Remember the Ant and the Grasshopper

A few years ago, I saw “The Grasshopper and the Ants” (Disney’s short film of 1934, also available in various book, audio, and video formats, based on Aesop’s fable, “The Ant and the Grasshopper”) and I was reminded how well Aesop’s fable, even in Disney’s presentation, teaches a valuable lesson.

grasshopper_and_ants

Aesop observed nature, which to him seemed to show that ants are industrious insects who work all summer and thus have plenty of food set aside for winter.  Grasshoppers, on the other hand, spend their summers frolicking and making music, and come winter are seen withered and dead.

When I first heard this fable as a child, I am sure I grasped the idea that we need to work during the summer so we have food in the winter.  My mother grew up on a farm and I visited her parents’ farm enough to get some idea of the cyclical seasons of farm life.

But when I saw Disney’s  “The Grasshopper and the Ants” recently, from a vantage point well past life’s mid-point, it suddenly seemed clear that the message, the real moral of the story, doesn’t pertain only to the seasons of a single year, but rather to the seasons of an entire life.  During the spring, summer, and fall of life, you work, gather, harvest, and save (you know, pay yourself first) … and during the winter of your life, what you have set aside provides security and enjoyment.  Or, be like the grasshopper: play, spend and set nothing aside when you should and suffer the consequences later.

One more thought: Some commentators say that the Disney version changes the meaning of Aesop’s original fable because instead of leaving the grasshopper to starve, the ants invite him in to share their food and hospitality.  I think this is partially moderated by two things.  One, sharing is part of the enjoyment that can be derived from having.  Two,  in return for his supper and a place by the fire, the grasshopper is obliged to make music for the ants, literally to sing for his supper; this shows he might have finally learned the fable’s moral.

Here’s an English translation of Aesop’s original:

aesop_ant_grasshopperaesop_ant_grasshopper_2

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Accounting For Different Kinds of Accounts

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Different kinds of accounts where you can keep your money … and how to use them.  This is the way I do it.

Checking account (for day-to-day expenses).  Even if it’s only used to fund ATM withdraws, de

bit-card purchases, and online bill paying, everyone should have a “checking account” — despite the fact that many people don’t even have blank checks these days, and the last time I purchased blank checks I probably got enough to last the rest of my life.  A checking account is for your usual day-to-day bills.  It should have enough money to cover transfers to your savings account (pay yourself first) as well as your regular monthly expenses, such as the rent or mortgage payment, and bills for utilities, groceries, transportation, and other things that you pay for every month.  Whatever spending comes out of your checking account should be replenished by income coming in.  (Did you see the post about how money is like a tank of water?)

In addition to your checking account for expenses that come due every month or more frequently, you should also have separate accounts for expenses that come less often.  The first three, like the checking account, should be at a bank or credit union.  The last one should be with a mutual fund company so the money can be invested in stocks.

Short-term savings (once-per-year expenses).  Money set aside for foreseeable and predictable expenses that come once per year, such as birthdays, holidays, and vacations.   

Medium-term savings (once every-several-years or just a few times per lifetime).  Money for foreseeable, but perhaps not predictable, expenses that come less often than yearly, such as an automobile, refrigerator, heating and air conditioning systems, washer and dryer, or a new roof.  Other medium-term goals might include buying a house, college education for your children, or starting a business.   

Emergency savings (unexpected expenses).  For unforeseeable expenses: accidents, medical problems, periods of unemployment, and special opportunities.

Long-term savings (once in a life).  For foreseeable expenses that come just once in your life, such as buying your dream house and retirement.

“Compound Interest” vs “Compound Earnings”

dividend_stocksRepeatedly I see the term “compound interest” used to describe the growth of stock market investments.  I think this is incorrect.

Strictly speaking, you only get interest from bank deposits and bonds.  If you invest any interest you earn by depositing it in the bank or buying more bonds, then you earn interest on the interest — and that’s compounding.

If you invest in stocks, you (might) earn dividends.  If those dividends are reinvested by using them to buy more stock, then you will start earning dividends on the dividends  — and that’s compounding.  But because there is no “interest” earned on stocks, I don’t think it’s right to call it “compound interest”.

Henceforth, I suggest we use “compound interest” only for investments in bank deposits and bonds … and we use “compound dividends” for investments in stocks.  We can also use “compound earnings” in a general way to refer to any investments that grow as their earnings are reinvested in the same investment.


A little further explanation:

The interest you get from bank deposits and bonds arise from a contract: you deposit your money in the bank or you buy a bond (in both cases you are, in effect, lending money and the borrower is agreeing to pay you interest), and the bank or bond issuer is legally obligated to pay you the stated interest and return your money (the principal) to you.

The dividend you get from owning stock is a portion of the profits to which you are entitled because by owning stock you become a partial owner of the company in which you purchased stock.  However, dividends are not guaranteed as there might not be any profits or what profits there are might be used for something other than dividends, such as expansion or development of new products.

The “Nest Egg”

People use the term “nest egg” to refer to their life savings, their retirement savings, what they will live on after they stop working.  “Nest egg” can also refer to any long-terms savings that are accumulated over time for a specific purpose.  I wonder how many people know the origin of the phrase.

nest_eggsAmong people that raise chickens, especially those in the egg business, it has long been known that leaving an egg in the nest will encourage hens to lay more.  Maybe even get a hen started if she hasn’t laid yet.  The practice of leaving an egg in the nest gives us “nest egg” — the nest egg is the egg that’s left in the nest.  Nest eggs don’t necessarily have to be real eggs.  Wooden or ceramic eggs seem to work just as well.  The principle is the same: the egg farmer doesn’t eat or get rid of the nest egg.  The nest egg is quite similar to “seed corn”, the seed that is saved from one year’s harvest for the next year’s planting, rather than being sold or otherwise used.  (Maybe there’s some reason we don’t refer to our live savings as our “seed corn”, but I don’t know what it is.)

Thus, the next egg is something akin to what economists call “capital”: money or some other asset that is used to make money.  Eat your nest egg, and you’ll have fewer eggs.  Eat of your seed corn and there’s no crop next year.  Spend your retirement savings, and it won’t be there to provide for you when you need it.

The Saving Road to Independence

Here’s inspiration from a century ago from The Baltimore and Ohio Employees Magazine (February 1916):

The Saving Road to Independence

For Men and Women of Limited Salary

DEBTS accumulate rapidly. Savings accumulate just as rapidly! It’s therefore a matter of determination, first, whether it shall be savings or debt.

Money will either serve or rule you. The minute you save your first dollar and begin to think of safe investments you are master of the situation. So reflect NOW. Do not regret later.

saving_roadMany people today are closing the door of opportunity by failing to lay aside some part of their earnings—thus condemning themselves to a life of continuous hard work. Your problem is one of persistence, not one of existence. So be up and doing!

Saving is the springtime of prosperity. To be effective, it must be practiced daily. It’s the steady, consistent, aggressive saving that makes men and fortunes. Save to the limit of your possibilities!

It is not enough to make money. You must make your money work for you. Putting your money to work means investment, and investment cannot begin until you have learned, or until you have an earnest desire to learn, to save.

Economize, but in the right manner. Avoid foolish, extravagant expenditures; save your money and invest it carefully while saving. You will always be in a position to live well and view the future complacently. Isn’t it worth while? A man who has always intended to start tomorrow has nothing. He is a slave to pay day.

Every dollar you save and invest brings you just one dollar nearer the goal of prosperity—the time when interest on your investments will provide for your comforts.

Prosperity begins when a man invests his savings or surplus capital intelligently. The man who saves his money will always have an opportunity to invest it. If he invests wisely, he will soon become a man of means and of credit.

Be prepared! Being prepared is half the battle. More men and women learned the value of ready money during the last financial depression than ever before during a similar period. Cheap investments abounded on every side and a man with ready money was master of the situation.

What of tomorrow? Are you prepared for it? For any emergency that may arise? Commence TODAY to fortify yourself against sickness, misfortune or financial difficulty, by saving and investing your money systematically. There is no time to begin like now, which, spelled backwards, means success.

Work hard! Plenty of work is your greatest need. It keeps your mind clear, your body strong and your appetite good. And see that your work accomplishes something. Your days are numbered— your earning period is short. Make each day show a satisfactory result. The best results are obtained when you save, invest and realize.

Nothing makes a m.an feel safer, happier and more courageous for life’s battles than a nest egg in the shape of good investments. It destroys fear of a rainy day and enables him to grapple with the big things.

If you have failed so far to lay aside any money, try again today.

To be a capitalist it is not necessary that you have several thousand dollars in the bank. A man with five dollars is a capitalist just so soon as he decides to make that five dollars work for him—to place it so that, with other sums he may add to it regularly and systematically, he will save, invest and realize in the shortest space of time consistent with safety.

Remember that interest in our work means interest on your money. Get the habit of doing things! Go it alone! You can succeed.

Net Worth, Year 2

A year ago I wrote a post about my net worth and the convenience of having it automatically calculated in an online financial tracker. net17

Since then, my net worth has increased by over $140,000—from about $706,000 to about $850,000.

About 80% of the increase (~$117,000) has been in the investments category.  This is mostly the result of the mutual funds in my retirement account going up along with the stock market over the past year.  Also, all the dividends that those shares have earned have been used to buy more shares.  Of course, I’ve made additional contributions during the past the year.  Breaking it down, the amount of the increase in investments from appreciation and reinvesting dividends was between $90,000 and $100,000 and the rest was additional contributions.

About $13,000 of the increase in my net worth is an increase in the (estimated) value of my house.

Another $8,000 of the increase is the reduction in the amount I owe on my home mortgage.

The remainder of the increase is a temporarily large amount of cash in my checking account.

Last year, I included my old used car (which was worth only about $2,000) in the “Property” category.  I have removed it, after recently buying a “new” pre-owned car.  However,  I have not added that car nor the debt which I will temporarily incur.  The value of the car and the debt would more-or-less offset each other.  I will probably pay off the car debt next month by borrowing roughly $15,000 from one of the retirement investment accounts.

This may be the first time that my net wealth has shown an over-the-year increase that is larger than my annual income.  (I wasn’t watching closely in previous years.)  This seems like quite a milestone on the road to retirement.

Buying a New(ish) Car, Saving $500,000

Some months ago, the driver’s side window of our minivan stopped working and wouldn’t go down.  Next, as it got warmer, we noticed that the air conditioning wasn’t able to do much to cool the air if was warmer than 75° outside.  And there was that self-inflicted damage to the car’s front grill panel, which occurred years ago, that I had fixed (literally) with duct tape and coat-hanger wire.

Then, a few days ago, came the straw that broke the minivan’s back, so to speak: the annual safety inspection.  The news wasn’t good.  The car wouldn’t pass inspection with a non-functioning window.  The inspection also showed that the headlight lenses were fogged up with road-wear scratches and needed restoration and one headlight had water inside the housing assembly.  All in all, it looked as if the car needed at least at least several hundred dollars worth of work to make it pass inspection (the window, the headlights) and more hundreds of dollars to make it comfortable (the air conditioning) and hundreds more to make it less of an embarrassment to drive (the front end grill).  It was a 2004 model, so it seemed reasonable to use it for a trade-in and buy another car.

Given that our time with this particular 2004 Honda Odyssey (“Redrock Pearl” a.k.a. “Burgundy” with “Ivory” interior, evidently) has come to an end, it seems a good time to get an idea what it cost.

car_invoiceWe bought our 2004 Honda Odyssey for $16,551 on March 9, 2010.  That price included a 2-year warranty (which was probably not worth what we paid for it).  It was a remarkably dependable car.  We had only two completely unexpected repair expenses, which totaled about $1,700.  (Of course, we did have the usual driving and maintenance expenses for gasoline, oil, coolant, transmission fluid, brake jobs, a couple batteries, and a serpentine belt.  But those would have been more-or-less the same regardless of which minivan we purchased.)  Let’s say that the cost of the car itself was about $18,250.

We drove the car regularly from March 2010 to May 2017, over 86 months total.

Considering the cost of the car and the time we used it, we spent about $210 per month or about $7 per day.  (Again: this is only the cost of the car itself plus major repairs, and not the total cost of driving, which would have to include operating expenses.)  Incidentally, the odometer was showing about 60,000 miles when we bought it and had reached 180,000 when we traded it in, so the cost of the car for 120,000 miles of driving was about 15¢ per mile.

Looking back, I am pleased that we purchased a used — ahem, “pre-owned” — car.  Had we purchased a new car in 2010, it would have cost about twice as much, meaning we would have spent about $400 each month on just the cost of the car itself.  In other words, over the past 7 years, we’ve been able to save and invest roughly $15,000 (which is, coincidentally, approximately the cost of the car itself.)

This method of saving money — buying used cars, paying for them as fast as possible, keeping them for a long time — allows us to save and invest over $2,000 each and every year.  This can easily amount to perhaps $100,000 ($2,000 per year for 50 years) worth of investments over a lifetime.  An extra $2,000 per year, with compounded earnings, for 50 years might grow to $500,000 or more.  A half-million dollars for driving used cars?  Sounds good to me!  Remember: In order to have at least $1,000,000 in your retirement account by the time you need it, you need to save several hundred dollars each month (more or less, depending on when you start investing and the returns you get on your retirement investments).  The savings you get from buying used cars can go a long way towards the amount you need to save each month.

We were so happy with our old car — the Honda Odyssey — that we decided to get another one.  And guess what?  It’s the new car that we could have bought 7 years ago!  Yep, we now own a 2010 Honda Odyssey that will probably be saving us money for the next 7 years.