The conventional financial advice you get from mainstream sources is to keep a strict budget of your monthly income. That advice is wrong. This can actually hinder you from achieving financial independence. If you look at how large companies manage budgets, you will see how flawed the idea really is.
Budgets In Large Companies:
Large companies have many departments and determine what the operating budgets of these departments should be for the year.
Where I worked, in the Engineering Department, we might have had a budget of $100 million for the year. This was a publicly traded company so the people who were responsible for the budget in our department weren’t actually spending their own money. They were spending the company’s money. Their only concern was that they didn’t go over the budget because it will affect their yearly bonus. But what happens to them if they are significantly under budget at the end of the year? Does the company give them a bigger bonus or a cut of the money they saved? No, of course not. In fact, if they are under budget at the end of the year, the company will give them less money for their budget next year figuring they gave them too much last year. So what does the budget manager do if he knows that he will come in under budget? He goes on a spending spree in the last few days of the year.
In our case that usually meant buying equipment for jobs that we might have next year or even just buying rooms full of laptops or anything else that we may need next year or down the road. After all, it’s free money right? Use it or lose it. It’s actually worse than that because if he doesn’t use it all, he gets less to use next year. Now, does this sound logical to you? It doesn’t to me but, based on the consequences of coming under budget, that is what it leads the budget manager to do. It’s not his money so it’s like having a bunch of money that expires on December 31.
Now think about what would happen to the extra budget money if this was a small company privately owned by the founder. Would he blow that extra money just so that he doesn’t under spend the budget? No, because it’s his money, and anything he saves by under spending the budget goes right into his pocket! This is how you should think of your own finances.
The mainstream financial advice is that you allocate your monthly income into a budget. If this advice is so good though, how come most people live paycheck to paycheck and are nowhere near being financially independent? It’s because keeping a budget is artificial and causes you to spend money you would not normally spend just like the manager in a large company that buys things he doesn’t need just because he is under budget.
Most people budget for categories that they think they need or are told they should budget for like restaurants, clothes, entertainment, car payment etc. When they are finished with their budget, they come out with $0 at the end of the month. Now, they may budget some money for savings but it is usually a small amount. So with a budget like this, if you allocate $300 a month for restaurants, but at the end of the month you only spent $100 on restaurants, what are you going to do? You will most likely go out and make sure you spend that other $200 at a restaurant right?
You see how keeping a budget makes you spend some artificial predetermined amount? It also keeps you in the mindset that you need to spend money on these things every month. What you should do is start from the idea that you will try to save as much as you can every month and only spend on things you actually need or want within reason. If you need some new clothes this month then buy it, but if you don’t need any next month there is no reason you should have a budget item that forces you to buy more clothes. Save that money instead. This gets you into the mindset that saving and investing the money you worked for is more important than some of the things that you would normally buy. It makes you think twice about if you really need it. If you do this, you will eventually find that some of the things you thought you needed are not really that important.
Try to think like the owner of a private business. Every dollar you don’t spend adds to your wealth. Remember, for every year of expenses you save, you can stop working one year earlier.
If you want to save a lot of wasted time and aggravation, then take my word for it when I say reward card churning is not worth it. It seems that everywhere you look there is a blog bragging about how many first class flights they flew and how many free nights they spent in a five star hotel in some exotic location just by exploiting this “Little Trick” or by sharing with you “The Secret The Credit Card Companies Don’t Want You To Know”. It sounds exciting doesn’t it? Who knew that credit card companies are eager to foot the bill for people to travel the world in luxury? Hmmm, how do credit card companies stay in business if they are just handing out all this free stuff to anyone who asks? Who cares how they do it, I just want to sign up now before they close the loophole and I have to go back to flying standing room only on Ryanair and sleeping in one of ten bunk beds in a one room hostel with 20 other practically homeless backpackers.
The dream that they are all trying to sell is that by signing up for the right reward credit cards and receiving the signing bonus miles or points, you will get free or extremely discounted travel. They take it a few steps further and give you some scenarios of which reward cards are best for you according to your needs. Even if you don’t travel there are still cards for you where you can get all kinds of merchandise with your points. By this point some people may be skeptical, remembering the last time they thought they were getting something for nothing and how that turned out. What about the yearly fees? Oh, you can just cancel the card before the year is up and go on to the next card and big sign up bonus. A few websites will even help you keep track of what you can redeem your points for on different airlines, hotels and stores. All you have to do is click on this convenient link, sign up for this credit card, and spend $1000 or so in the first three months and you are on your way to hobnobbing with the likes of Sir Richard Branson at the finest travel destinations in the world.
Credit card companies are like casinos in that the house always wins and you will never see a fifty story hotel built on the Vegas Strip from the winnings of some blackjack player with a “system”. I’m sure from analyzing their customers’ behavior, they know that they will come out ahead because most people will eventually forget or not be able to pay their monthly bill in full and then the 15-20% interest kicks in. Even assuming you will always pay your bill in full and avoid any finance charges, you still have the yearly fees to pay. Now some will argue that it is still worth it if you get more value from the points than you pay in the yearly fee. This may be true in some cases, like if you spend a lot per year, but when you are juggling multiple cards, the yearly fees can add up to a lot of money.
In my mind, the biggest reason not follow these schemes is that the time you have to invest and the benefit you receive is just not worth it. Have you ever tried to figure out which types of points are accepted or compatible with which companies? Once you spend hours figuring that out, you then have to spend more hours trying to find a flight or hotel that you can use the points on. To make matters worse, the rules and values for the points are always changing and they also devalue your points like American Airlines did not too long ago. The end result is that you now have an unpaid full time job as a lawyer trying to figure out all these programs and how to best redeem your points before they expire or are devalued.
So if reward card churning is not worth it or profitable for the average person, why are so many blogs pushing it as a viable strategy for everyone? Probably because they get $100 to $200 or more when people sign up through the link on their blog. So the reality is that these bloggers get a lot more money out of getting you to sign up for credit cards than they do for any of their reward card churning schemes that they try to glamorize.
So Should I Swear Off Of Credit Cards?
No. To me, the simplest deal with the least hassle is getting a no fee credit card with cash back. That way you are not forced to buy your flight or book your hotel room from that specific company. Usually you can find much better deals for where you want to go or stay just by searching a travel website like Kayak.
Here is an example :
I plan on going to Europe this summer. I have about 70,000 miles from an airline reward card that I had yet I could not find a flight for those miles even though I searched many different dates and even cities all over Europe. This took a lot of time to do and the end result was that I did not have enough miles. I also set up searches on Kayak for flights to Europe that show up in my email a few times a week. I eventually got a ticket to Spain for only $370 on another carrier. The carrier that I have my miles with charges about twice the price for the same flight. So why should I be boxed in with one company when I can pay cash to the most competitive company?
Let’s look at the actual numbers:
New York City, US to Madrid, Spain
Traveling from mid June to late July using the exact same dates for all three examples.
1 Stop Flight
Option # 1:
80,000 Miles + $50 fee or $622 cash without using miles
So I have to spend $80,000 to get a ticket worth $622 meaning I get $622/80,000 = $.0078 for every dollar spent
Option # 2:
125,000 Miles + $50 fee or $672 cash without using miles
So I have to spend $125,000 to get a ticket worth $672 meaning I get $672/125,000 = $.0054 for every dollar spent
Option # 3:
$370 cash on a competing airline. Since I know that I already get $.02 for every dollar spent, I only have to spend $370/$.02 = $18,500 to buy this ticket with my cash back money.
As you can see, it takes a lot more spending to buy a ticket on one of the airline miles cards than it does with a cash back card in most cases. Even if you account for sign up bonuses and other ways of accumulating miles without spending, you are still paying more and your choices are limited to dealing only with that airline and their partners. It’s kind of like going to a concert or the airport and finding out that a bottle of water is $4. Why is it so expensive when you can buy the same water a few blocks away for $1? It’s because you are captive in their venue and they control the price without any competition.
So What Card Should I Get?
Well, if you already have a bunch of cards, maybe you shouldn’t get any new cards. The card I use for everything is the Fidelity 2% cash back card. Fidelity offers a 2% cash back Visa card on everything if you have a brokerage account with them. It gets deposited right into your brokerage account. You can spend your money when and where you want to spend it with no black out dates or expiration of your rewards. There are other cash back cards out there. Do a little research, pick the best one for you, then figure out what you will do with all of this newly found time that you are not wasting with reward card churning.
(I am not affiliated with Fidelity or any other company mentioned in this article, nor do I receive anything for writing about them).
The Law Of Diminishing Returns is not just some term economy professors use in boring classes. It actually affects everyone in their everyday life. If you learn to recognize where it applies in your life and how you can optimize it to work for you, you can maximize your freedom.
What is the Law Of Diminishing Returns?
It is the idea when you add more resources (workers, factories, money, time etc) to produce something, at some point you start getting less of the desired product for each addition of resource. I’m paraphrasing here so if you are a stuffy economist, there is no need to send me a five page description using big fancy words. I always like examples to understand and idea, so here are some:
Your goal is to produce as many cars as you can using the least amount of workers per car. Assume a car factory has 100 workers and produces 100 cars a day. That is one car produced for each worker. If you add 10 workers, you might get to produce 10 more cars per day, but at some point adding more workers doesn’t produce more cars. In fact it might produce far less. Imagine if you added 1000 workers to the same factory that was designed to accommodate 100 workers. Nothing would get done because everyone would be in each others way.
Here is what it might look like:
100 workers -> 100 cars produced per day
110 workers -> 110 cars produced per day
200 workers -> 140 cars produced per day
1000 workers -> 5 cars produced per day & 17 fistfights
Painting Your New House:
Your goal is to get your house painted in one day with decent quality while paying less in pizza and beer than you would have spent if you had to hire professional painters. Assume you need to paint the inside of your house and you want to have your friends come over to help you paint it quicker. Well, you are probably going to pick the most industrious friends first. But if three relatively motivated friends are good, then the more the merrier right? Well what happens when you try to get everyone you know and their friends to come over and paint? If you have thirty people show up you will not get 30 times the production of your first friend. You might just find the house worse off than before they came.
Here is what it might look like:
3 friends painting -> house painted in 8 hours
6 friends painting -> house painted in 6 hours
10 friends painting -> house painted in 5 hours
30 friends painting -> more paint on floors than on the walls, a fortune spent on pizza and beer, and your new neighbors call the police on your friends for making too much noise
Your goal is to pass the class and get as good a grade as you can get with the amount of time you are willing to spend learning the material. Assume the final is your whole grade in the class. If you study for 2 hours, you might squeek by with a 60. If you spent 4 hours, you might get a 75. Well no matter how many hours you spend studying, you can not get higher than 100, so what is the optimum amount of time to spend studying without getting diminishing returns for the hours you are investing in studying?
Here is what it might look like:
2 hours studying -> result 60
4 hours studying -> result 75
5 hours studying -> result 83
10 hours studying -> result 91
15 hours studying -> result between 97 and 100
20 hours studying -> result is that you have no life outside of studying
So how does this affect you every day and what can you do about it?
Most of the usual things you do in your life are like an engineering problem that has many solutions. What I’m talking about are things like food, housing, cars, clothes, and other things that you have to use everyday while you go on with the business of what you want to do with your time.
Usually the extreme solutions are the most costly as we will see. There is a sweet spot that gives you the most of what you need for the least amount. Money is not the only thing I’m talking about when I talk of a cost. People have varying amounts of money, but everyone only has the same 24 hours in a day. You can make more money, but you can’t make more time. Money and time are things you spend in your day to day life to get the things you need. Let’s see how going to extremes diminishes your returns.
Looking at the chart for food, we can see that you can spend a lot of time and little money on food or you can spend a lot of money and little time on getting the nutrition that everyone needs every day. The sweet spot of course, is somewhere in the middle. Now you may ask, isn’t it much better if you can get your food free by just hunting or growing a garden or picking wild berries?
To answer that I will tell you about one of those shows about people living in the wilderness off the land. In the episode I saw, they hunted, gathered berries, chopped firewood, and built some kind of wilderness shack. You know the type of show.
The crazy thing was that when they needed to get salt to salt their meat so it doesn’t spoil, they didn’t go down to the local supermarket and buy five pounds of salt for $2. Instead, they drove a pickup truck a number of miles to the beach, built a fire and boiled sea water for many hours to get their five pounds of salt. Now in their mind they are being true to “living off the land” and not paying for food. But, they did not build that Ford pick up truck and they did not push the truck to the beach. They used gas. That is not exactly living off the land so would it go against their principles to just buy the salt from the supermarket? I guarantee you they used way more in gas than the 5 pounds of salt would have cost at the supermarket. That is the small part of what they spent. The large part is that the two of them spent the better part of a day boiling water to get salt. They will never get that day back. Granted, they might have done that for the show, but they are really getting diminishing returns for their time. If the minimum wage is $8 where they live, one of them could have worked for 15 minutes to make the $2 to buy their salt.
Just because your food doesn’t cost you money, does not mean that you are optimizing your time and money for the best result. Those people that call themselves Freegans who dumpster dive to get food thrown away by stores are not optimizing their time and money. How many garbage cans do you have to go through before you find eatible food that you want to eat? They are definitely not in the sweet spot, unless you consider the sweet spot to be in the middle of a dumpster surrounded by rotting food.
To a lesser extent, even having a garden may not be the best use of your time. If you calculate how much time you spend on your garden and how much vegetables you get from it, I think you will find it is cheaper to buy it from the supermarket. If gardening is your hobby, that is a different story.
So, if spending my whole day finding and preparing enough food to survive the day is not optimal, then what about doing the opposite? So what is the opposite?
I would say that would be to hire a cook to shop for your food and cook it for you. Maybe even hire a butler to cut your steak and feed it to you so that you don’t have to suffer the indignity of lifting your own fork. In reality, I would say that this is better than spending your time hunting for food. Of course, this is only if you have so much money that hiring these people is not going to make a difference to you financially. Most people are not in that position. A little less, extravagant than that is to eat out every day. Although you are saving time by not having to shop and cook the food, you are still spending a good amount of time going there and you are paying about three times what the food would cost you if you cooked it yourself (not to mention tax, tip and drinks).
By now you see where I’m going with this. The sweet spot in getting the nutrition you require every day is using some time and some money to shop and cook for yourself.You also get to control the quality of what you eat as opposed to restaurants that might use worse quality food.
Finding the sweet spot works for a lot of things in your life. Here are some examples:
One extreme: Buying a $20 Walmart tent and living in the middle of the wilderness spending your day gathering firewood and berries and trying not to get mauled by bears while you sleep.
The other extreme: Building a custom 20 bedroom house in the middle of Manhattan with a staff of 10 people for just you and your cat.
The Sweet Spot: Buying an existing home in a low cost area that is not too big that will not make you have to work an extra 10 years just to pay for it. The time you don’t spend working to pay for or maintain it can be spent on what you really want to do with your time.
One extreme: Buying a old $500 car that you have to keep spending time and money repairing
The Other Extreme: Buying a new $500,000 car that you have to keep spending time (at the dealership) and money repairing
The Sweet Spot: Buy a mass produced used car with good reliability rating so you don’t have to worry every time you turn the key like you do on the cars in the two extremes.
One Extreme: Spending hours at the thrift store trying to find the shirt you want in your size without bedbugs on it.
The Other Extreme: Spending money getting custom tailored clothes that may or may not be in fashion next month
The Sweet Spot: Find a good quality clothing manufacturer you like (For men: Gap, Banana Republic, Brooks Brothers, Ralph Lauren etc) and just buy simple classic clothes when they have their yearly sale. Spend your time on things that matter to you instead of fashion.
The lesson here is that cheap or free isn’t always better. Spending obscene amounts of money isn’t the answer either because the bigger, or more expensive something is, the more time you need to maintain it or get someone to maintain it for you. The sweet spot is the thing that satisfies your need with the minimum amount of time,and to a lesser extent, money. Minimizing those things maximizes your freedom to do what you want with your time.
One of the biggest expenses for people is a car. For people who live in a big city, they might get away with not owning one and just using public transportation, a bike, or ride sharing. I’m guessing that most people who are financially independent live in a lower cost, less dense area where a car is still a must. You may not drive it a lot, but you still need it. There is no good reason, unless you are really rich, to spend a lot of money on a car especially if you don’t need it to commute to work. There is even less reason to buy a car and pay interest on a loan for it. Think about that, when you buy a car with a loan, your purchase price increases (purchase price, plus interest) while the value of your car decreases. The difference between those two numbers is what your car is really costing you. A large monthly car payment is just another expense that keeps people on the work treadmill. You can have a reliable car without the large monthly payments and possibly, less insurance costs as well.
Before you get too excited thinking that this is an article about some “secret government auction” that sells 1-year-old luxury cars for $100, let me just say that there is no such thing. The most cost-effective car to buy is still a reliable used Toyota or Honda or something similar and keep it for a decent amount of time. It is the combination of what car to buy, how old should it be, how many miles should it have, and who do I buy it from, that will give you the result of having the car cost you about $100 a month over the time that you own it.
Before I get started, let me tell you about my car mistakes over the years. You probably couldn’t tell from my bland 4 cylinder 2008 Toyota Camry that I love cars. I have had 23 cars over the years if I didn’t forget any. I have owned German, American, and Japanese cars. I have never bought a new car and every car that I bought was bought off of a private seller except for 3 of them. Those were all mistakes. I have also sold all of my cars myself as well as for friends and co-workers. My obvious mistake is that I keep cars for such a short time. That was mostly when I was younger and I have gotten much better about that. I have had my current car for 5 years. My biggest mistake was buying a 3-year-old BMW around 2000 for about $30,000. My payments (only car loan ever) were about $500 a month. When my car got stolen about 2 years later, the insurance money exactly paid for what was still owed to BMW Financial. That means that every $500 payment that I thought was going to pay off my car was actually just going to the depreciation.
Let’s start with depreciation
Most financially aware people know that a car loses about half of its value in the first 5 years. Here is a chart I made from the depreciation calculator from Chartprice.com assuming a purchase price of $25,000 and a 15 year ownership:
Here is what the yearly depreciation looks like. Notice that depreciation is the most in the first few years:
Here is the actual data:
Notice that the red cell shows that the cumulative depreciation in year 4 is more than the next 11 years of depreciation combined. That means that if you buy a 4 or 5-year-old car, it will cost you as much for the next 10 years as it did the person who owned it for the first 4 or 5 years. Obviously this does not include maintenance or repairs so you better buy something with a track record of reliability.
So what car should you buy?
Buy the car that will do the job for your needs. I am 6’2″ so I prefer a larger car like a Toyota Camry or Honda Accord rather than a Honda Civic or Toyota Corolla or similar. I’m flexible on the car if I can get a good deal on the price for the condition. I love the look and drive of German cars, but I don’t like the stress of knowing every time I turn on the ignition I may be getting a $1000 repair bill for some fancy electronics that are malfunctioning. Don’t get me wrong, I like nice cars, but not at the expense of being afraid to drive it long distances because of the worry of it leaving you stranded. As for American cars, I think they are more reliable than German cars but less reliable than Japanese cars. I would stick to Japanese cars if you could.
As for the miles, most advice people hear is that they should buy a low mile 3-year-old car and keep it for 7 to 10 years. That may be good advice for people who drive 60 miles a day to work or 15,000 miles a year, but if you are retired or financially independent you save all those commuting miles. I have only driven about 6,000 miles since I have moved to FL two years ago. If you expect, like me, that you will only be putting a few thousand miles a year on your car, it makes sense to buy a higher mile car since you can get a better price on it. By the time you are ready to get rid of it, it will have below average miles if you don’t drive a lot.
Now that we have an idea of what to buy, let’s see some data from Kelly Blue Book and Edmunds on what these types of cars cost. I will use the example of a Toyota Camry LE with a 4 cylinder engine. I want to show real world prices for this car from 1-year-old to 10 years old. I did this by getting the current values for cars from the 2016 model down to 2007 model. This is not exactly the same as being able to say what a 2016 Toyota Camry will be worth each year for the next 10 years. It is a close approximation but not exact because the 10 year span I am looking at will include 3 different model upgrades on the Camry but all the same trim level and engine size.
The chart above Shows the Kelly Blue Book (www.KBB.com) estimation of the Trade In Value and the Private Party Value of a Toyota Camry LE 4 cylinder engine from the years 2016 to 2007. These values reflect 15,000 miles a year on the cars. So the 2016 data point on the chart reflects a 1-year-old Camry with 15,000 miles. The 2015 data point on the chart reflects a 2-year-old Camry with 30,000 miles and so on all the way out to the 2007 Camry that reflects a 10-year-old car with 150,000 miles.
Below is the data table for this chart:
Notice in the table above that the difference in price between the Trade In Value and the Private Party Value is about $2000.
Here is a second set of data from Edmunds (www.Edmunds.com) using the same assumptions about car type and mileage:
And here is the data table:
The Edmunds data includes the Retail Value as well as the Trade In Value and the Private Party Value. Notice that the difference between Trade in Value and Retail Value is about $3000. In case you are not sure what these terms mean, here is a quick breakdown:
Trade In Value: What a dealer gives you for your car when you trade it in, usually when you are buying a new car. A lot of times they offer a lot less than what the Kelly Blue Book and Edmunds suggest.
Private Party Value: This is the price you would expect to get for your car if you sold it by yourself on Cars.com or Craigslist.
Retail Value: This is the price a used car dealer would sell this car on his lot for. People are willing to pay this high price because they don’t know any better and also they hardly ever have the cash to purchase the car outright so they accept the higher price because the dealer gets them a loan usually.
How to get the most for your money
The way to get the most for your money is to try to buy on the bid and sell on the offer, or in other words, buy wholesale and sell retail. Most people end up doing the opposite of this and so they are about $3000 behind right from the beginning.
Looking at the Edmunds table, let’s assume you want to buy the 2012 model Camry which would be a 5-year-old car with 75,000 miles. If you buy it retail from a used car dealer you will pay $11637. Let’s say you keep it for 5 years and trade it into the dealer for $2734 (using the 2007 Trade In Value). This car cost you ($11637 – $2734)/60 months = $148 per month. This is not terrible and if you don’t put a lot of miles on it, you might even be able to keep it a few years longer before you have to worry about mechanical problems.
Now let’s assume you want to buy the same 2012 Camry but you are able to get it at the Trade In Value (or close to it) of $8253. In five years you sell it, but instead of trading it in, you sell it yourself and get the Retail Value (or close to it) for it which is $5764 (using the 2007 Retail Value from the Edmunds table). Now your cost is ($8253-$5764)/60 months = $42 per month.
By now you may be thinking that these numbers are fantasy numbers because only car dealers actually get to buy wholesale and sell retail. Yes and no. You may not be able to buy your car at or below Trade In Value and you may not be able to sell it later at Retail Value, but you can come close.
How to buy close to Trade In Value
You can buy close to Trade In Value by buying a car off of friends or family before they trade their car into the dealer to buy a new one. Just talk to people you know who buy a car every 5 years or so. Tell them you will pay them cash before they even go to the dealer to get the car appraised. Offer them Trade in Value or a few hundred higher to give them the incentive to sell to you rather than just trade it in. Everybody wants to get more than what the dealer offers them, but most people are afraid to sell their car themselves to get closer to the retail number so this is an easy way for people to get a better price for their car.
Only ask the people you know who have a car that fits your needs. Also, this is a very good way to get a good used car without the uncertainty of the car’s previous history. Only buy off people who you know take care of their car and do not abuse it. Do not buy off of people who are messy or have messy cars because they may not maintain their cars well. Also, do not attempt to buy cars off of people who are super Type-A about their car because they will think it is worth twice the retail price. I know somebody who squeegees his whole car after it rains and does other crazy things on his 8-year-old pick up truck. What do you think he thinks his car is worth? You want to buy off an older person that just uses their car like any other appliance and gets all the scheduled work done at the dealer. If you just let people know in advance that you are interested, you will be surprised at how many offers you will get from people.
If that doesn’t work or you need a car at a time when your friends are not getting rid of theirs, then the next best thing is to buy it from a private seller on a website like cars.com. Private sellers list their cars here to try to get a better deal than they would by trading it in to a dealer. You can get a car from them somewhere between Trade In Value and Retail Value depending on the condition and how well you negotiate. One problem with buying from private parties off of websites is that the more expensive the car is, the less private sellers there are. This is because there are very few people who have $10,000 in or more to pay for a car. That’s where the dealers come in with their loans and “affordable monthly payments”.
For example, if we check cars.com across the whole country for a 2012 Toyota Camry with the 4 cylinder engine with under 80,000 miles we get 1563 listings ranging in price from $8900 to $20,995. Only 10 of these listings are from private sellers! Also notice the crazy range in prices for these cars. Some dealers are trying to sell 5-year-old cars for almost what a new one costs. Cut out the middle man and buy directly from a private owner with cash.
So how do I sell my car?
If you are selling your car after owning it 5 to 7 years, you might want to ask your friends and family if they know anyone that is looking for a car in the price range of yours. If not, list it on cars.com or Ebay or Craigslist or something similar. You can check Ebay it see what cars similar to yours actually have sold for. You can’t see that on cars.com but you can get an idea of what your car is worth in your area by looking at similar private party car listings. If you think your car is worth more than some other similar cars then you can list it a little higher. Just know that if the people don’t call about your car, then it is priced too high. A lot of people look for cars on the weekend so if the weekend went by with no one calling, then lower it by about 5% every Monday until people start calling you. That is how you can get the highest price for your car when you sell it.
Conclusion: Car dealers exist to make things easier for people. If you don’t have enough to buy a car outright, they make it easy by giving you a loan. If you don’t want to deal with listing your car and showing it to strangers, they make it easy to just trade it in to them. All this so called convenience comes at a pretty big price. On a big purchase like this, making a little more effort can save you a large amount of money. I know most people dread dealing with car dealers, and they dread even more having to negotiate with strangers buying a car off of them. Even though I like doing that, I realize that it is not for most people. That’s why people are always asking me to sell their car for them. At the very least, make it a point to let friends and family know that you are willing to buy their car. With very little effort, you might be very surprised at the deal you are able to get.
Normally I try to keep things in my life as simple as possible. In a perfect world I would have one brokerage account with an associated bank account. Unfortunately, after seeing many large financial institutions fail or be bailed out by the US taxpayers, I feel much safer spreading my risk around. Not only do I have multiple bank and brokerage accounts in the US, but I also have bank and brokerage accounts in other countries.
If you ask most people if it is legal for a US citizen to have a foreign bank account, they would probably say “no”, and repeat the myth that only tax evaders have foreign bank accounts. This is very far from the truth. Many Americans have foreign accounts even though the reporting requirements that started in recent years has made many banks reluctant to do business with US citizens. In Switzerland, some Americans living there are even having a hard time opening or keeping their bank accounts because some banks don’t want to incur the reporting costs associated with the new US rules. There is even a story about the US ambassador to Switzerland asking more Swiss banks to accept US citizens as customers. This is extremely ironic since it was the onerous regulations and tax-evasion probes that prompted many financial firms to shun American customers in the first place.
I know many are thinking, okay that’s nice to know, but why would I get a foreign account? I have most of my money in nice diverse mutual funds and I even have some international stocks included in the mix so I am completely diversified. Well, yes and no. You may be diversified in your stocks, but you still have the risk of another financial crisis in the US, or any other country for that matter. In other words, this is systemic risk.
You know how you back up the hard drive on your computer to a USB drive or another portable hard drive? If you keep that back up in the same house as the original hard drive are you really diversified? What if someone robs your house and steals the computer and the USB back up, or what if your house burns down? This is the same analogy with US accounts where your accounts are the computer and back ups, but they are in the same house (the US).
This is the part where people’s normalcy bias kicks in and says “This has never happened in the US and therefore never will”. Well I hope it never does either, but I would like to have some protection just in case. Kind of like how you don’t expect your house to burn down but you buy insurance just in case. And just in case you think everything is a rosy as they tell you on TV because the stock market keeps going up, here is an alternative set of facts to keep in mind:
The FDIC (Federal Deposit Insurance Corporation)has about $72.6 billion in its insurance fund. This is 1.1% of insured deposits. The total of all US bank deposits is about $12.5 trillion. This means FDIC insurance can cover about 60 cents of every $100 in bank deposits.
The SIPC (Securities Investor Protection Corporation) covers brokerage accounts. It has about $2.4 billion in its insurance fund. The total amount in all US brokerage accounts is about $16 trillion. This means there is about $1 of protection for every $6666 in your account.
The total US debt is about $19.7 trillion. This is about $60,000 per US citizen or $165,000 per US taxpayer. How is this going to get paid back when, according to the Associated Press, “Three-quarters of people in households making less than $50,000 a year and two-thirds of those making between $50,000 and $100,000 would have difficulty coming up with $1,000 to cover an unexpected bill.”
Now many countries have bail in provisions for banks. This means that when you deposit money in your bank, you are now another creditor to the bank. It’s like saying when you park in a parking garage, you hand over the car keys and title to the parking garage owner and if he can’t pay his more senior creditors, he will just sell your car and everyone else’s car in the garage to satisfy those debts. You probably don’t think that can happen but it already happened in Cyprus in 2013 where depositers lost half of any deposits over 100,000 Euros. It also happened in Poland in 2013 where the state confiscated private pension assets.
Obviously I am not writing this article for the people mentioned above who cannot cover a $1000 unexpected bill. I am writing this for people who are already financially independent or retired. Those people may also need to open a foreign bank account if they want to move abroad or buy real estate in another country. Also, you usually need a bank account if you want to open a safe deposit box in a bank, but that is for another article.
If you decide to open a foreign bank or brokerage account, be aware that as a US citizen you will have to report all the accounts on IRS Form 8938. Also, if the aggregate amount of your accounts exceeds $10,000 in any year, you need to file FinCEN Form 114 known as FBAR. According to the IRS website, as of 2014 there were over 1 million FBAR filings per year so you see that there are many Americans with reasons for having foreign bank and brokerage accounts.
Okay so where should I open an account?
I have opened accounts in Canada, Australia, and Singapore although I would also recommend Switzerland even though I do not have an account there. I opened these accounts in person although some banks may allow you to open accounts online. One bank in Singapore did turn me down because I am a US citizen. I opened these accounts around 2010 and haven’t had any problems with them. If you just want to open an account in one place I would chose Singapore. I would stick to any of the big banks like DBS, OCBC, and UOB. I have a bank account with DBS and brokerage accounts with OCBC Securities and Lim & Tan Securities Pte Ltd. You can open up an account with a nominal amount like $1000 and then wire money in through SWIFT later.
Disclosure: Besides having accounts with the named financial institutions, I am not receiving any money from them nor do I have any promotional agreement with them. Any accounts you open is at your own risk so do your own research before considering doing business with any of these companies.
So, what country am I talking about? Well just click through my 40 page slideshow for the answer at the end. Just kidding, it’s Spain!
Before we get to Spain, let’s define what the “Greatest Country” means and who else are on the list. In this case it means countries that are:
“… world leaders when it comes to health goals set by the United Nations, according to a report published in the Lancet. Using the UN’s sustainable development goals as guideposts, which measure the obvious (poverty, clean water, education) and less obvious (societal inequality, industry innovation), more than 1,870 researchers in 124 countries compiled data on 33 different indicators of progress toward the UN goals related to health.”
Is Spain number 1 on the list or are there even greater countries?
Spain is number 7 on the list but is unique out of the top 10 countries on the list. Here are the other countries and the reasons that they are not the best place to live in my opinion:
Iceland: I have never been here and I’m sure it is a nice country, but it only has 330,000 people, has an average high temperature of less than 60 degrees in the summer. It is also is expensive, and has the word “Ice” in its name.
Singapore: I have been here. It is a nice place but also very expensive.
Sweden: I was just here along with the other Scandinavian countries. It is a nice place to visit and see, but it gets cold and is very expensive.
Andorra: It only has about 85,000 people and is a tiny country between Spain and France. Not super expensive and decent weather, but no beaches.
United Kingdom: Cold, rainy and expensive. That’s why so many Brits go to Spain to retire.
Finland: Nice country, but also very expensive and cold.
Spain: It seems to have the best quality of life for the least amount of money.
Netherlands: Nice country, but expensive and cold.
Canada: With a country actually slightly larger than the US, but with only about one tenth of the population, I don’t know how housing can be so expensive with all that empty land. Also, it is very cold.
Australia: It’s like a warm Canada. It is about the size of the continental US but only has 23 million people. Again, with so much empty space, why is housing, along with everything else, so expensive there?
Now, you might be wondering what makes me an expert on these countries that I can just write them off with a few words like “expensive” or “cold”. Well, I’m not an expert. I have been to all of them except for Iceland, United Kingdom, and Andorra. Even though I’m not an expert, I know what I am looking for in a possible place to live. A place that is cold or expensive is a deal breaker for me.
So what’s so great about Spain and those 50,000 homes?
If you want to retire early and do not want to spend a large portion of your net worth on a home, there are literally thousands of inexpensive houses and apartments all over Spain for as low as $10K, $20K, $30K and up. No, you won’t get a $10K apartment in the middle of Barcelona, but there are a lot of really good prices in cities, suburbs and rural locations. There really are 50,000 homes for under $50,000 in Spain. These two property websites list a large majority of them:
(I have no affiliation or make any money from these websites)
Most people assume that if something is cheap it must not be good. They probably think that these homes must be in some place like Chernobyl or Mogadishu. Those are the same people that were tripping over themselves to buy these same homes for $150K when Spain had a real estate boom. Now that the $150K home is $50K, people think there must be something wrong with it.
This August I spent a month in Alicante Spain to see what the city was like. I also traveled to Torrevieja, and Benidorm as well as Valencia and Barcelona last summer. I wanted to see if Spain was a place I can live in or at least spend a few months a year. Here are my thoughts:
Beaches: Spain has about 5000 miles of coastline which includes hundreds of miles of beaches in both crowded cities and sparsely populated areas.
Weather: Warm weather especially on the southern coast.
Food: The quality of the food is excellent. The quality of the vegetables I got was much better than I get in the US.
Crime: Very safe walking around late at night. Has a ranking similar to that of Germany, China, and Netherlands.
Infrastructure: First world infrastructure, water, electricity, internet, roads, public transportation.
Culture: Very friendly and laid back. Also has a strong family culture of kids, parents, grandparents all out together playing, walking, and talking until late in the evening instead of sitting in front of the TV.
Costs: Many areas, excluding Madrid and Barcelona, have low housing costs. Food is extremely cheap but very good quality.
Healthcare: Ranked number 10 between Germany and Denmark
Jobs: The unemployment rate is still around 20% so if you want to live here you should have your own money or a business you can do online
Language: This is not bad; it’s just bad for me since I don’t speak Spanish yet. Not many people in Spain speak English except in tourist areas.
Residency: You cannot just move there unless you are an EU citizen or you get residency.
Conclusion: Many people in the US look to South or Central America as an inexpensive place to retire. From what I have seen of Spain, it is actually cheaper than places like Costa Rica, yet it still has all the first world amenities that you would expect in Europe. If I ever decide to move from the US, Spain will be at the top of my list. It’s no wonder so many people from the other 9 greatest countries go there to retire.
I am in Alicante, Spain for the month of August as a vacation as well as to see if it is someplace I might want to live or at least spend a few months a year. Being on the Costa Blanca, which is about 120 miles of towns and cities on the beach, I was planning on exploring some of the beaches. In my first few days here, I went to downtown Alicante to get an idea of the city and where everything is. There is a beach right in the city center called Playa del Postiguet. I walked by it and took some pictures although I didn’t come there to swim that day. From what I saw, it looked like a nice beach although admittedly, it wasn’t very long or wide so it was pretty crowded.
When I got back to my hotel and did some research on the beaches in the area, I read some really bad reviews of Playa del Postiguet along with some good reviews. Some of the bad reviews did not pull any punches saying things like the sand is completely filled with broken glass and cigarette butts, the water is dirty and there are particles floating in it, and that the beach is plagued by an army of thieves that will steal all your belongings as soon as you sit down. Well, I didn’t see any of that when I was there but I listened to the advice of some of the people who posted that a better beach is in Playa de San Juan which is just north east of Alicante and can be reached by the tram system. The tram to get there took me about an extra 30 minutes longer than it took me to get to Playa del Postiguet, but it was a very nice, clean, wide beach with plenty of space and very nice clear water. So I figured this beach would be the one I went to whenever I wanted to go to the beach.
Walking around downtown Alicante a few times and seeing all the people going to and coming from Playa del Postiguet got me thinking. If this beach is so bad, why are people still going there by the hundreds? How come they are not covered in dirt from the dirty water? How come their feet are not bloody from all the broken glass in the sand? How come they still have their cell phones in their hands and do not have the angry look of someone who had all their belongings stolen? I figured that I had to see just how bad this beach is for myself. So I went one day to have a swim and see how accurate the reviews were. The water looked fine and I could not tell the difference between the water here and in Playa de San Juan. I did not cut my bare feet on any glass. In fact, I did not see any broken glass or cigarettes in the sand. I did see an odd water bottle cap or two lying around. I did keep an eye on my stuff when I was in the water, but I did not see anyone lurking around my stuff or anyone else’s for that matter. The beach was crowded but I was able to find a spot. The worst thing about the beach in my opinion was that it cost 9 Euros to rent a lounge chair and 9 Euros to rent an umbrella. If you did that every day for a month that would be 540 Euros which is more than it costs to rent many 3 bedroom apartments in Alicante.
So why were the reviews of the beach and my experience very different? Were people just lying about the beach? Did I just go there on a day where the water was clean, the sand was clean and the army of thieves took the day off? The truth is probably somewhere in the middle. Like I said, there were many good reviews about the beach, but maybe I focused more on the bad reviews. What I have come to realize is that there is no accounting for what types of people are making these reviews. Everyone knows people that will act like it’s the end of the world if the slightest thing is not to their liking. You know people like this. They complain if their beer is not absolutely freezing, or the train is 2 minutes late, or the shower in their hotel room doesn’t have the pressure they are used to. In real life you know to take their complaints with a grain of salt. Online, it is hard to know if the person giving the review has a real gripe or is just really particular with how they like things. Also more people write reviews when something goes wrong than when everything goes as it should. Or maybe some of these reviews were old and things have changed at the beach. Now getting a cut from a piece of glass or getting your things stolen is a real gripe and I don’t doubt that it has happened, but I doubt that the beach is “full of broken glass everywhere” and that there are an “army of thieves” operating there every day.
This is a small example of the more common bad advice I get from people who warn me not to go to the country I am traveling to. The funny thing is that almost all the time, the people who warn me about where not to travel to have never actually been there. They have no firsthand knowledge of the place, but somehow saw a bit about it on the news and now know that it is not safe to go to. I know they mean well, and there are some real dangerous places that I don’t have a desire to go to, but if you listened to everyone’s second hand advice, you would never go anywhere or do anything.
Here are some examples of advice I have been given on why I should not go someplace:
2006 Rio de Janeiro, Brazil:
The man at the check in counter at JFK Airport in NYC told me and my friend that when we get to Brazil we have a good chance of being kidnapped from the airport and taken to various ATMs around the area to withdraw money from our bank cards. I was also told not to wear my watch (a $60 Casio watch). We were a little concerned being told this by the guy who worked for the airline, so we took some precautions like taking off our watches and being very aware of our surroundings. What we noticed after a while is that we were the only ones not wearing a watch.
2009 Medellin, Colombia:
Just about anyone I told about this trip had the same comments about getting kidnapped by FARC or questioning jokingly if I am in the drug trade.
People were warning me not to go because of the government protests and unrest in some parts of Thailand that they saw on the news.
2015 Athens, Greece:
People warned me not to go because the Austerity Vote was going to take place while I was there and there could be problems, protests, strikes etc. They did have a bank holiday and put limits on ATM withdrawals for Greeks while I was there, but I came prepared with extra cash just in case.
2016 Kiev, Ukraine:
Many people warned me about going there because of the fighting and the plane that was shot down about 2 years ago. I’m not sure if they realized that Kiev is about 500 miles away from Crimea where the problems are.
Taking advice about where to go or what to do from someone who has never been there or never done that is not a good idea. Sometimes, you just have to take a look for yourself to make up your own mind or see if it really is how they say it is in the media. Most times you will find it is not how they portray it to be. Hell, even if I just stayed in Florida and vacationed at Walt Disney World in Orlando I would still have people in New York telling me it is too dangerous to go there because of the recent shooting. I guess the only safe vacation place is my couch.
This is what a good friend of mine said to me about 3 or 4 years ago when I was about 41 or 42. This statement sticks with me because it is so true, and often, the truth hurts.
Many people, like me, put up with a situation they are not happy with just because it is difficult to make major changes and also the fear of what those changes might bring. They figure it is better to just suck it up and continue on their path in the hopes that things will get better. People that are 40 or so think they have another 40 or 50 years to make those changes or follow those passions. They think they will take care of all the pent up desires or projects after they retire and have the time to do it. The sad reality is that those things you want to do now either will not be possible when you are 60 or older. Even if you can still do them to a certain extent, it won’t give you nearly the satisfaction that you will get if you do them now. So if you are around 40, you really only have 20 years to change, accomplish, or experience what you want. Don’t wake up when you are 60 and still be in an unhappy situation or have a long bucket list of things you wanted to do that now you don’t have the desire or energy to do.
Hey, I’m 60, are you saying my life is over?
I don’t want to offend anybody close to or over 60, and I’m sure some of those people will take exception to what I’m saying. They might argue that they can still do the things they did when they were 40 or even 30. Also, the commercials on TV tell you that all you need to do is drink their chocolate flavored supplement drink and you will be playing basketball with your grandkids, hiking that mountain trail, riding through the desert in a 1950’s convertible top down with your buddy of the same vintage, or just throwing a football through a tire hanging from a rope on a tree (whatever the hell that’s supposed to mean). Yes, you can probably still do some of those things above 60, but the effort it takes may be more than the enjoyment you get from it. I don’t plan on giving up on life when I’m 60, but I expect that I will slow down and do things that are less taxing on my body and my energy.
Here are some things you can’t put off until after you retire:
Spending more time with your kids and family instead of spending more time at work. Your kids will never be the same age again, but there will always be more hours to work.
Traveling to see the world as it is today. Also, experiencing travel through younger eyes will be totally different than doing it when you are older.
Moving or changing jobs. If you don’t like where you are or where you work, 20 years from now it will be that much worse and you will regret not doing something about it.
Doing anything physically demanding like hiking, swimming, running, cycling or even competing in races. If you don’t do it now, it is even harder and less likely you will do it later.
Start a project, renovate a house, start a business. These all get harder to do, the older you get.
Getting into a new relationship or getting out of one where you are not happy. You only get one life, don’t wake up at 60 and realize you are not happy in your relationship. If you are not happy, your partner is probably not happy either.
This sounds like one of those “quit your job and sail into the sunset” kinds of articles. What about accomplishing something or leaving my mark on society?
Technology will advance and progress will be made in society with or without you. The desire to make the world a better place or have the world remember your name is really a rich person problem. Most people in the world are worried about keeping a roof over their head, feeding their families and not getting killed in a war. People in some of the richer countries have the opportunity or luxury of even being able to consider retiring, let alone retiring early. The truth is most people’s jobs aren’t that important. Increasing your company’s toothpaste sales by 5% or getting an award for “Best New Stapler Design” is not really important in the grand scheme of things. Even if you think you might be the next Thomas Edison or Henry Ford, last time I checked, they are still dead.
I have about 15 good years left, how many do you have and what are you going to do with them?
For most people, the biggest expense in their life is housing. It is also one of the reasons that people can’t build up significant savings to invest and retire early. Some people have come to realize that they don’t need all the space in a modern large house and they choose to downsize to something smaller either because of financial necessity or because they want to have a smaller footprint and the lower associated costs that come with it. This realization has caused many people to look into and buy tiny houses. Of course all of the TV shows about tiny houses has helped fuel this fascination with them.
I’m all for minimalism, and not having more space than you need and generally living below your means, but to me there is a pretty big flaw in the idea of some of these tiny houses. The problem I have is with the ones built on a trailer. These are basically large sheds with no plumbing and of course no land under it that you own. I’m not trying to tell people how to live so if they want to use a composting toilet, go for it, but to me that would get old very quickly. The composting toilet is not my real problem with these, it’s the price.
Yeah, but on the tiny house TV shows they say it’s a good deal, and it is hand crafted with all kinds of neat little hideaway storage spaces. How can you go wrong with a tiny house?
Tiny House on a trailer: 192 Square Feet, priced at $52,000. This is $270 Per Square Foot.
Large House in NC on about 1 acre: 5478 Square Feet, priced at $500,000. This is $91 Per Square Foot.
Obviously, the house costs ten times more in dollars and someone shopping tiny homes is not cross shopping $500,000 homes. But the point I’m trying to make is that people who are buying these one off tiny houses on trailers are overpaying and there are better options out there that won’t leave you with a depreciating shed that you probably took out a loan to buy. Remember, it is the land under the house that appreciates, the house itself always depreciates.
Here are some better priced options:
If you want a tiny house on a trailer because you like the idea of living anyplace and being able to move your house when you feel like it or when you change jobs, then just buy a manufactured trailer. A quick glance on EBay shows that this 28 foot, 2008 trailer sold for $5000. It is a ready made home, made in a factory using economies of scale to keep the price down. Just like if you need to drive to work, you’re not going to hire craftsmen and engineers to design and build you a car. You just buy a Toyota because they make millions of them much cheaper than you could ever make for yourself and they are easily resalable. Also, buying a trailer like this is a cheap way to really find out if you like living in the woods or your friend’s backyard with no plumbing. You might find that you don’t really like doing it or having to move every few months. If you change your mind, then you can easily sell it without losing too much, compared to selling a custom tiny house.
Whatever you do, please, please, don’t do what I saw a young guy do on one of those tiny house shows. He convinced his mom to foot the bill to spend about $24,000 to renovate an old yellow school bus into his new tiny house on his mom’s property. He also had to recruit a bunch of family members to help with free labor. A school bus goes for about $1500 on EBay. Do you know how much you can sell a school bus that has $24,000 of “updates”? I don’t know either, but it is probably less than $5000. He could have just bought this trailer and saved $19,000.
So he put $24,000 and many hours of labor into this:
When he could have bought this for $5000:
Similar to this is the option of a self driven RV. It gives you the same ready made tiny house with the added bonus of a truck to move it wherever you want. You will be surprised how cheap these are. I found this one on EBay also. It is a 2003, 30 feet long and sold for $14,000.
If you want something a little more permanent, you can buy a manufactured home starting for around $20,000 brand new and much cheaper if you buy it used. Of course, you will still have to buy the land to put it on because the rental rates in trailer parks are really outrageous.
Small House or Condo
Lastly, your best option is to buy an actual small house or condo. Easier said than done right? Where are you going to find a house or condo priced similarly to a $50,000 tiny house? The answer is that there are literally thousands of them for sale in the US. If you buy an 800 square foot house for $50,000, that is only about $62 a square foot. Not all of them are in the greatest location or in the greatest condition, but if you do your research you can find something in the general area where you want to live. Obviously they will not be close to the expensive cities where high paying jobs are, but the whole point of having an inexpensive house is so that you don’t have to work if you choose not to right?
Here are two examples I got on Realtor.com from a 20 mile radius search of Fort Worth, TX and Raleigh, NC:
Texas condo 616 square feet, $94 monthly maintenance, $473 yearly taxes, listed for $34,000 on Realtor.com
This house in North Carolina is 1050 square feet, $598 yearly taxes, and listed for $38,700 on Realtor.com
So if you want to better your financial position, skip the cutesy tiny house trailer and buy a small house or condo with actual plumbing and electric. It will hopefully appreciate and is easily sellable or rentable if need be and you will be that much closer to financial independence.
Yes, when you add up all the vacation time that an American gets throughout their working life, it only comes out to 1.5 years of vacation.
Here is the math:
Assume you start working at 22 and stop working at 65 for a total of 43 working years.
The average vacation time given in the U.S. is 2 weeks.
14 Days of Vacation x 43 Working Years = 602 days = 1.65 Years Off
But, out of your 14 days vacation, 4 of those days are weekends that you have off already so:
10 Days of Vacation x 43 Working Years = 430 days = 1.18 Years Off
It gets worse. If you consider two days lost in traveling back and forth on your vacation you get:
8 Days of Vacation x 43 Working Years = 344 days = .94 Years Off
And one last thing, 658 million vacation days went unused last year. If there are about 160 million people in the workforce, then they each lost about 4 days each. So now:
4 Days of Vacation x 43 Working Years = 172 days = .47 Years Off
Some might argue that my assumptions are a little extreme, but even if you take the best case scenario of getting 1.65 years off, is that really much better? Think about that, you work for 43 years only to get 1.5 years off to yourself. Are you okay with that?
Okay, that sucks so what can I do about it?
At a minimum, you should make sure you use every vacation day given to you even if you are just going to stay home and do laundry. This is the low hanging fruit if you just want more free time without changing your lifestyle. Unfortunately, many Americans do not take all the time off they are allowed because they are afraid for their job or think their work is too important to leave to someone else while on vacation.
You can try to get a job in Europe where they get double or more the amount of vacation time. This is a little better, but you will have to disrupt your whole life and move out of the country just to get twice as much time off. This is not for everyone.
Another idea is to save up a year or two living expenses while you are still young and take a year or more off from work to do what you want to do. You might find out that when the year is up, you want to do something completely different from the work you were doing before.
Or, you can do what my blog and many other blogs advocate and work, live below your means, save, invest and retire early. This is not easy, but if you can do it, then you can really see what you want to do with your time. I know people say that work is a purpose in your life that you need, but if the work you were doing was so purposeful to you, they wouldn’t need to pay you because you would do it for free.