Posted in Budgeting, Personal finance, Spending

10 things worth spending money on

After months of dillydallying, I bought a second car. I also have a list of home improvements that I want to see get done. With the holiday season approaching, the vacation dreams are taking shape too.

However all these cost money, some little some a lot. And didn’t we say, we want to save more, invest more so that our retirement corpus grows with time? The $20000 spent on a car (decent, used or new), if invested instead can go a long way in boosting retirement savings over 15-20 years.

But life also gets in the way. We do have emergency fund for the unforeseen, worst case expenses. So are we going to just live frugally and save the rest?

After all, desires and dreams also make your life worth living. You have to find a balance on how to live a fruitful life and yet not damage your personal finances. However, it is very important to avoid consumer debt in all cases, and be ready to save and pay cash for these desires and wants.

I did exactly that. I had neat sum saved up in a savings account, and was procrastinating how to invest it. I also knew at the back of my mind that the family may need another car. Finally I gave in to the need and bought the car.

Thinking through this phase, I realized there are few expenses which are better made when the need arises. So I compiled a list of 10 such expenses, which are intangible investments in a way. These apply to my situation, yours may be different and so make your own wish-need list.

Insurance

We think bad things cannot happen to us or our family. However life is uncertain. I experienced this last December, when a very close family member in India met with an accident and passed away suddenly. He left behind a wife and a school going child, and being the only bread earner in the family, the whole situation was very shocking and sad.

Life insurance, health insurance and disability insurance are things no one should ignore. The exact amount of  the need should be assessed and insurance purchased as soon as possible.

I have also seen in India, people do not want to buy pure term insurance in which you do not get back anything if you survive till maturity. That’s precisely the meaning of insurance, to transfer the risk of  a life/event to the company. Many unscrupulous agents push cash-value, investment plans at a higher cost and lower insurance just to lure the people who wants to get back a return.

Keep the investment for the low cost mutual funds and ETFs, and buy insurance for what it is. And there is no better alternative to a cheap and effective term plan.

Peace of mind is worth paying for. 

Car

A good car is a must for our commute, weekend trips and running errands. As I researched my way through used cars in various forums like Carmax, craiglist and dealers, one common theme came up.

You can get cheap deals (Dave Ramsey’s proverbial $1000 car) but they may cause you more headache down the line. If you are anyway buying it, you better buy it to use for a number of years. I don’t plan to trade in my car in just 2 years, just to upgrade to a bigger and newer model.

It is always better to wait a few more months, save up more through a budget and then pay cash for a decent car (2-4 years old) with low mileage. These are the cars I bought in last two years.

  1. 2017 – Toyota Corolla from a private party – 2015 model, < 20k miles for $11,000 cash.
  2. 2018- Toyota Camry from a dealer – Certified Pre-owned 2017 model, < $25k miles for $18,000. I traded in the Corolla, as I wanted to pay cash and did not want to hold two cars. So I just had to pay the difference in cash.
  3. 2019 – Honda Accord from the same dealer – 2017 model, < $20k miles for $17,600 paid in cash.

So with the Camry and Accord, my needs are met for the next few years. Me and my wife do not have to timeshare our work anymore, it was only possible earlier as I was working from home. I think it is money well spent, and with no debt (a.k.a car payments).

Debt-free mobility is another name for Freedom. 

Vacation

If done correctly, and afforded with cash, this is one of the events I look forward to every year. And who doesn’t?

While in India, we used to go to the beach town of Goa every year, after the Dec 25 – Jan 1 rush is over. It gave us access to the same festive ambiance (since the beach shacks are still celebrating with their longer stay clients) at a much lower cost. The airfare and the hotel prices start dropping after Jan 1.

Now from US, one of the vacations I save for throughout the year, is visiting India in the summer. It is very relaxing to be able to meet family and friends and also keep my children bonded to their roots.

Whatever you do, make sure you enjoy it. A vacation bought with debt only brings back stress and payments, and hence make sure you save up for this event throughout the year. It’s an investment for your well being, and like any regular investment this should be planned and saved in small increments.

After all, stuff do not make you happy, experiences do. 

Home improvements

This can be small to big ticket items. You can fix or enhance small things like paint a wall or room, or bigger improvements like a kitchen or bathroom remodel.

While it can be very costly to do the high end remodel, this is a project that can pay off in the long run. Some well designed improvements like in the kitchen, bathrooms, an extra room increases the home value, while others may just increase your happiness and convenience to the family.

We had this problem where we did not have an extra space in the house, for my children to practice their dance lessons. We had to move the couch or dining table every day and it was becoming quite inconvenient. The natural reaction was we need a bigger house.

But then we realized we use our garage for only storing junk, and may be the car in the night. Throughout the day, it is an unused space that can be used. Cooling (AC) the garage effectively is a problem, but the kids are not going to practice for more than 30-40 mins anyway. So I spent about $2000 to have a shiny epoxy floor and some lighting installed. In that $2000, we now have a beautiful hobby space, and my wife improved it further at very low cost (just interior decoration and a bigger fan) to shift her music studio there.

At night, we still park the Camry inside. Its all about space management with an investment of $2000.

Home is where the heart is. Do not neglect it or underestimate it’s intangible value. 

Netflix

After the above expensive proposals, here is sweating the small stuff. However its not small, as cable expenses can add up to hundreds of dollars for some people.

While in India, I realized that I do not need the 100+ channels that the local cable or some of the high end services were advertising and everyone buying them.

Except for certain sporting events, I just ended up surfing and jumping from one channel to another killing time and really not watching anything to the full. I guess choice spoils you and your time.

So then I discovered Netflix (it was still new in India few years back) and subscribed to it. I knew if I needed entertainment, I can just start a movie and sit through it better than listening to a news anchor shouting at the top of his voice, throwing his political opinion.

Netflix has remained with me since then and the only TV subscription I have in the US. The $9/month is a good investment and much more value for money than any other TV subscription.  With free YouTube complimenting the rest, I don’t need to spend any more on passive entertainment.

You will be more entertained when you channelize your focus to one medium. 

Books and Courses

From my childhood, my introvert nature has one true friend – Books. I love reading and it has increased over the years to varied topics like technology, business and personal finance.

A part of my budget is spent on kindle books and paperbacks. This is also the reason why I do not need anything beyond Netflix, as my free time is well spent reading otherwise.

When I came to US, I discovered the local library which opened up a further avenue for my reading at $0 cost. The public libraries are an excellent initiative and maintained by the city here. Sadly they are long lost in most Indian cities, only some schools still have them.

To grow myself intellectually and improve my skills, Coursera has also been a huge help. Nowadays they run many good courses with a $49/mo plan, where you can take the course at your own pace (faster the better as you pay every month) and it gives you a certification. I am presently doing this amazing course on personal finance.

Personal and Family Financial Planning

and finished the following recently.

Finance for Non-Finance Professionals

The certificate I received looks something like:

Coursera certificate

Its certainly a wise investment and a satisfying experience to learn continuously out of work and school.

Education is much more affordable and accessible now than ever before. Use it and grow your skills and knowledge. 

Eating out

The finance gurus will scream – Live within your means, should not eat out, drop that latte and save the $3.50 everyday. But what is the problem if you have budgeted for it, to eating out with family twice a month? Or a set amount like a $100, which can amount to 2-3 dine outs for the family depending on what kind of food and restaurant you eat at.

It is a way to unwind once a week or two, and treats your taste buds to different cuisine. Socializing with friends and family also makes you happy and you get back to work on a Monday fresher and looking forward to another week.

Of course, daily and random eating out can have adverse effects on health and finances, hence like everything else, it also has to be budgeted and planned for.

Dine out not for the food, but for the experience. 

Productivity stuff

I have talked about automation in personal finance and other areas of life in an earlier post.

Five components of a personal finance system

Similarly with the automation of FinTech, you can use lots of tools to improve your productivity in managing personal finances.

FinTech – can you be immune to it?

Some of these websites and tools charge a monthly/annual fee, while some others may be fees for investment or specific service.

These fees, if reasonable, can be well paid to get the convenience of automation and services that will improve your productivity. Some of the online services and apps that I use are:

Elevate – Brain training and brain games – this is an excellent app which trains your brain and tests skills in Math, Reading, Writing, Listening and Speaking.

Rentometer and Dealcheck – Real estate information in USA. They help in evaluating rental properties. However, subscribe to the paid version only if you are seriously going to invest in rental property. I used them for a year but then dropped my plans as I am not investing in this hot real estate market. The reason I mentioned them here is the service is very good and constantly improving. I even wrote to the CEO of Dealcheck and gave him a suggestion of a new feature. I was happy to see that they rolled out the feature in next few months.

You Need a Budget (Y.N.A.B) – I use this for my daily and long term budgeting. The features are worth paying the $84/year and helps me to keep a holistic view of my cash flows.

I am sure you will find your own useful apps and after the trial period, if it seems useful in the long run, do not hesitate to sign up for the paid version.

Only thing to keep in mind is that we sometimes turn on the subscription and then forget to use it till the next year, when the credit card on file is charged automatically.

One way I manage it is – I download the app on my phone, and keep it all in one folder called “Productivity” or “Personal finance”. I visit this folder daily at least for the apps that I need to use. It gives me an instant look at the others in the folder which are lying unused. Once I figure out I am not going to use it in the near future, I cancel the subscription. This is how I discovered that I was not using Rentometer and Dealcheck after a few months. Most of these subscriptions let you finish the tenure that you already paid for, so you can keep using it and ramp down your usage.

Paying to get back your time and establish a system is worth its penny. 

Offline Automation

What is the offline automation? Just like online apps and automated services, there are some things in life that are unavoidable but you don’t want to spend your valuable time on them. For example, Amazon has made it so easy to get things delivered that running errands have cut down by a lot for most people.

For me, tasks like mowing the lawn or fixing the plumbing (when it develops a problem) are simply not expertise I want to build or spend time on. Hence I outsource this to contacts and experts who know their job, and in turn I don’t mind paying them regularly for their services. I also subscribed for a Home Warranty who dispatches service professionals when I have a problem with my household appliances.

It can get costly though if you want to use this blindly. You have to develop a good idea of the cost of each service through collecting quotes or researching on the Internet.

But at the end, I think its money well spent if it saves me the headache and time to try to do everything myself. And indirectly, I get to help the local businesses run.

Expertise is available and widely distributed, make use of it judiciously. 

Giving

Last but not the least, Giving is never regretted. In fact, what you give gets back to you in multiples of the original amount.

This is God’s way of paying interest to the good people.

I am not an expert on charity, and as long as you can find a legitimate and genuine organization which helps the needy, this is an activity worth spending money on and automating the giving every month.

Even if its just $20-$50, automate it so that there is no hesitation left. Sometimes we know we should, but we keep postponing it till we think we have enough surplus to give.

It is difficult to get over the inertia, so just like “Pay yourself first”, pay your rent on the Earth and help the not-so-fortunate brothers and sisters.

Giving is a way to abundance, even if it sounds counter intuitive. 

Conclusion

In personal finance, the gurus and pundits constantly talk about saving, investing and minimalism. However life is not about accumulating wealth alone – money is a way to gain freedom and is only a means and not an end.

The real freedom is when you are happy doing the things you love, and some of them do cost money, defying all financial logic and the only return is happiness.

If you love music, you know what I mean.

two men and woman sitting next to each other
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Posted in Personal finance

How to decide on a purchase – the P.V.T formula

I talked a lot about budgeting, saving and investing money in the earlier posts.

Budget – Grow the tree upside-down

One essential comfort zone

Investing in the High Five portfolio

However a fact of life is no matter how hard you try, there will be big purchases.

Some of them will be needs, while others may be simply wants.

These purchases are typically big ticket ones and can range from a thousand dollars to several hundred thousand dollars. For example, it can be an Apple iPhone/iPad to buying real estate for a primary home.

How do you decide when the purchase makes financial sense? After all, money will be spent and an opportunity to invest will be lost forever.

The P.V.T equation explained below helped me make the decision many times.

Although I have made bad decisions and recovered, but on hindsight sticking to a principle would have helped to be sensible 90% of the time.

What is the P.VT. equation?

The acronym stands for three important elements of a purchase decision.

  1. Price
  2. Value
  3. Time

To assign a score value to a purchase, it will have to be a combination of the relative success with above three parameters.

The main thing to guard against a purchase is whether it is a waste or not. So if we measure the waste factor, and try to keep it as low as possible, it is a sensible purchase.

The formula is as follows:

WF(Purchase) = WF(Price) x WF(Value) x WF(Time)

Where WF is the waste factor, in terms of how much of that parameter we are giving up during the purchase. Since it is a multiplication, a WF of zero will be approximated to 0.01 (1%).

Lets take 3 examples, an iPad, a car and a house.

iPad Pro: 

Price ~ $1000 and lets say it being Apple, we cannot manage a discount.

So WF(Purchase) = 1.0 [we consider the full price as 100% waste factor]

Value – How much value will it add to your daily life? Are you going to use it for work, or just recreation? It will also depend on whether you have other laptops or similar tablets at home. Lets say you are going to use it for personal work (like reading, keeping tab of investments etc.).  So you will use it 40% of your screen time.

Thus WF(Value) = 60% or 0.6

Time – How many years are you going to use it compared to the typical life of an iPad? Given that it is a technology product, the maximum life it can be used without needing replacement or becoming obsolete is probably 5 years. But you may be upgrading anyways after 3 years.

So WF(Time) = 2/5 or 0.4

Finally, WF(iPad) = 1.0 x 0.6 x 0.4 = 0.24

So 24% of the price is wasted. If you could have bought the iPad at 25% discount, then the purchase value will increase.

WF(discounted IPad) = (1.0 – 0.25) x 0.6 x 0.4 = 0.18, so now the purchase makes a little more sense.

Car: 

Typically it is a good practice to buy used cars at a discount. So lets say you buy at 40% discount, usually a 2-3 year old car.

Let us also say that this is your primary car and you don’t fancy owning 2-3 cars, so you will use it 90% of your commute time. And lets say you are going to upgrade after 5 years, even though a car can be kept for 10+ years.

WF(Price) = 0.6, WF(Value) = 0.1 (high value to you), WF(Time)=0.5

WF(Car) = 0.6 * 0.1 * 0.5 = 0.03

See this is much better usage than the iPad with a WF of 0.24. Now if you hold the car for 9 years, then 9/10 will give a better score.

WF(Car) = 0.6 * 0.1 * 0.1 = 0.006

House: 

This is the biggest purchase in most people’s lives and possibly can be better quantified as well.

We will make the following assumptions:

  1. Price – You will buy the house at 20% discount to the retail/asking price.
  2. Value – If this is your primary residence, the value may be very close to 100%, or the WF will be 1% (to avoid zero).
  3. Time – A house can be held for 20-30 years, but lets say you plan to upgrade after 10 years or so. So WF(Time) = 20/30 = 0.66

WF(House) = 0.8 * 0.01 * 0.66 = 0.005

So the house purchase makes even more sense than the car. Even though the house is used only 1/3 of its whole lifetime and the car is used 9/10 years, the house purchase makes more sense. It also had a lesser relative discount than that of the car.

The above P.V.T equation also reveals another hidden aspect. You can adjust one parameter vs. another. For example, if you are going to use the house or car for longer, you can afford to buy at a less discount. Your WF(Price) will increase but will be offset by the other two.

You can even use this formula when you are trying to compare paying a higher price for a high quality product or buying cheap for a not-so-durable product.

High Quality: WF(Price) = 0.8 or higher, WF(Value) = 0.6, WF(Time) = 0.1 (it will last long) , WF (Purchase) = 0.048

Low Quality: WF(Price) = 0.5 (less price), WF(Value) = 0.6, WF(Time) = 0.5 (last 1/2 as long), WF (Purchase) = 0.15

As you see, it makes sense to buy the high quality product if the value is same for both. At least in this case, however there are situations where if you can get a significant discount and know that the item will last longer, the lower quality product (non-branded) may outperform a branded one. 

Thus making purchases with such logic will keep your home clutter-free as below. You just have to choose a suitable threshold of the WF. For example, anything below 0.05 (5%) may be a good thumb rule to make the purchase.

Disclaimer: There will be many other factors in a purchase decision. The above formula acts as only a quick thumb rule and should not be the only criterion for decision making. 

cabinet ceiling clean comfort
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