Sunday, March 9, 2008

Oh Canada! Link-y carnival goodness

Four Pillars has posted this week's Carnival of Personal Finance #143. My participating entry is the first in the Doomsday Saturday posts, the quick-n-dirty guide to emergency preparedness in $20/20 min a week. Start now!

In a moment of deadly seriousness completely out of keeping with the tone of this blog, my town nearly burned down eight years ago in a massive and quick-moving wildfire that destroyed 400 homes, burned 47,650 acres, and caused the evacuation of my home county. I worked as a 9-1-1 dispatcher for police and fire for nearly 7 years. I'm FEMA-trained in fire and chemical spill emergencies--and I've dealt with them in reality.

You need emergency preparedness. You really do.

This home used to be within an eighth of a mile of where I now sit.

Saturday, March 8, 2008

Doomsday Saturday!

Do you have a $20 in your wallet? Gas in your car? A 72-hour emergency backpack? A six-month emergency savings account? Working smoke detectors? Current passports? Current fake passports? Livestock? Assault weaponry? Ok, then, me neither. Emergency preparedness is a pain in the butt, particularly for the segment of the populace who would really rather be checking the latest celebrity mug shots on line. Yes, I’m one of you. Almost anything is more fun than learning how to preserve string beans, although I am aware that my grandmother thinks this attitude Sadly Shortsighted. Your grandmother does, too.

This is the first post of a feature that will appear every Saturday morning: Doomsday Saturday! Because you're doing all your errands today anyway, and because emergency preparedness is more fun when you do it in little bits instead of huge chunks. All you need to begin is an official Emergency Sharpie, and every week's Doomsday Saturday will take no more than $20 and 20 minutes.

Check your wallet. How much money do you have in your hot little hand? I mean cash, coin of the realm, legal tender. [Me: $61.11. Woohoo! I forgot I had those twenties!] If you don't have a $20 bill, go to your local bank's ATM and get one. Get out your Emergency Sharpie and write, in large letters: "I LUV K-FED! HOTT HOTT HOTT" and sign with your first name. Alternate possibilities include: "DUBYA IS MY HOMIE," for those living in San Francisco or New York City, or "WHAT'S YUR NUMBER BABEE?"

Something that will really make you think twice before giving that bill to the pizza guy.

Now put that money in an envelope and find a bookshelf or something else tall to put it on top of. Tape it there. (If you already have an alternate out-of-sight and out-of-mind storage place, put it there.) All done? Excellent.

Exception: if you have a cash fund of $500 or more on hand in your home, skip this week's Doomsday Saturday.

Why: In case of an emergency requiring evacuation (particularly one tied to weather or natural disasters), you may need to drive away. If phone lines go down, you won't be able to use your ATM, debit or credit cards. This $20 is for gas or other essentials.

Friday, March 7, 2008

Investing in your career: the "I don't want this career" edition

It's been a long week. I got back from a month-long business trip on Sunday. I've been playing catch-up for much of the week, in between long naps. (I'm an insomniac, and one of the really crap things about long business trips is that I stop sleeping.) And my favorite newspaper ever, The Washington Post, printed a piece of dreck by the less-than-charming Charlotte Allen.

I know this is supposed to be a funny, "golly, can't we gals be dumb sometimes" piece. I'm able to make fun of my own girly behaviors, when necessary. I do have a sense of humor, I swear. But this piece hit me just wrong.

Perhaps it's the house painting. I'm going to paint the exterior of my house within the next few weeks. I can do it. I'd just rather hire someone else to. Maybe it's the cost of health insurance, or the fact that I paid a $500 utilities bill. Sometimes, I look at the high cost of living (not any government index, just the high cost of me living) and sigh. Being single and having no safety net can be daunting.

Statistically, I've got it harder than a single guy.

Being the female breadwinner in the United States is pretty daunting. According to this Reuters article, dated April 23, 2007, the gender pay gap in the US is $0.80 in women's salaries to $1.00 in men's salaries in the first year of work. By year ten, women are earning $0.69 for every male wage $1.00. Even accounting for time off work to parent, hours worked per week, and job choice, women are making less than men.

Guys, please don't glaze over or click away:
  • If you're single, consider what happens when you marry. Does your fiancee have debt? Is she saving? Is her life financially sound? It's easier to live within your means when you have a little more means.
  • How about the women in your family who may be sole breadwinners? What if (heaven forbid), you died and left your wife alone to get the kids through college? The numbers are already scary enough: how could you do it on 31% less?
I don't think the wage gap is a result of nefarious male undervaluing of women's talents. There are the occasional exceptions--you find them in the PF blogosphere posting comments about how women are golddiggers and ruin a guy's financial life. But, by and large, I think men and women generally like and respect each other, despite occasional mystification about the other sex's weirder quirks.

So why? Why are women statistically lagging so far behind men in the biggest investment of all: time for wage?

[I'm about to make some provocative statements, but I'm going to start by saying that I don't know the real answer. I can speculate, based on my own experience, but we just don't know. I want to provoke discussion, but I'd appreciate it if you keep any comments on target, relatively polite, and free of ad hominem attacks. I will delete anything that crosses my arbitrary line of civil discourse. So be warned.]

A girl's gotta do what a girl's gotta do.

The sweet young thing whose photo heads this post is my grandmother. She married at 19 and was a farm wife raising six children until my grandfather decided he'd had it with dirt farming in New Mexico. Grandad was a WWII pilot, and he always loved to fly. In the late sixties, he finally got his pilot's license and started working as a commercial pilot. Thirty-five years ago, on a cold January day, he died in a plane crash. My grandmother was left a young widow with a handful of teenagers. She'd worked for a few years as a secretary before her marriage and while my grandfather was getting his pilot's license, but had no special training or experience.

My grandmother went back to work to support her children. Two and a half years later, she retired from real estate with income-producing investments of a quarter of a million dollars.

I asked her once how she'd managed to do this. She wasn't sure, except that 1) she was blessed, and 2) she did what she needed to. I think that item 2 is a huge one for women.

Where's the love?

The last 30 years have told us that women can do anything we want to, and I'm deeply grateful for that change in social attitudes. At the same time, men aren't told they can do anything they want. (That's assumed.) They're told that their success is based on their financial savvy and their career.

I know that most of the jobs available to me are NOT 'anything I want to do.' Personally, I've found myself working an okay job without much enthusiasm as I try to break into my preferred field. I have friends who are in the same boat: corporate jobs, not much enthusiasm. (And yes, "my friends are like this too" is completely valueless as a statistical measure of reality.) I don't see this same apathy among the undirected men of our age: they seem more driven to succeed wherever they're at, although I doubt they are any more entranced by the nuts and bolts of these corporate jobs than the women are. And this isn't cool.

Is there are disconnect in ambition between the sexes? What's going on?

When women hear that we have lots of choices, do we miss the message that sometimes work sucks? That we have to spend part of our valuable lives doing something we don't much enjoy in order to have certain economic advantages? Some of the traditional lower-paid jobs requiring a college degree (teaching, for example) are filled with women. There's a job satisfaction issue here. But there's also a profound economic truth: following your dream is often lower-paying than doing what nobody else wants to.

I'm a huge fan of following the dream. That's why I'm blogging. It's the brass ring, being able to do what I love without worrying about money. But I've come to the conclusion that the easiest way to financial independence is to focus my work time on things that will produce more income per hour.

So here's my take:
  • Except for Charlotte Allen, women aren't stupid, nor are they less capable of corporate success.
  • Widespread but unconscious sexism is a possible explanation of the gender gap in wages, but seems unlikely given the preponderance of sane, fair and decent people in the workplace. [Note: pervasive sexism does still exist in certain dysfunctional organizations; I've worked for one such company, and it's soul-sucking.]
  • A focus on being able to "do whatever we want" may predispose women to focus on jobs with a high level of satisfaction and personal reward--which often correlates with a lower level of financial reward.
  • Our male counterparts may be more geared to focus on corporate advancement, rather than personal satisfaction.
The kicker for me is that higher levels of personal satisfaction are often part of high-level jobs. There are exceptions, of course; sometimes that window office is a pit of stress. But higher-level jobs correlate with more autonomy, the ability to implement our ideas, more dynamic coworkers and the feeling of being a valued contributor. So why aren't women pursuing these opportunities?

There's a dissertation to write about the wild card of children and childcare. I suspect that few women know for sure whether they'll remain in the workforce during their children's first years, which is a further disincentive to aggressively pursue higher-level work just for the sake of advancement.

There's the partnership aspect: if you are married, and one of you goes to graduate or professional school, that investment usually means that you're tied to the advancement of one career at a potential cost to the other.

There's the expectation of supporting a family: most guys grow up thinking that they will support a family--at least their kids, even if their wife works. Do women think about the possibility of supporting a husband and children? Some of us, certainly, but the idea is less culturally entrenched.

And then there are the myriad pop-psych explanations: women don't like asking for raises, or build consensus differently. All are probably part of the problem.

Is it that men don't value women's work equally? Or are women not valuing their own time enough to go after higher pay and better positions?

Case study: hi!

Everything is personal, especially in blogging, so let me tell you why this is at the forefront of my mind. I started focusing on my financial situation in September, when I realized that I really, really didn't want to spend the next twenty years not being a writer. At the same time, I realized that I wasn't being paid as much as I wanted. This wasn't my employer's fault: I'm honest enough to recognize that I was coasting. Until I can afford writing full-time, I've got to work. The more I get paid, the less time I have to be working.

A light bulb came on in my head--much as I imagine it did for my grandmother, entering the workforce in her forties and realizing that she had only herself to depend on. I was wasting my time at work by focusing on what I'd rather be doing.

I considered getting a different job, one that I liked better. But instead, I found a way to connect with my current job. In October, I floated an idea. In January, I presented a proposal to the company and division presidents. (I work for a national company with about 6,000 employees.) The program I'm pushing can potentially recapture between 1% and 4% of our yearly earnings. As of today, I am no longer one of 3000 workers doing essentially the same job. I'm in charge of implementing my plan on a national level and justifying it in our financial plan. And I get to do it out of my home office, wearing my fuzzy slippers.

This is scary, but it's wonderful, too. Remember, I don't want this career. I have other goals. But while I'm devoting 40 hours a week to it, I might as well make them fun and profitable--for myself and my company. In two months, I'll present the savings from the pilot project, and I'll ask for a piece of that money. I'll deserve it.

So tell me:

Women, are you making what you should be? If so, are you passionate about your career? If not, are you affected by sexism in the workplace? How do you view your job? Is it a long-term gig? Are you aggressively pursuing advancement and raises? Are you invested in your workplace success? Are you following a dream or just trying to keep food on the table? How does your career compare to your husband's?

Guys, feel free to chime in. Do you see evidence of sexism in the workplace? What's your perception of the relative ambition of young male and female employees? (And, if you chime in about that, what's your field?) Have you chosen a higher-paying career path rather than following a dream because you felt you needed to provide financial stability for your family? How does your wife's career compare to yours?

Thursday, March 6, 2008

Russian proverb day: Better is the enemy of good enough

First, some background. In my home growing up, all the best parental advice was in the form of Russian proverbs. Don't ask me why. I don't think I have a drop of Russian blood in my veins. Still, I'm predisposed to dispense advice in pithy Slavic sayings. This is the first of what will be a recurring feature.

Wouldn’t it be great to choose the best possible online bank?

Don’t you wish you knew which mutual fund was perfectly balanced for your risk tolerance and investment horizon?

Are you holding off on writing your will because you aren’t sure how to split up your assets?

Are you kicking yourself because you could have gotten an interest rate half a point lower on that car loan?

A quest for perfection often leaves important items undone. We don't want to mess up, but we don't have the time to do everything.

Better is the enemy of good enough. This proverb is attributed to the Soviet naval officer Sergei Gorshkov. The thinking behind it was explained to me by an former US naval officer, who keeps this statement framed above his work computer.

During the Cold War, the Soviets could not compete with the United States in technological innovation. The Soviet Union struggled to maintain a credible nuclear program and military infrastructure without the United States' economic advantages. As a result, R&D money was focused on high-profile and high-importance items. While the US was inventing velcro and space ice cream, the Soviet Union was cutting costs as much as possible.

My favorite example? NASA astronauts discovered that pens didn't work in space. They required gravity. So NASA developed an amazing gravity-free pen (now a staple item at museum gift stores.)

Cosmonauts used pencils.

Sometimes, worrying about the "better" options--the 0% balance transfer, the perfect asset allocation, whether Quicken or Microsoft Money is right for you--is costing you big as you put off necessary tasks. If you walk in front of a bus tomorrow, it would be nice if you had the perfect life insurance plan. But your quest for perfection isn't much help for your family if your pursuit of perfect life insurance has taken two years of indecision and you're still uncovered.

Very few consumer decisions are forever. If you have a list of undone tasks, look at them according to:
  1. The potential cost of inaction. High in this category? Purchasing life insurance. Writing your will. Allocating your stocks.
  2. The cost of future changes. High in this category? Home buying. Investment in an annuity. Retirement or job change. Mortgage financing.
  3. The time commitment to complete on a good enough level and on a better level.
If you have undone items on your list with a high value for #1 and a relatively low value for #2, do them NOW. You can revisit them later to improve them. But have the "good enough" option already in place. Home software is available to write a will. You can google life insurance and come up with a decent term plan. You can move your 401(k) from that money market into a retirement target fund while you work out the nuts and bolts of your investment strategies. Don't wait until you have the time for "better."

Items with high costs in #2 do need to be done right the first time. Those are worth a proportionally higher investment of effort. But if you've gotten your "good enough" items out of the way, you've freed yourself to focus your efforts.

Ultimately, you may be able to work everything into the "better" category. But let's get real. You have a life. You have other things to do. Some items--well, in some cases, a pencil is good enough.

Wednesday, March 5, 2008

A real kitchen garden

Trent, from The Simple Dollar, has posted a nice entry about starting a kitchen garden. But I am one-upping him: I have a real kitchen garden.

Now I'll admit that the potting soil in the sink takes some getting used to, and the drawer of seeds and verbena starts is where you would expect to find silverware. Fortunately, this is only temporary. Tomorrow, my kitchen garden will dwindle back to seven plants, and the geraniums, seed trays and so forth will migrage to a set of shelves upstairs by the window.

There's a lot to be said for gardening. By February, I have sickened of winter. March 1 is time to reclaim the world for human habitation. Unfortunately, the world is seldom taking my phone calls, so I have to resort to creating my own habitat. I keep a large bougainvillea plant in my kitchen over the winter, where it stabs the unwary passer-by and blocks access to the garbage can. (That's it, above, last summer.)

I am too cheap to buy herbs at the grocery store, so I also have a nice pot of basil, oregano, parsley and chives. Thyme and rosemary each deserve their own pot, as both are low-water items. I'd plant sage, but that's getting too Simon and Garfunkel.

This week, I picked up five geranium plants at the local grocery store for $3.75 apiece. They were in four-inch plastic pots, and you could almost hear them begging to be released from their prisons. They have been rescued, repotted, and are cheerfully awaiting placement on the shelf outside my kitchen window as soon as it's warm enough.

I bought a dozen seed packets on sale ($1 each) to supplement last year's stash. Technically, seeds should be planted in the year in which they were purchased, but last spring was a frenzy of moving and home purchase, and my opportunity disappeared. So I've started a flat of test seeds, using last year's packet. If they germinate, I'll plant the rest; if not, no harm's done. I still have time to get a nice bunch of seedlings before it's time to plant outdoors.

Ah, gardening. Springtime is come.

Gardening is a wildly expensive hobby. Probably more expensive than skiing, if you have a ski hill within driving distance. Not as expensive as golf--but then, what is?

But gardening is the fine art of getting something out of nothing. By nothing, of course, I mean a huge capital outlay in soil amendments, plants, sweat, tears, and dirty fingernails. On the other hand, you finish the year with beautiful plants and flowers and food, where before you had nothing but dirt. No wonder it appeals to us frugal people.

There is money to be saved, though, if you know what you're doing. Gardening abilities were part of my genetic inheritance--my mother kept us busy outside, and you can't spend years grumbling about yard work without picking up some basic skills. Here are a few important starters:
  • Know your climate and soil. I will never have a hydrangea. It's sad, but I have accepted it. On the other hand, tulips flourish year after year from the same bulbs, and pink and white honeysuckle lines the canyon edge.
  • Know your frost date. This is actually the first day on which there is less than a 50% chance of heavy frost. In my area, it's mid-May. Don't plant tender young things before that date, or you will waste your money and curse fate. Cursing fate is an integral part of gardening, of course, but you needn't set yourself up for it.
  • Prepare your soil. New gardeners cheap out on soil prep, because it seems so wasteful to buy dirt. Don't do it. You may live in Eden (aka Iowa) and your soil may be rich black loam. In that case, you might be home free. But call your local extension agent anyway and see whether there are things you need to add for better drainage or production. If you want to be cheap, there are cheap sources for manure and compost--check with your local sanitation people. There is nothing more frustrating than having your pretty new plants wither up and die because they can't get their roots from the potting soil into your nasty clay backyard. I live on a rock ledge in a desert, so I have the whole regimen: compost, water-conserving crystals, little bacterial soil improvers, old potting soil.
  • Spend the money to buy perennials at a good greenhouse. Home Depot has those cheap roses, or saplings, or bushes. Run screaming. A good greenhouse can sell you plants that have been kept watered and fed and properly potted. Remember the geraniums, above? They were all nearly dried out and should have been transplanted weeks ago. They will do fine, now I've got them repotted, but you don't want the quality of your long-term garden building blocks to be compromised by a poor early start. If a tree you bought three years ago starts showing signs of weakness in the base, you've lost three years and a good tree. A reputable greenhouse should offer a year-long money back guarantee on trees and other large perennials. As in, if it dies, bring it back with the receipt and get your money back. It can also provide you with the right variety of plant for your altitude, growing zone, and light.
  • Go ahead and get annuals wherever they're cheapest. That flat of petunias at Lowe's may be just what you're looking for. This does require knowing how to assess the health and quality of a plant--if it dies the week after you bought it, it was no bargain. Look for heavy flats, which indicates that the plants have been watered. Avoid truly top-heavy plants, or check them for root-bound conditions. (You will want to google this if you don't know how to assess it.) Look for generous foilage and stems, not heavy blooming. Blooming weakens a plant, and a plant in a nursery flat is pretty weak already. Plant right away, and make sure you loosen the roots and plant in well-improved, watered, non-compacted soil.
  • Plant from seed, and you've hit the cheapest method of all. Seeds are a pain in the tush, but they're (almost) as cheap as dirt, and they are a legitimate outlet for the frustrated gardener in early spring. Remember the frost date? Most seeds should be started inside 4-6 weeks before. Seeding outside has never been a big success for me with anything but weed flowers (cosmos, hollyhock, yarrow--not weeds, but non-hybrid heavy seeders.) But seed cultivation inside is fun, cheap, and gives you an excuse to get your hands dirty. I've started a bit early, but I wanted to know whether my old seeds were still viable. I also planted long germinators--the verbena in the drawer requires 10 weeks, and it has to stay in complete darkness until it sprouts. The payoff? Those little 2 inch nursery cups of flowers run about $2 apiece. Starting a dozen cost me a grand total of $2.25. That's a $21.75 savings.
The garden, the vinyard, and the harvest have long been used in parables and fables. Gardening lends itself to moral lessons on patience, investment, hard work, and personal responsibility. A tiny mustard seed grows into a huge plant. The seed that falls on rocks never grows. The one who plants the wheat, tends the wheat, harvests the wheat and makes the bread is the one who eats the bread.

Gardening is a nice money-saver if you stick to herbs in a pot. If you get more elaborate than that, the cost/savings ratio gets fuzzy. How much time did you put it? How much did you spend on water? How are we going to use all this zucchini? What did that MiracleGro cost, again? But it has huge rewards.

Gardening has a meditative and artistic aspect for its true devotees. There is no get-rich-quick option in gardening. There is no credit. There is no shortcut. Those of us who want to retrain our attitudes about money could do worse than to turn to cultivation in the natural world to remind us of the Law of the Harvest.

Besides, with all that weeding to do, who has time for golf?

Tuesday, March 4, 2008

Cheap date

I have a seventeen year old brother and a thirteen year old brother, both of whom live in the same town as I do. The seventeen-year-old is headed to college next year. He's a Type 1 diabetic. This means he can't spend the next four years living on Ramen noodles and Lucky Charms. At the same time, he can't afford to be dining out every night.

What's a sister to do?

I have the family over to dinner once a week. Tuesday is good, since the grocery store fliers usually come in the mail. I sit him down with the fliers before dinner and ask him to tell me what's a good price and what's a waste of ad space. He's getting good at this.

I try to have two or three courses for dinner--your standard restaurant meal with salads and desserts. About halfway through, everyone gives me a total and a per-plate cost estimate. My mother is always right (no shock there), but my brothers are always way over. Generally we can also give a comparable restaurant cost. I don't cook anything that can't be made by a novice.

The point is, of course, to give my brother a good reason to shop sales and make himself real food. A pair of candles and five bucks can make a spectacular romantic dinner on a college student budget, and he'll impress by being able to cook. There's some female indoctrination going on, too: we've got salad plates and salad forks, proper table settings, and a nice atmosphere. I'm not expecting Emily Post, but I do hope he remembers to put out napkins the first time he hosts a meal.

This is fun for me, as well. I've got an excuse to try new recipes. I'm getting good at having everything ready at the right time. And it reminds me that cooking for myself is the frugal option.

Yesterday, I got a take-and-bake pizza for $10.00, which provided three meals. (So I eat pizza for breakfast.) Tonight I served pork loin with orange oregano sauce, mashed potatoes, butternut squash, and shallot-and-lettuce salad for four. I have leftovers in my fridge to last two more meals. Total cost? $7.35.

Don't feel bad; my brothers didn't figure it out either.

Monday, March 3, 2008

smackdown: rent v buy

Squawkfox has an interesting article about good debt. Her take? There is no such thing. It's a myth marketed to us by financial professionals.

The most interesting part of the post, in my mind, was the discussion of mortgage debt. Squawkfox joins Millionaire Mommy Next Door in the devil's advocate position of saying that renting frees money for investing, which will earn returns greater than housing equity can. This is a 180 from the American conventional wisdom that home ownership is the path to wealth for the majority of us.

I agree with everyone. (I'm an agreeable sort of girl.) There are many paths to wealth. Some include home ownership. Some do not. But all of them include a strict scrutiny of the real financial picture underlying a decision.

If you decide to rent and invest your money in the cheerful expectation that you will make the stock market's historic average every year, you are gambling. You haven't done the math.

If you decide to buy and expect your home to grow in value at rates outperforming the stock market, you are gambling. You haven't done the math.

Doing the math is a burden and a chore, but no one said that financial freedom was easy and fun. I purchased a home in May of 2007. While it's still early days, I consider it my best financial decision ever. Let me take you through my personal numbers and show you why.

First decision item: Can I afford a home? Do I have the credit to do so?

Despite the ominous rumblings of the mortgage market in early 2007, I had the opportunity to purchase my home under a first-time homebuyer's program with a 1% down payment, closing costs rolled into the loan, and two mortgages at 80% and 20%, thus avoiding private mortgage insurance (PMI.) Deals like this have been recast as a seriously bad idea for both lenders and borrowers, but there were two redeeming features. The non-profit organization did months of financial monitoring and counseling before allowing a home purchase, so we didn't buy more than we could handle. They also financed both mortgages at a fixed 30-year 5.5%.

Second decision item: What is the opportunity cost of a home purchase? What else could I do with the down payment? What would it cost just to rent?

This is where I lucked out. I live in a small and rather remote town. Housing prices are traditionally horrific because there is very little buildable land. (We're surrounded by national part, pueblo land, and federal government property.) But, while the housing market has been irrationally exuberant in other parts of the country, price increases have been fairly restrained in my area due to financial uncertainty for the major local employer.

I also had an apples-to-apples rent/own comparison. There are several hundred homes in town build with the same age, materials, acreage and floor plan as mine. At any given time, there are two or three listed for rent in the paper. The rental cost for a house comparable to the one I purchased is about $1000 per month, not including utilities.

My actual financial outlay to get the home would be minimal: 1% of the purchase price and no closing costs. I knew that 1% would be less than $2,000, so I could use that number as my high number when counting opportunity costs.

My rent v. buy analysis assumed a 7 year horizon.

Renting would cost $1000 per month. $2000 could be expected to double in the stock market in 7 years, resulting in a rough profit of $2000. I could assume a rent increase of 2% per year and rental insurance at $200/year.

The total cost of renting for 7 years and investing the down payment instead would be $88,980 for rent and $1400 for insurance, with $2000 profit from the down payment funds, for a total cost over seven years of $88,380.

Third decision item: What is the home worth now? What was it worth five years ago? Will it maintain or increase its value?

After some intense house-hunting with a realtor, I had an idea of my preferred neighborhoods, home, and budget. I drove around those neighborhoods several days a week. This paid off: I was the first person to see the FSBO sign in front of the home I purchased. I actually signed a contract before the first ad ran in the paper.

Scoping out the neighborhood was an important part of the process. I bought within two blocks of an excellent elementary school. The neighborhood is settled and well-maintained. It's away from major roads. There is a municipal park (check out the photo at the beginning--isn't it rather breathtaking?) within a three-minute walk and a golf course within a five-minute walk. These features stabilize the value of the home. I had the selling prices of all comparable houses within the previous five years, so I knew what the type of home I wanted should cost.

Because I had this information at my fingertips, I knew when I had a good price and I wrote a check for earnest money immediately. Without the research, I might have missed a remarkable bargain. I ended up buying well under the appraised value.

Fourth decision item: What are the added costs of insurance, property tax, and home maintenance?

I am also fortunate to live in an area where my combined yearly property tax and insurance bill is less than 0.5% of my home's appraised value. I know that's unusual. I'm not gloating, I swear. I anticipated about 1% of the home's appraised value in maintenance and improvement costs.

Fifth decision item: Do the math. Do the math, do the math, do the math.

Ultimately, the cost of purchase broke down like this:
7 years at $990 per month for PITI and $130 per month for maintenance, which is assumed to increase at about 2% per year = $94,756.

Actual down payment: $700 (don't laugh), since the owners rented back from me for a month at $1000/mo and I crashed on my parents' couch. So the actual cost of renting goes up by $1300 (remember, we assumed a $2000 down payment invested in the market, instead.) So the real cost of rent is $89,680 over 7 years.

The cost of ownership is $5076 greater over 7 years. If that money were invested in a lump sum at the beginning of the 7 years, it might reasonably become $10,150 over the seven-year period.

However, if I sell the home after 7 years at the same price at which it was appraised when I bought it, I would have approximately $21,000 in equity, of which $8150 would go to brokers' costs, leaving a net profit from the home of $12,850.

After living in the home for seven years, assuming no increase whatsoever in the home's value, ignoring any tax benefit from home ownership, and assuming a generous and consistent market return for invested money, I am still $2700 better off as a home owner than as a renter.

These are excellent numbers for a worst-case scenario. I think they're unusual numbers; I live in a very good market for buying, and it took lots of time and effort to find such a low rate and a cheap house.

* * * * *
Lest I start sounding too self-congratulatory, let me observe that I still shoulder some significant risks as a home owner. If the major employer in this area failed, my home's value would drop significantly. If I had to move after only a short time, I might not be able to recoup the money spent on closing costs and brokers' fees.

One of the unavoidable downsides to home ownership is that it is putting a lot of eggs into a single basket. Investing all your retirement in one company's stock is courting huge market risk. The risk is lower in real estate, because you control many of the maintenance, capital improvement, and timing decisions. But the risk is still there.

To hedge against this risk, I've invested four times as much in mutual funds since buying my home than I've paid in equity. I understand the desire to retire a mortgage early, but I feel that I'm more financially balanced if most of my money is going into diversified investments. I would ultimately like to maintain a 4 to 1 ratio of investment to home equity in my net worth.

The moral of this story is not to buy a home. It's not to rent, either. It's to calculate. Every financial decision has real cost as well as real benefit. Doing something because everyone says it's a good idea is a bad way to run a personal exchequer. Americans lost a lot in the market in 2000 because they followed the leader into tech stocks, and they're losing their shirts in real estate now for exactly the same reason. No one else--no blogger, no financial analyst, no guru--can give an easy answer to investment questions. We all have to get out the calculator and do the math for ourselves.