There is hardly anything in the world that some man cannot make a little worse and sell a little cheaper, and the people who consider price only are this man's lawful prey.
- John Ruskin, 1819-1900.
Monday, September 5, 2011
Saturday, September 3, 2011
New Vehicle Woes...
There are few decisions in life that have the potential to cause more grief and woe, more wailing and gnashing of teeth, than the decision to buy a new car or pickup truck. Why is this? There are several reasons:
(1) We buy more car or truck than we need... or we buy one that has too many expensive options that we don't need or won't use; or, worst of all, we buy one that doesn't fit our needs at all.
(2) The monthly payment is more than our budget can handle because we did not have a large enough down payment (or our trade-in was not worth much), or our credit rating was so low that the interest rate on the auto loan was too high;
(3) We do not keep the vehicle long enough to fully amortize the loan, and so we end up rolling the remaining loan balance into the loan on the next vehicle we buy.
Even in the simplest of cases, in which we don't have a trade-in, and we're paying 10% down, we could still end up underwater... owing more on the auto loan than the vehicle is worth. As an example, let's imagine we're buying a new economy vehicle for $24,000. The vehicle is expected to depreciate steadily over the next ten years and be worth $6,000 at the end of ten years. We have a 10% down payment ($2,400), so we'll be financing $21,600 for 84 months (7 years) at 8% annual percentage rate (0.67% per month on the remaining loan balance). Our monthly loan payment will be $337.09. You can confirm this for yourself by entering the following values into this FINANCIAL CALCULATOR:
Present Value: -$21,600 (NOTE: money paid out is NEGATIVE)
Future Value: $0.00
Number of Payments: 84
Interest Rate per period, %: 0.67
Payment At: [End]
Click [PMT] to compute the monthly payment amount of $337.09.
The following graph shows what this transaction looks like. The RED LINE is the value of the vehicle. Notice how it steadily depreciates from $24,000 when new, to $6,000 when it is ten years old. The GREEN LINE is the remaining loan balance. Notice how it starts at $21,600 at year zero, when the vehicle is new, and declines to zero at the end of seven years.
The important thing to notice is that at the one-year point the car value and the loan balance are the same, $19,200. However, for the next three years, the car depreciates faster than the loan balance declines, so you are underwater on the loan. Sometime in year five, the loan balance has declined enough that the car is worth more than the loan balance, and you are no longer underwater.
The problem is that we frequently sell or trade-in our vehicle during this underwater period, rather than keeping it until the loan is paid off, at the end of year seven, or at least until the car is worth more than the loan balance.
(1) We buy more car or truck than we need... or we buy one that has too many expensive options that we don't need or won't use; or, worst of all, we buy one that doesn't fit our needs at all.
(2) The monthly payment is more than our budget can handle because we did not have a large enough down payment (or our trade-in was not worth much), or our credit rating was so low that the interest rate on the auto loan was too high;
(3) We do not keep the vehicle long enough to fully amortize the loan, and so we end up rolling the remaining loan balance into the loan on the next vehicle we buy.
Even in the simplest of cases, in which we don't have a trade-in, and we're paying 10% down, we could still end up underwater... owing more on the auto loan than the vehicle is worth. As an example, let's imagine we're buying a new economy vehicle for $24,000. The vehicle is expected to depreciate steadily over the next ten years and be worth $6,000 at the end of ten years. We have a 10% down payment ($2,400), so we'll be financing $21,600 for 84 months (7 years) at 8% annual percentage rate (0.67% per month on the remaining loan balance). Our monthly loan payment will be $337.09. You can confirm this for yourself by entering the following values into this FINANCIAL CALCULATOR:
Present Value: -$21,600 (NOTE: money paid out is NEGATIVE)
Future Value: $0.00
Number of Payments: 84
Interest Rate per period, %: 0.67
Payment At: [End]
Click [PMT] to compute the monthly payment amount of $337.09.
The following graph shows what this transaction looks like. The RED LINE is the value of the vehicle. Notice how it steadily depreciates from $24,000 when new, to $6,000 when it is ten years old. The GREEN LINE is the remaining loan balance. Notice how it starts at $21,600 at year zero, when the vehicle is new, and declines to zero at the end of seven years.
The important thing to notice is that at the one-year point the car value and the loan balance are the same, $19,200. However, for the next three years, the car depreciates faster than the loan balance declines, so you are underwater on the loan. Sometime in year five, the loan balance has declined enough that the car is worth more than the loan balance, and you are no longer underwater.
The problem is that we frequently sell or trade-in our vehicle during this underwater period, rather than keeping it until the loan is paid off, at the end of year seven, or at least until the car is worth more than the loan balance.
Sunday, August 21, 2011
Tires: the most important components on your vehicle (edited 10 January 2022)
THE MOST IMPORTANT COMPONENTS
If asked what they think the most important components on their vehicle are, most people will answer 'the engine' or 'the engine and the transmission' or 'the brakes'. I would argue that the most important components on any vehicle are the tires, and specifically the four tiny contact patches (or two on a motorcycle) on the tires that touch the road. Why? Because any input - acceleration, braking, steering - go through these four tiny contact patches. Here is a link to the subject of The Tire Contact Patch at the Vehicle Dynamics Institute.
ORIGINAL EQUIPMENT (the tires that came with your new vehicle)
Have you recently bought a new car, or are you in the market for one? Then you should know that Original Equipment (OE) tires, the tires your automobile manufacturer put on your new vehicle are usually CRAP - they're noisy, harsh-riding, short-lived, and poor-handling, especially in wet weather and snow.
For example, let's say you recently purchased a new 2022 Honda Pilot EX-L AWD. The tire size is 245/60-18 and according to TireRack.com the OE tire is a Bridgestone Dueler H/P Sport AS which is a Crossover/SUV Touring All-Season tire, a light truck tire. This tire gets 3 out of 5 stars from TireRack users. So, how good is it?
Click this link for the Crossover/SUV Touring All-Season tires survey by TireRack customers. Notice that the Bridgestone Dueler H/P Sport AS tire ranks close to the bottom of this table.
If you're a Costco customer, the simplest thing to do is to use TireRack to find BFGoodrich, Bridgestone and Michelin tires available at Costco for your vehicle. There are several Grand Touring All-Season tires to choose from, and my favorite is the Michelin CrossClimate2.
So, what can you do about the mediocre Original Equipment tires that you have on your new car? Well, you have three choices: (1) live with them until you wear them out, (2) replace them immediately with good tires, or (3) for $80 or so have them dynamically balanced and siped. Siping improves quietness, tread wear and handling. I would NOT sipe high-quality replacement tires because (1) it will void the warranty and (2) the tires don't need it, but I usually sipe the Original Equipment tires when I buy a new car. Here is the link to Les Schwab for siping information.
Wednesday, August 17, 2011
The two kinds of market losses we can incur...
In any market, there are only two kinds of losses we can incur... loss of capital and loss of opportunity.
In other words, we can lose part or all of our capital (investment) by being IN the market when we should be OUT OF the market, or we can lose out on the opportunity to make a profit on our investment by being OUT OF the market when we should be IN the market.
Personally, I would rather be OUT of the market wishing I were in, than IN the market wishing I were out.
To paraphrase Will Rogers: The return OF my investment is more important than any return ON my investment.
A financial advisor who always urged his clients to remain fully invested in the market once observed that, since 1900, there has never been an eighteen-year period in which the stock market did not fully recover its loss. The classic example is the 1929 stock market crash which did not recover until 1947, eighteen years later.
This brings up an interesting point. The two most important things we need to know about ourselves before investing are: (1) our tolerance for risk, and (2) our time horizon. If we are young, taking on risk is not a problem because we have time to wait for a market recovery. If we are retired, we may not have an eighteen-year time horizon to wait for a market recovery, so we are forced to become more conservative in our investment philosophy.
Sunday, January 9, 2011
"The Richest Man in Babylon" by George S. Clason
The Richest Man in Babylon [Paperback]
George S. Clason (Author)
Read by millions, this timeless, easy-to-read classic holds the key to personal financial success. It's been hailed as the greatest of all inspirational works on the subject of thrift and financial planning. This celebrated bestseller offers an understanding of personal money management. It reveals the secrets to acquiring money, keeping money, and making money earn even more money.
My comment:
This is one of the best books I have ever read on the subject of personal saving and investing. As of Jan. 9th, 2011 it is rated on the Amazon.com bestseller list as follows:
Amazon Bestsellers Rank: #2,207 in Books (See Top 100 in Books)
# 2 in Business & Investing > Personal Finance > Money & Values
# 4 in Business & Investing > Business Life > Ethics
#19 in Business & Investing > Mgmt & Leadership > Motivational
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