus a little extra."
Clive then claimed that I didn't pay enough because I was not paying the "market rate." He believes that if I don't pay the current rental rate, which is about $200 per week, then I am not paying enough. I currently pay around $200 per month, which is about $50 per week. Clive believes that because my parents could get $200 per week from renting out my room to someone else but are instead getting $50 from me, they are making a loss from having me in the house and therefore I am not compensating them enough.
This argument is actually wrong, mainly because Clive did not have enough information. One piece of information Clive didn't know about was that my parents are apprehensive about renting out rooms in their house to strangers (understandably). My brother used to live with the family but now he does not. His bed is empty and my parents have not rented out the room to others. If my parents did rent out my brother's room to others, they could potentially earn $200 per week, but they choose not to, and I think the reason why they choose not to is because it is uncomfortable sharing a family home--a very private and intimate place--with a complete stranger. I have spoken to my parents about moving out and I have told them that if they want me out them I can leave. They have no obligation to keep me if they didn't want to. They encouraged me to live with them for as long as I wanted to, and they cited the monetary benefits of doing so. I also asked my parents if they would rent my room out if I left and they said they would not the reasons I have previously given.
If I leave the family home, my parents get nothing. Their payoff is zero. If I stay in the family home, it is true that I use up electricity, gas, and so forth. However, I transfer cash to my parents every month. If I estimate that my cost in electricity, gas, and so forth is $150 per month then I pay that. Then I pay a little extra, say $20 per month. The net effect is that my living with my parents results in my parents making a profit of $20 per month, which is higher than the zero payoff that they would get if I did not living with them. Hence from cost-benefit analysis it is beneficial for my parents to keep me. My living with my parents benefits not only my parents but also me since I do not pay exhorbitant rental rates nor do I destroy my financial stability by imposing a massive debt burden on my future self. The arrangement is mutually beneficial.
I understand that there is social stigma if a male lives with his parents, but I am willing to face that. The guy at Yahoo! Answers who is in a similar position to me wonders why so many women do not like men who live with their parents. I personally think that a woman has the right to assess a man using whatever criteria she wants. But I think that many of the arguments that many women made on Yahoo! Answers is not quite right. I will address them below.
A female named Laraby9 said the following:
Another argument this female made was that a man who lives with his parents is not independent and therefore cannot survive. His inability to survive is bad because as a female she wants the male to help her survive. If there is one topic that I am passionate about, it is survival. Based on my research, I know that pure independence is difficult, if not impossible for an individual to achieve. To be independent you must live out in the country all by yourself and grow your own food. This is difficult because getting a balanced diet requires you to have Noah's ark on your farm. You'd need to raise cows, chicken, pigs, and fish. You'd need to grow many different types of vegetables and fruits. You'd have to prepare the soil, sow the seeds, water them, and then wait, and you'd have to hope that the weather is good otherwise your food will not grow. It is extremely difficult to be fully independent. That is why humans tend to specialize and trade with others. Instead of trying to grow all kinds of fruits and vegetables in your farm, you can focus on one, say, rice. Then you go to your neighbour and engage in a barter exchange, say, exchange your excess rice for his excess avocados. Through specialization and trade, we make things easier for ourselves. Even if I leave my parents, I will not be fully independent. Even if I cook my own food, I do not grow my own food. I buy basic ingredients from the supermarket. Hence I am dependent on that supermarket. I am dependent on the farmer to grows the basic ingredient. My point is that dependency or interdependency does not necessarily reduce your ability to survive. Rather, interdependency increases your ability to survive by allowing your to exploit the gains of trade to produce greater payoffs for both parties. When you go to work, you are dependent on your employer to pay you a salary and your employer is dependent on you for you services to the organization. There is mutual dependency. My living with my parents is just another form of trade. My parents are dependent on me for my cash (and also my presence, I hope) and I am dependent on them for accomodation. If I were to move out and rent, I would be dependent on the landlord. If I moved out and took out a mortage to buy a house, I would be dependent on the bank for the loan. No matter what I do, I am not fully independent.
Furthermore, the argument here is that a man who lives with his parents cannot survive. This is false, I think. If a man moves out of home and is put into a property market with very high prices, he either pays high rent or goes into immense debt to buy a house. Either way, he loses a lot of money, either in the form of rent or interest. If he loses a lot of money, his ability to be independent and his ability to survive decreases. By living with my parents, I save a lot of money, and the accumulation of saving increases independence.
I will use a numerical example to illustrate my point. Assume that investments produce 5 per cent return. Assume that you only need $5000 per year to cover the cost of food. Assume that by living with parents you are able to save $2000 per month ($24,000 per year). After 4.27 years of living with your parents, you will have $100,000 saved up, which will produce $5000 per year in investment income, which covers your food costs. You are dependent on your parents and your employer for 4.27 years after which you are independent because the most important necessity has been covered. Now assume that rent is $200 per week ($10,400 per year). If you move out, you can save only $13,600 per year rather than $24,000. This means it takes 7.35 years of dependency to your employer for you to be financially independent. Living with your parents allows you to be financially independent faster. Remember that the definition of financial independence is that the cost of necessities is covered by passive investment income.
I know I have gone on about this issue for a long time, but let me also address one more issue. Another friend of mine--let's call him Frank--told me that it is important for me to move out because it is important for me to find a female and start a family. I asked him why this is important and Frank told me that pooling my money with my partner's money means that I need a smaller deposit to buy a house. He also claims that living with a partner allows you to gain economies of scale e.g. with air conditioning bills. That is, per person the power bills are lower if two people live together than if one person lived alone. But just because there can be economies of scale if one person decides to live with two people, it doesn't mean I should leave my parents' house. In fact, living with parents gives even greater economies of scale because even more people live in the same house. The idea that moving out and getting a partner is important because it makes it easier to buy real estate seems to assume that buying real estate is something you must do. It is not. If Frank's argument is that real estate is a necessity because you need shelter from the cold, then living with your parents fixes that problem. If Frank's argument is that real estate is a good investment and you should get into it quickly by investing jointly with a partner, then a better idea is to invest through a property syndicate. Many property development companies have property syndicates that allow you to pool money with other investors to invest in real estate. Better yet, why not just invest in a mutual fund, which also pools money but to a massive extent?
The criticism this person gets reminds me of me. I too am a male who lives with my parents and many people criticize me. I remember last week I was talking to a bunch of friends about the Melbourne property market. My friends were all desperate to save up to buy a house. One was renting and the other two were living with their parents as well. Anyway, one of them said, "I plan to live with my parents for about two or three more years so that I can save for a deposit for a home, and then I will buy. Paying rent is a waste because you get no asset at the end. If you get a mortgage you get an asset at the end."
I actually think my friend is wrong because when you rent a house you pay less than if you borrow money to buy a house. If you took an interest-only loan from a bank then the mortgage repayments you make will be approximately equal to rent you would have paid for the house.
I told my friends that I personally do not plan to buy a house because I fear that Melbourne house prices are too expensive. Median house prices in Melbourne are around $500,000 now, so if I get an average house I would need to go into massive debt. The thought of paying off massive debt for the next few decades of my life is not appealing to me. I actually think the best move for me to make is to simply live with my parents and with the money I save I can invest. If I think house prices will continue to go up then I can invest in companies that are likely to profit from rising house prices, e.g. Commonwealth Bank and Stockland.
Even though my friend (let's call him Clive) is actually living with his parents at the moment, he then decided to criticize me. He said, "Oh, so you're just going to leech off your parents! How shameful!"
My response was as follows: "I am not a parasite. Every month I estimate my cost and then pay it to them plus a little extra."
Clive then claimed that I didn't pay enough because I was not paying the "market rate." He believes that if I don't pay the current rental rate, which is about $200 per week, then I am not paying enough. I currently pay around $200 per month, which is about $50 per week. Clive believes that because my parents could get $200 per week from renting out my room to someone else but are instead getting $50 from me, they are making a loss from having me in the house and therefore I am not compensating them enough.
This argument is actually wrong, mainly because Clive did not have enough information. One piece of information Clive didn't know about was that my parents are apprehensive about renting out rooms in their house to strangers (understandably). My brother used to live with the family but now he does not. His bed is empty and my parents have not rented out the room to others. If my parents did rent out my brother's room to others, they could potentially earn $200 per week, but they choose not to, and I think the reason why they choose not to is because it is uncomfortable sharing a family home--a very private and intimate place--with a complete stranger. I have spoken to my parents about moving out and I have told them that if they want me out them I can leave. They have no obligation to keep me if they didn't want to. They encouraged me to live with them for as long as I wanted to, and they cited the monetary benefits of doing so. I also asked my parents if they would rent my room out if I left and they said they would not the reasons I have previously given.
If I leave the family home, my parents get nothing. Their payoff is zero. If I stay in the family home, it is true that I use up electricity, gas, and so forth. However, I transfer cash to my parents every month. If I estimate that my cost in electricity, gas, and so forth is $150 per month then I pay that. Then I pay a little extra, say $20 per month. The net effect is that my living with my parents results in my parents making a profit of $20 per month, which is higher than the zero payoff that they would get if I did not living with them. Hence from cost-benefit analysis it is beneficial for my parents to keep me. My living with my parents benefits not only my parents but also me since I do not pay exhorbitant rental rates nor do I destroy my financial stability by imposing a massive debt burden on my future self. The arrangement is mutually beneficial.
I understand that there is social stigma if a male lives with his parents, but I am willing to face that. The guy at Yahoo! Answers who is in a similar position to me wonders why so many women do not like men who live with their parents. I personally think that a woman has the right to assess a man using whatever criteria she wants. But I think that many of the arguments that many women made on Yahoo! Answers is not quite right. I will address them below.
A female named Laraby9 said the following:
The fact that you don't cook your own food and you don't do your own laundry makes you seem infantile, I don't care how many degrees you have. To most of us, the goal in life is to be independent. When a woman comes across a man who has no desire to be independent or standing on his own two feet, it is a HUGE turnoff, and it makes the man seem weak and unable to cut the umbilical cord. It makes the man seem like he has no interest in being an adult. That is a big turnoff for most girls who are looking for that strong man to help them start and raise a family with. If you are truly proud of the way you are living, then why are you here defending yourself?I am defending myself on this blog. The issue of living with my parents is one that I have thought about over a long period of time. Am I proud of my decision? The first question to ask is what is pride? Pride is something you feel when you feel that you are important and worthy or respect. This is vague because when I decide to live with my parents I do not aim to respect myself or to make others respect me, nor do I try to somehow try to feel important or make others think that I am important. The decision to live with parents was based on an assessment of cost, benefits, and risks. Writing about my decision on a blog helps me to articulate my thoughts, which allows me to explore it further. Even though I have decided to live with my parents, I cannot be sure that I decision is correct. Based on my analysis so far, living with parents seems to be the best move, but I may be a victim of lack of information or even cognitive biases. By writing about the issue, thinking about it, and talking about it--all with an open mind--I learn about it more, which helps me make better decisions. There is also an altruistic aspect to it as well. By writing about the issue, I inform other people who may be in a similar situation to me. I give them ideas that they can use to make decisions for themselves.
Another argument this female made was that a man who lives with his parents is not independent and therefore cannot survive. His inability to survive is bad because as a female she wants the male to help her survive. If there is one topic that I am passionate about, it is survival. Based on my research, I know that pure independence is difficult, if not impossible for an individual to achieve. To be independent you must live out in the country all by yourself and grow your own food. This is difficult because getting a balanced diet requires you to have Noah's ark on your farm. You'd need to raise cows, chicken, pigs, and fish. You'd need to grow many different types of vegetables and fruits. You'd have to prepare the soil, sow the seeds, water them, and then wait, and you'd have to hope that the weather is good otherwise your food will not grow. It is extremely difficult to be fully independent. That is why humans tend to specialize and trade with others. Instead of trying to grow all kinds of fruits and vegetables in your farm, you can focus on one, say, rice. Then you go to your neighbour and engage in a barter exchange, say, exchange your excess rice for his excess avocados. Through specialization and trade, we make things easier for ourselves. Even if I leave my parents, I will not be fully independent. Even if I cook my own food, I do not grow my own food. I buy basic ingredients from the supermarket. Hence I am dependent on that supermarket. I am dependent on the farmer to grows the basic ingredient. My point is that dependency or interdependency does not necessarily reduce your ability to survive. Rather, interdependency increases your ability to survive by allowing your to exploit the gains of trade to produce greater payoffs for both parties. When you go to work, you are dependent on your employer to pay you a salary and your employer is dependent on you for you services to the organization. There is mutual dependency. My living with my parents is just another form of trade. My parents are dependent on me for my cash (and also my presence, I hope) and I am dependent on them for accomodation. If I were to move out and rent, I would be dependent on the landlord. If I moved out and took out a mortage to buy a house, I would be dependent on the bank for the loan. No matter what I do, I am not fully independent.
Furthermore, the argument here is that a man who lives with his parents cannot survive. This is false, I think. If a man moves out of home and is put into a property market with very high prices, he either pays high rent or goes into immense debt to buy a house. Either way, he loses a lot of money, either in the form of rent or interest. If he loses a lot of money, his ability to be independent and his ability to survive decreases. By living with my parents, I save a lot of money, and the accumulation of saving increases independence.
I will use a numerical example to illustrate my point. Assume that investments produce 5 per cent return. Assume that you only need $5000 per year to cover the cost of food. Assume that by living with parents you are able to save $2000 per month ($24,000 per year). After 4.27 years of living with your parents, you will have $100,000 saved up, which will produce $5000 per year in investment income, which covers your food costs. You are dependent on your parents and your employer for 4.27 years after which you are independent because the most important necessity has been covered. Now assume that rent is $200 per week ($10,400 per year). If you move out, you can save only $13,600 per year rather than $24,000. This means it takes 7.35 years of dependency to your employer for you to be financially independent. Living with your parents allows you to be financially independent faster. Remember that the definition of financial independence is that the cost of necessities is covered by passive investment income.
I know I have gone on about this issue for a long time, but let me also address one more issue. Another friend of mine--let's call him Frank--told me that it is important for me to move out because it is important for me to find a female and start a family. I asked him why this is important and Frank told me that pooling my money with my partner's money means that I need a smaller deposit to buy a house. He also claims that living with a partner allows you to gain economies of scale e.g. with air conditioning bills. That is, per person the power bills are lower if two people live together than if one person lived alone. But just because there can be economies of scale if one person decides to live with two people, it doesn't mean I should leave my parents' house. In fact, living with parents gives even greater economies of scale because even more people live in the same house. The idea that moving out and getting a partner is important because it makes it easier to buy real estate seems to assume that buying real estate is something you must do. It is not. If Frank's argument is that real estate is a necessity because you need shelter from the cold, then living with your parents fixes that problem. If Frank's argument is that real estate is a good investment and you should get into it quickly by investing jointly with a partner, then a better idea is to invest through a property syndicate. Many property development companies have property syndicates that allow you to pool money with other investors to invest in real estate. Better yet, why not just invest in a mutual fund, which also pools money but to a massive extent?
03 April 2010
Bear Grylls Misleading?
Bear Grylls's Man vs Wild is very entertaining. I often talk about it at work but whenever I talk about it there is almost always someone who says something like, "He's there with camera crew! It's not real!" I hate it when people think that just because they are cynical that they are smart. It annoys me. Bear's shows are not supposed to be survival simulations. The show is educational and is meant to educate viewers on survival. Obviously camera crew need to be there if the message is to be transmitted to viewers.
I am interested in the topic of wilderness or outback survival not because I think the end of civilization is near but because living in non-urban areas may be very cheap. Suppose I lose my job and my parents kick me out of the home and I am on the streets. How can I make the emergency money in my bank account last me for the rest of my life? One idea I think about is going to a real estate agent and buying a small plot of land in the country. Preferably I will get a camping permit or a building permit from the council that will allow me to camp there permanently or or at least allow me to build my own cabin there using trees cut from the area. The skills of survival, e.g. knowing how to start a fire using flint and steel, may seem useless if you have matches, but in a situation where you are trying to save money, flint and steel may be cheaper in the long run than matches.
20 March 2010
Saving Hard and Working Hard
Many people seem to stress about work. They are worried that they will not get a promotion. They work hard doing trivial things to impress the boss, e.g. making sure they wear the right tie or making sure they are seen hanging around the office late at night. In my opinion, the best you can do is to simply do the work you are given to the best of your ability. There is no need to try to do anything unorthodox.
I find that it's much easier to make money by saving money rather than working hard for it. This is because of taxation. If you earn an extra $100, you may only see $70 of it because it is taxed. But if you work hard to save $100 then you get $100, and because your savings will likely grow, you will likely get more than $100. I'm not saying it's one or the other. You can focus on both working hard and saving hard, but very often people focus on one to the exclusion of another.
If you have saved up money, the need to work hard decreases. Even if you are fired, you have cash to be able to cushion the blow of unemployment.
I find that it's much easier to make money by saving money rather than working hard for it. This is because of taxation. If you earn an extra $100, you may only see $70 of it because it is taxed. But if you work hard to save $100 then you get $100, and because your savings will likely grow, you will likely get more than $100. I'm not saying it's one or the other. You can focus on both working hard and saving hard, but very often people focus on one to the exclusion of another.
If you have saved up money, the need to work hard decreases. Even if you are fired, you have cash to be able to cushion the blow of unemployment.
18 March 2010
Money is Made to be Spent?
I think I am capable of saving 80 per cent of my net pay. That is my target savings rate. One friend of mine criticized me by saying the following: "Money is made to be spent. What is the point of saving money if you're not going to spend it? You get satisfaction from spending money, so by not spending you are denying yourself satisfaction. What if you died tomorrow? You would not get the opportunity to spend and you will have missed out on so much satisifaction."
I happen to think that my friend is not correct. The sentence I have issues with is the sentence about how you get satisfaction from spending money and so therefore if you don't spend money you deny yourself satisfaction. I find personally that spending does not give me much satisifaction. Saving money, on the other hand, seems to give me a lot of satisfaction. Saving money is a form of insurance because it allows you to be better off in the event of an emergency. An individual can spend money and receive satisfaction by buying income protection insurance. In the event of a job loss, that individual will not starve to death. Alternatively, instead of buying income protection insurance, an individual can save money and in the event of being fired from his job he will have a pool of money leftover to spend on necessities like food, which prevents him from starving to death. Hence saving money or spending money can both give satisfaction. That spending may give you satisifaction does not mean that not spending does not give you satisifaction.
If I died tomorrow, it is not as if I have missed out on an opportunity to achieve a very high level of satisifaction. If I spent all my money now and was broke, I would become fearful because I no longer have a safety net in the event of some unfortunately event. This fear would decrease my satisifaction. Therefore, if I spend all my money now till I was broke, I would become fearful, my satisifaction would go down, and then I would die. If I kept my money and saved it, I would be happy because of the insurance and security this cash gives me and even if I die, I die a happy man.
I happen to think that my friend is not correct. The sentence I have issues with is the sentence about how you get satisfaction from spending money and so therefore if you don't spend money you deny yourself satisfaction. I find personally that spending does not give me much satisifaction. Saving money, on the other hand, seems to give me a lot of satisfaction. Saving money is a form of insurance because it allows you to be better off in the event of an emergency. An individual can spend money and receive satisfaction by buying income protection insurance. In the event of a job loss, that individual will not starve to death. Alternatively, instead of buying income protection insurance, an individual can save money and in the event of being fired from his job he will have a pool of money leftover to spend on necessities like food, which prevents him from starving to death. Hence saving money or spending money can both give satisfaction. That spending may give you satisifaction does not mean that not spending does not give you satisifaction.
If I died tomorrow, it is not as if I have missed out on an opportunity to achieve a very high level of satisifaction. If I spent all my money now and was broke, I would become fearful because I no longer have a safety net in the event of some unfortunately event. This fear would decrease my satisifaction. Therefore, if I spend all my money now till I was broke, I would become fearful, my satisifaction would go down, and then I would die. If I kept my money and saved it, I would be happy because of the insurance and security this cash gives me and even if I die, I die a happy man.
13 March 2010
Spending Rate Falling
About a month ago, I started keeping a spreadsheet that detailed every bit of spending I did. I did this because I was worried that I may be overspending. Here is a sample of the spreadsheet. I made it using Google.
This spreadsheet has a column (column D) that tells me my rate of spending in dollar per month. The formula in this column simply takes the cumulative amount I've spent so far and then divides it by the number of months I've had the spreadsheet. This is useful because it allows me to measure my performance when it comes to reducing my spending. Recently I have been trying to reduce my spending, and it seems as if I am successful because my rate of spending has been going down. It is now at about $600 per month and I am aiming to get it down to $500 per month. Obviously as you have more data, your rate of spending will smoothen. The chart below clearly shows massive volatility (expected from a small sample size) at the beginning but as it smoothens there is clearly a downward trend.
Tracking your spending like this is useful because it allows you to look back on your spending and to see which areas can be addressed. As you can see on the spreadsheet, I have an essential that I cannot cut, namely buying petrol for my car. I cannot think of any way I can reduce costs there. I give about $150 per month to my parents. This is sort of an optional payment I make to my parents to keep them happy so that they let me live with them in their home. By living with my parents, I save a lot of money because I don't pay the market rate for rent or home loan interest. Paying $150 per month I think is a small price to pay for saving so much. I currently give $63 per month to World Vision, which in hindsight seems like a lot, but I would not feel too comfortable reducing this. If you look at the spreadsheet, it is clear that I love to eat out, and this is clearly an area where I can cut a lot of fat because eating out is not a necessity. In fact, eating out really makes no sense at all, and I don't know what I was thinking when I was spending all that money to restaurants.
I have tried to reduce spending on food. The spreadsheet shows that I go to McDonald's and buy value meals. When I go to pubs with work friends I always get the cheapest and smallest beer, which mostly happen to be the Carlton Draughts (plus Carlton and United Breweries is owned by Fosters Group, a company I'm sure I have quite a bit of equity exposure to). People often look down on me if I eat McDonald's, often saying that it is unhealthy, but I often buy those meals approved by the National Heart Foundation. They would often scoff and say that this certification process is corrupt, but seriously, do they think they know better than the National Heart Foundation? And why criticize McDonald's for being unhealthy then even commonsense would tell you that a McChicken, salads, and water is definitely healthy? I hypothesize that there is just some serious status snobbery going on under the cover of health concerns. McDonald's is like a victim of racism. Food snobs like to put the company down for no real good reason. McDonald's serves healthy food if you choose it, it is cheap, and it is served quickly, so what is the problem? I went to McDonald's once with three other work friends and purchased for myself the Seared Chicken Wrap with Chilli Sauce as well as a bottle of water, all for $5.95. This meal approved by the National Heart Foundation. My friends then started mocking me, saying that I was "deluding myself." How am I deluding myself for trying to be healthy? Furthermore, they had ordered meals with Coke (high in refined sugars) and french fries (high in salt), so clearly they were eating unhealthy and yet they criticize me for not being healthy!
I have gotten into a habit of eating out at restaurants with friends. This has happened so much so that my friends and I have gotten to expect it. When it comes to saving money, the worst enemy is an expensive habit. Eating out, regular lattes, smoking, home loans, car loans, children and so forth can suck you dry without you even knowing it because it just creeps in to your lifestyle to the extent that you think it's normal. You have to really attack the non-necessities. I understand that a necessity is difficult to define and I acknowledge that we humans can be weak when it comes to saving money. The best thing to do is to admit weakness and improve. The worst thing you can do is to try to rationalize your frivolous spending. We humans are all weak but it is better to acknowledge our shortcoming but still try to attain perfection rather than try to justify to ourselves why we should fail. What matters most is not whether you run or walk but rather if you're heading in the right direction.
Related post: Weakness is Not Hypocrisy.
13 February 2010
Living the Simple Life - Reducing Food Costs
This family is excellent at keeping costs down. They grow their own food, use solar power, buy second-hand clothes, and use biodiesel. They don't need to worry if energy prices go up.
I don't take detailed notes of what I spend my money on (I plan to start actually taking note of what I spend) but I have made the following estimates:
By far my biggest costs are the cash I pay to may parents as informal payment so that they in return let me live in their house and food. Food is really an area where I can cut a lot of fat because this food cost is actually due to me eating out at work at restaurants. I could get my parents to make me food from home but the food they make does not taste good. I don't blame my parents for making bad food for me because it is not their responsibility nor do they necessarily have much incentive to do so. I am trying to cut costs and as such I should expect poorer quality goods. It is also difficult for me to decline an invitation by co-workers to eat out because I have packed my own food from home. The type of people I am friends with at work like to eat out.
One strategy I have adopted to reduce food costs is to never buy any drinks and to drink water instead. I really hate it when restaurants serve disgusting water in disgusting cups. In order to be hydrated I keep a water bottle on my desk and refill it with free water at work.
Nevertheless, I estimate my monthly cost of living currently to be around $555, which is pretty reasonable. I could probably do better. Passive income produces around $260 per month, so the shortfall is made up for with my income from work.
I don't take detailed notes of what I spend my money on (I plan to start actually taking note of what I spend) but I have made the following estimates:
By far my biggest costs are the cash I pay to may parents as informal payment so that they in return let me live in their house and food. Food is really an area where I can cut a lot of fat because this food cost is actually due to me eating out at work at restaurants. I could get my parents to make me food from home but the food they make does not taste good. I don't blame my parents for making bad food for me because it is not their responsibility nor do they necessarily have much incentive to do so. I am trying to cut costs and as such I should expect poorer quality goods. It is also difficult for me to decline an invitation by co-workers to eat out because I have packed my own food from home. The type of people I am friends with at work like to eat out.
One strategy I have adopted to reduce food costs is to never buy any drinks and to drink water instead. I really hate it when restaurants serve disgusting water in disgusting cups. In order to be hydrated I keep a water bottle on my desk and refill it with free water at work.
Nevertheless, I estimate my monthly cost of living currently to be around $555, which is pretty reasonable. I could probably do better. Passive income produces around $260 per month, so the shortfall is made up for with my income from work.
02 January 2010
The Slippery Slope of Spending
At work I often spend $5 to $10 eating out during lunch. One day while I was walking around the city with a friend, we walked by a store that sold business shirts. He recommended to me that I buy what he thought was a good-looking business shirt. I told him I didn't want to buy the business shirt. He said, "You spend money on eating out, so why not spend money on business shirts?"
The problem with this argument is that it can lead to a slippery slope that can result in your savings rate dropping to zero. If you spend money on business shirts, why not spend money on shoes? If you spend money on shoes, why not spend money on wine? If you spend money on wine, why not spend money on gambling? By following this line of reasoning, you lead to a situation where you end up buying everything and therefore end up saving nothing.
Whenever a friend tempts you into spending money on something, just tell them honestly that you have a savings goal and that you cannot use the slippery slope argument.
The problem with this argument is that it can lead to a slippery slope that can result in your savings rate dropping to zero. If you spend money on business shirts, why not spend money on shoes? If you spend money on shoes, why not spend money on wine? If you spend money on wine, why not spend money on gambling? By following this line of reasoning, you lead to a situation where you end up buying everything and therefore end up saving nothing.
Whenever a friend tempts you into spending money on something, just tell them honestly that you have a savings goal and that you cannot use the slippery slope argument.
28 December 2009
Outcomes-Focused Thrift
Many people who save money save in different ways. I notice that Trent over at The Simple Dollar has a collection of tactics that he uses, for example, how to make your own laundry detergent. Even Ramit from I Will Teach You To Be Rich has what he calls the Scrooge Strategy that is essentially just a collection of tactics on how to save money, so it is really no different to the other tactics out there. What distinguishes Scrooge Strategy from others is that Ramit claims that you should focus on cutting costs on things you do not like, e.g. credit card bills, but you should spend extravagantly on things you love, e.g. if you love latte or buying wristwatches. A few days ago I spoke about a friend at work who tries to save money by never buying items at retail price. She always went for discounts (see Beware of Christmas Discounts).
All these people are inputs-focused. They focus on a collection of methods that, when implemented, is expected to save them money. I do things differently. Instead of focusing on how to save money, I initially set myself a goal of saving at least 80 per cent of my take-home pay. That is, every payday I log into my bank account and save 80 per cent of whatever came from my employer. I then try to live on what is left. If I can, that is great. I may even consider increasing the savings rate to, say, 85 per cent and seeing what happens. However, after increasing the savings rate bit-by-bit for a while, you will inevitably notice that you reach a point where you just cannot save any more. This happens when you start to pay on things using credit card and when payday comes you find that after you have paid off your credit card bill you can not longer afford to save 80 per cent of your take-home pay.
If you do not save 80 per cent in one pay period, then simply make up for it by saving more in the next pay period so that the net effect is that you save 80 per cent. To do this you create a speadsheet to track how much you undersave and then make sure that you oversave. Below is a chart that I use to track whether I am reaching my savings target. As you can see, I have undersaved by about $500, which tells me that I will need to be super frugal for a while to make up for this lack of savings. When I am in a super frugal state, I tend to question everything I buy.
An outcomes focus acknowledges that your objective is to save money and you focus on a metric that matches exactly what your objective is. This I believe is better that an inputs focus that can cause you to forget what your objective is. For example, if you focus so much on only buying discounted items, you may end up buying so many that even if each product is 50 per cent off you end up still paying heaps in total and not saving much money at all.
All these people are inputs-focused. They focus on a collection of methods that, when implemented, is expected to save them money. I do things differently. Instead of focusing on how to save money, I initially set myself a goal of saving at least 80 per cent of my take-home pay. That is, every payday I log into my bank account and save 80 per cent of whatever came from my employer. I then try to live on what is left. If I can, that is great. I may even consider increasing the savings rate to, say, 85 per cent and seeing what happens. However, after increasing the savings rate bit-by-bit for a while, you will inevitably notice that you reach a point where you just cannot save any more. This happens when you start to pay on things using credit card and when payday comes you find that after you have paid off your credit card bill you can not longer afford to save 80 per cent of your take-home pay.
If you do not save 80 per cent in one pay period, then simply make up for it by saving more in the next pay period so that the net effect is that you save 80 per cent. To do this you create a speadsheet to track how much you undersave and then make sure that you oversave. Below is a chart that I use to track whether I am reaching my savings target. As you can see, I have undersaved by about $500, which tells me that I will need to be super frugal for a while to make up for this lack of savings. When I am in a super frugal state, I tend to question everything I buy.
An outcomes focus acknowledges that your objective is to save money and you focus on a metric that matches exactly what your objective is. This I believe is better that an inputs focus that can cause you to forget what your objective is. For example, if you focus so much on only buying discounted items, you may end up buying so many that even if each product is 50 per cent off you end up still paying heaps in total and not saving much money at all.
27 December 2009
Social Influence is the Enemy of Thrift
A new personal finance blogger I am starting to read more about is Ramit Sethi. I have just been reading a blog post he has written titled 7 Lies We Tell Ourselves About Money.
One of the points he makes in this blog post is that you should not look to others as role models because most other people are failures when it comes to money. That is, if you see other people taking lots of vacations and buying luxury goods, you don't need to copy them. Ramit says the following:
As a thirfty person, of course I am not going to splash out on a new Mercedes. I'd be spending $100,000 for a car when I can easily get a car for maybe $20,000. Given that the average child costs $250,000, producing a child is monetarily equivalent to purchasing a Ferrari. If you've committed yourself to never touching luxury sports cars, why wouldn't you apply the same thrift to children?
This children-as-luxury-goods concept is something I always talk about to people. It's one of those topics of discussion that everyone loves. Whenever I tell people I plan to never get married and never have children, more often than not they tell me that I say that now because I am young, naive, stupid, or a combination of the three. According to them, I will change. What they normally say is that when they were my age they thought as I did but over time they fell in love and subsequently their whole way of thinking changed.
Ramit even says something similar to this to some degree. In the blog post Why do Delusional People Think Their Spending Will be Different Than Other People’s?, Ramit says, "We like to believe we’re individual and different, but the entire field of social psychology illustrates how we mistakenly believe we’re in control of our own lives while systematically underestimating situational and social influence." Ramit's main point, I think, is that even if you believe you won't have children, save up for it anyway because chances are you underestimate social influence and will end up having children.
I will concede that I do understand what he is talking about. I am fresh out of university and with my new full-time job I have a new group of friends who are more cashed-up than my old university friends. Already I do indeed notice how much social pressure there is, not just to wear the best clothes but also to drive a nice car, to have a beautiful wife and children, to fill your weekends with fun social activities, and so on. Being the rebel that says no to all this can be draining as I have to explain everything in detail from first principles. I am going against culture merely for the sake of saving money. To refuse to have children or buy a luxury car for monetary reasons is equivalent to walking into a wedding function naked because you want to save on the costs of clothing. You will save $100 or so from not having to buy a suit, but you pay for that with non-monetary and cultural costs, namely by incurring the emotions of shame, self-consciousness, embarrassment, and so forth.
So then what is the optimal trade-off? To what degree do we incur pain for cash? Saving money is a tool I use to gain security in the future, which in itself is something I do to achieve certain emotions since financial stability induces within me emotions like comfort and confidence. The solution then is to do what suits you. Do you value social conformity or are you willing to incur the costs of shame and embarrassment so that you can attain stability and comfort (as opposed to anxiety)? It's a dilemma because you either face shame or anxiety. If you buy a luxury car or produce children today, you reduce shame and gain pride but at the cost of comfort in the future as your loss of money creates anxiety. If you sacrifice the luxury car or children today, you feel ashamed at being such a rebel but the abnormal cash you accumulate reduces anxiety in the future and gives you comfort and stability. What is better for you depends on your preferences.
Ramit says that it is important to save up a lot because you are likely to underestimate the extent of unseen influences (such as social influence) on you. But saving up a lot is often dependent on your being able to resist social influence. Many of the big costs that we incur--buying mansions, having children, funding lavish weddings, buying expensive engagement rings, and buying luxury cars--are the result of social influence. How then can Ramit say that we should be thrifty for the sake of conforming to social influence when social influence itself is the enemy of thrift?
I haven't read too much of what Ramit has written, but based on casual observation I have a feeling that Ramit makes his living mainly by rebelling against mainstream thinking, kind of like Penelope Trunk and Jim Betts. Mainstream thinking is filled with contradiction, but knee-jerk rebellion or doing the opposite of what is mainstream will not fix that problem.
One of the points he makes in this blog post is that you should not look to others as role models because most other people are failures when it comes to money. That is, if you see other people taking lots of vacations and buying luxury goods, you don't need to copy them. Ramit says the following:
Would you look at a bunch of blue whales for advice on losing weight? Then why would you look at your ordinary friends, who are making ordinary money decisions, and will end up with ordinary results — not having enough money — as role models? Refocus your financial aspirations to people you value and their conscious decisions...Ramit has just told us not to be like everyone else. If other people buy a Mercedes, don't copy them. However, Ramit then goes on to say the complete opposite, that you should prepare yourself to be like everyone else, that you should save money based on the expectation that you will spend like everyone else.
People are delusional about what will happen in the next 10 years. For example, if you’re in your 20s, the next 10 years will bring kids, a new car, a mortgage, taxes, insurance, maintenance, travel, life insurance, medical insurance….etc.This strikes me as being contradictory. Earlier he said that you should not spend like others and then suddenly he is saying you should spend like others. Should I buy the new car or not?
Every day I get frustrated people who tell me they’ve implemented all my strategies, yet when I tell them the next step is to implement the Ten Year Savings Strategy — where they save for the most likely things they’ll encounter within ten years — they become oddly dismissive.
As a thirfty person, of course I am not going to splash out on a new Mercedes. I'd be spending $100,000 for a car when I can easily get a car for maybe $20,000. Given that the average child costs $250,000, producing a child is monetarily equivalent to purchasing a Ferrari. If you've committed yourself to never touching luxury sports cars, why wouldn't you apply the same thrift to children?
This children-as-luxury-goods concept is something I always talk about to people. It's one of those topics of discussion that everyone loves. Whenever I tell people I plan to never get married and never have children, more often than not they tell me that I say that now because I am young, naive, stupid, or a combination of the three. According to them, I will change. What they normally say is that when they were my age they thought as I did but over time they fell in love and subsequently their whole way of thinking changed.
Ramit even says something similar to this to some degree. In the blog post Why do Delusional People Think Their Spending Will be Different Than Other People’s?, Ramit says, "We like to believe we’re individual and different, but the entire field of social psychology illustrates how we mistakenly believe we’re in control of our own lives while systematically underestimating situational and social influence." Ramit's main point, I think, is that even if you believe you won't have children, save up for it anyway because chances are you underestimate social influence and will end up having children.
I will concede that I do understand what he is talking about. I am fresh out of university and with my new full-time job I have a new group of friends who are more cashed-up than my old university friends. Already I do indeed notice how much social pressure there is, not just to wear the best clothes but also to drive a nice car, to have a beautiful wife and children, to fill your weekends with fun social activities, and so on. Being the rebel that says no to all this can be draining as I have to explain everything in detail from first principles. I am going against culture merely for the sake of saving money. To refuse to have children or buy a luxury car for monetary reasons is equivalent to walking into a wedding function naked because you want to save on the costs of clothing. You will save $100 or so from not having to buy a suit, but you pay for that with non-monetary and cultural costs, namely by incurring the emotions of shame, self-consciousness, embarrassment, and so forth.
So then what is the optimal trade-off? To what degree do we incur pain for cash? Saving money is a tool I use to gain security in the future, which in itself is something I do to achieve certain emotions since financial stability induces within me emotions like comfort and confidence. The solution then is to do what suits you. Do you value social conformity or are you willing to incur the costs of shame and embarrassment so that you can attain stability and comfort (as opposed to anxiety)? It's a dilemma because you either face shame or anxiety. If you buy a luxury car or produce children today, you reduce shame and gain pride but at the cost of comfort in the future as your loss of money creates anxiety. If you sacrifice the luxury car or children today, you feel ashamed at being such a rebel but the abnormal cash you accumulate reduces anxiety in the future and gives you comfort and stability. What is better for you depends on your preferences.
Ramit says that it is important to save up a lot because you are likely to underestimate the extent of unseen influences (such as social influence) on you. But saving up a lot is often dependent on your being able to resist social influence. Many of the big costs that we incur--buying mansions, having children, funding lavish weddings, buying expensive engagement rings, and buying luxury cars--are the result of social influence. How then can Ramit say that we should be thrifty for the sake of conforming to social influence when social influence itself is the enemy of thrift?
I haven't read too much of what Ramit has written, but based on casual observation I have a feeling that Ramit makes his living mainly by rebelling against mainstream thinking, kind of like Penelope Trunk and Jim Betts. Mainstream thinking is filled with contradiction, but knee-jerk rebellion or doing the opposite of what is mainstream will not fix that problem.
25 December 2009
Beware of Christmas Discounts
Many people spend a lot during Christmas. A friend at work told me that she was now broke because she had spent all her money while shopping. She said that in order to save money her strategy is to never buy anything at full price for the next four months. This I think is a horrible idea. What matters is not how discounted a product is. What matter is how much you save. Suppose person A purchased a widget for $100,000 and person B purchased two widgets, each for $80,000. Person B paid less than person A and received a 20% discount, but person A is better off because he spent only $100,000 in total while person B spend $160,000. I think many people are so focused on the discount that they are forget just how much they are spending in total.
I must admit I am guilty of this myself. Last Christmas I wanted to buy a suit. I went shopping with my mom and purchased a suit for $500 because it was 30% off. But what I didn't realize is that I overspent because, after checking on eBay, I learned that there are many suits out there for only about $200. The discount then is completely irrelevant. What you need to focus on is spending as little as possible.
I must admit I am guilty of this myself. Last Christmas I wanted to buy a suit. I went shopping with my mom and purchased a suit for $500 because it was 30% off. But what I didn't realize is that I overspent because, after checking on eBay, I learned that there are many suits out there for only about $200. The discount then is completely irrelevant. What you need to focus on is spending as little as possible.
23 May 2009
Coffee at Work
In a previous blog post titled Frugality at Work, I claimed that being frugal made it difficult for me to behave normally at work. I have discussed this idea with friends, family, and strangers, and I have taken steps to address the issue.
I have noticed that many people at work bring their own lunch. The economic recession may the reason for this. There are some people who always eat out, and in order to still have lunch with them I normally eat my meal either before going out with them or after. When I go out to lunch with then I usually only drink a cup of coffee, usually a latte or a flat white (even though the two are quite similar). A cup of coffee costs about $2.80 to $3.00 per cup, increases my concentration, and provides lots of antioxidants. Normally my friends pay about $10 or $15 for a full meal, so I do save quite a lot of money by only drinking coffee. I prefer to just have a coffee at a cafe or restaurant instead of bringing my own lunch. The reason is because many restaurants or cafes actually do not allow you to bring in outside food.
Sometimes I wonder whether paying $2.80 per coffee is a good deal. You can easily make your own cup of coffee with your own machine or even just make instant coffee, and the overall cost is probably a few cents per cup. Nevertheless, I understand that I am paying not really for the coffee itself but for the atmosphere, the warmth, the environment, etc. It's also a great way to socialize rather than just staying at your desk and eating all by yourself. Walking to the restaurant or cafe gives you exercise and fresh air as well.
I have noticed that many people at work bring their own lunch. The economic recession may the reason for this. There are some people who always eat out, and in order to still have lunch with them I normally eat my meal either before going out with them or after. When I go out to lunch with then I usually only drink a cup of coffee, usually a latte or a flat white (even though the two are quite similar). A cup of coffee costs about $2.80 to $3.00 per cup, increases my concentration, and provides lots of antioxidants. Normally my friends pay about $10 or $15 for a full meal, so I do save quite a lot of money by only drinking coffee. I prefer to just have a coffee at a cafe or restaurant instead of bringing my own lunch. The reason is because many restaurants or cafes actually do not allow you to bring in outside food.
Sometimes I wonder whether paying $2.80 per coffee is a good deal. You can easily make your own cup of coffee with your own machine or even just make instant coffee, and the overall cost is probably a few cents per cup. Nevertheless, I understand that I am paying not really for the coffee itself but for the atmosphere, the warmth, the environment, etc. It's also a great way to socialize rather than just staying at your desk and eating all by yourself. Walking to the restaurant or cafe gives you exercise and fresh air as well.
25 April 2009
Frugality at Work
Last Friday, three other co-workers invited me out to lunch with them. We went to a restaurant and ate. To convince the restaurant that I was not a parasite using up their space without paying, I purchased a Coke Zero to drink with my sandwich. While I ate the sandwich, everyone else ate lasagne, chips, and lettuce purchased from the restaurant.
Even though I saved money by not buying food from the restaurant, I felt as if I was not fitting in to the organization's culture and that this might have adverse long-term effects. Everyone else had plates, cutlery, and fine food while I was eating a simple sandwich prepared from home.
This issue applies not only to the food I eat at work. I am frugal in many other ways. For example, I wear a $30 wristwatch and I have a $500 suit that's slightly too big for me but I am reluctant to change it because of the costs.
Over the weekend, in order to save money, I usually just sit at home and read things on the Internet. I also exercise. On Monday, when I return to work, co-workers usually ask me, "What did you do over the weekend?" I usually tell them I did nothing and they usually have a look of disappointment on their face. Conversations are harder to sustain when you seem like a boring person. I have thought about inventing stuff up and lying to co-workers, telling them that I go rockclimbing, bushwalking, etc. However, being a Christian I remember that the Bible says, "Lying lips are an abomination to the Lord." I therefore have to be honest.
Even though I saved money by not buying food from the restaurant, I felt as if I was not fitting in to the organization's culture and that this might have adverse long-term effects. Everyone else had plates, cutlery, and fine food while I was eating a simple sandwich prepared from home.
This issue applies not only to the food I eat at work. I am frugal in many other ways. For example, I wear a $30 wristwatch and I have a $500 suit that's slightly too big for me but I am reluctant to change it because of the costs.
Over the weekend, in order to save money, I usually just sit at home and read things on the Internet. I also exercise. On Monday, when I return to work, co-workers usually ask me, "What did you do over the weekend?" I usually tell them I did nothing and they usually have a look of disappointment on their face. Conversations are harder to sustain when you seem like a boring person. I have thought about inventing stuff up and lying to co-workers, telling them that I go rockclimbing, bushwalking, etc. However, being a Christian I remember that the Bible says, "Lying lips are an abomination to the Lord." I therefore have to be honest.
22 October 2008
Don't Classify Necessities Using Simplistic Categories
I have noticed that losing weight and being biologically healthy is very similar to being financially healthy. When you want to lose weight, you must burn off more calories than you consume. When you want to be financially healthy, you must spend less than you earn. Is it then not surprising that Americans and Australians are both obese and indebted. I believe that the behavioral make-up of those likely to be obese makes them likely to have huge debt. In fact, debt can be seen as a form of obesity.
When you want to be thrifty, you need to identify the difference between needs and wants. Needs are those things that you really need for physiological survival, e.g. food, water, a bed, a roof over your head, etc. Wants are things like luxury cars and plasma TVs. The problem is that the distinction between wants and needs is not clear-cut. One person's want is another person's need. For example, a drug addict really needs drugs because he or she is dependent on it. For someone who is not addicted to that drug, it is not so important.
One solution to this problem I use is to make money hard to get. For example, take a box, put $500 in it, then buy 10 small padlocks and lock the box up. Then hide the keys all around the house. If you want to spend that $500, you have to put in a lot of effort to go around the house, find the keys, and unlock the box. The difficulty of getting this money I believe will ensure that you will only go through the effort of opening the box if what you want the money for really is a necessity.
The reason why I started this post was to warn people against classifying necessities using simplistic categories. What I mean by this is thinking that, say, food is a necessity. Food may be a necessity, but that does mean that certain types of food are not wants. For example, eating bran cereal (which is high in fiber) for breakfast I think is a necessity. However, eating a $1000 meal at an upscale restaurant is a want, not a necessity. Someone who goes around thinking that food is a necessity will likely use this to rationalize buying luxury food.
When you want to be thrifty, you need to identify the difference between needs and wants. Needs are those things that you really need for physiological survival, e.g. food, water, a bed, a roof over your head, etc. Wants are things like luxury cars and plasma TVs. The problem is that the distinction between wants and needs is not clear-cut. One person's want is another person's need. For example, a drug addict really needs drugs because he or she is dependent on it. For someone who is not addicted to that drug, it is not so important.
One solution to this problem I use is to make money hard to get. For example, take a box, put $500 in it, then buy 10 small padlocks and lock the box up. Then hide the keys all around the house. If you want to spend that $500, you have to put in a lot of effort to go around the house, find the keys, and unlock the box. The difficulty of getting this money I believe will ensure that you will only go through the effort of opening the box if what you want the money for really is a necessity.
The reason why I started this post was to warn people against classifying necessities using simplistic categories. What I mean by this is thinking that, say, food is a necessity. Food may be a necessity, but that does mean that certain types of food are not wants. For example, eating bran cereal (which is high in fiber) for breakfast I think is a necessity. However, eating a $1000 meal at an upscale restaurant is a want, not a necessity. Someone who goes around thinking that food is a necessity will likely use this to rationalize buying luxury food.
13 May 2008
The Best Things in Life Are Free
I subscribe to podcasts from EconTalk and just a moment ago I received an e-mail reminding me of the latest podcast. I haven't listened to it yet. What I do is I download the audio file into a folder on my desktop. Then when I have listened to all the audio files on my portable audio player I delete everything on the disk and refill it with new audio files on my desktop.
Even though I haven't listened to this podcast yet, I know what it's about because I have read about it. It is called Chris Anderson on Free. Below is a summary from EconTalk:
This idea of the proliferation of free things is very relevant to me since I like to use free things on the Internet. For example, Google provides many services such as word processor, e-mail, notepad, videos, and so on all free. I also listen to an endless supply of audio podcasts and they are all free. I ignore of course the cost of Internet connection.
This idea of free things is not just limited to the Internet but also the television. I am not talking about cable TV but free-to-air television, which contains many great shows that are all free.
What makes these things free yet profitable for the provider is the advertising. For the individual who can wade through all the free stuff without buying what is being advertised, then life is good. He is essentially free riding off the weakness (or lack of self control) of others.
I am a big free rider. For example, when I am at university and I feel the need to go to the toilet, I usually don't go to the university's toilets. This is because these toilets in the Department of Mathematics and Statistics are used heavily by students and the staff here don't have any incentive to make the place nice. Therefore, the toilets at the Math building smell bad. What I do instead is travel via tram to McDonald's and use the toilets there. At McDonald's the quality of the toilets directly affects how many customers come in or not. They have a profit motive, an incentive to make their toilets clean. On the way to the train station home I often stop off at these toilets to urinate but I don't actually buy anything from McDonald's. This allows me to free ride of the good quality of the toilets without actually paying for it. I can do this because statistically I have more strength than others to resist the temptation to buy McDonald's when I am in close proximity. Thus in an almost Darwinian way there is a transfer of wealth from the weak willed to the strong willed. I realize I sound arrogant here when I call myself strong willed, but I admit to others and myself that I am tempted my advertisers. I am tempted to buy things. I believe that acceptance of weakness is an important first step before the next essential step of self-restraint.
Another area where suppliers of good may take advantage of the weakness of others is in the market for credit cards. The credit card I use is the Coles Group Source Credit Card. This credit card is free. There is nothing to pay. There are no annual fees. If you pay your balance before 2 months, you don't pay any interest. I am sure Coles makes money by tempting credit card holders with promises of cheaper petrol if they buy from Coles stores. I try not to fall for this. I have their credit card but I have never ever purchased anything from Coles. Unfortunately, I got what I paid for. This credit card is very annoying. It is starting to charge me interest of about 50 cents even when I pay off everything every month. I also had a lot of trouble activating it and I still cannot get the Internet account working.
Good free things can also exist when the supplier does not have a money maximizing motive. For example, Wikipedia is free, yet nobody makes money on Wikipedia. Those who write on Wikipedia do so not for money but for some other mysterious reason. I write on this blog not for money either. Clearly I don't have any advertising on this website other than ads for charities. This means that for those who want free stuff not only can you exploit from the weakness of others in media in which there is advertising but you can also exploit the desire of others to simply give stuff away. Of course, the problem with stuff produced not for profit is that the incentive to produce a good quality product are not as strong. For example, while I write this blog, I don't really have much of a money incentive to write good things. It makes no difference to my bottom line. Nevertheless, I still try hard to write good things because I do want to give others good information. Whether this mysterious intrinsic motivation to do something because of love is as strong as the profit motive is something I don't know.
Even though I haven't listened to this podcast yet, I know what it's about because I have read about it. It is called Chris Anderson on Free. Below is a summary from EconTalk:
Chris Anderson talks with EconTalk host Russ Roberts about his next book project based on the idea that many delightful things in the world are increasingly free--internet-based email with infinite storage, on-line encyclopedias and even podcasts, to name just a few. Why is this trend happening? Is it restricted to the internet? Is there really any such thing as a free lunch? Is free a penny cheaper than a penny or a lot cheaper than that? The conversation also covers whether economics has anything to say about free.
This idea of the proliferation of free things is very relevant to me since I like to use free things on the Internet. For example, Google provides many services such as word processor, e-mail, notepad, videos, and so on all free. I also listen to an endless supply of audio podcasts and they are all free. I ignore of course the cost of Internet connection.
This idea of free things is not just limited to the Internet but also the television. I am not talking about cable TV but free-to-air television, which contains many great shows that are all free.
What makes these things free yet profitable for the provider is the advertising. For the individual who can wade through all the free stuff without buying what is being advertised, then life is good. He is essentially free riding off the weakness (or lack of self control) of others.
I am a big free rider. For example, when I am at university and I feel the need to go to the toilet, I usually don't go to the university's toilets. This is because these toilets in the Department of Mathematics and Statistics are used heavily by students and the staff here don't have any incentive to make the place nice. Therefore, the toilets at the Math building smell bad. What I do instead is travel via tram to McDonald's and use the toilets there. At McDonald's the quality of the toilets directly affects how many customers come in or not. They have a profit motive, an incentive to make their toilets clean. On the way to the train station home I often stop off at these toilets to urinate but I don't actually buy anything from McDonald's. This allows me to free ride of the good quality of the toilets without actually paying for it. I can do this because statistically I have more strength than others to resist the temptation to buy McDonald's when I am in close proximity. Thus in an almost Darwinian way there is a transfer of wealth from the weak willed to the strong willed. I realize I sound arrogant here when I call myself strong willed, but I admit to others and myself that I am tempted my advertisers. I am tempted to buy things. I believe that acceptance of weakness is an important first step before the next essential step of self-restraint.
Another area where suppliers of good may take advantage of the weakness of others is in the market for credit cards. The credit card I use is the Coles Group Source Credit Card. This credit card is free. There is nothing to pay. There are no annual fees. If you pay your balance before 2 months, you don't pay any interest. I am sure Coles makes money by tempting credit card holders with promises of cheaper petrol if they buy from Coles stores. I try not to fall for this. I have their credit card but I have never ever purchased anything from Coles. Unfortunately, I got what I paid for. This credit card is very annoying. It is starting to charge me interest of about 50 cents even when I pay off everything every month. I also had a lot of trouble activating it and I still cannot get the Internet account working.
Good free things can also exist when the supplier does not have a money maximizing motive. For example, Wikipedia is free, yet nobody makes money on Wikipedia. Those who write on Wikipedia do so not for money but for some other mysterious reason. I write on this blog not for money either. Clearly I don't have any advertising on this website other than ads for charities. This means that for those who want free stuff not only can you exploit from the weakness of others in media in which there is advertising but you can also exploit the desire of others to simply give stuff away. Of course, the problem with stuff produced not for profit is that the incentive to produce a good quality product are not as strong. For example, while I write this blog, I don't really have much of a money incentive to write good things. It makes no difference to my bottom line. Nevertheless, I still try hard to write good things because I do want to give others good information. Whether this mysterious intrinsic motivation to do something because of love is as strong as the profit motive is something I don't know.
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