income level

It’s Dirt Cheap!

May 1, 2013 By Jennifer Derrick 2 Comments

The other day I was perusing another personal finance message board when I came upon, of all things, a debate about the merits of Blu-ray versus standard DVD. It came about because someone was mad that they were being “forced” to buy a combo pack that included both formats because the movie studio refused to release the DVD-only option. The person was upset that they had to pay the higher price when all they wanted was the standard DVD.

Anyway, the Blu-ray camp was defending the higher resolution and better picture, while the DVD camp was saying that the difference wasn’t enough to matter to them, or to make it worth shelling out more for the player and the movies themselves. At some point in the argument, one poster threw up their virtual hands and said, “Oh, for crying out loud. Blu-ray players are dirt cheap. Just buy one, get the [dang] movie, and be done with it. Stop whining about something that’s so cheap!”

At that point I just shook my head. (Remember, this was on a personal finance board where the careful spending of money, not the random blowing of money, should be the priority.) Sure, you can occasionally find a Blu-ray player in the $40-50 range, if you’re willing to choose the cheapest, lowest quality option. But if you want one that gets good reviews and has more functions (like internet streaming that might allow you to get rid of cable which would be a money saver), you’re looking at paying closer to $100 or more. That might be “dirt cheap” to someone who has a large income or a lot of extra cash lying around, but it’s not an inconsiderable amount to many people. And if they don’t feel like the picture gain is worth it, then it’s money wasted.

I see this a lot with other things. People have encouraged me to get a smartphone by telling me that they are “dirt cheap” now. Well, they may be but given that I have no use for the features of one, any amount spent on a smartphone would be a waste of money to me. The same is true of stainless steel appliances, granite countertops, tablet computers, new cars (how anyone can think of this as dirt cheap still escapes me), kitchen gizmos, and swimming pools, all things that people have encouraged me to get at one time or another. Over the years, people have told me things like, “Oh, you should upgrade this because prices have come down so much.” Or, “Those are so cheap now it doesn’t make sense to keep the old one.” And, “An upgrade doesn’t cost as much as you think. Get with the times.”

While these people may be well-meaning, what they fail to appreciate is that, in most cases, I don’t see the need or have the desire to buy whatever it is that’s so “cheap.” I don’t like stainless, don’t care for granite, have no use for a tablet other than to play with it in the free time I have too little of as it is, and I don’t want to tear up my yard with a pool. As for Blu-ray, I guess I fall into the camp that says the picture gain isn’t important enough to me to make it worth the price. (Not that it’s not better, just that it’s not important to me.) So no matter how cheap this stuff is, it isn’t going to make me happy. I prefer to keep what I have because it meets my needs without a lot of extra features I don’t need or want, and it keeps my costs down. If, at some point, I see an upgrade as worthwhile, I would certainly consider it. But that time isn’t now.

This is how a lot of people get into trouble, though. They hear the chants of “dirt cheap” and figure, “Why not?” Then they pay for something that they didn’t really need or want. And these upgrades often come with costs of their own. The tablet and cell phone needs apps and a case. The Blu-ray player requires an HDTV and then the movies themselves cost more than standard DVD’s. The pool has upkeep costs. And so it goes. If what you already have meets your needs and makes you happy, it doesn’t matter how “dirt cheap” the upgrades/new items are. Spending on them is simply wasting money.

If you want to save money, don’t listen to other people who try to pressure you into upgrades. While it might cost less today than it did a year ago and be “cheap” in that sense, it’s not worth paying any price if it’s not something you need, want, or which will make you happy. If you don’t see the extra features as worthwhile, the “cheapest” thing you can do is say no. The good news is that if it’s cheap today, it’ll likely be cheaper next year, especially in the case of electronics. Just hold out until it’s the right time for you to buy.

(Photo courtesy of Gerry Dincher)

The Significance of Income Level

December 12, 2012 By Jennifer Derrick 5 Comments

When people start throwing around financial advice (and when you’re deciding which advice to take), one of the considerations that often gets ignored is the significance of income level. Advice gets thrown around about what to cut and how to save without realizing that how much money you’re bringing in is the biggest factor in determining which advice will work for you.

Think about it: Someone making $90,000 per year has a lot more room to maneuver than someone making $30,000 per year (in most areas of the country). When the $90,000 person is setting up a budget, he will likely have categories in there that simply aren’t available to the $30,000 person (travel, meals out, etc.). Thus, a book that flatly says a budget should have travel and dining out categories in it won’t work for the $30,000 person unless that person spends way less in other areas such as housing and utilities.

If the $90,000 person gets into debt, there will likely be more areas to cut than the $30,00 person will have. The higher income person will likely be able to move to a lower cost of living area, trade down a car, or cut out more unnecessary expenses. The books and articles that throw out ideas for slicing a budget are probably more valuable to the higher income person since they can make more choices. The lower income person probably won’t have as much to cut. They will likely already be living in a lower cost of living area/dwelling, and not be spending on so many unnecessary items. While there will be some fat to cut, it might not be enough. They need to seek advice that includes very frugal tips, such as growing a garden, capturing and using rainwater, reducing utility use, etc. Telling these people to cut out lattes likely isn’t enough.

When you look at how much income level matters it becomes obvious why, as hard as it is, the lower income person avoid debt. If $30,000 just pays for your necessities, there will be no extra to pay off debt. The $30,000 person who takes on debt will find himself in a downward spiral more quickly than the $90,000 person and will find it much harder to reverse the spiral. There simply isn’t enough money to go around. The higher income earner still should avoid debt, if possible, but the income can likely support reasonable, small debt payments.

Debt level matters as much as income level. If the person who makes $90,000 per year ends up with $500,000 in debt, that is likely to put them in a much more strained position than the $30,000 person who has no debt. Who is likely to be more miserable? However, if the high earner has just $10,000 in debt, they are likely to be better off than the $30,000 earner who has $10,000 in debt. The dollar value of the debt is the same, but its impact on each individual will be very different because the income level is different.

When you’re thinking about setting up a budget, investing, taking out a loan, getting out of debt, or taking any financial advice, you have to consider your income level. It’s not enough to read a story about someone who paid off $30,000 of debt in six months and think that you can do that, too. When you’re evaluating their story and wondering if it can apply to you, you have to know how much income they were working with. Did they do it on a $100,000 income or a $50,000 income? Similarly, you can’t just follow any budget and hope it all works out. If the budget is designed for a lower earner, the higher earner will feel stifled and overly restricted. If it’s designed for the higher earner, the lower earner will find himself spending on things he shouldn’t be.

None of this is to say that all high earners have it easy while all low earners are miserable. I know people on both ends who are surprisingly happy or miserable, opposite of what you think their circumstances justify. It is possible to live well on a low income, just as it’s possible to squander a high income. People who do the best on either end of the spectrum understand that their income level dictates their financial decisions. They don’t blindly say, “Oh, I can take on $10,000 in debt because my friend did it,” or, “I can easily reduce my budget by $5,000 per year because that book told me I could.” They understand that what they have to work with is not the same as the author or talking head and they adjust the advice to suit their personal income level.

(Photo courtesy of philcampbell)

A Life Without Debt: “You Must Have a Huge Income!”

November 10, 2009 By Sadie Morris 12 Comments

One of the most common responses I get when people find out that I’m debt free is, “Well, that’s nice for you, but you probably have a huge income.” I’m not alone. Many of my debt free friends say that they get the same response. The assumption is that in order to live debt free that you must have a giant income (or have a trust fund or be the beneficiary of a great inheritance). It’s inconceivable to many people that a debt free life is possible on a small income.

I assure you that a large income is not a prerequisite for a debt free life. While we now have a good income for our area (upper double figures), that has only been the case for about two years. Up until that point we were never above $50,000 and most years a lot less than that. We lived debt free making as little as $18,000 a year. Granted, it wasn’t a very big life, but we were fed, clothed, and sheltered and managed a few small extras and vacations to nearby destinations.

We knew early on that we wanted to live debt free and we simply made sure we never spent beyond our means, even when those means were tiny. Now we can afford more extras and nicer vacations with a larger income but we still don’t go nuts, preferring to save against the day when we might need more money for retirement or a medical issue.

Certainly it can be easier to live debt free with a big income, but a debt free life isn’t a function of the size of your income. It’s a function of what you choose to do with the money you do have. At any income level you can save or you can overspend. You can choose to buy things you can’t afford or you can save up and learn to live with delayed gratification. You can make do with older items or you can always insist on having the newest and greatest. You can learn the tricks of a frugal life like couponing, energy conservation, DIY, and gardening or you can pay to have everything done for you and not worry about watching your expenditures. You can choose to take care of financial tasks like insurance and balancing statements or you can let it all go hang and hope for the best.

I know plenty of people who make three and four times what we do who are so mired in debt that they may never see the light of day again. And I know people who make a quarter of what we do who live very nice debt free lives. It’s not about the income level, it’s about the daily choices we all make with money. So when you learn that someone is debt free, don’t jump to the conclusion that they are making a fortune, or that they are a trust fund baby, or that they received a large inheritance. That might be true, but it might also be that they simply make smart money decisions every single day. You might discover that they work hard at being debt free and that there is something you can learn from them.