HealthyWealthyHappyWise

I've talked recently about our new Jeep (which does NOT win awards for gas mileage) and while the mileage isn't of too much concern to us (even at $3.59 a gallon for gas).

One reason for my lack of concern is that we often drive in together or I just take my bicycle to work. So what kind of mileage does a bicycle get? It's does consume energy, it just does so in the form of calories I've consumed.

Fortunately, nutritional calories is a measure of energy and the amount of energy in a gallon of gasoline is well-known as well. That means I can measure the gasoline-equivalent miles per gallon of me on my bike.

One gallon of gasoline contains 131 MJ of energy. That's equal to 31,289 calories (nutritional -- in physics and chemistry a "calorie" is 1/1000 of a nutritional calorie IIRC).

Hmm... that means a single gallon of gasoline contains the equivalent of what a human being burns in about two weeks!

As I was looking up the numbers I needed for my calculations I discovered that How Stuff Works already did the math for me here!

The gasoline-equivalent MPG for a bike: 912!

My 20 mile per week commute by bike costs me nothing since I have to worry more about getting too many calories rather than too little. What would it cost if I had to buy those calories at current gasoline prices?

The BP station I rode by this morning had gas for $3.59, so I'd be spending about 8 cents per week. Do the same commute in a car that gets 20 mpg and you'd spend $3.51 more than me.

I saw an article this morning over at Minyanville (the financial education site for investors) where someone had forgotten to send in their payment on their American Express Blue Card. Fortunately, they had plenty of resources to then pay it off in full because the missed payment sent their interest rate to 27.99%!

Are you carrying credit card debt? Maybe at a decent promotional rate? How would a missed payment impact your financial health?

Let's look at an example. Suppose "Joe Sixpack" has 2 credit cards with $10,000 on each. One is a promotional 5% rate and the other is at 12%. Not a great situation, but one Joe can handle. The interest on his debt is:

Card 1 (5%): $10,000 x 5%/12 = $41.67/month
Card 2 (12%): $10,000 x 12%/12 = $100/month
Total monthly interest charges: $141.67/month

Liveable. Not good to be spending $1,700 each year on interest, but it won't kill him either.

Now lets say Joe forgets to mail his payment on that 12% card. What happens? The 12% card goes to 28%, so his interest payments look like this:

Card 1 (5%): $10,000 x 5% / 12 = $41.67/month
Card 2 (28%): $10,000 x 28% / 12 = $233.33/month
Total monthly interest charges: $275/month

Ouch! But it GETS WORSE! Did you know that missing running late on a payment may allow all your cards to raise their rates?

So now the 5% card gets word that Joe missed a payment on the 12% card, so that promotional 5% is also replaced by 28%. How's Joe doing now?

Card 1 (28%): $10,000 x 28% / 12 = $233.33/month
Card 2 (28%): $10,000 x 28% / 12 = $233.33/month
Total monthly interest charges: $466.66/month

Joe has gone from $141.67/month for interest charges to a whopping $466.66/month or about $5,600/year. If Joe had been scraping by and just barely paying off any principle he is now falling behind and heading for serious trouble. He needs an extra $3,900/year (after taxes!) just for the additional interest payments.

So handle credit like a loaded gun: one mistake and it can go off without warning. Tripping the punitive rates that card agreements often harbor can take the most meticulously crafted get-out-of-debt plan and destroy it, leaving all plans a smoking ruin. I suggest that if you are carrying any credit card debt that you monitor your card balances and payments online weekly since you can't afford a single mistake.

1) Stop overspending.

If you are spending more than you make you are getting deeper and deeper into a hole. The first step is therefore to get your spending under control. Make a weekly budget. Stick to it. You may have to learn a bit about living well while living frugally.

2) Get out of debt.

Once you've stopped digging yourself deeper, start climbing out of the hole. Start with a Debt Snowball. If you feel you have enough discipline try starting with the highest rate debt rather than the smallest since it will save you money in the long haul, but the "smallest first" method is psychologically more rewarding. Your choice.

3) Start saving.

You need some resources in case of a rainy day. We were fortunate that we already had some investments that we did not liquidate to get out of debt we were building, so we get to sorta skip this step. Yes, it would have cost us less to sell an investment and pay off some debt, but we wouldn't have learned anything that way, so I'm glad we didn't steal from our future to pay off our current mistakes. Unlike many of the financial advisors out there (Remember: I'm just a guy looking to balance the role of money in my life), I don't want a lot of money in very liquid savings. You don't get much back for it, and I don't think it's necessary.

4) Start investing.

This is where you start building your future. Take the money (at least most of it) that you were using to get out of trouble and start using it to create a future for yourself that you can look forward to living in. If you want to keep it simple, go with a ROTH IRA or a 401K plan. If you are a bit more of a self-determined sort of person, consider starting side business or investing in (gasp!) real estate. What works best for you will depend on your time, energy, risk-tolerance and willingness to educate yourself thoroughly.

Finally, know when to say "when": building wealth is a method to securing the life you desire. Make sure to notice when you have enough -- you don't want money becoming the end rather than the means.

We are extremely fortunate to be able to say we've now reached Step FOUR. I'll be writing more about that end of things, but I'm not giving up on being frugal and budgeting. It's just the budget now has a line for "investments".

Unless you live under a rock, you've noticed that gasoline has gotten a tad expensive. Ever wondered where the money goes? According to CNN, it breaks down like this:

-- 72% Producers (Exxon, Chevron, BP, etc)
-- 13% Taxes
-- 8% Refiners
-- 8% Distribution and Marketing

A portion of that last 8% is where gas stations get paid: their share is 7 to 15 cents per gallon. Most station owners are also paying for the pumps and other expenses, so a single driver that drives off without paying can make the station unprofitable that day. So go easy on the gas station owner: he's not the one getting rich off gas prices.

So what can you do to save on gas? Here's a pretty standard set of tips:

1 - Consolidate errands into planned trips. Pick an efficient route. Clockwise routes are more efficient than counter-clockwise because they typically mean fewer left turns and less time stuck in traffic.
2 - Accelerate slowly. Mostly this just means never pushing the gas pedal any farther down than necessary.
3 - Leave more space between you and the car in front of you. This will keep your speed more even -- less braking means less accelerating means less gas burned.
4 - Slow down. A moving vehicle is robbed of energy by air resistance. The pressure exerted by this "wind" does not increase in a linear, but in a geometric fashion. OK, what does that mean? It means going twice as fast doesn't cause twice as much resistance: going twice as fast creates FOUR TIMES the resistance.
5 - Inflate your tires correctly. Low air pressure lowers gas mileage.
6 - Drive less. Do you have alternatives? Instead of going out for ice cream, what about buying some ice cream treats at the store and taking them with you on a walk around your neighborhood? How about a bike ride for Saturday afternoon fun? Rent a movie from your cable box rather than driving to the theater (besides, an "on-demand" rental for your whole family is less than a single theater ticket). Can you use public transit? Not only is it cheap (or in my town, free!), kids love it.

Not only does driving less and driving smarter mean you spend less on gas, but if we all do it we cut demand -- which in turn drives down the cost of gas for everyone.

The last year has been good to us. We've improved our income and purged unhealthy debt -- the only debt we have that isn't locked in at 0% is our mortgage. We've controlled our spending and remain committed to our spending plan (with a slight adjustment to reflect rising incomes and rising costs). Our side business is bringing in a little extra money and looks on track to be slightly profitable this year.

So now what? How do we move forward from here? We replaced our oldest vehicle, so there won't be any more big purchases planned for the next three years. We have fixed our debt situation so that we have money we can use for our future.

On the other hand the investment world is a mess right now: recession, credit crisis, subprime meltdown, soaring food and fuel prices, dropping real estate prices.

However... the economic world moves in waves. Looks like a big swell just passed us by (and without a plan in place we missed out) and now it's headed down into the next trough.

Of course, that means in a year, 18 months, or two years there is another wave coming. Most people are too busy staring down into the trough to see it, but I feel confident that it is out there.

That makes this a great time to build savings for your future if you've already paid down your debt. It's also a sweet spot for some purchases (like the Jeep) if you have good credit (i.e.: it's better to finance at 0% and keep your cash making money for you). Also, if you are stashing away funds now there may be some good opportunities for you in that trough. Just when everyone else is feeling like the end is near, you'll be well-situated to buy some good investments like bargain stocks or rental property. Then again, if you are investing for the long term, this is also a great time to pour money into a 401K or IRA. That's a great choice tax-wise and is comfortable if you don't want to be an "active investor". The end is not near. The world will keep turning. This is just a trough between between waves.

The smart surfer is watching that next swell and starting to paddle to catch it. I missed the last one.

Dude: I'm so totally gonna catch that next one.

As you know (from my previous entry), we just bought a Jeep Wrangler. Furthermore, if you have followed along here you'll see that I did some curves a few months ago that help define resale value on a new car (and make the argument that buying new is not the best decision from a purely financial point of view). So, how does our new Jeep impact our net worth?

For me, that's simple: It reduced it by the full cost of the car.

You see, net worth can serve one of two functions. It can tell you:

(a) how much stuff you have, or
(b) how much wealth you have.

For determining where you are in life and where you're headed, the second method is what is worth considering. For that purpose I calculate my net worth as:

Income-Producing Assets - Liabilities (excluding mortgage)
(I exclude mortgage because I also exclude equity from the asset column. Renting wouldn't show at all as it is a monthly expense, so the numbers would have little meaning if I included mortgage as a liability. Hmmm... maybe that deserves more discussion another day.)

The down-payment reduced our income producing assets.
The financed portion of the vehicle increased our liabilities.
The Jeep itself produces no income, so it does not appear in the assets column.

Therefore, it reduces our net worth by the total cost of the vehicle.

I'm still happy with the purchase, but I do recognize the hit to net worth that it caused. I'm OK with that. It's well in line with what we can afford to do and want to do as a part of our bigger picture. In other words, it was an acceptable level of expenditure.