Q: My brother passed away recently, and his children have asked if I would buy his share of our parent’s farm land, which is about 100 acres. I have the money, but I’m trying to decide if this is a good investment as opposed to simply keeping the money in the bank. - Gerald
A: For those not familiar, Gerald is talking here about something called “opportunity cost”, or the cost of doing thing A vs thing B. Gerald, the first thing I would question is whether you literally mean keeping the money in the bank. If you’re keeping enough cash to buy 100 acres of farm ground in a savings account, we need to talk about investing it. If you’re keeping it in mutual funds as I hope you are, that’s a different conversation.
I don’t know where the land in question is located, but the Iowa State Extension office shows a gross return on farm ground of 6% from 1970 to 2009. However, about half of that return was the result of appreciation in land value, which has jumped around a lot over the years. Over a similar time period, the Dow Jones (being used here as a proxy for the overall market) was up about 7.5%. The difference isn’t huge, and certainly neither are guaranteed.
Part of the discussion also needs to center around your need for liquidity. Mutual funds can be liquidated for cash in hours. Land isn’t quite as easy to divest. But if you have enough cash laying around to buy the land, I’m guessing you won’t need those funds too quickly.
At the end of the day, as a farm boy, I love land. And the argument can be made that you’re helping out your nieces or nephews by buying the land. Both sides of your coin have a degree of risk, but offer a relatively similar expected rate of return over a span of years. Whether you chose to buy the land or not, let’s get that money out of your savings account and doing some work for you!!
Q: My husband and I are doing the weekly allowance idea that you mentioned in a previous article, and we’re having trouble sticking to it. There are large purchases that just don’t fit sometimes. How do you handle those? - Beth
Beth, I hope you decided before beginning this journey what all expenses were going to be paid from allowance. You might only use it for things where you would normally walk into a store, such as groceries, clothes, trips to the home improvement center, etc. Where ever your delineation point was, make sure you’re taking only the amounts that are appropriate for those types of purchases based on your typical buying behavior. For instance, if you don’t want to include gasoline because of the additional time it takes to walk into the store when you’re done fueling up, decrease your allowance to accommodate the fact that those dollars are now going on a credit card that will have to be paid off at the end of the month.
Still, there is no question that some expenses don’t fit into this paradigm. For instance, if you need to spend $400 on new tires, you could cut your allowance by $40/week for 10 weeks. However, with a larger purchase like buying new shingles for the roof, taking a cut in allowance simply isn’t realistic. In those times, you may just have to call it an exception and move on with your life. It takes a degree of self-discipline to do that though, because it can be easy to just start calling everything an exception.
If you are chronically going over your expenses, borrowing against next week to cover this week, you have two options; raise the amount, or change your spending behavior. Were the amounts you set realistic based on past behavior or expected life-style changes such as raises, loss of a second income, etc? Or were they based on what you can afford in your budget? If going over your allowance means spending more money than you’re making, then you and your husband are going to have to make some tough choices.
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