Rule #41 Choose Value over Price

"Price is what you pay. Value is what you get." -Warren Buffet

One thing that has been said to me a few times is: "You can afford it so why don't you buy it?"

My father asks me almost every time I see him about something-or-other he saw on TV.  "I don't have cable Dad, I didn't see it." is what I usually say.  Dad still doesn't quite understand how we can live without cable TV.   We certainly can afford to pay the additional 30-50 bucks for the service, but why should we?  The reason we don't have cable is we focus on value instead of affordability, and we simply don't place much value on TV watching.  We usually only consider the affordability AFTER we've decided there is value in it.  Intuitively, you'd expect everyone to do the same thing, but I'm not so sure.  Using the Cable-TV analogy, how many times have you heard someone say "A bazillion channels and there's nothing on"?  or "I should get rid of cable... I wish I could just cut the cord."  I've heard it said quite a bit.  I've also heard people use the bundling excuse to justify why they have cable:  For an extra $20 a month, we'll add Basic Cable on to your internet-service bill.  Wow! Only $20!  "I didn't really want Cable TV, but this deal is pretty good, so I'll add it on."  Thats $240 a year for something you didn't really want in the first place.  Sure I want a good price, but I want to make sure we're getting good value.  I actually know of families who pay close to $100 A MONTH for a deluxe cable TV package, and still complain that there is nothing on.

Another analogy is the upsizing of portion sizes at a fast-food restaurant.  I've gone to fast food restaurants and ordered a sandwich and fries... For $0.30 more I could have ordered a combo meal and gotten the same foodstuffs with a medium sized pop as well.  But I didn't want a pop.  I know people who will always get the combo because its the better deal.  Its cheaper than if they purchased all of the items individually, so its very tempting to take the deal.  Now $0.30 isn't much money, but its for an additional item that I don't want.  Later in the day, I won't regret not buying it, and my waistline will thank me.

Memberships to the gym or joining clubs where we don't believe we will get the full value of the cost of joining are another example of things we wont buy.  If there is an a-la-carte option, we will typically take that one until we know for sure we will get good value for our money.  If I am only going to go to the gym 2 times a month, then it likely makes no sense for me to pay the monthly rate, especially if I would have make a 1 year commitment, which many gyms require.

TVs, electronics, new vehicles, dinners out are all things we could afford to do more of, but we place little value on these things, so we just dont spend our money that way.  It results in us having more disposable income and have more freedom and flexibility with our money.  Its one more way of not keeping up with the Joneses.

Thats not to say we don't spend money on things, or experiences that enrich our lives.  We try to buy things that are of high quality and will last a long time.  Because of this, we often spend more up front in order to have quality that lasts longer and requires less maintenance.  This ensures that we don't have to replace things prematurely either because of malfunction or it goes out of style.  We recently bought a $2000 couch.  It was regularly $3000 and was on sale for $2000.  The couch is made with high quality and durable leather that will last a long time.  While $2000 is still a lot of money to spend on a piece of furniture, we have two young sons who are hard on furniture.  By spending more on a quality couch, we hope to avoid having to replace that couch every few years.

Buying cheap and disposable things just isnt our style, and financially we feel it a wasteful way to spend our hard earned money.  While there are a lot of things that we can afford, we are very picky on what we are prepared to buy.

Lumbergh agrees! The first 40 rules.

Hey, here's the first 40 of Ryan's Money Rules.

Rule #1: The Power of Compounding - Earlier is Waaaay Better!
Rule #2: "Lotteries are taxes on the stupid"
Rule #3: Defining Assets and Liabilities
Rule #4: Never Carry a Credit Card Balance... Ever!
Rule #5: Know your Monthly Expenses!
Rule #6: Forget the Latte, Its the Car/Vacation/Renovation Factor
Rule #7: Maximize income in AFTER TAX money

Rule #8: Your Home is not an Asset
Rule #9: Spousal Financial Compatibility is VERY important
Rule #10: Thumb your nose at the Joneses

Rule #11: Dividends - Buy Stocks for the Cash Flow
Rule #12: Use Leverage for MORE positive cash-flow!
Rule #13 Take Accountability. Stop Whining! Go Read a Book already
Rule #14 Live on one salary
Rule #15 Don't try to "Beat the Market"
Rule #16 Plan on Financial Independence without CPP
Rule #17 Save/Invest ALL windfalls or bonuses
Rule #18 Don't Diversity... too much
Rule #19 No Fixed Income
Rule #20 Set Financial Goals

Rule #21 Chart your Progress!
Rule #22 Pay your bills on time.. Every Time!
Rule #23 Automate all Monthly Payments
Rule #24 Borrow money for things that appreciate, pay cash on things that depreciate
Rule #25 Live like a student as long as you can
Rule #26 Create/Develop Multiple Income Streams
Rule #27 No Financial Advisor
Rule #28 Pay No Bank Fees
Rule #29 Talk about money. Ask about money.
Rule #30 Live where you Work, Shop and Play

Rule #31 Out of Chaos comes Big Opportunities. Be Ready!
Rule #32 Take Full Advantage of Employer Matches
Rule #33 Don't spend all of that salary increase
Rule #34 Find Yourself a Money Mentor
Rule #35 The Main Goal is Financial Independence, Not Retirement
Rule #36 Owning a good company is are better than working for one
Rule #37 "Hedge" against price inflation by investing in staples you use
Rule #38 Use good debt wisely, get rid of bad debt completely.
Rule #39 Adopt an Entrepreneur/Investor mindset
Rule #40 One week wait time for impulsive purchases over $100

Plus there's these two gems:
Dividend income growth... 16 months in review
Buy vs Rent. Why we're okay with renting today

Rule #25 Live like a student as long as you can.

"The essentials of life are cheap. Only the luxuries are expensive." - Ron Muhlenkamp

Remember when you were a student at college or university? Remember how much fun it was and yet how broke you were? You didn't have a luxurious place to live in, or a car, and you walked to everything, or maybe skateboarded everywhere?  The TV you had was the TV the previous tenants left behind because it was too bloody heavy to move... you know.. the Radiation King with the wooden case, and you certainly couldn't afford cable TV.  You stayed in and hung out with friends, choosing potlucks instead of going to fancy restaurants.  You made coffee at home, and brought sandwiches for lunch instead of buying it.  Cheap Poutine and Pitcher of Beer night at the local pub was the best night of the week because you and your friends could nurse your drink and wax poetic all night long at discount prices.  Life was simple.  You had few financial liabilities and it was fun living this way.

But then something happened.  There was this temptation that with a new career must also come a car, new furniture, fancy clothes, an expensive watch or phone, a big flat-screen TV,  and instead of frequenting the local watering hole, you feel compelled to hang out in the more expensive places with the foreign or micro-brews on tap instead of the cheap domestics.   Your big adult paycheque deserved a big adult lifestyle.   That big TV meant a cable-TV plan, and high-speed internet and a phone with a big data-plan.  Whoa! This is starting to sound expensive.

I always tell young people I meet to resist this temptation as much as possible, for as long as possible.  It is extremely difficult to save, pay down debt, and generally get ahead if you jump into a higher standard of living without the financial base to make it happen first, and that is just what many recent grads do.  Once people get used to a high-status high-consumption lifestyle, it is often very difficult for people to reign in that spending if needed, so the longer you can prolong your student lifestyle, the better.  I can not emphasize enough how much financial sacrifice plays in to financial well-being and resisting many of these adult lifestyle trappings can be a boon to your bottom line and mental well-being.  In my opinion, spending money on luxuries in life such as cars, expensive clothes, and expensive monthly liabilities such as Cable-TV should only be done once the basics are covered such as eliminating bad debt and having some savings.  Another thing I've noticed is that people with high standards of lifestyle without a financial base often worry a lot about maintaining that lifestyle...  and I generally like to sleep at night, so a simple carefree lifestyle suits me just fine.

When I was in grad school, we lived just like in the first paragraph.  My wife and I lived in a very modest apartment, we didn't own a car, and we didn't have have a TV let alone cable TV.   When I got my first employment position as a technical professional, there was a temptation to buy all the fancy things people come to expect with such a position.  But we resisted.  We did however buy a house after  I had been working for 3 months only because we were going to be evicted from our apartment due to a coming renovation.  While we did own a house, it would be another 4 years before we would buy a car.  It wasn't that we couldn't arrange for a car-loan to get one, it was that cars are money pits, and we weren't interested in digging new financial holes while we were trying to pay off our student loans.

With two adult salaries, but without many of the liabilities many adults take on, we were able to slay both our student loans ($58 thousand worth) in just over 3 years, save up enough to pay for a used car four years after I started working, begin to max out our RRSPs, and give to worthwhile charities.  We were essentially saving 50% of our take home pay.... By comparison to many in our field and experience level, our standard of living was modest, but we were very happy because we maintained that interactive social face-to-face lifestyle by continuing pot-luck get-togethers and Cheap Beer and Poutine nights.  We still lived with "student" quality furniture because it still met our needs.  It was still functional, though certainly not fashionable.  We only bought stuff out of necessity, not because of some feeling or self-imposed obligation around keeping up with others.    We never focused on what status items we were missing out on, but rather focused on relationships and building a solid financial base to give us more flexibility and freedom as we got older.  Once the essentials of living have been taken care of, then we focus on adding the luxuries.

At our current stage in life, which is late-thirties with young kids, we have adopted many of the liabilities that come with adulthood: A nice car, high-speed internet, club memberships etc, but we only added these lifestyle choices when we could afford them.  To this day we still walk or bike everywhere we can, we do not have Cable-TV, dont frequent fancy restaurants more than once a year, and Cheap Beer and Poutine are still our favourite nights out.

Rule #14 Live on one salary.

I'd like to live as a poor man with lots of money.  ~ Pablo Picasso

This post is mainly relevant for couples working towards saving or paying down debt. We live on only one salary when we have two coming in. If you are not part of a couple, I would still recommend living well below your means if you can.

So if you are following along, you've probably guessed that we are very aggressive savers. When we started our careers 14 years ago, we were living in a small one bedroom apartment. I was in Grad School TAing Undergraduate classes and Kim was working an entry level front line position at a Social Services Agency.  We werent making very much money but we were very happy.  Our lives were simple and we didn't define happiness by how much stuff we had.  Pretty much all of my TA income was going to servicing and paying down our Student debt, and we were living on Kim's small salary.  We have always believed in NOT living beyond our means, and believe certain types of debt are anchors that weigh you down, so becoming debt free was a priority for us.  By the time I was done Graduate School in 2002 and had only worked about 3 years, we had tackled $58000 in joint student debt and were debt free.  I had entered my "adult" career phase and began making a fairly decent salary in 2002.  After out debt was paid off, we began saving every dollar of my take home pay.  Its amazing how much you can save if you don't let the cost of your lifestyle creep up as your income goes up.  We were still living a lifestyle that was paid for with only one salary.

We were informed that our apartment was being turned into condos so we were required to move, so we bought a house in 2002.  It was a very modest house on a very walkable inner city neighbourhood.  It seemed expensive at the time, but today it would be a screaming bargain.  Even though we could have "afforded" to take on a car loan, we chose to do without a car for another 4 years until we had saved enough to pay for it in cash.  My employer paid well so we began living solely on my salary and banked Kim's.  I worked in a boom-bust industry so while I was employed at the time, there was no guarantee that I would always have work, so we established a general rule that when both of us were working, we lived on only one salary and we saved the other, just in case one of us found ourselves without work or income.  We've done that every year since about 2002 unless Kim or I were taking some time off from working either for a Parental Leave or a personal Leave of Absense.  There was never a need to change our lifestyle since we were accumstomed to living on only one salary.  Easy Peasy.  The other great thing that happened is that as we saved and bought cash-flow producing assets, those assets began providing us income as well.  That investment income started small, but over time has compounded to a meaningful amount of income.  Its not easy to live this way if you are accustomed to a high consumption lifestyle, so it wont work if you aren't prepared to make sacrifices now.  If you haven't began keeping up with the Joneses, don't start.  

This "Live on one salary" strategy obviously works when you, as a couple, have two good sources of income.  If you don't have two good sources of pay, then getting two good source of pay is probably a bigger priority.  Once you are at that point, imagine how quickly you could amass a large nest egg if you as a couple saved half of what you brought home. To this day, we bank/invest about 40% of our joint net take-home income. We do not live lavish lifestyles so there is no shock to the system when either Kim or I, or both, are not employed. Since we've been living this way for about a decade, we have built up a substantial financial base as a cushion and we maintain a lifestyle that is somewhat modest compared to others in our age and income cohorts.

I've heard a lot of people say that they couldn't live on just one salary.   I believe most people can do whatever they set out to do, and that most couples choose to live on both salaries.  They have adjusted their consumption and lifestyle level to their joint income level which leaves very little wiggle room if one of the earners loses a job or wants to do something else like go back to school, or start up a business.  You are now trapped in the "I must work to sustain my lifestyle" vortex.  This is fine if it works for you, but don't use it as a crutch for why you can't save.