I am not that smart as I used to think
Have you been in a situation when you thought you did something smart, but it ended up pretty stupid?
Oh, you have done it as well. Nice, I am not the only one.
When I started working on this post my original plan was to tell you about smart decision we made last February. But after all calculations it turned out to be not so smart anymore. So, I had only two options here:
- Delete draft and pretend this has never happened. – Bad choice.
- Write a new post, tell you about our mistake, and learn the lesson. – Good, but painful.
In reality though, I had only one option – write this post and tell you the whole story.
Rent in Silicon Valley
We live in one of the most expensive area in the country. Area, where you can see more Teslas on the streets than regular cars. Area, where millionaires usually wear T-shirt and flip-flops instead of a business suit.
We live in Silicon Valley.
You know the rent situation is bad when your colleagues and friends share this video with you.
When we came here in 2013 our initial rent was $1,898 a month for a not so great 2 bedrooms 1 bathroom apartment in Sunnyvale.
Here you can see how our rent has changed over the course of four years.
In February 2017 we received a new offer for $2,975 a month. When you add utilities and electricity, total cost would be close to $3,100 – NO, THANK YOU.*
It’s time to move
The day we received this new and “very generous” (according to the property manager) offer. Of course we started looking for a new place.
As we started shopping around for a new place we noticed once thing. The market has changed since the previous year.
First off all, prices seemed cheaper, or at least they did not come up compare to a year before. Also, we didn’t see other families during “Open House”.
A year prior we had seen two or sometimes even three families checking out the same apartment with us. That was a good sign as well.
Several weeks later we found a new home for the next two years. And that’s when the whole story begins.
Our original offer was $2,700 a month + PG&E (gas and electricity).
And we; OK, I have to confess here, it wasn’t we. It was I. And I decided to pay for the whole year upfront and get $100/month discount. I don’t know what I was thinking of, but for a some reason I thought it was a good decision.
Let’s do some calculations.
Original rent – $2,700/month or $32,400 a year (It’s insane, I know… Watch the video above one more time).
Discounted rent – $2.600/month or $31,200 a year.
Savings – $100/month or $1,200 a year
Savings rate – 3.7%
We saved $1,200 just in one year, which is great, isn’t it? At least I thought it was great saving. I even said, “If somebody sent me $1,200 check I would cash it out”.
But in reality this deal wasn’t and still isn’t that great.
Let me explain.
To pay for the whole year upfront we had to take this money form an online savings account (We use Ally Online Savings and pretty happy with them) with 1.05% APY.
If we kept this money for the whole year, we would have gotten $31,529.
Just by keeping this money in the savings account our savings rates would’ve changed from $1,200 to $871 for the whole year or $72.5/month.
$1,200 – ($31,529-$31,200) = $871
$871 / 12 = $72.5/month
Interesting, now this $72.5/month saving stopped being so nice. And the percentage rate dropped from 3.7% to 2.7%
I don’t know from where you are, but in the place I was born 1% difference is HUGE.
But there’s more
If we invested $31,200 in VTSAX on February 1st, 2017 and continued to invest our monthly surplus we would have saved $2,227.22 more.
Did you get this? Just by paying higher rent every month we could’ve gotten $2,227.22 more.
I know that the whole market might be down by the end of the year. I know that the whole picture could be completely different. But as of today, this deal that I worked out and presented to my wife and property owner isn’t that cool as I initially thought.
Be like Mr. Claus
Have you ever done mistakes? I have. A lot of them. But every mistake I’ve done is the lesson for me. I try not to repeat the same mistake twice.
In Russia it’s called stepping on the same rakes.
What have I learned from this lesson? It’s better be like Mr. Claus. You know this guy. He makes a list and checks it twice.
Even if you think your idea is great and awesome, or you calculation is right. Check it again.
What about your financial mistakes? Have they been bad as mine?
* My wife and I, we live 2,5 miles from our offices. We ride bicycles to and from, and sometimes I walk. We could’ve moved further and find something cheaper, but we would’ve spent 40-50 minutes in traffic, just in each direction every day. So we prefer to live where our life is really happening.