I was performing the annual review of fiscal 2012’s income statement, balance sheet, and cash flow statement for my household and one of the lines caught my attention.
My family has two smartphones – a Samsung Galaxy Note and an iPhone. Combined, the annual charges are $2,328 for the service alone (that doesn’t even count the cost of the phones). That has to be paid for in after-tax dollars, so pre-tax, we are talking about more than $3,600 in income required to fund what amounts to two lines when you start looking at Federal and state taxation.
We ended up going to Wal-Mart earlier this week, getting cheap Samsung flip phones and a 1,000 minute T-Mobile card for $100, switching over the same technology that was available ten years ago. It looks, and feels, ridiculous in my hand but the benefits are huge.
Here’s what I am doing with the savings: I setup an automatic transfer out of the CCDA for $2,328 every year to buy limited partnership units in a natural gas and oil pipeline. The distributions are reinvested at a 5% discount to the market value of the units by taking advantage of the direct purchase plan. All else equal, I should have an extra $38,000 sitting around ten years from now from this single decision. If yield distributions are the same, it should be producing $3,040+ in cash per year at a very low tax rate due to some of the accounting mechanisms available for these sorts of securities.
Don’t Stop Calculating Your Opportunity Costs, Performing Periodic Reviews
The question is one of trade-offs and opportunity cost: Would I rather have an Android or iPhone in my pocket or $38,000 in extra assets, producing $3,040+ in additional household income when I am ten years older?
Imagine that ten years from now, I decide I am done with the program. Not only do I have the $2,328 I am saving from the lack of a smartphone, I have the $3,040 in cash generated by the oil and natural gas partnership. That is an extra $5,368 per year in free money, just sitting in the bank. I could give it to charity. I could go to Las Vegas and bet it all on black. I could donate to a local food pantry. I could add it to my spending cash for my trips to New York when I have suits or shirts made. I could put it into the Christmas fund and give wonderful gifts to friends and family.
All of those things have more utility to me than keeping around a phone that serves no purpose given my work routine. To someone else, that may not be the case. If I worked for a big law firm, was constantly on the phone with clients, and had to ride the subway to work for my morning and evening commute, I would probably be obsessed with my smartphone. But I don’t. I go where I want, when I want. I’ve set everything up so it is convenient for me. It makes no sense to have this additional expense.
This is what I mean when I say that millionaires are accumulators. This decision looks tiny but I’ve spent my whole life doing things like this that grow into giant oak trees. It doesn’t seem like much in the short-term – $194 or so per month, which is nothing compared to the few shopping trips I’ve shared on the blog. But after a decade, it starts to add up to something meaningful.
After two decades, I’d be looking at $133,336 in extra assets producing $10,700 or so in additional annual household income. I’d only be fifty years old.
By the time I was Warren Buffett’s age? It would be $3,283,479 in extra wealth generating $262,700 in additional annual household income.
The purpose of intelligent capital allocation is to make money work better for you as an employee. Sometimes you need to reassign the job a certain group of dollars has. My “phone” dollars are now hard at work buying me a pipeline. I like pipelines better than phones. I like the cash they produce. Pipelines are good.