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Creating a Better Life By Spending Less Not Earning More

April 10, 2017 - 2 Comments

Hello Financial Slacker readers. You may be wondering where I’ve been the last few weeks. I’m still here. I’ve just been busy creating a better life for myself.

And in between other projects, out-of-town swim meets, and a week in Northern California with the family, it’s been a hectic time.

But things seem to be settling back into a routine and I’m now able to dedicate some time to Financial Slacker once again.

My Background in Corporate Finance

Over these past few weeks, one thought has kept popping into my head.

What is the most important aspect of personal finance?

When I started Financial Slacker, my finance experience was primarily limited to the corporate world. In different jobs over twenty years, I had learned how to help companies make good financial, operational, and strategic decisions. I knew how to value businesses and how to forecast with accuracy how well companies would perform in the coming years.

But I hadn’t spent much time applying that same knowledge to personal finance. The skills, knowledge, and experience acquired during those twenty years has served me well. And while much of that wisdom can be applied to the personal finance world, there are some pretty big differences between corporate finance and personal finance.

Companies Need to Grow

Probably the greatest difference between corporate finance and personal finance is the underlying motivation.

In the corporate world, everything revolves around growth.

There’s a saying, “if you’re not growing in business, you’re dying.”

New companies are always sprouting up trying to take away your customers. And your customers are always trying to get more value for less money.

And if you don’t work hard to keep those customers happy, they’ll leave you.

Personal Finance Is About Creating a Better Life

But personal finance isn’t the same thing. Personal finance isn’t about growing your income stream so much as finding a balance between income and spending and using that balance to create a better life for yourself.

While more income is a good thing and certainly more passive income is even better, the most important factor in personal finance is about controlling your expenses. At least that’s what it’s been for me.

I’ve been fortunate to earn a good income for many years. Some years have been better than others, but generally we’ve had more income than expenses and as such have saved a considerable amount.

But I always struggled when it came to spending.

Stop Spending What You Earn

My spending was always tied to my income. If income was up, we could spend more. If it was down, we needed to cut back.

When you earn a decent income, there are probably things you’re spending money on that are well beyond the necessity level.

For instance vacations.

When I’m earning money, I don’t mind spending money on a nicer hotel room or dinner in a nicer restaurant. There are certainly less expensive options but if I have the money, I can choose to spend it in these areas.

And because I almost always had an income stream, I never stopped to think much about what it would be like without that income stream.

There’s Two Types of Spending – Essential and Discretionary

When I did stop and ask whether I could actually live off my savings if I no longer had an income, I had difficulty answering that question.

And the reason why I couldn’t answer the question was because I hadn’t separated essential spending from discretionary spending.

When I tried to determine how much I would need to have saved in order to live off my savings, the number was huge. And that’s because I wasn’t just including essential expenses but I was also including discretionary expenses.

By looking at my spending broken down into essential vs discretionary, it became clear that we had more than enough saved to pay for essential expenses and even a certain level of discretionary expenses.

It also became clear that we were continuing to work not to pay for essentials but to fund our discretionary lifestyle.

You’re Making a Choice to Work

Once you get to this point, your perspective on working changes. It no longer feels like you’re dependent on your job to survive. You’re not living paycheck to paycheck.

You are making a choice to continue working to pay for aspects of your life. But you know if work gets too bad, you can choose to pass on those luxuries and walk away.

It’s a great feeling of relief. And a feeling of empowerment. Knowing that you could walk away doesn’t mean you will quit. But it does mean it’s an option. As such, you’re now working on your own terms.

Readers, if you’re still working, how do you view your job? Are you working to pay for your essentials or are you working to fund a lifestyle?

I Found the Perfect Mountain Cabin Vacation Home

February 27, 2017 - 2 Comments

I’ve spent the last few weeks looking for a parcel of land to buy. And what started as a search for a multi-acre mountain property that we could use for camping, fishing, hiking, and other recreation has now evolved into finding a mountain cabin vacation home.

Looking for a Place to Get Away To

It seemed simple enough. I wanted a place where the family could go on the weekends to spend some quality time together away from our normal hectic lives. No work, no school, no swim team, and best of all, no screens.

Ideally, I wanted 10 to 30 acres of wooded, mountain terrain, with a water source on the property located within 90 minutes of our house. We could tent camp, or haul a trailer, or even eventually build a cabin.

But as I started the search, I began looking at properties that already had finished cabins. They also had wells, septic systems, and electricity. Essentially, these are turn-key, move-in ready vacation homes.

And while the appeal of having everything already up and running is strong, it also detracts from my original intention.

I Found the Perfect Mountain Cabin

Not only is the idea of buying an existing cabin different than my original intention, the cost of the vacation home is significantly more than the cost of the vacant land.

Additionally, when you start including the upkeep and other ongoing costs of owning a home, the “true” cost can easily be 10x the cost of an open site.

Let me explain in more detail.

As an example, I came across a 20 acre lot selling for $40,000. It meets all the attributes I am looking for – location, topography, cost.

At the same time, I found a fully-renovated mountain cabin with 5 bedrooms on 4 acres selling for $200,000. The land is pristine and also located approximately 90 minutes away.

Before I started writing on Financial Slacker, I probably wouldn’t have thought twice about buying the cabin. If I put 20% down and financed the remaining amount over 30 years, my payment would be a little over $800 per month.

My initial out-of-pocket expense with either the vacant land or the cabin way would be the same – $40,000.

And while the cabin would require a monthly payment, a portion of that would be tax-deductible and I could make an argument that the net amount is comparable to what we spend on other forms of recreation.

What Will the Mountain Cabin Really Cost?

I might also be able to justify the additional cost of the mountain cabin based on the need to buy a trailer or eventually build a structure on the vacant land. It would certainly be more functional with a place to stay on the property.

But that’s only part of the “true” costs of owning a house as compared to owning vacant land.

Because the land is improved, the property taxes and insurance expenses would be significantly greater. Additionally, the cabin will have utilities as well as maintenance expenses.

When I add up all the ongoing costs, I estimate the cabin would cost me an additional $8000 per year. When you add that to the mortgage, the additional annual expense is nearly $18,000 more than just buying the vacant land.

How Bad Do I Want a Mountain Cabin?

Today I look at spending money differently than I once did. Rather than simply looking at my budget and deciding whether I can afford something, I now look at ongoing expenses in terms of how much passive income I will need to pay for those expenses.

So assuming a 4% withdrawal rate, to cover both the cost of the mortgage as well as the ongoing expenses, the cabin will require an additional $450,000 in invested capital. This amount is on top of the $40,000 paid up front.

So the question becomes, do I really want to spend nearly $500,000 to buy a mountain cabin to be used as a vacation home?

If I can earn $100 per hour after taxes and expenses, it would still take 2.5 years of full-time work just to pay for the house. Is it really worth it?

When I look at the purchase this way, the answer is pretty obvious. For that level of investment, I could take some pretty nice vacations every year. Or, I could rent a comparable cabin in the same area for a fraction of the cost of owning one.

So as appealing as it initially sounds to buy a mountain cabin vacation home, at this point, I am redirecting my efforts back to buying vacant land to use for our outdoor recreation.

Readers, how many folks own a vacation home? Do you use it as much as you thought you would? When you’re not staying there, do you rent it out?

Getting Back to Financial Independence

February 20, 2017 - 1 Comment

After keeping up a daily posting schedule since before Christmas, I decided to take a few days off last week. It’s not that I had so much going on that I didn’t have time to write. Just the opposite. It was actually a rather slow week.

But I needed a break. Even without much going on, I was finding it difficult to sit down and write every day. I had lost my focus and instead of exploring financial independence issues, I was grasping for content and felt the site starting to move away from the original intent.

One of the nice things about running a site like this is that I’m not obligated to do anything. Unlike my past “real” jobs, if I don’t feel motivated to write, I don’t need to write. Consistency is important but so is keeping up my motivation. And as a one-man shop, there will be times when I just need to get away.

So after taking a short break, I woke up energized and ready to hit the ground running. And as I sat down to start writing this morning, I read a new post from the blogger, Amber Tree Leaves.

I’m a big fan of this site. I find the articles are generally pretty consistent with my own thinking. And today’s article is no exception.

Actually, as a side note, even before reading the article, the title caught my attention. I get dozens of new posts emailed to me every day. And it’s pretty unusual for an article’s title to grab me. But the simple title of this article was enough to get me to click over to read more.

And as I started reading, not knowing what to expect from the title, I was even more intrigued.

In the article, the author talks about Financial Independence not as an end goal but as another step toward happiness.

And it just so happens this is exactly where my mind has been over the past few days. While I wasn’t writing on the site as much over the past week, I was thinking through what I wanted to write.

And the idea of more closely examining financial independence is tops on my list. Not just how to get there but what exactly you’re seeking in this pursuit of financial independence.

Great way to get back in the writing groove. Thanks Amber Tree Leaves!

Watching Others Play Video Games

February 14, 2017 - Leave a Comment

My teenagers and their friends just can’t seem to get enough watching others play video games. It’s a huge revenue-generating segment on YouTube with the top earners making millions annually. They will play the game themselves while watching someone on YouTube playing the game and also videoconferencing with a friend who is also playing the game.

My generation was the first to have video games. I remember when Atari and Intellivison first came out. I did spend hours playing those games. And of course, there were the arcades with the full-sized games. But these were somewhat limited as even then, I didn’t like spending my money in an arcade. But home video game systems was a different story. Essentially, it was unlimited play once you bought the game (sounds like the subscription model we love today).

Honestly, I haven’t spent any time watching others play video games on YouTube, but I do catch little glimpses when my children are watching. I’ve tried to figure out a comparable form of entertainment from my generation. The nearest thing I can think of is listening to sports radio.

I’ve listened to the same sports radio station for 20 years or more. When we lived in Dallas, I listened live and now that we’re gone, I listen through a streaming app. While the station is first and foremost a sports station, much of the content is not sports related. It’s more like sitting in a bar listening to your friends talking about whatever happens to be on their mind. And that’s mostly what I see and hear when my kids are watching others play video games on YouTube. The entertainment is really in the commentary not the game-playing.

We all know YouTube stars are becoming more and more accepted and many have made the leap into full-fledged mainstream celebrity status. And I think it’s great. When used in this positive way, technology has created a platform that allows anyone for a very small investment to reach millions of viewers.

Maybe my next step with Financial Slacker is to create a YouTube channel. Probably not a channel targeting viewers watching others play video games but instead a channel providing personal finance commentary.

What do you think?

Avoid the Home Warranty Repair Scam

February 13, 2017 - 2 Comments

We had someone come in to repair a broken appliance today. While he was working on the oven, I started a conversation asking him about his job.

I found out that one of his biggest problems is that his schedule is dictated by the local office manager. He is typically assigned 10 to 12 service calls per day. And the frustrating part is that there doesn’t appear to be any logic regarding the location of each call.

He had to modify his assigned schedule to work us in when he did. If he had followed the call order given to him, he would have driven 45 minutes to another town and then had to turn around and come back to our house. And then he would have had to drive back near the other job again for the final call of the day. That’s over two extra hours of driving as compared to the 45 minutes he had after changing his schedule.

But the real kicker is that in addition to repairing whatever it is they’ve been sent out to work on, the technicians are also encouraged to sell a home warranty on each service call. He gets pressured to sell a home warranty on at least 4 or 5 of his 10 service calls every day.

The home warranty covers all of your household appliances and essentially gets you half-price on service calls. The cost of my service call was $219, all of which was labor. That’s a pretty ridiculous hourly fee for what was done. And I discovered that the reason they charge so much is so they can convince people to buy the home warranty.

The home warranty would have cut that fee in half but the least expensive home warranty was $49 per month with a minimum commitment of 1 year. So I could have paid nearly $500 more today if I had purchased the home warranty.

Most of the appliances in our house are 10 years old or more. So while I wouldn’t be surprised if they start needing repairs, at some point, it will make more sense to replace rather than repair. So paying an extra $500 for a home warranty just doesn’t make any sense to me.

What do you think? Did I make the right decision or should I have bought the home warranty?

Create a Sense of Detachment to See Things Objectively

February 12, 2017 - Leave a Comment

I know I probably sound like a broken record and regular Financial Slacker readers are probably tired of hearing me talk about trying to buy a business. And to tell you the truth, I am actually getting a little tired of it too.

But as I look at business after business, the one thought that keeps popping into my head is that the owners are looking to cash out of a sinking ship. It’s the same thinking that motivates garage sale shoppers. One man’s trash is another man’s treasure.

When I managed acquisitions as a profession many years ago, I came to the conclusion that owners only sell their businesses for one of two reasons.

Either they’re offered stupid money or they’re in trouble. And since I’m not likely to offer anyone stupid money, the businesses that I’m looking to buy will tend to be in trouble.

I know you will hear from company owners that they’re selling because they want to retire. And while that may be true on one level, if the business was doing well and was fun, they wouldn’t be looking to retire. I know people in their mid-60’s that are running businesses and they have no desire to retire. They may step back a little and let someone else handle certain aspects but they still want to own the business.

As a buyer, a business in trouble isn’t necessarily something you want to avoid. In fact, finding a business that’s undervalued for a specific reason that you believe can be remedied is a great reason to buy a business.

Sometimes companies outgrow their owners. Others need capital to grow or even to sustain the current level. And still others can’t adapt to a changing environment. If I can buy one of these businesses at a good price and fix whatever is wrong, I have a good chance to be successful.

But seeing what is wrong and being able to fix the problem is easier said than done. And after having spent 20 years analyzing businesses by applying a high-degree of skepticism, I am finding it quite difficult to see the hidden opportunity in these business for sale.

Instead, all I can see are the negatives. I see reasons why the business cannot be successful. I have always been the voice of hesitation and without an opposing voice of optimism, I have been unable to pull the trigger.

So my question to readers is, how do you get past your biased tendency to only see the negatives? What strategies can you employ to create a feeling of detachment that’s necessary to objectively view a situation?