Your Money or Your Life: Now That You’ve Got It, What Are You Going To Do With It?

YMOYLThis is the twenty-sixth part of The Simple Dollar Book Club reading of Your Money or Your Life. Want to know more?

A lot of people find this final chapter of Your Money or Your Life to be somewhat controversial because of the rather unorthodox investment advice contained within. However, regardless of your financial stance, most of the advice here does make a lot of sense, even if it is extremely conservative advice.

First of all, the book makes the astute point that you should be your own investment advisor, something I strongly agree with. Most financial advisors and brokers are seeking mostly to make a profit on doing things that you can quite easily do yourself, especially in the era of the internet where most investment houses allow you to directly invest in their products with next to no fees.

A much more interesting part comes when the book argues that inflation doesn’t necessarily affect the life of the individual all that much. This argument has raised a lot of controversy over the years, and it’s not hard to see why when our grocery bills appear to be constantly escalating.

Given that, I do think there’s merit to their argument. Take an honest look at the stuff you buy today – it’s not the same stuff that you were buying fifteen years ago. In theory, you’re buying “better” stuff – or at least stuff that’s marketed to seem better than the stuff of fifteen years ago. For that “better” factor, you’re paying more.

Take a walk down the produce aisle. For the most part, the prices aren’t all that much different than they were twenty years ago. They’re somewhat higher, sure, but the interesting part is that some items are far higher while others are at the same price or lower than they were twenty years ago. Why? Production has changed. Potatoes, for example, are often cheaper now than they were thirty years ago (per pound). Until rather recently, corn was very cheap compared to historical prices.

Dominguez argues that a rational buyer will continually look for bargains and switch purchases in response to such price shifts, but most people don’t do that. They buy the same things on a regular basis, and occasionally dabble in whatever the “new” version of the product happens to be at the moment. Even more importantly, they focus on convenience foods, which are priced without any real relationship to the underlying ingredients. The end result? Their grocery bill does go up over time.

Is this irrational buying? I think it depends on how you look at it. Convenience foods have appeal because they’re easy to prepare, and so people often buy them looking for a quick and tasty meal. What they’re really paying extra for is time, and it’s the value of time that has really changed over the years – it’s become more valuable.

As for me, I like cooking from scratch and I know how cheap it can be. Regardless of the relationship to inflation, buying staples is far cheaper than buying prepared foods, and buying simpler versions of items is always cheaper than the “new and improved” version.

Tomorrow, we’ll continue the ninth chapter, “Now That You’ve Got It, What Are You Going To Do With It?” starting with the header “Three Pillars of Financial Independence” and continuing on to the header “Cushions Make For Smoother Landings.” This section appears on pages 305 through 318 in my paperback version of the book.

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  1. FIRE Finance says:

    Since the value of time has increased one has to weigh in how much one really saves by cooking from the scratch. If we have a job paying us $80 to $100 per hour, then it really does not make sense to save a few dollars by cooking from the scrap.

    Rather it makes sense to invest the time with the skills in the market and earn the money which can be invested to pave way for a faster retirement. In that respect, it makes sense to go for processed foods to save time. Also, processed foods are cheaper than eating out.

    But the value of time and money will vary with each person’s perspective and value system. If spending time with family during cooking is more valuable then so it is. But we feel that we should make hay while the sun shines! Often in trying to be frugal we sacrifice time without knowing its true worth in dollars.

  2. Mr. Nickle says:

    This is the part I have been waiting for. This is the only chapter of the book that I have found challenging to accept (due to these 2 points):

    1. Inflation is a factor that has negligible impact.
    2. You should only invest in Treasuries.

    Regarding point number 1: I want to believe this. I really, really want to believe this. But maybe this is just wishful thinking on the authors’ part?

    Some factors that I do not remember being discussed here that are among my biggest expenses:

    1. Housing – If you rent, your rent is likely to increase over time. Even if you own your home, your property taxes will likely increase over time as the value of your home appreciates, and as your local government(s) raise their tax rates (there always seem to be more tax hikes than cuts over time). I’m not sure, but I imagine the costs of home insurance rise over time.

    2. Medical care – Isn’t this getting more expensive all the time, as well as the costs associated with medical insurance? My employer likes to tell me this every year.

    3. Energy (fuel/utility) costs – Certainly there are large fluctuations taking place, but I believe the long-term trend is definitely upward. Maybe someone older than me can straighten me out here. How are today’s fuel costs compared to 30 years ago? Electricity? Heating? Are we supposed to adjust for this by traveling less or reducing our utility usage?

    I’ll save my comments on Treasuries until that portion of the book is discussed.

  3. FIRE Finance says:

    In the above comment there is a typo “cooking from scratch” rather than “cooking from scrap” ! :-D

  4. plonkee says:

    I’m going to say that in the length of time that I’m planning on being alive for (we’re thinking 55+ years) even if inflation was really, really low, it would still have an impact.

    I understand that one of the arguments is that cost of living has increased because some things everyone wants/needs to have didn’t even exist previously and so they aren’t really needed now. But I don’t want to do without computers, mobile phones, electricity and running water even though its perfectly possible.

  5. Matt says:

    One of the benefits of tracking all my expenses is that after a few years I’ll be able to calculate MY inflation rate, not the inflation rate the government says.

  6. Bill says:

    I wouldn’t ignore inflation, but today’s technology does offer me cheaper alternatives, e.g.:

    – ebay for consumer goods, with a selection of used items unmatched by any neighborhood rummage sale

    – prepaid cellphone or voip instead of landline

  7. PoonJab says:

    Bad bad advice here. People generally should NOT be there own financial advisors. Find a good firm and find an advisor you’re comfortable with. Yes, you’ll pay money for the relationship, but it is worth it if you don’t have the time or expertise to be your own advisor.
    Second point, your point on inflation and food is WAY off. Inflation destroys our wealth, and food prices have skyrocketed in 20 years.
    Poor quality article.

  8. S. B. says:

    Last month I cleaned out a file cabinet and discussed how old receipts for various purchases of mine showed just how persistent inflation really is:

    http://blog.retire45.com/2007/09/personal-inflation.html

    Another good source of anecdotal items are those little booklets designed as birthday gifts that give a brief walk down memory lane for the year you were born. (The books are usually titled by the calendar year they describe: 1950, 1951, etc.) It addition to describing the elections, hit music, etc, from that year, there is usually a page on what common items cost back then, like a movie ticket, a can of Coke, or a gallon of gasoline. It is really hard to believe some of these items were that cheap only 30 or 40 years ago, so I’m not sure it’s a good idea to discount inflation and count on substitution for more than a very short time frame.

  9. plonkee says:

    I don’t think it’s worth the money to get a financial advisor – DIY gets good results. The expertise isn’t that hard to come by if you regularly read a selection of personal finance blogs (for example) and how long does it take to rebalance twice a year?

  10. Most people seem to be commenting on the financial advise side, so here is my two cents. Using a broker that allows you to buy partial stocks each month is an easy way to build up your portfolio, and you can stick with index stocks that are simple tracking stocks instead of mutual funds, which can start to cost you a bit. Aggregate bond funds and an S&P500 tracking stock makes good sense for a beginner, then you can break out to a stock which tracks a foreign market, if you so desire.
    I do have one comment, which prompted me to leave this missive. I love to cook as well, and I know that if I avoid the produce aisle to buy can goods, I can reduce my grocery bill. It is an unfortunate fact that the Farm Bill causes a situation which makes fresh produce more expensive than can goods. Because of that fact, I grow my own vegetables (or at least as much as I can). Can goods also have been shown to contribute to our bulging waist lines. Alright, I am off topic, but I felt that I could not let this go by.
    Thank you for your time with this book.

  11. Eileen says:

    I always wish I could ask more questions of the people who state “my time is worth x dollars an hour so its more worth it to pay for the convenienve of (fill in the blank.) I want to ask questions because many people I know will throw out that phrase but not follow through on it. The equation works IF the time you save allows you to work a few more hours and be paid for it. But clearly the equation collapses if (as many people I know do) you pay extra for the convenience, use/lose that time in some unproductive or expense activity, and then continue to wonder about your debt.

  12. Johanna says:

    It seems to me that most of their argument about inflation is along the lines of “Your cost of living can be lower today than it was 20 years ago, if you make frugal choices today that you didn’t make 20 years ago. Therefore inflation doesn’t exist.” But that’s misleading, because once you introduce frugality into your life, you can’t introduce it again to drive your costs even lower. If you’re already buying the cheapest clothes, food, and movie ticket, you can’t choose cheaper ones to maintain your cost of living when prices go up.

    The authors do make the good point that you can partially combat inflation by not letting your standard of living creep up with everyone else’s. If you were content not to have a cell phone 20 years ago, you can be content not to have one today, and so forth. But prices are still going to go up. Their advice to live off all of your investment income without making any attempt to account for inflation is extremely poor, and it’s not doing anybody any favors.

  13. Jim says:

    Whoever wrote this last article on this book solely convinced my NOT to buy it. Consumer prices are almost 100% higher than they were in 2003. The are 10% higher than they were last year. I save all my receipts for tax purposes, and that is what I discovered. The only thing going down are housing prices (any “returns” on housing are always unsustainable, and housing prices match inflation over time) and computer prices (can you eat a computer?)

    Inflation is a HUGE concern, that WE ALL MUST BE AWARE OF HOW IT AFFECTS US.

  14. Johanna says:

    @Eileen: Good point. Another way to look at it is, if earning $x an hour means that your free time is worth $x an hour, shouldn’t you be willing to pay someone else $x an hour to do your job for you? Then you’ll have a lot more free time, but no money. So then what are you going to do?

  15. Eileen says:

    I hope no one misunderstands me–I’m in no way advocating working 24/7 and I know how precious free time is and that it must be guarded. I just become concerned when I hear people use the “my time is worth it” excuse with reckless abandon and don’t realize that the numbers are just not adding up.

  16. rhbee says:

    Managing my own money. Making my own plans. Being in charge of myself. My new job is me.

  17. Marcy says:

    I get a real kick out of these people who say “If we have a job paying us [$X-$X] an hour…There’s some things I often wonder when running across folks like this.”1.Why does what ‘they’ do get more vague as they the supposed pay goes up2.What’s up with the “If we have…” anyway. Is that a hypothetical ? or what! 3.If ‘they’re’ filthy rich, why the heck would ‘they’ need the advice of a PF blog of someone who makes the [chicken] scrap? (sorry Trent, no offense, just part of my illustration) 4.What are ‘they’ doing wasting ‘their’ time reading and replying to such a PF blog, ‘they’ are so high above the rest of us po folk. ‘They’ are wasting an opirtunity to make MORE $$! Or maybe ‘they’ need validation. I wonder if it’s just their way of making people who are making $10 or er-$6.50 feel crappy?
    If ‘they’ were doctors, ‘they’d’ know better than to consume excessive amounts of sodium (most of us get more than the recomended upper limits from processed foods). Nevertheless, what good is a pile o ‘retirement’ $$ if health prevents ‘them’ from enjoying it. That’s not even considering all the chemicals: artifical flavors/colors/preservatives, HFCS, transfats(partially/hydrogenated oils), to mention a few.
    Maybe ‘they’ sell rocks @ $80~100, a piece, depending on the customer…Who knows. It’s a bad attitude to have and a miserable way to live. $$ only buys so much happiness. Eileen makes a good point. If ‘they’ throw $$ at things, I bet ‘they’ haven’t wasteded precious time/$$ figuring out how much is being saving/lost(you know if ‘their’ time is worth more than making a meal from the scrap, their has to be other simple tasks $$ blindly thrown at). I think Eileen answered 2 of my questions too. People of this caliber would foolishly throw $$ @ such things and wonder why ‘they’ are in debt.
    Besides, according to the mil. next door, and others I presume, there are many of ‘them’ who make @ least that much or more. Some of ‘them’ aren’t wealthy because ‘they’ do such things: buying more than needed to live comfortably, xpensive cars, possibly leased or traded when the new car smell fades, and other flashy displays.
    Truth be told, cooking is a lost art, along with baking, sewing, knitting, etc. People don’t know how to perform these basic tasks. Some are deeply threatened by suggestions of cooking. The sad thing is, as ‘they’ admitted, it IS about spending time w/family. But that’s for people whose values are skewed anyway. It’s also about mastery, being able to make something you buy frozen or otherwise ‘pre-pared’ and know you make it better. I bet it’s a rotten feeling, knowing a machine can make better food than ‘they’ do. Having control, if you don’t like ingredient X being in that concoction, you know you could make it w/out the nasty ingredient. It’s sad though, people open a jar of tomato sauce and say they ‘made’ it, or ‘baked’ cookies, brownies, etc. when all they did was rip a package open and set the oven temp. It they could make it any easier, I’m sure they would. And it would enable people to become more lazy.
    I’m sure prepared ‘foods’ don’t really save, even @ a buck an hour. Not when all the health factors: medications, medical treatment (you can’t deny the rise in obesity, diabetes-even type 2 in children, cancer, etc. that has come on the heels of processed foods)
    consider the fact that it still takes time to shop for prepackaged foods, ‘prepare’ them, and the cost gas and all the Add that to the xtra $$ spent on those ‘foods’. I bet the real problem is: (with all due respect) ‘they’ don’t know how to cook. Probably the type that would burn water. I wonder if that’s why fire is included in the name…it’s what happens when ‘they’ attempt to make a meal from the scrap.

  18. rebecca says:

    Jim,
    I agree the inflation is something that should be considered, but I think your numbers are way off. I don’t know where you live or what you are buying, but here (in California) inflation hasn’t been nearly that bad except in a few areas (housing, electricty, gasoline.) Consumer goods and food are holding steady or getting cheaper.
    A couple of specific examples:
    I bought a computer in 2003 — to buy a computer today with the same features would cost about half as much. Would I buy the same computer today? No — I’d spend more to buy one with more memory and speed. But that is desire inflation not monetary inflation.
    I bought a cell phone in 2000 — I paid about $30 and with a prepaid plan was spending about $8 a month for service ( I only have it for emergency purposes). I bought a new cell phone this year — I paid about $30 and it has many more features than the old phone. I also have a new prepaid plan that cost me only $5.00 a month.

    So while some prices have risen, I think that for most things it is not a matter of the price of goods rising, but that the quality (real or imagined) of the goods has risen which cause us to pay more, as Trent said.

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