Devil’s Advocate: Buy a New Car, Not a Used One

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[Today I continue a short-series of devil's advocate posts. The series is short, because I'm running out of ideas for them, so if you have some ideas you'd like to share, please contact me.]

It seems like everyone knows that a new car loses a lot of value as soon as it is driven off the lot. I've seen estimates in the 20-33% range. It's natural to want to avoid this. Why not be that person that buys the car after the depreciation, scoring a big deal?

Better yet, I've seen estimates that a car loses 50% of its value in the first 3 years. So it makes sense to buy a car after that and drive it for another 7+ years. I'll take 7 years for half the price over, right? In fact, I've written about this car buying strategy before.

That was exactly what I was planning to do when I bought a new Subaru Forester at the end of last year. Sometimes there's a wide difference between having a theory and pulling it off in practice.

It seems my first miscalculation was thinking that the 50% loss of value applied to car dealerships. It seems like the car retained closer to 66% or 70% at the dealership. It makes sense because dealerships have to make money for their overhead. Also they've presumably put these cars, typically coming off of leases, through a process to get them "certified used." That adds to the price too.

So when I went to cash in that 50% depreciation, it was closer to 30%. Simple math: if you plan on driving a car for 10 years and you've only scored 30% depreciation for 3 years... you really aren't saving anything. In fact, you are giving up the best three of the car.

What's worse is that you are buying a car that's three years behind the times. If there's improved fuel efficiency in the newest version of the car, you sacrifice that in going used. I also found that there aren't dealer incentives, and that generally leaves less room to negotiate. For example, the 0% financing that they were offering on the new car didn't apply to the used ones. It was like the dealers were purposely pushing us to buy the new car... almost as if they liked having a few used cars in to bring in people, so that they could upsell them a new one.

But car dealers aren't that smart, are they?

What do you think? Did you score a good deal from a dealer on a used car? Let me know in the comments.

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Devil's Advocate

Posted on October 11, 2013.

Devil’s Advocate: Give Me A Stock Market Crash!

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Last week, I put forth a Devil’s Advocate argument, Give Me High Gas Prices! The crux of the argument is that high gas prices spur demand from consumers for more fuel efficient cars, which in turn spurs more car manufacturers to fill that demand. The end result is that we get cars with outstanding MPGs, at which point, I can wish for low prices. My dollar goes further and it's better for the environment. Cue the puppies, ponies, and rainbows!

A commenter brought up that of course it isn't that simple. It never is. Nonetheless, I still believe there's a good correlation there.

So this week, I'm going to make a devil's advocate request for a stock market crash. Why on earth would I do such a mean and crazy thing like that?

I want to buy stocks on sale. I like paying between $17-19 for Facebook. I don't like paying $45. I like paying in the $500-600 range for Google. I don't like paying $900.

I'm a frugal guy and like to buy things on the cheap. With the S&P 500 recently climbing to all-time highs, I'm not finding a lot in the bargain bin. I've got some cash looking for a home and I can't find anything that I know and trust at a great price.

I realize that I shouldn't be so sensitive to the prices. After all, the underlying metrics like earnings are what matters, right? Well stocks look expensive according to the Shiller PE that takes earnings into account.

It may sound crazy, but in my ideal scenario, we'd have the exact inverse relationship to the gas scenario that I mentioned above. Stocks would stay low and for an extended period of time, while I build up a ton of shares. Then we'd see a huge spike and I could sell for millions.

One can dream right?

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Devil's Advocate

Last updated on September 20, 2013.

Devil’s Advocate: Give Me High Gas Prices!

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[For the next couple of weeks, I'm going to mix in a few devil's advocate posts in here. It's been done a few times in the personal finance space, but I think it breaks up a little of the monotony of the everyday post. I've only got a couple of ideas to start, so it could be a short-lived series. If you have some ideas you'd like me to cover, please contact me. Finally, let me warn you in advance this article is a little two articles in one. You'll see what I mean.]

In this month's Kiplinger's magazine (well October, 2013 since magazines seem to live a month in the future), I noticed an interesting article about fewer buyers for cheap gas. The author, Knight Kiplinger, states that every time gas prices go up people drive less and conversely when they go down people drive more. This is not amazing. In fact, it's common sense.

He thinks that's going to change. That caught my attention.

The nerdy folks in Kiplinger Business Forecasting Group think that oil prices are going to drop 30% by 2016... which would lead to about a similar price drop in gas prices. If all goes according to the prediction we'll have more money from the savings. Awesome. Kiplinger thinks you won't put that money into driving more, but instead towards other expenses.

In the discussion of one of my article published this week, Are We Financially a “Lost Generation”?, readers noted that the price of health care has sky-rocketed. As a military family, I'm thankfully insulated from the rising costs, at least for now. My friends mention seem to mention it at least once a month. It wouldn't be a surprise to see any money saved on gas to go towards their health care bills.

Give Me High Gas Prices

In thinking about the gas prices going down, a small part of me was disappointed. Over the last few years, I've had some conversations with my friend Kevin and he's convinced me that high gas prices are a good thing.

Why could high gas prices possibly be a good thing? When the price of gas gets high, people and companies adapt. Companies put more money into hybrids and giving us more MPGs because the people are buying those cars. It sparks change. Change for the better as we invent new solutions to combat the problem.

If gas prices stay low for an extended period of time, there's no urgency to improve. Things stay stagnant. The need for progress is limited and the money goes towards other things.

So give me high gas prices now. Get them high enough that manufactures are doing whatever they can to put a SUV out there that can get 50 MPG (or MPGe), even if it means I have to plug it in over night. Let's see smaller cars consistently get over 75 MPG. I want to a super-efficient solar panel on the roof of the car and a wind turbine on the antenna. Give me some sort of magnetic system in the engine to reduce friction. Give me whatever is going to get us there even if these somewhat far-fetched ideas can't.

And when we have cars that are super efficient, I'll take lower gas prices please. Then we'll be able to go 500 miles on $15. Our wallets and the environment will love us.

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Devil's Advocate

Last updated on September 19, 2013.

5 Reasons to Throw Away Your 401K

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I've been doing a lot of thinking about 401K's lately. Almost every financial professional screams from the top of his/her lungs that it's a great deal. If your company offers matching funds it's probably a great idea to take advantage of that. If you are like me and your company doesn't offer a 401K match, should you still contribute? I used to think yes. Now that I've done some math, I'm not sure. Let's look at some of the reasons why I wouldn't want to contribute to my 401K:

  1. Today's tax rates are relatively low in the large scheme of things (see this website for evidence). With a 401K you are basically deferring paying today's low tax rates for whatever the future's tax rates are. I don't have a crystal ball, but if taxes are low now and we have health care and social security problems in the future, I would suspect they'd be on the rise.
  2. With 401Ks, you can face a penalty if you need to get your money early. Sure you can take a loan, but if you want to leave your job, you have pay that back immediately or pay a penalty on the money. If I invest the after tax money myself and I need it for whatever reason, I can sell the investment at no penalty.
  3. With 401Ks, you are limited in where you can invest your money. Often times your choices have high administrative fees and expense ratios. Free Money Finance says that the average large cap equity fund has an expense ratio of 1.28% while some exchange traded funds are typically under 0.15%.
  4. When you withdraw money from your 401K plan, it is taxed at ordinary income, currently 25% for many people. If you invest the money after taxes, you can take advantage of long-term capital gains and dividends rates, currently 15%. Again, I have no crystal ball to know what things will be like in 30 years, but if we use today's rates as a guideline, I'd rather pay 15% over the 25%.
  5. The Math:
      401k Regular Account
    Starting $15,000 $15,000
    After Starting Tax $15,000 $11,250
    Growth Rate 9% 10%
    Year 1 $16,350 $12,375
    Year 2 $17,822 $13,613
    Year 3 $19,425 $14,974
    Year 4 $21,174 $16,471
    Year 5 $23,079 $18,118
    Year 6 $25,157 $19,930
    Year 7 $27,421 $21,923
    Year 8 $29,888 $24,115
    Year 9 $32,578 $26,527
    Year 10 $35,510 $29,180
    Year 11 $38,706 $32,098
    Year 12 $42,190 $35,307
    Year 13 $45,987 $38,838
    Year 14 $50,126 $42,722
    Year 15 $54,637 $46,994
    Year 16 $59,555 $51,693
    Year 17 $64,915 $56,863
    Year 18 $70,757 $62,549
    Year 19 $77,125 $68,804
    Year 20 $84,066 $75,684
    Year 21 $91,632 $83,253
    Year 22 $99,879 $91,578
    Year 23 $108,868 $100,736
    Year 24 $118,666 $110,809
    Year 25 $129,346 $121,890
    Year 26 $140,987 $134,079
    Year 27 $153,676 $147,487
    Year 28 $167,507 $162,236
    Year 29 $182,583 $178,460
    Year 30 $199,015 $196,306
    Tax Rate 25% 15%
    After Tax $149,261.38 $166,859.91

    Here I took $15,000 and showed how it might grow over 30 years in a 401K vs. a regular after tax account. With the 401K, I don't take taxes out until in the end. I assume it grows at 9% due to extra fees and adminstrative expenses. With the after-tax account, I immediately take 25% off (to pay taxes) and assume 10% growth (an extra percent that can be saved by going to low-expense funds). At the end, I take the 15% off for long-term capital gains tax.

So is it possible that the after-tax route is really better than a 401K? It appears to me that it very well could be. I may be missing some of the minor details or my math may be off.  If that's the case, please help me fill in the gaps in the comments.

Update: As I was getting ready to post this, I happened across a similar article at My Pocket Change. It goes into a lot more details about the advantages and disadvantages of a Traditional IRA vs. a regular account. It's definitely worth checking out.

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Posted on February 14, 2007.

Throw Away your Television?

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One of my new favorite sites is Getting Rich Slowly. Recently they had guest post about how you can save a bundle by throwing away your TV. In it they mention a few benefits to a TV-free life. Playing devil's advocate, here's a pile of rebuttals to every claim made.

1 - "There are obvious benefits to personal growth (better self-esteem, more time for family and friends, etc)."
Rebuttal - I think the self-esteem depends on what you watch. Whenever I catch a Rocky re-run, I feel I can do anything. As for spending more time with family and friends, I agree somewhat, but often times, TV is a social component. How many times was last night's episode of Seinfeld or Sopranos the talk of work the next day? If you didn't watch it, you can be considered a social misfit.

2 - "An hour of television carries about twenty minutes of commercials." The implication is "Imagine what you could with that all that time."
Rebuttal - I acknowledge that I have a DVR, so those 20 minutes rarely come into play for me. If they do, I can multi-task to the web or get up and stir something I'm cooking.

3 - "I acknowledge that much of this lifestyle change may not be fully related to giving up television per se, but turning off the appliance opened more 'space' in our lives to do other things."
Rebuttal - True, giving up one thing always leaves time for other times. However, I could make the same argument to someone that reads books - if you give up reading it will leave more time for other things, like watching TV. :-)

4 - "The purpose of television is to sell you stuff."
Rebuttal - The purpose of television is to entertain and educate. They are profitable by selling advertisement. If we buy into the "The purpose of television is to sell you stuff" then we need to buy into everything else advertisement-related. The purpose of billboards is to sell you stuff - should you not drive? By the same logic, the purpose of many web sites (including this one) is to educate and entertain as well. Should you ignore all of them? Money Magazine has advertisements in it, should you not read all the great money saving tips inside?

5 - "Find a medium that is less pervasive to you than TV. Get your news from the web. Watch DVDs on your laptop. But don't replace one tube for another."
Rebuttal - I guess I don't understand this point at all. What's the real difference between watching a DVD on my TV set vs. my laptop. I guess on my laptop, I'm more huddled up and less social with finacee. That doesn't sound like a good thing. I do get a lot of my news from the web. Interestingly, with multitasking, I can do both at the same time and be done in half the time. If I don't like the news story on TV, I can go to the web and vice-versa. I'm not waiting for web movies to load and I'm not waiting for the TV to show me something of interest. It's a win-win combo.

6 - You'll shop less.
Rebuttal - I would probably use some of my extra time to go to the mall where I would shop more. Or else I'd fill up all that extra time I saved (see #3) by buying more gadgets. Even though Sony stopped making their Aibo, I'd probably pick one up quickly on Ebay and spend hours training it. The cost would be over a thousand dollars. Doesn't sound like a big savings to me.

7 - You'll feel better about your life.
Rebuttal - Just a weird blanket claim with not too much evidence to support why. I summit "you'll feel worse about your life" with the same lack of evidence ;-).

8 - You'll be forced to take care of your children.
Rebuttal - What if you don't have children? Even so, one of my favorite memories with my dad is rooting for Red Sox and watching a ton of those games together. Baseball is very educational way for children to learn about math by the way. If you need to throw away your television to take care of your children, you have bigger, deeper issues to address in my opinion.

I firmly believe a television is a tool. Like many tools, it can be used for both good and evil (see the Beatles' song Maxwell's Silver Hammer). It's in the way that you use it that matters.

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Devil's Advocate

Last updated on May 25, 2007.

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