Saturday, February 2, 2013

MPGs; It's All About the Octane!

In today's car market of rising gas prices and an urge to be recognized as eco-friendly we frequently hear discussion regarding a car's miles per gallon, or MPG. The higher the MPGs the less money spent on gas and the less gas consumed, hopefully starting a trend towards lower foreign oil dependency (not likely anytime soon). Just a quick side note: I personally feel people in general associate the original development and overall interest in hybrid and fully electric vehicles with increased gas prices over the last decade or so; cars consuming less gas would save the consumer money of the length of ownership thus benefiting the consumer and allowing the manufacturer to meet the desires of their target audience while meeting such government regulations as the CAFE and CARB standards which impose MPG averages that the manufacturer must meet across their entire fleet of cars. The consumer is now satisfied because they are in essence in saving money at the pump, never mind whether or not they attribute the fact that this increase in fuel efficiency was not to save them money but rather to reduce pollution; the consumers savings is an unintended consequence of sorts.

Moving on, what does this have to do with our mission here at Prorate? Well we like to explore all things financial and the statement that a car with a higher MPG rating than another will have a lower fuel cost than that competitor is in our sights today. Consider this, my car, which has been the topic of some controversy, is rated at 28 MPG on the highway (we will only be considering highway mileage as I drive about 97% of my miles on the highway, plus the results wouldn't be much different using city or combined MPGs). Sounds decent and also signifies another trend in which manufacturers are turning towards small displacement turbocharged engines that produce high power output and high MPG. In contrast, we will compare this to a 2011 Ford Mustang GT that is rated at 26 MPGs when fitted with a manual transmission. Now a difference of 2 MPGs may not sound significant but imagine if each had a 15 gallon tank, those 2 MPGs would become 30 miles additional between fill ups and if you filled up twice monthly, 720 extra miles annually. Put different, if you drove 15,000 miles a year those 2 MPGs would become about a $130 difference per year.

This brings us to the entire point of this discussion, as if you couldn't get it from the title, this is all based on the octane! My car, again being turbocharged, requires 91 octane fuel; the 2011 Mustang runs on 87 octane, only sacrificing 10 horsepower compared to burning 91. Based on our most recent Triple AAA survey of nationwide gas prices 87 octane will save you $ 0.30 per gallon.

So let's bring in the all these statistics and see how they compare over a year:

My car has a higher MPG rating and cost less to fill up each time, but in the course of the year is more expensive to pump gas into due to the 91 octane requirement. Maybe the $40 difference does not seem significant enough to consider; well consider the fact that I personally drive about 20,000 miles annually, exponentially increasing the cost as compared to the car with the lower MPGs, and all things being equal, when comparing two cars which would you choose? Keep a close watch as manufacturers gravitate towards small displacement turbocharging due to the higher advertised MPGs when today's modern technology is already producing engines with larger displacements, such as the 5.0 liter Mustang in this example, and respectable MPGs.

Wednesday, January 9, 2013

What to Do With $1 Million?

You've got a million bucks! What do you do?! Unfortunately for me this situation is strictly hypothetical. As much as I would love to plan my financial future around winning the lottery or inheriting a fortune, for the majority of us it simply won't happen (save for this old witch in Buckeye; buying an RV would be low on my list). Nevertheless, it is fun to pretend, and $1 million has always been a traditional wealth defining point, but how far does it get you today? Is it enough to quit your day job? Thankfully the powers of prorating will allow us to examine this equation and see how far we can stretch the value of a dollar, albeit one million of them.

For the purpose of this illustration we will ignore taxes on the lump sum and assume you are starting with $1 million net (maybe you won $2 million and B.O. already got his 50% cut). Additionally we will add some sound investment strategy which generates an annual 8% return, however minus inflation, which depending on who you ask varies from 2-3%, thus we will say a 5% annual growth on our fortune for the entirety of this experiment, minus 15% capital gains on the investment income. As if that's not enough, let's imagine two different strategies: one, quit your job and see how long we can make it at our current lifestyle with no working income, and two, upgrade our lifestyle a little bit but accept the fact that it will be unrealistic to go without working. Here's how my implementation of $1 million, from two different schools of thought, would go down...

  1. Quit your job and maintain your current lifestyle
    1. Pay of any existing debts
      1. For me this would consist of my mortgage and car loan, totaling about $104,000
    2. Maintain current annual expenses, allowing for a 3% annual increase
      1. Not including the now deleted car/mortgage payment, totaling about $20,000 annually
      2. Add $30,000 every 5 years for the purchase of a new vehicle, maybe splurge once...
      3. $10,000 every other year for vacationing
Do this right and you'll never have to work again! 


Sounds too good to be true, huh? Well you know the saying... while this example seems to provide reasonable estimations as to projecting expenses and investment income, there are a few likely misrepresentations. Mainly a consistent 5% return, we all know this would be great but what happens in years like 2008 when the financial markets collapse? So for fun let's say every 4 years we have a step backwards in the form of a 10% investment loss...

Notice that come 2026 we have a remaining balance of about $550,000 less than in the previous example; not a trend we can maintain if we want to live off this indefinitely... So let's get realistic.
  1. Keep your (a) job and enjoy a lifestyle increase, and some realistic life events
    1. Pay off those debts still $104,000
    2. Expenses will go up! Not gonna be a single bachelor forever!
      1. Double those expenses: 2 cars, 2 mouths to feed, 2 people who like to shop, etc.
        1. $40,000 annually, 3% increase still
      2. Kids anyone? According to this nifty calculator, including college a little munchin is going to cost about $267,000. So let's say you have 2, but one of them gets a full ride scholarship, saving you about $48,000. That's a total of $486,000, which we will prorate out over 18 years at $27,000 annually
      3. Big purchases, we're still paying cash!
        1. New house for the family, $350,000 once
        2. New car for you and the spouse every 5 years, $60,000
        3. Vacation for the family! $20,000 every other year
    3. So you get some type of job
      1. Maybe a low stress, just to do something position while the spouse stays home with the kids, $40,000 net annually, 2% cost of living pay raise
    4. Investing
      1. We'll try to get realistic although no one can predict the future, so maybe 5% annual increase with a 4% step backwards every 4 years

And as of 2025... we are out of money! Is this totally accurate? Of course not. The potential appreciation and sale of the $350,000 house is not included, nor trade-in values of our vehicles, nor is any savings and potential growth stemming from our day job; and I'm sure any accountant would tell me I'm leaving out plenty more. This does however still force us to think towards the future and look at what our financial outcome could be based on a few different paths. Things are without a doubt easier with an extra $1 million; almost makes you wonder what the picture looks like without it? At the same time, the extra million doesn't go as far as some, at least I, thought it would. So the obvious question thus becomes: what would you do with $1 Million?

    Thursday, January 3, 2013

    Back to Basics: Luxury or Necessity?

    As we continue our 2010 budget reflections and gauge how we will proactively head into 2011 we need to take a second look at where our money went in the previous year and determine which expenses were a necessity, and which could be considered a luxury. Yes, this will require some non-emotional straightforward sacrificing; something none of looks forward to but at the same time is a prerequisite for getting onto the path of debt-free and realistic financial lifestyles. So, where do we start? Let's pull up last year's summary again and use that as a starting block. 

    Now everyone's perspective will differ based on your goals of what you intend to do with your discretionary money once you have mastered the art of prorating; as previously discussed one of my goals for 2010 was to loosen up the wallet a little and enjoy some vacationing; a reward for my previous years of strict savings. This was an advanced technique for me as to still maintain my intended high savings goal I needed to free up money from different areas. Conveniently, as previously mentioned, the misses has been chipping in towards the groceries, freeing up some cash, and the savings from cutting my cell phone bill down and eliminating cable TV have continued to pay dividends. The savings from those two categories basically went straight towards the increase in my social life spending (remember: spending less doesn't always equal saving more).

    Let's however take a step towards the traditional topic discussed here: saving money. Assuming your ultimate goal at the end of 2011 is to look back on January 1st, 2012 and feel the accomplishment of having hit whatever savings target you have established for yourself, how are you going to get there? Making more money is always an appealing solution but one we will leave out as these goals and principles should apply no matter the income. Thus accomplishing this feat will require some sacrifice; for me, one of these sacrifices included the often mentioned cable TV. 

    When I originally moved into my new home I had set up an HD DVR cable service with all the premium channels, as well as the medium internet speed Cox supplies and a home phone land line number (just made it feel like more of a home!). The first thing I canceled was the home phone number- no one was calling as my cell phone was still the more widely distributed contact number. Secondly I downgraded to their slowest internet speed; so incredibly slow that I cannot at all tell the difference from the speed that cost twice as much. I use the internet frequently, for checking e-mails, managing back accounts, watching videos, etc., and find this speed to be plenty adequate (I highly recommend trying the lower speeds your provider may offer, if you feel it is too slow then you can always go back). Finally I looked in the mirror and made a personal decision that I do not want to spend my evenings watching TV. I like TV, probably like watching movies more, but I enjoy reading, researching financial news and opinions and just generally not being committed to one spot on the couch for the evening. I did sign up for Netflix, which satisfies my movie fix, and do have the very basic channels that anyone can get such as CBS, NBC, FOX, ABC, etc. This may be an absolute impossiblity for some of you, but one I swear by and have found more personal satisfaction out of. Below, a copy of my previous Cox bill...


    I am proud to say that for the last year, my Cox bill monthly is $19.95, no more, no less. The approximate $1,500 savings is satisfying as is the extra time I've had to explore some different hobbies. Will this sacrifice work for you? Maybe not. How about that $4 a day on Starbucks (you know who you are), or the gym membership you never use, or the latest smart phone when you still don't know what an 'app' is. The list goes on and everyone's perceived value will fluctuate greatly per expense, but when faced with hitting a strict savings target, luxuries and necessities take on a whole new meaning.

    Wednesday, January 2, 2013

    Financial Resolutions!

    Happy New Year! A new year is upon us, and like most people I like to reflect on times past and present and use those experiences to plan for the future. However here at Prorate we're not interested in the lose weight or take up knitting resolutions, not the case. Rather we would like to examine previous spending and look ahead to 2011 and how we would either like to change or continue certain trends. Now the obvious financial resolution might be to save money! Granted that is likely the most popular of the fiscal category, it was not however one of my financial resolutions for 2010. Instead I told myself to 'stop and smell the roses'- which was code for stop being entirely cheap. Of course this does not mean to sign-up for the extended cable package or say 'screw it!' and leave the A/C at 78 degrees 24 hours day during the heat of summer. My goal here was to allow myself to take some time off from work and not be afraid to spend some money vacationing and enjoying the finer things. So how did I do?

    Summary 2009
    Summary 2010

    OK, let's digest. First obvious conclusions, anyone?
    • Savings increased dramatically from 2009 to 2010 and home expense decreased?
      • This is slightly misleading as in 2009 I incurred the brunt of my home purchase expense including the down payment as well as some minor remodeling I chose to complete
      • I also received the first-time home-buyer tax credit in 2010 after purchasing the home in 2009; thus the 90% of it I saved is reflected in 2010
    • Groceries expense decreased about 2%
      • This is a result of the misses staying over frequently
    • Car expense decreased over 2%
      • Again this is somewhat misleading as we cannot forget my potentially financially ignorant car purchase in 2010
      • My previous car was paid off in the middle of 2009 but also required a new set of tires and some other slightly more expensive maintenance before the year was over, thus inflating my 2009 expense
      • However in 2010 the previous car required no noteworthy maintenance and car payments for the new ride did not begin until June; combined with the lack of needed maintenance for the new car this deflated my car expense- this will surely change in 2011
    • Credit card expense went up!
      • Yes, I broke one of the cardinal rules of the Prorate principles and carried over a balance on a credit card. I honestly don't remember what event occurred to prompt this but I can assume it had something to do with the house
    • Cell phone expense decreased
      • As also previously discussed, I cut some of my monthly expenditures when I was gearing up for the home purchase in 2009, which thus took effect in November 2009 and saved me money throughout 2010
    • Was my financial resolution successful?
      • It appears yes! My social expenditures increased almost 3% from 2009 to 2010
      • All it required was my first cruise, 2 Vegas escapes and 4 Rocky Point, Mexico getaways
    • Misc. expense went up
      • I think I just had more people to buy gifts for
    • Health-care expense was previously non-existent
      • Yes, up until the beginning of 2010 I was spoiled and able to remain on my parents' insurance as I had been a student throughout 2009. Once that I ended I began paying insurance and some medical expenses, which fortunately are minimal, out of pocket
    • Pet expense
      • Got the pooch in August 2010 and thus an increase began
    So after review, I feel pretty content with my 2010 financial performance. I achieved my resolution by loosening up the wallet and living a little; of course this prompts the question what resolutions will be in affect for 2011?

    1. I find it immoral that I spend more on vehicular expense than food (of course some food intake falls under the social category) and half as much on the car as I do for the social category. Thus my goal is to pay off the vehicle as fast as possible, possibly making double payments, etc.
    2. No credit card balances!
    3. Maintain a 20% savings rate while still vacationing- there won't be a big tax refund this year, but there will be another cruise...
    4. And probably the most obvious fiscal resolution second only to saving more money, make more money!

    Wednesday, December 5, 2012

    Back to Basics: Be Realistic About Expenses

    Yes, we're almost already two weeks into 2011, but it is still early enough for some reflecting and re-examining; fiscally speaking of course. Thus this seems to me to be a prime opportunity to take a nice simple step backwards and re-assess the basics and principles I preach here at Prorate. The obvious main principle that has started this mess is of course prorating, more specifically accounting for every expense within every paycheck and every month. Some illustrations will follow below, but the point I wish to expand on here is to realistically plan for your expenses and hold yourself accountable for them before you ever get paid; in other words tally up those expenses as if they have already occurred and pretend for a second you're in the negatives before that first paycheck ever hits your account. 

    Now we don't wish to feel like we're always playing catch-up, but we can't ignore inevitable pending expenses either. So just for fun let's continue with a mock scenario where you net $2,000 monthly, paid the 1st and 15th (we're not concerned with any taxes for this example), and some predetermined monthly expenses as follows:
    • Mortgage- $600
    • Previous month's utilities- $100
    • Car payment- $200
    • Cell phone- $80
    • Health Insurance- $50
    Of course in addition to this we can't leave out our monthly prorated infrequent expenses, or rather those that we don't pay every month but we know are lurking in the future (expressed as annually/monthly).
    • Homeowner's insurance- $400/$33.33
    • Forecasted car expense- (tires, maintenance, insurance, registration) - $1680/$140
    • Dental appointments (Personally I have no dental insurance)- $340/$28.33
    We could go on but this will plenty for our example. With the above expenses in mind, where would you stand on the 31st of the previous month?

    So before we've had a chance to spend a single discrentionary penny, we're already $515 in the hole, or $716.66 if you're becoming a real stickler for accounting for all real expenses. Looked at differently, we have $485 to spend from now till the 15th, and we have yet to feed ourselves or save anything either. Using the savings guidelines we have previously established, we are trying for a TROS of 10%; which means we need to save 10% of our net income plus our prorated expenses; which in this example comes out to $200.83 for each paycheck (10% = $100 and half of our prorate expenses total = $100.83). If you're following along at home, do you think we're going to make it? To fill in the rest of the blanks let's use my own personal most previous statistics since 2007 for the portion of spending done in each category, but ignore any category already included and categories below 1%. So we'll include groceries, credit card,  social life, and cash withdrawals. 

    I don't know if you can make out the balance but it reads $12.17, with the effective prorated balance even lower as we have yet to save 10% and all of our prorated expenses that month. Sounds low, but think about it, you're done! Let's take it a step further and complete a full month...

     Again, I'm sure it is difficult to make out but the remaining balance is $24.34 and the prorated balance is equal as we have saved enough to cover our 10% goal plus fully covering the monthly prorated total. $24 doesn't sound like a lot to leave yourself but remember that this example represents a complete month; you've paid all your expenses hit your savings goal and based off of over 3 years of my data have spent the amount of money you typically do. Is this going to be totally accurate every month? Definitely not. Obviously there will be fluctuations within each category but the principle remains intact: your outlook on your monthly spending and budgeting probably looks and feels a lot different when you account for all real expenses and start off looking at yourself in the negatives.

    Tuesday, October 30, 2012

    The Discount Conundrum

    As the holidays are upon us and we begin to start our gift shopping, we are all going to be looking for the best deals and discounts (I am not referring to the nonsense that is Black Friday). I have taken a personal vow to attempt to complete as much of my holiday shopping online as possible, strictly just to avoid participating in the shopping madness of which I experience more than enough of from the retailer perspective. However in researching this I have encountered a maze of discount offers and promotions from one retailer to next, varying per credit card type and purchase amount, making it near impossible to decipher which purchase route will yield the highest savings, which is the tie-in to theme of this blog.

    Let's start with Kohl's for example. Whether or not this store is for your is moot, the plethora of different offers they have makes it a great illustrative example for this topic. To start, they are offering 10% off any order over $100, from now until December 25th. A major pro/con for online purchasing is shipping: expiring today you can receive free shipping on orders over $49.95. So far this sounds relatively straight forward right? Wrong! Should I wait until tomorrow, I can use a 15% discount coupon without any spending limit, however only if I use a Kohl's charge card. Furthermore they start offering free shipping for orders over $75; the plot thickens. As if this isn't already getting complicated, using a Bank of America Visa to shop at Kohl's will earn an extra 5% cash-back, a Discover card will earn 10% cash-back. Where do we start?

    We're not interested in financing rates as again our main principle is to not carry credit card balances (besides the Kohl's charge would have the highest APR by far). The determining factor as to which option is best for you depends on the total purchase amount. If you are intending to spend $100 or more, the best option is to wait until tomorrow and use the Kohl's charge card. We eliminated the BofA credit card immediately since all else being equal the Visa's 5% cash back obviously falls short of Discover's 10%, and waiting till tomorrow enables the 15% off additional with the Kohl's charge, as pictured to the right.

    If for whatever reason you are unable to wait until tomorrow and must complete the purchase today, using the Discover card then becomes the clear winner as the 15% discount when using the Kohl's charge no longer applies. Just to take this equation one step further and throw in another variable, suppose you are only making a purchase of about $50; would it be better to buy today with the Discover card and the free shipping, or wait till tomorrow and use the Kohl's card which yields a 15% discount but unfortunately not a high enough net total for free shipping?

    With the graphic above we can see the purchasing today, 11/28, nets a lower bottom line when considering the free shipping and 10% cash-back bonus then waiting till tomorrow for the 15% and paying shipping. The math in these equations is obviously not of great difficulty and obviously will not fit the bill for every retailer and individual, but for a visual person such as myself just seeing the options laid out on paper allows for a clearer path to getting the best deal. In summation: if spending less than $74.95, buy today with the Discover card. If spending $100 or more, buy tomorrow with the Kohl's charge.

    Wednesday, October 10, 2012

    So What Should We Be Prorating?

    Thus far I have touched on a few basic examples of expenses that although I pay semi-annually or annually, I account for every paycheck. This has included homeowners insurance and car insurance, but certainly does not stop there. All of this ties in with the previous posting regarding TROS, and how we have to ensure we do not deduct from our savings to cover these infrequent expenses as this will ultimately dilute our claimed savings percentage.

    So besides the aforementioned examples, what else should we be prorating for every paycheck as to not be caught off guard when the time comes? Each month I prorate a total of $318.33, as demonstrated below:

    • Home Expense- $109 monthly
      • Homeowner's insurance: $308.04 annually/$25.67 monthly
      • Unexpected maintenance- 'they' recommend setting aside 1% of the home's value to cover yearly maintenance: $1,000 annually/$83.33 monthly
    • Car Expense- $141.08 monthly
      • Insurance- since I pay it per 6 months, given Progressive's discount for doing such: $793 annually/$66.08 monthly
      • Registration- hopefully will go as the car depreciates, so my estimation based off my previous tab: $200 annually/$16.67 monthly
      • Tires- an estimated tire replacement once every two years: $600 per two years, $300 annually/$25 monthly
      • Maintenance- every 5,000-7,500 miles routine maintenance: $100 every 3 months, $400 annually/$33.33
    • Social Life- $5 monthly
      • Haircut- once very 3 months, $15 including tip: $5 monthly (maybe not significant for me but more so an example that would be worthwhile for the ladies.)
    • Misc. Expense- $35 monthly
      • Gifts- I have reviewed a calendar and someone I know has a birthday/anniversary/Mom's Day Dad's Day every month, not to mention Christmas: average monthly expenditure $35
    • Healthcare- $28.25 monthly
      • Dental Cleaning- I do not have dental insurance (so yes I do brush and floss twice daily) thus the routine cleanings and x-rays come out of pocket- $339 annually/$28.25 monthly
    Note the example of this above and the negative effective balance as we have yet to save for these expenses accordingly.

    Although this may seem like a tedious list there is certainly always more that could be added. For one, I am fortunately (for me and the kid) childless; so there is a whole mess of expenses and another few columns that would be added if that is applicable to you. Besides the obvious example such as that, yearly pet immunizations could apply, maybe charitable contributions, taxes if you usually owe, clothes, etc. Not to mention you can work in temporary prorated expenses: suppose you're saving for a vacation next year, you would just add another $50 monthly (or whatever it may be) to your social expense for the few months leading up to said vacation. So what examples apply to your situation?