5 Reasons Car Loans Are A Bad Deal

For most of the country outside of a few major metropolitan areas, cars are the primary mode of transportation. The car we choose and how we pay for it, however, can make a world of difference financially. According to the Federal Reserve Bank of New York, 107 million Americans had car loan debt in 2017. That’s about 43% of the US adult population. That’s complete insanity! While there are instances where taking out a car loan makes sense, it’s generally a bad deal.

Why Car Loans Are A Bad Deal

1. Depreciation

Most people don’t understand how costly depreciation is. Depreciation just a fancy way of saying that something is losing value over time. Depreciation for cars is steep. For example, the average new car cost about $30K, but the second you drive it off the lot, when that odometer goes from 0 to 1, the car lost 10% of its value. Imagine taking $3,000 out of your bank account, cash, spreading 300 Benjamins on the floor, pouring gas on it and lighting it on fire.
[bctt tweet=”Some people love the new car smell, to me, it smells like burnt money.” username=”moneyspeakeasy”]
 
Now that was just the first minute. The average car loses about 25% of its value in its 1st year, and nearly 50% of its value in the first 3 years. So that $30K car is worth about $15K three years later. Now, different cars depreciate at different rates, but the point is borrowing money for a depreciating asset is almost always a bad deal.
Let’s say you went to the store and saw an item you wanted that was $100, but the box was damaged, and it was the last one. Even though the box was damaged, you thought it was still good and wanted to buy it. Typically, they would take 10% off because the box was damaged and offered it to you for $90. What if I told you instead of paying $90, you actually paid $110? That’s what borrowing for a depreciating asset looks like.
When you borrow money, there’s a cost (interest). So not only are you paying the retail cost of the car, but you’re also paying interest while the value is rapidly decreasing.

2. Lengthy Loans

Now that you understand depreciation, you can see why having a long loan term loan is a bad idea. The average car loan in the US is now over 69 months, that’s nearly 7 years. The longer the car loan, the more interest you pay and the more likely it is that you’ll be upside down on your loan, meaning that you owe more on the loan than the car is worth. Trust me, you do NOT want to be upside down on a car loan. That is truly the sunken place. I hate car loans in general, but if you can’t afford to pay it off in 3 years, you honestly can’t afford it.

3. Credit Risk

It’s also a credit risk to have car loans. Within a 5-year span, it’s very likely that you’re going to have at least one major financial emergency. It could be a job loss, a health emergency, home repairs, car repairs or even a combination. If you’ve ever been in that situation, where money is tight because of an emergency, the last thing you want is a bulky monthly car payment. It makes dealing with a financial emergency much more difficult. When you’re in a cash crunch during those times of emergency, it’s much more likely that you’ll damage your credit by missing or being late on payments. One missed or late payment can affect your credit for 7 years.

4. Killing Wealth

The truth is car loans are killing wealth. We have somehow normalized going from car loan to car loan. That’s a recipe for staying broke. The average car payment today is $523/month. Over 30 years, that’s $188,280 worth of car payments. Imagine if we invested it instead.
$523/mo. invested over 30 years is $611,624 with a 7% annual return.
So you can either give $188K away to banks and car companies or earn yourself $611K. You choose.

5. Borrowing Money To Get To Work?

For many people, the majority of their mileage and the primary reason for their car is transportation to and from work. Think about how insane it is to pay over $6000 a year just to get to work. On an average income of $50K, that’s 12-15% of your income before you even start working. That’s not even including gas or maintenance! If you want to really blow your mind, calculate the number of hours you would have to work to pay your car payment for the year.
 

What to Do instead

Chances are you likely already have a car. Personally, I drive my cars until the wheels fall off because I would rather invest my money than pay car companies.
[bctt tweet=”Most people want to impress others with their purchases. I would rather impress myself with my bank account.” username=”moneyspeakeasy”]
Let’s say you just finished paying off your car loan. Instead of rushing out to finance a new car with a 5+ year loan. Be your own bank and buy a used car cash. You’re probably saying to yourself, “I don’t think I can save up that much money.” Think again. Let’s use round numbers to make this simple. Let’s say you want to buy a car in 3 years, the average new car is about $30K.

  1. Set up a savings account for your car and rename it to the car you want.
  2. Continue to pay a monthly car payment to yourself (i.e. $500/mo.) in that savings account.
  3. Three years from now, buy the car that you wanted 3 years ago. Buy it used with < 50K miles, CASH ($500/mo. x 36 months = $18K + interest). Remember that 50% depreciation? That same car you wanted 3 years ago costs $15K now.
  4. Sell your old car, and put the proceeds in the savings account for maintenance, repairs and/or your next car.
  5. Continue paying yourself the payment, but now invest it (401k, IRA)
  6. Drive it car note free, maintain it well, and when you’re ready for a different car (hopefully not for a long time) rinse and repeat.

Most Americans (76%) are living paycheck to paycheck, and the vast majority of people that buy cars finance them. If you want to be different, you have to do different! Get Out! Car loans are generally a bad deal. Think of the irony of going broke just trying to get to work! Be your own bank, pay cash for used cars, maintain them well and keep building wealth for yourself and your family, not car companies.

7 Ways to Maximize Your Income Tax Refund

You take a few hours one weekend between February and April to pop numbers into your online tax prep software or prepare documents for your accountant. You don’t know whether you’re going to owe more to the government or get money back in the form of a tax refund.  

Quick side note: Getting a large tax refund may sound like a huge win, it can often mean that you had too much taken out of your paycheck. In other words, you gave an interest-free loan to Uncle Sam. So while it may be tempting to cheer when you get a big refund check, you may want to take another look at your W-4 exemptions to make sure the right amount is taken from your paycheck. Imagine if you overpaid your rent monthly and received your surplus payments back in April of the following year. Not a cause for celebration, in fact, you might be upset and you would figure out what the correct amount was so you didn’t overpay.

So let’s say that you are “fortunate” enough to receive a large tax refund. The question is, what do you do with that money? Well here are seven ways to maximize your refund so you don’t regret a single dollar you spend.

1. Make a donation  

The size of the donation is not important, it’s the act of giving first that’s important and giving to something (or someone) that’s meaningful to you. Giving is one of the most important aspects of my Spending Formula to Win with Money. That spending formula applies to any money you receive, whether it’s a tax refund, paycheck, inheritance or a gift. Giving counterbalances our naturally selfish instincts to spend on ourselves first and also makes us happier.

2. Emergency Fund

An emergency fund, separate from your checking account (preferably at a different bank), is one of the most important financial decisions you’ll make. You should have a minimum $1000 cash in savings at all times. This is to help keep you out of credit card debt in case of emergencies. This is not an account that you’re looking to make a ton of interest on, it’s an account that you put money into and forget about until your car breaks down, you get a bill from an ER trip, or you have to travel unexpectedly for a funeral. Online savings accounts work perfectly for this.

3. Pay Down High-Interest Debt

If you have revolving credit card debt (you carry a balance from month-to-month), check out the annual interest rate on your card(s), It’s likely 15%+. Giving credit card companies and banks interest payments on items you’ve likely already consumed is like lighting money on fire. Credit card companies are NOT charities! Let’s not donate our hard earned money to them. You cannot find a bank that will pay you guaranteed 15%-25% annual interest, but VISA, AMEX, and Discover are making that off of you. Let’s not.


4. Resignation Fund (Emergency Fund with Flair)

If you have at least $1000 in your emergency fund and you have no credit card debt, consider increasing your Emergency fund to 3-6 months of essential expenses. That is different from 3-6 months of income. Essential expenses are your housing, food, healthcare and transportation costs. If you lost your job tomorrow, how much would you absolutely need monthly to get by without credit cards? (FYI – cable and  smartphones are not absolute needs) When you have a fully funded Resignation Fund, it changes the way you look at your job and how you value your time. Remember, 76% of Americans live paycheck-to-paycheck, meaning they don’t have enough cash savings to cover basic expenses if they missed 1 or 2 paychecks. They would have to borrow money. That’s living on the edge! Have you ever noticed wealthy people use different language when they quit? They resign. It’s a polite way to tell your employer, “I’m just not that into you anymore.” Don’t let your employer control your life! A Resignation Fund gives you the flexibility to walk away if you need to and the security to maintain your expenses if you are unexpectedly laid off.


5. Roth IRA

If you have a fully funded Emergency/Resignation fund and no credit card debt, you should consider long-term investing. We discussed before What a Roth IRA Is and Why You Should Care, but it’s a great option for investing outside of your 401k/403b if you have one. There is an annual contribution limit of $5500, and you have until tax day the following year to contribute, so at the time of this writing, you can still contribute for the 2017 tax year until tax day 2018.


6. Personal Saving and Debt Payoff Goals

Now that we’ve got your emergency and retirement savings out of the way, you can stash funds for a vacation, a home, a car, wedding, kids college fund, etc. You can also put extra money down to pay off debts like student loans or auto loans.


7. Splurge

Often with money, particularly when we receive a lump sum, we spend first and if there’s any left over, we may save and donate. This is a broke mindset and broke behavior! Remember 76% of Americans are living paycheck-to-paycheck, so if you want to be different you have to do different! I want you to do the exact opposite. Give first, save second and spend third. Once you’ve taken care of your important giving and saving priorities, you can spend guilt free!

The #1 Killer of Wealth in America

It’s not a surprise to hear stories these days about the middle-class shrinking. A big part of that trend has to do with the lack of sustained wage growth for decades. Families were essentially standing still financially while the tide of inflation continued to rise. The tide came in and many families are underwater. However, stagnant wages and inflation are not the full story and may not even be the most important part.
During this time of relatively flat wage growth, one would think that personal spending would go down. Typically people spend less when prices go up. For example, when gas prices go up, people tend to drive less. However, over the years, the complete opposite happened, while wage growth has been flat for the past 30 years, consumer spending has shot through the roof!
How do you explain that? One word. Credit.

Misuse of Credit Kills Wealth

We’re not looking to bore you with the history of credit, but as consumers, the only way to spend what you don’t have is to borrow. Over the past 40 years, banks have made credit such a regular part of everyday life, that today, you likely may not know an adult that doesn’t own at least 1 credit card. Imagine before credit cards, where you had to walk into a bank and fill out all kinds of paperwork to get a personal loan. We must acknowledge, access to credit is actually a good thing when used properly. The problem comes when credit is misused or financial products are designed in such a lopsided fashion that debt problems are inevitable.
The way most people build wealth is to consistently save over an extended period of time. They use those savings to invest in the stock market, real estate, or to build/invest in businesses. Unfortunately, as credit availability grew and became mainstream, personal saving rates did the exact opposite.
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Above is a chart showing the outstanding credit since 1970. Keep note that credit cards really didn’t start becoming mainstream until the 80’s. You’ll notice that credit begins to skyrocket in the 80’s and hasn’t stopped since. Compare that to the chart below showing personal savings rates. People used to regularly save 12-15% of their income in the 70’s, but now it’s down to 5%. One guess on where that 10% difference went. According to a NerdWallet study in 2016, the average family with credit card debt pays $1,292 in credit card interest per year. That does not include interest paid on student loans, auto loans and mortgages.
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This is not all about reckless consumer spending, there’s plenty of blame to go around. Inflation, lack of government regulation and complex, misleading terrible financial products are a large part of the problem. For example, recently auto dealers started extending 8-year auto loans. Depending on the interest rate, a borrower could pay as much in interest on that loan as the car itself. Imagine paying $50K for a $25K car and at the end of those 8 years, the car is worth less than $5K. The point is paying interest to banks is the exact opposite of building wealth. The money spent on interest payments for credit cards, auto loans, student loans, mortgages is money not saved and not invested.
It’s not about whether credit/debt is good or bad. Consumers need to be much more savvy about the cost of borrowing money. It’s not simply the monthly payment, but the amount of interest over time and what one is losing out on by paying that interest. It’s about making an active decision about which side of compound interest you want to live on. You’re either paying interest and growing the profit of banks or receiving interest by investing and growing your own wealth. Choose wisely.

4 Reasons Financial Literacy is Essential 

April is Financial Literacy Month! The purpose of Financial Literacy Month is to bring awareness to and promote the importance of establishing and maintaining financial healthy habits. Unfortunately, in our country, financial literacy has not been prioritized as an essential topic of learning in Public K-12 or higher education. Too many are left to fend for themselves when it comes to managing money.

“College graduates spent 16 years gaining skills that will help them command a higher salary; yet little or no time is spent helping them save, invest and grow their money.”
Vince Shorb, CEO, National Financial Educators Council

1. Personal Finance is 20% knowledge and 80% behavior

There’s a big misconception that personal finance is about math. Some people will shy away from financial topics because “they’re not a math person.” This could not be further from the reality. Avoiding personal finance because you’re not a math person, is like avoiding learning to drive because you’re not a car person. You don’t need to know how to rebuild an engine to get a license and become a safe driver.
Personal finance is much more about the habits and behaviors utilized with our limited resources. Some of these are so ingrained that you may not even see them as habits.

  • Do you use cash or debit/credit cards?
  • Do you have a written budget monthly or do you just pay bills as they come?
  • How often do you check your financial accounts? Do you use an aggregator like Mint?
  • How often do you check your credit score? Credit reports?

Many of our personal finance habits are learned when we’re children. In many ways, we model what we see from our parents and older siblings. If you grew up in a household of spenders or if you grew up in a frugal household, you’ll likely carry some of those same habits today. In order to change those habits, we have to have the requisite knowledge of how to properly manage our finances, but knowledge alone isn’t enough. Much like weight loss, knowing which foods are healthy and how to workout is only the first step. Making the behavior changes into consistent habits is what makes the difference.

2. Some of the most important financial decisions you make are when you’re young

Another reason financial literacy is so important is because there’s another big misconception:  ‘We can deal with the financial stuff when we’re older.’ If you talk to just about anyone over the age of 50 about money, they will tell you they wish they had learned about managing their money when they were younger. The chief financial complaint of older Americans is that they didn’t start saving or investing early enough.

40% of Americans are counting on the lottery, sweepstakes, getting married, or an inheritance to fund their retirement
– Money Magazine

Money Management should be a required curriculum in Junior High, High School and College in every school in America. If the purpose of school is to train you to prepare you for the real world, it doesn’t get much more real that how you manage your money.
Decisions such as your level of completed education, financing higher education, choice of career, location, marriage, children, first home purchase are all decisions that can have a serious impact on your long-term finances and for many are decisions made while relatively young. Don’t make the mistake of waiting until you’re “all grown” up to take responsibility for your finances, you’re already making important financial decisions.

3. Companies are providing fewer guaranteed benefits and shifting risk to employees

We’ll spare you the history lesson, but companies used to guarantee retirement benefits in exchange for years of service. They’re called pensions and they are extremely rare today. Essentially, if you worked for a company for, say 25 years, the company would fund a percentage of your salary in retirement until death. It was completely managed and paid for by the employer.

46% of Americans have less than $10,000 saved for retirement.
– 
Employment Benefit Research Institute

Today, you are totally responsible for your own retirement. Which means you have to save enough money so that you live off your savings. If you participate in your employer’s 401(k), you might get some help from your employer in the form of a 401(k) match, but that’s optional.  You choose what to invest in, how much to invest or whether to invest at all. You have to fund your own account and none of the investments are guaranteed, so all the risk and responsibility of funding your retirement is on your shoulders.
If that wasn’t depressing enough, the safety net of Social Security will likely not be enough to live on for anyone under the age of 50 today, if it exists at all. It is essential that we fund and properly invest early and often to manage that big responsibility.

4. Consumer debt is devastating wealth

Another reason it is vital to learn and master your personal finances is that it has never been easier in to spend money we don’t have. We live in a consumerism culture and our natural inclination is to acquire more stuff. In generations past, cash was the major option. If you wanted to purchase something that you didn’t have cash to purchase, you had to physically walk into a bank, convince the banker for a personal loan and fill out loads of paperwork, and/or put up collateral.

60% of Americans spend about equal to or more than their income.
– FINRA Investor Education Study

Today, in order to spend money you don’t have, you can use a piece of plastic in your wallet or swipe your phone. You may never have to physically walk into a bank. Financial products like credit cards, leasing, payday loans, student loans, interest-only mortgages, adjustable rate mortgages are all products created in the last 30 or so years which allow more and more people access to credit. The downside of having access to credit is that if not used responsibly, it reduces the ability to save and leads to crushing debt. We only have to look at the most recent economic recession of 2009 to see the impact of having too much debt.
 
From a financial standpoint, it’s not at all a rosy picture. There’s no sugarcoating the fact that 76% of US Citizens are living paycheck-to-paycheck. 20% of them earning more than $100K per year. That means more than 3 out of every 4 Americans are essentially broke. This is why financial literacy is essential in order to avoid the traps that many Americans find themselves in. Again, financial literacy is essential, but it’s just the first step. One has to use that knowledge to change their mindset and their behaviors in order to be truly successful. Finally, financial literacy is a continuous process, it’s not one course, it’s not one topic, it’s ongoing. We hope you take the first of many steps in that ongoing journey.

Financial literacy is not an absolute state; it is a continuum of abilities that is subject to variables such as age, family, culture, and residence. Financial literacy refers to an evolving state of competency that enables each individual to respond effectively to ever-changing personal and economic circumstances.
– Jump$tart

3 Ways to Increase Your Compensation Without Talking to Your Boss

Not everyone gets salary increases every year, but that doesn’t mean you can’t increase your total compensation. Most of the focus on compensation is on salary, but your employee benefits can account for as much as 30% of your total compensation.

Remember when you started at your company and in your orientation, you had a meeting with HR to discuss your benefits? They likely gave you a thick folder of information and depending on how long you’ve been with your employer, you may not remember a single thing from that meeting, but that folder is likely buried at the bottom of your desk drawer. You may not realize in the fine print of those handouts are some really important benefits that can either put money back in your pocket or improve your overall financial standing. If you want to increase your compensation without having to talk your boss, it’s time dust off that folder and/or set up a meeting with HR. 

We’ve created a detailed FREE guide to maximizing your employee benefits, which explains common employee benefits in plain English, but here are three of the most unused benefits which cost can cost us thousands of dollars each year.

1. 401(k) and Employee Matching

If your employer matches your 401(k) up to a certain percent, you are actually turning down free money if you don’t take full advantage of it. Let’s give an example of how this works:

Example: John Doe makes $50K in salary. His employer matches his 401k at 5%. So if he invest 5% ($50K * 5% = $2,500), his company will match that investment up to $2,500. If he invests less, the company will match less.

So in that example, if John decides not to invest in his company’s 401(k), he just reduced his total compensation by the $2,500 match each year.

We recommend building a base emergency fund prior to long-term investing, but it is important to take advantage of your company match as soon as possible.

2. Wellness Programs

If you have health insurance through your employer individually or your family, your employer likely pays 70-80% of your health insurance premium. The portion that comes out of your paycheck is closer to 20-30% of the total cost. This is important because that means your employer is financially incentivized to have a healthier workforce. Healthier employees equal lower insurance premiums for the company. In order to accomplish this, employers have created incentives to get you healthier and many of these can take the form of financial incentives.  Examples include discounts or reimbursements for gym memberships, discounts on home fitness equipment, healthcare reimbursements, cash rewards, weight loss programs, smoking cessation programs. Think about it this way, your employer is willing to pay you more money to be healthy.

3. Corporate Discounts/Partnerships

Most people are familiar with receiving employee discounts if they purchase products or services from their employers. However, employees are less familiar with discounts they may receive from other companies because of their employer. Particularly with larger companies, they often have sizable contracts with different vendors and often as part of that contract, they will offer discounts to their client’s employees as well. So you may able to receive a 20% discount on your monthly cell phone or cable bill because your employer has a contract with Verizon. It’s not solely cell phone or cable bills either, this may include electronics, rental cars or even group insurance policies such as auto, home, and life insurance. Also, employers sometimes have internal online portals where you can purchase products with the discounts built-in instead of purchasing in-store or from the company websites directly.

Saving money on your expenses, particularly fixed monthly bills, is not much different than increasing your salary. Instead of increasing the income bucket, you reduce the expense bucket. The result is the same, more money in your pocket. So whether it’s retirement, wellness programs or corporate discounts, make sure you dust off that HR packet in your desk drawer or give a call to HR to learn more about your benefits and how you can increase your total compensation.

For more detailed information on maximizing employee benefits, check out our FREE 15-page guide including details on Retirement, Health, Life, Disability benefits and more, which we call Give Yourself A Raise!

3 Money Lessons for Thanksgiving

Thanksgiving is my favorite holiday. It’s a holiday with the least pretense or pomp and circumstance and is almost exclusively focused on family, gratitude and quality time (a.k.a. the things that really matter). That focus is also extremely important for our finances. There is no shortage of distractions when it comes to things we can do with our money, so here are three lessons Thanksgiving can teach us about money.

1. An Attitude of Gratitude

Pilgrims arrived and anchored near Cape Cod, MA in 1620 arriving just before a brutal winter, which many spent on the ship. Between the 66-day voyage and that brutal first winter, half of the 102 passengers and 26 crew members died. In the Spring, when the remaining passengers moved ashore, they were greeted by Natives, who taught them to hunt, fish, farm and survive in this new land. Thanksgiving’s history begins with a celebratory feast where Pilgrims invited local Native tribes to a feast to celebrate their first successful harvest. These were not people of wealth or high status, they went through a traumatic voyage and a brutal winter and lost many lives. One would imagine they would be heavily reconsidering their decision to leave everything they knew in England to risk life and limb for freedom and opportunity. They were grateful for their freedom, they were grateful the gift of life and they were grateful to their gracious hosts, who without them would have certainly not survived.

The money lesson here is gratitude. Gratitude is free, unlimited and enhances your life immeasurably.

Gratitude unlocks the fullness of life. It turns what we have into enough, and more. It turns denial into acceptance, chaos to order, confusion to clarity. It can turn a meal into a feast, a house into a home, a stranger into a friend. – Melody Beattie

2. The Beauty of Simplicity

There are only three requirements for Thanksgiving – food, family, and fun. Each one of those can take different forms. Whether you have a turkey or go vegetarian. Whether you have a traditional family, or your own community, and fun can mean anything from falling asleep watching football on the couch to card games and uncomfortable conversations about politics. Either way, there are no religious requirements, expectations of gift exchanges, costumes, candy, ceremonies or fireworks. Thanksgiving is simply about spending quality time with the people you love and sharing a feast. There is a simplicity of Thanksgiving that makes it so appealing and universal.

The money lesson here is that money is just a resource if we break it down to its simplest form. Money doesn’t define who we are and it does not make us better than anyone else. Money doesn’t have to be complex and complicate our lives. If we use money wisely, we use it as a resource build or enhance things of real value like time, relationships and community. The very same things we are grateful for on Thanksgiving.

 

3. Death to Black Friday

Commercial interests have all but ruined Christmas, but over the last decade, those same commercial interests have made a full push to commercialize Thanksgiving. People are actually leaving their loved ones to stand in line at a retail store overnight to buy products. Think about the irony of leaving the dinner table after giving thanks for everything and everybody in your life to stand in line at a store overnight to buy more stuff.

[bctt tweet=”Don’t go from being grateful for what you have on Thurs, to buying things you don’t need on Fri!” username=”moneyspeakeasy”]

Make no mistake, Black Friday is a retail scam. It’s been proven that major retailers steadily raise their prices in the weeks and months before Thanksgiving for the appearance of steep discounts for Black Friday. Let’s not forget the reason for the season – Thanksgiving is about spending time with your loved ones, not camped outside of Target or Wal-Mart. One more benefit to not Black Friday shopping is that fewer employees will have to work crazy overnight hours on a holiday! Let these folks spend time with their loved ones.

So for this Thanksgiving, both with your loved ones and your wallets, be thankful for what you have, enjoy the things that really matter and let’s all sleep in or play flag football on Friday morning!