There was a thought-provoking NYT article about luxuries last week that pointed to a 2006 report by the Pew Research center that surveyed Americans on what they considered “necessities” versus “luxuries”. Some things have become more accepted as a necessity over time:
Other things have stayed “needed” on a constant level, like having a car, TV, or clothes washer. I stewed on this over the weekend, because right now I have all 7 of those things listed above. But as recently as 10 years ago, I only had a computer, broadband internet, and a microwave. No car, no washer/dryer, no air conditioning, no dishwasher.
Are any of these really a need? Even if you live somewhere hot, somewhere in the world there are people living in the same conditions without air conditioning. My wife’s grandmother still used a washboard to clean her clothes up until recently. On top of that, each of our needs or wants can be scaled up or down. You may “need” a car for work, but that car can cost $200,000 or $20,000 or $2,000. A house can cost $1,000,000 or $100,000 or less. Even a TV can cost $2,000 or free (you can’t even give away a tube TV these days). You could run your A/C all day long, or set the thermostat to 83 like my dad does.
It would seem that the real decision is more about priorities. Somewhere in those spending priorities is saving for a rainy day, or saving for retirement. Some people are effectively making the decision that they want to live in a 3,000 sf house instead of a 1,500 sf house than, rather than stop working period 5 years early (or work part-time instead of full-time for 10 years). Is that wrong? I don’t necessarily think so, if that’s their choice. In the end I couldn’t think of any easy answers, but hopefully we start making our choices more consciously rather than just going along with others.
If you’re looking for the cheapest plan that offers the iPhone 4S (or iPhone 4), with unlimited data and text included, then check out the Sprint Everything Plus Referral Program. This is meant for friends of employees, but the aforementioned Sprint executive has offered to refer us:
Sprint employee e-mail address: Russ.S.McGuire@Sprint.com
Last 3 digits of employee ID (CID): 383
Monthly plans start at $59.99 for individuals with 500 anytime minutes with unlimited text and data, which is $10 cheaper than their regular plans. Family shared plans start at $109.99 for two lines sharing 1600 minutes with unlimited text and data, which is $20 less than their regular price. You also get unlimited nights and weekends starting at 7pm.
However, Sprint adds on a “Premium data charge” of $10 a month for iPhones and other select smartphones. This brings the total to $69.99 a month for the 500 minutes individual plan. I don’t know of any carrier that offers all that for a lower price, but let me know in the comments if you do. In fact, only Sprint has unlimited data right now, and most others charge for texting separately.
Already in a contract? Check if you are eligible for a student or employee corporate discount, or 10-15% savings for being a credit union member. Finally, if you are an AAA member, Sprint should offer you a 10% discount on their regular retail plans if you call them and ask. You can apply these for a discount on your current plan, even in the middle of a contract.
This post is an update for fellow stubborn folks still clinging to the Sprint SERO plan. This grandfathered plan gave us individual plans with 500 minutes, nights starting at 7pm, unlimited text, and unlimited data for $30 a month. However, this was with severe restrictions on available phones. In 2010, Sprint announced SERO Premium which allowed us to upgrade to Android or Blackberry phones for $10 a month, and another $10 a month for “high data use” smartphones like the ones capable of 4G data.
Yes, the new iPhone 4S (and iPhone 4) is available on the SERO Premium plan for $50 a month. The 500 minute plan will cost $30 + $10 +$10 = $50 a month, because it is also “high data use” even though it’s not 4G-capable. For a while, the swamped Sprint CSRs were not well-trained in this area and were giving conflicting information. But customer-friendly Sprint executive Russ McGuire has confirmed the $50 price on his personal blog, and it has been ordered successfully in various cell phone forums. Looks like it’s time for an upgrade.
Never heard of SERO? You can still get the cheapest iPhone 4S plan available to the public at for $69.99 a month, including unlimited data and text messages, through the Sprint Employee referral program.
In Time is a new sci-fi movie about a future where science has figured out how to stop the aging process. To prevent overpopulation, the solution was to allow everyone to live to age 25, and then give them one year to live. Time has replaced money as currency. If you don’t earn more time, then you die. The rich effectively live forever. A cup of coffee costs 4 minutes. The trailer is below:
This storyline made me think of the almost frugal-cult-classic book Your Money or Your Life (get it used for $3 shipped). One of the concepts inside is that working is the same as exchanging your life energy for money. Let’s say you earn a solid living, $25 an hour after taxes. But then there is all the stuff attached – the commute, the clothes, the lunches, the stress (need for vacations and drinks after work). You might really be earning $20 a hour.
If your rent is $1,000, you’re spending 50 hours each month just to pay for that. An iPad costs $500, 25 hours of work. If you spend $100 a month on wasteful things that you really don’t enjoy, that’s another 5 hours of your life every month. In a way, we are sacrificing our lives for money. Sure, you may not die any sooner, but you’ll be spending that much less time on what you really want to do. It just happens so gradually and indirectly, we don’t notice. Try pricing everything out in terms of your real hourly wage. (A cup of coffee might actually cost more than 4 minutes.) Try adding up all the money you’ve ever made, and calculate your net worth to see how much you actually kept.
If you concentrate on maximizing the gap between expenses and income, one day your income from your investments will match your expenses. That’s financial independence.
Steve Jobs said in a great commencement speech that we should find work that we love. Most of us don’t love our work in the way that if we didn’t get paid, we would still go out and do it. Amazingly, he did. If you’re like me and are still having trouble with that, then at least we can reach for the day when we can simply do what we love because we don’t need more money.
Costco just announced that they are raising their annual membership fee 10% in the US and Canada as of November 1st, 2011. This makes the Gold Star and Business memberships $55 and the Executive membership $110 per year. The maximum 2% cashback reward that comes with Executive Membership will increase from $500 to $750. The last price hike was in 2006, so the membership fee has actually been rising less than inflation. See Costco press release, WSJ article.
Is Costco worth it? As someone who shops at Costco regularly, I’ve asked Is the Executive Membership upgrade worth it? (You can’t lose money by trying it out.) This time, I thought it would be interesting to look at how the Costco business model itself affects the value to customers. There are various articles about the Costco business strategy, for example here, here, and here. This is a quick and dirty summary:
Costco tries to make a low but constant profit margin, combined with large volume. Two metrics for this are operating margin, and sales per square feet. Costco keeps around a 3% operating margin, which means for every dollar in sales they get 3 cents of profit before things like interest and taxes. They don’t want this number higher (more room for competitors), or lower (race to zero). Costco has more sales per square feet than Wal-mart, Home Depot, or Nordstroms. They keep this high with low prices, bulk packaging, and limiting selection.
Instead, most of the profit can be seen as coming from membership fees. Roughly half of the 22 million members in US and Canada are Gold Star/Business members paying $50 a year, and the other half are Executive members paying a $100 a year but with a 2% cash back check. Simple math says that Executive members should be spending $2,500 a year at Costco for this to be a good idea ($2,500 x 2% = $50). Spend $5,000 a year, and your membership is “free”.
They treat their employees better with higher pay and benefits than say Wal-mart or Sam’s Club, as well having better stats for upward mobility. One number given was Costco pays 40% higher than Sam’s Club. I think this makes for a more stable operation and less employee turnover.
They treat their customers better with a generous lifetime return policy. They’ve had to tighten it up with customers abusing the policy by returning TVs every year before the Super Bowl and buying a new one (now limited to 90 days on electronics), but it’s still very customer-friendly. I’ve seen people return empty wine bottles.
What’s the result? I like to look at it this way – at the two extremes:
If you buy nothing and they can’t make any profit on markups, they’ll still charge you the $50 membership fee.
If you buy $5,000 of stuff and get the 2% cashback, your membership fee is basically free ($100 minus $100). If you remove membership fees, you’ll find their retail profit margin is actually a thin 1%. I visualize this as the 3% overall margin minus 2% cashback. That leaves them with 1% of $5,000 = $50 again. Coincidence?
In the end, Costco makes money even with such low profit margins, as long as they keep you as a happy customer. Over 90% of people renew membership every year. This leaves Costco only concerned about expansion of members. In fact, they have a rule that they never charge more than 15% of the cost of any product. That’s tiny in the retail world. Remember, they still need to pay for the building, worker wages, and so on. As a result, Costco prices will always be “very good”, but it can be beat by short-term sale prices of an aggressive competitor or “extreme couponing” at grocery stores.
For some perspective, Wal-mart’s operating margin is around 6%, and Target’s is almost 8%. Since the basic membership fee is $55 a year soon, your only hurdle is to buy enough stuff to make the $55 worth it. Assuming based on the operating margins that Costco prices are 3% cheaper than Wal-mart, you’d have to spend $1,833 a year (about $150 a month) at Costco instead of Wal-mart to pay for the $55 membership fee.
Based on these assumptions, if you are someone who is satisfied with all-around competitive prices and doesn’t want to hunt for the best deal all the time, and would be spending more than $150 a month at Costco, then the new membership fee should be still worth it. Our family got $88 cash back last year.
If you do go for it, you can get 3% cash back on gas, 2% cashback on restaurants, 2% back on travel, and 1% back on everything else with the TrueEarnings Card from Costco and American Express, which also replaces your Costco membership card.
I was paying some bills online and noticed that my electricity bill had a new option for paying via a credit card through something called Western Union Speedpay. I’m not sure if this is universal, but for my utility company it accepted MasterCard, Visa, or Discover with a $4.95 convenience fee per payment for residential accounts. The maximum payment allowed is $1,000 per month.
I decided to charge the full $1,000, because that makes the fee only 0.5%. Even if I pay with a card that gets 1% back, I’d end up ahead over my usual online banking billpay. Of course, you can do better than that with one of these best rewards credit cards. Actually, I put it instead on my wife’s Chase Sapphire Preferred Card to quickly reach the $3,000 spending required in order to qualify for the 50,000 point bonus ($500 value!). I don’t mind paying extra because I never have any problems with my electricity bill, and future bills will just reduce the credit over time.
Anyway, the take-away here is to check if your existing bills have such a similar option. I remember checking before and the only option charged some sort of onerous 5% fee. There are mortgage companies, insurance companies, and more listed on the Speedpay site. For some reason, my company is not listed online (so I suspect many other aren’t either), and I had to call into a telephone bot to pay my bill.
Many recent articles and surveys have illustrated how many American are basically living paycheck-to-paycheck, with no significant savings cushion:
Most Americans can’t afford a $1,000 emergency expense – “A majority, or 64%, of Americans don’t have enough cash on hand to handle a $1,000 emergency expense, according to a survey by the National Foundation for Credit Counseling.”
Many don’t have $2,000 for a rainy day – “A new study by the National Bureau of Economic Research shows 50% of Americans would struggle to come up with $2,000 in a pinch.”
CareerBuilder.com Survey – “Forty-two percent of workers in the survey of more than 5,200 workers say they usually or always live paycheck to paycheck”
Along the same lines, a reader introduced me to an interactive poverty “game” called Spent, in which you try to make it through one month as an unemployed worker looking for a job and housing with their last $1,000. Try it out, and you’ll have to make some touch choices.
In just one month, I managed to get sick, need dental work, receive an undeserved traffic ticket, my best friend gets married and I can’t go, my mom needs money for medicine, my landlord raises the rent illegally, and my child refuses to eat the government-subsidized lunch. Seems a bit unlikely, yes. But a combination of a streak of bad luck and lack of support is exactly how you might end up in such a scenario.
In addition to the societal issues this brings up, from an individual point-of-view, I found that this simulator shows how living close to the edge is often significantly more expensive than someone with a cash cushion. Being poor can cost more than being rich. Consider the following:
If you don’t have enough money for a security deposit, you’ll have a hard time renting an affordable apartment. Many renters are thus forced into long-term motels that actually charge more on a monthly basis.
If you can’t afford a car repair, you can’t make it to work and face the prospect of losing your job.
If you don’t pay for preventative medicine, you can end up needing more expensive treatment later.
If you have a low balance on your bank account and overdraft by just $10, you’ll get hit with a $35 overdraft charge.
If you just don’t pay the bill, you’ll get a late fee charge.
If you don’t pay the bill for consecutive months, you’ll get your gas/electricity service shut off and be subject to an additional $250 deposit to get it back on.
If you charge any of this on a credit card and don’t pay off the balance each month, you’ll owe 15-25% interest. That’s if you have the credit history to get a credit card. If you go with a payday loan instead, you’ll owe more than 100% annualized interest.
For this reason, one of the first financial steps a person should take is to save up a cash cushion. That emergency fund can easily save you more money than a 20% increase in the stock market. I would tell my own child to forget saving for retirement until you have a least a couple months of expenses saved up. Luxuries like smartphones, alcohol, cable TV, and dining out should be off-limits until then as well.
One should expect “unexpected” expenses. Even though I have a relatively high income, I place great value on my emergency fund.
Amazingly, less than two months from mailing in my claim submission, the State of California actually sent me a check for my $74.93 in unclaimed money. Thanks guys, sorry you can’t use it to plug your gaping budget hole, but I’m sure you’ll get me back somehow. Here’s an expanded listing of useful websites to see if you’ve got any money waiting for you:
USA.gov – Listing of US government-related items, including bank FDIC insurance failures, mortgage insurance refunds, and more.
I’m normally not excited by water heaters, but I do love the idea of investing small money upfront to lower my expenses and save big money in the future. We currently have a 10-year old electric water heater which I’d like to replace soon due to age and inadequate size. We live in a warmer climate and thus considered a solar hot water heater, but the combination of cost and having to cut and install water pipes through our roof didn’t sound especially fun. I just saw that until October 5th, Lowe’s is selling the GE GeoSpring 50-Gallon Hybrid Electric Water Heater for $999. Currently, both GEAppliances.com and Sears also have it at $999. If you can get free delivery in your area, one may be cheaper than the other. Both Lowe’s and Sears offer another 5% off if you have their store credit card.
Tax credits. There is a Federal tax credit of $300 available on electric heat pump water heaters. In addition, check for state energy rebates here, and you may get even more back (look carefully, as many states have already exhausted their rebate funding). Without anything local available for me, this makes the net cost $700. A conventional 50 gallon electric heater with a shorter warranty can be found for about $300, with a 9+ year warranty runs about $400. This makes the cost difference with no state credits to be no more than $400. Both could be installed yourself if you’re handy, otherwise installation is extra.
Potential $2,400 in savings. With average electric cost assumptions, this heater is supposed to save about $25 a month, or $320 a year in electricity costs. If you have your electric bill handy, you can do the math yourself as a 50-gallon standard electric tank water heater uses about 4881 kWh per year vs. the GE Hybrid water heater at 1856 kWh per year. Using their standard numbers, this hybrid system would pay for itself less than two years. Assuming a 10-year usage, you would then have 8 years x $300 a year = $2,400 of potential total savings.
What’s a hybrid water heater? It’s called a hybrid because it can heat up your water using a heat pump as well as the conventional electric resistance coil. I was having flashbacks to my thermodynamics college courses while learning about it, but essentially a heat pump takes the heat from ambient air and transfers it into the water. This is kind of like an air conditioner in reverse, which takes the heat in the air and moves it outside with the aid of a refrigerant like Freon. The heat pump is more energy efficient than the electric coil, but slower, so the coil is still there as a backup during times of high demand. A heat pump works better in warmer climates, as there is more heat in the air. You’ll also end up with condensation which will need a drain unless you want to empty out a water pan every few days.
The added complexity of the heat pump does make for more things to go wrong, which is why I suppose it comes with a rather long warranty. It is worth the upfront investment? I think so for us, but I’ll haven’t fully run the numbers on a similar whole-house tankless system. Thoughts?
School is back is session and lots of people are buying new computers. I’m thinking of one myself, to replace my aging 2007 refurbished Mac Mini that cost $400. As an example, the manufacturer’s warranty on a new* Apple Macbook is only one year, unless you pay an extra $250 for AppleCare. (*Still 1-year if you buy refurbished.) A much more economical option is simply to buy it with an American Express credit card. The “Extended Warranty” feature on their consumer cards is pretty generous, with details from their FAQ page:
When you charge the cost of a covered product with your American Express® Card, the Extended Warranty1 will extend the terms of the original manufacturer’s warranty for a period of time equal to the duration of the original manufacturer’s warranty, up to one additional year on warranties of five years or less that are eligible in the U.S.
This means your Apple warranty will have been doubled to 2 years if bought with your AMEX. Be sure to keep as much supporting paperwork as possible, including your original receipt and the warranty information. Some versions of Visa and MasterCard also have an extended warranty feature, but in my experience AMEX is the best at actually paying out when called for. Even the consumer advocate site Consumerist has a tale of AMEX refunding the entire cost of a laptop as part of their extended warranty. I’ve also written before on the AMEX warranty covering a Roomba vacuum. AMEX has some other additional features as well, but I’ll save those for later.
Don’t have an American Express? Everyone has their favorites, but here are the two that I still keep. One has no annual fee, and the other one is actually the only card I’m willing to pay an annual fee for.
True Earnings Costco Card from American Express
Almost a must-have if you’re a Costco member since it doubles as a membership card in your wallet anyway. 3% cash back on gasoline, including Costco gas (up to $3,000 a year), 2% cash back at all restaurants, 2% cash back on travel, and 1% cash back on everything else. No annual fee.
Starwood Preferred Guest Credit Card from American Express
My default rewards card. You get 1 point per $1 spent, and 20,000 Starwood points = 25,000 airline miles (free ticket). Essentially up to 1.25 miles per dollar spent, and you can convert to a variety of airlines or free hotel rooms. Top off an account, or convert a big lump sum. Currently, the sign-up bonus is 10,000 points (worth $100 gift certificate at Amazon.com) after first purchase. On top of that, you can also get an additional 15,000 points by spending $5,000 on the card within the first 6 months. Annual fee is waived for the first year, and is $65 the second year if you keep it.
Cheap: The High Cost of Discount Culture by Ellen Ruppel Shell covers a wide variety of topics, but the main idea I got from reading it, was that we are too focused on price, and not enough on value. We have shifted from quality, durability, and craftsmanship towards quantity at the lowest possible price. I previously wrote about how it’s harder to judge quality these days as it relates to Coach Outlet stores. Next time you buy something, think about what you actually know about who made the product, the materials or ingredients used, and how long it will last before you have to buy another one.
Thanks to globalization and a relentless pursuit of efficiency, we now have $1 chicken sandwiches, $5 toasters, and $10 IKEA coffee tables. That saves us money, right? However, also notice that it’s often the crap in our lives that gets a bit cheaper. The real essentials – rent, education, healthcare, gas, never seem to get less expensive. On top of that household wages are stagnant, partially because all the jobs making stuff have gone to the countries with cheapest labor before our workforce has had a chance to learn to do something else. Look at the current unemployment rate. So are we really coming out ahead?
The book includes an interesting history of the evolution of retailing and the creation of the discount superstore. There was a time before Wal-mart when small shops sold specialized products through educated salespeople. Now, everything is propelled by mass advertising everywhere, followed by do-it-yourself shopping. Now, I personally like reading tons of peer reviews on Amazon before buying a product, but you have to admit that the genius of a store like IKEA is that so much of the cost is shifted onto the consumer. We load up the huge boxes onto a shopping cart ourselves, cram it into our car, drive it back home (paying for the gas), and build it ourselves with hours of labor.
There is also the interweaving of behavioral economics topics you may be familiar with by academics like Daniel Kahneman and Dan Ariely. For example, you probably get excited when you buy something marked down 60% at the mall. We’re all genetically wired to get hyped up for that, so it’s not surprising. Well, these days basically everything is marked down. Only 20% of department store merchandise is actually sold at full price. If everyone is getting the same “deal”, is it still a deal or just manipulation?
On a related note, discount stores often tout “everyday low prices”, but they really just try to compete hard on things that we buy most frequently and are most familiar with. Wal-mart actually has higher than average prices on about 1/3rd of its inventory. On the items for which prices are lower, the savings is 37 cents, with about 1/3rd of items carrying a savings of no more than 2 cents. The loss leaders draw us in and make us feel like we’re saving money, but the other things we toss in our basket make the profit.
Although some of these trends are unlikely to be reversed, we should remember that it’s not all about the price tag. An example of how things “should” work is the grocery store Wegman’s, which I am not familiar with but sounds a lot like Trader Joe’s on the West Coast. Locally-sourced products, good wages and benefits for employees, and good service create an atmosphere that is not solely focused on price (although it is still an important component).
An article this week on GetRichSlowly about frequent flier program basics mentioned a WSJ article that I’ve never seen about which airlines make it easiest for you to redeem your miles. The research was done by a consulting firm IdeaWorks Co, which looked for awards equivalent to a domestic roundtrip flight using 25,000 miles “saver” award level. Here are the results:
JetBlue (79%) and Southwest (99%) are tops for domestic carriers. Alaska, American, Continental, and United all had seats available at least 60% of the time or better. Delta and US Airways were at the bottom of the list, with flights up for grabs only 1 out of 4 tries. I’ve mentioned that my parents are served by Delta and I’ve definitely wrestled with them over award flights, and only by booking well ahead of time and being flexible we’ve still managed to get by.
I have no real loyalty towards any airline, which is why I still prefer the flexibility of the Starwood American Express card for racking up my miles and hotel points. I use it for hotels whenever I can, but also to top off my accounts when I finally reach an award I want to redeem. I’m glad there are articles like these to publicly shame airlines like Delta into improving their awards availability.
If you’re looking for the cheapest plan that offers the iPhone 4S (or iPhone 4), with unlimited data and text included, then check out the 
Costco just announced that they are raising their annual membership fee 10% in the US and Canada as of November 1st, 2011. This makes the Gold Star and Business memberships $55 and the Executive membership $110 per year. The maximum 2% cashback reward that comes with Executive Membership will increase from $500 to $750. The last price hike was in 2006, so the membership fee has actually been rising less than inflation. See 
I was paying some bills online and noticed that my electricity bill had a new option for paying via a credit card through something called 
Here’s an expanded listing of useful websites to see if you’ve got any money waiting for you:
I’m normally not excited by water heaters, but I do love the idea of investing small money upfront to lower my expenses and save big money in the future. We currently have a 10-year old electric water heater which I’d like to replace soon due to age and inadequate size. We live in a warmer climate and thus considered a solar hot water heater, but the combination of cost and having to cut and install water pipes through our roof didn’t sound especially fun. I just saw that until October 5th, Lowe’s is selling the 
True Earnings Costco Card from American Express
Starwood Preferred Guest Credit Card from American Express
