The Super-Power of Discretionary Income

Life is a series of experiences. Some are trivial like brushing your teeth, others are memorable, like your wedding day, or that cruise you took to Alaska. Some experiences are fun (maybe your last vacation is on your list of fun experiences), some are neutral (your list depends on your personality, washing dishes is on my list), and some suck (like getting a root canal). The most awesome power of having discretionary income is that you can opt out of some of the things you hate doing and opt into some of the things you love.

When I was younger, I didn’t understand this super-power you gain as you develop a discretionary income. I thought of money as something your exchange for goods. Paying to opt out of an experience is a more abstract transaction – you give away money but you don’t get an object in return. Of course, when I was younger I also didn’t have discretionary income so it was hard for me to understand its power. Sadly, this super-power is somewhat limited — you will still have to get that root canal yourself, no matter how much discretionary income you have.

When the Child talks about money, she always talks about the things she wants to buy – a huge mansion with a pool, a fancier car, the latest cell phone. She doesn’t yet understand that this is not where the power of money lies. Lots of adults also either don’t know this super-power or just don’t agree that it is awesome–based on the choices they are making with their money. Maybe owning the newest cell phone does optimize their happiness profits but somehow I doubt it.

There are lots of things I enjoy doing that other people outsource. For awhile we had a person who cleaned the house and I hated it. I don’t like other people in the house, I don’t like the weird chemicals they use, and I always worry about the pets. That service wasn’t optimizing my happiness profits. On the other hand I will call a repair person for the simplest things. I don’t like fixing things. It makes me anxious, it always takes more time than I predicted, and much of the time I have to call the repair person anyway. Instead of spending 5 hours trying to fix a leaky faucet, I can have an expert fix it in 5 minutes and I can spend my time messing with the yard which I love.

Today, I decided that I will have someone else build the website for this blog. I feel slightly guilty about it because I know I am perfectly capable of figuring out how to do it myself. But I only have so much time, I have a full time job, a child I am homeschooling (schools are closed because of the pandemic), and I am taking classes to complete my Masters in Finance. I don’t want to give up any of these things and I want a nice blog so outsourcing is the logical move.

I am a big fan of Mr. Money Mustache. His followers would vehemently disagree with this post. Mr. Money Mustache lives on a ridiculously low budget and in part he achieves that by not approaching problems from the perspective that he can just spend money to fix the problem. I am pretty sure he repairs his leaky faucets himself. I admire that attitude and I agree – if you want to minimize your spending that is the way to go. But this blog is not about minimizing spending, it is about optimizing happiness profits so on this particular topic I will not follow his advice.

One important caveat to this post. Notice that the super-power of opting out of experiences exists only if you have discretionary income. When I was younger and didn’t have discretionary income, I did fix my own leaky faucets and much more. Those experiences weren’t fun but I don’t recommend buying yourself out of experiences if you don’t have enough money to meet the basic needs of your family.

Having super-powers is awesome and it is worth working hard to get them!

No-Snacks September

As we noticed in our annual budget analysis, our family spends way more money on food than most households. That got me thinking if we are optimizing our happiness profits within this part of our budget which lead to me going over all of our food receipts from the past two months. We have been quarantining so all of our shopping since March has been through deliveries and therefore all of our itemized receipts are online. In fact, for July and August we have only shopped at two stores and I know for sure we didn’t do a quick trip for milk I have forgotten about so the data is very accurate. In total, for the two months, we spent $1,793 at the grocery store of which $128 was non-food items (mostly detergents and toilet paper) so we spent $1,664 on actual food. This is $832 a month, way lower than our average for 2019 ($1,231 per month) which is great. What is not so great is that 22% of the money we spent on groceries was spent on snacks! And that is the part of our food budget that is bringing our happiness profits down.

I put everything that is prepackaged processed carbs in this category. For our family, that is mostly cookies, chips, popcorn, and ice-cream. There were some frozen pre-prepared foods (pizza and fries) but the bulk of it was stuff that doesn’t even resemble actual food. So, what is the problem with snacks?

I like snacks too much. It takes too much willpower for me not to eat them when they are lying around. I know processed food is bad for me in all kinds of ways but grabbing a handful of chips is so much easier than figuring out something better to eat. And a bag of kettle corn is an easy replacement for an actual dinner and I can eat it while working.  

Snacks are bad for our family happiness as well. As I am writing this post, the child is apparently raiding the goldfish crackers stash and my wife is having her umpteenth discussion about what “foods” can and can’t be eaten before supper. If the child over-indulges in goldfish, later she’ll say she’s not hungry for supper and I will feel guilty that my child has had nothing but processed carbs all day.

So, it is clear that the $370 wasn’t money well spent. And I don’t do moderation well so my family is going on a no-snack challenge for the month of September. I am sure the child will be excited to hear this plan :0)

To make sure nobody actually starves, we will have to pair this challenge with some sort of plan for what we are going to eat once all the goldfish are gone. My wife is just starting work again after having most of the summer off and the child will be going to online school which means we’ll all be busy and the child will need a lot of attention from us throughout the day. So, our time to cook will be severely limited. I have read many blogs about the value of meal planning and meal prepping. This is supposed to be the ultimate answer to lowering your grocery bill and decreasing your time in the kitchen. And as we would like to achieve both, I will attempt to follow the wise advice of others this month and meal plan and maybe even meal prep. Reports of this adventure to appear in future posts! Stay tuned.

Optimizing the ROI on a big state school education

So, you (or your child) are ready to go to college. Now the question is, where to go and how to go there for the least amount of money. Large public research universities (think UC system, University of Minnesota, University of Iowa, University of Illinois, etc.) are an excellent option for many students. Some benefits of a large research state university are:

  • A lot of options for choosing a major
  • A wide variety of courses
  • Access to top research faculty
  • Variety of student activities such as clubs, Greek life, etc.
  • Generally, easy to transfer in credit if you took classes somewhere else

There are also some negatives to be aware of. Most of these negatives can be largely avoided if you do some planning:

  • Large classes: Many of your classes, especially general education classes, will be large, often hundreds of students. You can mostly avoid this issue (and save money!) by taking many of your general education classes at a community college. Do make sure you understand the rules your university has about transferring credits, but most state schools have very generous policies.
  • TAs instead of professors: Graduate students will teach many of your discussion sections (small sections that go along with your large lecture classes). This is not necessarily a bad thing because, while inexperienced, graduate students usually put a lot of thought and effort into making their classes a good experience for the students.
  • Adjuncts: Some of your classes will be taught by adjuncts who teach at the university part-time and are often hard to reach if you need a recommendation a few years later. You can select your classes carefully to mostly avoid this issue.
  • Easy to get lost: Being self-motivated is very important when going to a large public university. Help is available, but you have to seek it. It is easy to fall behind, miss assignments, etc., and it is unlikely than anyone will notice. If you see you are falling behind, seek help right away!

State schools often give you the best ROI because they combine relatively cheap tuition with well-established credibility of your degree. Even with their lower tuition, though, an average public university will run about $80K with in-state tuition for four years. According to Zillow, that is 1/3 of the average price of a home in the US, so it is worth doing some planning to reduce your cost. Here are some ideas:

Start taking classes at a local community college while in high school. Make sure you take courses that will transfer. If you take one class per semester each of your junior and senior year and two classes each summer, you will be able to transfer eight classes–cutting your time in college by a whole year! That means not only saving $20K but also entering the job market a year early. If your starting salary is $60K, your hard work in high school will translate into $80K! That’s way better ROI than any high school job that you can get.

If you already missed your chance to take classes while in high school or if you want to super-charge your college experience, take summer classes while in college. You do not have to take summer classes at your university; you can still take courses at a community college, just make sure they transfer. Taking two classes every summer starting with the summer before your freshman year can also give you eight extra classes–cutting your time in college by a year. Some institutions also offer winter term classes for extra fun!

Take a minimum of 15 credits each semester and consider taking 18 credits. Even though 12 credits is deemed to be full-time, taking 12 credits per semester is not enough to graduate in four years. In fact, at most universities you will have to take five full years to graduate if you take 12 credits per semester and that is assuming that you don’t need to retake any classes, you don’t decide to change your major, you never have to drop a class, etc. An extra year in college will cost you not just $20K in tuition and living expenses but also a whole year in lost wages as you will enter the job market a year late.

On the other hand, taking 18 credits each semester will shorten your time in College by nearly a year. Keep in mind that 18 credits is a large workload. Be sure you can handle it before committing to such a plan. Taking summer classes may be an easier route to take to shorten your time in school.

Consider alternative living arrangements. Room and board run around $12K per year, but you do have options. If living at home is a possibility, seriously consider it. Maybe you feel ready to be out of the house, but if you stick it out for four years, you will start your post-college life $50K richer! And your chances of being academically successful are probably better if you are away from the college party scene.

If living at home is not an option, consider getting a job as a live-in nanny. It is usually easy to build your schedule around the hours the family will need you, and you can get all the benefits of living at home without actually living at home.

College is expensive, but that doesn’t mean that you should approach it with the mentality that you will “spend whatever it takes.” Making smart decisions about this huge investment will have a significant effect on your financial health for many years after you get your degree.

Is College worth it?

My wife and I both have PhDs, and we both work in education, so it is safe to say we deeply value education. I have also been a faculty member at a large state university for the last 15 years, and I have seen many students come in, take some classes, and then drop-out for various reasons. Hopefully, the experience was valuable to them, but without a degree, the rate of return on investment (ROI) is likely to be poor. Many of them ended up with $20K-$30K in student loan debt, which will affect their financial health for years to come without getting the boost to their earning potential that a degree provides. There are also students who did finish but have not worked at a position that requires that degree. The ROI here is a little bit less clear as a degree is probably helpful even if it is not related to the person’s job.

Different students also “invest” very different amounts of money into their education. For me, this is most jarring when the education they receive is basically identical, but they choose to pay very different amounts of money for it. Going to an out-of-state public university can cost many times more than going to a similarly ranked in-state institution.

Let’s look at an example. Mary and Beth are both graduating from high school in Wisconsin, and each of their families is able to pay $10K per year towards their college education. Mary decides to go to the University of Wisconsin-Madison (currently ranked #46 in National Universities by US News). She pays $10,725 for tuition and $11,558 in room and board (based on 2019-2020 costs). Assuming costs stay fixed for four years, she will graduate with roughly $50K in debt. Beth decides she wants a warmer climate and goes to the University of California-Davis (currently ranked #39 in National Universities by US News). She pays out-of-state tuition at $43,484 and $15,863 to live in the dorms. After her parent’s contribution of $40K over the four years, she will graduate with almost $200K in debt! And this doesn’t even account for the extra money she will be spending to travel to visit her family.

The value of the degrees that Mary and Beth will start their careers with is roughly the same. They both graduated from well-known large public institutions. They also had approximately the same experiences living on campus and had very similar opportunities to build their social network. However, Mary paid a total of roughly $90K for her degree, and Beth spent a total of about $240K. If you view a college education as an investment, you are essentially choosing if you want to pay $90K or $240K for the same investment. Of course, how your ROI looks depends on how much you decide to spend in the first place.

Mary, the student going to an in-state school, may be able to avoid debt altogether if she lives at home and spends her summers working to make the roughly $2K a year–that is the difference between what her family can afford and the cost of tuition. Or she can live at home and take summer classes to graduate in 3 years. In this case, she will be ready to enter the job market a year early with no debt at all. Her ROI, in this case, would be totally different than Beth’s.

The ROI computations becomes more complicated if a student is choosing between two different types of schools. If instead of going to UC Davis, a large public university, Beth decides to go to Augustana College – a small private liberal arts college where she will get a lot more attention from faculty. While Mary will likely take her math requirement in a class of 400, Beth will be in a class of 15. Beth will be paying about as much in tuition as she would have at Davis (assuming she doesn’t get financial aid), but the investment she will be buying is actually different than what Mary is purchasing. Is it worth it? That depends. Beth will receive a lot of personal attention. If she doesn’t show up to class, her professor will likely contact her to make sure she continues to be successful. That is unlikely to happen in Mary’s school. On the other hand, Mary will have access to a much larger variety of opportunities and will have much broader choices for building her social network. The ROI, in this case, depends on the type of people Mary and Beth are and on their future goals.

In the next several posts, we will explore how to choose the best environment for each student and how to minimize the cost of your investment in every case. We will bring in our experiences both as former students and as current educators. Please put your questions or tips in the comments below.

Get to know us through our numbers

National averages from the Bureau of Labor Statistics

One fun way to get to know someone, is to check out what they choose do to with their money. It is not something that we often get to find out about people but our family is an open book so here is what we spent in 2019 together with some US national averages. Starting in September 2020, we will post our monthly spending with a bit more detail than this annual summary.

Housing: $14,918 (avg. $1243 per month)

This includes bills/utilities: $5,756 (avg. $480 per month), property taxes: $5196, and home maintenance and appliances: $3,966 (avg. $330 per month).

Food: $14,774 (avg. $1,231 per month)

Yes, that is a lot! And $11,000 of it is on groceries, not eating out. The average US household spends only $7923 on food. We are vegetarian and drink almost no alcohol. I guess we eat a lot!

Pets: $9978 (avg. $831 per month)

We started the year with four cats, two dogs and a gecko. Sadly, two of our cats passed away during the year and a good chunk of these expenses were incurred in their last weeks of life. The average US family spends less than $1000 per year on pets.

Shopping: $7,667 (avg. $641 per month)

This breaks down to Amazon: $4,057 (avg. $340 per month) and Non-Amazon: $3610 (avg. $301). This includes clothes, shoes, household items, books and workbooks for the kid, as well as some pet food not included above.

Kids: $6,078 (avg. $506 per month)

We have an 11-year-old and a 20-year-old (who is financially self-sufficient). This number includes after-school care, summer camps, and a few relatively cheap activities like soccer. We choose to put the kid in camps all summer. It is expensive but we consider it a good investment into her social and academic development.

Auto/transportation: $2,890 (avg. $241 per month)

This is mostly gas, parking, and an occasional car maintenance expense. We own two newer cars which we bought for cash so no car payments. According to Expedia, 85% of new vehicles and 55% of used vehicles are financed.

Insurance: $2496 (avg. $208 per month)

This includes our home and two cars. Health insurance is mostly covered by our employers and what is not covered is deducted from our paychecks before taxes so it is money we never see.

Health: $1,091 (avg. $90 per month)

We are lucky to have excellent health insurance.

Other: $4586 (avg. $382 per month)

This includes a period during which I had a gym membership, cash withdrawals (about $3,000 total) which I can’t track but much of it went to pay babysitters, and random other expenses.

Donations: $8,694 (avg. $725 per month)

Our donations were on the low-side for us this year because we had made several end-of-the-year contributions in 2018 and were planning to do first-of-the-year contributions in 2020 for itemizing deductions purposes. We typically aim for about 15-20% of our annual spending to go toward donations/charities.

TOTAL: $73,202

Mortgage-free: the pros and cons

If you looked at our spending for last year you noticed that we have no rent and no mortgage payments. We paid for our house in cash. We waited to buy our first house while living in very cheap shared housing (that was before we met and while dating) and our first house was small and cheap ($120K). A few years later we acquired the kids and moved into a much bigger house ($240K). We always lived way under our means and so we were able to pay cash.

Living mortgage-free is a priority for me because I tend to be anxious and knowing we can’t be foreclosed on (yes, I know we still have to pay our property taxes) is important for my peace of mind. And as the motto of this blog is to spend your money to optimize your happiness, paying off the house is the right decision for our family. However, security and peace of mind are probably the only pros for living mortgage-free.

There is a long list of cons:

  1. Unless you make significantly more than you spend, you won’t be able to buy a house for a while. This is an even bigger issue in parts of the country with high housing costs. In some parts of the country, even a “cheap” housing option can be over half a million.
  2. The kind of house you can buy will be much more limited than if you are willing to take on a mortgage.
  3. While renting to save enough cash for a house, you are spending money that is in no way increasing your net worth. There are many positives of renting but that will be a topic of another post.
  4. If you have the money, spending it on a house is probably not the best investment. Historically, mortgage rates have been below the rates of market growth. So even if you have the money, mathematically you may be better off taking a mortgage and investing your cash in the stock market. However, it is important to account for RISK. You know for sure you will have to pay the interest rate on your loan, you don’t know for sure what the market will do.

So, as with most decisions related to money, don’t make this decision to optimize the money, optimize your happiness. For us, living mortgage-free is the best decision but it might not work well for your family.

Does money buy Happiness?

According to an often-quoted study, satisfaction with life tops off at an income of $75K. That is barely over the average US household income of about $65K. Yet, most of us believe we would be happier if we had more money. So what is going on? As you make more money optimizing the happiness profit gets harder and if you are not thoughtful about it, at around $75K your profits begin to turn into losses.

For most of us, to get money we must do something (usually that involves going to work), and then chose how to spend it so that the exchange (our time and effort in return for the thing we spend money on) has a positive bottom line, or happiness profit. If your income is fairly low, most things you buy are worth doing most kinds of work. Let’s look at an example. Mary and Beth are on the opposite ends of the income ladder. Mary works at McDonalds for $10 per hour. Beth has a corporate job making $125K per year.

Mary works at her fast-food job for 8 hours a day, 5 days a week (sacrificing some choice and freedom but generally her job is not stressful and her commute is easy) making a total of $400 for the week. Mary spends the money on a month’s worth of groceries for her family–meeting an important basic need. She has generated a happiness profit without having to think very hard about her choices.

Beth also works at her job for a week and makes about $2000 after taxes. It is a stressful job with a long commute but overall Beth enjoys her work. Beth has noticed that her friend has recently bought a Louis Vuitton bag and Beth decides to spend her money on a bag similar to her friend’s. She purchases the bag and invites her friend for drinks. She is proud of her bag but when they meet, she notices that her friend has upgraded to the $4000 Louis Vuitton bag and hers now looks small and unimpressive. Beth is no longer proud of her bag and puts it in the back of the closet determined to work harder to get the fancier bag. Overall, Beth didn’t make happiness profit despite her high income.

After basic needs are met, people really do have to understand their priorities and what brings them long-term happiness. Mary has few choices and most of them result in happiness profits. Beth has many choices and many of them will not result in happiness profits. Beth will have to do some soul-searching to figure out if she wants to keep her high-paying job despite the stress and the commute and how to spend her money in more satisfying ways.

What ways do you spend money that bring you optimal happiness?

Our dog ate yeast! Advice I paid $60 for that I will give you for free

We have a beagle. A middle-aged, lazy, blind beagle named Flopsy for her tendency to flop and fall asleep anywhere. She is a calm, easy dog (she doesn’t even howl) except when it comes to food. She will engage in amazing feats of agility to get to food. In the first year we had her (we got her when she was already middle-aged and blind) she got into grapes twice. Grapes are bad for dogs. Both times we rushed her to the emergency vet where they emptied her stomach and my wallet. After the second time, we just decided that having grapes at the house is not worth it and we banned grapes and raisins from entering the house (FYI, a shocking percentage of cereal and breakfast bars have raisins). Dark chocolate only enters the house in small amount and is stored in the highest cupboard. Teabags are never left close to the edge of the counter. We all have a list of things toxic to dogs memorized and are always scanning for dangers hoping to prevent a Flopsy disaster.

Or at least I thought we all had the list memorized. I had never told me family about yeast. Usually, dogs ingest yeast when it is in raising dough. If they ingest enough of it, the dough continues to raise in their stomachs potentially causing bloat or other kinds of major trouble. But I am the only person in the house who bakes and I always keep track of my dough so I had never impressed upon my family the danger of yeast.

My lovely wife was cleaning the fridge and dropped an open yeast package. She picked it up but didn’t know yeast is bad for dogs so she didn’t check carefully that none of the yeast spilled. Our floor is light brown so yeast blends really well. Then she noticed the beagle was licking the floor where the yeast had dropped. She checked in with me if yeast is OK for dogs and I freaked out (that is what I do when an animal might be in trouble).

I called the emergency vet but the vet on duty had never encountered a dog eating plain yeast and referred me to the pet poison hotline. They were very good and sounded thorough and competent. They also cost $59.95 for the consultation. A very calm woman explained to me that if there is food in the stomach, the yeast begins to ferment releasing ethanol gas. You essentially end up with a drunk dog. If there is too much ethanol, that is very, very dangerous and does require immediate emergency care. Luckily, it was right before feeding time so Flopsy hadn’t eaten in 6 hours. We were instructed to monitor at home and not feed the dog until the next day. Our dog is 30 lb and my estimate was that she ate less than a teaspoonful. If you have a smaller dog, a dog who ate more than a teaspoonful of yeast, or a dog who has recently had food, this is a vet emergency.

So, today’s money saving tip – double bag your yeast! It can save you thousands in vet costs! Here is a list of all the other things to watch out for if you have pets.