I am not going to argue that motor vehicle transportation isn’t convenient, or even necessary in some circumstances, but it certainly is a bad investment in most cases. As a site that focuses on cash flow, unless you have tens of thousands in credit card debt, having a car payment is quite possibly the worst debt you could have.

Let’s Examine Vehicle Ownership

A car loan is typically amortized over anywhere between 4-6 years. So, for half a decade you are paying off a car that also costs you money in fuel and maintenance. Even if you have a warranty, you still need to replace the tires, filters, fluids etc.

From a cash flow perspective, depending on where you live, it is quite feasible that a vehicle loan plus the additional costs of ownership could eat as much of your monthly cash flow as a mortgage payment would. Yes, there are the associated costs of home ownership as well, but with a home you are making payments on what is (in the vast majority of cases) a long term appreciating asset that will also have utility long after your precious car has driven it’s final mile.

My household does use two vehicles, both 10 year old Hondas, that are owned outright. I do commute to work from the suburbs, so I am not as hardcore as some others, like Mr. Money Mustache, who bike almost everywhere. However, I do own a functioning bicycle and view it as an excellent means of transportation when the weather allows. I digress.

If you do need, or want, a vehicle I highly suggest buying a safe, reliable used vehicle for cash and driving it for as long as possible. Limiting your vehicle expense will allow you to focus your cashflow on gathering appreciating assets like real estate, dividend paying common stocks, and businesses. Don’t concern yourself with keeping up appearances with your vehicle. If it is -30 degrees outside and someone needs a ride, trust me, they aren’t going to care what kind of car you drive as long as they aren’t walking!

Plus, imagine how quickly your investment account will grow when you put the equivalent of a car payment on top of your regular savings each month.

This advice is especially true for new college graduates. Even though you’ve done a great thing by graduating college and landing that new job, please don’t go out and get yourself committed to six years worth of car payments on top of trying to pay back your student loans and save up for a down payment on a house… it just isn’t worth it in the long run.

Remember – you can have anything you want, you just can’t have everything you want!
(At least not right away)

How Does It Feel?

In Joe’s comment, he offered up that I had missed a reason to pay off my mortgage and that is the peace of mind that it offers.

While he is correct that it does offer peace of mind knowing that as long as I pay my property taxes, my house will never be taken away from me, it honestly doesn’t ‘feel’ any different.

It isn’t that I expected to feel much different without a mortgage payment every month, but for some reason I expected to feel something. Maybe I expected to feel relief, or satisfaction?.  In any event, I do not regret the decision whatsoever, but the shift of stress now seems to have planted itself squarely on the shoulders of replenishing the investment and savings account(s).

What To Do With That Extra Cash Flow?

Because the majority of the cash that was used to pay the mortgage off came from a brokerage account, the former mortgage payment is now being directed to that account to replenish that capital.  I have automatic transfers set up and am currently treating this as a ‘bill’ that required being paid each month just like the mortgage did.

Treating the transfer of funds to my investment account as a bill is likely part of the reason that it doesn’t feel any different not having a mortgage.  I set this up on purpose to ensure that I do not fall victim to lifestyle inflation . I certainly don’t need to frivolously spend that extra cash simply because I don’t have a mortgage payment any longer.

 Since I already max out my retirement accounts, have no other debt and an emergency fund, the replenishment of the brokerage account will be the top priority. Some of those funds will also be earmarked for a few things that have been neglected in the quest to pay off the mortgage. The earmarked funds will be directed to the following categories:

1.) Vehicle Replacement Fund – Although both 2003 Hondas are still serving us well, replacing one of the vehicles in the next few years is likely inevitable.
Disclaimer – I absolutely hate buying vehicles. I believe that they are the worst use of money and generally cause people more financial troubles than housing debt. More on this in an upcoming article.

2.) Home Maintenance – While major repairs such as a new furnace or air conditioner would be covered by the Emergency Fund, a more general home maintenance fund will take care of deferred maintenance such as new paint, upgraded finishes, shingles etc. A home should maintain or increase its value over the long term, especially if it is well maintained. And, a well maintained home is more efficient and comfortable to live in.

3.) Vacation Fund - It was important to my family not to sacrifice too much in the quest to become completely debt free, so we did take vacations every second year. However, with the additional cash flow from paying off the mortgage, some of the funds will be earmarked to increased vacation time. This doesn’t mean frequent air travel and/or all inclusive luxury vacations, but simply more time with friends and family. Spending from this fund could include local camping, visiting friends and/or family in their homes, or destination vacation travel. The idea is to invest some money and time in fostering relationships with others – including the immediate family. Often, being away from the distractions of home life allows people to focus on just being together.

 As you can see, there are plenty of places to direct the additional cash flow from what used to be the mortgage payment.   Due to all of these different competing priorities, it doesn’t feel like there is extra money to go around. That said, regardless of which account the funds get transferred to now, the net result is the accumulation liquid assets.

Did I miss anything that you feel is important?  What is the first goal that you will focus on when the mortgage is paid off?

According to them, the financial industry, with its ostensibly objective online calculators, overstates how much money someone will need in retirement. Some, in fact, contend that financial firms have a pointed interest in persuading people to save much more than they need because the companies earn fees on managing that money.

The more realistic amount could be as little as half the typical recommendation made by Fidelity, Vanguard or any number of other financial institutions.

For a middle-income couple, that could mean trading $400,000 in retirement money for about $3,000 a year more during prime working years to spend on education or home improvement. For a middle-class household, that’s a lot of money, said Laurence J. Kotlikoff, a Boston University economics professor, who is on the forefront of this research into spending and savings, and is selling his own retirement calculator.

Andrew Behla is a case in point of someone who is not saving enough. Mr. Behla, a Los Angeles graphic designer and consultant, is at age 38 just starting to think about retirement. He and his wife, Michele Krolik, a payroll manager, together have just $70,000 squirreled away for their old age.

I think we will have to save a lot more, he said, a point on which the economists and the financial planning industry would agree. Even so, the couple recently bought a house and put extra money they had into improving it, figuring that over their lifetimes it will add handily to their net worth.

But other people like Beverly Alexander, 49, an energy consultant in Marin County, Calif., might be able to slow down. Her financial planner has her retirement finances mapped out to age 105 (her parents are still alive in their 90s), a plan that gives Ms. Alexander, a former utility executive, the freedom to quit her corporate job and live on her consulting income.

One reason I could retire, she said, was that I saved and I always lived below my means.

The findings of the economists are being met as most challenges to orthodoxy are: with stony silence or extreme umbrage.

I count myself as deeply skeptical, said Christopher Jones, the chief investment officer at Financial Engines, a financial planning software company.

The big financial services companies refused to comment on the research but they did say that their use of simple rules of thumb keeps the process of retirement planning less complicated, and thus, less daunting.

After the recent events in the market, we might be hard pressed to find anyone who thinks they have saved too much for retirement.

Nevertheless, I think the key factor in the entire article was the quote from M. Alexander who simply stated the most basic tenet of financial success… “I saved and always lived below my means” .

I don’t think that we need a “professor” to tell us that!

Holiday Incentives

Many traditional retailers are offering incentives on financing. Just what a nation that has lived on credit for the last ten years needs – more debt. I do believe that the main stream media, with a the constant barrage of negativity toward the economy, has scared the average person into saving more money. (The only good thing the media has accomplished over the last few months.)

Some recent statistics show that many Americans are not taking on any credit card debt this holiday season and that is certainly something that has changed from recent years. With mortgages getting harder to qualify for, the importance of a good credit score has finally hit home with American consumers.

Many consumers have also said that they are planning to spend significantly less money this holiday season overall. Again, a profound change from the overspending that plagued recent years.

Will this Be  Lasting Change?

One has to wonder if these changes will become habits that will last and be ingrained in the generation like the spendthrift and frugal survivors of the great depression era, or if the ideals of the recent “have it now” ideology will return with a vengeance at the end of this economic downturn.

I must say that I personally do not know which one is the lesser of the two evils? There must be a reasonable balance between spending and saving that will both benefit the economy and businesses as a whole and the individual. That is the balance that we seek as a society.

Today’s Investors Will Benefit

I am certain that this economic downturn will offer today’s young investors, who continue to buy stocks, an opportunity at wealth in their later years.

No matter how much money you spend this holiday season, I urge you to not only look in your favorite stores, but look at them as well. Who knows, the best bargain you find this season may be that beaten down retail store stock you’ve always shopped at!

Putting my personal ideas of ”cheap” and ”frugal” aside, I’d like your opinion on whether or not I crossed the line on this one.
In the interest of fairness, let’s visit Wikipedia to get neutral definitions for both terms.

Cheap: Wikipedia re-directs the word “cheap” to Miser

A miser is a person who is reluctant to spend money, sometimes to the point of forgoing even basic comforts. The term derives from the Latin miser, meaning “poor” or “wretched,” comparable to the modern word “miserable”.

Frugal:

Frugality includes the reduction of waste, curbing costly habits, suppressing instant gratification by means of fiscal self-restraint, seeking efficiency, avoiding traps, defying expensive social norms, embracing free (as in gratis) options, using barter, and staying well-informed about local circumstances and both market and product/service realities.

The Scenario

Yesterday my office had a guest speaker in during lunch hour to discuss a product that we have been under utilizing in our office.  It was very apparent that the product provides the company with significant revenues and provides great value to a certain number of our clients.  One of the rare instances that these “learning” sessions provide significant value.

Due to this session being held over lunch hour, the company picked up the tab for lunch and had sandwiches and refreshments delivered to the board room for the meeting. We all enjoyed the food and refreshments as well as the information that was delivered during the meeting.

Honey, Supper Is On Me Tonight

At the end of the day I noticed a few sandwiches left over and asked our administrative assistant what she was planning to do with them. When she responded that they were likely going to be thrown away, I asked (maybe too quickly) if I could take them home.

To make a long story short, my wife and I enjoyed sandwiches (me for the second time that day) for supper yesterday evening.

It wasn’t until after we finished eating that I told her how I had obtained the sandwiches, to which she responded “you are soooooooo cheap”!
(Expletives have been removed in the interest of good taste)

I pose this question to you

Did I cross the line from being frugal to being cheap?

Tell me your cheap vs. Frugal stories or leave a comment and let me know if I crossed the line.