I came across David Bach’s Five Ways to Save $2,500 in 20 Minutes the other day. The article hits my two major pet peeves: #X tips that will save you $Y and The 10% Compounding Myth. The first pet peeve deals with all the articles that detail so many ways to save money. I always read these tips and come out no better than I was 5 minutes ago. The second pet peeve is when a personal finance writer glosses over the concept of inflation and taxes. Usually it’s goes something like: Save $X a year for Y years, earn 10% compounding interest, and you have a million dollars.
Let’s start off with the 5 tips David Bach offers.
- Lose the premium cable television and save $960 a year. Suggestions include: not having a cable box on every TV, downgrade to basic cable at $20 a month instead of the typical $100. Unfortunately, I’ve got the minimum package for my HDTV cable box with DVR. I could skip these luxuries, but I get full use of them. I’m also looking to get around them with my plan to cut cable TV. Still, my cable costs are half of what the typical cost is.
- Get a cell phone plan with fewer minutes and save $240 a year. My cell phone plan with unlimited data and text messaging is $30 a month. I got lucky with Sprint on this on this, but it’s pretty much impossible to save any money here.
- Get rid of the landline phone and save $600 a year. I have a $15 a month Vonage plan and even that can be a problem sometimes. I tried applying for a Discover card, but they couldn’t verify my landline belonged to my address. That meant no card for me. The most I could save is $180 and I think that’s money well spent. If you’ve ever used 60 minutes of your cell phone on hold, you’d understand why I like to have a landline.
- Get rid of the premium gym membership and save $240. I ditched my gym member for the one in my complex, but even when I did have a gym membership, I had the cheapest one around. I don’t know anyone who has ever had a premium one. Do people really have these?
- Shop for car insurance and save $500. It’s a great idea in theory, but Massachusetts car insurance is standardized. Most companies won’t even offer it, let alone have different prices.
The projected grand total savings – $2,540. My grand total savings: $0.
What does that savings buy you? According to David Bach:
In 20 years, investing $2,500 a year with an 8 percent interest rate will amount to almost $125,000. In 30 years, you’ll have accumulated over $300,000, and in 40 years, almost $700,000. Earn a higher interest rate — say 10 percent — and in 40 years you would have well over a million dollars.
Let’s look at the math in more detail. We’ll take the 40 year and 10% case… It turns out that after taxes, that 10% interest rate that you were getting is probably closer to 8% (if you are really good about the taxes). After 3.75% yearly inflation that 8% is closer to 4.25%. Adding in all those expenses (we won’t even count investing expenses) and instead of “well over a million dollars”, you’d have the equivalent of $262,769.50 in today’s dollars. That’s nothing to sneeze at, but the changes won’t give you the buying power of a millionaire as implied.
Mr. Bach’s heart might be in the right place (and sure it sells more books), but it doesn’t seem the math is.
TF Miser says
I have the same frustration with these “easy ways to save $1000’s” articles. There always things I already do.
Agreed.. good ideas, but still totally “in the box” kind of thinking. If I come across any really creative suggestions, I’ll definitely bring them to your attention.
* Cable — If I had good reception here, I’d go back to rabbit ears and not pay a single dime to the cable company much less only pay basic for $15/month.
* Cellphone — Prepaid plans can get you down to $5/month.
* Landline — I’m using Vonage right now. Skype now though has VOIP incoming outgoing service for about $8 a month (using a custom Skype WAP phone) and I may switch over to them if I hear some good reviews. Yes it can make verification for credit cards harder. At this point, I only attempt to apply for cards where I have significant assets at the bank issuer to ease the process.
* Gym — How about the good old outdoors? I have WAY WAY WAY more fun rollerblading around the city so I end up doing it more often and going for longer. Now that I think about it, I will rollerblade from/to work and combine the workout time into my commute.
Numbers slightly off for Skype:
$29.95 / year outgoing
$38 / year incoming
$5.66 / month for phone service
$160-$230 Custom Skype WAP phone required (if you want computer-less phone calls)
I also get frustrated with the guru’s simplified investment gains. It just doesn’t come close to reality.
Also, I’m already living with really low expenses, so there aren’t really all these areas to trim them. I just concentrate on being disciplined and take all their “calculations” with a grain of salt.
I disagree. I think David Bach writes his books/articles for the people that may not be as financially savy as those that troll around on finance blogs. I think he is doing a good service to those that will listen. I read “the automatic millionaire” well after I had already “seen the light” regarding personal finance. While not learning many new ideas/concepts I realized what the impact on my financial life could have been if I had read that book 15 years earlier. It’s often the book that I recommend people read if they want to change their financial ways. I agree that the impact of inflation may not be pointed out but a million dollars is still a million dollars no matter the year or how much it will actually purchase.
Lazy Man says
Yes, financial blogs might not be his intended audience, but he’s still pretty much a trick pony of “look at your expenses, reduce them, and invest the savings…” The problem with that trick is that if the person has already looked at their expenses (as everyone should), his tips aren’t very helpful.
It’s great that a million dollars is a million dollars, but why not count what it will purchase? That’s the important part of having a million dollars. You might as well just convert $8500 of your money to Yen and have a million Yen to play around with ;-).
I agree with you that he may be a “one trick pony” but the trick actually works. As I stated previously the audience that would benefit the most from his writings are those that are currently poor savers/non investor types. I agree that everyone SHOULD look at controlling their expenses, however the reality is that most people don’t. I believe that these big spender, live check to check types will only drag the rest of us down with them in the future through increased social programs. Every time one of them wakes up and takes some responsibility for their financial future translates into a little less drag on the rest of us. For the beginner, I believe that Bach explains his concepts well.
As far as the million dollar subject. . . .my point is even if it only has the purchasing power of around $262,000 40 years from now it’s more than someone would’ve had if they didn’t save/invest that money starting today. You have your goal set at $2.5mil. . .why? It will only be worth $655,000 adjusted for taxes/inflation 40 years from now. I think that the number $1,000,000 is stuck in most peoples mind as being unattainable. . . Bach just gives an example of how easy getting to a million could be for virtually anyone.
Sidenote: Enjoy your blogs regarding Prosper. I’ve been thinking about jumping in but I just can’t pull the trigger. I keep coming across bloggers/lenders that put a little in to try it out, haven’t really lost much money but all of them are talking about taking out their money when the loans come due. I also came across a prosper blog that did a analysis of the actual returns which ended up somewhere between 4-5%. I hope it turns out differently for you and I’ll keep checking back to see how your prosper investments do for you to decide if I should bite into that apple.
Keep up the good work. . . .
Adam Bourque says
Couldn’t have said it better myself. That’s why I created The $20 challenge web site. It’s at http://20challenge.blogspot.com I like to create unique ideas to increase cash flow. I too have already done the obvious money savers. David Bach’s rec’s dont’ save me a penny cause I either did them already or have come up with even better ideas…or they don’t apply.
Joseph Sangl says
I perform nearly one-on-one financial counseling with nearly 600 people a year, and it is STUNNING to see how many people don’t even know what compound interest really is.
The statistic recently reported by the social security administration is that over 50% of those people who are between the ages of 55 and 65 have less than $25,000 to their name. Over HALF!!!
That is why David Bach is repeating this same principle over and over. Every day, he is encountering a majority of folks who have never even realized the power of compound interest. It is the same thing I see over and over and over and … Yeah. You get the picture.
This is one reason why I am on a crusade to help others learn how to manage their personal finances well.
I’m with Hightower on this one. The advice is good…it just doesn’t apply to those of us who have already followed it.
And how much emphasis should really be put on taxes and inflation…ESPECIALLY if you’re trying to convince someone who’s not financially savvy to become so? If a person starts learning these bits of information on the idea that they’re going to become a millionaire, why not give them a chance to figure out on their own that it’s not going to be easy rather than crushing their unrealistic dreams immediately? I say let people have their dreams…and find a way to deflate their bubble rather than bursting it.
Besides…I could live quite comfortably for many years on $250,000…especially considering by then my mortgage will be paid off and I’ll have a little extra from social security.