Tuesday, April 24, 2007

A Car Is Just A Car - Reason # 123781237 Why America Is Hopelessly In Debt

I drive a 1994 Toyota Tercel.

I purchased this Caddilac of vehicles 4 years for the princely sum of $2,300 (in cash, naturally).

It has A/C, automatic, heat, power steering and a rear defroster. About the only thing it lacks that I "need" is cruise control, which would be helpful on my (rare) long drives.

I make a comfortable six-figure income, and no, I'm not a Voluntary Simplicity advocate (well, not yet anyway)...

...BUT, I don't understand paying more than necessary for a depreciating asset.

Had I bought a "normal" new Toyota for $18,000, I would have paid an extra $10,000+ over the past 4 years (see below). And that's being generous, since insurance, taxes, etc. are much higher on newer vehicles.

True, it would have been more comfortable. But how much comfort does one need? Is a Corolla really that inferior to a Camry, and a Camry to an Avalon, much less a Lexus or Mercedes?

When I hear folks who make $40K a year complaining about $300 a month car payments, I have to fight every urge I have to grab them and walk them out to my car, still worth about $1,800 after 4 years of depreciation and costing me about $350 to insure. A year.


I paid a grand total of $1,500 last year for my Tercel, as follows:

Depreciation $150
Gasoline $450 (yes, I only drive about 5,000 miles a year)
Insurance $350
Maintenance $250
Repair $250
Taxes $ 50

Think about what you spend on your car: Depreciation + Insurance + Taxes + Maintenance + Repairs + Gasoline.

My calculation is that folks with a $300 per month car payment spend about $600 a month total for their car:

Payment $300
Gasoline $100
Insurance $ 70
Maintenance $ 25
Repair $ 25
Taxes $ 50
Total $570 per month or $6,840 per year

$6,840 "Normal" car cost
$2,400 Cost to drive a Tercel/Corolla for 12,000 miles per year

$4,440 Net savings every year

Your car may be eating you alive.

The Onion - Proving George Orwell Right

"If you tell someone the truth, you'd better make him laugh. Otherwise, he'll kill you." - Orwell

Radio Shack gets a good send up on The Onion, a great satire site. It devolves into potty humor at times... which is especially annoying, because those articles are neither funny nor insightful.

But with respect to the business world, it's spot on. Check out this little ditty about Starbucks... I swear this will happen some day.

Friday, April 13, 2007

Good Geeky Compounding Fun: When a 14 Year Old Can Surpass a 45 Year Old

Let's ponder for a bit.

Many financial analysts use the 25 year old vs. 35 year old example to show that starting early trumps trying to play catch up. Fair enough. It's an impressive example.

But I wanted to go one further: What about starting really early? If I can install saving and investing in my boys when they are early teens, how will that impact their retirement (or other) savings?

Naturally, I whipped out Excel to help me out.

Let's take a 14 year old boy who is fairly lazy, but mows lawns for an entire summer due to the overwhelming mathematical brilliance of his sainted Father, then socks $3,000 away in a Roth IRA. He plans to start taking withdrawals at age 65.

When this boy turns 45, a friend of his decides it's time to start saving for retirement. He puts away $3,000 a year, every year, from age 45 until he retires at age 65.

To make this easy, let's assume they both earn 8% per year, every year, on all invested monies.

Who had more moolah when they turned 65? (You can see this coming a mile away, can't you Dear Reader?)

14 year old boy who invested 1 year @ $3,000: $103,422 (total invested: $3,000)
45 year old who invested for 21 years @ $3,000: $ 90,973 (total invested: $63,000)

Now imagine the delta if the boy invested $3,000 a year for 5 years (ages 14 - 18).

He would have $445,970. Amazing.

So if your kids want to be rich, show them this... then show them where you keep the lawn mower and the gas can.

Pay the Mortgage or Invest? Redux

In a previous post, I advanced the position that it is (almost) always advatangeous to pay down mortgage debt vs. putting the money in a higher-paying money market account.

This article focused on the word "almost".

My employer has what is called a Safe Harbor 401(k) Matching program. Long story short, it matches 4% on the first 5% of a person's 401(k) contribution. These company matches vest instantly, which is a critical distinction.

Thus, if you make $50,000 a year, a $2,500 annual contribution is matched with an additional $2,000 from the company.

In this scenario, I would unequivocably encourage contributing at least to the point of the maximum company match. The guaranteed rate of return on your investment is 80% ($2,000 / $2,500), so unless you are in a Payday Loan Trap, this is going to be far more beneficial to your net worth than paying down your mortgage.

Real Estate Roller Coaster

If a picture is worth 1,000 words, then a solidly done video says millions.

Exhibit A: Real estate prices (adjusted for inflation) presented as a roller coaster ride.

Yes, a roller coaster ride.

Those of you gamers will recognize Roller Coaster Tycoon as the artistic medium. This is an amazing journey, going from 1890 until today, and reflects why so many thoughtful folks believe that real estate is overvalued.

Take the 4 minute ride and see for yourself!

Saturday, April 7, 2007

Pay the Mortgage or Invest?

An interesting discussion has sprung up over at the Diehards in response to one reader's question: Should he take out a loan on his debt-free home to invest the assets?

My take on this is simple: Unless you have a very good risk/return opportunity combined with a high propensity for risk, 1) don't go back into debt and correspondingly 2) pay off your mortgage before investing in taxable assets.

# 1 is pretty straightforward.

Most folks just do better without the loadstone of debt hanging over their head. Just about anyone will agree that high-interest credit card debt makes more sense to pay off before a mortgage. Even at 10%, credit card debt isn't deductible, and so just about any other investment will pale against a 10% post-tax rate of return.

# 2 gets more tricky.

Folks who have adjustable rate mortgages now, by and large, realize that the days of cheap credit are coming to an end, and therefore their rates will (or are) much higher than historically.

For those with fixed debt, I still maintain that a 6-7% post-tax guaranteed rate of return is almost impossible to beat.

Livesoft over at the Diehards points dissents, pointing out that his 4.875% mortgage can be arbitraged with a 5.1% FDIC-insured money market account.

I still say: You are making 22.5 basis points (5.1% minus 4.875%)... assuming all of the following:

1) You fully itemize on your federal taxes (half of folks don't, the rest don't get the full value of their itemization)
2) You aren't dinged for state taxes (5.75% in my state)
3) You aren't hit by AMT
4) There are no inactivity, transfer or low-balance fees
5) There is no "lost interest" during transfers to and from your bank
6) You are guaranteed that rate for a set period of time... or at least can easily move the money out if the rate is lowered

There's probably more, but you get the point.

In this example, if you pay $1,000 a month in interest and have no fees or "waste", you can gain the princely sum of $27/year (calculated as follows):

$12,000 interest x (5.1% - 4.875%) = $27

The bottom line is this: Pay off your debts first, then invest.

And yes, I know I've neglected matching funds from employers. I'll hit that in my next post.

Good Friday and Easter, Compressed Version

Compliments of John Donne:

Good Friday

Spit in my face you Jews, and pierce my side,
Buffet, and scoff, scourge, and crucify me,
For I have sinned, and sinned, and only he
Who could do no iniquity hath died:

But by my death can not be satisfied
My sins, which pass the Jews' impiety:
They killed once an inglorious man, but I
Crucify him daily, being now glorified.

Oh let me, then, his strange love still admire:
Kings pardon, but he bore our punishment.
And Jacob came clothed in vile harsh attire
But to supplant, and with gainful intent:

God clothed himself in vile man's flesh, that so
He might be weak enough to suffer woe.


Death be not proud, though some have called thee
Mighty and dreadful, for thou art not so,
For those whom thou think'st thou dost overthrow,
Die not, poor death, nor yet canst thou kill me.

From rest and sleep, which but thy pictures be,
Much pleasure, then from thee, much more must flow,
And soonest our best men with thee do go,
Rest of their bones, and soul's delivery.

Thou art slave to Fate, Chance, kings, and desperate men,
And dost with poison, war, and sickness dwell,
And poppy, or charms can make us sleep as well,
And better than thy stroke; why swell'st thou then?

One short sleep past, we wake eternally,
And death shall be no more; death, thou shalt die.

Sunday, April 1, 2007

Quote of the Day

Compliments of Money magazine:

There’s a big cocktail party on Martha’s Vineyard. Someone comes up to this writer, I think it’s Joseph Heller[author of Catch-22], and says, “Joe, see that guy over there? He’s a hedge fund manager, and he made more money yesterday than you made on all the books you have ever published.” Heller looks over, pauses, and says, “Yeah, but I have something he’ll never have: enough.”