RPF 0005 - The Ultimate Guide to Spending Money - How a smart person can optimize each and every buying decision to get maximum utility out of their money

Today’s show gives you some questions to ask yourself when making some buying decisions and some tools to make more intelligent decisions.

Resources for today’s show:

When is it okay for you to spend a lot of money?

  1. When you want to because it satisfies something that’s important to you–it’s your money.  You earned it and it’s yours to do what you want with it.
  2. When you’ve considered the opportunity cost of your purchase (what are you giving up with your choice?).
  3. When it’s a small percentage of your wealth (if you care about wealth). Rich people consistently spend a small percentage of their net wealth.  We often just forget that because it seems like such a high dollar amount.  Example: Paul Allen is worth approximately $15,000,000,000. In 2003 he bought a yacht, Octopus, for about $200,000,000 and it costs $20,000,000 per year to run.  If we assume an investment income of 5% of net worth (made up number for illustration is $750,000,000 of income per year), this is like someone with a net worth of $2,000,000 who earns $100,000 per year from investments buying a boat costing $26,000 and spending $2,600 per year maintaining it.
  4. When you’ve seriously considered the best way to get the maximum utility out of your purchase.

Practice frugality, frugality, frugality in all things. That’s what you have to do if you’re poor. And that’s that’s the behavior, when combined with earning power, that makes you rich.  Truly wealthy people mostly do the same thing (that’s why they’re wealthy. It just doesn’t seem like it if you’re not accustomed to the numbers.

Must make intelligent buying decisions at every point along the way (both beginning and later when the size of your transactions change…getting the best deal on the $1M item is very important.)
You stay poor by not understanding that and spending consistently more than you should such that you have nothing left to save and invest.

Tips for making buying decisions:

Consider your methods of payment to get maximum value:

  • Can you pay cash and get a discount instead of paying with a card? (e.g., when buying from private individuals, cash often speaks loudly and gets you a discount)
  • Can you pay with a rewards credit card instead of cash or a debit card to get more value for yourself? (e.g., miles programs, points programs, or cashback can add up when used well)
  • Can you pay with a credit card instead of debit card for better consumer protection? (e.g., American Express warranty instead of a store warranty; better return policy; protecting yourself from a contractor/service provider with the ability to do a charge back if necessary)
  • Can you pay with a debit card instead of a credit card so you feel the expense more emotionally and don’t overspend? (e.g., fast food transaction amounts are higher with card purchases…what makes you feel the expense more)
  • Can you pay with cash for greater purchase privacy? Do you really want all of your transactions to be part of the public record? (Bonus tip: anonymous cash can be gotten through cashback transactions at a store.)
  • Can you barter for the service or item instead of using currency for it? (trade/swap/barter goods or services locally or on Craigslist; can you use local currencies like the Ithaca Hoursmall businesses can increase markets/customers and save money for other needs by using barter; alternative barter currencies such as AOCS gold/silver coins and online currencies such as bitcoin, helpful list of barter exchanges, be careful with the tax issues–bartering income is not tax-free and the IRS website has tax guidance for you)

Buy with the lowest price and with the lowest cost:

  • Price vs. cost.  They’re not the same.  Consider both.
  • Can you buy it online instead of in a store? (save on sales tax–for now, get a lower price because the company has lower costs, greater selection)
  • Can you buy it used and still great? (Goodwill wine glasses / dog bowls)
  • Can you buy it on sale? (only shop for groceries based on what’s on sale then learn to use what you bought, plan ahead for when things go on sale – Brooks Brothers sale in June / Berkshire Hathaway shareholder meeting discounts)
  • Can you become a shareholder or member? (you can get discounts on Geico car insurance by being a shareholder with Berkshire Hathaway)
  • Can you buy something that goes up in value instead of down (buying fancy furniture may come out ahead vs. middle of the road vs. Ikea. Tom Stanley’s research on high quality wooden furniture in the house.).
  • Can you buy something super cheap that does the job instead of middle of the road? (Ikea is trendy vs. middle of the road @ Target)
  • Can you buy something that has a high re-sale value? (cloth diapers? Rolex watches? Honda cars vs. Kia)
  • Can you buy something just as good that’s cheaper (store brand razors vs. Gilette Mach 3. Store brand groceries vs. name brand.)
  • Can you buy something with lower ongoing taxes and fees (lifetime costs, florida exempts antique boats…cars too?)
  • Are there any special tax credits available? (e.g., first-time homebuyer credit, renewable energy credits, hybrid car credits)
  • Can you get the best deal by checking out the competition? Use a competition site or app.  Sites like pricegrabber and Google Shopping can help online.  Apps for your phone like Shop Savvy or Amazon Price Check help in the store.  When buying online, check websites that have short-term deals like Brad’s Dealswoot!, DODTracker, GiveAwayOfTheDay, and 1saleaday.  If you want to know if you’re getting a good price right now, try websites and applications like Decide.com, Hukkster, Deal News, and Invisible Hand.  Consider the daily deal sites Groupon and Living Social.  Clark Howard’s team keeps a great list of Deal-A-Day and Coupon sites updated and also has a ton of great stuff on their Free and Cheap list.
  • Can you find a coupon code before you checkout? (Just Google “Company Name Coupon Code” before you checkout and see what pops up on websites like RetailMeNot).
  • Can you do get the best deal by bundling? Or by unbundling? (e.g., the “Triple Play” options from utility providers.)  Do the math!  (See the “Save Money on Cell Phones” podcast we did.)
  • Can you get a lower lifetime cost by paying more up front? (e.g., Berkey vs. Brita, straight razor vs. disposable, printers)
  • Can you get a lower lifetime cost by using a reusable solution instead of disposable? (e.g., swiffer vs. mop, dish rag instead of paper towels,
  • Can you buy from a warehouse club?  Can you join a coop of some sort? (Costco’s markup is a maximum of 14% and Sam’s Club’s markup is unknown, but guessed by some to be 18%)
  • Can you buy at wholesale instead of retail by becoming a distributor or dealer? (friend who bought cigars at wholesale by becoming a dealer, Joshua Kennon became a wholesale rose dealer)
  • Can you research discount programs that are available to you? (e.g., USAA members, M-B owners club…Brad Wilson wrote in Get More Spend Less how to get awesome deals on cars by becoming a member of the owner’s club)
  • Can you cancel a subscription and buy things ad hoc?  Most subscriptions tend to be more than needed.
  • Can you use the web to find forums filled with experts? (e.g., Flyer Talk forum for travel tips, Howard Forums for cell phones, etc.)
  • Can you buy in bulk and save? (e.g., at convenience store they sell individual bottles for $2 and cases for $5)
  • Can you research a discount for what you already have? (e.g., discount on house insurance because because of storm windows, savings on electricity bill by allowing the power company to cut your appliances)

Try to find a smart source of funds:

  • Can you buy it out of a tax advantaged account? (e.g., you can pay for everything from contact solution to long term care insurance premiums out of a Health Savings Account; see IRS Publication 502 for details)
  • Can you pay for it out of a business account?  Is it a legitimate business expense?  Could you combine it with a business purpose? (e.g., out of town stay for business that requires you to stay the weekend)

Try to buy at the optimal time:

  • Can you be behind the times (iPhone 4 instead of 5)
  • Can you buy off peak? (travel on weekends/holidays/shoulder season or to regions of the country/world that are currently out of favor Europe air fares vs. Egypt and south america)
  • Buy it a few days old but still good and repurpose (day old bread for french toast)
  • Can you plan ahead (Halloween candy, Christmas gifts after Christmas)
  • Can you buy at the right time or season? (gardening stuff in the fall, cars at the end of the month, houses in a depressed market, businesses at a difficult time)

Try to find the best source:

  • Can you buy local? (support your values)
  • Can you buy it from an ethical company or a company that you want to support?
  • Can you buy renewable energy vs. cheaper?
  • Can you buy it from a family member? (rent from family member)
  • Can you buy it at a smart place (costco vs. tiffany’s)
  • Can you buy it used and good or get it free? ebay? freecycle? (cloth diapers)
  • Can you buy from a company that will have a lower built-in cost? credit union vs. bank, mutual insurance company vs. stock, coop/collective
  • Can you buy it in a different state (sales taxes), region (demand for subarus) or country (buy a BMW or MB in Germany, and then travel through Europe or medical tourism (mexican baby)
  • Can you find a waste stream and re-purpose it? (e.g., woodchips/manure = free mulch)

Get the absolute best product or service:

  • Can you research the best value (Consumer reports)?
  • Can you buy it for life? (cast iron pan/Toyota car) Consider lifetime cost.
  • Can you repair the product?
  • Can you buy a more efficient version? (appliances)
  • Can you buy the product with less processing / lower on the value chain?

Try to substitute something else to get the best solution:

  • Can you easily do without and not experience negative consequences?
  • Can you completely eliminate the need for an expense? (live close to your job instead of commuting)
  • Can you use what you already have and wear it out?
  • Can you change your mind instead of your circumstances? (tent vs. RV, trip with what you have)
  • Can you adjust your real goal? (take the trip in the car you have vs. saving for a super cool vehicle)
  • Can you simply do without? (Roof rack vs not. Fun noodles on surf board.)
  • Can you make/grow it yourself?
  • Can you repurpose something else? (turn a dresser into a chicken coop)
  • Can you increase your internal strength so you don’t have to keep up with the Joneses?
  • Can you buy something one time (nice theater in your house) rather than going to the theater? Or, can you just go to the theater rather than put in a nice one at home?  It seems silly to do both.
  • Can you buy something more concentrated — shaving oil instead of cream, soap?
  • Can you change your habits? (copytalk vs. dragon)
  • Can you increase your skill instead of buying a solution (EXCEL VS. ms money)
  • Can you use the library for your books/magazines/ebooks?
  • Can you do things yourself instead of outsourcing (taxes/pool/lawn)
  • Can you hire a business to do it instead of buying a product? (fixing your own roof and chances of falling off vs. hiring it done. also opposite)
  • Can you combine and repurpose two things? (junker parts car and a new one/buy a boat to re-power)
  • Can you substitute for something better (take the college money you would spend and travel instead)?
  • Can you use new technologies instead of old (virtual classroom for college rather than physical)?
  • Can you choose different hobbies – gardening instead of racing cars, reading instead of movies, mountain biking instead of 4x4s?
  • Can you use instead of own? (use land vs own it in community garden. Apt vs. home ownership)
  • Can you optimize in order to eliminate the expense completely (buying an efficient commuter car instead of living right next to work – McDonald’s)
  • Can you build yourself (furniture)?
  • Can you use a cheap technology vs. expensive (roof soaker vs. spray foam, clay pot vs. irrigation)?
  • Can you replace maintenance intensive with low maintenance (lawns vs. xeriscaping)
  • Can you change the style and be a trend setter instead of a follower? (rap song about buying clothes from goodwill)
  • Can you use technology to bypass your limitations (guy who put everything on YouTube – Alex Day and piano guys vs. record label)
  • Can you learn the details of what you need to do from a library book instead of paying for advice because you’re uneducated?
  • Can you simply eliminate something instead of paying someone else (xeriscaping vs. landscaping)?
  • Can you design things to be working passively (water efficient property instead of having to water your lawns)?
  • Can you design your property to be productive without a lot of maintenance (fruit trees vs. ornamental trees)?
  • Can you re-purpose wasted space (e.g., put solar panels on your roof water or electricity…saves you money on your taxes)?
  • Can you replace the expert and become the expert yourself? Or can you simply pay an expert for a small amount of time that could save you lots of money? (e.g., income producing assets into retirement account vs. capital gains assets, muni bonds vs. corporate bonds, expert vs. lay person, buying the right class of stock)

What if you made money on the deal instead of it costing you:

  • Can you get for free and then re-sell it?
  • Can you turn an expense into an income stream (have people park their car at your house while they travel using ParkAtMyHouse, rent your car out while you travel instead of paying to park it using FlightCar, rent a spare room on AirBnB–collect two weeks income tax free income. do a house swap to go on vacation or simply rent your house out while on vacation a la Mr. Money Mustache)
  • Can you stack pull income from something that’s usually an expense (wrap your car for pay/ build a billboard on your land / tattoo a logo on your body / wear a t-shirt for pay or change your name for pay / rent an extra room / build an apartment behind your house 
  • Buy an RV for your mobile business and wrap it with your business name? (stack the advertising functions with your business location)
  • Can you turn your expense into an income (expensive clothes into money by buying and selling…also books?)
  • Can you turn your hobbies into money? (scuba diving club instructor instead of just paying for it, hang gliding or flight instructor)
  • Buy in bulk and then resell? (e.g., buy and then re-sell an entire grassfed cow)

Try to eliminate the expenses of something:

  • Can you store your stuff on craigslist?
  • Can you buy it there if you need it there (travel sundries to save on bag check fees and travel hassle)?
  • Can you buy it only if you actually find that you need it?
  • Can you increase your skill for efficient use? (Mad Max hypermiler / frequent flyer programs)
  • Can you take care of what you already have instead of replacing (even if free)?

Is there an alternative to buying:

  • Can you rent instead of own (pickup truck/boat/bigger car for road trip) or own instead of rent (buy cheap vs. lease)?
  • Can you carpool/share? Can you share tools instead of buy? Can you use the toy library for kids?
  • Can you buy for good re-sale value? (cloth diapers, Snap On tools)

If you need to borrow, do it intelligently:

  • Can you do intelligent financing (5/1 ARM, 10 year mortgage)
  • Can you do unsecured instead of secured debt. Non-recourse instead of recourse loans. Judgement proof instead of attachable.
  • Can you cover your assets (IRA/House)?
  • Can you save for it? Make savings automated to make it easy to save (various funds for savings — emergency, travel, maintenance , insurance etc.)
  • Can you use OPM, OPT, OPR instead of your own?
  • Can you substitute other kinds of capital instead of financial capital (social/knowledge to use something and fix it and return it (trimmer)?
  • Can you set up student loan repayment program with the government’s money? Can you repay your loans while you spend other money using UPromise?
  • Can you start a business to do things you want to do (car racing business, fishing charter)
  • Be intelligent about where you place assets (own the expensive car in business and beater car owned personally).
  • If you like doing yoga, why not start a business so you can deduct your instructor training classes and retreats?
  • If you love music, can you start a band and record music? Now you can write off your tours and travels…it’s the same system as the big guys. Run it in a business-like manner.

Can you find an angle, loophole, or exception?

  • Can you get someone to pay for your college education by working for them? job reimbursement? Work at the school?
  • Work at kids; school instead of paying tuition
  • Can you play the system (take a year or two off work to lower your income so your kids qualify for more scholarships/grants/need-based income on FAFSA, etc.)
  • Government student loan forgiveness programs, mortgage indebtedness forgiveness
  • Can you find a pricing anomaly (like electric car leases/vehicles)?

 Can you find a way to stack all these functions together?

  • Stack MB owner’s discount, buy it in Europe, drive it in Europe, combine the cost of the flights with a business trip to get you there, or do business through Europe and purchase tickets with a business CC and use the miles for personal travel and get a discount on the airline trip by choosing the cheaper airline you got a discount with premier status.
  • Live at the university where you’re employed with discounted housing/education/lower income/lower tax rate/time freedom to build skills and knowledge/do in another country where you gain travel fun, earn income in a country where wages are higher (not taxed)
  • Energy efficient washer bought used with a rewards credit card from a local dealer?
  • Can you do this again and again with everything in your life?

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