A story about one financial mistake

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:

  1. Delete draft and pretend this has never happened. – Bad choice.
  2. 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.

rent Silicon Valley

32% increase just in 4 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.

My daughter was tired helping us loading.

Financial mistake

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.

5.7% vs 2.7%

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.

Sideshow Bob, annoyed grumble (original content)

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.

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13 Responses to A story about one financial mistake

  1. Steve from Arkansas says:

    Many many years ago we bought our first and still current house. We live in Arkansas where houses are inexpensive and ours was small. We added a lot in later years, second story, garage, two more bathrooms and two more bedrooms. But when we bought it cost exactly the same amount as one year of your rent. $32,400! Imagine a four bedroom house with 1440 square feet on a full acre lot eight minutes from work for the cost of one years rent where you live. You know the flyover states do have an advantage every now and then.

    • Hello Steve,
      Thanks a lot for stopping by and commenting. We don’t have any plans for staying here in Silicon Valley.
      So far California lets us earn more money, even with this insane rent. But in 2 years we are moving to Colorado 🙂

  2. Silicon Valley is bad for sure. But Los Angeles is the #1 most expensive in regards to housing (relative to income), in the nation. Sure in absolute dollars it’s more expensive in the bay area or New York, but people tend to make more money. Case in point, the apartment by our place: it’s $2K/mo for a 1bed 1 bath! Not including utilities and not including HOA’s (yes these apartments charge an HOA, lol). It’s getting nuts out there. Good thing we locked in our housing expenses via a mortgage. It’s like an inflation hedge.

  3. If you haven’t made a mistake with money it probably means that you’ve never handled it. Everyone has made a mistake at this point and I’ve found there are two key points. One don’t repeat the same mistake. Second make sure that the mistake you make doesn’t turn into a disaster. If you can avoid making major mistakes and repeating them most people will go a long way 🙂
    Mustard Seed Money recently posted…The Benefits of the SP500My Profile

    • Yep, you are exactly right. And I would add another key lesson for me – think longterm. Decisions we make can be really nice in short-term, but completely awful in longterm.

  4. Joe says:

    Wow, you paid for a whole year of rent in advance? That’s a ton of money. The discount should be a lot more than $100/month. Maybe I should try to offer this deal to my tenants. 🙂
    Joe recently posted…How We Keep Our Food Expenses LowMy Profile

  5. Meow says:

    Ouch! Leave it to opportunity cost to take the wind out of what you believe is a good decision! This is such an important reminder that no decision should be weighted against a vacuum, but rather the next best option!

    Learning from your mistakes, well, that’s called wisdom. 🙂
    Meow recently posted…7 Cheap, Healthy Foods you can Cook for One without a RefrigeratorMy Profile

    • As my great grandfather used to say, “Smart people learn from others and their mistakes. Foolish people tend to make the same mistake.” I guess it was his paraphrase of “Fool me once, shame on you! Fool me twice, shame on me!”

  6. Grth says:

    Hi Friendly Russian,
    What city is it?

  7. Artem says:

    Hi Friendly Russian, first of all huge thanks for such interesting thoughts, ideas! You are doing great job! Hope to see you one day on CO.
    I have a question for you about leasing/buying a car (especially used one). Of course if u buy a new one the price will drop immensely (~40%). However, if you buy used one the math looks similar to “paying all rent upfront”. And it’s better to lease (especially if u have a good deal +warranty). Of course you can sell the car but only if u’re lucky enough and don’t have a car accident.
    These are my thoughts about this right now. And it will be very interesting to read yours.
    Overall, I wish you a great success in your journey and hope to see you one day in Denver!

    • I’d disagree with you. In order to get a good deal on a lease, you have to put a good downpayment.

      The only exception I’ve seen is a company benefit, I’ve seen $100/month with 0% downpayment and the prices include maintenance + wheels. Sometimes, depends on a company, the price includes gas up to a limit as well. (BMW has one of the greatest options)

      We are moving to Colorado in 2018

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