You might think I’m a hypocrite for what I’m about to admit (since I blog about personal finance), but this is reality. In the past, I’ve made some wildly erroneous assumptions about our future ranging from how much we’d be making and spending each year to how our investments would perform. Many of these misconceptions are still somewhat ingrained in my thinking because I took them for granted and it was “conventional wisdom” pounded into our heads for years, and I need to constantly reinforce that THEY ARE NOT TRUE – at least not anymore. It’s a new world that many Americans haven’t yet accepted but after reading some Thomas Friedman economic reality books you will. We’ve based our lives and major spending decisions like homes, cars and lifestyle on faulty assumptions. On the plus side, we always spend less than we make and I’ve been putting away money for the kids’ college accounts for years, retirement, and we enjoy plenty of great life experiences. However, many people with more discipline than us would have amassed a small fortune by now, while we let a lot of money slip away on questionable spending. Here are some critical mistakes in financial assumptions I’ve made over the years and I’d interested in hearing about whether you find yourself in the same boat:
1. My Salary/Compensation Assumptions Were Shit …
Continue Reading: 6 Critical Financial Miscalculations I’ve Made – That You May Be Making as Well
I made one horrific mistake. I assumed that because I moved halfway across the country for a job, made a deal with them, pulled their ass out of a sling, won lots of awards, worked very hard, and was honest, that would mean something; and that I’d continue to have that job. Wrong. Not a mistake I’ll make again.
Wow, that sucks; sorry to hear that. This has become the reality for so many Americans. I don’t have the same feelings I used to about “The Man”.
Inflation Eats Shit
Here is my financial tip for families with small children (or anyone, for that matter):
Never go shopping without a list. And never buy anything not on that list. Never. The grocery list should be made to 1) cover 21 meals, with the exact ingredients required, 2) snack items, 3) miscellaneous items. Do not vary from the list. Make only the meals that are on the list. Have two or three days of really inexpensive meals on the list (one of my favorites was always beans and cornbread).
We found we could cut our grocery bill in half by following this method. And it is relatively painless – it just takes planning out a week’s meals. Save the list week to week for reference – and after a couple of weeks it is a very easy task.
My wife and I didn’t eat out for several years when our kids were young and we were saving and investing in our business. It sucks – but it also pays off.
We finally had a new ShopRite open near us which will hopefully give the overpriced place my wife shops now some competition. Our grocery bills are off the charts. We entertain a fair amount, the wife does south beach, etc., so there’s lots of pricey stuff, fresh fruit, organic here and there. It really adds up. Would like to see some competition in town drive the prices down across the board. Wishful thinking…
And yes, inflation does eat shit.
Darwin – If you really want to save food money, my little system works great. No kidding. But it takes some discipline, and the mrs. either needs to be on board or you have to shop yourself. I did the shopping for us.
True inflation is north of 10% when measured exactly as it was in 1980.
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Darwin
I’ve cut my 403b contribution back to the level required to get the university match. The whole point of deferring income is to take advantage of lower income taxes in the future. My effective tax rate today is below 10%. I don’t think there is a chance in hell that my tax rate will be below 10% in 20 years.
Darwin,
Nice read.
Curious why you think real estate will return you 6% over the next 20 years? If this banking thing collapses, that could be rather optimistic, couldn’t it?
EF
Based on reasonable expectations for corporate earnings, stocks are priced to deliver 4.5% returns over the next 10 years. Bonds are priced to deliver less than 3%.
Admin – does that stock price include dividend return?
llpoh
Yep. Total return. Those numbers are from Hussman. He calculates the return based on a discounted cash flow model.
That is after a 0% inflation adjusted return on stocks for the last 15 years, including dividends.
Totally off topic-When I was in Anchorage last week, I finally made it to a little hole-in-the-wall bar I have wanted to visit: Darwin’s Theory. I missed Darwin, the owner, but had a good time. A little dive that reminded me of my youthful bar adventures, full of colorful regulars. I even bought a T-shirt. The front has a picture of a monkey holding and looking at a skull, and the back is the bar’s motto: “A smart monkey doesn’t monkey with another monkey’s monkey”. Made me think of TBP. Unfortunately, no reference to throwing shit.
That is pretty dam awesome, AKAnon
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eFarmer, as long as the college bubble keeps inflating (and the govt seems inclined to continue that one forever since it is a key transfer of wealth mechanism), the real estate we’re involved in should continue to do well. Right now we’re getting about 15% cash on cash return with some assumptions for upkeep. That doesn’t include tax benefits and principal reduction. So, we figure that is quite conservative; even if real estate collapses, kids will always need housing and often times they prefer off-campus housing no matter how cheap the university is with their on-campus offerings.
Admin – agree, based on valuations, neither stocks nor bonds seem very appealing given current valuations and expected inflation. Trying to selectively pick stocks increasing dividends, some commodity stocks, etc. is my approach for that asset class.
AKAnon – I think I’d like that place. Will have to keep in mind if I ever make it there!
Nice post. IMO, it is the spending side that gets most people into trouble. The best advice I’ve followed and always tell young workers is to never upgrade your lifestyle until you are out of debt and then always live lower than your income. If you keep living on your initial salary and throw every raise at the debt, you will still have a shot at being wealthy in the long run. Look at it as a guaranteed after-tax return.
The more practical corollary is try not to hang out with people who make as much or more money than you do, or at least try to avoid their influence. If you spend like them, you’ll never make it. Most people in our culture still buy things on reflex just because you see other people owning them.
The most amusing example of this is Q: “Why is the sixth best poker player in the world always broke?” A: Because he insists on playing with the five best players.
I’d highly recommend “Your Money or Your Life” and “Early Retirement Extreme”. Both books explore matching your spending to your real values and just how little one really needs. They are also interesting to read together, because the former is directed at Boomers and the latter at X-ers even though the themes are the same.
Here was an additional blurb today on real estate as an investment – personally, of the various things I have going on, the recent real estate investment is the one I’m most excited about (or at least view as having the best risk-adjusted return):
CNBC:
The single-family home market has collapsed and is going to be underwater for years to come. But where are all those people who have been foreclosed on or who can’t qualify for the now tough-to-get home mortgage loans going to live? They’re becoming renters.
According to a recent study by Harvard University’s Joint Center for Housing Studies, the number of renter households increased by an average of about 692,000 per year, from 2006 to 2010, while the number of owner households fell by about 201,000 annually.
That trend is likely to pick up steam, because the nation’s apartment vacancy rate dropped to 5.9 percent in the second quarter, the lowest since 2006, according to the real estate research firm Reis Inc., while the percentage of people who own a home dropped to 66 percent in the second quarter — the lowest since the first quarter of 1998 and down from a peak of 69 percent in late 2004, according to the U.S. Census Bureau.
@Dragline: “best advice I’ve followed and always tell young workers is to never upgrade your lifestyle until you are out of debt and then always live lower than your income. If you keep living on your initial salary and throw every raise at the debt, you will still have a shot at being wealthy in the long run. Look at it as a guaranteed after-tax return.”
Absolutely…wish I was given that advice 30 years ago…but who knows, may not have taken it.
When I first started out in 1980 in NYC after college, I made $135 net per week and was thrilled to get the job. I rented an apt with college friend – we shared $300 monthly rent. Shopped on sales, and outlets before they were trendy. Food was the first to go – a cup of soup with bread was about $1. For dinner, we would all head down to Harry’s at Hanover Square. They served sliced steak on toast – which was fabulous and free. I’d nurse a wine spritzer – tip the bartender and head home on the subway for $1.
Actually had money left over at the end of the week and had the time of my life.
As I progressed in my career, the clothing, food and cocktails became more expensive.
Could never figure out why I was making ten times more – and had no money left. My rent was dirt cheap – lived in a rent stabilized apartment and paid $463.26 when I left. Would have stayed, but the crack epidemic ruined my neighborhood and it was time to flee for the burbs.
I kept telling myself I needed to increase my salary, get promoted and better job. Then I’d make it.
But that wasn’t the answer. Less spending was the solution.
Read an essay awhile ago by an economist that described my lifestyle choices. He called the theory Hedonistic Consumption. It is exactly what Dragline describes.
As we move upward and our compensation increases, our purchasing choices become more expensive. To keep up or surpass our peer group, we over reach and buy items that we simply cannot afford. It explains why we believe we never make enough money.
Hedonistic Consumption explains why people will go into debt…without really thinking thru why they are doing it and what the consequences will be.
Thought it was interesting and Dragline’s comment reminded me of it.
Thanks for listening…
Mary Malone, I like your analysis of the situation. The more you and your friends make, the more you spend to keep up appearances. Everyone wants to look good with a nice threads and drink better cocktails when you are with friends. Later you feel a twinge of envy when your friends and family are moving into bigger homes and have nicer cars while mine has rust spots and is over 100K miles. Think back to college years and the thin money situation you had then. Your entertainments was cheap and yet fun. I was told the same thing to live beneath your means and yes in college I violated that law with credit cards like lots of folks did. Assume that debts can be paid no problem is one reason this country is in trouble from the macro to micro perspective. Nice cars, houses and clothes and educations were all financed from debt and not savings. I will read the article and share on face”crack” for my friends. Remember Bill Gates and Company write a check for what they want. I liked the book a dozen years ago and wish it were updated is the “Millionaire next door”. Basic them of the book is that most moneyed people live simply and avoid spending lots of money of clothes, houses and cars and vacations. Peace out.
Thanks Biggy.
USA 14 trillion in debt….accrued one family at a time.
Easy to point finger at the other guy, but when you come right down to it, we (at least me), deserve alot of the blame.
Biggy, I agree (and it’s well documented) that the people you associated with greatly influence your behaviors (spending included). Conversely, hanging out with successful people can often have a positive influence (i.e. entrepreneurship, motivation, etc). But on the spending side, it’s often tough to keep up and gets people in trouble.
Mary,
While individual Americans are to blame for their own personal situations, the US federal debt is so unacceptable and is basically the result of decisions being made on Behalf of Americans with Their money by corrupt politicians. Any catch the 60 Minutes this week with Jack Abramoff? Outrageous!
Anyway, for some levity, here’s the funniest (and true) epic rant about the US national debt. Hilarious, I’d love to learn more about this guy, if he’s just an actor or if this is for real…