A popular theory states that something is not worth doing if it makes you less that your hourly wage. For example, if you make $30 an hour and you can hire someone to mow your lawn for $20 an hour, you should go ahead and pay for the service. As someone who is earning more and yet trying to combat lifestyle inflation, I’ve been struggling with this idea. According to this rule, all of a sudden I can start paying people to do all kinds of stuff for me. Laundry. Cooking. Cleaning. Or can I?

Thought #1: What Is Your Real Hourly Wage?

1. First, roughly estimate your hourly wage. If you work 40 hours per week, a quick way to estimate your hourly wage is to take your annual income, remove the trailing three zeros, and divide by two. For example, if you make $100,000 per year, then you make $50 per hour. A person earning $20,000 per year = $10 per hour. If you are using gross income then you’ll end up with gross hourly age.
2. Take taxes into account. If you earn $50 per hour gross, that might be only $35 per hour net. Someone earning less at around $10 per hour gross will probably be earning more like $8 per hour net. Try this net paycheck estimator or look at your paystub.
3. Be realistic with hours. Do you really only work 40 hours per week? If not, adjust accordingly. Now add in your commute time, the time it takes to get ready each morning, the time it takes to decompress after each day. Your job takes up a lot more hours than you might think.

Now, what is your final per-hour wage? If I made $50k per year, but worked 50 hours per week plus 1 hour total each day for commuting + getting ready, with filing single and taking standard deductions, I’d be down to around $13.50 an hour. Paying someone to do the lawn for $20 an hour is not longer a mathematically prudent idea.

Thought #2: Are you salaried?
The premise of the argument implies that you can simply earn more to cover your expenses. Hire the maid for $20 a hour, the landscaper for $30 an hour, restaurant food at $20 per hour - hey you make $40 an hour so who cares? Work in your office, and make up the difference. But many of us are salaried workers. If we work 40, 50, 80 hours a week, we won’t earn any more money.

In other words, this only works if you can at the same time make more money elsewhere. Someone who works in their own business or does consulting has much more freedom in this regard.

Thought #3: Will you always be making as much?
I’ve come to see regard frugality as a habit, which can take years to form. Getting used to paying for everything to be done for you is going to hurt if you want to retire early. If you get used to a higher cost of living, you’ll need a much larger nest egg to generate more income. Living a simple and frugal life now will help make the same life an enjoyable one down the road.

In addition, by doing things yourself you may be learning a skill that can also pay off when you can’t justify paying for it anymore. Gardening and growing your own food is a skill. Cooking is a skill. Performing your own car maintenance. Doing your own home repairs. And so on.

Not Just Math
Obviously, if there are activities which you prefer not doing, or can simply be done by someone else for a fraction of the cost, it can definitely be worth it to outsource. Childcare is a common example, although some do it for the socialization. Besides cost and skill development, I would also adjust for personal taste.

For one, we are considering putting in our own hardwood floors in our new place instead of paying for installation. It will probably take us a lot longer than professionals to put it in. Although we’d be saving at least $10,000 in labor costs, and we’d probably earn more in our regular jobs if calculated on an hourly basis. But I will be learning a lot about home remodeling during this project, it will be a nice respite from staring at a computer screen all day, and it will be personally satisfying.

On the other hand, I hate driving in traffic. I learn nothing from doing it more. If I had access to good public transportation, I would totally pay for it. Similarly, driving around for an hour to save $10 on an item is not going to be worth it to me. However, I love bargain shopping online, and I might research for hours on the best model and price on a $99 item. But I can do that while in my pajamas at odd hours.

Are there some frugal activities that you no longer do after your income increased?

Time for another net worth update:  The March 2008 Edition!

There is a saying in Newfoundland that would describe the markets perfectly..  "The arse has fallin out of her."  When will the markets find a bottom?  Are we there yet?  In terms of market returns, the only reason my retirement accounts are showing positive relative to last month are due to a $3,000 contribution.

My non-registered accounts are still mostly cash and I'm waiting for my opportunity to buy more over sold dividend paying stocks.  To me, those dividend yields are looking pretty attractive, especially big bank stocks.  In fact, I've already started dabbling in a couple stocks in my leveraged investment account.  More on this in my upcoming Smith Manoeuvre Portfolio updates.

In other parts of the net worth statement, there was quite a shakeup this month as we finally closed on our new house.  The large $100k+ savings that we had was deployed into a readvanceable mortgage which is indicated below.

Here are the numbers:

Assets: $570,750 (+46.76%)

• Cash: $4,500 (+0.00%)
• Savings: $ 35,400 (-71.08%)
• Registered/Retirement Investment Account: $ 50,000 (+2.46%)
• Pension: $ 22,350 (+0.68%)
• Non-Registered Investment Account: $18,000 (-60.44%)
• Smith Manoeuvre Investment Account: $25,000 (+100%)
• Investment Property: $ 124,500 (+0.00%)
• Principle Residence: $275,000 (+100%)
• Vehicles: $16,000 (2 vehicles) (-0.00%)

Liabilities: $280,600 (+275%)

• Investment Property Mortgage: $93,900 (-0.21%)
• Principle Residence Mortgage (readvanceable): $153,700 (+100%)
• HELOC balance: $25,000 (+100%)
• Other Liabilities: $8,000 (-0.00%)

Total Net Worth: ~$ 290,150 (+1.17%)

Started 2008 with Net Worth: $279,300

Year to Date Gain/Loss: +3.88%

2008 has started off at a slow pace but any gains are good in this market environment. 

In addition to buying dividend paying stocks, I'm thinking about using my HELOC to purchase another rental property should the opportunity come up.  I'm still up in the air about that one.  The only issue is the cash flow risk involved as we are currently living on 25% reduced income.  Actually, until the maternity benefits come in (30 days), we are living on 50% income.

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Walgreens is having a promotion on will refill one of your ink cartridges for free on April 2nd (April 7th in Hawaii). Just look in their 3/20 Sunday ad or print out this online coupon. It usually costs $10 for black & white, $15 for color. Here is a list of eligible brands and models (no Canon or Epson). Via Wisebread.

KeyBank is offering a $100 pre-loaded Mastercard for opening up a Free Checking account with them and making two direct deposits and/or automated payments. There is a lot of fine print, but the free iPod Nano I’m listening to right now is evidence that they do deliver. This is only a partial excerpt:

Must open a qualifying checking account […] between 3/29/08 and 4/25/08 and make a combination of two direct deposits and/or automated payments each of $100 or more by 6/27/08. […] You will receive your $100 Key Possibilities MasterCard® card within 90 days of meeting requirements. Direct deposit transactions are limited to: payroll, social security, pension and government benefits. Automated payments exclude Key Bill Pay, debit card automated payments, PayPal® transactions and account to account balance transfers. If you close your account within 180 days of account opening, you will be charged a $25 account early closure fee.

More articles from other bloggers:

• Jacob of Early Retirement Extreme explores is minimalist inspirations. I just watched the move Into the Wild this weekend, about a new college grad who abandons his possessions, gives his entire $24,000 savings account to charity, and hitchhikes to Alaska to live in the wilderness. I always like it when people break from the norm, even if I choose not to do it myself.
• Lisa Tiffin has a guest post at Get Rich Slowly about inoculate your kids against advertising. The analogy is great, and may save me a lot of saying “No” in the years to come.
• The Finance Buff explains why he chose against funding a 401(k). I enjoyed his explanation of how your effective tax rate in retirement may be a blend of different tax brackets, often resulting in a lower rate than you might think. I constantly find myself wishing things were more straightforward with IRAs and 401ks, but unfortunately I nobody’s listening.
• Singla Ma of Fabulous Financials shares her series about The Professional Woman. After reading this and Suze Orman’s book Women & Money, I have definitely found similar differences in how my wife and I handle things in the workplace.
• JB of Get Rich or Die Trying posted his new monthly budget in detail, all the way down to his Netflix subscription.
• Finally, I’d like to congratulate my sister for shopping smart when she found a top she wanted at Gap, but a button loop was broken and it was the last one in her size. Instead of leaving it, or paying full price anyways, she remembered my Home Depot experience and asked politely for a discount… and got 50% off. Now if only I could convince her to open up that IRA on top of funding her 401k…

I was trying to run some more recent numbers to update my most recent concerns regarding person-to-person loans at Prosper.com. Essentially I was wondering if the loan performance would continually get worse over time. I was curious because it’s one thing to advertise 8-12% returns when the loans are new, but what really matters is the performance at the end of the 3-year term.

While trying unsuccessfully to churn those numbers, I ran across this related chart from the very analytical Prosper lender Fred93’s blog. The graph is essentially % of loans defaulted vs. loan age. Fred93 explains further:

These charts show statistics for the performance of all prosper.com loans. Each curve represents the set of loans that were created in one calendar month. The vertical axis is the fraction of those loans that have “gone bad”, in other words are 1 month late or worse (up to and including default). The horizontal axis is now days since month of loan origination. All data comes from Prosper.com’s performance web page.

If you look out one year from origination (ie 360 days) you will see that about 20% of Prosper’s loans have gone bad. You can also see that this is remarkably consistent from month to month (ie the different curves). One can only conclude that the default rate of Prosper loans is in the neighborhood of 20% per year. Loans originating after Feb’07 are going bad at a slightly lower rate, probably because Prosper increased the minimum credit score required for a Prosper loan at that time.

I learned also that he makes these conclusions because (1) historically over 85% of Prosper loans that reach 1 month late eventually go into default, and (2) the recovery rate after being sent to collections is terribly low. Together, you have his statement that ~20% of loans go into default each year. For a three-year loan, that ain’t good!

The slope (default rate) does seem to be slightly lower for the newest loans, but what concerns me the most is the constant linear deterioration of loans. This confirms my fear that loan performance consistently gets worse as the loan ages.

Now, I know this chart doesn’t tell the whole story, but I do think P2P lending is still very new and has a lot of growing pains to overcome. For borrowers, it can be a great deal. But as much as I want to be grabbing some solid returns this way, I’m still wary of committing significant money given this information.

(I haven’t found similar numbers for competitor LendingClub yet. They are still young, but they seem to be doing better in defaults so far. I’m waiting for more loan data to accumulate.)

Related P2P Lending Posts

• $25 Sign-Up Bonus For Lending On Prosper
• Free Experian Credit Score via Prosper Lending
• Lending Club P2P Initial Review, $25 Bonus Promotion
• Update #1: Will Returns Drop As Defaults Increase Over Time?
• Prosper.com Person-to-Person Lending Review, Part 1: First Looks
• Prosper.com Person-to-Person Lending Review, Part 2: The Numbers

Update: Here is a simlar graph which is also Percentage 30+ days late vs. Loan age, but broken down by credit grades from RateLadder’s blog.

I would say these are the expected results… Percentage of defaults still rise steadily with time, which means your performance is expected to get worse with time. The actual rate of default differs based on credit score. Even AA loans have ~10% defaulted after 1 year.

When you look at price quotes on mortgages, you should always note both the rate and the points. A discount point is one percent of your loan. So paying 1 point on a $200,000 mortgage costs $2,000. Usually this is paid upfront as part of your closing costs, but some people also finance their points (roll it into an existing or new loan). The more discount points you pay, the lower the interest rate on your mortgage.

For example, here are some quotes that I pulled up today for a $400,000, 30-year fixed-rate loan:

So you have to ask whether you would you rather pay

1. a higher amount upfront + lower monthly payments?
2. or a lower amount upfront + higher monthly payments?

The general logic is pretty simple. Let’s say your local gas station asked you to pick between these two scenarios for buying gas:

1. $100 upfront + $2 per gallon.
2. Nothing upfront + $3 per gallon.

You could probably do the math pretty quickly to see how many gallons you’d have to buy to break even. After that point, you’d be happily buying cheap gas and saving more money each subsequent fill-up. But if you don’t use much gas or might move away from the gas station soon, you may never reach that point and never make back your upfront outlay.

In reality, there are additional complications like “what would my unused money be earning?” and “what about tax-deductions?”, so the easiest way to do this calculation with mortgage rates/points combos is to use an online calculator like this one at the Mortgage Professor.

Let’s use it to compare Loan #1 and Loan #4 above. I put in the following info:

…and receive these results:

Taking Points or Not: Will You Keep Your Mortgage 4-6 Years?
So if you keep the loan less than 4.83 years, you won’t quite make up your upfront points paid. But after 4.83 years, each monthly payment you make will mean you saved more money over the higher rate loan. ($10,000 after 10 total years in this case.)

So the question is - how long will you stay in your home? The weird thing is, almost all loan rate/point combos that I’ve seen give you a break-even period of about 4-6 years. Even if you take as little as 0.50 points. So that’s the magic number. More or less than about 5 years?

I’ve read stats that say the average mortgage lasts about 7 years. But you should know yourself better than some average. Is this a starter home? How stable is your job? Are you rooted to the area due to family or other reasons? If you think you’ll stay less than 5 years, don’t pay points.

How Many Points? Well, How Confident Is Your Guess?
Now let’s compare Loan #1 and Loan #2, only have a difference of about half a point. The breakeven period is now 4 years, with only a $2,187 advantage over 10-years. So here both the risk and potential reward is less. If you’re wrong and you move earlier than 4 years, you might be out a thousand dollars or so. But even after 10 years, your advantage would only be about $2,000.

So, the more points you pay, the bigger the bet you make that you’ll stay past the break-even period. You could pay 4+ points or more if you really wanted to.

Update: As commenter Ted has pointed out, paying points also reduces your ability to refinance to a lower rate mortgage before that break-even period. So room for rate drops should also be put into consideration.

As for us, we definitely felt that we were going to stay longer than 5 years, but didn’t want to “bet” that many points. So we ended up paying 1 discount point to lower the rate on our loan to 5.625% at the time. I really don’t expect for rates to drop far enough lower so that a refinance would be worth it, but I could be wrong.

Finally, you should always compare different rate quote combos from different lenders. One lender might not have the best zero-point loan, but might have a relatively awesome 2-point loan. Don’t be afraid to ask for additional rate/point combinations if you don’t get them at first.

The post is a new addition to my Experiences in Buying A Home.

Great Canadian Rebates $25 Amazon/Chapters Gift Certificate Winner

When I first wrote about Great Canadian Rebates, I promised readers who joined under my referral that they would have an opportunity to win a $25 gift certificate from Amazon/Chapters.  As keeping with the promotion, we have drawn the newest winner..  Patricia from Toronto!  Congrats!  The next 100 sign ups will also be put into the draw for another $25 GC.  Remember, not only is it free to join, they pay you $2 upon registration.  You can check out my review of Great Canadian Rebates for more info.

Another quick note, Great Canadian Rebates is offering 5.25% cash back (normally 3.33%) from Canadian Tire (including gift cards) until Sunday March 30, 2008 12am EST.  Here is a quick note from GCR on how to maximize the rebate:

The great thing about the Canadian Tire GC is that they're treated like cash so you are given Canadian Tire Money. With the 5.25% Cash Back Rebate, you can save up to 12% on your purchase.

Here's how to do it: 

1. Purchase Canadian Tire Gift Cards through Great Canadian Rebates (5.25% Cash Back + 2% Credit Card Cash Back Reward = 7.25%)
2. When fueling, pay with gift card + Canadian Tire Gas Multiplier (3%-5% Cash Back in CT "money")
3. Collect Canadian Tire money in car until you reach $5.00 or more. Go in an actual Canadian Tire store and ask one of the cashiers to kindly put all the CT Money onto an open value gift card "since it's annoying carrying around this thick wad of CT money".
4. Use new gift card to purchase gas at CT gas bar (thereby using CT money to purchase GAS AND further maximizing your reward).

Weekend Reading 

• My Dollar Plan gets into analyzing their energy use with pretty charts and graphs.

• Thicken My Wallet gives a primer of critical illness and disability insurance. 

• The Digerati Life writes that in order to survive a recession, think long term.

• Lazy Man Gives us Five Cheap Date Ideas! 

• Canadian Capitalist explains The Costs of Home Ownership. 

• Brip Blap has a great article on how to make your 9-5 job a 10!

• Generation X Finance asks us if Generation X is responsible for the real estate and mortgage problems.

• Consumerism Commentary has a study showing the correlation between payday loans and bankruptcy.

• The Sun's Financial Diary created a poll and asked if we bought the Visa stock.  The results seem to go 50/50 based on 53 voters.

• Money Smart Life warns us to Watch Out for these Tax Scams, Frauds and Schemes. 
  
  

Have a good one!

Photo credit:Dplanet

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Copyright 2007 MillionDollarJourney.com - All Rights Reserved

Yesterday I was asked by a foreign news publication some questions about my reactions to the current financial problems in the US markets. As I wrote my responses, I thought to myself “this is so boring that there is no way that it will be published”. I have no juicy stories of hoarding gold, selling all my stocks, or fleeing to ultra-safe bonds. Instead, here are my Ambien-like responses:

What have you been doing to protect your assets since last summer (when sub-prime mess hit financial markets)?

Nothing, really. I keep the same general asset allocation and haven’t sold anything. I already have investments in inflation-protected bonds and broad stock index funds, so I am not worried about short-term losses.

To avoid investing losses, in trading, what kind of financial products (like stock/bonds/REIT and so on..) did you sell? and what did you buy instead? How did you change your asset allocation?

I did not change my asset allocation at all, as I still have a long-term investing horizon.

Have you changed your thoughts about investment under current crisis in financial markets?

No. I did consider adding some commodities for additional inflation protection, but I ultimately decided against it.

Have you been negatively or positively impacted by the current financial crisis?

Negatively, I suppose. Besides the drop in my investment portfolio, my house which I bought recently will probably decrease in value over the next year or two.

This is a pretty common question asked during tax season.  What exactly is the difference between a non-refundable tax credit and a tax deduction?

Tax Deduction

A tax deduction reduces your income for the year which can potentially mean that you've over paid on your taxes.  Come tax return season, you'll get a refund on your over paid amount. 

A common tax deduction for Canadians is an RRSP contribution.  An accurate way to calculate your tax return based on your contribution is through a tax calculator available online. However, if you want a quick (and approximate) way to calculate the tax return based on a tax deduction, simply multiply the tax deductible amount by your marginal rate.

If you are curious, you can check out your marginal rate here. 

If you own a business, a tax deduction is the same idea but it works a little differently. As an employee, you make money, get taxed, then the rest goes to your bank account.  As a business, you make money, subtract your tax deductions, THEN pay taxes on the net amount. 

This is a little off topic, but businesses have BIG tax advantages over employees as they have numerous tax deductible expenses where employees have few.  

A side tip:  If you make regular RRSP contributions, get your employer to reduce your bi-weekly tax payments.  Remember that if you're getting a big tax refund at the end of the year, the money was basically an interest free loan to the government. 

Non-Refundable Tax Credits

Instead of reducing your taxable income, non refundable tax credits reduce your taxes owing.  You will not get extra money back if you have more tax credits than taxes owing.

Tax credits give you an amount equal to:  amount claimed  x lowest federal rate (15% for 2008).  Where it gets confusing is that provinces will match the federal rate with their own lowest marginal rate on some tax credits (ie. the donation tax credit).  Other credits, like the transit tax credit, is a federal program only.

For example, say you spent $1000 in a year on public transit.  If the public transit is eligible for the tax credit, you would get back $1000 x 15% = $150.    

Final Thoughts

Which is better a tax credit or a tax deduction?  If you are anywhere higher than the lowest tax bracket, you'll get better benefit with a tax deduction.  But then again, we don't get to choose whether a tax write off is a tax credit or deduction.

Note that I'm not a qualified tax advisor, so please do your own due diligence. 

photo credit: blmurch

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I received a very sad e-mail today from reader Tina:

…A recent crisis with my cat has deeply taxed my savings. […] I have spent more than $4500 on my pet in the last three months. She developed lymphoma and the initial hospitalization and testing to find out what was wrong accounted for the bulk of the expense. The rest has been spent on follow-up chemotherapy treatments.

I’m curious how you would handle such a crisis (heaven forbid). Do you think you’d ever get to a point where the price was too high to keep your pet alive (assuming doing so will give it a relatively good quality of life)?

I think this is an important topic, but at the same time it’s very touchy because I’ve found that people tend to have very polarized views on pets. Here is a quote from VPI pet insurance founder Jack Stephens:

Pet insurance is a nonstarter for many pet owners, simply because they take a pragmatic approach to their animals. If the cost of treatment got too high, they would choose to put the animal to sleep.

“About half see the pet as disposable. If it got really ill they just wouldn’t treat it,” said Stephens, whose company conducted research on the issue. The other half “were willing to treat, whatever it took.”

Now, I don’t think it’s nearly as black and white as that, as I think most pet owners love their pets to some degree. But the people on the “pets-as-children” camp are often just as militant as the “they’re just animals-not-humans” camp.

Economic Euthanasia
A recent Slate.com article subtitled What I wouldn’t do for my cat also addressed this issue in depth. (The editor’s choice response letters are also thought-provoking.) It refers to refusing care due to cost as “economic euthanasia”. From reading it, cultural norms seem to be shifting. But in the end, I think it still all comes down to personal priorities.

What is the benefit? Are you talking about the cat or dog coming back to 100% health like a broken bone? Or are you paying to extend its life by weeks while lying in pain? There is a time that palliative care is the most humane choice.

Where is this money coming from? Don’t just look at the number, look at what you’d be giving up. At $2,000, is this money that would go to a vacation to Mexico otherwise? A new HDTV? Payment on your nice car? Now, let’s say it means you can’t buy gas for work or food for your kids. Different story.

Give it away? I think most vets can draw their own line as to what is “necessary”. So if you’re not willing to pay, maybe you should let one of them handle it:

Recently, I called our vet, Dr. Timothy Mann of Northside Veterinary Clinic in Brooklyn, N.Y., to ask him what would have happened if we hadn’t opted to pay for surgery.

“We don’t believe in putting animals to sleep because of money,” Dr. Mann said. “If someone can’t afford or won’t pay to save an animal who can be saved, we’ll save the animal and then keep it or find it a good home.”

Also, be sure to contact local rescue groups. They will be happy to take your sick dog, and will find some way to pay for the care. We are signed up for rescue lists for our specific breed of dog, and we would gladly take another one in if the need arose.

Plan Ahead With Pet Insurance
One way to avoid such difficult decisions is to buy pet insurance. Although it can be expensive at around $30 a month, it will definitely help soften the blow of a huge unexpected bill (although it likely won’t cover it all). Alternatively, put away money regularly in a “pet health savings account”. If you put away just $20 a month and your animal experiences issues at 5 years old, you’d already have $1,200 + interest to cover it.

My Own Doggie Evolution
I never had any pets growing up due to a broad parental ban. Not even a goldfish! My wife, on other hand, was always surrounded by animals. Rabbits, hamsters, guinea pigs, fish, dogs… When we got our first dog from the local Humane Society nearly 3 years ago, I didn’t really know how I would react. Would I love it? Would I ignore it? I must say that our little dude has burrowed his way into my heart. I mean, how can you say no to this buttercream-covered face?

For us, we would give up just about all of our luxuries before withholding healthcare for our dog. We are both in agreement as well, which is great because I know for other couples it can be a point of great tension. Heck, my wife the fashionista would probably wear a potato sack around while selling our car and taking the bus 2 hours to work every day if it came down to it.

However, if it meant sacrificing the health or safety of an immediate (human) family member, I would think twice. By this I mean taking on a dangerous level of debt, or cutting corners in the essentials like nutritious food, health insurance, and safe housing.

But this doesn’t mean I spend my time judging other pet owners for deciding against care due to high cost. For many people pets are not humans, and there is a line to be drawn. But again, if you can’t or aren’t willing to pay please make sure you’ve considered all your options.