Yearly Archives: 2009

Wealth Tip #1 – Controlling Lifestyle Creep After Getting a Raise or an Additional Income Stream

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Controlling Lifestyle Creep

“Lifestyle Creep” is when we finally get a big raise or pickup side income from other sources, we start to spend more.  We should be able to save this additional money, but instead the money is spent on increasing our lifestyle (via buying a new fancy car, bigger and more expensive vacations, adding new costly daily habits like lattes and buying expensive lunches).  This is the kind of behavior that keeps us from becoming financially independent!  We need to change this pattern or better yet, never let it happen in the first place!  If we save that new income, instead of going on a hog-wild spending spree, we would be well on our way to becoming financially independent.

The problem with most of my friends and co-workers is that they do spend that extra money to increase their lifestyle!

Below, I created a simplified chart to show the potential savings if we stop lifestyle creep:

After Taxes Total Discretionary Expense/Income
Total Income Expenses Income Ratio
$40,000 $35,000 $5,000.00 0.88
$60,000 $40,000 $20,000.00 0.67
$80,000 $45,000 $35,000.00 0.56
$100,000 $50,000 $50,000.00 0.5

*Note that the Total Expenses column will still increase a little.  This is expected because of higher tax rates and small increase in necessary expenses like gas, clothing, etc that might be required to make the additional income

The “Discretionary Income” column show how much more we should be able to save!  If we were to control our lifestyle for 10 year, that would add up to some serious savings, anywhere from $50,000 to over $500,000 dollars (depending on if we invested it or not).

The most important thing to note in the chart above, is that once we jump from 40,000 to 60,000, we add $15,000 to Discretionary Income.  So, in the example chart above, once we start to earn more than our Total Expenses, we get a huge jump in “Discretionary Income” (aka. savings potential)…  This is the key, we need to find that break even point in our finance and try our hardest to get over it by as much as possible!  Whether it be increasing our income, or scaling back our expenses, or better yet doing both!

This is the first in my wealth creation series.  Most posts like this one will be from my personal experiences, but some will also be from hanging around millionaires that I’ve grown up with or currently speak to.

Christmas Tree Mission Accomplished

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Yesterday, we finally got our tree.  We held out for snow as long as we possible could, but it just didn’t happen.

Old tyme Christmas tree

Old tyme Christmas tree

The tree is small but nice, it’s a Frazier fir…  It cost $54 (ouch)…  The hot chocolate and cookied cost another $5.50.  So after all was said and done, it almost cost me $60 for our Christmas Tradition this year.

Yes, $60 is expesive for a tree, especially considering we have an artificial tree down in the basement.  But it makes the kids (and me) happy.

I was proud of my son!  I injured my back a week ago so my son ended up pulling my daughter around in the plastic sled while looking for the perfect tree.  He did a great job!  And he even tried to cut down the tree (he only got half way through before I took over).  Next year, I told him I’d let him cut down the tree all by himself.

This year was different than past years, the area on the tree farm we normally go for trees was mostly depleted, so they were taking groups over to a different part of the farm in a hayride wagons pulled by tractors.  It was fun, but cold.

After we cut down our tree, and rode the hayride wagon back to the main farm, I tied down the tree on the car rack.  My family went in and bought hot chocolate and cookies.  Next, they sat in rocking chairs by the cast iron stove, listened to the christmas music, and finished off the cookies and hot chocolate.

Next, we all went back to the car, turned on the Christmas music and drove home.

Another thing different this year was that the kids played their Nintendo DSs all the way home.  I think next year, the DSs will have to stay at home.  We might take our dog next year too.

Overall, it was another great experience, even if there wasn’t any snow…

The Value of Infomercials, Caveat Emptor

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We are constantly bombarded with Infomercials, especially in the early morning and wee hours of the night, when we’re at our weakest moments.

Exercise Infomercial

Exercise Infomercial

While the some of the infomercial products may work, most are not worth the money.  You’ll buy them, using them a few times, realize they aren’t magic, then (especially with exercise equipment)  just put them in the basement.

Infomercials should not be part of the frugal lifestyle.  As a mid-level frugal person (freegans being at the apex level of frugality), I’ll watch the infomercial and try to figure out a way to simulate what they are doing for free.  Especially with the exercise packages.

Speaking of “Exercising” Infomercials, it’s not the video that will make you lose wait, it’s “the you“ (and me too), actually doing the exercise routine in the package.  In my opinion, most exercise videos are definitely not worth the money.

If you want to look good, you really need to alter your diet and stick to an exercise routine that:

  • You create yourself.
  • Is on TV and you can follow (Gilad, All Star Workouts, Bodies in motion, whatever…), be sure to combine this with a little bit of weight training too.
  • You can borrow from the library via an exercise video, most libraries will carry such videos (DVDs and tapes).  You’ll be surprised if you look for it.
  • Involves Walk/Bike/Jog, and work out with weights.  Remember the diet part too. 😉
  • anything that involves both cardiovascular and anaerobic exercises, even part-time work (a two for one deal here!!!)

Of course, you need to do the exercise routine for more than a month…

As for the “Making Money” Infomercials, Google the review of the product.  Nine times out of ten, the review will be negative.  and the 1 time out of 10 that it isn’t negative, it’s usually a site that is trying to sell us the product.

So how do you know what is worth the expense and what isn’t?

  • First, not much is worth it, think of a way you can achieve the same desired results for free!
  • If the presenter says “It’s great” or gives thumbs up too many time, really start to question the product.
  • Google the infomercial product name follow by the word “review”, this is tricky though because some reviews are people trying to mislead you into buying the product from them.
  • Read blogger posts from highly ethical bloggers.  ex.) MoneyReasons.com, freemoneyfinance.com, frugaldad.com, thesimpledollar.com, etc…  After reading a few days worth from a blogger and skimming it’s archive of previous articles, you’ll have a fairly good idea if the blog is ethical or not and thus to be trusted…  Note, the reasons I mention this here is because I’ve been seeing a few blogs that are really “wolves in sheep’s clothing”.  Meaning that the blogger is really a new startup company pretending that it’s a blogger!  !!Caveat emptor!!

If you’d like my opinion of an infomercial, email me at MoneyReasons(dot)com[at]gmail(dot)com.

To use the address in the previous sentence,  replace (dot) with . and replace [at] with @ (this is an anti-spamming technique).

If you think my assessment is flawed, please submit a comment or email me.   If you have stories you like to share, please do.

Fixed versus ARM Mortgages

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Okay, let’s review the choices!

First, what is a “Fixed rate mortgage loan”?

These are loans where the interest rate is a non-changing rate, so the interest and principal payment portion of the loan will always stay the same throughout the life of the loan.   This type of loan is the best type in my option, because of the predictability of the monthly payments.

Now for the ARM (Adjustable Rate Mortgage) loan (provided by BankRate):

When you get an ARM, two main factors determine the rate you pay: the index and the margin. The index is a rate set by market forces and published by a neutral third party. The margin is an agreed-upon number of percentage points that is added to the index to determine your rate.

So, like everything in life, which mortgage to choose depends on the current financial environment.

The concerning problem with ARMs, is that the home buyer can afford a larger loan when the rates are low, but when the rate rise, the homeowner might find that it’s harder to afford the loan now that the interest rate and total payment has increased!

With both types of mortgages, over time the cost will go up.  But this is because of the property tax (where this is applicable) and house insurance increases.

Before taking out the load, I saved up 20% of the house price and made a down-payment on it so I wouldn’t have to pay PMI (Private Mortgage Insurance), both fixed and variable mortgage loans typically have the 20% down requirement.

So, which did I pick…  the fixed mortgage loan of course.  Would I do the same today?  You betcha!

We all seen how an ARM can go bad with this past year!  I believe that the fed are going to start raising rates gain (then will have to eventually to curtain inflation).  And when that happens, I don’t think an ARM would be the best vehicle to use for buying a house.

For a list of the current mortgage rates, click here.  I’m actually a big fan of the bankrate site.  They provide more that just rates, some of their calculators are great, and they also have some good information on a broad range of financial topics.

The ARM loans are actually pretty complete, with product varying quite a bit, not to mention the hybrid loans.

Mortgages

Another mortgage loan that I will never get, is an “Interest Only” loan.  I don’t see the merit in that type of loan at all.  Way too risky for me.

So, here is where I ask any viewer that has or had an ARM… what do you think of it?  and would you do it again?