Last week we dumped a third of our position in Time Warner (NYSE: TWX).
I'm not talking about the stock, which we've never owned. We dropped digital TV from our cable/high-speed online/digital phone package. Our friends think we're nuts: "Life without CSI, Desperate Housewives, or The OC? You've got to be kidding!"
Mind you, we're not completely out of the popular film/TV show loop. We have over 120 movies in our Netflix queue, and our current video obsession is last season's Lost, courtesy of our neighbors' seven-DVD set. We probably watch our HDTV two or three hours a night five nights a week, but we almost never view anything from cable. So why pay for it?
Canceling our cable TV was inspired by a recent review of my parent's telephone bill. Since downsizing to a new home a year ago, they'd been paying $15.95 a month for in-house wiring maintenance, telephone hardware maintenance, and voice mail -- none of which they need or use. For the cost of about 10 minutes of my time mastering the maze of their provider's phone menu, my parents are now saving over $190 a year -- hardly chump change for elderly retirees on a fixed income.
Creating value from waste
No matter where you are in your financial life cycle, eliminating waste from your budget generates opportunities to create value. If you have savings goals -- a down payment on a home, a college education for your kid, or a plush retirement -- redirecting wasted or weak-value dollars to your monthly savings will get you there a lot faster. If you need an incentive to get started, an understanding of the time value of money can be a powerful motivator for detecting waste and poor value in your discretionary expenses.
Hold on! Don't change that dial! Here's an almost painless refresher on how it works. Everyone knows that a pot of money today is worth more than the same amount in the future. The rate charged or paid for the use of money is how we agree on the difference between today's value and the higher future value. We call this the interest rate when we're calculating thefuture value (at an 8% annual rate of interest, $1,000 today would be worth $1,080 a year from now). When we're calculating the present value of money that isn't actually received until next year, we refer to it as the discount rate (at an annual discount rate of 8%, $1,000 next year is only worth $926 today).
Using the $55 monthly cost of my cable TV as an example, I could use either a future-value or present-value calculation to help me decide whether to keep the service or make better use of the money elsewhere.
Future value: If I were at an early stage in my financial life cycle with 30 years to save for retirement, I could use a calculator to tell me the future value of automatic monthly deposits in an IRA. If my $55 monthly savings earned 8% compounded annually for 30 years, I would build up an extra $81,970 in my nest egg at retirement. So which would I rather have? A cable service I rarely use or a bigger nest egg? A future value calculation is an obvious way to use the time value of money as a financial motivator.
Present value: Calculating present value is a bit less intuitive, but it can also be a powerful incentive to drive out budget waste, especially for someone at a later stage in the financial life cycle with savings needs already met. This approach asks the question, "What's the value today of a series of future payments?" For example, I could view my $55 monthly savings as annuity payments over 30 years earning 8%. A financial calculator tells me that this stream of payments has a present value of $7,430. Interesting! My wife and I are considering a vacation to Hawaii this summer, and the tour package that caught our eye is about the same price as the present value of our cable TV "annuity." As Fools with good cash flow, we could pay for this trip up front and consider it the present value of our canceled cable TV payments. So, do we exchange our cable box for a month in Maui? Um, I think I see a luau in the not-too-distant future!
Foolish bottom line
To get more value for your money, you should give your discretionary expenses a close audit. Cable TV might be a high-value item in your household, but you can probably find other areas where cuts are a no-brainer. Be on the lookout for waste and poor value -- hidden charges on your phone bill, subscriptions to magazines you rarely read, fees for the fitness club you don't use, or any expense that gives you minimal value relative to its cost. Play with a financial calculator to estimate the future value of those dollars if converted to an investment savings strategy. Or if your savings are sufficient, figure out the present value of those dollars and spend them on something that really delivers that value.
Yes, indeed, for this Fool, there is life without cable TV. I'll gladly trade a harem of Desperate Housewives for a second honeymoon in Hawaii.
Time Warner and Netflix are Motley Fool Stock Advisor picks.
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When he's not watching DVDs or contemplating financial planning tips and tricks, Doug hangs out at the Rule Your Retirement discussion boards. He welcomes visitors to dshort.net, where he keeps his favorite vacation snapshots. Doug can be reached at [email protected].
