Keeping Up with Mr. Jones

Until very recently I was pretty much immune to the urge of keeping up with Mr. & Mrs. Jones. We live in the Bay Area (Northern California), one of the most expensive areas in the country. People here drive fancy cars and live in multi million Dollar houses, but I didn't care. We rent our modest townhouse, and I stubbornly insist on driving my 10 year old, beat up, Geo Prizm.

So what changed? Last month my son started kindergarten, and while I couldn't care less about what people think of my car or my house, I have been having these nagging concerns that my lack of housing & driving "style" will influence the way that my son is received at school.

When I drop off my kid in the morning, the other parents arrive driving their shiny BMWs, Porches and Mercedes, next to which my dinged up junker looks even worse. Dropping off my son is the only place where I feel uncomfortable driving my old ride, but let's face it I am not going to spend tens of thousands of Dollars just to satisfy an irrational urge to keep up with the Joneses. However, I did make a few concessions to good taste: last weekend I replaced my cracked windshield, bought a new set of hubcaps for $24.95 (one of my old ones was missing), and even went the extra mile and bought new floor mats for the Geo. If I am going to drive this beat up old car for a few more years, I might as well drive one that looks slightly better kept.

The total cost for this cosmetic treatment: $300 including the windshield. Ouch. But a much smaller ouch than buying a new car... Still, the urge to upgrade is not gone. I bet other parents experience the same pressures. I would love hear any suggestions and feedback from people that had similar experiences. Do share.

Rent is NOT Waste

Time and again I hear people (some of them very close to me) refer to renting a house as a waste of money. As I previously mentioned, I don't share this opinion. Today we renewed our lease on our house for the fifth year. Yes, we have been renting our house from the same elderly couple for the past four years. Happily our rent has remained unchanged for the next year, and has increased just 10% since we started renting the house. According to Rentometer our rent is well below average for our zip code. Here are the benefits we are getting from renting vs. buying:

Flexibility - renting allows us to get up and leave at any time. Anyone who has tried to sell a house in the past year realizes that it's not such a simple undertaking in a down market. We are not facing that challenge. Some would say that this sword cuts both ways - we could get kicked out of our place next year. Sure, it could happen, but we have been living here for several years, the owners view this house as a rental property, and they like us because we keep the house well maintained and always pay our rent on time.

No Headaches - if something goes wrong with the house, our cost is zero. Just today I called our landlord and mentioned that we have spotted a minor leak below the kitchen sink. 20 minutes later our landlord was here and the leak was fixed. If I owned the house, I had to either fix it myself (not bloody likely) or pay someone to do it. I pay an all inclusive monthly fee, that covers everything from property taxes, to maintenance to trash collection. When I speak to my friends and colleagues who are home owners the conversation frequently turns to the repairs and housework that they do on weekends. I've got better things to do with my time.

Free Money - quite the opposite of being a waste of money, renting is a low cost financing option that allows me to commit our portfolio to a historically superior investment: the stock market. In a previous post I have written that our annual rent of $24,000 amounts to approximately 2.6% of the value of the house, according to Zillow. If this is the cost to finance my investment in the S&P 500, which has shown an average annual return (incl. dividends) of about 9%, by renting we are essentially making money, not losing money . But house prices have historically appreciated just as much as the stock market. Nope. House prices have historically barely kept up with inflation. Check out this graphic. Don't let the past 10 years fool you.

Far from being a waste of money, if you are a disciplined and diligent investor who does not need someone to force you to save money in the form of a mortgage, renting is actually a way of making money.

Recommended Articles

It's Tuesday, so here are my article recommendations for the week. As always, I tried to pick out the most interesting and original pieces. Incidentally, if you run across some articles that you consider especially interesting, or if you happen to have written one yourself, e-mail me a copy and I will post it here.

This week's Carnival of Personal Finance was hosted by Blunt Money.

Online Savings Blog describes Mint.com a new personal finance website that aggregates your financial data all in one place. To be able to do so they need all your passwords and user names... yeah, that sounds like something I would do. Why on earth would anyone risk their personal information by sharing it with any third party online? I visited the site and they claim to be encrypted, biometrically protected and so forth. I am sure that they think they are extremely secure, and I will grant that maybe they are, but why would I even want to take that risk? I can get the same benefits by buying Quicken software and running it at home. Sorry, I just don't get it.

Cash Money Life continues his excellent series about getting an MBA. This time the topic is the cost of the degree. I can testify that the cost of this degree is atrocious, but Patrick missed the biggest cost of all associated with an MBA: the opportunity cost - i.e. the cost of foregoing two years of income. Can't blame him for missing that cost - he hasn't taken that class in b-school yet... :-) Incidentally, I have a couple of mini sites on the topics of getting into business school, and acing the admissions interview.

Probargain Hunter has an interesting piece about Why Plug-In Hybrids are not a very environmental solution. Funny. I reached a very similar conclusion on regular hybrids. I fear global warming needs to be battled on a larger scale than shelling out extra cash to drive a hybrid. The sentiment is noble, but appears misguided.

The Bag Lady wrote an article explaining that not all 401K plans are the same. Don't I know it. Readers of this blog will have read my detailed adventures regarding my company's conversion of its 401K plan to a new provider. By the way, today, after about eight months of working on it, we finally signed the agreement with our new provider: ADP. Now the real work starts. Bag Lady, you may be interested to know that we looked at Vanguard as one potential provider for our plan, but decided against them. They could not provide the level of service that our company required. That's too bad, because their fund selection is excellent, and most of our personal portfolio is in Vanguard funds. I was cheerleading for them, but no dice.

The Future of Retirement

The retirement system in the U.S. is broken. This weekend I was reading my copy of Business Week, when I came across an ad on the back cover of the magazine. The full page ad by Allstate was so well-written and to the point that I decided to do an entire post about it. Here are some quotes from the ad and my take on them:

"1. Examine Social Security - Americans will not be able to rely solely on Social Security for a comfortable retirement. In the future, it's projected to cover an increasingly small percentage of the average retirement. There's debate as to whether it should be repaired or replaced. But What's clear is we need to reform Social Security now."

I could not agree more. Where is Congress? Why are we paying those guys to spend all that time in Washington if they cannot be bothered to fix a system that is obviously broken and that many Americans will have to rely upon in their old age? There are about 20 presidential candidates running around the country, both Democrats and Republicans. How many times have you heard them talk about plans for fixing Social Security? Far fewer times than you heard them talk about gay marriage, that's for sure. Why is it that we cannot make our politicians focus on what's important to the vast majority of their constituents?

Here is a sobering statistic. Take a look at the following quote from Wikipedia:

"According to most projections, the Social Security trust fund will begin drawing on its Treasury Notes toward the end of the next decade (around 2018 or 2019), at which time the repayment of these notes will have to be financed from the general fund. At some time thereafter, variously estimated as 2041 (by the Social Security Administration[30]) or 2052 (by the Congressional Budget Office[31]), the Social Security Trust Fund will have exhausted the claim on general revenues that had been built up during the years of surplus. At that point, current Social Security tax receipts would be sufficient to fund 74 or 78% of the promised benefits, according to the two respective projections."

If this information is true, politicians are choosing to ignore this problem knowing that the bad stuff will happen long after most of them leave office. Rule number one of politics: let the next guy deal with the bad stuff.

More from the ad:

"2. Boost Retirement Plan Enrollment. Companies should continue looking for ways to encourage employee participation in 401(k) plans. One proven way to increase retirement savings is through company matches. Another is automatic enrollment - employees are signed up for savings plans when they join the company, unless they specifically opt out."

I completely agree. Especially since Social Security is in such a sorry state, 401(k)'s are extremely important to the financial well-being of Americans. For once, Congress did the right thing in encouraging companies to automatically enroll employees into 401(k) plans, as part of the Pension Protection Act of 2006.

My company is about to move to automatic enrollment, and it is my hope that this encourages the 20% or so of employees who are not yet enrolled, to do so.

Finally, the last quote from the ad:

"3. Increase Personal Savings. Ultimately, everyone is responsible for their own retirement. It's why we support laws that reward people for saving. Tax-advantaged savings vehicles like annuities and IRAs are two examples of products that can help allay Baby Boomers' biggest fear: living to see the well run dry. When planning for retirement, it's time to realize that no one is going to take care of us unless we start taking care of ourselves."

Once again, spot on. Personally, when making our financial plans for retirement I am assuming that the only resources we will have are the ones we save ourselves. We are not counting on a dime from social security, not a nickel from any inheritances, and we are certainly not taking into account any manna from heaven. It's all about our personal savings. That may be too conservative, but my philosophy is that it is better to have too much money saved up than too little. After all, you can always take an extra trip to the South Pacific if you have too much money, but if you have too little you may be planning on dinner for two at Chez Dumpster.

While we should fight to make sure that Congress addresses the Social Security situation, and push companies to become more generous and more diligent in their 401(k) offerings, the ultimate responsibility for your retirement rests with one and only person: you.

So there you go. I never thought I would write a favorable article about a financial ad, but I guess there is a first time for everything.

By the way, to read about how I think the retirement situation can be at least partially fixed, check out this post.

Reducing Our Car Insurance Bill

It's car insurance season at the Shadox household. We insure our cars with AAA, and our renewal notice just arrived. Essentially we have one good car - a 2005 Toyota Sienna - and one junk car, my not so trusty Geo Prizm 1997. The Geo is in fair shape. I have never had any accidents or major mechanical problems with this car, and it has definitely served me well over the years. However, it is clearly showing its age, and according to the Kelly Blue Book it is worth something like $2,500.

My philosophy regarding insurance is a simple one: if you can afford to self insure, do it. There is no sense in insuring against a risk that you can easily afford to bear yourself in a worst case scenario. Complete loss of our Geo falls into the self insurance category, in my opinion. If I had to replace this vehicle tomorrow the dent to our finances would be minor.

With that in mind, I spoke with my wife and proposed that we eliminate the collision and comprehensive coverage on the Geo, especially given the fact that our insurance carries a $500 deductible. This move would save us a total of $300, or about 25% on our insurance bill. My wife quickly agreed to eliminate the collision coverage for a savings of $200, but did not want to get rid of the comprehensive coverage, which is supposed to insure us against theft or vandalism. She just did not agree with my reasoning that there is no real difference between the two types of insurance in terms of our financial exposure.

At the end of the day, our total cost to insure both cars was about $900 including the comprehensive coverage for the Geo. While it pains me to pay $100 that I don't really think are required, I would rather not have to fight and argue with my wife over a relatively minor expense.