The Money or The House?

I was talking to one of my Simple Wealth Steps students last week and she told me about her friend who has just won the lottery.

Her friend is 62 working full time and her husband is semi-retired. They don’t own a home and they lease a car. Not a good position to be in at retirement age! Anyway, knowing they really would be better off if they owned a place of their own they bought a lottery ticket in a $1.3million house not far from them just on the off chance that they might get lucky.

And they did!

houseYou can imagine how excited they were! It’s not just your average garden variety house either. It’s a beauty (no it’s not the one in the photo but I thought I’d throw in a photo of a pretty fancy house just to help get your imagination working)!

Anyway now they have to make a decision. You see the prize was the house OR $1million in cash.

It didn’t take me long to come up with an opinion on what I would do in their shoes but I’d be really interested to hear from you. What would be your advice to these guys?

If you are on facebook I’d love for you to go to www.facebook.com/simplybudgets where I have also asked this same question and give your thoughts there or if you prefer just reply to this e-mail.

I’ll report on what people had to say in my next e-mail.

PLAN FOR ‘LATER’ SOONER

Not everyone is so lucky to win a house of course so I thought today we should just have a quick look at the topic of planning for the future.

The majority of expenses we have to pay for in life are in our face every week, fortnight or month. Certainly within a yearly cycle we experience almost all of the expenses we call ‘Bills’.

Way too many people never manage to get beyond taking care of their weekly needs and bills though and this is why it is possible to end up at retirement age not ready for retirement!

If you look at the hierarchy of your life’s expenses it takes larger amounts of money each week to deal with the most frequent expenses and smaller amounts over much longer periods of time to deal with what are eventually much more expensive needs.

E.g. you might need $300 a week to pay for your groceries but you might need $2,000,000 in 30 yrs time for retirement.

Clearly retirement costs a lot more than your weekly groceries but if you start saving early enough that $2m is only a small amount each week.

The trouble is; we need food every day and retirement seems to be way off in the distance when it could be dealt with by saving that small amount each week. It tends to be seen as less important than this week’s needs and desires so is postponed till ‘next week’.

The following example shows in a much more tangible way how putting off saving for the future will blow up in your face.

Your refrigerator just stopped working and can’t be fixed. You need $1,000 for a new one right now.

A brand new $1000 refrigerator that you expect to get good service from till it is 10 years old costs approx $2 a week ($2 x 50weeks x 10 years).

If you wait till it is 5 years old that $1000 refrigerator costs approx $4 a week ($4 x 50weeks x 5 years). Double the amount!

If you leave it till it is 9 years old that $1000 refrigerator will cost approx $20 a week ($20 x 50weeks x 1 year). 10 times the amount!

It’s pretty obvious that the sooner you start saving for these longer term expenses the less they will cost you each week! Delaying will cause you more burdens and more stress.

Retirement is the same, but over 50 years the interest earned really starts to add a whole new dimension to your saving plan as well.

So my advice is to plan for ‘later’ sooner!

If you own a copy of Simply Budgets you should be using the Long Term Planner to make sure you have money for the replacement of white goods, furniture, computers, car needs and similar items when they reach old age and you should use the Savings Planner for allocating money for unpredictable future expenses and saving for one-of things like retirement and larger ‘once in a lifetime’ goals.

Allocating money to these larger less frequent expenses is much easier once you take control of your weekly needs and cyclical bills so make that your first priority and then make sure you use the surplus created to take care of these less frequent larger needs.

You won’t regret it!