- Investment Workshop 59: Are Robo-Advisors Compatible With FIRE? - June 22, 2020
- Reader Case: Grounded in Vancouver and Dreaming of FIRE - June 19, 2020
- Real Estate Agent Gets Crushed by Real Estate Math - June 8, 2020
FIRECracker was supposed to write today’s post, as she does every Monday, but since she’d been fiendishly working on her Chautauqua UK talk, coming up in August, I’ll be taking over today’s post completely of my own free will (and NOT because she totally bullied me into it).
So without further ado, here goes:
Have you ever noticed how certain people just have bad shit happen to them so much more often than other people? Financially, I mean, I’m not talking about health issues or something, but there’s always some people who just can’t seem to catch a lucky break if their life depended on it.
These are the people who are constantly complaining about a pipe that burst, so they had to run to get a plumber, but then that means they have to pull their kid out of daycare, and then on their way they get into a fender bender, and now they have a repair bill to take care of, and on and on. They’re trying to make things work but shit just keeps happening to them outside their control. It’s like they ran over a bunch of black cats in a previous life.
And then there are others who just to cruise through life. At the end of every month they always have money left over and their big decision is whether to put it in a savings account or go out for a fancy dinner.
If you’re like us, you probably think the answer is simple: Some people are Spendy, and others are Frugal. Spendy people are the first group who are always running on empty while Frugal people are the second group. What could be simpler?
That’s what I thought too. Until we started this blog and hundreds of people starting writing into us asking us to analyze their personal financial situation.
And as we did more of these, a third group started to emerge that I couldn’t explain: People who were Frugal, yet shit kept happening to them.
These are the people who will send their spending to us in a ton of detail, indicating they actually kept on top of the finances, and will do things like cut out all their eating out to put $500 a month in an emergency fund, but then will keep having emergencies each and every month. One month it’s the A/C. The next it’s a flat tire. Then the next month the cat is sick and needs to go to the vet.
“No matter how hard I budget, I just can’t seem to get ahead. Shit keeps happening” is something this group tends to say.
And what I realized over time is that the thing that determined this “Unlucky” group is not their Frugalness but rather how much shit they owned.
What Shit Really Costs
When people buy something big and shiny, like a flat-screen TV or a car, they think that this is what that item costs.
It’s actually not. If you own something like a car, you have to feed it with gas. You have to protect it in a garage so that nobody steals it. You have to insure it in case you crash it, and on and on and on. So your actual ownership costs look like this.
You have not only the initial cost, but also these other costs that recur over time, sometime even randomly. And generally, the bigger the initial cost, the bigger the other costs are as well.
For example, let’s take a bunch of typical items you might buy, like a hair dryer, a cell phone, a car, and a house. A hair dryer typically only costs the buy price and that’s it. But a cell phone, you need to buy it, and then feed it continuously (the data plan). But you don’t need to insure it, and there’s usually no ongoing maintenance cost. A car, on the other hand, you HAVE to insure. And maintain. And repair when it breaks. And of course, for a house, all those costs are there and are ginormous.
|Item||Buy Price||Ongoing Cost To Use||Ongoing Cost To Maintain||Insurance||Repairs|
But these are only costs that apply to you when you OWN that item. If you own a car and you hit a pole, you are responsible for getting it repaired. But if you rent a car via a car sharing service like AutoShare and you hit a pole, that’s someone else’s damned problem to fix. And this effect is even bigger for housing, where unexpected repair costs like the roof leaking can cost $10k+ to fix.
But don’t think that I’m just using this as a thinly veiled excuse to bash housing. There are plenty of other things that have this effect. I know someone who collects art, and he regularly stresses out about getting the right display case for his paintings, getting the right lighting, spending money insuring it, etc.
And I have another friend who collects purses. One time I was visiting and after she was done showing off her purse collection, she took me to a place that dry-cleans purses.
That’s right: a dry-cleaner. For purses.
When I asked why she was spending money on this in my usual subtle way of pointing directly at the cashier’s face and screaming “WHHHHHYYYYYYY?!?!?” she replied “Well, I need this! How else am I going to keep my purse in showroom condition?”
So yeah. Purse Dry Cleaners. Apparently a thing that exists.
But anyway, enough about me and what a terrible friend I am. What I noticed over time was that the less items people owned, and the more they rented, the less they tended to get hit with these crazy recurring expenses that keep setting them back. Which is why I came up with 1 simple rule that will make you richer.
Rent More. Own Less.
Types of Spending
There are 3 basic types of spending that can occur in someone’s personal finances.
- Baseline Spending. Things that regularly occur every month, like food, rent, etc.
- Splurges. This is optional spending for luxuries, like fancy booze or a trip to Hawaii.
- Emergency Spending. These are unexpected expenses that come up randomly, like a broken window or a leaky roof.
These 3 types of spending and which ones dominate your budget determine how “in control” and happy people generally feel about their finances. A typical budget of someone who rents most of the big items like housing, cars, etc. tends to look something like this.
This is spending data I copied over from when we were still working. Rent was $800 a month, our other baseline spending was about $1500 a month, and twice a year we went on vacation costing around $5000.
But this is what the finances look like for someone who owns those big items like houses, cars, and *eye roll* designer shoe collections.
Every few months, something unexpected would happen to something expensive they owned, and they’d have to spend money fixing it, or repairing it, or cleaning it.
And here’s the big difference between these two types of spending patterns. Despite the fact that the total amount of money spent is actually the same in these 2 examples, one person is far happier than the other.
When you spend money on a splurge, you enjoy the Heck out of it. If you know a vacation’s coming up, you anticipate the upcoming trip to Hawaii or whatever, you enjoy it while you’re there, and then afterwards you’re happy reminiscing about what a kickass trip that was.
When you spend money on an emergency, however, it never makes you happy. Because first of all, unlike splurge spending, emergency spending isn’t your choice. You were forced to do it for reasons outside your control. And second, if your car breaks down and you have to spend $5000 to fix it, once the spending is over you don’t get a fancier car back, you just get your old beater back but with the problem fixed. So you just spent money to be right back to where you already were.
So if we were to overlay happiness over the renter’s chart, it might look something like this.
Note: The axis for “Happiness” is on the right, and I’ve defined 0% as a baseline “normal” level of happiness. 10% means they’re 10% happier than normal, -10% means they’re 10% sadder than normal.
So the renter floats along at a normal amount of happiness, and as their vacation approaches, they get happier. Then the vacation arrives and they get even happier. And then when they come back their happiness level gradually comes back down to normal and the cycle continues. So they get these happiness spikes caused by their splurge spending.
Now look at the owner. If we were to overlay happiness over their chart, it might look something like this.
Every time an unexpected expense happens, their happiness goes down because they just set a bunch of money on fire and got nothing in return. In the months where nothing bad happens, their happiness starts to float back to normal, so in theory a long enough stretch of nothing bad happening will result in a normal amount of happiness, but in practice because they own so much shit and bad stuff keeps happening to this shit, their happiness never really gets to float back to normal. Hence, they’re seemingly stressed and upset all the time.
So What To Do?
So what is our unlucky bastard supposed to do? Simple. If something you own never breaks and doesn’t keep costing you money each month, keep it. But if you constantly find yourself having to patch and repair and insure and maintain something, sell it and rent it instead. This will convert a source of continuous unexpected spending into a more normal, predictable spending pattern. Once you have that, you’ll be able to breathe easier since your life isn’t a rolling series of fires you need to put out.
Rent More. Own Less.
And once you’ve mastered that rule, you can apply a Second Rule in kicking your budget’s ass, which we’ll reveal in next week’s Monday article.
Hi there. Thanks for stopping by. We use affiliate links to keep this site free, so if you believe in what we're trying to do here, consider supporting us by clicking! Thx ;)
Build a Portfolio Like Ours: Check out our FREE Investment Workshop!
Earn a 2%* everyday interest rate. No Everyday Banking Fees.: Open up an EQ Bank Savings Plus Account! (Canada only, excluding Quebec)
LIMITED TIME OFFER: Earn up to 4% cash-back (Canada): With Tangerine's Money-Back Mastercard!
Travel the World: We save $18K a year by using AirBnb. Click here to get $40 off your first booking!
Don't Pay FX fees: We used the Scotiabank Passport Visa Infinite card to eliminate foreign exchange fees around the world! Plus, we got 35k points in the first year, and free airport lounge access too! Click here to sign up!
*Interest is calculated daily on the total closing balance and paid monthly. Rates are per annum and subject to change without notice.