Thursday, March 26, 2009

The More Changes You Make, The More It Will Cost

Tip #105 - The More Changes You Make, The More It Will Cost. Years ago, people did not move around as much as we do today. They often were born, lived, and died in the same town, and sometimes even in the same house. They usually had one job throughout their lifetime. They bought things to last as long as possible and used it until it broke. Not true today. Today, our society has become such that many people are constantly changing, constantly upgrading, constantly moving and trying to improve their lifestyles. And those changes cost money.

Each time you buy a house, you have mortgage closing costs, clean-up costs for the old house, moving costs, possible storage costs, realtor fees, and maybe other costs. In addition, each time you buy a new home, you start a mortgage over again. And most of us know that the first years of paying a mortgage are primarily interest payments. So by moving, you are delaying your opportunity to build equity in your home. In short, it costs money to move.

What about your job? Many of us look for better jobs that pay more money, are better suited for us, or have better benefits. But each time you start a job at a new company, you may be losing out on other benefits from your old company. Many companies have a 401(k) match that they will pay you after you have been “vested” or working there a certain number of years. Other companies give you more vacation time when you have put in a certain amount of time. Still others offer an Employee Stock Ownership Plan (ESOP) or similar plan. And that company may provide a match once you’ve worked at the company a certain number of years. And don’t forget seniority and reputation that you have built up at a company. All of those things are lost when you change jobs. That’s not to say that you should not look for a better job or one more suited to you, just that you need to take into consideration that there are lost benefits or costs associated with starting a job at a new company.

Lastly, there are things in our life that we often upgrade or change. We may want a newer, smaller, more technologically advanced cell phone. Or maybe we want a different cable television or satellite system. Or perhaps we want to upgrade our washing machine. In addition to the obvious cost of the new product, there are other costs associated with these changes. A change to a newer cell phone may mean you need another type of replacement battery or a new charger. With the new television cable or satellite, there is often an activation fee and a setup fee. And that new washing machine you want to buy may cause you to buy a new dryer in order for them to match.

Anytime we make changes, those changes cost us money in lost benefits, extra fees, or additional associated costs. So it is important to take this into consideration when making big purchases. Is it worth it to buy a starter home and then move in five years or should we buy our long-term home now? If I take a new job, will I lose out on some vesting on my 401(k). Maybe I should wait a year until I am fully vested and then leave. Do I need to upgrade our computer/cell phone/camera/television or will the associated costs make this upgrade unreasonable at this time? These are questions you should ask yourself or consider when you are thinking about making a change to your job or when you are buying a long-term product like a house or a car or even a refrigerator or a service such as telephone or cable. If you know you will want to upgrade it in coming years, consider if it is worth it to buy the product that will last in the long-term from the getgo. It may be or it may not be. Just realize if you don't, that there are costs associated almost every time you make a change.

In Real Life (IRL) – In addition to being conscientious about saving since I graduated college, I realize that I have made other decisions in my life that have helped me save money. I didn’t necessarily do them knowingly, but it seems that is how it has worked out. Since college, I have only had two jobs. And I have been out of school for 20 years this May. Many of my friends have had five jobs or more. I didn’t have a dream job when I graduated. I was only making $19,500 in 1989 in the expensive city of Washington, DC. I had friends working at Big 8 (as it was then) accounting firms who were making $30.000 or more. But the company I worked for had good benefits. They even had a pension plan which was unheard of even in those days (they have since gotten rid of it). I stayed at that company for 9 years. Because of that, I am vested in their pension plan. I was able to move up internally to a completely new department for significantly more pay ($34,000) a few years later because I had a good reputation within the company because I had been there a number of years. I contributed to the 401(k) match after waiting the typical one year for participation. When I left that job for one better suited for me, I already had built up a nice retirement nest egg. I may not have been able to do that if I left before the vesting of the pension or if moved frequently and lost out on that one year of waiting to make retirement contributions each time I switched jobs.

For the company I am with now (I am not actually working, but I am still currently employed there on an hourly basis if they had hours to give me, which they don’t), I am not fully vested in their ESOP plan. It takes 1 year of waiting plus 5 years of full time work to be fully vested. Because I only worked there full-time for 4 years (the remainder hourly), I am only 60% vested. I hope to go back within a few years and at least get two full-time years in to get the rest of that ESOP match. Sure I can look for a job elsewhere, but the least I want to do is get the rest of that ESOP match before I do.

Another area where we have kept costs down is by buying just one house. When my husband and I (no kids) bought our house in 2000 we were looking for a home that we could live in for at least 5 years. But we knew we would like the possibility of living in it longer if we could afford a house big enough. Our budget at the time was $250,000 for a home. However, $250,000 would only buy a 3-bedroom ranch with one bathroom. I was really adamant on having a second bath so we looked at higher priced homes up to $300,000 (which we could still well afford). By doing this, we went into a whole other level of homes – bigger ones made of better materials with more square footage and that second bath. As it turned out, it was probably the best decision we've made by buying a bigger home. We now have three children and we are able to stay in this home comfortably until our kids are grown. We considered moving to a bigger house when I was pregnant with my third child, but when factoring in the closing costs, the realtor fees, and moving costs it didn’t make sense to move. Instead, turning a porch into a bedroom made the most financial sense for us, in addition to emotional sense since we love our home and our neighborhood, too.

I would say we have incurred more costs on the small electronics front than I would like. My husband is constantly upgrading his cell phone, which necessitates a new case, a new charger, etc. I know it’s a small cost compared to cars and homes, but the extra costs are there nonetheless. When we changed our cable to satellite back to cable to fiber optics over the past 9 years, we have had to pay start up fees, connection fees, service fees, etc. Fees that you don’t incur if you stick with what you have. Again, it doesn’t mean it wasn’t the right move for us, but it did cost us. So when you are thinking of making a change to a job or a new home or buying something initially like your first home, think about what extra costs you will incur from this change now or if you make one in the future and whether it is still worth it to make the purchase.

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