Tag Archives: retirement

How to Never Pay Full Price for (Just About) Anything

Now that we know that the true cost of our spending is often much higher than we think, we should be eagerly striving to figure out ways to pay less.

It’s easy to get caught up in an obsessive search for discounts.  Some of the money-saving tips and habits espoused by other blogs and the media can become quite intense, and it might even be a turn off.

I’m pretty conscious of this myself.  While I do not like leaving money on the table, the reward needs to be compelling enough for me to go do it, and there are plenty of activities where the return on time doesn’t make sense to me.  For example, the energy needed to pore through circulars, clip coupons, and redeem them in-store (even with an assist from online tools) is simply not that interesting.  There are just too many small decisions to make with too small a payoff.  I would much rather focus my time on fewer activities that have greater reward potential.

It doesn’t have to be savings on large purchases either; consistent savings on frequent small-ticket purchases like coffee and movie tickets can also add up to a meaningful amount over time.  I can overlook small amounts of missed opportunities and not be too bothered about it.  You will need to determine for yourself what incentive is necessary to justify the time and energy needed to implement these savings.

The point of this post is to highlight what I think works for me.  I don’t think any of the below are particularly original strategies, but I’m often surprised by how infrequently they’re used.  So hopefully, perhaps there are a few ideas in here that might work for you.

 

1. DO YOU REALLY NEED TO BUY IT?

This might seem like an obvious question, but it is still worth returning to and asking every time.

Can you borrow it?  Can you rent it?  Can you use something else as a substitute?

Take a moment to consider potential alternatives to get what you need apart from purchasing an item new.  These mainly fall under the following two categories:

(1) Money.  How much money can the savings become in the future?  I recall reading somewhere that this is how Warren Buffett thinks about his spending.  I’m pretty sure it was in The Snowball: Warren Buffett and the Business of Life, since the basic premise is about the magic of compounding.  Essentially, every dollar spent on an item today is a dollar that isn’t compounding to some ridiculous amount many years down the line.  If you’re able to think that objectively and rationally, and you are also reasonably confident in your investment abilities and temperament, it rarely makes sense to make a purchase today when the decision is framed in those terms.  I don’t really find this approach that effective, as it’s hard to get into the proper mindset, and the amounts of my spending are typically small relative to investment amounts.

(2) Hassle.  What I find effective is thinking about the hassle to get rid of what I have currently and what will likely happen.  For example, I have an almost visceral negative reaction to any new kitchen item that we might consider.  Consider a stand mixer, which seems to have become an essential kitchen accessory as popularized in the media recently.  This sort of purchase immediately gets me thinking: where are we going to put it; how often are we really going to use it; can’t we just mix dough with the tools we already have; and could we just borrow it from someone else if necessary?  We have a small kitchen as it is, and the bulkiness of the thing means that it might be challenging to resell down the road.  The key factor to me isn’t so much the cost as the hassle of owning it.

 

2. DOES THE ITEM NEED TO BE NEW?

If you’ve decided that you do need to own the item, the next question is whether you need it to own it in new condition.

I certainly have had a preference toward buying new, so I can completely understand how this might not be for everyone.  My evolution has come to mean keeping an open mind about what I truly value about new items.  It’s not so much a strict adherence toward always seeking to buy pre-owned items, but assessing the differences between new and pre-owned and making a judgment based on the tradeoffs.

From my perspective, the primary tradeoff is between cost and certainty.  This is the certainty that the item will work as described, as well as the means to return the item if it does not.  That peace of mind seems to be what you’re paying for by buying new, as the actual functionality and brand value doesn’t really deteriorate over time for most items.  Brand value is actually important here as a signal of quality, and it seems to be reflected by how well an item retains its price.  There may be some wear-and-tear issues, but I can choose to either not consider those specific items or accept those issues as part of the package.  As long as I’m reasonable confident in what I’m getting and can deal with the consequences of getting a lemon, it might be worth the cost savings to buy used.

Books are a good example.  I’m always behind on my reading, and one of the silver linings is that I can often acquire former bestsellers at significant discount by buying used.  Both Amazon and eBay are great sources of used books.  I can also choose what condition I’m willing to pay for.  If it’s a book I only intend to read once, then something in fair condition might be sufficient.  I’ll happily overlook a torn cover and a few highlights to get the book 80%+ off.  If it’s a classic that I plan to refer to often, then I may be willing to shell out more for something in newer condition.

Clothes are a bit trickier.  For example, I’ve purchased a few pairs of premium jeans from sources like eBay and Goodwill.  These were in very good condition and could be acquired for a fraction (~$50) of what it would cost to buy them at retail (~$200+).  You are probably thinking that someone like me making this purchase is a bit incongruous to the principles of frugality.  It is admittedly somewhat indefensible.  My only justification is that these have been part of the de facto uniform in my area of work, even though the dress code is technically casual.

Certain electronics like Apple products and photography equipment are also viable candidates for buying used, though I’ve been surprised at how well these items maintain value when I’ve looked at sold prices on eBay.  In these cases, I’ve definitely considered buying used but found that the premium for buying the item new (i.e., 10-20%) was fairly reasonable.  To go back to #1 on this list for a moment, the price retention of higher quality and name brand items allow you to construct a synthetic rental.  For example, I might be willing to pay top dollar for professional grade camera equipment to sustain a photography hobby, since I can still recoup most of that outlay by selling the equipment if I lose interest or upgrade later on.

A car is likely the one item for most of us with the biggest source of potential savings between buying used versus buying new.  Surprisingly, I’ve never actually purchased a used car before.  Growing up, my family’s philosophy was to always buy new and to drive them until they stopped running.  This meant that buying a new car was a rare occurrence, as each of our cars for about 15 years on average.  I’ve had my current car for 7 years now, and I still feel as though I haven’t reached the midway point with that car yet.

With that prologue aside, suppose that you have decided that you need to buy the item, and you need to buy it new.  What do you do then?

 

3. USE COUPONS AND GIFT CARDS

Like I said, nothing too revolutionary.

Step 1: Search for coupons.

You need to search for coupon and offer codes through Google or a site like RetailMeNot before every purchase to see if there are any discounts that may or may not apply.  Most of you probably already do this.

For purchases where you have some time to plan, it’s also sometimes worthwhile to check sites like eBay to see if someone has listed something useful for sale.  In addition to more conventional retailer coupons and vouchers at discount, you may also find items like AMC gold/silver movie tickets, airline club passes and beverage vouchers available.  There’s a bit of caveat emptor here, so pick your spots carefully.

Step 2: Use a payment method that gives you a discount.

This is primarily through gift cards acquired at discount, and credit cards.

Gift Cards

For gift cards, the sites have changed over the years, but check sites like Raise and Cardpool periodically to see what gift cards might be available.  They may not always have something in stock for every retailer, and price changes happen quite frequently, with discounts often varying with denomination.

When purchasing gift cards, keep an eye out for what exactly you are buying.  For example, there are differences between an eGift, a voucher and a physical gift card.  Some can only be redeemed online or in-store, but others are valid for any purchase with that retailer (whether online or in-store).  Most gift cards also have no expiration date, but always confirm.

Watch out also for the denomination of the gift card that you are getting.  You can always buy several low-denomination gift cards (~$25 to $50) and combine them to pay for a single large purchase, but you might not want or need a gift card with a large $500+ balance.

Here are a couple categories that I like to target:

  • Movies: AMC Movie Theaters (25% off).  These cards are typically offered in the 15% range, so this is a great price.  I would get more, but we just don’t go to the movies that much anymore.  Buying morning matinee tickets with the gift card is the most economical way to see movies.  Even the added fees for 3D and IMAX films are less painful once you factor in the embedded discount in the gift card.
  • Clothes: Uniqlo (13% off), Macy’s (20% off), and Marshall’s (18% off).  Just about every clothing specialty retailer offers gift cards, and the cards with higher balances can easily be had at a 20%+ discount.  Clothing retailers also typically have the most frequent special offers for hitting certain amounts (e.g., a coupon code that lets you save $20 if you spend $100).  Use a gift card to pay for that $100 to get the stacked discount.  Shop in the clearance section on top of that, and the level of savings possible here can be quite astonishing.
  • Coffee: Dunkin Donuts (13% off), Peet’s (11% off), and Starbucks (12% off).  I much prefer making my own coffee at home, but I do keep a small balance on my Starbucks app for those occasions when I need to buy a cup.
  • General Merchandise: Target (5% off), Wal-Mart (4.5% off).  This category usually offered in the 2 to 3% discount range, so this week seems pretty good.  Some of these stores also offer their own rewards credit card that might offer discounts (e.g., Target has the REDcard program which gives 5% back on most purchases).  However, we have typically shied away from the store credit cards as the rewards are not as good as other options.  Also, keep in mind is that while shopping here may be convenient, not everything needs to be purchased here.  After you factor in the discounts, it may be more economical to buy certain items like clothes elsewhere.
  • Home and Home Improvement: Bed Bath & Beyond (8% off)Home Depot (10% off), Lowes (7% off).  I typically see these offered in the 8% range.  If you are planning any sort of significant home improvement project, there is no reason that you should not be paying for it with discounted gift cards.  This is also a good category for stacking discounts, as these retailers often have 10% coupons (particularly if you’ve recently moved), and they often will honor coupons from competitors.  If you’re like us, you may receive plenty of 20% off one item physical mailers from Bed Bath & Beyond to get you to visit their stores frequently.  Pay for the balance with a discounted gift card to save even more.
  • Major Purchases (e.g., electronics and appliances): Best Buy (6% off), Sears (8.5% off).  5% to 8% seems to be the typical range for this category, but check often.  Categories like electronics are notorious for low margins.  Best Buy’s profit margins have been averaging 2.5% or lower over the past 10 years, so it’s remarkable that you can get 6% off.
  • Other Categories: The above categories have been the most interesting to me, but there are plenty of other categories where it may make sense to pay with gift cards.  Peruse the other categories on Raise and Cardpool depending on where your spending lies.  For example, we don’t have any pets, but pet owners may want to consider running their purchases through a discounted Petco (8% off) or Petsmart (12% off) gift card.  Arts & crafts stores like Michael’s (16% off) practically demand that you take advantage of their various discounts; paying retail just seems silly.

As you can see, the breadth of discounts available through gift cards can be quite compelling.  However, not every category is suitable for saving money through gift cards.  For example, you’ll notice that I excluded Gas and Grocery.  These categories also offer gift cards, but the discounts available are typically so low (in the 1% to 3% range), that it isn’t really worth the hassle to implement them.  That’s not to say that you can’t save a lot of money in these areas; it just that going the gift card route is not the optimal path.  We’ll need to table this discussion for a future post.

One other hassle is that you will need to have these cards on you in order to take advantage of them.  Otherwise, it’s very easy to forget that you even have these gift cards.  No one wants to carry dozens of gift cards around in their wallet or purse.  It’s probably the reason why so many people choose to monetize their gift cards in the first place on those sites.  I’m sure there will be a digital wallet available soon enough that would enable you to store all of your gift cards on your phone.  Until then, you might want to sacrifice an old wallet to store all of these gift cards conveniently (e.g., in your car) so that that they’re available whenever you go shopping.

Credit Cards Rewards

Credit cards rewards are useful, but my preference is to pay with discounted gift cards.  Our level of spending is just not high enough to make the credit card rewards from ongoing spending volume that attractive relative to the initial sign up bonuses.

There are plenty of sites that talk about credit card strategies and the intricacies of the respective programs, so we won’t go into that here.

For general purchases, we currently favor Chase Freedom and Chase Sapphire Preferred (part of Chase’s Ultimate Rewards Mall shopping portal), and Barclaycard Arrival Plus (which runs the RewardsBoost shopping portal).

The areas of interest are the shopping portals and Chase Freedom’s rotating 5% categories.  The shopping portals typically offer bonus points if you purchase from online retailers by navigating there via the portal.  At stores that we are actually interested in, these can range from 2 extra points to 8 extra points per dollars (which basically translates to 2% to 8% off if you redeem those points for cash).  This is actually most interesting for some of the higher end retailers like Nordstrom and Neiman Marcus, which typically don’t offer many discounts.  The key drawback is that using these discounts often voids any other coupons that you might want to utilize, which often is more interesting than the elevated credit cards rewards.  There’s no such constraint if you pay with discounted gift cards

Chase Freedom selects a few categories like gas and department store purchases to offer 5% rewards every quarter, so it makes sense to pay attention and opt-in to these.  Chase Freedom’s Q1’2015 5% category includes grocery stores, which is fantastic considering it’s next to impossible to acquire a grocery gift card at that discount magnitude.  Even if you can’t take advantage of the $1,500 spending max this quarter because you don’t buy that many groceries, you can always buy grocery gift cards at the store to extend those savings year-round.

In the end, the credit card spending tactics can be quite hairy and full of fine print.  In practice, I’ve found that we typically take advantage of the standard rewards by using those credit cards to buy discounted gift cards from Cardpool and Raise.

 

4. BE SHAMELESS ABOUT SAVING

Sometimes, you just need to ask: for a discount, or for something extra.  I am terrible at this.  Something about simply asking for something so blatantly makes me uncomfortable, as though I’m being rude and going way outside the boundaries of acceptable behavior.

My father, on the other hand, has absolutely no qualms about this.  It’s his preferred and only negotiation style.  The worst case is that you get a no for an answer, which also happens to be the status quo outcome.  So basically, there is really nothing to lose by asking.

Objectively, I know this.  And still, this requires quite a bit of effort and courage to pull off.  And even when I have had success, it doesn’t make me want to do it again, nor do I feel like I’m getting better at it.

We’ll need to explore this further in a future post.  Suffice it to say that it’s quite expensive to self-enforce your perceived norms of proper behavior.

 

 

CONCLUSION

That concludes the tour for the time being.  This is really just scratching the surface, and I’ve tried to highlight the areas that I think can be most impactful.  It does require a bit of planning, but hopefully nothing too unreasonable to implement.  I think that there is surprising opportunity to optimize spend, and taking simple steps to cut aggregate costs by ~5%+ to feed into savings can really be meaningful over the long-term.

Whew…3,000+ words, thanks for making it down here.

How to Reach Financial Independence

The answer to this question typically seems to center around hitting some magic number, sometimes with astonishing precision according to those ING commercials.  Accumulate a big enough financial nut, and you’ll be able to live off the interest for the rest of your life.

But that’s the problem.  It’s easy to fantasize about this, and it’s also very easy to get discouraged.  The focus on the number, a figure that is often quite ginormous and several orders of magnitude more than whatever I have today, makes the whole thing seem like a decades-long endeavor at minimum and most likely unattainable.  Might as well splurge on something that will offer me a bit of comfort right now.

Where to begin?

I’ve been pretty fascinated by this area for a long time, and fortunately a lot has been written about this already.  This is great, as it’s less writing for me, and savings in time are way better than savings in money.

Consider two very awesome and popular blogs on the topic and their takes on the path to the promised land:

  • Early Retirement Extreme: Emphasis is on the extreme.  If you can cut spending to the bone through extreme frugality and sustain those spartan habits into perpetuity, you can consider retiring within 5 years.  It’s a combination of philosophy and lifestyle design optimized for a poverty-level budget.  This approach seems pretty accessible, but one that few would likely pursue voluntarily.
  • Financial Samurai: In a way, this is the opposite end of the spectrum.  For all the faults that holding down a corporate job may have, it is still an incredibly effective way to earn a lot of income quickly.  Combine a few years of high earnings with high savings, and you can contemplate leaving those salaryman days behind soon enough.  It’s basically the traditional path to retirement, but accelerated and condensed into a decade.  This approach is somewhat less accessible than Early Retirement Extreme, as you would need to have the ability and drive to actually be hired into a well-paying corporate position.

Both of these blogs offer viable paths that worked out well for their respective authors.  On the other hand, I readily admit that neither of these approaches are a good fit for me.  I have to think that many others share a similar opinion.  I’m just not sure how practical it is to sustain myself on a diet of oatmeal and lentils, or to get rid of the car and ride a bicycle everywhere.  Or to keep a demanding job AND climb the corporate ladder for over a decade in order to score that first million.  There might have been a time in my life when I could summon that desire, but that time has long passed.

Don’t get me wrong; these are two of my favorite personal finance blogs.  As a source of inspiration and as a source of ideas for what is possible and what to do (here’s the path depicted as a cash flow diagram), these have been invaluable to my own education.  These are merely examples, and the beauty is that I can pick and choose among these and many more for what I think works for me.   I think the approach outlined in Mr. Money Mustache blog is the closest to my own thinking about how to become financially independent.

What does financial independence even mean?

At the most fundamental level, I think financial independence means not having to worry about money.

This is not quite the same as early retirement, as many resources (blogs, books, etc.) often conflate financial independence with early retirement.  The point isn’t to move from full-time wealth accumulation up until financial independence day, and then be dedicated solely to leisure activities thereafter.  The point is to be able to live life on your own terms, to be able to say no to requests from bosses that you don’t admire and to tasks that you feel disinclined to pursue, and to be able to bear comfortably whatever financial consequences that might entail.

This also means that I do not think that it’s absolutely necessary to have all anticipated expenses covered by assets or passive income sources.  I realize that some may consider this heresy.  From a purely mathematical standpoint, the precise point of financial independence is when passive income sources is sufficient to cover all expenses.  Much work has been done around retirement calculators and ideal withdrawal rates in this area to determine the right combination that minimizes the risk that you run out of money.

And I would agree that having all your bases covered would be the ideal situation.  However, I would also point out that:

1. Expenses can be fluid.  Unless you are planning for an absolutely bare-minimum budget, chances are your lifestyle will have sufficient flexibility to accommodate more frugal measures if necessary.  That flexibility will be necessary, as planning out your expenses for the rest of your anticipated life with any degree of accuracy seems unrealistic.

2. You may still find yourself engaging in income-generating activities post financial independence.  This isn’t meant to be a loophole.  It’s one thing to engage in an activity for personal enjoyment that includes income as a side benefit, versus working a job for the primary purpose for making money.

3. If you are actually going to spend your time differently and in a more fulfilling way once you are financially independent, then shifting to those activities earlier may ultimately be more valuable to you than continuing to spend time sub-optimally to simply accumulate a bit more in savings to bolster your passive income.

Of course, this might not apply to everyone.  What it means to not worry about money will be different for everyone.  Some may prefer the security of a perpetual income stream, while others might be fine having only 20 years covered, or 10 years covered.  If you are fortunate enough to have some useful and readily employable skill, whether it is programming or a trade skill or healthcare-related, you may likely never worry about the financial consequences of leaving a current job.  Or you may just have picked up an eclectic mix of handy skills over the years, and you can live your life while expending fewer financial resources.

The point is that if something is holding you back from changing your current situation, you probably don’t need as much as you might initially think you need.  And whatever amount that is will be a fluid number; it won’t be precise to the dollar.  Hopefully, this post, the links provided, and other writings to come will help to clarify that.

A few basic principles

The journey toward financial independence is going to be long and interesting, and one that I am still on.  Here are a few thoughts to keep everything in perspective.   Nothing too original here, but still worth outlining.

1. One step at a time.

We’re going to be dealing with big numbers and long time frames, and the incremental amounts that will be saved and earned will seem tiny and slow by comparison.  It will be easy to lose sight of the long-term goal when it feels like we’re hardly making a dent.  But it all adds up.  Dividends and other passive income streams will build from $10 to $100 to $1,000, and eventually cover 1 day’s worth of expenses into perpetuity, then a week’s worth, then a month, and then the better part of a year.

2. Not all capital is financial.

Money is just another resource.  It’s easy to get obsessed with the financial elements, but spending time picking up other useful skills may yield better returns.

3. Spend less than you earn.

This is the basic formula that it all boils down to.  You can achieve this by figuring out how to earn more, or figuring out how to spend less, or a combination of both.  The more you save, the faster you get to where you want to go.

4. Focus on net worth, particularly the assets that are working for you.

Whatever scenarios you run regarding savings rate and investment returns, the key takeaway is that the faster you accumulate a big chunk of capital, the closer you are to hitting your target.  If that capital is lying idle an unutilized as equity in your primary residence, then it doesn’t really help you.

5. Live your own life.

For whatever reason, there are going to be people that will choose to be the guardians of current societal norms.  Norms that include conventional career paths, working unceasingly for decades, leaning in for more responsibility, angling for raises and promotions, and pursuing consumerism.  I may have been guilty of that myself, once upon a time.  The important thing is to figure out what matters to you, determine how to get there, and then go out and get it done.