“Penny wise, Pound foolish.” This historic phrase has British roots and was coined over 500 years ago. How many people have yet to learn this simple concept, be frugal with the large purchases? There are many excellent frugal bloggers out there. They track every dollar and simply don’t spend on things that won’t improve their life in meaningful ways.
I am not advocating you abandon your thriftiness and splurge on a $4 coffee today, however I am suggesting to pay attention to your largest purchases over a lifetime. After years of watching spending so delicately, some people fall victim to bad decision making every ten years or so on large purchases. The likely culprit has one or many of the four qualities of difficult decision making. One slip up can ruin decades of proper planning and frugality.
Here are three areas we were frugal with the large purchases in adulthood.
#1 Mind your College Bill
Lets face it, not everyone will get an academic or athletic scholarship and not everyone lives in a state like Georgia that offers the Hope Scholarship.
The cost of college is a huge burden for newly minted graduates. If the upperclassmen is not financially sound and the bank of mom and dad is not footing the bill, she may be in for a shock when she graduates as one of the 70% with student loans and has to start paying back the average of $37,172 college debt.
Make sure the degree you are pursuing is worth the expense. Some practical advice to decrease your indebtedness.
- Understand value of the degree you are pursuing and how much you can expect to earn upon matriculation. Determine if the return on investment is appropriate.
- Consider an in state public university.
- Consider a community college for two years and transfer later.
- Investigate your employment options at the university you select and who the big recruiters are.
- Obtain a part time job to help pay while you are in school.
If you plan to go back to school for a master’s degree let your employer pay or find a program where you can go for free, like my MBA in Finance.
We have a family member who met his wife in law school. They graduated with over $200k in combined student debt. What a burden. They will dig themselves out of that giant hole because they found decent starting salaries, but this will have a significant impact on their future new worth due to time value of money.
We both were lucky to find decent paying jobs upon graduation at large corporations and eliminated this debt in a couple years.
How we did it
- We attended a great public university in the state of Pennsylvania.
- Mrs. TPM has a father who worked in a University and received subsidies for her education. Her debt was squashed the first year of employment.
- I worked part time at the IT help desk at the University and in the summer worked as a traveling systems administrator to pay for living expenses.
- My parents covered a portion of tuition, but I was responsible for a significant portion. I graduated with about $16k in debt and paid it off in two years.
#2 Purchase a Car Very Infrequently
I’d love to tell you that we don’t own a car and bike everywhere, but alas we don’t live in Longmont. Atlanta suburbs are some of the least bike friendly areas I have seen. Its a daily occurrence in the local patch of some brave lad getting run down by an irate commuter. For this reason an automobile is a necessity for us.
We keep our transportation cost low and it is only 1.63% of our budget. Based on my research in that post where I compare our single income budget to actual mean spend of high income US residents, the mean transportation expense for high income people is 9.43% of income. For lower earners, the transportation expense is even higher. This makes it the second highest expense just following housing. The frequency of buying becomes paramount especially If you are swapping out your ride every three to five years.
We finally upgraded our cars after ten years for the safety of our newly born children. When my first child was born, I envisioned my wife with the kids stranded on the side of one of the highest trafficked highways in Atlanta that she commutes on everyday. With a pregnant wife by my side, we were an easy mark in the dealership, but still negotiated a fantastic deal.
There have been many debates with financial bloggers over taking a loan versus paying cash. We always pay cash. When we write a check it forces us to consider what is really important to us. When we have to pay a couple extra thousand dollars for an upgraded featured versus an extra $15 per month, it makes us really think about whether we need adaptive cruise or parking assist.
The cars we purchase, like our Toyota 4 Runner, are extemely dependable and have a great a residual value. Based on Kelly Blue Book, the trade in value of our 4 Runner has lost about 32.5% over 4 years from its original purchase price since 2013.
How we do it
- Buy dependability and quality.
- Purchase automobiles with outstanding residual values.
- Keep vehicles for over 10 years.
- Drive as little as possible.
- Alway pay cash.
#3 Buy Less House than you can “Afford”
The standard guidance for loan approval is limiting the payment to no more than 30% to 35% of your pretax monthly income. This amount of mortgage is far from conservative and would make us downright uncomfortable. This leaves little contingency for when life happens, a layoff or a medical issue. Even though we think of our home as a quasi investment, it is still a major expense with little in the form of expected appreciation higher than inflation.
Our total housing expense, including insurance, tv/phone/internet, utilities, lawn service and house cleaning total only 16.73% of our take home pay on a single income. The take home pay is after automatic deductions like maxing out our 401ks, medical insurance, HSA contributions and a few other investments.
How we did it
- Buy a house with at least 20% down to avoid PMI.
- Do not buy a house worth more than 1.5x annual income (Our house is now valued at less than 1x our annual income on a single income.)
- Stay put for as long as possible, preferably forever.
- Find the best school districts you can afford. New families flock to great schools driving up the capital appreciation.
How are you frugal with the large purchases? What rules of thumb do you follow with your largest purchases?