Financial Uproar

It’s The Financial Uproar Mailbag

2012-05-25T02:54:17Z

Bonus points if you can get the joke between this image and the title

Yeah, I know, I’m totally ripping this off of Control Your Cash a few months ago. It’s okay though, since he ripped off The Greatest Frugality Blog Of All Time, (TM) The Simple ~~Doofus~~ Dollar. He probably ripped it off Teen People magazine or something. I guess what I’m trying to say is, the concept of a mailbag is more ripped off than a Chinese copy of Spiderman 3 on Megavideo. If I owe somebody royalties, they can kiss the hairiest part of my ass.

If you want your question featured in the next Financial Uproar mailbag, just go ahead and use the contact me page. I will probably ignore it for something more interesting that I pulled out of my ass. Let’s do this thang.

Yo, Captain Handsome:

What’s up with everyone popping wood when Facebook’s IPO flopped? I thought people liked Facebook.

First of all, well played with the Captain Handsome reference. What time is dinner tonight, Mom?

I noticed this too. When Facebook retreated to the issue price ($38) at the end of their opening day of trading, people reacted like you were giving them a puppy. When it sold off sharply on Monday, people were practically sexually aroused. Considering how most people spend about an hour a day on the stupid thing, you’d think they’d want the IPO to be successful.

There are a couple of reasons why I think people may have acted this way. Firstly, as the blogosphere has discussed ad nauseum, Facebook has a very high valuation. According to Google Finance, the stock trades at 105 times earnings and about 15 times book value. Calling the valuation lofty would be a bigger understatement than calling Taylor Swift kinda cute. Every wannabe investor took a look at the P/E ratio and ran for the hills.

Yet, nobody even bothers to talk about Amazon, (P/E of 176, P/B of 30) LinkedIN, (P/E of 611, P/B of 15.25) Zygna (P/E of DOESN’T EVEN MAKE MONEY, P/B of 2.8) or Netflix (P/E of 24, P/B 6.3). Those got more reasonably valued as we went on, (especially Zynga’s book value) but some of those companies are pretty rich. Why isn’t everyone pounding the table on Amazon going down? Because sweet Jesus, it makes Facebook look like a value stock. If Facebook’s valuation means it deserved to go down, then where are the people cheering Netflix’s recent price decline?

The real reason people cheered Facebook’s decline is because they called it, and they want the reason to gloat. There’s nothing wrong with pumping your chest after a good call, but being the 256838296829532934902582658th person to call it (author’s estimate) kind of takes away what little thunder you’ve earned. Look for their next prediction, that the sun will rise in the east tomorrow.

Hey Nelson:

I have a question about financial blogs in general. It seems like everybody has differing opinions about everything. Some say you should start your own business, others say you should go find a job. Some say you should cut your spending, while others focus on increasing your earnings. Some say you should use the snowball method to get rid of debt, others say you should pay the debt with the highest interest rate first. What gives with all the contradictory advice?

Steven
Nome, Alaska

Here’s the deal Stevie. Most bloggers don’t know anything beyond their experiences. If that’s all they have to draw from, what are they supposed to do? Make crap up?

Finances are just a big ol’ confirmation bias. If I have credit card debt and I use the snowball method to pay the thing off, I’m probably going to tell the world how awesome the snowball method is, even though math would argue with that logic. It might be the most useless thing in the world for the reader, but all the writer has to lean on is prior experience.

(Aside: one night when you’re bored, get your favorite adult beverage and Google Reader with like 1000 unread personal finance blogs. Drink every time you read some variation of ‘works for me’. I guarantee you won’t make it through all 1000.)

This isn’t really a bad thing, unless the author literally tells you to throw money away. Just keep in mind that the author has a bias that they’ve probably disclosed, just not directly. It’s up to you whether you embrace their advice or discard it. Just remember, usually when someone says ‘works for me,’ that means they’re justifying a bad financial decision.

Hey Nelson:

Why do I suck so much?

Trent Hamm

Inbreeding.

Nelly:

I know you like both RIM and Nokia. If you only had to pick one, which one should I buy?

Joesph Carter Ashton Vanderbuilt III
Harvard University

Hey, that’s the closest I’ll ever get to Harvard.

I know this is going to sound like a cop-out answer, but just hear me out. You should buy both.

I think both companies are capable of turning things around. RIM has a fortress of a balance sheet, even though their path to profitability isn’t very clear. Their new phones aren’t very exciting, and I’m not really sure what the catalyst will be to boost the shares. Meanwhile, Nokia has already released a couple of models of their new Windows based phones, with plans for a tablet later on in the year. Nokia has an execution problem facing them, while RIM has an identity problem.

Who really knows which one will recover. One might, both might, or they might both go to zero. When you invest in companies like these, there is a legitimate risk they will go to zero. I’m willing to take that risk, since the upside is so great if they figure it out. If one of RIM or Nokia survives, the stock price could easily increase 5x from these levels. If one goes up 5x and the other goes to zero, you’ve still made 4x your money. I’m willing to take those chances all day long, and so should you.

If you bet the farm on one and the other goes up, this is bad. Spread out the risk. You may lose a bit of return, but you also decrease your chances of losing all your money.

It’s The Financial Uproar Mailbag is a post from: Financial Uproar For 140 character musings, follow me on the Twitter

You’re Driving Me Crazy

2012-05-22T03:51:43Z

There I was, sitting in Subway, minding my own business, about to put 6 inches into my mouth. I’M TALKING ABOUT A SANDWICH YOU PERVERTS. Suddenly, two girls in their early to mid 20s appeared, subs in hand, and they sat down at the table beside me. One was cute, so you know I was at least a little excited about this. Except she talked in the little girl voice, which immediately takes away from the sexiness. Just a little though.

Anyhoo, I need to add a little more to the back story before this will all make sense. I live in a small town, approximately a hour and a half away from the nearest big city. As you can imagine, there are all sorts of people who are just waiting until they can make their next trip to the excitement of the big city, not to mention all the exciting nightclubs that are just waiting to take their money in exchange for getting drunk next to unfamiliar people.

Back to that lunch at Subway. It turns out that one of the girls lives in the big city (Calgary) and commutes every day to my crappy little town. This literally blew my mind. I’m surprised my brain is still in tact.

I checked it out on Google Maps, it is 135km one way. She drives back and forth every single weekday, with the exception of statutory holidays. For easy figuring, lets assume 225 workdays per year. 225 workdays multiplied by 270 kilometers per day is 60,750 kilometers per year.

According to this fancy chart, driving a Toyota Prius 60,750km would cost our cute lunch friend $21,908 over the year. She’s also looking at a minimum of 1 hour each way, even though the trip takes at least an hour and a half if you do the speed limit. People who drive 60,000 km per year don’t typically drive the speed limit though. So let’s assume an extra 2 hours per day commuting time.

If she makes $60,000 per year for 1800 hours worth of work, (225 work days x 8 hours per day) that works out to an hourly wage of $33.33. That ain’t so bad, I think most people not living in New York or San Francisco would be happy with that. But what if we factor in just the time commuting? Suddenly her hourly wage drops to $26.67 per hour, a 20% decline.

Not only that, but she’s paying more for housing by living in the big city. A lot more. Once you add in her increased commuting costs, and she’s probably spending an extra $30,000 per year for the privilege of living somewhere exciting. I have no idea how she actually was able to afford a whole sub. This chick should spend more time reading personal finance blogs.

My example is pretty extreme, but there are all sorts of people reading this blog who commute across their city to work and think nothing of it. 30km return commute is still 150km per work week, which is 7500km per year, assuming 50 weeks per year. Assuming 35.9 cents per kilometer, you’re still shelling out almost $2700 per year driving your ass to work.

Plus, just about every office jockey out there uses their commute as an excuse to spend all sorts of money on new (or next to new) cars over their working lives. Hey, they need something reliable to get to work, and alternative transportation just isn’t an option. So they overpay for cars to the tune of like a hundred grand over their working lifetime. Car loan interest rates are low now, but they won’t be like this forever, just adding more to your transportation bill over the years.

As the mantra says, housing is about location. People want more house for the same money, so they buy in the suburbs. Typically, the further out the suburb is, the cheaper a house costs. So people figure out how much house they can afford, and then choose the best location they can afford. The problem is though, often these houses in the suburbs come with a long-ass commute. Nobody factors in the cost of this commute when they buy a place in the suburbs.

What’s my solution? I’ve said it before, and I’ll say it again. Move somewhere smaller. If you have a generic government job, you’ll make exactly the same no matter where you live. Small towns often come with less competition as well, since about half the people are just counting the days until they can find a job in an exciting big city.

You’ll cut your commute to 10 minutes max, and you’ll cut your living expenses significantly as well, since housing costs less. Plus, crime is usually lower, the air is cleaner, and you might actually know your neighbors. Over the course of a lifetime, you can put hundreds of thousands of dollars in your pocket by just choosing a lower cost of living area.

Yes, I realize not all of you will be able to pull this off. If your dream is to work at Vogue magazine, you better get your ass to New York. And if you want to work for Apple, community college in Mobile, Alabama probably isn’t going to get you there. But, if you’re in that huge majority of average people, you can easily find a job in your chosen field in a small town.

There are all sorts of extra costs to living in high demand areas. If you’re serious about getting ahead, maybe you should pick somewhere that actually makes it easy to save. This doesn’t mean living in the sticks, there are plenty of medium sized cities with low costs of living. Maybe you should consider these things before choosing a place to live. Or you could piss away tens of thousands commuting like my new girlfriend. Except now I always pay for Subway.

You’re Driving Me Crazy is a post from: Financial Uproar For 140 character musings, follow me on the Twitter

Guest Post: How To Supercharge Your Savings

2012-05-16T04:35:28Z

Nelson’s note: This is long, but it’s filled with actual tips you can take to supercharge your savings. You should read it.

Hi all – call me Greg (Gregory’s too long). I’m here because I like money. Pretty straight-forward, eh? And not liking money is kind of not liking chocolate. So what’s the big deal? Well you see, I spend a few extra minutes every few days going over various finance-related blogs including this one where a Financial Uproar post was mentioned.

Nelson argued that many early retirement bloggers are simply “selling a dream … and the time frame is short. Everybody who isn’t satisfied with their life is drawn to the dream and the freedom the dream provides”. The response?

Buy Experience over Stuff
Delay Buying Things
Focus on Equal Outcomes

(you can go read the full post linked above if you really want more)

I happen to have “financial independence” as my main life goal right now, meaning that I would have enough in assets to not have to work for the rest of my life. But unlike “early retirement” junkies, I do not have any desire to stop working on cool things and picking up new skills. I agree with Nelson that things like the three listed above do a poor job of describing the benefits and details of financial independence . . . I even disagree with the above quite a bit myself: buying experience can be much more expensive than simple material things that will bring much more happiness without being groped by the TSA, delaying purchases technically just means buying the same amount of stuff (it should read “not replacing things as frequently”), and “focusing on equal outcomes” hinges on knowing every possible action and exactly how much each can make you happy (not possible). So aside from stating that I like money, I’ll briefly discuss who I am, what motivates me, how my finances have evolved over the past four years, and what I plan to do to both achieve my goal and reap the benefits.

I’m a bit over 24, have a well-paying tech-based job in the northwest of the US, have worked for 3 years after getting a B.S. in Computer Science, and got a closer look into finance during an internship at an investment bank. Then I had to compare a job offer from the bank in NYC with another offer in Long Island, and I did it with most of the emphasis on the money:

Investment bank – Manhattan:
$63,000 base salary plus unknown performance bonus
-$22,800 in taxes (roughly calculated, but includes a city tax – NYC SUCKS!!!)
-$19,500 rent ($1625/mo for small studio)
-$2,600 for food (probably under-estimated)
-$1,080 for subway cards
-$1,200 for cell phone and internet
===> remaining for the rest: $15,820

Small software firm – Long Island (full budget, I chose this option):
$67,000 base salary plus performance bonus (turned out to be around $10,000)
-$20,700 in taxes
-$15,240 housing (rent + utilities)
-$3100 food
-$2500 car expenses
-$3500 regular expenses (insurance, gym, laundry, haircuts, cell phone)
===> remaining for the rest: $21,960

When looking at these numbers, I didn’t even bother with the details in New York City. I’d have an extra $118/week (probably more) guaranteed in Long Island, not have to deal with a dirty city, get a car to avoid lugging things on the subway, and still be able to go into the city on weekends. I’ll skip the details, but assuming a 3% growth rate over inflation I would be able to retire securely around the age of 58 … but only on my expenses right out of school. But Real Life led me to realize something else: shit happens. I despised signing a lease for more than my net worth, I wondered what would happen if my car broke down . . .

For me, realizing that “shit happens” became the core motivation for increasing my net worth by making the possession of money/assets more valuable relative to my ability to live luxuriously.

So let’s step back for a bit. This is still psychological at its foundation and is different from what many people value, but to me it seems a lot less disconnected from widespread appeal than the three items from the other blog above. So the first question I would use to assess my pretty non-standard approach from your perspective is:

How much does making trouble go away, to the extent money can (IMO a lot), appeal to you?

I could argue this is a much more powerful, fundamental motivation than “focus on equal outcomes” or “delay buying things” because you immediately get something in return: security. How much would you rather just never have issues regarding money compared to buying a few things every week? IMO, that is an example of motivation for the vague mechanisms that Nelson criticized as an incomplete basis for financial independence.

With my initial job, I didn’t eat out all that much and spent most time with friends at my place by simply inviting them over a lot, and that let me save a bit over $20,000 a year with my bonus (some of which was spent on a vacation, expensive car repairs, and eliminating my small student loans). Now let’s take another step in my financial life: I got a significant salary bump and simultaneously moved to a place where living is cheaper. When I moved out West, I had a net worth around $45,000 and found I could do without my car — my only source of significant, unplanned expenses. Now if I really needed a car, I could rent one or use a Zipcar; this was my first step to saving a lot of money — roughly $2800 / yr excluding any super-expensive repairs (my car had some transmission work) and the price of the car itself.

So my new budget looked like this after I moved:
-$16,400 housing (rent + utilities)
-$580 insurance
-$1,500 cell phone and internet
-$3,840 food
-$1,440 dance lessons
-$1,700 other recurring (haircuts, gym, netflix, etc.)
===> Total expenses: 25,460 (less than I paid in taxes, FYI)

Now that I was making more, I felt OK paying the same amount for about 30% more space than in New York and also started grocery delivery with the rationale that it was still cheaper than having a car to drive to the store; I ordered pretty much everything else I needed on Amazon. This increase is what many call “lifestyle inflation” — referencing how people generally raise their spending in line with any salary gains they procure — but it was at least partially offset by deciding to get rid of my car. For me, ditching the car was a good way to save more while still balancing saving with a good lifestyle.

But then a friend pointed out that living in a luxury apartment was unnecessary and against my goals of saving and investing, alongside getting groceries delivered and paying $80/mo for a cell phone. I thought about this for a while, and what helped me realize how much all of this was costing me was thinking about it on a weekly basis: if I have wifi at home and at work, could I just use my existing smartphone on wifi and instead have $20 to spend every week? That’s a good dinner, more than 3 cheap and insanely satisfying teriyaki plates … or new running shoes every month (I actually got some pretty awesome ones on Amazon for $60 instead of $85 at REI). And with rent? If I could find a suitable place for less, that would save me much, much more.

And then my landlord tried to increase my rent by just over 10%; that pushed me over the edge. Refusing to pay so much more became a matter of principle, so I walked around my neighborhood looking for “For Rent” signs. I ended up with a studio three blocks away that is probably a bit smaller than my place in Long Island, but for $440/mo less than I had been paying ($550/mo or so less than the new rate). At the same time I replaced my cell phone with a pay-as-you-go phone at roughly $100/yr and unlimited Skype calling, decided to hike to the grocery store instead of getting groceries delivered, canceled my Netflix, and got cheaper internet service. All together, this amounted to savings of $550/mo or $6,600 every year.

Adding this to the savings from not having a car, I currently have $9,400 in savings a year compared to my lifestyle in Long Island. As I have monitored my feelings towards paring down my expenses, I have found that I am a bit happier than before, too. In fact, I would actually be fine living like I live now for the rest of my life. This means that the amount I need to be financially independent has been reduced by $235,000 (assuming the reasonably standard 4% safe-withdrawal rate) or 5 1/2 years added to the period of not having to work (based on investing $42,000 / yr). (Conversely, when adding a recurring expense to your budget, divide the yearly amount by 0.04 to see just how much extra you’ll need to amass in your investments to cover the expense in retirement without chewing into the principal).

“Aha!” you say – I have reverted to talking about not having to work! Doesn’t that mean my goal is just having a long-but-lousy retirement? No, I still plan to work. But psychologically, achieving financial independence is, for me, a matter of being able to handle one of the most drastic “shit happens” scenarios (measured by expected cost). To me, not having my livelihood held hostage by a need to work is the ultimate elimination of worrying about the shit that can happen to everybody–I would even argue that achieving financial independence (but not necessarily retiring) is one of the largest doses of freedom one can acquire after being in a country that cannot restrain the rights of its citizens too severely. And if I continue to work, I’ll have $67,000 of pure addition to my net worth. If I work for an extra 10 years and invest my entire salary, that can bring me an additional $20,419 a year in income during retirement if I beat inflation by 3%. Retiring at 48 with twice my current expenses? Sounds good to me.

In summary:

I strongly value just not having to be worried about stuff
I have twice moved a significant distance to maximize my income relative to living expenses
I am privileged with the absence of crushing student debt paired with a high salary
I have decided to fast-track my goals by taking actions available to anybody living in an urban area
The distance I have to my goal does not increase because I do not allow “lifestyle inflation” before achieving it

So above are some numbers and a brief summary of how I achieved them along with why I took the steps I did. I’m under no illusion that most people would view me as bat-shit-crazy in many ways, but I just thought I’d see if Nelson would accept a post with some numbers along with the motivations and how I view the tradeoffs. Please yell bloody murder in the comments at how plainly stupid my plan is if you feel the desire, but make sure to include some substantial rationale with it!

Guest Post: How To Supercharge Your Savings is a post from: Financial Uproar For 140 character musings, follow me on the Twitter

Sunday Morning Dump: Fake Number

2012-05-20T17:34:03Z

I’m not about to give you guys my phone number or anything, but you need to know I have a very easy to remember cell number. This is a throwback to when I was in a business that required I be easy to contact, so I got the easiest phone number I could. It’s not quite 555-5555, but it’s close.

Anyway, on Thursday, I have the following text message exchange with a random guy:

Him: Hi

Me: Who’s this?

Him: Depends on who this is.

Him: Is this Maria?

Me: No.

Him: Who is it then?

Me: I asked you first.

Him: Alright, this is Daylon.

Me: I don’t know anyone named Daylon. Are you sure you have the right number?

Him: I’m sure. This is the number Maria gave me.

Me: Does Maria have a reason to give you the wrong number?

Him: No. I met her at the bar. She seemed to really like me.

At this point, it’s pretty clear that Maria gave him a fake number, and that number happened to be my real number. Well done Maria. I wonder if Maria was even her real name.

Song I Like And Therefore You Should Too

So many choices of songs that aren’t Call Me Maybe.

Franz Ferdinand is definitely my favorite band named after an arch-duke. Plus, their tunes are incredibly catchy. I dare you to listen to Dark of The Matinee without your feet moving. The lead singer is an ugly dude though.

Simpsons Quote

Homer: Look, boy, here’s my advice on women: Don’t give them nicknames like “Jumbo” or “Boxcar,” and always get receipts. Makes you look like a business guy.

Gambling Is Fun

Another week, another 1-2 finish. Half the reason why I took last week off is to avoid yet another 1-2 week. The other half had to do with laziness. I’m going to go with different strategy this week. Instead of taking the teams I think will win, I’m going to take the opposite side of the same bet, which obviously has a 100% chance of breaking the 1-2 streak.

With that said, I’m going with Tampa Bay over the Braves, the Mariners over the Rockies, and the under (4.5 goals) in the Phoenix and LA Kings game. I swear, if I go 1-2 again, I’m going to quit this stupid category.

Overall record: 35-49-3

A Post You Might Have Missed

Sometimes, when I look for this posts from a year ago, it hardly seems like it’s been a year since I wrote them. And then I realize that’s how old people talk, so I slam a Red Bull and go loiter outside the 7-11 to regain some of my youth.

Anyway, back in the day I wrote a little thing called You Don’t Know Squat. Unfortunately, even us sexy bloggers don’t have any sort of insider advantage over Wall Street guys. Is it still possible to invest our own money actively and beat the market? Click back to find out, and for only a minimum of penis jokes.

The More You Know

Admit it: you’ve read the Wikipedia entry for at least 4 dirty terms. It’s okay to be curious. NOW HIT ME.

Lahore Stock Exchange (Guarantee) Limited (LSE) is Pakistan’s second largest stock exchange after the Karachi Stock Exchange. It is located in Lahore, Pakistan.The Lahore Stock Exchange (Guarantee) Limited came into existence in October 1970, under the Securities and Exchange Ordinance of 1969 by the Government of Pakistan in response to the needs of the provincial metropolis of the province of Punjab. It initially had 83 members and was housed in a rented building in the crowded Bank Square area of Lahore. The number of listed companies has increased to 519 since its inception. With 37 sectors of the economy and 519 listed companies with total capital of Rs. 555.67 billion having market capitalization of around Rs. 2.51 trillion . The LSE has 152 members of which 81 are corporate, and 54 are individual members. The LSE was the first stock exchange in Pakistan to use the internet and currently 50% of its transactions are via the internet.

I just learned of this stock exchange’s existence, and I immediately want to buy some stocks listed on the exchange. Suicide Bombers Inc. would be an interesting stock, don’t you think? I’m just not sure how they’d make money.

Dirty Word Words With Friends

Friend of the blog Joelaw played booger, while I turned toil into toilet. I’ll let you guys decide which word is dirtier.

If you want to play me, my user is nelsmi. It will be more sexy than Kim Kardashian and Katy Perry having some heavy petting action.

Babe Loosely Related To Finance

Remember my reader who feels the need to chime in on the babe selection? Well, he’s back. Take it away:

Well played on the F-Me boots, Nelson. Well played, indeed.

Now, onto this week’s epic fail. Your picture of Trish Stratus.

While I appreciate and applaud your affinity for naughty librarian or
dirty secretary glasses, could you have picked a worse picture of TS?

…I expect there to be a glasses AND F-Me boots photo next week!

Glasses and hooker boots? That’s asking a lot, but I’ll see what I can scrounge up….

After literally 20 minutes of searching, I found nothing. Lots of girls with sunglasses wearing hooker boots. Not so many just wearing regular glasses. So screw it. I’m going with this instead:

They’re basically falling out. What more do you expect from me?

Time For Links

This will be an extra long version, since I’ve got two weeks worth of links to go through. They’re all good, so read until the end.

Top spot this week goes to Don’t Quit Your Day Job, who I think should totally quit their day jobs and bum around South America for 6 months just to screw with people. PK writes about the poor job stock analysts do, and why you’re foolish to follow their recommendations.

If I had more than one top spot, I’d share it with Frank Voisin, who actually took the time to crunch the numbers and figure out which properties are the best to own in Monopoly. Remember this, just in case you ever play Monopoly again.

Meanwhile, we have the affable Len Penzo giving us one of those top 10 lists bloggers are so fond of. Unlike 98% of the others though, Len’s is entertaining, funny, and talks about something other than emergency funds. Len lists 10 monumental product flops, most of which are absolutely hilariously bad, given the benefit of hindsight.

Weakanomics looks at some alternate ways colleges could charge students so their interests are more aligned. These changes will never happen, but it’s fun to think about alternatives to the status quo.

I hearts me some Seth Godin. He’s got a list of things you should do to make money online. It’s better than most everything else on the internet on the subject.

My homie JT McGee heads over to Darwin’s Money and churns out a terrific piece on the state of the timeshare market, and how legit owners are paying for the sins of their deadbeat peers.

Hot personal finance chick, Vanessa from Random Thoughts and Acronyms, has a perspective on the Quebec student protests that’s unmatched by every other blogger who’s tackled the subject, since she lives right smack dab in the middle of all the shenanigans. She brings some good level headed perspective to the topic.

Paula from Afford Anything consistently churns out content that’s better than yours. She points out that letting invisible money scripts run your life is a pretty silly thing to do. You know what else is silly? Not sending me sexy pics of you in your underwear, female readers.

Control Your Cash ran a guest post from a dog. And then they used a monkey for a butler and a cat for a wheelbarrow.

I’m liking these videos from Kathryn’s Conversations, mostly because they give me the opportunity to ogle her. This week she explains how the student loan bubble will impact main street.

And finally, go to the Globe and Mail website to read the 1266 comments on a 29 year old’s struggles to get a job in his chosen field.

Carnivals

For once, yes! I was featured at both the Carnival of Wealth and Totally Money carnival.

Have a good week everyone.

Sunday Morning Dump: Fake Number is a post from: Financial Uproar For 140 character musings, follow me on the Twitter

The Financial Uproar Car Buying Guide

2012-05-16T04:12:01Z

Because not all of us can afford to hire someone to carry us on a rickshaw, it’s the Financial Uproar guide to buying cars. And I would know, since I’ve bought exactly one of them.

It’s been repeated so many times it’s practically cliche. You should buy a late model used car rather than the same model new. Vehicles lose a full 25% of the value once you drive them off the lot, didn’t you hear? Of course you have, since it’s been repeated by every person in the history of ever. And while you’re at it, you better buy a Toyota or a Honda, since they’re 749% more reliable than their North American brethren.

I’ll admit, I used to buy into these rules as well. I would have bought a Toyota Corolla, but my crappy little town has no Toyota dealership, and I wanted something that was new enough there’d still be some warranty attached. I also bought a leaseback, because the 4 year old Ford Focus was something like 60% cheaper than the new one. My car had low mileage, meaning there was lots of life left in it. The intent was to drive it into the ground. It’s 6 years later and I’m still driving it.

However, a lot has changed in 6 years. Those hard and fast rules I mentioned earlier? Throw them out the window. Stuff is all messed up – with one big caveat. It all depends on the model.

The difference in price between a new and a used Toyota Corolla is only a couple thousand bucks, which is only 10% or so in depreciation over a year or two. The same thing applies for all sorts of other models too, mostly the in demand foreign cars. If you’re looking for a couple year old North American car, most models can be found at a 25-40% discount compared to a new one. The reason why comes all the way back to the principles of economics. Foreign models are in demand right now, and Honda and Toyota just haven’t caught up to the demand in North America. Plus, all the various Cash for Clunkers programs took a crap-ton of used cars off the road.

If you add in super low financing rates, you get an equation that makes it awfully tempting for people to buy a new car. So they do it. For most people, buying a car involves two variables: what model and how old. If in demand models only depreciate by 10% a year, they’ll probably choose new over used. If their model of choice depreciates 25% a year, used probably has the inside track. When we look at these variables, people are logical when it comes to buying.

But then, as soon as they start to get all logical about buying, most people abandon that logic faster than North Carolina banned gay marriage. (SORTA TOPICAL!) There are two things people really screw up on when it comes to buying. One is getting stuck on a specific model, and the other is limiting their search to stuff only a few years old. Let’s start with the model.

These days, crossover SUVs are more popular than beer at a frat party. Everyone has one, including my cheap, cheap Dad. (He doesn’t read my blog because HE DOESN’T LOVE ME!) They’re like an SUV but smaller and better on fuel. They’ve got enough space to drive the rugrats to soccer practice and enough space for that one time a year your wife makes an IKEA run. (Swedish for crap, amirite?) It’s all great, except one thing. Crossovers are just minivans. If you’re willing to suck it up and buy a minivan over a crossover, you’ll save thousands of dollars. But nobody does, because it’s unmanly for a guy to drive a minivan. And because crossovers are cool.

Because we get hung up on certain models, we unnecessarily pay thousands of dollars more for a car just to buy something cool. When you shop for your next car, do some research on what models just aren’t moving. Car dealerships hate having crap on their lot, so they’ll price it to move.

Secondly, we need to stop with this fallacy that new or next to new cars are the only vehicles that are reliable. Cars aren’t like that older lady who used to be hot but now isn’t – they don’t deteriorate simply by existing. They deteriorate from being used, not from sitting in the garage. Which means, from a mechanical point of view, a car with 70,000km is the same, no matter if it’s 2, 5 or 10 years old. It’s the amount of wear and tear on a car that matters, not the age. As creepy 30 year olds who want to date 19 year old girls say, “age is only a number.”

Yes, older cars with very few kilometers on them are hard to find. But there’s huge advantages to buying one. Assuming 20% depreciation, here’s what a $25,000 car would be worth over a decade:

Year	Value
0	25,000
1	20,000
2	16,000
3	12,800
4	10,240
5	8,192
6	6,554
7	5,243
8	4,194
9	3,355
10	2,684

Look guys, I made a spreadsheet. Tell everyone.

Even if you buy the proverbial lemon, you can still fork out thousands of dollars in repairs (and rent a car in the meantime) and still be tens of thousands of dollars ahead of the guy who bought the same car new. You’ll pay a premium for a car with low kilometers, but it’s still considerably cheaper than the alternatives.

Look for cars that old people used to drive, but they’re now dead. This sounds bad, but hear me out. Old people drive rarely, at a very low speed, maintain their cars well, and are likely to have the resources to store the car in a garage. That’s the golden ticket of buying an older car that’s barely been used. Just be respectful and wait until the funeral is done before you ask to test drive Grandpa’s ride.

The advantages don’t stop there. If you drive an older car, you don’t feel the need to make every single little repair. If your car gets a small dent, you’ll just keep on driving. Plus, you can save all sorts of money by not needing collision coverage on your insurance. All you have to insure is the other guy, since your car will be cheap enough that you can afford to take that risk.

I haven’t touched leasing, because that’s the equivalent of lighting your money on fire. Don’t do that, unless you have a way to write it off. Even then, I’m not entirely sold on the benefits of leasing.

To summarize, buy something old with low mileage. If you really want something newer, a brand new car might be better than a used one. If you do buy something new (or close to new) though, can you just admit vanity plays a big role in that decision?

The Financial Uproar Car Buying Guide is a post from: Financial Uproar For 140 character musings, follow me on the Twitter