Category: Personal Finance

One of Microsoft Windows’ competitors is Linux, a free operating system.  Beyond it’s low price, it’s a very stable, reliable system.  If I was playing a game or watching a movie, it’s easier to do so on Windows, but if I’m running a web server or an ftp server Linux is far better.

While competing, Microsoft faced the difficult challenge of going head-to-head with a free product.  The only way to beat them on price was to pay people to install Windows.  Instead, they brought up the concept of “Total Cost of Ownership” (as an aside, people have accused Microsoft of being very deceptive in how they presented TCO comparisons, which I agree with – that isn’t the point of this post).  Their line of reasoning went that although you may pay $400 for a Windows license (and be able to get a Linux license for free), once you’d paid all the costs that went along with running Linux on a computer you’d end up paying MORE than on a Windows system.  One of the big parts of the argument was that Linux system administrators command a higher salary than comparable Windows system administrators and, the line of reasoning went, what you saved on the license you’d more than lose on salary.

While this is an interesting business issue, I think this concept is also highly relevant in day-to-day life.  Often we’re sold things with a set price tag, or with a  set monthly cost, when there are actually a large number of hidden costs behind this.

A prime example is cars.  A Toyota Corolla is a decent vehicle, which can be had for $15,430.  Immediately when you click on the fine print, the cost doesn’t include freight, PDI (whatever that is), license, insurance, registration, taxes, levies and fees.  If we finance the purchase, we then need to add interest onto that.  Once we finally get it home, we get to pay gas, maintenance, and parking (both at home and at work).  Estimates of the total annual ownership cost of various models range from $6K to $16K.

Real estate agents love to advertise an affordable property as “cheaper than rent”.  Of course, the only things being compared are mortgage payments and rent, they conveniently omit maintenance (estimated at 2.5% of the property value per year), property taxes, utilities, insurance, etc., etc., etc.  When you take into account all the extra it would a VERY unusual situation where you could own for less than rent.

Real estate investors are often just as bad.  My post on “Tenants Paying My Mortgage” discusses at length one special case of a lesser price being substituted for the total cost of ownership.  Investors love to talk about “cash flow positive”, but it’s INCREDIBLY difficult to achieve, unless you fudge the numbers (such that you can convince yourself it’s cash flow positive, even when it’s not).

A boat is completely a consumer purchase (and an expensive one at that).  Beyond the purchase price, maintenance, gas and whatnot there’s also additional storage fees (which can be pricey in Canada where the water freezes over).  Many people want a boat, look at the ticket price and don’t think of anything beyond that.

A while back I read a newspaper article (which would make a good post) about how people who live in Barrie and commute to Toronto aren’t saving the money they think they are.  They get a house out in the ‘burbs cheap, and think they’re really benefiting from making a 1.5 hour commute each way 5 days a week, but when you add up the cost of the commute (gas, wear-and-tear on the car and time spent in traffic), it would more than pay a higher mortgage on an equivalent house in Toronto.

The way for dealing with total cost of ownership issues is to always be aware of follow up costs to a purchase.  Don’t be lulled into lazy thinking that you just pay the one price and that’s it forever – almost everything has follow up costs.  Thinking about things in terms of their cost per use, or cost per unit of time (e.g. how much to drive a car for 1 year) is often a more realistic perspective.  I read recently (on some blog or another) that clothes are good to be worn 100-200 times, and you should amortize their cost over the article’s lifespan.  This seems a little extreme to me, but it’s probably a good thing when looking at an expensive piece of clothing to realize you won’t have it for the rest of your life:  it has a number of uses before it’s worn out.

What things have you bought which turned out to have hidden expenses that exploded on you afterwards?

This is a guest post by Rat from Ending The Rat race – a good Canadian blog.  Check out his site and subscribe to the RSS feed.

At the beginning of the year I entered in a stock picking competition with some other bloggers.  As I outlined in my original 2010 stock pick post I bet the house on the price of gold falling.  Well, it hasn’t fallen and as was pointed out in the comments of the original post, I didn’t even really pick the right investment instruments to reflect my bet.

Oh well – it’s just for fun.  🙂  (At least I’m ahead of Frugal Trader).

1. Dividend Growth Investor: +9.58%

2. Wild Investor: +9.30%

3. My Trader’s Journal: +5.78%

4. WhereDoesAllMyMoneyGo: +5.24%

5. The Financial Blogger: +2.87%

6. ZachStocks: +2.55%

7. Four Pillars: -1.01%

8. Intelligent Speculator: -1.27%

9. Million Dollar Journey: -11.83%

Jay is a new writer here at Four Pillars – read his introduction post here.

Time is a valuable commodity.  Every day, I spend 8 hours preparing myself to spend the remaining 16 ones as richly and as fully as possible – and make no mistake, I do spend time. For as Benjamin Franklin once said: Time is Money.

Today we’re going to look at how I divvy up my time and help you visualize a bit better how I live and what my priorities are.

• Sleep – I need at least 8 hours a day to be fully functioning
• Exercise – I currently get about four and a half hours of soccer in a week, plus an hour of Ultimate Frisbee. I wish it were more, but it is what it is.
• Social life – I am by no means a social butterfly, but I do enjoy spending time with my friends and I make that a priority on the weekends.

Now that you’re armed with this knowledge, here’s a look at my schedule which is in Google docs.  You don’t need a Google account or anything – just click on the link and my schedule spreadsheet will appear.

Thoughts on my schedule

My first thought when I looked at my schedule: I spend way too much time in transit. I was tracking how I spent my time this week, and I spent close to 20 hours in transit just getting to work and back. To put that into perspective, I work 30 hours a week.

To me, that seems a little disproportionate.

The simple solution would seem to be to work more hours so that I get more bang for my transit (time) buck, but it’s not quite that simple.

Right now, my only viable source for increasing my income is through gaining additional tutoring clients, or doing more freelance journalism.

Here’s the problem: most, if not all, of my potential tutoring clients live downtown. This would be fine, except that it takes me about an hour and a half to get downtown, and I charge $20 an hour. Right now this doesn’t affect me too much, because I meet my clients in a coffee shop near where I work, and therefore I’m not losing any additional time in transit. However, if I (hopefully) find a job closer to where I live. I’m now only getting paid $20 for 4 hours of time (3 hours transit, 1 hour tutoring).

Just to clarify, that would amount to a measly 5 bucks an hour. For a little perspective, the McDonalds down the road pays at least 8 an hour. In theory, I would make $12 more by working at McDonalds that I would tutoring one client.

I did the math, and I break even with McDonalds at 2 clients, and only start to become more profitable than McDonalds after 3 clients. Now I may not have grand ambitions at this point, but I would hope to be shooting for a little more than slightly-more-profitable-than-a-McDonalds-job.

On the plus side, I’ve found that having friends come over and help me cook on Sunday has really helped me economize on my time and money. Cooking every day is very tedious, and I find it much more enjoyable when I know I’m only doing it once a week, and that I’m also spending the time with my friends.

In a future post, I’ll look a lot more in depth into the actual costs and benefits of cooking only once a week. However, next week will be my budget report where I let you know how fiscally responsible I was in the month of March.

Jay is a new writer here at Four Pillars – read his introduction post here.

Today we’re going to figure out my financial budget by breaking down all the money that I earn and then try to see if I can explain where it all goes.

Net Income

After taxes, I earn roughly $1000 a month currently as a telemarketer. They tell me I would earn more if was better at my job. I feel like I need a better job to be better at. Whatever the case may be, it hasn’t really been close to enough money for me, and so I’ve started tutoring English as a second language on the side. I’ve got one student who generates $80 a month, and I’m hopefully expanding my clientele soon.

Net Monthly Income = $1080

Fixed Expenses

My current basic fixed monthly costs are as follows:

• Rent – $350. I live with my uncle, but he doesn’t believe in free rides.
• Bus Passes – $111. A 1-zone monthly pass costs $73, and two packs of 10 bus fare add-ons cost $19 each, or $38 total. I’ve already cut this down from the previous cost of $136* for a 3-zone pass.
• Student Loan repayment – $150. It doesn’t matter to the government that I’m going to go back to school in the fall, they want my money now.
• Food – $80. Basically $20 a week, and I’m not entirely sure I can keep within this limit
• Cell – $37. I have a Koodo phone plan that totals at $37, ($25 Talk and Text plan with the added $12 “essentials” pack)
• Tithe – $108. I am a Christian, and I tithe 10% of my income. Incidentally, my parents are missionaries in Japan, so I support them instead of giving to a local church
• Debt – $50. I owe my brother about $700, and this is the payment arrangements we’ve come up with

Total fixed costs – $886.

Now, I’m no math genius, but if I take my total net income and take away my total fixed costs, I’m left with $194.

$194 a month

Here’s what I have to do on $194 a month

• 1. Replace things that run out every few months (toiletries, laundry soap, clothes etc.)
• 2. Have some semblance of a social life.
• 3. Save up for my short-term, and long-term goals.

Right now, I’m probably spending close to $100 a month on the social life, and the rest is going into replacing stuff and savings. I’ll have more precise numbers at the end of the month, when I balance the books for March and give my report to the blog.

Quick Thoughts

Obviously, the biggest problem I have here is that I’m not earning enough money. I’m hoping to find a new job to either supplement my current income, or replace it entirely if the new job pays well enough. Unfortunately, I haven’t had much luck finding additional income so I’m stuck at the moment.

Another issue I’m having is the amount of time I am spending/wasting in transit. I’ll be taking a closer look at my calendar next Monday, and perhaps you will see some of the problems I am facing.

Housekeeping

Just to give an outline of how the next few posts are going to look for me, my next post will be on my time management. I will probably be linking to my Google Calendar and explaining from there.

The post following that will introduce the budget spreadsheet that I will be using, and some of the financial goals that I have for the month of April.

The first Monday of every month will be my budget report to the blog going over the previous month’s budget.

As always, questions and comments are welcome, I really hope you guys have some good tips for making/saving money over the next few months, because I would love to try implementing some of them. I may never make my own laundry soap – My brother tried doing that once when we were living together. It was great, except that he used the frying pan to make it, and all our food had a faint soapy taste for the next week. Needless to say, I was not happy – but I would like to put into practice some of your ideas, so speak up!

Remember, I’m Four Pillar’s very own financial guinea pig, and I subscribe to the tri-financial principle of budgeting: I’m willing to try just about anything.

* for those who are interested, I have to travel 3 transit zones to get to work. I work from 6pm-12am. After 6:30pm, all transit is considered 1 zone, meaning my return trip was essentially a 1 zone trip. By using a 1-zone pass with a fare add-on on the way to work, and just the pass on the way back home, I save $25 dollars a month.

Do you know what a zero-based budgeting system is?  Basically it is a budget where you track every single dollar of income and each single expense down to the penny.  This is a great system for someone who is trying to get a good handle on their spending since they will be able to see where every dollar goes and act accordingly.  It also helps with spending decisions since it doesn’t let you spend money you don’t have.  I did a You Need a Budget review recently which is a great example of zero-based budgeting software.

I don’t use this kind of system, in fact I pretty much do the opposite.  I like to keep an extra couple thousand dollars in my checking for two reasons:

1. I avoid transaction fees if I keep the minimum balance over $1500.
2. I don’t have to track bills, ATM withdrawals etc since I always know that I have enough to cover them.

I do look at the balance fairly frequency to make sure it is more or less where I’m expecting.  But otherwise the only time I actually do any kind of “budget” is when I want to make a large purchase or debt repayment. In that case I’ll take my account balance, subtract any upcoming expenses, subtract my $2,500 “float” and that tells me how much extra money I have that I can put into my mortgage or continue my plan to buy a big screen tv for every room in my house.  (I’m still working on the first room).

But how do you avoid overspending?

This system might not work for some people because they need some sort of spending restraints in order to not buy things with money they don’t have.  I don’t seem to have this problem although I did in my younger days so it works great for me.

You could put that $2,500 into your mortgage and save 5.2% interest each year.

Yes, that’s true since 5.2% is my mortgage rate.  But 5.2% of $2,500 is $130.  I value my time quite highly and the idea of spending a lot of time and hassle tracking every penny just to save $130/year is not at all appealing to me.  For someone who has a tighter budget, more time and has high interest debt where they can put the $2,500, the payoff return might be different.

What kind of budgeting do you do?  Are you a strict budgeter?  Loose like me?  Somewhere in between?

A few years ago when I was on a big asset allocation kick, I bought some REITs (real estate investment trusts) for my RRSP account.  The amount was only about 5% of the portfolio but according to the experts, having some real estate is a good diversifier.

While I accept the idea that REITs are good for your portfolio in theory, I never liked the whole investment trust structure of REITs and their huge payouts.  I had bought some RioCan (REI.UN.TO) which is a reasonable proxy for the Canadian REIT market but started to get nervous when there was some news reports about the unsustainability of their dividend.

The other problem I had with my REITs was that my original investment was now only about 3% so I needed to buy more to get back up to 5%.  But I didn’t really want to buy any more and even if I did,  5% is not that much.  This was the same sort of thinking I had with my former leveraged investment plan – either go big or go home.

So I decided just to sell it and not worry about it any more which is what I did for $18.60 per unit.  I’m just leaving the proceeds in cash for the moment until I can do a proper asset allocation analysis of our investments.  Once that is done I’ll rebalance according to my desired allocation (roughly 80% equity, 20% bonds).