PP and Other Purchases

[moda0306]

Does anyone else take the idea of not knowing what the future will bring to other purchases they make?  I had to purchase a car, but had time to find one.  I figured the following was the best possible hedge against everything:

- High mileage, yet well taken care of reliable model
- Manual transmission for lack of maintenance and gas mileage (and my own enjoyment)
- Wagon for utility, but good gas mileage by not going to an SUV

I finally found a mint 1996 Honda Accord wagon with 230,000 miles that ran like new and looked it too.  I figure it's the perfect car to get me through the combination inflation (gas) / deflation (new, high cost luxuries and contraction of credit) environment that we're probably facing.  It comes down to fundamentals of the asset's basic value added to my life.

Likewise, when I purchased a house, I looked at the fundamentals: good structure, no rot or serious issues, great location, no faults that couldn't be mended with some sweat equity, big enough for a family but not a McMansion by any stretch of the imagination, cul de sac, great neighbors...

[AdamA]

Not sure about the PP part of the purchase, but kudos for being smart enough not to blow a small fortune on a car. 

[moda0306]

The PP part is basically being aware of possible future outcomes and what will best prepare one for anything that might be thrown his way.  I personally see a stagflationary future as being a pretty scary/possible one, and tried to think of what would be most likely to add value to me without costing me much, and could very likely sell for about as much as I paid for it if the crap really starts hitting the fan economically.

It amazes me that people with little/no savings will throw $25k at a new car... not to mention the ones that then trade those in every 3 years for the new model.

[Storm]

Being a PP investor causes me to think about the time value of money much more often now.  For example, I'm about 30 years away from retirement, maybe a little less.  I think about the fact that a $500 discretionary purchase now will be worth roughly $5,000 at retirement if I just stuck it in the PP.  So, while I'll probably still have gadget lust and purchase my iPads and other things like that, I do consider whether it is something I will really get use out of, rather than some toy I might stick in a drawer after using it a couple times.

[moda0306]

Storm,

I even sometimes look at a contract-type purchase in terms of "how much wealth would it take me to sustain this purchase without working" which works even better for me to avoid bad repetative spending.

If something like cable is going to cost me an extra $40 per month ($480 per year), I don't just look at how much I could earn off of that, but how much it would take to sustain that lifestyle choice at approximately 6% ROI... 480/.06=$8,000.

So I'm basically setting aside $8,000 for the rest of my life to be dedicated to watching cable TV.  No thanks!  I'd rather keep the ROI and let it compound.

[Jan Van]

But Harry Brown also said to go out and have fun at times, and I agree
So yes, I think it's great that you didn't buy the lastest model hotrod, but a utilitarian vehicle. But then don't feel bad on spending some money on cable... Or instead of cable TV, get Netflix and/or Hulu... Or whatever... Enjoy life while you can!

Or, in the words of Ikkyu:

All is vain!
This morning,
A healthy friend;
This evening,
A wisp of cremation smoke.

Feel better now? 

[moda0306]

Yes, it really comes down to being able to visualize a value on something, as well as the marginal cost/value of its alternative.

I fully believe in enjoying life.  I just need a mechanism to help me decide how to most efficiently spend my money on things I enjoy.

[MediumTex]

We have built a consumption based society, which encourages all manner of "misallocations" of household capital.

This month's Contrary Investor discusses how the disappearance of personal savings in the U.S. coincided with a basic "hollowing out" of the U.S. economy as the amount of new investment capital in the form of personal savings was diverted to consumption. 

We are seeing today the effects of 30 years or so of mindless debt-driven consumption that helped countries like China build for themselves a real economy as ours trended more and more toward a speculative finance-based economy subject to all sorts of outside shocks and turbulence.

It's amazing the degree to which people have lost sight of what they can actually afford.  They are like some of these professional athletes who have been juicing their bodies for so long that they have forgotten what normal (and sustainable) strength levels even look like.

To extend the steroids metaphor, it's no surprise that people are outraged at what they perceive to be an economy with rampant cheating and the creeping suspicion that the whole thing has become utterly unsustainable. 

To me, debt taken on to finance personal consumption is just as destructive as using leverage in investments--at their core, both acts are fundamentally speculative, and when they go wrong they are both highly destructive.

To put the cherry on top of the consumption discussion, it's surprising at how unfulfilling consumption can be.  The idea that people would become debt slaves to fill their homes with useless plastic crap makes one wonder about how things could get so screwed up in the first place.  It's like society needs a reality enema every generation or so to cleanse it of all the accumulated dumb ideas that would otherwise poison the entire system.

I think that what the Fed is doing right now, in part, is trying to prevent this cleansing of bad ideas from the system.  Rather than recognizing that asset values had gotten too high relative to the economy's ability to make the payments on the associated debt and understanding that the only real source of capital for future investment comes from personal savings, the Fed seems to think that the real problem is that we have run out of steroids and the goal is to simply get the juice flowing again.

Part of the hubris of every period of history is that each of them viewed their own time as somehow the culmination and final end point of all that had come before it, rather than seeing the present as merely the latest end point in a process that is endlessly unfolding.  The idea that we have built an economy that can only grow and we have built a world in which people can only become more prosperous reeks of this type of delusion.

The PP is a strong antidote to the patterns of confused thinking and acting described above.  It's not foolproof, but I would say it is at least "fool-resistant."  I think there are many useful analogues in the PP that have application in other parts of life (purchasing decisions being an obvious one of them).

[Lone Wolf]

It's amazing the degree to which people have lost sight of what they can actually afford.  They are like some of these professional athletes who have been juicing their bodies for so long that they have forgotten what normal (and sustainable) strength levels even look like.
...
Part of the hubris of every period of history is that each of them viewed their own time as somehow the culmination and final end point of all that had come before it, rather than seeing the present as merely the latest end point in a process that is endlessly unfolding.  The idea that we have built an economy that can only grow and we have built a world in which people can only become more prosperous reeks of this type of delusion.

Great post.  This is why I find artificially low interest rates so dangerous (and, likely, why the political temptation to create them will so often be too great to resist.)

Interest rates are supposed to reflect (among other things) the level of savings within a society.  Very low levels of savings should cause the cost of borrowing to go up and the rewards of providing real savings to go up as well (in the form of higher interest rates.)  Once you break that signal, the incentive to save and the disincentive to spend beyond your means both go away... simultaneously!

Dressing up poverty like prosperity doesn't turn it into prosperity.  It just makes people more likely to invite poverty into their homes.

[MediumTex]

I've thought that an interesting book exploring this topic of over-consumption and the resulting debt could be called "The Affluent Peasant".

Without realizing it, many people have basically turned their lives into a process of renting a lifestyle by the week, with the same punishing interest charges that are charged by the furniture and appliance rental businesses.  When something unexpected happens like a job loss or a reversal of housing prices, they don't experience minor turbulence--they experience a complete disaster.

[Wonk]

I've thought that an interesting book exploring this topic of over-consumption and the resulting debt could be called "The Affluent Peasant".

Without realizing it, many people have basically turned their lives into a process of renting a lifestyle by the week, with the same punishing interest charges that are charged by the furniture and appliance rental businesses.  When something unexpected happens like a job loss or a reversal of housing prices, they don't experience minor turbulence--they experience a complete disaster.

MT,

Great way to frame it.  I also believe most people are renting a lifestyle.  I've discussed this more than a few times with friends who believe that people actually pay attention to the price of a house.  My position is that most people don't care what the price is, they care what their monthly payment is.  They don't care what the price of a car is, they care what the monthly payment is. 

Essentially, they are lulled into a false sense of security at work with their salary.  They assume it is safe and will continue to fund their liabilities.  Then they get laid off and the wheels fall off.

On a related note, I've adopted a perspective I picked up from Tim Ferriss (The Four Hour Workweek).  He mentions he doesn't spend much on "things," but instead spends a good amount on "experiences."  I've found WAY more happiness in this approach.  For the last few years, I've done my best to shun the acquisition of stuff I don't need and pursue experiences I'll remember for the rest of my life.  For me the results have been amazing.  Quality of life has gone through the roof. 

[Lone Wolf]

"Renting a lifestyle by the week".  Huh.  Had never thought of it that way, but that's what it is.  How utterly apt.  How utterly depressing!

Essentially, they are lulled into a false sense of security at work with their salary.  They assume it is safe and will continue to fund their liabilities.  Then they get laid off and the wheels fall off.
...
For the last few years, I've done my best to shun the acquisition of stuff I don't need and pursue experiences I'll remember for the rest of my life.  For me the results have been amazing.  Quality of life has gone through the roof. 

You approach makes tons of sense.  To tie both of your points together, I'd also point out the very real pleasure of properly saving.  (Don't I sound like the life of the party? Let's hope that Huey Lewis was right when he insisted that it is "Hip to Be Square".)

Knowing that you have enough saved up to weather what comes allows you free yourself from so much worry.  That's one less thing keeping you up at night.  One less thing putting a strain on your marriage.  One less thing constraining your freedom.  Like anything else, saving can be overdone if you sacrifice the present too much.  But I find it to be an awesome way to improve event the present because your mind can make decisions with far more freedom.

Wonk, since this is the "Other Discussions" forum, I wouldn't mind hearing about it if you have any particular purchases in the "experiences" category that you'd highly recommend!

[Plumbline]

[ Quality of life has gone through the roof. 

Wonk,  Just try to eat healthy.  Earth Fare, Trader Joes and Whole Foods r our favorite stores.  Organic is expensive, but I'd rather have a great falafle wrap than another playtoy that sits in the yard. 

[Pkg Man]

On a related note, I've adopted a perspective I picked up from Tim Ferriss (The Four Hour Workweek).  He mentions he doesn't spend much on "things," but instead spends a good amount on "experiences."  I've found WAY more happiness in this approach.  For the last few years, I've done my best to shun the acquisition of stuff I don't need and pursue experiences I'll remember for the rest of my life.  For me the results have been amazing.  Quality of life has gone through the roof. 

There is a lot of truth to that.  The Behavioral Economics profession has studied this quite a bit (not that that proves anything).  Daniel Kahneman, a psychologist, won the Nobel Prize in Economics for work on topics like this.  Below is a link you might find interesting.

http://monevator.com/2010/03/03/wasting ... -memories/

[Jan Van]

Interesting link, pkgman. Interesting lecture from Daniel Kahneman:

"We don't think of our future, normally, as experiences...
We think of our future as anticipated memories."

Have to chew on that one for a while.

[MediumTex]

Interesting link, pkgman. Interesting lecture from Daniel Kahneman:

"We don't think of our future, normally, as experiences...
We think of our future as anticipated memories."

Have to chew on that one for a while.

That reminds me of the comment about skillful living being the ongoing process of minimizing future regret.

[Wonk]

You approach makes tons of sense.  To tie both of your points together, I'd also point out the very real pleasure of properly saving.  (Don't I sound like the life of the party? Let's hope that Huey Lewis was right when he insisted that it is "Hip to Be Square".)

Knowing that you have enough saved up to weather what comes allows you free yourself from so much worry.  That's one less thing keeping you up at night.  One less thing putting a strain on your marriage.  One less thing constraining your freedom.  Like anything else, saving can be overdone if you sacrifice the present too much.  But I find it to be an awesome way to improve event the present because your mind can make decisions with far more freedom.

Wonk, since this is the "Other Discussions" forum, I wouldn't mind hearing about it if you have any particular purchases in the "experiences" category that you'd highly recommend!

LW,

Totally agree about saving as well.  We all need to strike a balance that suits us.  Ever since I began working, my pay has been lumpy--usually entrepreneurial pursuits that start with no pay and end with relatively large sums of pay.  So, the mindset that comes with it is keeping expenses to a bare minimum and splurging when money is available.  Having a good sum in reserve while overall expenses are low is liberating.  You can do whatever you want (within reason), whenever you want.  So, you asked for examples?

I'm partial to travel.  Before my last start-up, I went to Australia and backpacked down the east coast for 6 weeks.  Probably in the top 3 experiences of my life.  I learned to scuba dive on the barrier reef, did a camping safari on Fraser Island, learned how to surf on Manly Beach and did tons of little things that made each day special--like talk to new people from around the world, play with koala bears at a wildlife sanctuary and eat various "meat pies" and vegemite.  Simply amazing and life changing.  When I came back, I was changed forever.

Although I haven't done the same length of time continuously since, I've made numerous trips throughout the U.S., Carribbean, Central America and Europe over the last few years.  I could probably qualify for my pro-card in bachelor party appearances since I've made every one of them that I felt like going to.  One thing I try to do is take great pictures while I'm in each new place.  The walls in my house are not covered in expensive art.  They're covered in framed pictures of me with my friends/family/travel buddies in special places.  I took plenty of the Grand Canyon, but if you've been there, pictures do no justice.  It's a memory seared into my mind for as long as I'll walk the earth.

All travels have been great in their own way and definitely worth the tradeoff for not buying the new Audi or McMansion.  I find consciously refusing to keep up with the Joneses to be so much less stressful.  People seem to be more envious of my lifestyle than my things.  "I wish I could travel like you" is what I hear a lot.  Well....you can!  It's a decision that needs some problem solving, that's all.

When I'm not travelling, I try to pick up things that make me more well rounded and (perhaps) more interesting.  I've picked up the guitar over the last year and will be learning magic tricks over the next few months.  The one or two I put on display always make people happy.  The smile you see on someone's face after a magic trick is a life experience in itself.  I try to give myself a crash-course on new languages so I can force a conversation while I'm in a new country.  It's awkward, but an experience I'll remember.  

So, stuff like that.

Anyway, somewhere along the line I realized how fast my life was going and I figured whatever was on my "get er done" list better get done--and now, not later.  I had a cousin die at 16 from breast cancer.  At the moment, I have an elderly grandfather who's in the last week or two of his life.  He's 95 and for the last 20 years his body has slowly failed him bit by bit.  He's tired, he's ready to go and he's just waiting to see everyone.  He did his share of living earlier in life, but I can't help but think that 20 years is a long time to contemplate all the things you meant to do but didn't.  It's a long time to think about regret and although I don't know for sure, I imagine you don't think about how happy you were that you bought the brand-new TV 50 years before.

On that happy note, it's my take on experiences over stuff!

[Wonk]

[ Quality of life has gone through the roof. 

Wonk,  Just try to eat healthy.  Earth Fare, Trader Joes and Whole Foods r our favorite stores.  Organic is expensive, but I'd rather have a great falafle wrap than another playtoy that sits in the yard.   

Plumline,

Funny you mentioned that!  My last start-up was a company that made fresh, healthy, low-glycemic and portion controlled meals for people who (at least told themselves) don't have time to cook.  Nearly all of the ingredients were organic/free range and people were amazed at how much better they felt after losing 20-30lbs.

Pkg Man,

Thanks for the link.  I love TED lectures.

[Lone Wolf]

Thanks, Wonk!  That is great stuff.  Congratulations on doing what it took to make all of your plans come together like that!  Those sorts of experiences (and the opportunity to partake in them) don't "just happen" on their own.

Added to the ol' bucket list: See the Grand Canyon.  Eat Vegemite.

[Pkg Man]

Interesting link, pkgman. Interesting lecture from Daniel Kahneman:

"We don't think of our future, normally, as experiences...
We think of our future as anticipated memories."

Have to chew on that one for a while.

Here is another way to think about this.  I have been to a lot of concerts in my lifetime, many of them in my youth. And due to my priorities at the time, I have little or no recollection of ever attending many of them, except for a ticket stub 

Now that I am a bit older and more restrained, I am more likely to actually remember the performance.  In other words, as a youth I placed a higher value on the immediate experience whereas now I am more concerned with the anticipated memories.