Hidden Benefit of Financial Security

The following is a staff writer post from MikeS.  He is a married father of 2.  So, with the cat, he ranks number 5 in the house.  He loves numbers and helping people. Please leave any questions or comments below for either Mike or Crystal.

Living in the Northeast, as I do, heating my home is a significant annual expense.  Since, I have been living on my own, I have used the three main types energy, gas, electric and oil.  It has been difficult to compare the costs between the different types as the sizes of my homes or apartments have varied.  The cheapest by far was when the heat was included in the rent, but I can’t seem to get my mortgage company to cover that now.  I bring this up because it’s time to renew my oil contract for the winter.  I have several options that I can choose from and I am actually making a change from last year.  In case you have to go through a similar exercise, I’ll take you through my thought process.

The Plans

The first option is simply to have the oil company automatically deliver and charge whatever the spot price of oil is for that day.  I went this route my first winter in the house.  Having never had oil heat before, I was unsure of what to expect.  The biggest downside to this program is the spot price.  When you need the heating oil the most is when the price will be the highest, supply and demand. 

The second option available to me was a contract where there is a price ceiling.  This contract would allow the price to drop if the market rate dropped, but came with a $100 fee.  When I calculated costs, I figured the price would never drop low enough, long enough for me to recapture the $100 fee.  Again, the likelihood of the price dropping in the winter when demand is high is pretty low.  I have never used this option. 

The third option is a straight fixed price with a $50 fee.  Essentially, I reserve a set amount of gallons at a fixed price and pay when it is delivered.  This is the option that I have used for the past couple of years.  The benefits are twofold; first I know that my price is locked in, so that no matter how cold the winter is, my price doesn’t change.  The second benefit is there isn’t a large upfront cost, as I pay as the oil is delivered.  The last option available to me is similar to the fixed price, but with a few main differences.  The first is there is no fee, the second is you pay upfront and the third is the cost per gallon is $0.10 per gallon lower.

My Choice

As you might have guessed, I am going with the last option.  Reserving and paying for my oil ahead of time.  I’m buying 800 gallons, at $3.699 per gallon, which is my historical average usage over the winter.  By going with this plan, I will be saving about $130 over the plan that I used last year.  The money isn’t substantial savings, but it is certainly more than I would be earning in interest.  At best, I might be earning about $20 in interest.  A couple of years ago, I couldn’t even make this choice.  I didn’t have enough money in savings to cover that amount.  Now, I can use the money I have to save money.

Flexibility

The savings has allowed me to choose the best financial option.  It’s also what I do with my auto insurance.  I pay that in full every year to take advantage of a lower price.  Rather than pay a fee ranging between $2 and $5 a payment, I pay it all off in one shot.  As my financial position becomes more secure, I keep finding benefits that I never contemplated before.

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4 thoughts on “Hidden Benefit of Financial Security

  1. Great post!

    I’m reminded of something Warren Buffet said. Maybe in one of the shareholder letters. I don’t recall, exactly. Paraphrasing, it was along the lines of, “Berkshire Hathaway likes to keep a lot of cash on hand, because cash creates opportunities.”

    The idea being that you can take advantage of opportunities when they present (like cheap securities), but only when you can afford them.

    MikeS here has mostly the same idea! On a smaller scale, of course, but much more relevant for most of us.
    Robb @ Top Financial Advisor recently posted..Ultimate Guide: The Best Way To Invest 50kMy Profile

    • Thanks Robb!! I’m hoping to feel secure enough to take advantage of the securities opportunities in the next few years. I’m also using the security to my advantage when it comes to health insurance for next year too. That’s coming up in a future post. I really am enjoying the benefits of the extra cushion.

  2. That’s a good plan. We had oil at my mom’s place before we switched to gas and this is what we used to do. We tried the first option at first but, like you, realized that it was more expensive when it was colder.

    Since then, we switched the boiler to gas and it has been a lot cheaper.
    Aldo@MDN recently posted..How To Track Your SpendingMy Profile

    • Thanks Aldo. We have a gas fireplace on the first floor, that we are going to try and use more frequently this year. Now that my kids are a little older, it’s not as big a worry as it had been. The plan is to use that to pretty much heat the first floor, then have the oil take care of the second floor and basement. I’m curious to see what the savings might be.

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