Sunday, August 8, 2010

Is it better to take a vacation or buy a new couch?

Is it better to take a vacation or buy a new couch? The NYT tackles this question and the conclusion seems to be that people get more happiness value from experiences rather than goods.

I thought it was also interesting that the article mentioned that anticipation increases happiness, and that by saving up for a purchase makes it more valuable. I generally agree with this premise. We live by the $100 and the $300 rule. Any purchase over $100 requires a 1 day wait for each $100, so a $500 purchase requires a 5 day wait, etc. Any purchase over $300 requires a family discussion and agreement.

I can attest to the fact that I very much enjoy our new living room furniture, which we saved up for and which we shopped for and researched over the course of a year. Would I have enjoyed the furniture if I had run out and bought it on credit, I'm sure I would have since there is something to be said for immediate gratification, but by waiting and saving up for it I do believe I increased my enjoyment for the following reasons. First, by saving up for the purchase I didn't incur any debt, there was no big bill to pay off for the next several months. Second, by waiting and researching I took the time to find the right furniture for the room. If I had rushed my purchase I likely would have ended up buying something that wasn't quite right and would have given up on my search to find the perfect fit (the room is odd shaped).

Wednesday, August 4, 2010

What is Your New Normal or New Abnormal?

Interesting article today from MSNBC on the "new abnormal" and "schizophrenic" American consumer.

  • Ralph walked away from his $329,000 condo and let it go to foreclosure and then went to DisneyLand and bought himself an iPad.

I guess Ralph is not worried about a judgment, not sure what the California law is, but here in Florida the statute of limitations on a deficiency judgment is twenty years. But, I guess if you are spending your extra cash rather than saving it the bank won't be able to collect on that judgment.

The article describes the new abnormal as follows:

The current circumstances might be better described as the new abnormal, in which no one knows anything. In June the Conference Board Consumer Confidence Index fell 9 points on the heels of an 11 percent drop in the S&P 500 the month before. New housing starts were as bad as they had been in eight months. Meanwhile, the unemployment rate still hovers near double digits. That's 14.6 million Americans out of work. Federal Reserve Chairman Ben Bernanke only added to the anxiety with a July 21 declaration that the economic outlook is "unusually uncertain."

So who are all those people at the mall? It's easy to forget that a 9.5 percent unemployment rate means that roughly 9 out of 10 Americans in the workforce are still employed. "Some consumers are probably liquidity-constrained," says Kenneth Rogoff, Harvard University professor and former chief economist at the International Monetary Fund. These are "the ones who are probably not the ones buying iPads. But 90 percent of Americans do have a job, and maybe 70 percent are confident about them. And maybe half of those have liquidity."

Perhaps it is good that those who "have liquidity" are spending it rather than saving for a rainy day. Spending helps to drive our economy and provide jobs. And I have to agree that when I'm out and about at shopping centers and restaurants, there seem to be quite a few people out shopping and dining these days. My husband and I often note "what recession" when we observe the very full parking garage at our local shopping centers (in the off-season too).

I thought it was particularly interesting that 51% of consumers had fallen behind on their annual savings plan due to impulse spending or spending beyond their means.

How about you, are you spending more these days? If yes, what types of purchases are driving your increased spending? Are you feeling more comfortable with the economy?

Tuesday, August 3, 2010

Motivation Follow Up

Following up on my earlier Motivation post, I received some interesting feedback.

Anonymous # 1 said...
I just read an article on WSJ about people putting money in to refi their mortgages to get lower interest rates and shorten the term since the alternative of investing in the stock market seems so uncertain. After reading that article, I started looking at refi options and 15 yr mortgages are at all time lows. I am in the process of refi'ing our mortgage from a 30yr at 4.875% which we just got last yr and thought was great, to a 15yr at 3.75%. For an extra 35% each month we'll pay our house off in half the time. This rate seems unbelievable to me, but we just locked it in and I'm really excited about having each mortage pmt mainly going to paying down principal compared to interest in the past.

3.75% is a great rate.

Like you, we refinanced last year and went from a 30 year @6% rate to a 25 year 4.7% rate. In the process we shaved a year off the term and we shaved a few extra thousand off the principal as we had to pay down the principal a bit to get down to a certain ratio vs. the appraised value (at this point I'm a little fuzzy on the details). If we could find a 3.7% mortgage rate we would absolutely consider refinancing again. We did a little research, but we need to do more as so far the rates we are finding here in South Florida are not at that level.

Anonymous #2 said...
I found an online mortgage extra payment calculation website and played with different extra payments. I discovered I can pay off my mortgage comfortably in 6 years and still have funds for other needs. So I started it last month. While the economy is slow and stock market bouncing around and savings accounts paying low rates it is probably a better use/return on my funds to pay down the mortgage. If
inflation kicks back up it may not make sense to pay the extra amounts. I am not sure it pays to refinance, you can use the cost of the refinance to jump start the pay-down and maybe come out ahead.

We have played this game too and spent an hour or more with a mortgage calculator to see how quickly we could pay off our mortgage by adding $100 a month (this is our current extra payment), $500 a month, $1000 a month, etc. We can afford to put more towards our mortgage, we just need to come up with the plan and execute it.

SJ said...
At 24, I am wondering if I am going to be forced to move out of my home state in order to afford a house. H and I have stable jobs with good pay (~80k) but the average price for homes in our area is more than 3 times our combined salary. Even with a 30% downpayment the mortage + taxes will be nearly $2k/month plus extra
expenses. Any advice for the young future homebuyers?

SJ, it sounds like you are way ahead of where I was at 24, so kudos to you.

In general, your housing costs, mortgage payment plus taxes and insurance, should not be more than 28% of your gross monthly income. So, if you and hubby are earning $80,000 a year, your monthly housing costs should be @$1860 or less. You don't mention if you have other debt, i.e. student loans, car loan, credit card debt, etc., but if you do, your total debt service per month should not exceed 36% of your gross monthly income or @$2400.

So, my general advice would be as follows. First, focus on killing any debt that you might have before you think about purchasing a house. Second, if you want to stay in your home state and you want to buy an average price home, you should probably focus on saving up more for a down payment to reduce your monthly costs to a manageable level. Third, you might want to consider moving to a state with lower housing costs, but you'll want to consider job security, family connections, costs of moving, etc. Fourth, focus on increasing your income.

I'd also suggest considering whether or not you need or want an average price home, could you be happy and content with a less than average price home? Good luck to you.

Monday, August 2, 2010

Hidden Fees

This past weekend, I had to take my car in for repairs, specifically the air conditioning has been acting up. I took my car to the dealership service shop rather than our local mechanic, because I needed the car fixed on Saturday as I was traveling for work on Monday (can't really be driving around in South Florida in a car with no a/c in August).

The dealership called and told me that the repair, a new a/c compressor, would run $800. Ugh! Well, I have no idea how much this part plus the labor should cost, nor does my husband (although he has more car knowledge since he has an antique car that he is always tinkering with). So, we called our neighbor, who is a mechanic, and he was kind enough to assist us with the research. He gave us part information, key questions to ask (so the dealer would know we really had talked to a mechanic) and a hard quote of $600 which included replacing a companion part.** Mr. Sam calls the dealer back and talked them down to $700 with the companion part included (which was not part of the original quote), plus we also had a couple of belts replaced and the oil changed. Before Mr. Sam hung up with the dealer he reviewed the hard quote with the representative, wrote it down and confirmed that the only addition to the hard quote would be sales tax.

I'm sure you can figure out where this is going. When we reviewed the invoice the numbers didn't quite add up. Mr. Sam and I sat down with the invoice, reviewed his notes, calculated the tax and there was a $30 extra charge on the bill that did not jive. I can't remember exactly what it said, but it was something like "garage fee." Dealer rep informs us that they charge everyone a "garage fee" although he couldn't explain what we got for that fee. In the end, recognizing that the "garage fee" was not part of the agree hard quote he took it off the bill.

Bottom line, don't be afraid to negotiate the costs with a service provider and watch out for hidden fees. Think about how many people had their cars serviced at this shop during the course of a week, think about how many of them were charged a $30 "garage fee", how many of them paid that fee without blinking and that the fee is simply pure profit for the dealer.

**We would have had our neighbor make this repair, he normally takes care of our cars, but he doesn't work on the weekends and I was traveling on Monday so the repair had to be completed before Monday.

Sunday, August 1, 2010

August 1 Numbers

(1) Max out 401ks - $33,000
(2) Max out IRAs - $10,000
(3) Prepay mortgage - $1200
(4) Add to baby fund - $3500
(5) Add to emergency fund - $7000
(6) House/Furniture fund - $3000
Total - $57,700

(1) - $17,986 (55%) (goal is $33,000)
(2) - $10,000 (100%) (goal is $10,000)(Completed)
(3) - $700 (58%) (goal is $1200)
(4) - $2457 (70%) ($8819 in our baby fund, goal is $10,000)
(5) - $869 (12%) ($27,063 in our emergency fund, goal is $32,000)
(6) - $3000 (100%) (Completed)
Total - $35,012 (61%)

Two goals completed, working on baby fund next (as it is easiest goal to close out) and we are slightly ahead of schedule on our 2010 goals.

Unexpected Bargains

Yesterday, Mr. Sam and I were out and about taking care of some errands. In particular, we needed vacuum cleaner bags for our Kenmore vac. So we put together a Sears list, said vac bags, light bulbs, etc. and headed to our local Sears.

Mr. Sam is traveling for work this week and we have our summer vacation scheduled in a couple of weeks so he ended up poking around the men's clothing department. Well, Sears was having an end of the summer sale and there were tons of shorts, t-shirts, casual shirts on sale for 60% off. Mr. Sam ended up picking up a several pairs of heavy, good-quality cargo shorts for $10 each along with super-sale shirts as well. We went home, washed everything, cleaned out his closet and tossed a bunch of stuff that had paint (home improvement projects) and grease (antique car projects) stains. We also donated items that he no longer wears or don't fit properly anymore.

I never think of shopping for clothes at Sears, but I was so pleased with the results that I have encouraged Mr. Sam to go back today and pick out a few more pairs of shorts. We are in South Florida so shorts are a necessity.