DISPOSABLE INCOME and Cost Cutting

Cutting unnecessary costs out of your life has the effect of expanding your disposable income greatly.

Further to my previous entry regarding Disposable Income and Part Time Work, it is worthwhile to explore the same concept with regard to cost-cutting of your personal overhead.

Many folks, reading a blog like this, will get impatient and say "Well, I make a lot of money, so I don't have to worry about that! Why should I worry about saving $100 when I can go out and make that much money in a couple of hours!"

And it is true, if you are making $100,000 a year, you are making the equivalent of $50 an hour. That's a lot of money. And when you think in terms like that, it seems that an expense of $5, $10, or even $50 is pretty trivial in the greater scheme of things.

Well, "making" $50 an hour is not quite right. You are costing your employer (or your customers) that much, if not more (with employer matching funds, every dollar you make costs your employer $1.15). That annual salary number represents your gross pre-taxable income. Once you deduct Federal and State Income Taxes, Social Security payments and Medicare payments, you'd be lucky to take home half that much.

But as I illustrated in my previous example, most people have fixed expenses that cannot be cut too much. You have to make the mortgage payment, pay home owner's insurance, property taxes, maybe car payments and car insurance. And you have to buy food and clothing for you and your family.

So, when you deduct all those taxes and all those "fixed" expenses, it leave you with little in the way of disposable income. Maybe 1/10th of your income is really spendable (or savable). You might be making $100,000 a year, but you get to "spend" only $10,000 of it, in terms of money in your pocket.

So even assuming you are a big-shot with a six-figure salary, saving $100 on some expense is a big deal. Because to "earn" the same amount of additional disposable income, you'd have to increase your salary by 10 times as much - or $1,000.

Would you turn down a $1000 raise? I think not! Yet many people will shrug off an unnecessary $100 expense as merely the cost of doing business or a trivial amount not to be bothered with.

If you can cut some expense in your life, it is a big deal. And if you think creatively and continue to think creatively about your spending habits, you can live a better life for a lot less money.

Today, for example, I called the utility company about my bill. They charge me a minimum of $25 a month for the electric service for my lake cottage, even in the dead of winter when the power is off. I asked if they could disconnect the power without a service charge, and lo and behold, I discovered that they could - with no re-connect fee, either. For the six months I am not there, I will save $150 in unnecessary expense.

That may seem like a trivial amount, but it equates to an increase of gross income of $1500, if you think in terms of Disposable Income versus Gross Income.

A five minute phone call is all it took - and I am sorry I did not think of this five years ago! I would have $750 more in the bank by now. And for subscription-type services (where you are billed monthly over time) savings do add up over time as well. So saving $10 a month on your phone bill might not seem like a big deal, but over a year, that is $120, and over a decade, $1200, not including interest. It adds up, and if you can squeeze a dollar here, $5 there, or maybe $10 somewhere else, it can end up putting thousands of dollars in your hand, which effectively would be equivalent to tens of thousands of dollars in a pay raise.

Unlike increases in income, cost savings are not taxable. So every dollar you save goes right into your pocket. A big salary and a big pay raise is nice, but one thing you discover quickly about the big salary is that you don't feel much richer as a result of it.

So the next time you hear someone say "Well, it isn't worth it" to cut expenses and save money, don't listen to them. Chances are that person is broke, and they have no idea why...

UPDATE:  Note also that cut cutting isn't taxed.  If you can "save" $100 by cutting unnecessary expenses in your life, it is the equivalent of earning $150 more in income, as you have to pay taxes on income but not on cost-cutting savings.

DISPOSABLE INCOME and Part Time Work

Note: The details of the following example are combined from a number of different people and do not represent any one particular individual

A friend of mine is married. Her husband has a pretty high paying job, making $150,000 a year, enough for them to live on.

The conundrum for her is this: Should she get a part-time job now that their child is in school? She can make $20,000 a year working part time and still be able to see the kid off to school and pick him up afterwords - working on a few hours a day, three days a week.

Her friends tell her "don't bother - the additional amount of money you'll make really won't make much of a difference, after taxes and all".

Such a summary view of finances doesn't necessarily address the whole situation, however. When looking at a part-time job or additional income, you have to look to see how it affects your disposable income, not your overall, before-tax income.

Let assume our couple is presently making $150,000 a year. They pay approximately 35% of that in Federal and State income taxes, or about $52,500 a year. Their mortgage payment is $3500 a month, or another $42,000 a year, leaving a balance of $55,500 a year. Their car payment of $350 a month comes for $4200 a year (their other car is wisely paid for) and their other miscellaneous expenses (utilities, etc. ) comes to $6600 a year. So out of $150,000, they end up with $44,200 a year. They try to put $20,000 a year into their 401(k) plan, so they end up with an effective "disposable" income of $22,200 a year, or about $1850 a month.

That money is used to buy groceries, clothes for the kids, the occasional meal out. It is not a lot of money, and they have to stretch a lot to make ends meet. Like many middle class and upper middle class Americans, they are puzzled as to why, after making so much money, they still have to scrimp and save.

Now, if we look at our friend's part-time job proposal, we see that yes, $20,000 a year doesn't look like much compared to her husband's $150,000 a year salary. It is a mere pittance!

But compared to the couple's disposable income, it is a sizable chunk.

Even if we assume that 35% of this is taken in Federal and State taxes, that leave $13,000 on the table.

If added to the couple's existing disposable income, we can see that it increases their disposable income by nearly 60% ! That leaves money left over to invest or to save - and to build more real wealth, rather than just spend it.

Suddenly the blase comments of her jaded housewife friends make a lot less sense (they would rather see her stay at home and have cocktails with them, of course).

Now you can play with and tweak these numbers all you want. But you'll still come to the same or a similar conclusion, namely that a small increase in overall income can mean a big increase in disposable income. The idea that a small part-time job doesn't add anything to the bottom line really isn't true.

Now there are a couple of caveats in this picture, of course.

If you have been awake and alert and reading some of my blog entries, you might look at their finances and say "Well, gee, they could also increase disposable income by spending less - living in a more affordable home, for starters, or spending less money on utilities, like cell phones and cable TV."

And you'd be right. Cutting expenses and keeping overhead low is the first step toward building real wealth. Making more and more money does not make one wealthy - making more and more money while maintaining the same low-cost standard of living allows you to accumulate wealth, and once you start accumulating it, it snowballs into larger and larger sums.

And therein lies the conundrum of the part-time working spouse. In many scenarios, when the spouse takes a second job, the temptation is to increase spending and as a result have no additional disposable income or money to invest. For example, after a hard day at work, the couple says "Oh, we're too tired to cook, let's send out for a Pizza". And $20 later, they have barely a meal to show for it, when that same amount could have bought food for several meals - if prepared at home.

Similarly, a second job might not make any sense if you have to drive long distances to get there. In addition to the fuel costs, the additional wear and tear on your car will mean you will have to buy a new one sooner.

But overall, if you play it right, that part-time job can be a major influx of usable cash, making the financial burden much easier for a couple, and allowing them to get ahead of bills and set money aside. Don't compare gross salaries when considering such a job - consider the effect on your net disposable income - chances are, you might end up way ahead.

Note that a similar mathematical analysis is also true for those on Social Security. Years ago, Social Security benefits were untaxed. Today, they are taxed, and once you start earning a certain level of income, your taxes will go up. Many Seniors tell me that that won't look for work, or if they do work, try to keep their income low (by working less) so their taxes won't go up.

Again, I think when you do the math here, you have to look at the overall effect on how the additional income from work affects your disposable income, not just your gross income or even income after taxes.

Gas Milage - How Much is Good Enough?

A friend of mine just sold a perfectly good and reliable "paid for" car for a pittance and bought a brand new car for nearly four times the amount he sold his old car. Why?

"Gas Mileage" he said.

He sold a reliable car that got maybe 25 MPG in favor of a new car rated at over 30 MPG. Is this a sound transaction?

The short answer: NO.

Gas mileage, as I have noted before, is a funny thing. The higher your gas mileage goes, the smaller the incremental savings are. The big savings in gas mileage are found in going from a 10 MPG gas hog to a 20 MPG sedan. The savings in going from 20 MPG to 30 MPG are half as much and from 30 MPG to 40 MPG even half again.

Many economists believe that the figure of gallons per hundred miles is a far better way of determining gas mileage. If we compare the mileage of several hypothetical vehicles, in terms of miles-per-gallon and gallons-per-mile, we can see why.

The average American drives about 15,000 miles a year. One way to really save on gas is to drive less - and people can, easily slicing 10-20% of their driving miles each year. The price of gas has fluctuated wildly in the last few years, from $2 to $5 a gallon. For our examples, lets assume an average of 15,000 miles a year driven and gas a $4 a gallon.

CAR# 1 HUMMER-Like SUV
Gas Mileage: 10 mpg (10 gallons per hundred miles)
Gallons per year: 1500
Cost of gas for one year: $6000

CAR #2 LARGE SEDAN
Gas Mileage: 20 MPG (5 gallons per hundred miles)
Gallons per year: 750
Cost of gas for one year: $3000
Savings over Car #1: $3000 (50% cost reduction)

CAR #3 MIDSIZED SEDAN
Gas Mileage: 30 MPG (3.33 gallons per hundred miles)
Gallons per year: 500
Cost of gas for one year: $2000
Savings over Car #1: $4000 (66% cost reduction)
Savings over Car #2: $1000 (33% cost reduction)

CAR #4 COMPACT SEDAN
Gas Mileage: 40 MPG (2.5 gallons per hundred miles)
Gallons per year: 375
Cost of gas for one year: $1500
Savings over Car #1: $4500 (75% cost reduction)
Savings over Car #2: $1500 (50% cost reduction)
Savings over Car #3: $500 (25% cost reduction)

CAR #5 HYPER-MILER
Gas Mileage: 50 MPG (2 gallons per hundred miles)
Gallons per year: 300
Cost of gas for one year: $1200
Savings over Car #1: $4800 (80% cost reduction)
Savings over Car #2: $1800 (60% cost reduction)
Savings over Car #3: $800 (40% cost reduction)
Savings over Car #4: $300 (20% cost reduction)

Note that the increase savings when going from Car #4 to Car #5 are almost laughable - a mere $300 a year. The 75 gallons in fuel saved won't affect the world economy much - or the environment. Fuel savings and cost savings drop off non-linearly as mileage increases.

But the cost of getting ever-increasing fuel mileage does not increase linearly. Engineering required to get hyper-mileage often means resorting to more and more complex technologies, such as hybrid powertrains. Thus, the cost of building such vehicles (and their resultant purchase price) is far higher than the cost savings involved, compared to a standard car getting "reasonable" fuel mileage.

A perfect example is Ford's new Fusion sedan. In a standard 4-cylinder model, it gets a reasonable 30+ MPG at a fairly attractive price. The Hybrid version gets 40+MPG, but at a considerable increase in cost and complexity. Is the extra cost of the hybrid drive worthwhile? Probably not, even at $4 a gallon. Add in the complexity of maintenance as the car gets older, and the picture gets even murkier.

The big savings in gas mileage are in going from the 10 mpg "gas hog" to a 20-30 mpg sedan. Back in the early 1980's America did just that, dumping the "full-sized" American car (with under-performing low-compression engines choked with poorly designed smog gear) to smaller cars with smaller engines, with more sophisticated fuel injection. Overnight, average fuel economy in this country shot up from 10 to 20 mpg, dropping demand in half, and thus causing fuel prices to drop.

Today, similar things will happen as people dump their 10 MPG truck-based SUVs in favor of 20-30 MPG car-based SUVs and minivans. The latter provides most of the functionality of the former, with better fuel economy and at a reasonable cost.

Selling a working and durable car to buy a higher gas mileage car is often false economy. Unless you are driving an 10 MPG car, chances are, the savings will be minimal. For the average consumer, getting 20-30 MPG is more than sufficient. Savings by going to higher gas mileage levels are minimal.

If you are buying a car, yes, you should carefully consider fuel economy, and walk away from any 10 MPG vehicle, unless you are towing a bulldozer or something. I would shoot for 30 MPG in a newer used car, as down the road, that will provide reasonable economy. But if price is the issue, anything above 20 MPG might be acceptable.

Cars as Presents? Are you INSANE?

Buying a car without telling your wife is a stupid idea.  And the giant bow?  Designed to impress the neighbors no doubt!

A friend of mine sent me this viral video recently, which is a take-off on the classic "Honey, I bought you a Cadillac for Christmas" advertisement. It is pretty funny.

The idea of giving a car as a gift for Christmas has been promoted by the media over the years. Dad can come off as a hero if only he surprises the wifey with an expensive SUV or Caddy, replete with a giant BOW on the hood or roof.

Saturday Night Live did a spoof on this concept with a fake commercial for "Flederson's Giant Car Bows."  Husband surprises the wife with a new SUV, only to find out she is disappointed when it doesn't come with a giant bow attached. (If you have a link to this skit, please let me know. Here it is).

UPDATE:  Apparently there is a Flederson's, but it has a different name - "Bow Kingdom".  They make huge bows for cars and whatnot.

Yes, you could buy a giant bow for your car.  What do you do with it after that?

Ironically, when searching for this SNL skit on the Internet, I did find links to companies that actually make Giant Car Bows. So the spoof on SNL was a little too close to reality. People apparently do this - act out the advertisement on TeeVee and buy their spouse a new car for Christmas, replete with Giant Car Bow. I wonder if the reality is anything like the commercials. I doubt it.

An early sighting of this idea in popular culture that I am aware of was in Kurt Vonnegaut's Slaughterhouse Five, where the hero (anti-hero?) Billy surprises his wife with a new Cadillac on her birthday. Ironically, she later ends up dying in the car due to carbon monoxide poisoning.

In the HBO Soap Opera The Sopranos, Tony surprises Carmella with a new Porsche Cayenne, to salve his guilt over having mistresses and also provide a neat product placement for a sponsor (Whoops! That's right. HBO is commercial-free. Riiiiiiight!).

As I have noted again and again in this blog, the media, specifically advertisers, like to promote as "normal", many personal economic ideas that are fraught with peril. Car makers would love it if you believed that buying your wife a car as a gift was a good idea and that she would love you forever for it.

The reality is, for most middle-class, upper middle-class and even wealthy Americans, the idea of buying something as personal as a car as a gift is a really, really bad idea. Taking aside the issue of whether she'll like the make, model, and color (would you want someone else to select your car for you?) buying a car as a gift is a fundamentally unsound financial proposition.

And if you think about it, if you take the joint marital assets and buy your wife a car as a gift, is that really a "gift" at all? After all, half that money (in most States) is hers. So far from buying a thoughtful gift, you are merely spending her money for her. How nice - and misogynist, too.

A husband and wife should work together on family finances and make major purchase decisions jointly. A husband who goes out and makes a major purchase such as an automobile, without consulting his spouse, is being irresponsible with their finances. A new car is a multi-year financial commitment in terms of payment, depreciation, and insurance. To buy one on a whim as a gift, well, most spouses I know would not be jumping for joy.

Merry Christmas..... Bitch!

And for a spouse to be so unaware of the family finances that the husband can go out and purchase a car is also a scary scenario. Unfortunately, in many families, such is the case. In the old days - 50 years ago - it was not uncommon for a man to be the sole breadwinner and to "handle all the money" - giving the wife a weekly or monthly allowance to maintain the home.

However, in today's world, it is more common for both husband and wife to work or have careers, even at least part-time work. And regardless of whether both husband and wife work, managing money should be a joint effort and something done with mutual consultation. Managing money in such a scenario should be a joint effort, not a solo practice. And why not? Managing money is a difficult task. Two heads are better than one. So it pays to have someone to bounce ideas off of and to get feedback on financial management.

This is not to say that one person shouldn't balance the checkbook and keep records of purchases. In any relationship, one person will end up more inclined to do such things - it is an onerous chore. And trying to have two people balance the same checkbook is often difficult at best.

But the allocation of resources in a relationship should be a joint undertaking and something jointly discussed. Otherwise, a relationship quickly becomes a "race to the bottom" as each spouse tries to out-spend the other, sometimes in retaliatory acts of revenge. "He bought a new power tool! I'll show him! I'm buying a new pair of shoes!"

Such relationships do not last long, as each spouse looks at relationship in terms of "what am I getting out of this?" Financial difficulties inevitably follow and the recriminations start and pretty soon even more money is squandered in a divorce.

Think I am being dramatic? It actually happens. As I noted before, I once sold my motorcycle to a fellow who had just been divorced. He paid me full asking price, which sort of surprised me. When I asked him more about why he was buying it, he said, "I just got divorced and had to sell my Harley and my Corvette. So I'm buying another motorcycle and a Camaro. I'll show that bitch!"

He was desperate to show his ex-wife that he was not going to be cowed. He would still have a bike and a sports car, albeit not a Harley and a Corvette. I kind of felt sad for the guy, but was happy to take his money. I hope he realized there is more to life than buying things in an act of revenge.

Making a major financial decision such as buying a car should be something that is carefully discussed and debated between you and your spouse. You should research it carefully and make a wise investment decision. Impulse purchasing a major appliance like this is never a good idea. While it may be thrilling to buy a new car, it is a much smarter deal to buy a 2-3 year old used car. Working together toward a common financial goal and financial future is far more rewarding than impulse-spending to try to win approval.

And please, don't tell me "you can afford it". Unless you are mega-wealthy, you can't. The average suburban Joe, even if he is making $100,000 a year or more, can't afford to be that lax with money.

The idea of a new car as a gift has a corollary in the concept of the new car as memorial. Increasingly, we are seeing cars, trucks, and SUV's with carefully crafted stickers on the back proclaiming that the vehicle in question is "In Memory Of" a deceased loved one. I am not sure how this concept came about (perhaps the car was purchased with the life insurance money or accident settlement?) but it is pretty tacky.

To begin with, a car is a transitory thing. As a long-term form of remembrance, using a car as tombstone seems somewhat odd. I saw one such vehicle the other day, with "In Memory of Joe Blatz, Loving Brother" neatly decal-ed on the rear window. Next to that was a sign saying "FOR SALE".

This begs the question (or questions) as to whether the new owner is to maintain the truck as a permanent memorial to old Joe, or whether Joe's brother will summarily scrape off his memorial when selling the truck. Will the next truck have a similar memorial? What is the protocol on this? Does one have to perpetually have memorial stickers for family members on all cars, or only until you sell or trade-in the vehicle? I don't fully understand these newfangled traditions.

Here's the deal. Cars are just things. Expensive things. And they can cost 2-3 times more than they should if you are buying them brand new and then trading them every 2-3 years. Buying your wife a car as a gift is not going to make you the hero of the family, particularly when the car payments mean that some other expense (such as funding your retirement) goes unpaid.

More than three-quarters of martial difficulties can be traced to money problems. But money problems need not be a force that divides a couple. Working together to overcome financial difficulties and to plan together to work toward a financial future can be a force to bind a couple together against the odds. It is all a matter of choice - your choice.

And please, please, do not memorialize me on the back of some pickup truck or SUV. I don't even want a headstone, much less something as tacky as that.

Black Friday - Good Deals or Hype? (Hype).

Are there really "good deals" to be had this way?  Maybe not.

As I noted in my Demilitarizing Christmas Posting, the entire concept of the Christmas Holidays has been hijacked by commercial interests. I will leave it to the religious sorts to make the faith arguments. I am only concerned here with the financial ones.

As I have noted before, following the herd of cattle to the slaughterhouse, the lemmings over the cliff, or the sheep to the butcher, is never a sound idea. Doing what everyone else is doing is sometimes a good idea - but more often than not is fraught with peril. When someone says (figuratively) "Hey everybody, let's all do THIS!" then you should probably think about quietly slipping away.

Nowhere is this more true that with the media's hyped stories about "Black Friday."  Today, they interviewed a doe-eyed mouth-breather at some chain store about the "incredible bargains" on "Black Friday."  The mouth-breather in question had waited up all night to be first in line to buy a small flat-screen television for an apparently bargain price. The interesting thing was that the television was not a purchase as a gift, but for himself. And the price mentioned by the interviewer did not seem to me to be all that great.

As other media outlets have noted, many of the "Black Friday Bargains" are limited to a few items per store. Thus, they are usually sold out by 6 AM when the stores open (or earlier, more on that later) and when you arrive at 9 AM there are no bargains to be had. Also, many of these "bargain" items, particularly in electronics, are stripped-down versions or specially made units that may not have the quality, resolution, or features that the regular unit has.

Being herded and stampeded into buying something on the premise that "the price is only good for today" is never a good idea.  If someone can get you to impulse-buy, without thinking too carefully, they can pull a fast one on you.

Here's a clue: consumer electronics, historically, have dropped in price from year to year, as the cost of production drops, manufacturing efficiencies are implemented, and more competition drives down prices. If you wait a week or two - or a month, or a year - to make a purchase on a television, stereo, computer, or whatever, chances are the price will be about the same, if not lower. There is no incentive or imperative to "buy now" in this segment of the market.

The other humorous part of the "Black Friday" story was when the interviewer asked the mouth-breather whether he had thought about buying any of the $3 small appliances being offered this year (toasters, crock pots, coffee makers, etc.). He replied, "Maybe I'll get one for my Mom".

Here you are Mom, Merry Christmas. Here's a cheap-ass toaster. Enjoy.

$3 or not, if you don't need a new toaster or crock pot, why buy one? And how well made do you think such appliances are? Is this something you will have for many years, or will it be clogging some landfill before the year is out?  As even Wal-Mart is learning, people really don't want things that are so cheap that they are broken before you leave the parking lot.

And even at "bargain" prices, the average Christmas shopper ends up putting all this stuff on a credit card, which, thanks to the miracle of revolving Interest, means that they will pay for the purchase two or three times over.

I alluded to earlier that many stores are opening earlier and earlier on "Black Friday."  Many are open at midnight. This year, many cut to the chase and opened on Thanksgiving (why not? There is little else to do that day other than watch football). People camp out overnight to snap up the five or less "bargain" flat screen televisions offered at the local Wal-Mart or whatever.

As was widely publicized, last year, a temporary worker was trampled to death at a Wal-Mart on "Black Friday" as eager shoppers tried to snap up the alleged bargains the minute the store doors opened. One can only imagine what Christmas is like for that young man's family since then. The idea that someone should get killed over a flat-screen television is appalling enough, but when placed in the context of the season, doubly so.   Jesus would be pissed.

The incident, and many similar to it, serve to illustrate how sick our society has become and how sick the media has been, to hype and promote this sort of "group think". As I noted in the beginning of the article, when someone (particularly in the media) says "Hey, Everybody, let's all do THIS!" chances are whatever it is they are hyping is really a sour deal.

If the idea of fighting crowds on the second-busiest shopping day of the year strikes you as a good time, go for it.  But don't kid yourself that you are snapping up any "bargains."  And as I noted in my Demilitarizing Christmas Posting, buying people expensive and/or useless gifts because the media (and commercial interests) say you should, is a pretty dumb idea.

Gift giving comes from the heart and should be spontaneous and fun. "Exchanging" gifts and carefully evaluating their worth is not gift-giving but a very lame form of involuntary bartering.

I already have a toaster and coffee maker, thanks. And if I need a $3 crock pot, I know where to get one. If you want to bring me a gift, bring a bottle of wine and help me drink it.   Otherwise, don't feel obligated to buy me anything.   And I won't feel obligated to buy you anything either.

And together, we'll stick it to the Christmas Industry and the minions who hype it.

Have a really Merry Christmas, not a stressful shopping spree!