Author Topic: "Smoking good life optimization" vs just not spending  (Read 1542 times)

jengod

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"Smoking good life optimization" vs just not spending
« on: July 24, 2016, 03:49:12 PM »
http://www.mrmoneymustache.com/2013/06/24/when-the-back-of-the-napkin-can-be-worth-millions/

"Divide annual savings by the money spent to get a return on investment figure. If itís higher than 10%, you have found a smoking good life optimization and need to put it into action. Solar panels, tankless water heaters and LED light bulbs often do well when you evaluate them this way."

OK, help me understand this, fellow Mustachios.

Does this rule apply to anything you buy? Aren't we always aiming for "breakeven" at some point, ideally immediately?

Like, I bought a huge wall-mounted foldable clothesline this year for $300. I rationalized the outlay because it's good for the environment, but I also know that if I save ~$0.25 a load, it will be 1200 loads before I make back my money! But according to MMM's assertion quoted above, if I line-dry 208 loads (4 loads a week for 52 weeks, which is very very possible with our current rate of laundry; we have small children and we use cloth versions of as much possible) at $0.25 each, I will save $52, which is...a 17% annual ROI?? (Is that right?!!)

So is the point that making 17% on my money by buying something is better than leaving it in a bank account making 1% (or even making an optimistic 10% in the stock market), because 17 > 10 > 1, therefore outsmarting my mother-in-law's general life dictum to never ever spend money at all because it's indulgent and unnecessary and naughty and you're gonna need that money later when something terrible happens?

csprof

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Re: "Smoking good life optimization" vs just not spending
« Reply #1 on: July 24, 2016, 05:34:30 PM »
http://www.mrmoneymustache.com/2013/06/24/when-the-back-of-the-napkin-can-be-worth-millions/

"Divide annual savings by the money spent to get a return on investment figure. If itís higher than 10%, you have found a smoking good life optimization and need to put it into action. Solar panels, tankless water heaters and LED light bulbs often do well when you evaluate them this way."

OK, help me understand this, fellow Mustachios.

Does this rule apply to anything you buy? Aren't we always aiming for "breakeven" at some point, ideally immediately?

Like, I bought a huge wall-mounted foldable clothesline this year for $300. I rationalized the outlay because it's good for the environment, but I also know that if I save ~$0.25 a load, it will be 1200 loads before I make back my money! But according to MMM's assertion quoted above, if I line-dry 208 loads (4 loads a week for 52 weeks, which is very very possible with our current rate of laundry; we have small children and we use cloth versions of as much possible) at $0.25 each, I will save $52, which is...a 17% annual ROI?? (Is that right?!!)

So is the point that making 17% on my money by buying something is better than leaving it in a bank account making 1% (or even making an optimistic 10% in the stock market), because 17 > 10 > 1, therefore outsmarting my mother-in-law's general life dictum to never ever spend money at all because it's indulgent and unnecessary and naughty and you're gonna need that money later when something terrible happens?

Yes.

Kinda.  You need to take into account the lifetime of the "thing" you've purchased.  If that clothesline lasts only 5 years, you're at -$50 at the end of 5 years and have nothing to show for it.  You shouldn't have purchased it in the first place.  If it lasts 10 years, you're at +$220.  But if you'd left the $300 invested at 6.5%, you'd be at +$273.  So you need to get about 12 years of use out of your $300 clothesline before you're doing better, by that simplified analysis.

jengod

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Re: "Smoking good life optimization" vs just not spending
« Reply #2 on: July 24, 2016, 06:32:07 PM »
http://www.mrmoneymustache.com/2013/06/24/when-the-back-of-the-napkin-can-be-worth-millions/

"Divide annual savings by the money spent to get a return on investment figure. If itís higher than 10%, you have found a smoking good life optimization and need to put it into action. Solar panels, tankless water heaters and LED light bulbs often do well when you evaluate them this way."

OK, help me understand this, fellow Mustachios.

Does this rule apply to anything you buy? Aren't we always aiming for "breakeven" at some point, ideally immediately?

Like, I bought a huge wall-mounted foldable clothesline this year for $300. I rationalized the outlay because it's good for the environment, but I also know that if I save ~$0.25 a load, it will be 1200 loads before I make back my money! But according to MMM's assertion quoted above, if I line-dry 208 loads (4 loads a week for 52 weeks, which is very very possible with our current rate of laundry; we have small children and we use cloth versions of as much possible) at $0.25 each, I will save $52, which is...a 17% annual ROI?? (Is that right?!!)

So is the point that making 17% on my money by buying something is better than leaving it in a bank account making 1% (or even making an optimistic 10% in the stock market), because 17 > 10 > 1, therefore outsmarting my mother-in-law's general life dictum to never ever spend money at all because it's indulgent and unnecessary and naughty and you're gonna need that money later when something terrible happens?

Yes.

Kinda.  You need to take into account the lifetime of the "thing" you've purchased.  If that clothesline lasts only 5 years, you're at -$50 at the end of 5 years and have nothing to show for it.  You shouldn't have purchased it in the first place.  If it lasts 10 years, you're at +$220.  But if you'd left the $300 invested at 6.5%, you'd be at +$273.  So you need to get about 12 years of use out of your $300 clothesline before you're doing better, by that simplified analysis.

Gotcha.

Something something don't buy depreciating assets. Coming late to my financial education so really appreciate the tutorial. Bookmarked your calculator site. Very cool.

csprof

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Re: "Smoking good life optimization" vs just not spending
« Reply #3 on: July 24, 2016, 07:04:30 PM »
Gotcha.

Something something don't buy depreciating assets. Coming late to my financial education so really appreciate the tutorial. Bookmarked your calculator site. Very cool.

Something something right - or, at least, consider the depreciation schedule. :)  Very welcome - and thanks.

(The calculators were the result of getting annoyed with all of the ad-splattered crapola out there + a desire to play with a new web framework.  The very geeky goal behind them was to see how small I could make the code for the page while still having it feel vaguely "modern".  It was educational.  Not having to deal with old versions of internet explorer has made the web a much happier place.)