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Home > Investing > Take Care Of Your Financial Big Hits

Take Care Of Your Financial Big Hits

December 27th, 2011 Leave a comment Go to comments

When it comes to managing my finances and saving money, I like to look at the big picture. If you focus on the big hits in your finances, it makes it that much easier to handle the smaller items where you can make incremental improvement over time. When I look at my own finances, taking care of the big hits enable me to be lazy: I don’t do budgets and I don’t really track expenses that hard.

Here are my two big hits: housing and transportation. Once you tackle these two main expenses, everything else will be easier to manage because they are typically a much smaller part of your budget than the two main cost drivers. I have tamed the two big expenses for many years which has created the cash flow to be an investor as well as enjoy my life more with entertainment and travel. Read on to see how I save almost $30,000 per year.

I AM REALLY RICH

When I tell people where I live, they think I am rich. I live in a wealthy, status driven suburb outside of New York. If I followed the path that the typical resident of this community takes no doubt I would have to be rich to live here. But, I took another route that gets me all the benefits of living in this community without the high cost. All the while leaving lots of money leftover.

My housing secret: renting instead of buying. The numbers are so compelling as I will show you. First, the median house price in this community is about $700K. For demonstration purposes, I will select a home below that amount @600K. For a rental comparison, I will use my rental home which comes in @1,800/month for a 2 bedroom apartment.

Owning A Home

Home Value: $600K

Mortgage, 30 year fixed 4.5%: $2400/month

Down Payment: $120,000

Monthly Taxes: $1,000/month

Yearly community utilities: $600/year.

Yearly Insurance: $600

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Renting A Home

Rental Unit: $1,800/month.

Monthly Taxes: Included.

Yearly community utilities: Landlord pays.

Yearly Insurance: Landlord pays.

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My transportation secret: keeping the old car versus a owning newer one. An old car will save you money on car payments as well as insurance. Even after factoring in higher expenses due to expected maintenance, the old car will save you money every year you keep it.

Own Older Car

Car Payment: $0

Insurance/Year: $600

Maintenance: $1000/year

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Own Newer Car

Down Payment: $4,000

Car Payment: $350/month

Insurance/Year: $1200

Maintenance: $0/year

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Adding It All Up

As shown in the spreadsheet above, the yearly cost of keeping the old car and renting is about $24,000 ahead of owning and buying a newer car. Also, because no down payments were laid out, the bank account has $124,000. I didn’t even consider the interest you could earn on the money in the bank account. So, the bank account will increase $24K per year every year you keep the same home/car situation.

FORGET THE STATUS

If you keep your home and car expenses to a level you need versus what other people may expect of you, it’s easy to get ahead with your finances. I don’t need the status, expense, or hassle of owning more expensive digs. I don’t need to impress anyone.

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  1. December 27th, 2011 at 09:59 | #1

    Auto and home are two of the largest expenses for a family. Keeping those in check goes a long way in keeping money in the bank.

    Well done!

  2. December 27th, 2011 at 19:28 | #2

    You did great with the two largest expenses. We bought our cars new, don’t assume the maintenance is $0 🙂 Oil change, scheduled maintenance… it does add up, not $1000, but definitely a good chunk.

  3. December 28th, 2011 at 10:15 | #3

    @Moneycone

    Thanks for stopping by MC.

  4. December 28th, 2011 at 10:18 | #4

    @Suba
    Suba, thanks for stopping by. It’s hard to estimates expenses for a car, I just figured that the old car would cost more than the new one (definitely no zero of course).

    My current car I bought new, it’s ten years old. It still runs great so I save a bunch of money each year I keep it.

  5. December 29th, 2011 at 22:56 | #5

    I have come to the conclusion, after as much research as an obsessive compulsive person can do, that renting is superior to buying on a pure dollar-to-dollar basis. It’s simply cheaper when you compare apples to apples. The financial differences arise when people compare apples to oranges (small apartment to 3-br home). When looking at it purely as a financial decision (which is cheaper), renting almost always wins. This is especially evident in the market you live in.

    With that said, I believe that home buying is for people who want a “home” where they can raise children and have pets without restrictions or weird neighbors. For these people, the money doesn’t factor in as much. It’s really more of a lifestyle/quality of life decision at that point.

    I plan to rent for the rest of my life, as from a pure financial perspective renting is almost always cheaper except in a few markets in the Midwest. Down here in southwest Florida, the decision is also getting a little blurry, as homes are extremely cheap down here. The flexibility and lack of maintenance keeps me renting though.

  6. December 30th, 2011 at 12:32 | #6

    mantra thanks for stopping by.

    Implied in this comparison is that the home buyer is “paying for more housing”. If the rental unit could be bought, it wouldn’t be 600K, perhaps 300-350K. So part of the rental savings is simply buying less housing.

    This does depend on your circumstances. Where I live most people buy because there isn’t a lot of rental housing in this town. So, my rental is not common.

    I wouldn’t suggest that people don’t buy a house, just understand the financial tradeoffs and how much it really costs. And how it fits into your other budget needs and goals. For my needs, renting allows me to save a bunch of money without really affecting my lifestyle that much.

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