FINAL CAR BUYING TIPS

This is the final article in a series about buying automobiles. We have discussed how to buy new cars, how to buy used cars, trade ins and the finance office. This time we are going to clean up the loose ends. Here are a few other items for you to review.

• As the relationship develops, the salesperson will want to know how you expect to pay for the vehicle. Tell them you are prepared to pay cash by obtaining a loan from your own bank, but if they can get you a better rate you will consider it. Tell them your score but do not tell them your bank’s interest rate or they will know they only have to beat that number rather than give you their very best rate. If they do not offer you a rate that beats your bank’s rate, then get the financing from your own bank. If they offer you a better rate than your bank or credit union, tell them you want a loan approval “subject to your credit score being as stated”. This way there is no inquiry on your credit report unless you are certain you will be approved.

• When you find a car you like, be sure to compare the sales tax rate if you take delivery at the dealership or at home or work. If you can save a couple hundred dollars by having them deliver it to your door, I would suggest you do that.

• Try to avoid using finance companies because rates are very high.

• Do not believe a dealer when they tell you a vehicle has never been in an accident. They might be lying or simply unaware of a previous problem. The bad boys will put a sticker on the car that says something like, “All sales are final” or, “As is”. If you should later find out the vehicle has been in a wreck, you cannot do anything about it. Therefore do one of the following 1) demand a vehicle history report such as is available through Carfax 2) require a WRITTEN warranty of at least 30 days 3) or take your vehicle to a qualified mechanic for an inspection before you complete the deal.

• If you need to upgrade your car but you also want to buy a home in the near future, you should buy the home first, unless you have a very good credit rating and strong income history. It is much harder to get a home loan when you have car payments than it is the other way around.

• Consider using a line of credit loan that is secured by your home for your auto loans. They allow more payment-flexibility because you can pay interest only, or add principal anytime you wish. Another benefit is you don’t have a new inquiry on your credit report. Next, you might get a lower interest rate. And finally, the interest you pay is probably deductible. If you don’t have enough equity in your home, ask your banker if they would consider taking your property as primary collateral and the title to the vehicle itself as additional collateral. If so, you may still qualify for lower interest rates and the interest deduction.

• Miles per dollar – My nephew and I came up with the idea of measuring how many miles you get out of a dollars worth of purchase price. If you buy a new $24,000 vehicle and drive it 100,000 miles and then sell it for $4,000 you got 5 miles per dollar. That is fairly normal. But if you buy a good used car for slightly over wholesale at a dealer for $14,000 and then you put an additional 90,000 miles on it and sell it for $3,000 you get over 8 miles per dollar. That is very good. The best I know of was Matt who bought a van from the GSA auction for $2,000. It had only 24,000 miles on it. He drove it back and forth to work for six years and put an additional 105,000 miles on it, then he gave it to a charity. That is a whopping 50 miles per dollar. Way to go Matt!

• Regarding auto repair shops. This can be a hit and miss proposition. For routine matters like oil changes and brake jobs, I recommend you ask the people you know if they have had good luck with any particular shop or mechanic. For more serious repairs I prefer experts. For example take a vehicle with a transmission problem to a transmission repair shop. If you are uncertain about the ethics of these people, call the Better Business Bureau or a consumer protection agency to find out if there have been complaints filed. Be sure to ask what type of warranty they offer and get it in writing. Finally, if you find an honest shop stick with them.

Nearly everybody buys autos from time to time, so it is worth the effort to read these articles.. The most important thing to remember is that the dealer needs you, not the other way around. Don’t let them get you emotionally involved. As long as you remain on an intellectual level, you should do great. Remember, there are thousands of cars out there. Good luck.

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The Land Mines

In my recent discussions we have explored the practices of the auto industry. We have talked about buying new and used cars.

This article will reveal some of the sleazy practices of the less-ethical auto dealers. Do not assume that all dealers and salespeople resort to these tactics because they do not. I have known several very nice people in this field. However, some of the people in this industry have become masters at exploiting the ignorance of the masses, so now you will know what to watch for.

Eventually, you will settle on a vehicle you like. It would be nice if you could just take it to the cash register and get a good deal, but many dealers want to see how many extra dollars they can squeeze out of your pocket before they complete the transaction. Let’s take a look at some of the common “shifty” practices of the bad boys.

• Do not surrender your keys to the used car manager or anybody else in the dealership. Some dealerships will use this ploy to keep you from leaving. Once they have your car and the keys safely set aside, it is difficult for you to get out of there. If they want to test your vehicle go with them and get the keys back before you resume negotiating.

• One of their many sales techniques involves using a “manager” against you. The sales person first tries to get you to sell your vehicle for wholesale and buy his vehicle for full price, but when he meets any resistance from you, he starts talking about his manager. They want you to make a written offer, which “must be approved” by the manager. Naturally, the manager NEVER accepts your offer. They will always attempt to squeeze more out of you. They are willing to stretch the negotiations out for hours if necessary because they are obligated to be there all day. On the other hand, they expect you to grow impatient because you want to do something else. The dealer will try desperately to get you to pay more by telling you what a one-of-a-kind bargain this car is, or the other buyer who is just about ready to grab up the vehicle, but don’t fall for that. They don’t usually let real buyers get away and besides if you lose this particular auto, there are thousands of others just like it.

• When the first salesman suspects that he has exhausted your patience, he will call in a substitute. The “T.O. Man” (take-over man) is a master closer. This fellow is a little different than the mystery manager from the above example because you will actually meet him. He will ask you something like, “What do we have to do to put you in this car today?” Regardless of your response the answer is, “I can’t do that, but if I can get the boss (we are back to that practice) to agree to blank will you go along with him? What a loaded question!!! He has made no commitment at all, but has gotten you to establish your “starting point”. (see above). Tell him you want to know their best deal and you will decide to take it or leave it. Before you answer them be certain there are no additional fees (Like dealer preparation). We have already established what to pay.

• Once the price is hammered out, they will escort you to the office of the Financing Manager, where there are more sleazy tricks than anywhere else on the dealer’s lot; and, those with poor or substandard credit are more vulnerable than anybody else. Here is an interesting and common tactic that comes into play whenever the dealer helps customers to obtain loans from banks. The dealer offers to help you get your loan. He obtains up to five of your Credit Scores: these can include your FICO scores or standard scores or Enhanced Auto Scores from one or more major reporting agencies. Then he gets you approved based on your best score. But, when he presents the loan package to you, he pads the numbers any way he can. He writes up your loan based on whatever he can get you to pay above and beyond what the bank would have accepted. Since the bank cannot accept the overpayment, they kick-back the “juice” to the good ol’ dealer and you get screwed every month thereafter as you make your payments.

• Another tactic involves misleading you about your loan approval. They assure you they can get your loan approved and then they “help” you sign all of the paperwork. After those formalities are out of the way, they whisk you out the door with you new vehicle. About a week later they call you back, whether you got approved or not, and tell you your loan was denied because of poor credit. They advise you that your credit score falls into a high-risk category and lenders have to charge higher rates to off-set the risk. Naturally, they can save the deal for you if you pay more money down or make higher payments. When you squawk, they show you the “fine print” on their contract that says the deal is contingent upon getting financing. If you demand to undo the deal and get your trade-in back, they tell you they have already wholesaled it out and they do not have it any longer. If you get caught in this scam demand to see the rejection letter from the bank or tell them you will be giving the state attorney a call.

• They have a scam they pull involving cosigners. They tell you that you do not qualify and if you can get somebody else to sign for you, such as grandma, you can still get the car. Then they prey on grandma’s kindness and ignorance. She does not know what you have agreed to or about the fine print so she willingly signs anything they ask her to, and you can imagine where that leaves you. The bottom line is, if you need a cosigner you ought to ask yourself if you can really afford this particular vehicle.

• Beware when they tell you that your bank’s checks are not accepted. Sometimes they will say that your particular bank’s checks are no good or they take too long to clear, etc. Then they will try to help you get financing from their own bank. You know what happens from there. Once again tell them you would like to call the Attorney General’s office in your state to see if they know about any such practices.

• The finance manager is going to try to sell you an extended warranty, but I would NEVER ever get one because of my basic philosophies about insurance. However, if there is some reason you think your vehicle is more likely to experience severe maintenance problems than an average vehicle, then you can get good extended warranties on line, where there is real competition for your business. Never let the finance manager tell you that the lender requires an extended warranty, because lenders do not do that. If the bad boy persists, tell him to write down the fact that the lender requires it so that you can check with your state’s attorney.

• Many dealers like to sell service contracts. You pay an upfront fee and then you can bring your vehicle back for free oil changes, tire rotations and other routine jobs. If you do indeed use all of the coupons, you do actually enjoy a modest discount, but after the dealer has your money a lot can go wrong. You might forget to come back or sell the car or move away or it gets in a wreck. This program is designed to get you into the service department where you will be unlikely to get any great price breaks. I suggest you forgo this expense and look for bargains as you need them.

• Dealers are notorious for add-ons. This mostly applies to new vehicles but there are some of them in the used market as well. One example is they offer to upgrade your tires, then they charge you for the new tires and keep the other tires, whether they are new or not. Be sure to read your invoice well. Make sure they have not charged you for things like Dealer Preparation, under carriage rust protection, extra detailing or cleaning, service contracts, fabric guard, or paint sealant unless you already approved it, which I hope you did not.

This is just a partial list of the ways that naïve consumers get mistreated, but I am certain new tricks are popping up all the time. Fortunately, you can avoid falling into any of these traps just by knowing they exist.

Note: The above article and several of the ones that preceded it are part of one chapter in my upcoming book about family finances, entitled Stop Flushing Your Money Down the Drain.

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Buying Used Vehicles

We have been discussing one of the chapters in my next book about various aspects of the car-buying business. The previous article was just about buying new cars; This time we will discuss purchasing used cars.

Once again, you should get your financing lined up before you go shopping. This will keep you in a position of strength and reduce the likelihood that you will fall victim to dealership financing scams.

Now, get this thought imbedded deep in you mind: Dealers do not pay more than wholesale price for any vehicle and sometimes they do not even have to pay that. If they have several similar cars, they probably bought them from a fleet of rental cars or some similar situation. They also buy blocks of cars from each other and at dealer auctions. In cases like that, they can usually buy for slightly below wholesale prices so they have plenty of bargaining room in those cars.

The dealers also get inventory from the public. Sometimes they will buy cars outright but it is more common for them to take cars in trade. If they take a private party’s car in trade, the dealer’s approach is to start at wholesale and deduct for needed repairs. In other words if they take in a car that has a wholesale value of $8,000 but it needs $400 worth of tires and $600 worth of body work, they will not pay more than $7,000 for it, but they will probably try to pay you less. Expect them to say something like, “We can get cars like yours at the auction for less than you want.” Whether it is true or not is debatable.

The only time a dealer will over-pay for a car is when they are taking a trade-in and they have excess profit built into the vehicle they are selling to that same customer. But, in a case like that they write off any amount they overpaid to buy one car against the profit they are making on the other one they are selling; therefore, they still consider themselves to be into the trade-in vehicle at the wholesale value.

The point of all of this is the dealer pays wholesale or less for every car on his lot. Therefore it is easy to compute how much to pay them, or more importantly, what NOT to pay them.
At some point they may take out a “book” of some type and try to imply that it is the Bible of pricing, but don’t fall for that. Those books are just “guidelines” and they do not all agree (Otherwise, why have more than one?). Furthermore, they are not as current as on-line information. Once you have a vehicle picked out, get to a computer and check out kbb.com (Kelly Blue Book). It will give you a great indicator of value. It even takes into consideration local matters like a convertible will have more demand in Florida and a 4-wheel drive will be common in Montana. Add $1,000 or 12%, whichever is higher, to the wholesale price and it is as simple as that. It will not work every single time but most dealers are going to have a hard time turning down a respectable profit like that.

If you are buying from a private party, you can employ the same basic procedure. First get your financing lined up and then use the kbb.com site to tell you a fair “private party price”. It is usually about halfway between wholesale and full retail.

Frequently, the private parties are more difficult to negotiate with than the dealers. Some private parties need to get retail pricing because they owe so much debt against the vehicle, but that is not your fault so do not overpay them. Others are just greedy and looking for a full retail buyer. Hopefully, you won’t be that person.

Furthermore, the dealers will ordinarily give you some sort of warranty, but private parties do not. In addition, the Better Business Bureau and the State Attorney offer some sort of leverage against a dealer, but they are of little value when dealing with Joe Blow.

Finally, when it comes to buying used vehicles, I have a strong preference for Federal Government auctions. If you are in a large metro area, there is a good possibility they are right in your area. A common one is GSA auctions. If there are very few private parties at the auction, you can usually get nice vehicles for wholesale prices. That is because your primary competition is car dealers and as we just noted, they do not pay over wholesale. So if you bid $100 higher than wholesale, there is a good chance you will be the high bidder.

You can generally assume that these vehicles are in good shape because the employees who drive them are supposed to be taking them in for regular maintenance. In our area, most of the vehicles have less than 65,000 miles on them or they have very few miles but they are 6-7 years old. My last purchase was a 7 year old pickup with 4-wheel drive, air conditioning, automatic transmission and only 28,000 miles (It would have still been on warranty if it was younger) for $4,700. I have been driving it for about 4 years now and can still get all of my money back if I want to sell it.

I have bought at least two-dozen cars and trucks this way. Many were for personal use, others were helping friends and family, still others were work-trucks, and we have even purchased a fair number of them strictly for resale.

Sometimes they have other interesting items at government auctions such as large trailers, buses, ambulances or wrecked cars.

Other government agencies, as well as businesses and private parties also use the auction process to unload inventory. The state of Colorado uses Ebay’s auction format to sell a lot of their vehicles.

The City and County of Denver sells all sorts of fascinating “vehicles” every year. In addition to many dozens of vans, pickups, and autos, they always have gobs of other items like excavators, bobcats, trash trucks, dump trucks, tractors, pavers and lots of heavy equipment. One year they sold three very large fire trucks for $2,700 – FOR ALL THREE! Two of them still ran. It is a hoot to go to auctions like that, even if I don’t buy anything.

One final point regarding auctions: The best bargains usually come at the very beginning and very end of the auction. In the beginning of the day, many customers arrive late and others hold back until they are familiar with the process. At the end of the day, the excitement wears off and most people already have what they came for so you may only have a couple people or dealers who will bid against you.

The bottom line is, I suggest you get on line and search for any auctions in your area. At the very least, you will have a good time and you just might find an incredible deal.

The next article will be about the challenges in the Finance Manager's Office. Come on back.

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Buying Brand New Vehicles

This particular entry is about buying BRAND NEW CARS. If you have a few extra minutes scroll down to read my previous entries about the auto industry.

For starters, I am not a big fan of buying new vehicles because of the expensive depreciation, on-going payments, high cost of insurance and the interest rates that accompany these purchases, but if you are in the market for a BRAND NEW AUTO, and if you don't mind saving money, here are some good things to know:

• All dealers pay the same basic price for the vehicles. You can find out their price by checking on line. A few places to check are InvoiceDealers, Cars.com and MyRide.com.

• Depending upon your point of view, there are several different “prices” for any new car. You should be familiar with all of them. 1) The Manufacturers Suggested Retail Price (MSRP) is top retail as indicated on the sticker. Dealers love buyers who actually pay that amount. 2) There is the dealer’s “list” price. They may try to tell you this is what they paid for the car, but that is misleading, because there is some “fancy accounting” going on. More on that in a moment. 3) There is the dealer’s “actual cost”, which is lower than the list price.

• The dealers get to keep a hold-back fee of two to three percent of the list price on every vehicle they sell. On cheaper, entry-level cars that will be a few hundred dollars but on top-end luxury vehicles it can be a thousand dollars or more.

• The dealer also gets factory kickbacks in the form of incentives from the manufacturer. These might include year-end closeouts or other promotions, including highly profitable “loaded” cars. That is why so many of the cars on the lots have expensive extras.

• Therefore, when we take into consideration the hold-back fee and the manufacturer’s incentives, a dealer can actually sell a car at below the list price and still make a handsome profit. But they will try to get more, a lot more.

• Most dealers like to charge $300-600 for “dealer preparation” fees. This is strictly another profit-grab because part of the purchase price is supposed to cover this service. Ask your salesman what the philosophy is before you make any offers. Tell him if the dealer wants $500 for “preparing” a vehicle that he is supposed to prepare anyway, you will lower your offer accordingly. I would not pay more than the list price for any car that carries a dealer prep fee.

• There is a similar issue with “destination” charges. Some dealers will put their own sticker on the vehicle and add an entry for transportation or destination charges. This is just another way to increase profits because the transportation fees are already built into the list price. If you pay extra for destination you are paying twice for the same service. Therefore, beware of customized stickers.

• When we add the hold-back fee plus any manufacturer’s factory incentives and dealer preparation fees and destination charges the dealer can easily make $2,000 even if he sells the car at his list price. But that does not stop him from marking up the asking price even more, and that is where the MSRP comes in. As far as I am concerned $1,500 over the dealer’s actual cost is plenty of profit for entry level vehicles (below $20,000) and $2,000 is the maximum for any vehicle.

• Once you find a model you like, ask the salesperson if they have more of that model from which you can choose. You are going to do that for three reasons: First you want to see if you like any particular car more than another. Perhaps you like the gold one or the four-door model. Second, you are finding out how much inventory they have because their motivation will vary depending on the circumstances. If they have only one or two of that model, there may be good demand for it and they may be inclined to hold firm on their prices. But if they have plenty of inventory, or if they are closing out a model, you will know not to pay more than a couple hundred dollars over the list price.

• The third reason you want to look at a bunch of cars has to do with all of those extras they have on them. Dealers love to sell “loaded” cars because they often get factory incentive kickbacks, but you can actually use that against them. So, get a note pad and look on a bunch of the stickers to determine how much they charge for the individual extras like pin stripes or upgraded tires etc. Write down every item and its cost. Now ask yourself this question with each item, “If I already owned this vehicle and it did not have that item, would I be willing to go out and buy that item for the price on the sticker?” If you are looking at an air-conditioner and you live in Texas or Arizona the answer would most certainly be, “yes”, but would you pay extra for air-conditioning if you lived in Alaska? What about that fancy $400 stereo? If you already owned that car would you be willing to shell out an extra $400 for that system or would a simple CD player or Am/Fm radio do just fine? Fifteen minutes on this exercise will reveal a lot.

• Once you have a good wish-list, you can ask the dealer which vehicle is the closest to what you like. There is a good chance they won’t have your ideal car, but you can still get it or a very deep discount to take one of his loaded cars. Tell the salesperson their cars are too expensive because they are loaded with things you don’t want. Advise him that you intend to contact a Fleet Manager (These are very common, especially in larger dealerships) to special-order your vehicle. At this point, he knows he has one last chance to make a commission and will probably be inclined to remove nearly all of the profit from the extras if you will take one of his cars off the lot.

• If he does not satisfy you, go home and call a fleet manager in that dealership or a competitor, and special-order your new vehicle with the extras that you want and no others. There is no sales commission. I custom ordered an SUV this way and saved several thousand dollars on extras that meant nothing to me. It took six-weeks to get the vehicle, but there was some extra pleasure in the wait: sort of like looking forward to your vacation.

• Eventually you will have to enter the negotiation process, but how much should you offer? There are several approaches. You can do like most people and just wing it. I bet you can guess how well they do.

• Another approach is to gather all of the data you can from this book and other sources and then make your wisdom known and take your chances. At least the salesman will realize that you are not a complete dummy and you will probably do okay.

• If you don’t have the time or desire to do all of this homework you can use a simple formula to determine how much the dealer will accept. Here is how it works. Put the number “1” in front of the first digit in the MSRP, and that is the percentage you can deduct from the MSRP. As an example, suppose the vehicle has an MSRP price of $32,500. In that event, the first digit is a “3” so put the number “1” in front of “3” and you get “13”. Therefore you can reasonably expect the dealer to accept a 13% discount. In this case, that means your target price would be $28,275, provided there are no dealer prep or destination fees. If you have one of those stubborn dealers who will not sell without those fees, then you will lower your target price accordingly. Let’s do another one. If the MSRP for your new luxury SUV is $50,000, the first digit in the MSRP is a “5”. So put a “1” in front of the “5” and you get “15”. Therefore you can reasonably expect to get about 15% off, or an adjusted price of $42,500. Once again, subtract for any dealer prep or destination fees. Naturally, these numbers vary among manufacturers, models, dealers and other circumstances, but they are usually in the ball park.

• My suggestion is that you avoid all of the above and use a professional buyer service. Some of them sell the cars directly to you, but others negotiate for you, as your agent. In the latter case, there really isn’t much “negotiating” involved. They know the dealers actual cost. They add a modest profit for the dealer and a fair fee for their own services (finding the vehicle and knowing what to pay) and that is your price.

There are plenty of these companies so the competition forces them to be reasonable. Since there is no other overhead, such as commissions and dealer prep, it is very unlikely you will beat the deal that a professional buyer will get for you. My favorite company is CarsDirect.com. They have been around a long time. You can go to their site at any time and plug in what vehicle you like. They instantly show you the MSRP and your cost if you decide to use them. You do not have to provide any private information to see how it works. The only information they ask for is your zip code so that they can consider the shipping costs.

What do you think?

Check back in a few days and I will share with you information about buying USED CARS.

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Buying a Car: Part One

I am nearly finished with my book about Family Finances. One of my recent chapters explores purchasing automobiles. Here is one of three parts from that chapter.

Reality Check
Let’s face it, if you are not a good negotiator, buying a car is like rough-housing with your big brother. You don’t have much of a chance. They know everything you know and a lot more. There are all sorts of ways they can take advantage of your ignorance. That does not mean that all dealers are crooks, but if your dealer does happen to be a scam artist, at least you should know how to recognize it. To begin with, I would like to discuss the shopping experience with you.

General Practices
Regardless of whether you expect to buy a new car or a used one, here are a few things you should consider.

• Try to approach the transaction from a logical perspective rather than an emotional one. If you fall in love with a stereo or with leather seats, you may end up buying a lot more car than you need; and, that is Flushing precious dollars down the drain.

• Sales tax on a vehicle is usually determined based on where you take possession. Call your local city and state agencies to determine what the sales tax will be if you elect to have a vehicle delivered to your home or at your workplace. This can be higher or lower than what it will be if you take possession at the dealership. A two-percent savings on a $25,000 vehicle is $500. That is certainly worth a half-hour or so of your time.

• Many urban areas require regular emission tests or similar requirements. But, if you have a second home in some other out-lying area with less severe requirements, you may be better off to get the vehicle from a dealer in that area and take possession there and get license plates there. Thereafter you may be able to avoid the time, expense and aggravation of those emission procedures. They might also have lower taxes and lower dealer overhead which could mean a lower price for you.

• If you determine that you will take possession at a dealership, it can easily be worth your time to call around to find out which nearby dealers are in areas that have lower sales taxes, especially if you live in a large community that has lots of dealerships. For example, I live in the Metro-Denver area. Boulder and Lakewood have high sales taxes, but Greeley and Brighton are much lower. Would you drive an hour away to a cross-town dealership to save $500 in sales taxes? You can bet I would.

• If you expect to obtain financing, get your FICO Credit Score from at least one credit bureau. The cost is under $20 and it does not affect you credit rating (Actually there is a more accurate credit report for buying cars, called Auto Enhanced Credit score, but the public cannot currently get copies of those) Then contact your own bank or credit union and an on-line bank such as MyAutoLoan.com to find out what rate they will charge you for a loan based on that score. Also inquire about any and all closing and financing costs they might charge. This will help you get the very best interest rates. That interest savings can mean several hundred dollars EVERY YEAR until you pay off your car.

• I recommend you sell your car yourself or donate it before going to the dealership because dealers make their greatest profit from their trade-in programs. I do not see a need to Flush all of that money away. However I realize that some people find the entire selling process to be so unpleasant they would rather take a loss than jump through the necessary hoops of taking calls, meeting strangers, etc. Other times we don’t want to stick a private party with that old lemon we have been driving, so the dealer offers an acceptable way out.

• If you insist on trading in a vehicle, do some research to discover its wholesale value. You can get a good idea at kbb.com. Don’t forget to factor in the mileage and extras, such as air-conditioning. If you do complete a transaction, it will be a lot easier to keep the numbers clear if you think in terms of trading your vehicle at wholesale for their vehicle at wholesale, and then add a “reasonable” profit ($1,000) for the dealer on the one he is selling.

• The transaction is more likely to go your way if the dealer is more motivated than you are. So, one of the worst things you can tell them is, “My old car died, and I have to get something right away.” Therefore, if you do not have a vehicle that you can drive for a couple weeks, while you shop, try to borrow a car from a friend so that you do not put unnecessary pressure on yourself.

• When the salesman probes for some basic information, let him know you are serious about buying; but, make it clear that you do not have to buy today. They know that people like that usually buy within a couple weeks and do not ordinarily come back. This motivates the salesman and dealership to lower their price as much as necessary, rather than let you slip away.

Stay tuned. Dealer tricks coming up.

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How Debt Sneaks Up On Us

I am constantly harping on the damning effect of debt but it is time to identify the primary reasons people get into such financial predicaments. Following are the top 10 causes as I see it.

1) No Mentors - Unfortunately very few of us have good financial mentors. Nobody tells us about the pitfalls of credit. Too often, the very people who should be able to guide us in our financial decisions, such as teachers and parents, don’t really do all that well with their own money. Therefore, we are left to learn our lessons the hard way: By trial and Error. Sadly, most people whom I know that are financially responsible had to make mistakes and learn from their pain; then there are the ones who don’t even learn from their own mistakes.

2) Easy access to credit – It is no wonder we get into credit trouble. The credit card companies converge on new college students before they even unpack their bags. Stores are constantly trying to get us to apply for their cards. Banks advertise on TV and radio why we should get their cards. Auto dealers will hand a set of keys to almost anybody who has a job or a down payment if they will simply sign on the bottom line. We have even heard of dogs and dead people getting credit cards. With cavalier policies like that, ill informed consumers are doomed.

3) Failure to keep score – Budgeting is at the root of financial responsibility. It you don’t know where you are at or where you are going or how you are going to get there you might as well face a certain grim reality: You are lost. How can you possibility expect to “get there” if you have no idea where you are going? Get a realistic budget and stick by it. You will be surprised where your money goes.

4) Instant gratification - In our TV driven world we see crimes solved, remarkable reality TV accomplishments and sporting victories all portrayed as if there is no work involved. We are a lazy society, susceptible to sales pitches about quick fixes, instant food, over-night romance and lottery winnings. Ryan Healy calls it Premature Lifestyle Enhancement. But, very few people have an incentive to tell us about the importance of discipline, hard work, practice and perseverance. If we only hear about the glamorous life, how can we be expected to restrain ourselves?

5) Unwise spending choices - We pay too much for everything from mustard to vacations. When you buy the smallest jar of mustard, you are paying the most per ounce for it. The same about anything else you could buy in bulk and save money. By overpaying for so many things your money does not stretch as far as it could, and this leaves you with unnecessary debt. You should start thinking about using coupons, buying out of season, and getting larger quantities of non-perishables.

6) Excitement – There is a certain flush of power or adrenalin when we buy things. It makes us feel important. We see so many other people throwing money around we want to project a certain degree of prosperity ourselves. So we pull out our credit cards and buy all sorts of things we don’t really need. Before long, our credit cards are at the max. Like all other bad habits, unnecessary spending can become an addiction. We tend to justify such purchase with thoughts like “I deserve this.” But that is actually a counter-productive instinct. Gomestic says that in large part, people make purchase this way to counteract the feeling that nobody cares about them. The truth is that such impulsive purchases deny you the more important items that you really do deserve.

7) Bummers - If you are like me, you are constantly surprised by the unexpected monetary demands that come knocking at the door. When we don’t save for the proverbial “rainy day”, we are not prepared for life’s setbacks. That can easily mean that other debts do not get paid off or we use our credit cards to get by. Here is a good article about "Avoidable vs. Unavoidable" debt.

8) Minimum payments - If you think in terms of “what is the least I can pay” rather than “What is the full amount of the debt” you are asking for trouble. If you don’t pay off your cards every month, the lenders attach interest charges that prohibit using that money for other items. When you get paid you find yourself thinking “who do I owe this to” rather than “How do I want to use this money” Pay off your statement in full every month and you will be much more careful about what you buy.

9) Excessive refinancing – In years gone by, people tried to pay their homes off. But more recently, the masses have looked upon their homes as an additional source of income. Every time the home value goes up, they run out and refinance to get some of the equity out. That is troublesome on several levels. First and most obvious, they owe more for their homes and their payments go up. Second, it sets a false sense of financial health. As long as the consumer can refinance her way out of debt, she sees no reason to exercise restraint in her spending. I have known quite a few people who have run their credit cards up then refinanced their homes multiple times to pay off the debt. Each time they convince themselves they will not do that again. However a year or so later the credit cards are at their limits again and they repeat the process. Sadly, we all know what happened to the housing market a couple of years ago and the gravy train stopped but the debt remained. Many of those people went broke.

10) Imitating Ostriches – I weigh too much and I rarely step on a scale; partly because I don’t really want to know just how bad my problem is. The same thing happens to people who are wrestling with their finances. They know they are struggling, but they just don’t want to know how bad things really are. We can both solve our problems if we would just pull our heads out of the sand, examine the truth and act accordingly.

There are many other reasons why we get into too much debt. Which ones do you think are worth mentioning?

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The “Fortunate” Ones

Most people don’t know that in spite of recent economic times there are over seven-million millionaires in our country? That is probably because the media has more to gain by broadcasting the plight of the homeless and down trodden than they do by trumpeting the success stories. For some reason people want to hear about crime, struggles, and hardship so that is what garners ratings and sells newspapers. Most good stories are usually hiding somewhere between the later pages.

The politicians like to portray the financially successful people as “winners of life’s lotteries” as if they were merely lucky. This mischaracterization of the accomplishments of these people serves to set up an unnecessary bitterness between the classes. A much better alternative is to show the “less fortunate” group what they can do to raise their standard of living via their own endeavors.

In a previous story (see archives section) I illustrated, through the use of a strawberry farm, one of the main flaws in the mind of many: That is they live in a world of scarcity. They think there is only so much money (or strawberries or practically anything else) so those who have these things must either be lucky or they must have cheated in some way. That cynicism prevents them from achieving their own potential. Instead of looking inward for their successes, they hope the boss, the union or the government will watch out for them.

Sometimes they will try to increase their value by working harder, or taking training or getting more schooling. Those are worthwhile ideas but in most cases their new value, if any, is still determined by their employer or provider. It does not ordinarily lead to financial security, just a slightly plusher rut.

The difference between the “fortunate” ones and their counterparts has to do with how they look upon money. The less fortunate group perceives money as scarce, so they struggle to accumulate it. But the “fortunate” group knows there is lots of money to be had and they learn how to make the money come to them.

The “fortunate” ones understand the difference between good debt and bad debt and are therefore more likely to be debt free in the typical way we think of debt. They usually have some sort of budget and they abide by it fairly well. Because of that budget, they are more likely to save money than spend it on wild indulgences. By avoiding impulsive purchases they can use the savings they enjoy to make investments that generate passive income. Once they get to the point that they can live on the passive income, the rest of the money they earn is available for additional investments or enhancing their lifestyle. Once they get to that point, their net-worth grows exponentially.

It is not overly difficult for the common person to join the ranks of the “fortunate” ones. The first thing to do is rethink the role of debt. Basically, bad debt is a result of impulsive purchases or debt which cannot be paid off each month. It carries interest charges that eat into the buying power of the consumer. Essentially, any money spent this way is wasted and could have been saved and invested. For another list of millionaire practices as told by U.S. News and World report go HERE.

The next thing to do is look for ways to get your money to generate additional income. This can be as simple as buying CD’s or annuities. You might buy stocks or real estate. There are several other asset classes worth considering and each one offers its own risks and benefits. Here is a blog that explores how to earn passive income on line. Overall I like real estate the most because there are 4 ways to make a profit and you can get somebody else (tenants) to pay all of the bills.

Semi-passive investments are also appealing. For example, if you could buy or build one of those drive-thru car washes. Customers will put money in your pocket while you are not even there. A friend of mine has five-dozen laundry machines placed in several apartment buildings around town. They are fairly easy to maintain, they pay for themselves and they generate $30,000 a year in extra money. It only took him about four years of a casual but on-going effort to build his business from scratch. At the rate he is going it will only take a few more years to live off of that money. He can even hire somebody else to do all of the work if he wants to and retire while still in his thirties. His primary job, while respectable, can never offer him flexibility like that.

Even if you can’t think of a way to make money “on the side”, you can still earn a nice return just by paying off other debt, such as a mortgage. If you save 5-7% interest on that money you are using your money much better than running up credit card debt.

As difficult as it may be to believe, it is not impossible to become a millionaire in the US. There are over seven-million people who figured out how to do it. The easiest way to join them is to rethink how you look upon money. The first thing to do is stop wasting it. The next primary object is to accumulate passive income.

What say you?

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Your Amazing Hidden Debt

The National Debt has just surpassed twelve-trillion dollars.

That means every man, woman and child in America owes approximately $40,000.

If you are under the impression that we can just make the lucky rich people pay all of this debt, then think again. The richest man in America is Bill Gates. His net worth is estimated to be around forty-five-billion dollars. We would have to steal all of his money from him plus 20 others just like him to pay off one of those trillions, but we don’t have that many rich people. In fact, you have to throw in all of the money from Warren Buffet, and the Walmart Klan and the rest of the top-ten billionaires (see this list) just to round up one-quarter of a trillion.

After that group, we would have to seize all of Oprah’s money and Ted Turner’s and Martha Stuart’s resources, and the majority of the richest 400 people in America before you finally pay off the first trillion.

Now consider this point: According to The Tax Foundation, in a recent year, there were approximately 134 million tax filers and of those over forty-million were exempt from paying income taxes, (many of them actually get refunds) so somebody else has got to pick up their share.

So, if the richest people can barely make a splash in the bucket of debt, and tens of millions of citizens pay no taxes, who do you suppose is going to be expected to pay it?

Do you have a mirror?

In my next entry I will tell you who you owe the money to and how all of this is affecting you and your family.

Your input is invited!

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