Is a spending money fast the right move for you?

If there’s a time of year that makes you feel that you’ve definitely been overspending, it’s the holiday season. Even when you try to be frugal, and keep the materialism to a minimum, spending still manages to creep. From the gift exchange you feel you have to participate in, to the food you purchase when you entertain, to the decorations that you couldn’t pass up because they were on sale, it seems as though it’s especially hard to keep your spending under control this time of year.

It’s especially hard for me to keep a lid on my spending during the holidays, no matter how hard I try. As a result, come January, I’m ready to never spend again. There’s a reason that so many people decide to go on a “spending money fast” after the holidays are over. But is a spending money fast the right move for you?

What is a spending money fast?

A spending money fast is a conscious effort to dramatically reduce where you spend money. In fact, much as you avoid eating and drinking for a set period of time when going through a fast, you decide on a period of time in which you won’t spend any money. Usually, a month is the desired amount of time, since it is a meaningful period of time, and it can help you develop new habits to replace the spending habit that you might be stuck in.

With your spending money fast, you continue using your money on must-pay items, like your mortgage payment or rent, your bills, and making your debt payments. You should also purchase groceries as needed. Everything else is usually cut out, unless an emergency comes up, such as the need to repair your car, or replace a broken appliance.

Your spending money fast should also consider cutting out extravagant spending, like junk food at the store. The idea behind a spending money fast is that you only purchase true necessities. So, you might need produce for this week, but you don’t need to buy popcorn or candy. Many people also use a spending money fast as a good time to make use of their food storage. If you are concerned about some of your pantry items reaching an expiration date, your spending money fast can include these items. You won’t have to spend as much at the store, since you can use your food storage to prepare most of your meals. If you wait until later in the year, your spending money fast can coincide with harvesting your garden in order to reduce your need to buy food.

Some people make it a point to go on a spending money fast three or four times a year, just to make sure that they refocus their priorities and reduce the chance that lifestyle inflation will creep in.

Is a spending money fast practical in your situation?

For my family, a spending money fast isn’t really practical. That’s because my husband won’t get on board. He’s not really a big spender, but he likes to buy extra foods at the store sometimes, just to try them, and he enjoys being able to purchase collectibles when he wants, without having to worry about the timing. A spending money fast isn’t going to work in my case — unless I’m willing to to just make it a personal spending money fast.

A spending money fast might not be practical if you have obligations coming up, or if you know that you will be spending money on something important to you soon. An upcoming wedding that you will have to travel for, or if you know that you are going to make other purchases soon, a spending money fast might not make sense, since you won’t be able to keep with it.

On the other hand, a spending money fast can be a good idea if you are trying to figure out what really matters to you. If you want to see what you can do without, and what you would like to cut from your budget, a spending money fast can be a way to see what you truly miss in your spending, and what you don’t care for. Plus, a spending money fast can help you set new priorities, and reduce your overall spending.

Finally, if you are determined to get out of debt as quickly as possible, a spending money fast can be a way to kick off your efforts. A good spending money fast, with the savings going toward your debt, can boost your morale and help you see good results.

What do you think? Have you tried a spending money fast? Did it work?

You’re Nuts To Buy a Vacation Home

For many Canadians, the dream goes a little something like this.Youre Nuts To Buy a Vacation Home

On Friday afternoon, after dealing with Carl from accounting for approximately the 400th time, it’s finally quittin’ time. You elbow past everyone else to the lobby, desperate to get the stink of work off you. After exchanging pleasantries with your fellow wage slaves, you’re in the car and off to the races.

First stop, home. Just enough time to pick up the wife and kids before you’re back on the road again. Destination? Cottage country. Sure, it’s a couple of hours away, but you just can’t wait to get away from the bumper-to-bumper traffic, the urban sprawl, and everything else that annoys you about day-to-day life.

Finally, you’ve arrived to your home away from home. Everything is still set up after last week, all you need to do is hit the store for a gallon of milk and maybe some hot dog buns. The rest of the weekend is spent sitting around the fireplace, roasting marshmallows and probably drinking too much wine.

Ah, now that’s the life.

I won’t knock the experience of going up to the lake for the weekend. I’m not much of a nature guy (“man conquered nature, why would you willingly go back” is my slogan), but I have to admit sitting by a serene lake is pretty great, assuming the mosquitoes are kept at bay.

But there’s a huge difference between wanting to go hang out at the lake and buying property up there. Buying a cabin just isn’t a good idea.

There are a couple of reasons. First of all, cabins cost a lot of money for something that just gets used a few months of the year. Look at it this way. If you buy a cabin worth $250,000 and it takes 20 years to pay back at a 4% interest rate, you’ve spent more than $362,500 just to buy the thing, and that’s not even including property taxes, insurance, and general upkeep.

Besides, most people are just too busy to properly enjoy a cabin. For each family that actually spends each summer weekend at the cabin, there are probably five more that wistfully yearn for more time away, but just can’t seem to find the time. For that family, renting a cabin for the few weekends a year they can get away is a much better choice.

Let’s assume it costs $1000 to rent a cabin for a weekend during the summer months. Our busy family makes it out for three weekends per year. The amount they pay in rent won’t even cover the property taxes and upkeep, leaving them to save thousands in interest over the life of a mortgage. It seems like renting is a much better choice.

But wait, you say, the analysis is missing a very important point. Over the last 20 years, most cabins have been a terrific investment, tracking the price of Canadian real estate in general, which has practically been on an uninterrupted path skyward. Surely cottage owners have made more than enough in capital appreciation to make up for the interest paid.

And you’d be right. On average, Canadian real estate has increased approximately 5% annually over the past two decades. But will that growth continue? And how does it look compared to the alternatives?

Let’s assume two folks took radically different paths. The first one bought a cottage in 1994 for $250,000, paying 4% interest for 20 years. This investment has gone up 5% a year. Today, it would be worth $663,000, less $112,500 in interest. Let’s call it $550,000 for easy figuring, for a profit of $300,000.

Mortgage payments on the cabin would have set back our first investor a cool $1510 per month, or $18,100 per year, give or take a few bucks. Instead of investing in a cabin, the other guy stuck his $18,100 per year into the S&P 500, just buying the index. How much would his investment be worth today?

The answer is $1.2 million, give or take a few thousand.

The reasoning is simple. Even after a crazy bull market in housing, the stock market still crushed the performance of the real estate market. Even after the gift of leverage, which we didn’t give to the stock market investor. And that’s after the greatest bull market in history for Canadian real estate.

Bottom line? Rent the cottage and stick the savings into the stock market. You’ll end up much further ahead.