Tuesday, 29 July 2008

Dry July, Pointless Habits, and Finding Your Dream Money

Okay, let's get serious. Saving shouldn't always be about sacrifice, but do you have some vice  that's costing you a ton of money? 

Chances are, you have a habit that's, well, just a habit. Nothing you particularly glean enjoyment from. Just something you do because you do...

Today marks the end of Dry July. It's a movement started in Australia to raise money for the Prince of Wales Hospital Foundation, and is proudly supported by Adam Spencer of ABC Radio's 702AM, who's raised $19,251 for the charity.

But it's some of the conversations he's had about it on his radio show that have intrigued me. His listeners are competing to raise the most money, but they're also discovering the amount they're saving by staying off the booze!

These people are also realising how often they drink purely from habit. It's not something they set out to enjoy, but when they look at their social calendars, they realise how many of their upcoming events they would normally expect to be getting a little sloshed at, and they're marvelling at the thought of still going to them and staying sober!

"Alright, alright," you say "Stop evangelising already! You think we should all stop drinking and save the money instead."

Well, no.

Not really.

It's just a metaphor for the habits we've most of us get into. Buying something just out of habit isn't fulfilling unless you know you get tremendous enjoyment out of it. I have a friend who has a ritual meal every couple of weeks - she goes and buys herself a couple of crabs and settles in for a night enjoying her seafood. She feels much better for it, and it's a simple pleasure that makes her fortnight.

There are other more destructive habits which really can remove a vast quality of life from their habituants, and they don't even realise this until they give up. If they give up.

I suppose you think  I'm going to get on my bandwagon here and bang on about how smoking is a filthy, smelly habit that will most likely kill you, and can harm those around you as well. Well, I'm going to pick smoking as my example of a habit, mostly nervous, yes. And I'll happily state all of the above as a firm belief and add that it's just as inconsiderate to kill those around you who are passively smoking your pollution. I don't want to hear you post nastiness here. I have a best friend whose life has been drastically shortened by his father smoking around him until he was ten years old. He has emphysema, and he's never smoked anything in his life.

But getting down from my bandwagon, I also know that a great many smokers would rather quit if they could, and have tried quite a few times to do so. You actually have my sympathy in that sense. I'm mainly using this as a great example of a quality of life being improved by the money that giving up such a habit can save. Maybe I can help:

Take some friends of ours: Habitual pack-a-day smokers, they were on welfare because one had an autoimmune disorder and the other was injured in a workplace accident. They also had four children, so it's not like there was a lot to go around. One day they decided they wanted to go to a big event, and they needed to save up for it, so they quit smoking. Suddenly they didn't know themselves - they could *do* things again - go out to movies, make things, learn new crafts. It gave them a whole new lease on life, and they wondered why they'd ever allowed themselves to go so long wasting their money on a meaningless habit. They're now some of the most vehement anti-smokers you'll meet!

Another friend allowed her local gym to keep taking money out of her account every month for over a year because she thought she'd get around to going in "one day", and it seemed too much effort to give them a call and cancel her subscription. Over $1000 later, she finally picked up the phone for a five minute, 20c call to cancel, and she's never looked back.

Do you have a habit you don't know why you're continuing? If you have a need to save money, take a look at all your weekly, monthly, and annual expenses, and work out which ones aren't really giving you very much value or enjoyment any more (and remember that enjoyment also means value quite a lot of the time!). Then work out how much you could save for something you really want and value from not simply spending that money out of habit.

It could be: 
Alcohol
Newspapers (do you need the depressing news?)
Gym Subscriptions you don't use

Send me suggestions for this list!

If it's smoking (or even something similar), every time you think of having a cigarette, put the money for a pack in a tin... at the end of a month, shock yourself at how much you've saved, and reward yourself with a really nice treat. Then get down to putting that money away for that special something you've always dreamed of!

Best of luck finding your dream money!

The Power of the $2 Jar

Call it the $2 Jar, the Piggy Bank for the shrapnel you have lying around in your pocket or purse, The Swear Box or the mattress stuffed full of cash... It might sound basic, but there's saving power in a jar in the cupboard for $2 coins. 

It's also something that's saved a few budgets! I was minded of it this morning when, having spent our all our very tight budget for the fortnight, my little daughter woke up with a major case of conjunctivitis. I was at my parents' house so Mum could babysit for the day, and, quite aside from Cara's comfort, which was pretty low at that point, I needed her eyes to be better in time for daycare on Thursday so we could get by for another two weeks.

Never fear: Out came the tin from the back of the larder. The spot where Mum chucks all her excess coins when her purse gets too heavy. I've lost count of the number of times it's saved the day! I was able to dash out to the chemist, get the necessary bits, and get on to work without too much disruption to my day.

Driving in to work, I remembered the story of a man who went from living on the streets to owning a multinational company with the simple decision one day that he would save every $2 coin he got in a jar and put it into starting his own business. It truly was an inspiring story of how one simple change rippled out and changed a man's life completely. He wrote a book about it, but I can't seem to find it for sale anywhere now. (Does anyone know where to get it?)

I think the point of this story is, there are always little things you can do which, over time, can change a great deal. It doesn't really matter what you keep that jar or money box for, making the decision to put all your 5c pieces in it, or all or some of any denomination of coin, you can actually save a surprising amount - for Christmas gifts, an education fund, emergencies or for starting your own business. 

I started a business once on nothing more than the $300 I'd put together with $2 coins in a money box, and my collection of hobby tools I'd gathered through my University years. It went on to do alright...

I also remember being horrified, many years ago, when my first boyfriend, who'd spent around five years collecting all his 5c pieces in an ice cream tub, decided he couldn't be bothered counting them or even taking them to the bank for counting by machine. He tossed the lot (which sort of describes the guy, really... ahh the benefit of 20/20 hindsight...) into the bin! I nearly had a heart attack. Just looking at the volume of the tub, there must've been between $50-$100 in there. Just dumped in a savings account, that could have earned some decent compound interest! Oh well. Some people have more money than sense...

Make a decision today: to start putting something away in a jar for a rainy day. Have a goal. What is it for? When can you open the jar to use it? Christmas? Birthdays? 

It doesn't matter if they're the smallest denomination coins your country has. It will still make a difference.

Saturday, 26 July 2008

A Better Value Proposition


Y'know, some might say I have some really weird ideas about money...

Thing is, they're ideas that are ever-evolving, and they're ones that work for me. Maybe they'll work for you too. I can't tell. You'll have to decide for yourself and realise that these are *ideas* not advice, and therefore, DON'T SUE ME!

Here's a thing though: I had a conversation with a friend today, and it got me thinking about a few things, including a web site I was reading yesterday. It talked about a saving concept called "Value Proposition". It's when you make a decision to save or spend based on whether it's a better "Value Proposition" to do the one or the other.

Here's a personal example from our discussion this morning:

We have debts from our business, and we also recently bought a house. 

I've figured out that the best thing for us to do will be to consolidate those debts onto our mortgage. Logical and normal enough thing to do, you might say, but this has a bit of a twist: the bank just told us our house needs to be worth around $10,000 more than its current valuation for us to cover the consolidation.

What to do? Well, I have around $1000 left over from a design job I've been doing, and I've been wondering what to do with it. 

My first thought was to save it. In my high-interest online saver account, it'll make me around $8 per month... The other part of that plan was to use it to cover the instalments on a course I'm doing in money management and investing. Even at $200 per month (and with me trying to save the same out of my pay to reduce how fast and how much I withdraw, but having that $1000 there as a backup for when I need to use my pay to cover, say, the car being serviced one month), I'd still be getting something for my money...

Then the problem of the consolidation came up. Crap. What do I do?

Well, if you saw the pic of our house above, you'd understand that it's not very impressive from the outside. We've done a heap to the inside, and that's already added value, but it's not enough... soooo....

I did some calculations, and figured that if I spend my $1000 on jazzing up the outside of our house, it should give us enough boost to add $10,000 to its value. The whole 10% rule thing (which I'll talk about somewhere else later). For that, and with a bit of work, we could fix the garden up, probably the fence too and, surprisingly, afford to repaint our exterior in a colour scheme other than "boring". That will definitely boost the value!

"But why don't you just throw the $1000 at your debt and reduce that straight away?" asked my friend. "You'd save yourself a whole lot of extra work at the weekends" she added, pointing out that the project I've just worked on to make the money has already left me with a sore back and a bad cold. "You'd do better to take on some extra work at home," (since we have a baby and I can't get enough day care to go work full time) "...and use that to pay down your debts", she added.

I thought about this, and argued a big point:

The money I throw at my debts doesn't cover the bit that's actually about to cause a real problem. Not only that, consolidating the loans will actually save us something like $19000 in interest, and I'd rather not have to pay out extra money I don't need to. Thinking back to that web site and it's article, the best way to describe the idea of simply paying off the debt with the money was that it was a Bad Value Proposition.

When I got home and had a bit of a ponder over the washing up, I thought about what my friend said. Perhaps she could be right and I was missing something?

But on further examination, the proposition of putting all the money I earn from extra work onto the debts looks like and even worse proposition to me. With a little one who needs her Mum around some of the time, I need to work smarter, not harder, for my money!

I'd have to work another three days a week (that's six days total, folks) to even make an inroad into that debt. Of course there are other factors affecting that figure, but they're not important here.

Why not spend the money and a couple of weekends working, even with a cold, to get the benefit that will allow us to pay it all down a lot faster (this assuming that we continue to pay the same amount off per month as we are now, before we consolidate)? That's a Better Value Proposition (BVP)...

Plus, if you think about it, it's making the money work much harder for us if it's spent on improving our house, than if it goes to feed a money-hungry bank. How? Here it is in point form:

  • We already know it will probably add enough value to our house to allow us to consolidate our debts.
  • Remember the debt is already there, and it's going to cost us $19K in interest (money that's doing nothing but pay the bank for the "privilege" of borrowing about half that amount of money) at the rate we're going. So really, by spending $1000, we're gaining $19,000. Sound like a BVP now?
  • Because the debt is already there, were still gaining another $10,000 value on our house, because we're only moving the debt, not spending more. That's $29,000 of actual gain.
  • "But," you say, "you're adding to your mortgage...". Yes, that's right. But we're also going to continue to pay the same amount we were paying every month onto the mortgage as we were onto the credit cards. Given that we're saving $250 per month off actual interest repayments, we're actually paying that in as extra repayments. I went to one of the best mortgage calculators out there and added that in as a split fortnightly repayment of $125 over the life of the loan. It saved us a gobsmacking $150,400 in interest, and shortened the life of the mortgage by 9 years, 8 months.
  •  So add that to the $29,000 we've already gained, and we're actually saving $179,400 over the life of our mortgage. I couldn't believe it!
  • Another interesting point is that if I'd gone the suggested route and put the money on the debts, I still would have had to find the money to fix up the house later on. Honestly, while the place isn't falling down around our ears, it still needs upkeep, and it's ready for paint, the garden fix, new gutters etc... I'd still have to find another $1000 to pay for the work I plan to do on the garden, and then the rest. This way, I'm getting my garden fixed and saving $179,400, just for spending $1000. Actually, I'm also saving that extra $1000 I'd have to have found, so make that $180,400!
  • Putting the credit cards into the home loan also frees up extra money we make later to either a) pay down the home loan even faster (saving incalculable amounts of money) or b) add value to the house by improving it or c) both!
  • And it mustn't be forgotten that a value proposition can also have an emotional and practical reason for being better value than simply paying one thing off. As if the argument wasn't good enough already, I get fivefold benefits personally: 
  1. I get to stop coming home to the truly depressing sight that is the front of my very practical and downright ugly/boring house... instead coming home to a view from my driveway that I can enjoy!
  2. I get to spend a little more time exercising and out in the fresh air than I used to - both while working on the job of fixing the view, and maintaining the garden later.
  3. I feel more inclined to spend leisure time outside because it's more inviting and...
  4. It's safer, once the job is done, for our little daughter to be outside and playing in the garden, because part of the process is removing some dangerous plants and nasty-for-baby-to-play-with debris!
  5. I get to spend more time with my daughter because I don't have to work nearly as hard to cover the repayments in the long term.
So, if I haven't managed to illustrate the sense of spending money instead of "saving" it (under certain circumstances), I don't know what will do it! 

Remember to think carefully before you save or spend your money - you might find that the spend is a much Better Value Proposition than you thought!