Statistical Proof of Lifestyle Inflation!

The idea that as people earn more, they tend to spend more as well has been termed lifestyle inflation. Derek Thompson in this Atlantic article illustrates this concept using data from the Bureau of Labor Statistics. A family led by a high-school graduate has average annual spending of $35,000. A family led by a Bachelor’s degree holder earns and spends nearly double that at $63,000. Yet both groups spend about 50% of their income on housing and transportation, much like the average household:

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Families with radically different incomes—from lawyers and doctors down to high-school dropouts—all spend about half of it on homes and getting around, which suggests an historically tight relationship between marginal income growth and marginal spending growth on real estate and transportation. You get a raise, you shack up with roommates. You get another raise, you get nicer studio. A bigger raise and you move out to the suburbs and buy a house—commensurably increasing your spending on transportation (bigger car + gas).

We earn more, and we use that extra money to buy bigger houses, nicer cars, and more gas. This blog talks a lot about financial independence, and for most people early retirement is all about your savings rate. Most people spend over 95% of what they earn (source). Early retirement involves spending closer to 60%.

However, we tend to hang out people of similar income and thus we are pulled into “keeping up with the Joneses”. Even if you earn a comfortable income that is well above average, lifestyle inflation can kill any dreams of early retirement. Focusing on managing the big targets, housing and transportation costs, can help.

See also: Your Entire Financial Life in One Deceptively Simple Chart

AT&T Mobile Share Value Plan Discounts

AT&T Wireless has changed the pricing on their Mobile Share Value Plans, with unlimited talk, unlimited text, and 2 GB of shared data across all lines now costing $40 + $25 per line if you are off-contract. That’s means two lines with 2 GB of shared data would cost just $90 total (off-contract old phone or bring your own used phone), competing more closely with T-Mobile and Straight Talk. If you do sign a contract, the cost is $40 + $40 per line ($120 total for 2 lines) because you need to pay back the value of your subsidized new phone.

In addition, AT&T will let any customers who signed a contract on March 8th, 2014 or earlier get this pricing even if you are still in contract, provided you switch to a qualifying Mobile Share Value plan. This means that a 2-line plan formerly running $135 can now just be $90. The 2GB, 4GB, and 6GB data tiers all offer a promotional rate. If you upgrade to a new phone on contract in the future, the rate will go back to $40 per phone.

Bring on the price wars. Good news for the consumer! As always, see if you can stack an employee or student discount as well.

More: AT&T website, Verge, Engadget

15-Minute Resolution: Save More For Retirement Today

The problem with most New Year’s resolutions is that they just take a moment to make but to actually accomplish it you’ll need to re-make that decision hundreds of times. If you’re trying to be healthier, every single day you’ll have to choose the grilled chicken with steamed vegetables instead of the bacon cheeseburger with fries. Walking the stairs instead of taking the elevator. Willpower is like a muscle, and it gets fatigued after a while.

The good news is that if you want to save more, automation technology allows you to make a decision now and never be asked about it again. If you can, consider simply increasing your 401(k) contribution rate by 1% (or more). Just log into your account today and make the change. Today being the operative word! Let’s see how much 1% is for a household with a single earner making $50,000 gross per year. For simplicity, let’s say they live in a state without income tax. If you are paid bi-weekly, putting away $500 pre-tax annually (1%) into a Traditional 401k amounts to an additional $19 per paycheck.

Alternatively, it is quite easy to set up recurring online transfers from your checking account to either a savings account or IRA account ($100 a month, $50 a week, etc). Once set up, it will happen automatically and you won’t have to think about it. I like the idea of opening a online savings account, as it gives you a separate “savings jar” that psychologically you’ll be less likely to raid.

If you do it this week, you’ll already be done with your 2014 resolution!

Chart: What Percentage of Your Budget Goes Towards Food? Should You Spend More?

Here’s another interesting chart from a Businessweek article about a food-delivery start-up called Blue Apron. It shows how food costs have decreased dramatically as a percentage of total U.S. consumer spending from 1959-2013.

I’ve seen similar stats before, usually to support the argument that food really isn’t that expensive and people can pay for higher-quality, healthier, more wholesome food. (Often by the people selling it.) Does allocating less than 10% of your budget to food mean that you are choosing to eating crap? Looking at this chart in isolation, I can see how you get there, but it isn’t that simple if you look at the bigger picture.

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Ooma Phone Service Long Term Review + Referral Discount

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The Ooma Telo is a VoIP system that creates a home phone service through your broadband internet. Just plug in your regular landline phones and go. Features include unlimited domestic long distance, 911 service, caller ID, voicemail, and call waiting. In addition to the one-time purchase price, new customers must pay a share of government taxes and regulatory fees that works out to around $4.32 a month.

Consumer Reports rated it their #1 home phone service in their June 2012 issue. Here is a public Consumer Reports review video:

My Long-Term Review
I bought my system in December 2009 for a then-good deal of $158, and I remembered worrying about the FCC shutting them down because I couldn’t believe their business model could be so cheap over the long haul. Well, I’ve now gotten over 6 years of home phone service for that $158, working out to under $2 a month. (Early adopters with the original Core system were grandfathered out of tax recovery charges.) It appears now that as long as the government gets their share of phone taxes and fees, they won’t be shutting down Ooma any time soon. I’m glad I spent the extra $40 to port my previous landline phone number.

The best compliment I can give about the Ooma system that I don’t even notice that it’s not a landline. It just works. In my entire time of ownership I remember reading about a few hours of downtime in the middle of night, and nothing within the last year. The call quality is always great, and I can even use my fax machine with it. In some ways it’s even better than my old landline, because I can get e-mail notifications of voicemails and then listen to them on my computer or smartphone.

The “unlimited” phone service technically has a limit of 5,000 minutes per month under the explanation that it is meant for personal use. That works out to an average of nearly 3 hours per day, every day, so that’s close enough to unlimited for me. They do regularly bug you to upgrade to their Premier level of service which has added features for another $10 a month, but I’ve never felt the need to. Just make sure your number is on the Do Not Call list and you should be fine.

VoIP home phone service is best for those people who make a lot of calls at home. I worry about accumulated cell phone radiation when making a lot of calls on my iPhone, and thus always use a headset and keep the (hot) phone away from my body. Ooma helps alleviate that concern for long phone calls.

I would pick Ooma over other costlier alternatives like Vonage any day of the week. A possibly cheaper alternative is the Obihai + Google Voice combo, but it is dependent on Google continuing to provide free phone service every year. Another option that I have not tried is MagicJack Go which includes a year of free service but after that costs about the same as Ooma (~$3 a month). Whenever possible, lower those recurring monthly expenses!

Current Ooma Deals
As I am an existing user, there is a refer-a-friend promotion right now where you can get Ooma for $99.99 + free shipping using my referral code SAD5171.

Cheapest iPhone Plan with Unlimited Data? Virgin Mobile $30 a Month

Price drop! You can now buy an 8GB iPhone 4 for only $199.99 from Virgin Mobile. Even after learning about the new iPhone 5S, in my opinion the iPhone 4 is still not that outdated and still works fine with nearly every app out there.

Their Beyond Talk plans at just $30 a month will get you 300 voice minutes, unlimited text messages, and unlimited data (throttled after 2.5 GB each month). To get the $5 discount, you must sign up for automatic monthly payment with a credit card, debit card or PayPal account. No contract.

Virgin Mobile is a Sprint MVNO which means your coverage is coming from Sprint towers. Compared to a regular Sprint plan, paying $200 + $30 a month can save you more than $500 dollars over a 2-year contract when compared with paying even $0 for the phone and $60+ a month for service.

For $50 a month, you can get unlimited minutes. Here are all the plans:

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State Farm Insurance Payment Plan (SFPP) Review

Ever since we started cutting back our work hours in order to share childcare duties, Mrs. MMB and I have kept a closer eye on our monthly spending patterns. One of the headaches for budgeters is dealing with large lump-sum payments like those for home/car repairs, healthcare bills (human repairs), and home/car/life insurance. Our homeowner’s insurance is due annually (we don’t use mortgage escrow anymore), life insurance is due annually, and auto insurance is due semi-annually.

We use State Farm for all of these insurances due to our positive claim experiences in the past and their multi-line discount. When I asked about payment options, they told me about the State Farm Payment Plan (SFPP). I’m sure that most other major insurers have a similar program.

Pros

  • Steady monthly bill. With this plan, all your insurance bills get averaged into equal monthly, quarterly, or semi-annual payments. We chose monthly as that is how we visualize our spending.
  • Float. Let’s say your total bill is usually $1,200 once a year. If your policy is renewing today, then instead of paying $1,200 upfront now, with SFPP you pay $100 per month spaced out over the next 12 months. So you’re gaining some additional float time on your money. If you’re already paid up then you have to wait until renewal to start an SFPP.
  • Pay with credit card. You can use a credit to pay most bills already, but some auto-pay plans require a linked checking account. SFPP allows you to pay with a recurring charge on any Visa/Mastercard (no American Express). This is good news for those earning credit card rewards.
  • Chose payment due date. I don’t use this, but if you find it convenient you can select your specific payment due date each month (any day except 29th, 30th, or 31st).

Cons

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Mint.com Budgeting Tips & Tricks

While I don’t believe everyone necessarily needs a tracked-down-to-the-dollar budget, I do think a major problem is that many people simply don’t know where their money goes. That makes it quite hard to know if your spending habits match up with your priorities. I’ve been using Mint.com (free, ad-supported) to track our household spending for a while. (I used to be a Yodlee guy, but they’ve been left behind with slow and clunky updates.) For those starting out, here are some practical tips that may be useful.

Using Credit and Debit Cards
The primary advantage of using a service like Mint.com is that if you pay for things with a linked credit or debit card, then important stuff like the date, merchant, and amount are immediately recorded so you don’t have to do it manually. No receipts, no typing, no writing. That’s a lot of time and mental energy saved.

Auto-categorization Training
After Mint imports your transaction information, it will provide its best guess as to the proper spending category. McDonald’s will be “Fast Food”, for example, but it also thought my water company was a clothing store. You can correct the category, and also create a rule that always changes the category to what you prefer. For example, I always set Sam’s Club and Costco as “Groceries” because that’s mostly what I buy there.

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Household Cashflow Diagram with Automated Savings & Bill Payments

As part of our transition to parenthood (less time) and part-time work (less income), Mrs. MMB and I have been trying to get more organized with our finances. I’ve eased up on my control-freak ways and we’ve shifted as many bills as we can to auto-pay status. I still try to pay everything I can with credit cards in order to make things easy to track and of course, maximize credit card rewards. Here’s a rough diagram of our current situation:

Household Cashflow Diagram with Automated Payments

We’re still trying to stick with our existing simple budgeting system and only putting money into our checking account that we are willing to spend. That way we basically force ourselves to meet a minimum savings rate for the year by “paying ourself first” with a good chunk of our paychecks into savings-type accounts (401k’s, separate bank accounts, brokerage accounts, etc). If the checking balance still grows past a certain point (hasn’t been happening much lately!), then we skim off some and transfer it over to savings.

I would note that I don’t put the credit cards themselves on auto-pay, as I still want to spend the time and look over those statements each month. I know some folks do this as well to reach nearly full-automation.

Another backup use for this chart is for reference in case something happens to me, as I usually keep track of all the bills. This fits into our 2013 resolution to get our crap together.

Which Fuel-Efficient Cars Are Worth The Extra Money?

Recently, the NY Times had an article about how many models of fuel-efficient cars may take years to justify the extra cost. Here’s a graphic from the article with data from TrueCar:

(I note that the NY Times compares the Prius with the Camry. I still think the Corolla is closer in size. You can see from this side-by-side comparison that in terms of length, width, interior passenger volume, shoulder room, and leg room, the Prius is closer to the Corolla than Camry. Also, does the Lincoln MKZ hybrid really only cost $1,400 more than the regular model and is 15+ mpg better??)

Consumer Reports also had a similar article which discussed how the ultra-efficient “40 mpg” models which were upgrades to the normal versions. The Ford Focus SFE, Honda Civic HF, and Chevrolet Cruze Eco all cost between $495 and $800 more, but the breakeven time when using real-life mpg varied widely between 3 and 38 years.
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Manilla.com Review: The End of Paper Bills?

Most people still elect to receive paper bills, even though almost every vendor is pushing paperless. Why? Personally, my e-mail inbox is so much more cluttered with crap compared to my post office mailbox. It’s very easy for me to forget about a short e-mail saying “you have a bill waiting” with 86 other unread e-mails shouting at me. But then again, I do end up paying the bills online, so perhaps there is a better way? This is where Manilla.com comes in.

Making Paperless Billing Better

All your bills are organized in one central place. You give Manilla your login information*, and they handle the rest. If you need to look up an old bill, you don’t need to open the filing cabinet or reset your password (again) to that archaic water department website designed in 1995. You can just view or print out the .PDF from Manilla. They promise to store your bills for free, forever. I do wish there was a way to download all your stored bills at once, perhaps in a .zip file.

You may find that Manilla may not list some of your local vendors, although you can suggest future account providers for them to add. I couldn’t find my local water utility. You can also add magazine subscriptions, frequent flier mileage programs, and hotel rewards programs.

Easy-to-manage bill reminders. You can request e-mail or text message reminders to 7 days, 3 days, and/or 1 day before the due date. I need these repeated reminders, and it’s nice that they turn off automatically after they see that the bill has been paid.
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Why Nobody Budgets

I was watching a Techcrunch interview about finance start-up Personal Capital (review) and was surprised by a comment about budgeting. The founder was Bill Harris, who was former CEO of Intuit and Paypal, and Product VP was Jim Del Favero, who was also a former Product Manager of Quicken. While guiding us through their new iPhone app, they shared:

Our #1 takeaway over the years was… nobody really uses budgeting. Everyone means to do it; Nobody really does it. The more important concept is cashflow. It doesn’t matter that you spent $200 on clothing this month or last month, what matters is at the end of the month, do you have more money than you spent.

So the guys in charge of the most popular budgeting software admit that… nobody budgets. Well, maybe not nobody but it’s probably safe to say that the great majority of people don’t track their spending monthly. This is an issue I’ve thought about many times. I often talk about budgeting, but I don’t really budget either.

Why is it so difficult? I point to recent books and research about willpower and how it is similar to a muscle. If we have to track every purchase, it causes us fatigue and sooner or later we give up because it becomes just too hard. Doing one push-up isn’t that hard. Doing a hundred push-ups in a row is another story.

The sheer number of choices we must make each day — what foods to eat, what products to buy, what information merits our attention, what tasks to prioritize — can be overwhelming. […] Put simply, the more conscious willpower we have to exert each day, the less energy we have left over to resist our brain’s primitive and powerful pull to instant gratification. According to one study, we spend at least one-quarter of each waking day just trying to resist our desires — often unsuccessfully.

Behavioral psychology has also found that happiness is earning $60,000 a year. As Del Favero suggests, perhaps it’s because all we really want is to spend comfortably and at the end of the month have something left in the bank account. That number just happens to be about $60k in the US.

So what should the personal finance “experts” be pushing instead of budgeting tools that nobody will use? Here’s one possible plan of attack.

  1. Determine a safe savings rate. What percentage of your salary do you need to save for retirement? The idea of a safe savings rate was introduced and researched by Wade Pfau, and varies based on the assumptions. 15% is a good minimum number to start with, although if you don’t want to work for 30 or 40 years you’ll have to save more.
  2. Automate that savings. Automatic 401(k) or 403(b) deferrals are great, as well as automated contributions to Roth/Traditional IRAs. It’s best to have the money taken away before you even see it, so there is no temptation to spend. Every automation means one less decision.
  3. Check your cashflow. Are you good? Then stop, and enjoy your life. Or do you still spend more than you earn, net of the automatic savings?
  4. Don’t think about the small things. Deciding not to get that coffee or not to order lunch with all your coworkers every day may exhaust more of your willpower than is worth it.
  5. Instead, try attacking one BIG thing. Housing and cars are the biggest expenses for most people. Moving into a smaller or cheaper apartment or house. Move closer to town, sell a car, and use public transportation. Switch to a economical car and drive it for 10 years. Look for something you can cut once, albeit painfully. You may not like it initially, but it’s much easier to get used to that than to rely on repeated displays of willpower.

For example, a prospective college student with limited financial resources can choose to go to in-state university instead of private, as opposed to worrying about the price of every textbook and having to constantly choose between studying, socializing, or working at one of three part-time jobs on the side.