There’s no context for these, but I have to admit that I laughed out loud when I saw them. With only my sister-in-law sending me humor via e-mail any more, I may have to actively seek humor that teases women . . .
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There’s no question that some purchases are wiser than others. What’s tough about personal finances specifically (and life in general) is that delayed gratification is underrated. How can that tendency be overcome? When it comes to personal finances, the best way to focus on the long term is to track your net worth. People who are serious about accumulating wealth (i.e., those who won’t do it accidentally — there are a few of those out there, actually) already have a method of calculating their net worth. That method includes a carefully constructed formula, and I’ve already shared my thoughts on the subject. But if you really want to focus on your true, conservatively-calculated net worth, here’s a great trick: include some liabilities without adding in the value of the asset. The effect is that you immediately see the downside of purchasing large, non-appreciating “assets.†Buying expensive electronics or a new car comes right out of your net worth total with nothing to soften the blow! It’s beautiful. If your husband or wife wants to spend that extra $5,000 to get a slightly newer/nicer car, it’s very easy to demonstrate how that permanently damages your net worth. Buying just enough vehicle for your needs becomes more attractive because even when you get 0% APR on a new one, your net worth still takes the full $30,000 hit. I’m primarily referring to purchases on consumer items up to and including vehicles because I don’t really consider our cars to be assets. They’re objects (like so many other things) that we purchased to use. We couldn’t really sell them because they’re necessary for maintaining the quality of life that we’re used to. Not going overboard on the vehicle purchases means that there’s not really any extra cash tied up in them. By “extra cash†I’m referring to the difference between what we have and what we need. For example, if we had purchased an expensive luxury car, we could sell it, buy a cheaper one that still met our needs, and have money left over.
This trick also simplifies net worth calculations because you don’t have to try to re-value all of your assets every month. For example, if you buy a new plasma TV for $4,000 but add its value to your assets column, each month the TV is worth less and less money because its current resale value drops over time. In order for your net worth to be as accurate as possible, each month you’d need to lower the value of the TV by some amount. So back we go into philosophical territory. What really belongs in your net worth calculation, and what is the most accurate way to represent what you own? Ultimately you’ll have to decide for yourself. But if your goal is to maximize your net worth by minimizing bad purchases, use this trick to keep yourself headed in the right direction. As recently as a few years ago, I dreamed of having a house so big that some rooms would only see use when large groups of friends or family visited at the same time. “We aired out several rooms in the south wing to get them ready for you,†I imagined myself saying to a future guest over the phone. Visiting huge mansions that had been turned into museums let me picture myself stealing down a huge spiral staircase on the 15-minute walk between my palatial bedroom and the cavernous kitchen for a late-night snack (from the grocery store-sized, stainless steel refrigerator). Bed and breakfast stays sent my mind reeling with great ideas for themed rooms. It was easy to picture sneaking away to a far-off and quiet part of the house to take a nap or read a book. What changed wasn’t the world around me because if anything, it’s become more worldly and materialistic. You’d probably be impressed if I were to say that I had an epiphany one day and realized that there are much more important things in life than having a huge house and expensive cars, but that wouldn’t be 100% accurate either. Frankly, it was reality. The fact that I wanted to take an active approach to increasing our net worth meant measuring and analyzing our personal finances. What would help us achieve that goal? Conversely, what would be an obstacle? Boston Gal’s post was a great one and you can really feel for those people in the Boston Globe article she references. What a shame to be presented with such a predicament. Actually, what a shame that those people made such a (probably) poor choice! When you really think about it, there are some very compelling reasons to buy an appropriately/conservatively/modestly-sized house. Mortgage A larger monthly mortgage payment is the most obvious downside of purchasing a big and/or expensive house, but it’s not the only disadvantage. In IT the term “Total Cost of Ownership†(TCO) is used to describe a way of accounting for all the expenses relating to owning an item. The initial purchase price isn’t the only thing that will cost you money. For that reason I’ve outlined below a few of the other aspects of TCO. Property Taxes Part and parcel with an expensive house is high property tax. It’s worse in some parts of the country than others, but the higher the property value, the greater the property tax. The other evening we went for a walk in an expensive neighborhood in town. The houses are gorgeous, spacious, and the landscaping and furnishings are really something to behold. They’re so expensive though, that the annual property taxes alone are almost as much as my families total housing costs! If someone were to give us one of those homes for free, we could barely afford to keep the town paid, let alone address any of the other expenses associated with home ownership. Insurance The greater the value of the house, the more it costs to insure. Additionally, the larger the house, the more “stuff†you can accumulate inside. And it must be properly protected, too (against theft, loss, damage, etc.). Furnishings The larger the house, the more space you must fill with furniture. Whatever you bring with you from a previous residence may be adequate for the in-law or au pair suite, but what about the rest of the house? You’ll spend lots of time and a tremendous amount of money trying to make the place to feel like home. An elegant home can’t be furnished with budget or inexpensive furniture (let alone thrift stores or yard sales) — that would at least partially defeat the purpose of having a nice house. Because Ikea and Target won’t do, you’ll be spending copious amounts of money on depreciating “assets†that will eventually need to be replaced because they become too worn or outdated. Extras Big homes have rooms that are designed with specific purposes, and each requires attention. What can you do with an exercise room other than fill it with expensive exercise equipment? How can decorating feel complete if there’s no pool table, ping pong table, pinball machine, foosball table or retro full-size video game in the game room? Big family rooms require big TVs, and all the other rooms will need TVs too. If you have a lot of money, how far are you really willing to walk to watch your favorite shows? And an HDTV would be a pretty silly investment if a broad assortment of high-quality programming wasn’t piped in from a satellite system. Large back yards seem a little bare without an in-ground pool, hot tub, wooden deck, pool house, and outdoor kitchen. All of those amenities require their own proper, costly care. Cleaning Keeping even a small home clean can be a real challenge, and a larger home takes even longer. Unfortunately there’s no real economy of scale when you’re talking about home square footage. The only options are to let the house go, spend all your time cleaning, or pay someone to clean it for you. These approaches are neither attractive nor likely to enhance your net worth. Utilities It goes almost without saying (though I will anyway) that the more space you have, the more it costs to adequately light, cool, and heat. Landscaping An expensive property would look pretty silly if the landscaping wasn’t up to par. Don’t forget a sprinkler system, in some places a private well, and chemical treatments to keep the big lawn thick and green. Then there are bark chips in the gardens, pruning the trees, trimming the bushes, raking the leaves, planting the annuals, painting the fences, and so on. You’ll need to put in the required time or pay someone else to do it for you. Either way, there are probably other things you’d prefer to focus on. Maintenance A larger house requires a larger roof and more money for repairs when they’re needed. Painting, siding, windows – they’re all part of the maintenance picture, and big houses need more money and attention to keep them in good shape. Security Protecting your possessions is always important, but it becomes more of a priority and more expensive to do so the more you have. Appearance of Wealth For better or worse, you’ll look like you have money if you live in a large house. People make assumptions about you based on your house. If the goal is to impress clients, then that can be a good thing. If you don’t want coworkers or your employees to think you’re exploiting them, a large house will probably send the wrong message. I’d imagine that looking like you have a lot of money would also make people more likely to try to get your money though a number of different means including lawsuits. Entertaining What’s the sense in having a big, beautiful house if you don’t get to share it with family, friends, coworkers, and clients? And when they come over, you can’t very well skimp on the food and drinks. The expensive-looking house will lead them to believe that you’re going to go all-out on the meal(s). If you don’t, they would reasonably think you’re holding back. The Dang Joneses Expensive houses are usually in expensive neighborhoods where people display wealth in various ways. Whether the people are genuinely rich or just trying to look like it, living in that kind of neighborhood will put pressure (even if it’s subtle) on residents to “keep up with the Joneses.†Opportunity Cost If you’re like us, you haven’t reached your net worth goals yet. Why would I want to have my money tied up in (or worse yet, wasted on) assets and expenses that don’t have the effect of increasing my net worth. Money in furniture, paintings, and services (cleaning/landscaping/etc.) doesn’t generate dividends, pay interest, or appreciate (usually). At the very least, it’s not very liquid. Too Spread Out You may also be worse off personally. In a house with a lot of space, there’s less of a chance to interact with the members of your family. Room for people to enjoy quiet, personal time is one thing, but too much room can detract from the most important relationships in your life. Conclusion Ultimately, it’s your money so you can make whatever decision you’d like when it comes to the purchase of your next house. Qualifying for a huge mortgage doesn’t mean you should take it. Maybe you do have more money than the average person, but high net worth and a really expensive house are mutually exclusive for most of us. As for me and my family, we’ll keep our house adequate but not excessive. We prefer to spend our time together rather than trying to maintain (and pay for) more house than we really need. While assembling this site I was frustrated with the way certain elements were appearing in different versions of different browsers. One especially puzzling addition was a new Word Press text widget which was supposed to add a Google Adsense block to my sidebar. While the ads showed up properly in IE 6.x, only a placeholder showed up in my primary browser Firefox 1.5.x. What was wrong? The Adsense block also showed up correctly in my Portable Apps Firefox 2.0b2, so with that test it became clear that it was the Adblock Firefox extension that was blocking the advertisements in Firefox 1.5.x. Consider the www.digg.com crowd. They are more likely to:
Maybe Diggers are less likely to click on advertisements, but maybe they’re also less likely to even SEE the ads in the first place. Note: Please note that there are true victims, i.e., people who — through no fault of their own — have been abused, injured, maimed, or otherwise wronged. True victims come in all shapes and sizes, walks of life, locations, nationalities, ethnicities, religions, and preferences. This post is not an attempt to belittle or degrade them in any way. Instead it will describe the differences between the ways that people can and do respond to circumstances beyond their control. A man goes out for a leisurely hike in the mountains just outside of town one beautiful morning, something he enjoys and does quite often. He obeys all the rules and stays on the trail. Unfortunately, he accidentally falls into a deep hole that was obscured by falling branches and leaves. Bruised and scraped up, he finds it difficult to climb back out. He is understandably frustrated at the bad luck that has befallen him and wonders, “Why me?” The very real pain from the fall is something that deserves attention, but his bigger problem is being stuck in the hole. Holding a one-man pity party occupies him for a few minutes but the novelty wears off quickly. Other people pass by the top of the hole and call down to him. The fellow hikers sympathize with him and agree that he’s had some bad luck. They even ask if he’d like some help and he accepts their condolences and some food and water, but he refuses to have them pull him out. He enjoys the pity of those who find him in those conditions and he has no compelling reason to go anywhere else. In fact, all the attention is kind of nice. Being a stranded, injured hiker is much more fun than being anonymous back in town. Each time he recounts the terrible event, the description becomes more vivid, detailed, and scary. Everyone seems to be able to identify with his predicament on some level because hey, who hasn’t had some bad luck? Those who pass by are confused at the man’s reluctance to accept help, especially when none of them would want to trade places with him in the dark, dirty hole. The trouble is that people figuratively choose to stay in the hole all the time! Why does that choice seem so attractive? Usually (whether they realize it or not) it’s because they think they stand to somehow benefit from victim status. Maybe, like the man in the story, it means new-found attention and sudden interest. Book sales, radio interviews, and TV appearances are much more compelling if there’s a personal interest story that sparks emotion and grabs headlines. Another benefit that people expect is special treatment as a result of their — real or perceived — misfortune. Such treatment can take many forms and may come from family, friends, fellow citizens, coworkers, private/public institutions, or local/state/federal governments. Other people secretly like being a victim because it offers a convenient excuse for any of a number of shortcomings. If something happened to me, and it was beyond my control, it follows (the logic goes) that I’m somehow no longer responsible for my behavior. The way I am and act are a result of whatever tragic event(s) took place. Feel sorry for me and excuse basically anything I do! Were society to adopt the kind of “moral relativism” that would be required to properly contextualize each person’s actions, it would dramatically alter the way our justice system works. Murderers who grew up knowing only the violence of the streets would have to receive lighter sentences than those from better neighborhoods, simply because it’s all they ever knew. How could any reasonable person expect something different from someone so obviously disadvantaged and emotionally scarred? (Especially compared to someone who made the same mistake but knew much better.) In reality, those of us who are capable of rational thought always control our response, even when it wasn’t our choices that led to the misfortune. If I get in a car accident due to someone else’s mistake, is it productive to spend all my time complaining about what I’ve gone through? Should I subject everyone I encounter to an unsolicited, lengthy rendition of the whole sordid story? Am I not justified in being angry, sad, disappointed, and vindictive? Whether or not a feeling or action is justified usually depends on a person’s perspective. Even if I am legitimately justified in having any of those emotions, there are better ways of handling the situation. In some way everyone is a victim of an injustice, some greater than others. But does acting like one really help you in any way? Does wallowing in misery and self pity move you forward or help you overcome whatever obstacles may stand in your way? Does expecting special treatment from others empower you to effect the necessary changes and keep you in control of what happens? To express the thought succinctly in a less formal way: Yeah, that sucks. So what are you going to do about it? The hiker in the hole would be well-served to find a way out. He might then look for ways to prevent other people from suffering in the same way, or help those who do. He might use his experience to avoid making the same mistake again. However, he’ll eventually need to go on hikes again and put the past event behind him. If he doesn’t go, he effectively gives up control over important areas of his life that he had previously enjoyed. I’ve found that being presented with unfortunate circumstances provides an opportunity for active decision making and personal growth. Rising above injury (or injustice) and the tendency to claim victim status is the most effective way for me to get through the situation and come out stronger on the other side. I’m the only person who has the ability to do that in my life, even when it seems easier to stay in the hole and complain. |
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