Seeds of Change - Investments

Ok, you’ve slogged your way through the preliminaries and the warm-up bands. Now it’s time for the headline act. This is the one I suspect you’ve all been waiting for. I hope you have your cross-trainers on, or a comfortable pair of hiking boots, because we’ve got a lot of ground to cover.

But first, it’s story time again.

Let’s set the Wayback Machine for just a decade ago. It’s the darkest days of the Great Recession. The market has fallen off a cliff. Money markets almost broke the buck, which most people didn’t know. No one knew if the banks would completely unwind as they had nearly 80 years before. Many were content to let it happen with no idea what that would mean. Fear was the dominant animal spirit prowling the trading pits, preying on the weak and leaving their blood pooled upon the exchange floor as a warning to others.

I remember the day in 2008 when the Dow Industrial Average dropped 777 points. I turned to Karen at dinner and said, now’s the time to get out, wait for the bottom, jump back in and make some money. Because no one knew where it was going or how long it would last, she preferred to ride it out like most experts always advise (generally good advice). We make joint decisions, so we sat. And we knew we’d still be buying in through her 401k all the way down so wouldn’t completely miss the opportunity.

But as the carnage continued, I started getting edgy.

I’d been investing since we first got married. As I mentioned in a previous essay, for a long time we’ve contributed to various retirement accounts, both 401ks and IRAs. But we also had a side account that I alone managed where we’d dumped some of my excess money from when I was still an engineer. It, like everything else, had hemorrhaged roughly half its value.

As I listened to the debate on Too-Big-to-Fail raging through the halls of power, I spotted a potential opportunity. I marked the three Big Banks on a watch list. I identified stocks we owned that I could sell, ones I didn’t think would bounce back quickly, mainly consumer companies.

Then came the day CitiBank fell below $1 a share while the normally fiscally responsible party seemed content to let it (and the economy) fail just to damage their political rivals. It felt like the world was ending. Everything was unravelling.

But I suspected there was money to be made.

So, I pulled the trigger. I cashed out some investments in that side account and dumped it all into Citi, placing a heavy bet that sanity would return.  It took a long, sleepless, panic-fueled month, but reason finally prevailed. Fairly quickly, my little side bet jumped to three times what I’d bought it for.

I cashed out, knowing it wouldn’t last, but I didn’t stop there. I’d already identified a couple Dow stocks with price-to-earnings ratios (P/Es) down around 8 (the historic average for the S&P is around 13). So, I immediately dumped the proceeds into them. A year later, those investments were up another 30%. In a year my initial investment was now worth four times what I’d started with. Pretty neat.

I continued making changes as I spotted opportunities, desperately trying to make up our loss. Our potential reversal from 2007 was still fresh in my mind, as it would be until we were five years out.

So where did all that get us?

Well, from the depth of the Great Recession to a year or so ago, the S&P 500 was roughly 3.5 times higher than its market bottom. Karen’s 401k paralleled that (so not a bad choice on her part to hang tight). Our IRAs were slightly less because we’ve been slightly more defensive with them.

And my side account? It was worth 7 times what it was when I placed that little bet. So if you were wondering whether I’m qualified to write about this, I’ll let that serve as my resume.

But once again, I’ll invoke my mantra. I am NOT a trained professional, so DO NOT attempt this at home.

What I am is an empiricist, and likely an extremely lucky one.

Our accounts divide into three unequal pots, each managed by a different guiding principle. Pot 1 is Karen’s 401k equivalent. That gets managed by a philosophy of indexing and compound interest. Pot 2 is our IRAs (including my 401k rollover). That gets managed by our financial guy who is a trained professional. Pot 3 is my side account, stocks and mutual funds. I’m its financial guardian.

Each year, I evaluate which philosophy has performed better. And I’ll probably be content to gather data for a long time to come. To me, it’s just amusing to see how it plays out. Yes, I have a strange sense of humor.

Let’s start with Pot 2 because I think it is the least instructive.

We are on our third financial guy. The first came highly recommended, a reputation that seemed to be borne out until he lost his assistant and a number of mistakes and oversights began to appear. So, we transferred our accounts to financial guy number 2, who was also recommended and closer to home. We could have sit-down conversations with him instead of just talking over the phone. As he prepared to retire, he transitioned us to financial guy number 3. We’ve had him for over a decade. We sit-down with him once or twice a year.

Financial guys are good and bad. Good in that they know more about the markets and various investment schema than I ever will. Bad in that sometimes they push things I don’t fully understand. My general rule is that if I don’t understand it, I don’t invest in it no matter how much money there is to be made. That comes from experience. While we’ve never gotten involved in anything particularly sketchy or Madoff level too-good-to-be-true, we have occasionally had some extra icing layered on our cake. Those empty calories haven’t always worked out, though fortunately those pieces were small. So now I take a firmer hand and do more self-direction. But our current financial guy likes a balanced approach so I always listen to his advice. He’s still in the race.

Now Pot 1 is pretty boring. In investments, that’s a good thing.

Remember way back in the first essay when I talked about average S&P returns? Of course, you do because I haven’t stopped harping on them since.

In a couple previous essays, I touched on the power of compound interest but haven’t formally called it out. Compound interest is my bestest friend. It’s my soulmate. It’s the kumquat Haagen-Dazs to my Kareem Abdul-Jabbar.

I’ve pointed out that the power of compound interest has been the workhorse of our financial plan and execution, making time and money work for us. You have seen how this has paid off in the way we paid our mortgage down. And again, when I mentioned how much money a small annual tax credit could add up to over time. It really is the key to the F.I.R.E movement.

Here’s a little rule of thumb to help you remember how it works. I learned it as the Rule of 7/10, (aka the Rule of 72).

Basically, if you take an initial chunk of money, say $1000, and invest it at 10% (the average S&P 500 returns) it will double every 7 years. You can work this out on a calculator. Enter 1000, multiply it by 1.1 seven times. What do you get? You should get 1948.72 (or just under $2k). Now clear that, enter 1000 and multiply it by 1.07 ten times. You should get 1967.15 (or again, just under $2k).

So, it works both ways. If I want to double our money, I should invest it at a 10% interest rate for seven years, or at a 7% interest rate for ten years. It really is that simple.

Ok, but it’s not. Because I’ve been lying to you all along. That 10% return rate on the S&P 500? Yeah, as I’ve alluded to before, it’s not really 10%. It is on paper (so be careful with that axe, Eugene). But capturing those paper gains is somewhat of a chimera.

Why?

First, because even most S&P 500 index funds have management fees (or sales charges and commissions, or a few other hidden gems). Finding one with a 1% overhead is pretty good (you can find better in exchange traded funds, ETF, but 1% in mutual funds is the standard). So now our 10% (really 9.8%) is down to 9%.

Next up is the big bear: Inflation. For those who don’t know, inflation means your money won’t be worth as much in the future as it is right now for a variety of reasons that I won’t get into. But remember when you were a kid and candy bars cost $0.25 in a convenience store? Well, I do. And they were huge. Now they cost, what, $1.25? Ok, I don’t know how much they cost but a lot more at any rate. The same candy bar or smaller, likely made from the same or cheaper ingredients on the same machinery. That’s inflation.

Over the past hundred years in the US, inflation has run at roughly 3% a year (3.22% from 1913-2014). 3% doesn’t seem like all that much until you multiply it out like we did above and come up with something like 20 times what you started at (3.22% nets you 22.75 times over that 100 years). Which means that’s how much more money you would have needed to start with 100 years ago to have the same theoretical buying power now. It does get more complicated than that, but it’s a good working number.

Inflation is a beast.

Thankfully, for the past decade inflation in the US has only run at 2%. Though interest rates have also been at historic lows, too, which is good or bad depending on whether you are borrowing or saving. But I also remember when inflation hit double digits in the 80s (14.5%), when interest rates were also double digit (11%). I always work with the average for planning purposes and hope for the best.

What does that mean? Well, it means I have to slice off another 3% from our theoretical returns just to keep afloat with the same spending power, leaving me now with 6% returns. Just under the easy rule of 7/10, and more like 12 years to effectively double which is almost, but not quite, double the 7 years we started at.

And that’s before paying any capital gains (taxes) which we may or may not owe depending on our income and situation at the time we cash them out.

Now you begin to see where all those little matching funds and tax advantages come into play. Daddy’s little helper. That and a lot of cognac.

And yet, there is still almost no better game in town than an S&P 500 index. In Pot 1, we have access to other index funds (a small-cap index, a corporate bond index, an international index and a safe government bond index), all of which have extremely low management fees. As well, there are lifecycle funds that balance all those different indexes based on how far we are from retirement.

As a very quick rule of thumb and aside, it used to be that financial experts recommended you have your decade of age stashed in bonds or other safe investments. In your fifties, that would be 50% of your funds in bonds. I’ve seen a number of variations on this rule, more and less aggressive depending on your timeline, assets and risk tolerance, as well as different mixes that include real estate, international and value funds. More recently, I’ve seen an interesting scheme where keeping a 60/40 split between stocks and bonds and rebalancing annually might be the best to keep afloat and limit any downside carnage. I have to look into that more.

In essence, the closer you are to retirement, the more conservative you want to be. As we’ll get to in a moment.

We generally buy a mix of S&P, Small-Cap and International every paycheck (in that weighted order), though sometimes we park a significant percentage in the safe bond fund to preserve what we have. The buy strategy provides us cost averaging, meaning when the market dips, we get funds cheaper, and when it’s high, they are move expensive, which tends to average out throughout the year without us having to think about it. We tend to want to control how much or how little is at risk at any given moment through how much we park in the safe bond fund, though many people we know use the lifecycle funds to do that so they don’t have to think about it (which I recommend). Different criteria.

On to Pot 3. Daddy’s playground.

You got a taste of what I tend to do above. I am not above taking calculated risk. That’s because the purpose of this pot is a little different than the other two. But more on that in a minute. 

In general, I am a value shopper. I look for opportunities based on stocks (or assets) that are beaten down. I am not really good at spotting trends like an online friend who I sometimes trade ideas with. She has her finger on the pulse of society and is in tune with where it’s going in a way that I’m just not good at.

What I am better at is spotting opportunity. In general, I follow Warren Buffett’s advice: When others are fearful, be greedy; when they are greedy, be fearful. I’ll give you a few quick examples. Often, they involve stocks that are getting beaten down in the news cycle or ones that have fallen out of favor.

The first example goes back to the nadir of the Great Recession. I started thinking through what the long-term consequences might be. One was that consumers would likely become more frugal. Which meant they were more likely to buy and sell secondhand. I figured eBay might be a good pickup. I already owned some eBay, so I knew a little about their business. They had three prongs. First, the auction site. Second, an app called Skype which was supposed to support the auction site, but they could never make work. And third, a little payment outfit called PayPal, which drove more profit than the auction site and they eventually spun off. I knew that last one folded into the long-term trend of internet economy. eBay was beaten down at the time like most consumer stocks. While eBay has only doubled in value since the Great Recession, the PayPal spinoff is now worth eleven times what it started at from the spinoff. A tidy profit.

A better example might be from just over two years ago. After the 2016 election, all the FAANG stocks started taking a beating (Facebook, Apple, Amazon, Netflix, Google/Alphabet). Most of their CEOs had made an enemy in the President-elect intentionally or not. Their stocks plummeted. I believed they were oversold because the incoming administration had very little influence over their businesses, so near the bottom, I picked them up. In the intervening two years, they are up an average of over 70%. That beat the market average significantly, even after the carnage late last year.

Now just like I’m a value shopper, I also pretty much stick to a buy and hold philosophy. Which means I don’t turn over stocks frequently. I prefer to hold them and let them grow. Sometimes this works out, sometimes not. With a little company called Skyworks (which bought up a company called Alpha Industries which I’d bought in 2001), this has definitely worked out (to the tune of nearly twenty times return on investment). Not getting out of GE at its peak (not knowing they were lying in their accounting), cost me though I still walked away with profit. Not so with Carbo Ceramics which followed oil prices through their spontaneous boom and surprise collapse, though I didn’t lose much either.

In general, I’ve been fortunate in that technology stocks have led the way for the bulk of my investment career. Technology is something I understand, so it’s easier for me to see its implications. One of the reasons I picked up GE (aside from its low P/E, which is often but not always a good marker of value) was that it had captured a great deal of the market on wind turbines, like 70%. Even in 2009, I could see a future in alternative energy. I’ve considered Tesla if only for its battery tech, but Elon Musk is bat-shit crazy.

You get the picture. Basically, in this account I played to my strengths and background, and got lucky that it paid off over time. Though the initial learning curve to get there was at times pretty steep (which is why I don’t recommend it).

Ok, three pots of money. Each of them with a different philosophy and a different purpose.

The purpose of Pot 1 (Karen’s 401k) is to provide long-term income through our retirement. The purpose of Pot 2 (IRAs) is to bridge us from initial retirement to claiming Social Security. And Pot 3 (stocks and mutual) is a combination of bridge money, emergency money (ala 2007) and fun money in retirement. Because Pot 2 is the slow runner of the group with the highest fees, it will get tapped first.

Somewhere in here, we may have lost sight of the plot. The goal has always been financial independence and early retirement. But what does that even mean?

It means having enough money to do what we want when we want to. How much is that? Well it’s different for every person. You can find all manner of advice on that online.

But here’s where all the tedious accounting you’ve slogged through in the past bunch of essays begins to come together. Because we have a budget, we know exactly what how much money we are living on right now, not just a snapshot, a long-term, running average. Because we live debt-free, that average is well below our means, which has fueled the three accounts above. Because we have a disciplined mindset and live simply, we don’t need as much as others and can likely enjoy our current standard of living indefinitely. Because we’ve planned, we are hedged against uncertainty with both insurance and emergency funds. And should a deeper uncertainty arise, we can find other discounts and reductions if we have to. As well, we have an emergency maintenance fund for the house, and the house itself as a double-emergency fund should we need it.

But hopefully we won’t.

Because we’ve gone through the budgeting process once again, only this time looking forward rather than back.

We know from our Social Security statements what our benefits will be at various ages we might claim them. In general, we intend to defer claiming our benefits until the latest possible date because the government gives us an 8% bonus for each of three years past our full retirement date that we do so. Always take the free stuff.

We are also both very lucky in that our jobs had pensions. Karen’s is better than mine. We know what those benefits are and when they come online. We also will have access to her health insurance at the same premiums she would pay as an employee.

Now once we add all that up, then subtract off our expenses (which I’ve expanded to cover things like taxes and insurance premiums which aren’t accounted for automatically in retirement), I find we are completely covered. In fact, we’ll likely get a raise. And maybe a travel fund if we have anything left over.

Which only leaves getting from here to there now that Karen has retired early. Here is where the above accounts come into play.

Remember back in the first essay, I mentioned additional healthcare costs in retirement? That’s what Pot 1 is mostly dedicated to. It could be a little, it could be a lot. There’s no way to know exactly how or when the dice will fall.

Pot 2 (IRAs), as I said above, is bridge money. Unfortunately, that bridge money can’t be touched (without a lot of hassle or penalty) until the owner is 59.5. That’s still a few years away.

Which is where Pot 3 (stocks and mutual funds) comes into play. I can withdraw from that freely as long as I’m willing to pay the capital gains (taxes) which really isn’t much right now for people like us because, as I’ve said, we don’t make a lot of money.  Fair or unfair, it’s the way the cards lay out.

None of which answers how much we really need. So, it’s time for another rule. The 4% Rule (aka The Bergen Rule). That basically says you can withdraw 4% from a pot of money each year (adjusted for inflation) and have a great chance that your money will outlive you. So basically, in an average year, we need a 7% return to make it work. Tough but doable.

Given that again, we know our expenses (with or without any supplemental income depending on the scenario), all we need is roughly 25 times whatever that income gap is each year (1/.04). Which Pot 2 and Pot 3 cover from now until various other guaranteed income comes online (like Social Security). In fairness, there’s a bit of a spreadsheet that goes with all this, but you get the drift.

But all of this comes with a really big, huge, caveat. Order of Returns.

You can tell by the caps this one is important.

Ok, in an average year you know by now the S&P returns 10%. But you also know there is no such thing as an average year. The thing is, the timing of those down years can be really important.

I don’t have numbers handy, but let’s play a little thought experiment. Let’s say I add up my Soc. Sec. and my pension (lucky me) and then deduct my expenses and find I have a $10k annual gap. Ok, no problem. By the 4% Rule, I know I need to have $250k prepared to earn 7% a year (likely in some combination of stocks and bonds). But I’ve planned and saved and overengineered so, lucky me again, I have $300k eager to go to work. And I retire…

…in July 2008. Right on the cusp of the Great Recession.

By July 2009, my $300k suffered a drive-by, though not quite as bad as the S&P because I diversified. Which means I only lost a little less than a third rather than over half. Which means at the end of my first year of retirement, I now only have $200k. Which is less than the $250k I need to generate the income to fill the annual gap. In fact, it leaves me with a $2k/year shortfall if I withdraw at safe returns. I either need to cut my expenses, find a new source of income, or take greater risks with my investments.

And if I’d started with less and lost more? Potential nightmare scenario.

In an alternate scenario where the year before I’m going to retire, the Great Recession hits, I could likely delay retirement, save a little more and let my investments recover before I pull the trigger.

In another alternate scenario, let’s say for the first nine years of my retirement, my investment beat the returns they need by 4%, then give back that 40% (so an average wash). By the time the crisis hit, I would have $427k in my account (compound interest) which then gets chopped to $256k after the carnage. Hey, as long as I had let that extra money sit, I’m still afloat, with a tiny amount of room to spare.

Long story short, when the professionals have run through both theoretical and real-world scenarios, they find that once a retiree falls below that line of what they need in annual income, they don’t tend to recover. Which means many outlive their money instead of their money outliving them.

Order of returns matters.

To mitigate that, experts recommend that you maintain 2-3 years of reserves in cash (or very liquid assets with guaranteed resale value, i.e. savings bonds not 10-year Treasury bonds) to cover your expenses. In our case, that would be the gap between Karen’s pension (and supplemental) and our expenses. That theoretical $10k in the example above. On average, when a bear market (a 20%+ decline) lasts 18 months to 2 year before it recovers to its previous levels. Three years gives you a cushion. Which might be a little less if you reinvest any dividends (which would be bought at a reduced price). What all that means in practice is that you don’t have to sell assets at a loss in a crisis; you just spend your cash and replenish it when the market recovers. You ride it out. Time and patience solves most problems. This emergency cash fund negates Order of Returns in all but the worst-case scenario.

Which for me might have been if I’d stepped away from engineering in 2008 rather than 1998. Yeah, 2000, 2001, 2009, those years kept me up at night. Thankfully, we came out the other side at least in as good shape as we entered. But we remain vigilant.

Now that the seeds are planted, we can only wait to see what grows. But the trick to financial independence, whether to pursue a dream or with the goal of retiring early, is that you and only you are responsible for tending the garden. So be sure to choose the instruments with which you tend its rows wisely.

© 2019 Edward P. Morgan III

Death and Taxes - Planning

When I was in high school, my best friend came from a background much different than my own. From a young age, he and his siblings worked. Not to generate a little extra spending cash like I did; they contributed to the family income out of necessity.

His mother, who was their head of household, had an interesting rule that stuck with me. When she or my friend or his brother came into a bonus or some overtime, not all of it automatically fueled the family coffers. Whoever’s windfall it was kept a portion of it to do with what they pleased. The rest went to common finances.

Now you might think this arrangement seems a little harsh. Shouldn’t the person who did the work get to say what happens to that money? Maybe. But his family lived more hand-to-mouth than I ever have, mostly due to circumstances of birth which I won’t get into. For them, middle class was a goal, not a birthright. Theirs were subsistence economics. This arrangement was a necessity to keep the family afloat.

But my friend’s mother was a very wise woman. I learned a great deal from her on a variety of subjects. Here, she was tapping a fundamental piece of economic psychology, one I’ve used to our advantage again and again.

Pay yourself first. But don’t starve yourself of a reward for your efforts or good fortune.

This is an important concept, one many people miss.

I’ve said before, personal finances are a lot like dieting. Making a radical change and going into starvation mode usually doesn’t work. In fact, most studies have found that mindset is counterproductive. Partly because we can only go so long before we need a reward or treat for our efforts. Yes, most of us are little children deep inside, or Pavlov’s pet. If we deny ourselves for too long, we are likely to binge when we get the chance to make up for what we missed. That’s deep-rooted evolutionary psychology from a time when our daily existence was often feast or famine.

I know better than fighting fundamental psychology. My id is devious and cunning. It almost always wins these fights. It will definitely fixate on what it’s missing. But if I can put it to sleep with a little treat, it will focus elsewhere.

Example time. As I said before, when Karen and I were living in Maryland, she was carrying some credit card debt. Anyone who thinks federal employees are overpaid has never tried living on one’s salary right out of school in DC. Anyway, to work it down, she needed to save some money. One of the ways she did this was by always paying herself first.

Back in the day, we didn’t use credit cards for daily expenses. Not only was it impractical, it was also actively discouraged by most businesses. For our day-to-day needs, we carried cash. Fortunately, greenbacks not the Rai stones.

Which meant every payday Karen went to the bank or ATM to withdraw money to see her through the week. To pay herself so she could work down her debt, every time she withdrew money from checking, she made an equal transfer from her checking to savings. This simple act reminded her that debt was still out there needing to be paid. At the end of each month, she took the extra she’d saved and applied it to her credit card debt, rather than just throwing in the minimum payment. In under a year, the debt was gone.

But she didn’t starve herself of a little spending cash to see her through each week. Which meant for her the practice was sustainable.

Once banks got a little more electronically sophisticated, this became easier. As I mentioned in the essay on budgets, we created a hierarchy of deposits which fuels our overall finances. Karen’s paycheck goes directly into our joint savings. From there, we have an automatic transfer to our joint checking for our normal monthly expenses. We also have two more automatic transfers to each of our personal savings accounts (where we each have another automatic transfer to our personal checking accounts). It’s a kind of waterfall effect, with money flowing in then dividing into separate pots, each without our having to intervene.

We operate out of our checking accounts. Which means we don’t see our savings on a day-to-day or week-to-week basis.

As I’ve said before, we don’t miss what we don’t see.

The money that goes into our personal accounts, savings and checking, is ours to spend alone. The other person doesn’t necessarily see where it goes, unlike the joint account. That means we each get to manage our own weekly reward and savings for special purchases without having to consult the other. Yes, we still buy special things for both of us out the joint account. But I don’t have to bother her with weekly lunches or coffee, or that special game I see in the local gaming store. She doesn’t bother me about yarn or jewelry. It works for us.

And because we use our checking accounts as our operating capital to meet our immediate needs, our savings (both personal and joint) continues to grow. Though part of this works because we grew up with checking accounts, not credit and debit cards.

We didn’t stop there. We used to have two more areas of automated savings, which through circumstances has winnowed down to one.

When I started my job down here in engineering, the company I worked for took their US Savings Bond drive very seriously. They prided themselves on 100% participation and got really tiffy if the CEO didn’t get honored for it by the government every year. They put a lot of pressure on employees to participate.

Being engineers, a number of individuals I knew just contributed the minimum allowed and set it so they would never receive a bond. A friend actually fought the unofficial policy by not contributing at all which ended with him in a series of managers offices receiving lectures all the way up to a VP.

I looked at it differently. I saw it as an opportunity. I contributed something like $25 a week to build up some savings. Savings bonds weren’t a horrible investment at the time (before George H. W. Bush gutted the way interest was paid). We continued contributing through Karen’s job until Treasury (under George II) restructured the program and made it much more difficult to contribute automatically. By then, we had enough bonds to put a new roof on the house. Those bonds, which continue to increase in value, serve as our house emergency fund. They aren’t a great return, but they are guaranteed. In general, they are better than a savings account and more accessible than a CD.

Our second automated savings opportunity is longer term. Both our employers had 401k plans or equivalent. Both had some level of matching contributions. This investment pays a couple different ways.

First, the contributions are pre-tax (tax deferred until you withdraw money in retirement which should be at a lower tax rate). So immediately, we are essentially saving our tax bracket on that money (when we started around 28%). That alone is an outstanding return on investment, though as I said, the taxes are just deferred.

But it doesn’t stop there. Because her employer matches her contributions in a hierarchy, they are basically giving her money to participate. Now here, a few people get confused. They think that because their company only matches the first, say, 3% they contribute from their salary one-for-one and the next 2% at one-half-to-one that they are only gaining 4%. In reality, they are gaining 80% on that investment (they contribute 5% of their overall salary to which the company adds another 4% of their overall salary for free). That is a huge return on investment even before taking into account the average gains on the S&P.

Of course, she can contribute more than that theoretical 5%. There is a maximum annual percentage as well as an overall hard dollar maximum. And because she’s over 50, there is an additional “catch-up” contribution which basically bumps that maximum up by another quarter. Since we’ve been married, we’ve maxed out our contributions, upping hers when she turned 50.

As well, Karen’s 401k equivalent has some of the best index funds and lowest management fees in the industry (much less than 1%). Which means almost all of her money goes directly to work. And because the contributions are automated each paycheck, we take advantage of any market dips throughout the year.

But wait, there’s more (order now and you’ll also receive…). Because, again, she doesn’t make that much money, we qualify to contribute another chunk of money (with another catch-up) to personal IRAs (traditional or Roth). And because she still doesn’t make that much money, the IRS subsidizes the first $4k of our contributions with a 10% tax credit ($400). For those keeping track at home, remember that $2k savings I mentioned in the essay on Discounts? Yup, there it is, working its little heart out so I don’t have to. And yup, that first year’s contributions are guaranteed the average S&P returns regardless of what the market does.

Now you begin to see where all that money we freed up from mortgage and car payments goes. Trust me, seeing the statements of how much we’ve saved provides a tidy little jolt of dopamine each quarter. And people are paying us to do it.

Let’s do a little quick math. Let’s say you have an employer that through a combination of direct contributions and matching is willing to add $4000 a year to your 401k. Let’s say you have a 30-year career ahead of you. And let’s say, because you are already pretty lucky, that you can capture the average S&P returns for that 30 years. What would you be leaving on the table by not taking it?

Plugging that into my quick search internet compound interest calculator (with annual payments)… $693090.64. Yup, you read that right, almost $700k. And that would be on top of the $866378.90 (just over $850k) from your $5000 a year contribution from the example above. That translates to $240k and $300k over a more realistic 20-year contributing career.

Ok, let’s settle back to something many people will find more realistic. Let’s run those same numbers for getting a $200 tax credit on $2000 IRA contribution, again for 30 years. The annual tax credit alone ends up worth just under $35k. The base $2000/year contribution ends up at just under $350k. (see the Notes and Asides for a caveat to these calculations)

Thirty years. For most people with a full retirement age of 67, that means starting those contributions at 37 years old. Quite doable.

Now of course, with inflation, management fees and the vagaries of the market, it’s not quite worth that much, but you get the idea. That’s a lot of money left on the table.

Pay yourself first, especially for retirement. What you don’t see, you won’t miss. And always take the free stuff. Win-win-win.

And there’s one more little tax break we take advantage of, Karen’s Flexible Savings Account, which basically allows us to spend pre-tax money each year on medical expenses (including dental checkups and glasses). While the rules are more Byzantine than an HSA, and the amount we can contribute is limited, we can’t beat the subsidy on routine medical we get from it being pre-tax. Beats the S&P any day.

Of course, before we were in that position, we were paying down debt. So, when Karen received a small inheritance, she used half of it to pay off the remaining note on her car. The other half she used to take us on a trip. When I was deep into overtime the year we got married, over half that money got poured into the mortgage, which is how we eliminated it even earlier. The other half went into things we wanted around the house. Now, if Karen gets overtime, a bonus or travel money (which doesn’t always happen and isn’t much), half gets dedicated to funding our IRAs and half usually goes to vacations (with at least some amount to yarn).

Which brings me back to allowances and another principle we live by: When it’s gone, it’s gone.

Funny thing about an allowance. In my experience, until very recently, I would always spend whatever money was in my pocket. When I had very little money, I didn’t spend it if I didn’t have it. When I increased my allowance, I usually spent close to the limit I carried. By the way, yes, I used to track this in my budget numbers, mostly out of curiosity.

Again, this is fundamental psychology for most of us. If you don’t have it, you won’t spend it. Of course, credit cards changed that calculus significantly. With them, it’s quite easy to spend what I don’t necessarily have, or at least want to have.

Remember way back in the essay on budgets where I said there were two kinds of budgets, a long-term and a short-term, and I said I’d get to the short-term later? Guess what time it is.

Full disclosure, I ran across this exercise in some article or book about twenty-five years ago. Credit cards had just begun to become ubiquitous for daily purchases, at least in certain crowds, which included me at the time. Because of the ease of purchases, more and more people were getting into trouble with them.

The exercise went like this. Set your credit card (or debit card) aside for a month. Each week, take out your allowance from the bank in cash. Yes, most people have what they consider to be an allowance, even if not a formally designated one. Instead of putting that cash in your wallet, stick it in a small notebook you carry in your pocket. Every time you spend any money, write it in that notebook with a date and time. It doesn’t matter how small the amount, even $1. Just make sure it’s noted every time.

At the end of the month, review those purchases. Group them into categories which can be broad or narrow, like lunches, dinners, coffee, movies, drinks, clothes, jewelry, craft or hobby supplies, gifts, gas, cigarettes, etc. Whatever categories best fit. How many of those purchases do you not remember making? How many that you remember gave you a distinct sense of joy? How many were just out of habit?

Many people end up being amazed how much they spend on coffee in a month. Or alcohol. Or cigarettes. Multiplying that by 12 gives you how much you spend on any given category in a year. The cliché example is buying coffee on your way to work each morning. It’s only $5. I hear that from people all the time. It’s only $5. That’s $25 a week, or $1250 a year. Even $5 a week is $250 a year. The question to then ask is do you get that level of enjoyment out of that purchase?

For me, this was a useful exercise. One of the things it changed was that instead of stopping in the company cafeteria for coffee each morning (which was crap), or buying into one of many coffee funds (which were also crap), I bought a thermos and started bringing in coffee I brewed at home (which was definitely not crap). A cheaper, better alternative. I also cut back going out to lunch to only Fridays, which had the added side benefit that I lost weight even though I wasn’t really trying to. All of which meant my allowance stretched farther and my savings built up faster (as well as my looking more svelte).

Now I’ve never really liked shopping but once upon a time in her princess days, Karen did. Every now and then she still gets the itch (she grew up as a mall child, just like me). She finds that sometimes grocery shopping can fulfill that urge. Other times, it’s thumbing through catalogs. If she’s really jonesing, she goes shopping for shoes or bras she really needs. That almost always cures her. It’s a weird trick but one that works for her and doesn’t burn through her allowance buying things she doesn’t necessarily want or need. In favor of things she does, like yarn.

When it’s gone, it’s gone.

That same philosophy applies to us with maintenance.

A number of years ago, we were watching an American Experience on the Great Depression. One of the sayings used by people who went through it or were born into it was, “Use It Up, Wear It Out, Make It Do or Do Without”. When I bounced that off my aunt, who was born in the middle of it, she said, that’s exactly right. So many people could learn from that in today’s disposable society.

For us, that translates to waste not, want not. As I’ve mentioned earlier, we will fix or improve things rather than immediately buying new. Which, oddly, seems to get reflected in the amount of trash we put out compared to our neighbor’s trash migration each week (they are always coming home with something). A personal choice.

But we have found that when we take care of things, we value them longer. And if we have fewer of them, we don’t get paralyzed by having too many choices, which is another condition confirmed by psychological studies. More on that in another essay.

In general, maintaining a car or the AC, though somewhat of a hassle, is easier than the bigger hassle of buying a new one. And as I’ve said before, we prefer to buy quality which we think will last. It probably helps that neither of us ever looks forward to shopping for new things because our tastes run far enough outside the norm that we can rarely find what we want or envision.

As I mentioned, my car is almost 30 years old. A bunch of years ago, a friend who we gamed with offered me double its Blue Book value. Cash. Tomorrow. He was dead serious. As was I when I turned him down. But to get an offer for half of what I’d paid for it a decade later said something about both the initial choice I’d made and the way I’d taken care of it. Our mechanic used to make us offers to sell it all the time. Of course, I’ve replaced the roof and Karen’s now resewn the seats.

We’ve bought one set of bedroom furniture since we’ve been married. It’s solid pine and matches a number of bookshelves, the spare bedroom set, end tables, a set of storage cubes, a corner cabinet, a chair, a sweater chest, a stereo cabinet, a wine rack and the game table. We picked it up in stages as we could afford from various manufacturers, some at closeout. Several years ago, when we had a mold issue in the house, we had to take all of it out into the garage and revarnish it. I’ve had to repair a notch taken out of one of the bookshelves. Just last month, Karen had to replace the cheap staples they used on her drawer fronts with screws.

But we knew when we bought it that it would last if we took care of it. Sure, there are scratches from various cats either using a piece as a launching board or making a hard landing. But those varnished over scars just remind us of those missing cats. And in the intervening years, Karen has made a paperback shelf, a DVD cabinet, two CD cabinets and a game table top to match the set. And all of it still glows when it catches sunlight.

As another example, when we first moved into the house, Karen really wanted a solid wood front door. We both wanted a door with a window but she insisted on solid wood. We made a deal. If she took care of it, we would get it. Which she has. Every year, she goes out, sands it and applies a fresh coat of spar varnish. This year, she made repairs to the jam where it had rotted from below. But looking at it, you wouldn’t think it was a 25-year-old door. We’ve known people who couldn’t get their solid wood doors past year five. Personally, I don’t think I could have. But Karen did.

A quick third example. When we bought the house, the back bathroom had countertops that could best be described as Flintstone fluorescent green marble. Yeah, lovely. Oddly, Karen (it was her primary bathroom) decided that she didn’t really want that color scheme. But instead of ripping out the cabinets and countertop and replacing them with something new, she had it resurfaced with a new laminate including replacement cabinet doors and drawer fronts for a fraction of the cost. And that minor improvement endures to this day as both of us remain content with the conservative color scheme she chose.

And in case you think it’s just her, ask me about the 25-year-old pair of Birkenstocks I glue back together every time the leather separates or the cork cracks. They cost a lot more than regular shoes, but no pair of sneakers has ever lasted that long. And I wear them every day around the house. Or ask about the only pair of dress shoes I’ve ever bought that still hold a polish.

Sometimes you have to spend money to save money. Our house is 40 years-old this year. Our cars are 30 and 17. Our washer (with a new knob) and dryer, almost 30. Our stereo and speakers (some of which we’ve refoamed), 25. Our freezer, almost 20. Our fridge and dishwasher, 15. Our TV (with a replaced power supply), 14. Our stove is original to the house. The list of items we could have upgraded or replaced for newer models with more features goes on and on. But what we have suits our needs and desires just fine. Quality shines.

I’ve found that there is something about pride of ownership that makes people envy what you have just as much as if you had the biggest, brightest, newest, ooooow shiny. And sweat-equity costs so much less than replacement if you start with good bones.

Simplicity, discipline, patience and planning.

Which brings me briefly to the first part of the title. Planning for the inevitable but unforeseen.

A number of years ago, I was talking to my mother when the subject of life insurance came up. I mentioned that while Karen has a basic amount provided through her job (with no premiums for us), we don’t have a policy on me. She was aghast. How could we not have life insurance? (kind of missing the point we did on Karen, just not on me. When I was in engineering, I carried a minimum policy, too).

Well, we don’t really need life insurance at this stage of our lives. The intent of life insurance is to provide a replacement income in case someone dies. It makes a lot of sense for young couples just starting out or couples with kids, or anyone with a dependent who might not be able to make up that income. A minimal amount makes sense to save someone burial costs (which we could get for free through our credit union). We are not in that position. If we had kids, it might be different.

Insurance at its heart is a hedge against uncertainty. In most cases the uncertainty is likely to occur, we just don’t know when. Everyone dies. The vast majority of us get sick. Many people get into auto accidents, whether through their fault or someone else’s. At its heart, the insurance industry, which has been around at least 2000 years, studies the average occurrence of various possibilities and their costs in various locations (ok, this is how it ideally works, so save the snark).

Because like most of people who don’t have the operating manual to their crystal balls, we don’t know whether certain events will occur (like a direct hit by a hurricane, or breast cancer) or when (like dying). In general, insurance provides a good hedge against that uncertainty, in much the same way a fixed interest rate, fixed payment mortgage hedges against interest rate uncertainty. With insurance, pooling the risk among a large enough population is what allows those collected statistics to work.

In general, I like hedges against uncertainty. If I had any lingering doubts, 2007 cured me of them. But likely I would have been content either way because I understand the math and how the dice can roll.

In the same way, while I would never willingly go without health insurance (having it in 2007 paid us to the tune of $300k in dividends), we don’t need dental insurance right now (it’s a wash because our teeth are sound). We might be able to get our money out of vision insurance but every time I’ve run the numbers, it’s been basically a wash with the other discounts we can unlock (which don’t stack).

Homeowners insurance we still have even though we no longer have a mortgage (which requires it). Though with the rise in premiums and deductibles for wind-storm damage, it might be better to get an umbrella liability policy combined with another for fire, theft and casualty. I’m not quite ready to make that leap.

Auto insurance is required by law, and I am generally lawful at heart. Though with the age of our vehicles, comprehensive really doesn’t do us much good (except for replacement windshields for the Jeep, which has needed two). And because we have good health insurance, we don’t really need the coverage for uninsured motorists as I understand it.

We’ve considered long-term care insurance through Karen’s work but unfortunately, the opportunity to sign up for it only comes around every 5-10 years. The last time it did, she was still disqualified for being too close to her final treatment. Regardless, I have heard mixed reviews on whether you can ever get your money out of your premiums. It is increasingly difficult.

All of these are planning trade-offs with potential savings and expenditures that we weigh out year after year as our situation changes. But like an old Soviet 5-year forecast, life often has other plans.

Which is why we keep living below our means. As we plan to do for the foreseeable future. 

© 2019 Edward P. Morgan III 

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Always Take the Free Stuff - Discounts

A friend of mine from college had a saying he repeated like a mantra. “Always take the free stuff.”

For him, that meant things like maps, information booklets and brochures from places he’d visited; a couple extra napkins at a fast food restaurant; free samples in a grocery store or a food court; the pens, pencils and notepads hotels set out for their guests; even promo items like basic solar calculators, tape measures, earphones, golf tees, cable ties and any trial-sized food, products, or OTC medications that various businesses wrote off as advertising.

Admittedly, he was a gamer, so much of this ended up in his backpack as supplies. The informational content almost always added whole new levels of detail to his games. Another of his favorite sayings was “I’ll file that under I, for I might need that someday.” Ok, in the end, he was a bit of a hoarder, but that’s different story.

He didn’t steal anything; he just took what was freely offered. Although he was not above smuggling out a particularly amusing phonebook, say from a place like Waycross, GA (“where there is absolutely no reason to be bored”), which he knew would be replaced. He used them to create encounters and as random name generators. Sadly, this is what we were reduced to in the dark ages before the internet.

The funny thing is, there are always a ton of things being given away in a capitalist society, and tons of discounts if you know where to look for them. Karen has picked up more cool swag from conferences she’s attended than I’ve ever seen. And if you can con someone into giving you an official tour of their business (which many are more than happy to do), they basically throw this stuff at you in hopes you’ll remember them if you need them.

After the last essay, you were probably wondering how we generated some of that extra cash to pay off the mortgage. Prepare to be bored by basic math for the next few thousand words in a way you haven’t been since second period in sixth grade.

Ok, remember way back in the essay where I talked about my second financial lesson in college? Of course not. Here’s a quick refresher.

I had just moved into an on-campus apartment and cut out the cafeteria meal plan to save money by cooking for myself. Most of us know that cooking at home is cheaper (and healthier) than eating out almost anywhere. Anyone can learn basic cooking if they apply themselves. Even children can learn to cook. It’s a survival skill I highly recommend. And the longer you do it, the better you get.

But that’s not what this essay is about.

At the time, I had two roommates. One cooked, one didn’t. The one who did taught me a trick for stretching a food budget that I’ve never forgotten. Buy meat in bulk and freeze it. Meat is generally the most expensive staple in a grocery bill, at least if you are an omnivore like me (sorry vegetarians but Nyala says your food is what our food calls food). Next is fresh fruit and vegetables, though as an interesting aside, flash frozen fruits and vegetables are nutritionally equivalent to fresh because of the way the technology and the supply chain works.

In the apartment I had to split the space in a regular fridge freezer with the roommate who cooked, which wasn’t really a problem as I was still working out the kinks of my system. The year after he graduated, I ended up with three roommates who didn’t cook so I had almost all of that little freezer to myself. I bought in bulk, which shaved about 10% off the price of meat per pound.

10%, that number should ring a bell. Yup, the S&P return number I keep harping on. But I didn’t know that at the time.

I dumb lucked into some of that savings because I basically hated grocery shopping. Not the act itself, just the time it took. I would only go every four to six weeks and stock everything into an overflowing cart. Which meant bulk buying worked for me on two fronts. Synchronicity.

Since those days of yore (when someone would just kill the mastodon and slap it on a glacier), I’ve continued and refined that approach.

After we moved into the house, the first appliances bought after a washer and dryer (because laundromats are the devil’s waiting room) was a small chest freezer. It cost $250.

I am what I call a lazy cook. Left to my own devices I eat pretty Anglo-Saxon basic (meat, veg, starch at the time, which is now meat, veg, salad). Combined with my aversion to spending time grocery shopping (only countered by my aversion to eating out), which got somewhat worse once I had a career, I still liked to stock up. The chest freezer meant we could.

I’ll spare you the blow-by-blow history lesson and just tell why it was perhaps one of the best investments we’ve ever made. In fact, we still have and use it over twenty years later. The same one, never replaced. Remember way back in another essay when I mentioned Kenmore? Yeah.

The savings this 5.5 cubic foot freezer generates currently works out slightly differently than in college. While we don’t buy bulk packages as much anymore, we still stock meat in quantity. Because we always have a running stock, we can be picky and only buy it on sale. Saving $1/pound or more on chicken that normally costs $5/pound works out to a 20% savings (no, we aren’t buying the cheapest meat anymore). That’s a hefty discount. With Buy-One-Get-One, it gets even better. Lamb shanks, salmon, pot roasts, ducks, turkeys, all that stuff goes on sale at one point or another. And it easily keeps until we need it. Because we have enough stock to see us through, all we have to do is keep notes on what we’re low on and wait for a sale.

The only time we run down the freezer is leading up to hurricane season so that if we lose power for several days, we don’t lose several hundred dollars of meat.

As well, we can make and freeze soups and stews and lasagna all winter which we can then thaw when we don’t really feel like cooking. Karen calls it our “fast food”. As I said, I am a lazy cook. Which means the best countertop appliance we own is a crock-pot. That allows us to brown some meat, chop up a bunch of veg, throw it all together with some stock, wait a few hours, and presto. A hearty Anglo-Saxon meal. At least when served with fresh bread.

Which is another thing that gets stocked in the freezer. Every few weeks, Karen bakes a batch of bread that she makes into little two-person loaves. Mostly now we have it for breakfast but occasionally we have it with dinner. The discount of her baking over buying (multigrain, no additives, no preservatives) adds up. As does her making fresh yogurt, but that we store in the fridge.

Anyway, you get the point. This little freezer was one of the best investments we ever made, easily paying for itself a thirty-fold or better over the years with the discounts it allowed us to capture on stuff we normally buy. Which freed up the fridge freezer for larger bags of frozen veggies.

Say that generates $25 a month, which might be a little low. Doesn’t seem like much, maybe not worth going after. But that’s $300 a year, which for us is a better way of looking at it. $300 is money I can work with.

Next up in the grocery aisle is coupons. As I mentioned in the essay on budgets, I track coupons on our bill. I never really paid much attention to coupons until the Great Recession. Boy, do I wish I had.

For a long time, we had a subscription to the local paper. I occasionally glanced at the coupon flyers but when I was working, they didn’t seem worth my time. I started clipping them after I left engineering.

Coupons are an old lady's game, right? Wrong. In the past ten years, we’ve averaged savings of about $25 a month. That’s another $300 a year. A little less when we still received the paper (the coupons easily paid for a Sunday subscription). We killed the paper several years ago because we had better sources of news. Now the only coupons we get come in the local throwaway, in the mail and in the store flyers. But until last year, that’s been enough.

For us, there are a couple tricks with coupons. First, we are somewhat brand loyal. We have brands we like, so we only cut coupons on them. Second, we only use them on products we normally buy. Just because there is a coupon on ice cream doesn’t mean I’ll clip it. We don’t normally buy it. In fact, I don’t generally want to buy it. Third, when there is a coupon for multiples, like shampoo, we stock up. Karen usually has 2-3 containers of the shampoo she likes in the bathroom cabinet beneath the sink. Finally, our grocery store allows us to combine manufacturer’s coupons with store coupons for a double discount. They also accept competitors coupons.

A funny thing about coupons. They follow the economic cycle. When times are good, you don’t find as many offered. When times are bad, you find tons on items you almost never see. When times are really bad, like the Great Recession, grocery stores offer $5 coupons off a general bill about every other week just to get you in the door.

Right now, times have gotten good enough that we only averaged about $6 a month in coupons last year. That’s way down from our peak in 2011, with a whopping $55 a month. That was $660 that year. Which paid for our flights and registration at Dragon*Con. Currently, we see more BOGOs that we take advantage of in the same way, overstocking the pantry with sale items that won’t go bad.

So on groceries alone, we came up with $50 a month or $600 a year. And that’s without considering how much cheaper it is to eat at home is than eat in restaurants. Tastier, too, in my opinion. Those savings alone would have shaved five years off our mortgage. Or been a nice supplement to a vacation. Or a little more money to invest.

Let me give you another example. About ten years ago, we started having trouble with our cable company. The upshot of it was a technician walked out of the house saying he needed to get piece of equipment and never came back. We cancelled our cable the next day, though not our internet.

Which cut our bill in half, down from about $100 to about $50. Again, that’s a savings of about $50 a month or $600 a year. But we weren’t quite ready to ditch small screen entertainment completely. We bought a digital antenna and converter box to pick up the major broadcast channels (which we only tune in for sports, and increasingly not that). As well, we picked up Netflix and Amazon Prime subscriptions (Amazon for the video content, though it comes with other perks). Those totaled $250 a year, leaving $350 extra, or roughly another $25 a month.

Initially, we weren’t certain how we’d do without cable television. As it turns out, we are happier without commercials and have more quality content than we could ever watch on just two services. And again, at over a 50% savings, which well outperforms the S&P on even the best year. That’s year over year savings, at least until the cable companies figure out how to recoup their loss.

So we are up to $75 a month in savings we can track.

Where else could we look?

Well, a couple places. Fun fact, a number of businesses offer discounts on monthly services if you pay a year in advance. Currently, our pest control gives a 10% discount. They didn’t offer it, we had to ask. Now they just give it to us every year. Again, that magic S&P number. Though it only generates about $16 a year, it’s now our $16, not theirs. As well, they offer another 10% discount on termite coverage for having pest control with them, which is a little more. And they only cost half of the previous national service we had with none of the problems.

A number of companies also offer bundled service discounts. Cable companies for things like TV, internet and phone. We used to get a 10% discount from our insurance company for having auto and homeowners through them (we still would if they were writing policies in Florida, which most aren’t). Our old AC company used to offer a deep discount to do an annual service check if we scheduled it in February ($30 vs. $80-100 in May).

Speaking of pay-in-advance discounts, the State of Florida discounts our property taxes 4% if we pay four months early. Worth if for both parties (we get a discount, they get to put our money to work early, write fewer bonds and pay less interest).

Speaking of taxes, a perk to being a resident of Seminole is free access to the workout room at the rec center. That alone is worth about $250 a year just for me, though I’ve only used it sporadically. But I wouldn’t use the gym much either. I prefer to do my Jane Fonda impression without an audience.

And speaking of insurance, the longer you initiate a policy for, the deeper your discount in general. I had friends who paid their auto insurance monthly. The difference between that and a six-month policy for the same driver is amazing. A yearlong policy, if you can get it, is even better. Companies want a guaranteed, stable revenue stream and are often willing to pay for it.

AAA gets us a deep discount on our glasses when we need new ones, which easily overcomes the $80 a year fee (we have rarely used roadside assistance but it’s nice when we’ve needed it). We also get a 10% discount on labor with our auto mechanic. It also gets us better rates on hotel rooms and cars, among other things. AARP offers comparable discounts for many goods and services with much less of an upfront fee. A few professional organizations do as well.

On the utilities front, our power company offers an energy check and duct leak test which they subsidize half of, along with an insulation upgrade, which they also subsidize. We’ve had good luck with both and have seen the savings. Though we didn’t have as good luck once I was home with their energy control program that would interrupt our AC or water heater at peak hours. Upgrading our incandescent light bulbs to LEDs and turning on every energy-saver mode we can find on our devices (especially the computer and monitor) has made a noticeable impact on our power bill. Another reason why I track kW-hrs, as I mentioned in the essay on budgets.

Similarly, a low-flow toilet in back (and fixing a leak we didn’t know existed) made a difference in our water bill. The crossover-point there is probably a long way in the future, but the work had to be done regardless.

On the travel front, both our old employers allowed us to register and keep our frequent flyer miles from work-related trips, as well as hotel reward points. Which has meant free airfare to Dragon*Con and more than one free night in the Marriott Marquis. Karen’s employer also had a discount program for employees buying computer equipment and software, 5-10%.

All that easily adds up to another $25 a month, if not more. And that’s without breaking a sweat.

So now we’ve made that $100 a month. That’s ten years off our mortgage if we still had one by paying a little extra each month. And we could do more.

But honestly, I don’t really work that hard at this. Believe it or not, I spend very little time searching out discounts, especially now. But I haven’t lost the mindset or the discipline so I do know other places I could look should I need to.

One would be trading our landline (yes, the Copper Age still persists) for the simple cell phone I started carrying in 2012 for emergencies which gets fueled by $100 a year for more minutes than I use. That change would generate $50 a month, or $600 a year (which puts what I’ve outlined here close to $2000 a year, which you will see in the future is another magic number). Even trading it for regular cell service would save $120 a year.

Another might be signing up for a rewards program on a credit card. My personal card wouldn’t generate much cash back as I don’t make many purchases in a given month, but our joint credit card might since we started putting gas and groceries on it. But I wouldn’t pay an additional fee.

Over the years, we’ve found many enjoyable entertainment alternatives. When I was unemployed and living in Maryland, their library system was my bestest friend. One of the networked libraries specialized in science fiction which meant I read more classics than I ever would have otherwise. Recently, we’ve also purchased a number of HumbleBundles for books (and comics), which have contained a lot of classic and Nebula/Hugo award winning science fiction for exceedingly low prices.

We still look for free lectures at the local university and the community college by speakers we might never have found otherwise. We ended up seeing Robert Pinsky (a US Poet Laureate) at USF one year, for only the price of gas. They also hosted a small science fiction conference with major authors every few years. I’ve written essays on watching the US Men’s Under-16 team play down in Bradenton, again for the price of gas (which gave Karen an inordinate amount of joy). Plus many museums have free or discount days once a month, or once a year. And, of course, the park behind the house is open year-round, beautiful and completely free.

There are tons of these events for little or no money if you know where to look.

In the past we’ve also had good luck with rewards programs for businesses we went to regularly. Though like coupons, they tend to offer more in hard economic times than good. Total Wine still sends us 15-20% off coupons. While we don’t drink a lot of wine, what we do goes farther, especially on bottles recommended by Wine Enthusiast that only they carry around here. PetSmart still gives us discounts on necessities for the girls. Free and it about makes our 10% rule, although a few items are now cheaper online.

Of course, now that we have a Prime membership (remember, we got it for the video content), we end up buying more there. With two-day shipping we don’t have to plan out as much or wait as long for free delivery. We end up using their music streaming service off and on, but haven’t even tapped the Prime books we can get for free on Kindle.

Which brings me to an interesting point. Membership fees. In general, I avoid them unless I am positive they will pay for themselves (like AARP) or I want the underlying service anyway (like AAA or Prime).

Some people we know find good savings in a warehouse club like Sam’s or Costco. We never went that route for a couple reasons. First, I don’t like paying an upfront fee for potential savings. I feel like it locks me in to a location that isn’t always convenient for savings I am not guaranteed to get. That’s me. Second, when we priced out various items we regularly bought a number of years ago against what friends paid for the same items at their warehouse club, we found many of those items cost more, not less. In fact, I’ve read a number of articles that break down prices between the warehouses and groceries stores. You can generate savings but only by buying very specific items or brands, usually the in-house ones. There may be other non-grocery items that overcome that, but in general we don’t buy many of those.

As well, I’m now a lot more circumspect on various rewards programs. 10-20 years ago, they were mostly loyalty programs. Now they are data-mining operations. We’ve run into more than one scam (one being run at the local mall that made the paper which Karen neatly avoided by reading the fine print). If it seems too good to be true….

Another trick Karen uses. She created a special email account to give out just for rewards programs and other places that require an email. That cuts down on traffic to her regular account and keeps it separate from her social media (which we never use for offers, contest or promotions).

I always ask myself, how much is my data worth? In general, more than they are offering. The same with setting up a credit card for a discount on a purchase, which for me just entails the hassle of cancelling it (and a potential credit hit). Or free trials and introductory offers which automatically rollover to a paid subscription unless you cancel. No thanks.

Simplicity.

It’s easy to get carried away with all this and either spend more time or money than it’s truly worth. I always try to understand a rewards program or discount before signing up for it. We only tend to buy things that we want or need, not because they look cool and someone is giving such a deep discount. As I said in another essay, that is the easiest way to control our spending. And in general, we never pay for the privilege of receiving a discount.

In other words, we always take the free stuff, unless it’s not really free. 


© 2019 Edward P. Morgan III  

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