Financial Planning Archives - Lazy Man and Money

Introducing the Subway Footlong Index (SFI)

August 11, 2016 by Lazy Man 4 Comments

I was reading Retire By 40 a couple of days ago and Joe had a good article about not forgetting about inflation in retirement. After all, if you are going to “Retire by 40”, you’ve got to consider dealing with potentially 45 years (or more) of inflation. If you retire at age 65, you are looking at “only” 20 (or more years). (Yes, that’s me getting ‘mathy’ by subtracting 25.)

Inflation over 45 years is a significantly bigger deal than over 20 years.

In the article, Joe mentioned the rising prices of the lunch special at a local Chinese restaurant. In a few years, the $5.50 special became a $7 one.

That triggered a thought about my own mental inflation index, the price of Subway footlongs subs. You might remember that back in 2008, Subway launched a $5 footlong promotion. From everything I’ve read, it was fabulous successful, so successful that it became part of the regular menu.

Over time the number of subs that were available for $5 dwindled. Then they disappeared except for a monthly special. That disappeared and, in my area, has been replaced with $3 six-inch sub. The $5 footlong became $5.50. Now the cheapest footlong is $6.25.

The Subway Footlong Index (SFI) is a good way to thin slice overall inflation because Subway can’t reduce the product and still call it a footlong. (Though I supposed they could “thin slice” in a different way by making the meats thinner or smaller). It’s different than the price of a computer which always seems to be the same or a “half gallon” of ice cream that shrinks to 1.75 quarts.

Another useful thing about SFI is that most of you know what I’m referring to. Sure in San Francisco, Hawaii, or New York, the same subs might be $7, but people have probably traveled to an area with a Subway that has typical pricing.

Let’s look Subway prices and see if the SFI makes any sense with regard to traditional inflation indexes. I’m going to presume that you might have a $6 footlongs (I think I’ve still seen these). That means that prices have gone up around $1 (or $1.25 for me) in 8 years… from 2008-2016. We’ll call it between 20-25% over 8 years.

That’s around 2.7% per year compounded annually… which seems in line with other measures of inflation.

Maybe there really is something to this Subway Footlong Index? What do you think? Let me know in the comments.

Rewarding and Motivating Myself

June 14, 2016 by Lazy Man Leave a Comment

I have a problem. It’s a “first-world” problem, so I don’t expect any sympathy.

Father’s Day is just around the corner and my wife asked what I wanted. I honestly couldn’t think of much. I kind of want this Intel NUC to update our Windows Media Center that eliminates our cable box rental fees. The Dell Zino that I got 5 years ago is showing its age.

Unfortunately, Microsoft discontinued the software to make it go, so I’m reduced to experimenting putting Windows 7 on it (not easy) or putting an experimental build of WMC on Windows 10 (also not easy). I don’t want to take on the project. I just want something that works.

Other than this, the only other thing I can think of wanting is this extremely expensive television. Hey it only costs a fraction of the $25,000 that the technology cost a few years ago, so it’s a “bargain”, right?

I don’t see myself saying, “I think it’s a good idea to spend $3000 on a television.” I’m just not wired that way.

However, I realized that if I put aside a little money each month, it feels like an easier purchase. I saved specifically for it, so I can justify it.

I’ve decided I’d put aside 1% of my monthly revenue each month. So if I were to make $60,000 a year (I don’t, this is just an example), it would be around $5000 a month. When I put 1% aside, I transfer $50 to a specialized account. That would be around $600 a year saved. So it’s going to take me 5 years to save up for the television, right? Well fortunately technology becomes much cheaper over time. In a couple of years, I wouldn’t be surprised if it was $1500 and I would have saved $1200 (in this example).

I’d still be a little short, but here’s where the Father’s Day solution comes in. If my wife adds $50 here or there the gap is bridged pretty quick. It’s no big deal if it takes 30 months instead of 24.

This helps me in three ways:

Budget for a big purchase – Some people just add it to their credit card and pay a ton of interest. Those people are not likely to be the ones retiring early.
Motivate Me to Make More Money – Because I’m putting 1% away, the more money I make the faster I get to my goal. If I can grow from $5000 a month to $6000 a month, that means that I’m putting $60 aside each month. That would get me to $1440 after two years instead of $1200. I’ll reach my goal quicker and get the television quicker.
Reward Me for Doing Good Work – This is kind of big thing for me psychologically. As I mentioned in the beginning, I don’t really want a lot of things. To expand on that, there aren’t a lot of experience things I want at this time either as it’s hard to do them with the 2 and 3 year old. All work and no play make Brian a dull boy, right?

What do you do to motivate and reward yourself? Let me know in the comments.

Planning Your Long-term Financial Objectives

April 16, 2016 by Guest Poster Leave a Comment

Managing your finances prudently and watching your wealth grow is one of the most fulfilling things in life. Since the beginning of the year 2016, the price of gold keeps going up and those who invested in the precious metal years back are now smiling all the way to the banks. You need to be among those making such wise financial decisions early on and build their own sustainable financial empires.

We all want to live a happy life free from the burdens of debts and financial shocks when emergencies occur in our lives. However, to get to that point where all is smooth sailing is not by accident; you need to take deliberate steps in securing your financial freedom both now and in the future.

Need for budgeting

It all begins with your spending and saving habits which then determine how much you are able to invest, and eventually determine how wealthy you become over time. If you are interested in building long-lasting wealth you need to analyze how much you earn and how much you spend and create a personal budget that will guide your financial transactions going forward. The budget should always be for a given period of time; and should include all your foreseeable costs and certain sources of income within the period under consideration.

Having the long-term view

The long-term view of life is very important when doing your personal financial planning with an aim of being financially free at some point in time. Your long-term objectives in life will determine your financial needs which in the end will influence the channels you decide to use to generate the income to meet those expenditures. This is the reason why it is always advised that you need to start with the end in mind as you come back to date.

Say for instance you want to own a ranch where you shall retire peacefully to and be tending to your herds of cattle. You will first have to consider how many years from today you want to buy and set up operations running in the ranch. Then you will have to think of how much it will cost to buy and set up the ranch. This will then advice you on how much money you need to start saving every month and investing today in order to have enough money to buy the ranch in say 20 years down the line. Of course there are other financial calculations involved in this in order to discount the future cash flows to their present value; but in a nutshell, the planning must be done today!

Setting of milestones

Once you have the long-term objective in mind it is then very easy to break it down into smaller manageable milestones. These milestones can be in a couple of years, annual, semi-annually, quarterly and finally monthly. At the monthly level, that is where you plan on how much you are going to set aside as savings towards your goal. You then need to decide which investment vehicle will best suit your savings in order to accelerate your path towards meeting your investment goals in the long-run.

Based on your risk appetite, you may prefer investing in the financial markets using the different instruments available there or you may decide to save your money. For those who go with saving, the decision on the saving mode you choose will be determined by whether you want to earn interests and capital gains on your savings or you just want to store the value of your savings. If interested with interest incomes, fixed deposit savings accounts will come in handy. However is interested with both capital gain and shielding your wealth from depreciation as a result of currency fluctuations, you may want to consider saving your money in gold.

Choosing your investment strategy

For investment enthusiasts, there are a myriad of options out there that await you; ranging from the passive to the active investment options. Under the passive investment strategy, you will use your savings to accumulate different assets and form an asset portfolio that will be managed by a third party. Your daily presence is not required and your investment manager is responsible of making investment decisions that grow your wealth based on the terms of agreement you have with them. Investment vehicles available under this category include mutual funds and unit trusts as well as real estate investment trusts among many more. For the active investment strategy, you shall be personally involved in the day to day management of your portfolio. Investment vehicles in this category include running your own business, active participation in daily forex trading or stocks trading among others.

Whichever investment strategy and vehicle you choose, always ensure it is aligned with your long-term financial goals and it helps you in achieving your medium term milestones.

The Car that Lived Forever

March 28, 2016 by Lazy Man Leave a Comment

Several weeks ago, I received an email from regular reader, Jason Stone. You might remember him from his guest post, Jason Stone’s Journey to Financial Freedom.

He wrote about an old story that became very popular around 2012. Unfortunately, I didn’t hear about it until Jason’s email. He essentially asked whatever happened to Rachel Veitch’s 1964 Mercury Comet Caliente.

What is Rachel Veitch’s 1964 Mercury Comet Caliente

As this 2012, NPR points out, After 567,000 Miles And 48 Years, Florida Woman Parks Her ‘Chariot’. I think a name like “The Chariot” needs to be earned and this car certainly did that, right?

It’s an amazing enough story on its own. Here’s a video of the car:

Here are my two favorite takeaways:

1. Regular Maintenance Matters

“She’s had her oil changed every 3,000 miles — Veitch buys it by the case and purchases filters too, then stands right there to make sure the mechanic does things right every time.”

I’m not sure that regular maintenance is the key to making a car last nearly 50 years. In fact, I’m fairly sure it isn’t since we’d all be driving cars that are 50 years old. I note it because it is a great reminder to take care of things if you want them to last. Admittedly, this is something that I’m not always the best at.

I don’t think the cars build today are built to last like they were in 1964, but that doesn’t mean we shouldn’t want to get as much out of a car as we can.

To take it beyond cars, let’s take a minute to congratulate Rachel Veitch on her own maintenance schedule. At age 93, as of 2012, that’s a longevity story in itself.

2. Take Advantage of Lifetime guarantees

“Chariot has outlasted the ‘lifetime guarantees’ on three sets of shocks, eight mufflers and 18 batteries. ‘I’m the lifetime guarantee people’s nightmare,’ Veitch said.”

I’m the worst at this. Fortunately, my wife is much, much better with keeping and logging warranties. It certain sounds like it can pay handsomely over time. We have cashed in a few warranties, but it certainly wasn’t anything like 18 batteries.

What happened to Rachel Veitch’s 1964 Mercury Comet Caliente?

I couldn’t find out what ever happened to Veitch’s The Chariot. Maybe you can? What I did find is that an 1964 Mercury Comet Caliente was auctioned for $17,280 in 2015. It’s probably not The Chariot as it appears to be superb condition, but it’s still interesting to me.

The Financially Independent Baby

March 14, 2017 by Lazy Man 2 Comments

I had a crazy idea yesterday. Let’s imagine that a blessed baby was born today. For lack of a better name, we’ll call him Baby Gronk.

The parents of Gronk aren’t rich, but they are wise. In particular they are wise hen it comes to personal finance and compound interest.

These parents decide that they are going use that personal finance wisdom to spoil Gronk by covering some of his major life expenses on the day he is born. (For the person of this article, we’ll push aside that Gronk should learn to “financially fly on his own.”)

The question is, “How much should they put aside for Gronk?”

Gronk’s parents proceeded to make a bunch of assumptions, many of which will turn out to be wrong. That’s the nature of predicting the future. Their plan is to use the information they have at their disposal to make the best possible estimates and adjust as time marches forward.

They also realize that if their calculation is a little off, Gronk will pitch in the difference. They aren’t going to let a quest for perfection stop them from a great attempt.

First Car (Age 16)

Gronk’s parents have set up a budget of $6000 for his first car at age 16. Using the rule of 69/70/72, they realize that their money may reasonably double when Gronk turns 8 (a growth of ~8.5%). They also realize that it may double again when he’s 16.

Working backwards from their budget, they decide to put aside $1500 hoping that it turns to $3000 (age 8) and $6000 (age 16).

College (Age 18)

Gronk’s parents decide to make this calculation easy and limit this expense to tuition. (And one blogger is very happy that this fictional family made that decision.)

The big question is whether Gronk’s parents want to fund in-state public college or private college. The price difference between the two is huge. Public in-state tuition is ~$9K while private is ~$31K. Multiply that out by four years and it is either ~$36K or ~$124K.

Since the calculations are so different, Gronk’s parents decide to do the math separately.

Age 18 is very close to the age 16 exercise with the first car above. However, it’s just different enough that Gronk’s parents decide to break out a calculator instead of the rule of 69/70/72. They use the “y to the x” to calculate compound interest. They specifically type in “1.085”, “y to the x”, then “18” to arrive at 4.34… a key number we’ll use. The 1.085 comes from projecting a 8.5% growth on the current investment (the “1”). Why pick 8.5%? Your guess on the growth of the market is as good as mine. I used a convenient number from the previous example for consistency, but feel free to substitute your own.

This tells us that every dollar we invest will yield 4.34 dollars… giving our assumptions and uncertainties in the market. We can mentally check this using the above example of doubling, and doubling again. Double a dollar once and you get two. Double it again and you get four. In this case we have a little more time (two years) so it’s a little more than doubling.

Now that we know we can grow one dollar to 4.34 in 18 years, we just need to divide our total expenses…

… for public in-state college, we’d need to roughly put aside $8,300.
… for private college, we’d need to roughly put aside $28,571.

What’s interesting to me is that this almost comes out to exactly one year of tuition. In fact, if we used an expected return of 8% it comes out to exactly one year of tuition.

Finally, to decide how much to put aside they flip a coin. Heads, they go with the in-state public tuition numbers and tails, they go with the private tuition numbers.

They flip the coin and it comes up…

Wedding (Age 25)

The average cost of a wedding varies greatly. Since Gronk is just a baby, the parents use this to estimate $30,000, a nice round number.

They use the same math as in the previous example and realize that at 8.5% growth a dollar is worth $7.69 in 25 years. This means that they need to put aside ~$3900 at birth to pay for the wedding.

(We’ll ignore outdated traditions of the bride’s side of the family paying for it. Additionally, we’ll presume Gronk’s parents want to pay for the whole wedding instead of half. Or we can keep the traditions and calculate the wedding expenses for Gronkette.)

Down Payment for First Home (Age 25)

Who buys a home the same year they are married? I’m not sure and neither are Gronk’s parents. Sometimes people buy homes before they get married and sometimes they get married before they buy homes.

Since we have the same age and the same interest rate, we have the same growth of a dollar – $7.69.

Gronk’s parents decide to put in the 20% down-payment and not buy the house outright. (They’ve spoiled him enough, don’t you think?)

They think a starter home should cost around $200,000. This depends greatly where they live and what they agree is a starter home. The parents budget $40,000 which is 20% down on that $200,000 home.

Anticipating a dollar grows to $7.69, they realize that need to only invest $5200 to cover the $40,000 down payment.

Retirement (Age 70)

Up to this point, many would say that Gronk’s parents are ridiculous. They don’t care. Instead they say, “In for a penny, in for a pound!”

They estimate that Gronk will want to retire at age 70. That’s where the trend is nowadays with improved health care. They start with the rule of 4% that says, you can withdraw 4% of your investments to live on indefinitely.

They realize that they need to get him 2 million dollars at age 70 so that he can have $80,000 a year (4%) to live off of. (Yes, health care is expensive.)

Getting Gronk 2 million dollars sounds absurd, but Gronk’s parents realize that time is on their side. At 8.5% interest a single dollar grows to $302 in 70 years.

They divide $2,000,000 by $302 and realize that they only need to put in $6622 at his birth to cover his entire retirement.

Conclusion

Smart readers should be screaming “Shenanigans!!!” I didn’t factor inflation in any of the examples above. You got me. The idea of this exercise was never about complete accuracy. It’s impossible to accurately plan out a person’s expenses at birth. Instead, it was about illustrating an idea.

If Gronk’s parents were able to put aside around $19,000 at Gronk’s birth, he’d have most of life’s major milestones mostly covered. While $19,000 is not petty cash, it certainly doesn’t seem like a crazy amount to cover some of life’s greatest expenses, right?