Lazy Man and Money

Should You Co-Sign on a Car Loan for Your Teenager?

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[The following is a guest from Amber Satka. She writes on financial topics, and much of her research can be found at her app site: www.carloancalculator.org. Amber is a former office manager and current mother and writer.]

The day you have dreaded has come: Your teenager is ready to drive. Not only that, but he wants you to buy his car. I mean, it’s his first car! Aren’t you, like, morally obligated or something to buy him his first car? How is he supposed to afford to buy it himself? Don’t you want him to focus on his school work instead of worrying about how to come up with the money to buy a car? Geesh.

Maybe you’ve gotten past that fight discussion and come to the conclusion that your teenager will, in fact, be buying his own car if he wants to drive any car at all and now the issue has turned to how much you are going to help him buy the car — if any. Will you give him a little cash to help with a down payment? Offer a match? Or will you agree to co-sign on a lease or loan for him?

While you might be inclined to dismiss the possibility o becoming a co-signor, it’s worth a second look. In addition to the many cons you may have already thought of, there are also a lot of pros. Here are a few things you should consider when trying to decide if you should co-sign on a car loan for your teenager:

Pro: It Provides a Safety Net

This may be a pro for your teenager and not so much for you: When you co-sign for a loan, you offer a safety net in case he isn’t able to pay the bill for some reason. If he defaults, the bank is going to look to you to pay up. That means you can help save your teenager from himself (which is really what the job description of any parent should actually say: “Here to save you from yourself”) and can help to protect his credit and ensure that he doesn’t lose his very first car.

You can also use the opportunity to try to teach him about financial responsibility and the consequences that he can face if he doesn’t meet his obligations. (We say “try” since you will likely be having this conversation over rolled eyes and shoulder shrugs.)

Pro: Allows Them to Get a Safer Car

Let’s face it: When your teenager only has about $1,000 to spend on a car, he’s looking at options like an old Jeep without a cover or a broken-down Chevy that requires special voodoo to start and a system of hand maneuvers and pullies to stop. Most teenagers aren’t going to be able to afford a new car or even a certified used car that is up-to-date, in good repair, and packaged with safety features — that is, unless, they can get financing, and they are unlikely to get financing without you co-signing.

If you want to sleep easier at night (an elusive quest for parents of teenagers), you should co-sign on the car so you can at least know that the car your teen is driving won’t be won’t causes him to get into an accident — it will be the game of chicken or the off-road racing.

Pro: Protects Them from Financial Issues

There are a lot of shady dealerships that would be all too happy to take your teen’s money and sign him up for financing — which is also likely to come with outrageously high interest rates and other cut-throat terms. Or you can leave him to his own devices in the Wild, Wild West that is the secondary market. He can just hand over his money to someone who “seems like a really good guy” who promises that the car was only driven on Sundays, only to find out that the car is never going to run without a hope and a prayer (even with a good mechanic).

Offering to co-sign on a loan will allow your teen to shop at a reputable dealer and avoid being taken in by these scams, which could end up causing long-term financial issues. And who do you think he’s going to call when he finds himself in trouble anyway? Better to take a proactive stance.

Con: They Might Default

Obviously, the biggest drawback to co-signing on a loan is that you might actually get stuck with the bill — and if you refuse, it’s your credit that will go down the toilet with his. There’s no way to get around this reality. You can try to minimize your risk by having a discussion about the serious nature of the responsibility of taking on a car loan (see eye rolling above) or by asking your teen to enter into a “contract” with you about paying for the loan (though, if the contract with the dealership isn’t enough, we’re not sure a contract with you will be any different).

The bottom line is that you take a chance. Either way, it’s a good opportunity to teach your teen something about financial responsibility. Worst-case scenario: You’ve got yourself a nice new car if he defaults.

Con: They Might Push to Get a Car They Can’t Afford

On any dealership lot, there are cars that range from your basic box car with an analog radio and roll-down windows (which is going to be your jam when you’re shopping for a teenager’s first car) to top-of-the-line, suped-up luxury cars (which your teenager is definitely going to gravitate towards). When the car is being financed, your teen may not have a tangible concept of how much money is actually being spent, so he may push to get a car he can’t actually afford — of course, thinking that you’ll make up the difference when he can’t. Lay down some boundaries and a strict budget before you go shopping.

Con: You’ll Have to Pay for More Insurance

Most parents opt to put their teens on their insurance policy to give everyone a discount (since you’ll get a multi-car discount, and that will bring down the sky-high rates that your teen is charged). However, if your teen is financing a car, you’ll have to pay more for insurance as you’ll have to have full coverage. You’ll also likely want to get GAP coverage to pay the difference between the payout value of the car and the amount you still owe on the loan so you don’t get stuck with a bill if your teen is in an accident.

Ultimately — as with all things concerning your teenager — there’s not going to be an easy answer. But it’s worth considering these pros and cons to make sure you know what you’re going to be up against and then making the best decision you can. Co-signing on a car loan will definitely make you your teen’s hero, but forcing him to buy a beater from someone you help him screen on Craigslist will also help him learn the value of working and waiting for nice things. You decide what’s in his (and your) best interests.

Did you agree to co-sign on a loan for your teen’s first car? Tell us why or why not in the comments!

Grading Men’s Health’s Tips to Build Wealth in Trouble Times

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I’ve been a big fan of Men’s Health for over a decade and a half. It seems that in the past few years they’ve sprinkled in a little more personal finance into every issue. The latest one is no exception. One article in particular caught my eye: Build Wealth in Troubled Times. Their idea was to ask a variety of money people (traders, economists, and money managers) and ask them their advice for navigating these difficult financial times. You’ll notice that these are all Wall Street people. You won’t find Clark Howard or Jean Chatzky here. Men’s Health is realistic with the information that they received saying, “Some of their prescriptions are unorthodox and unproved, and just because these experts were right once doesn’t mean they know what’s right for you. On the other hand, whose advice are you taking now?”

I thought it would be worth giving my personal finance spin on their advice.

  • Frank Partnoy (Finance professor, University of San Diego school of law)

    Frank’s Take: Partnoy focuses on picking stocks of a few companies and being optimistic, “Pick out about a dozen companies that sell products you know and understand, and research them. You’ll still be taking risks, but at least you’ll understand those risks. Buy the stocks and then forget about them.” and “Over the long run, our economy grows… People become better off, and technology improves our lives. If you come out of the blogs and news feeds and look at the arc of history, it’s a story of human beings getting better over time. So stay optimistic.”

    Lazy Man’s Response: While the advice to buy and hold equities is a fairly proven mainstream strategy, Partnoy loses points for lack of diversity in number of equities and types and of equities. Just because you know a company, it doesn’t mean that you truly understand the risks. So many things can happen at the management level of a company to that the average Joe probably wouldn’t know about. Blackberry maker RIM comes immediately to mind. Worldcom comes to mind as well. This advice leaves people with no bonds and/or potentially little or zero foreign exposure.

    As for being optimistic, it’s good advice, but I don’t see it as financially applicable. It essentially claims that we’ll have a better quality of life over time, which is true. Optimism doesn’t put more moeny in your wallet and it isn’t much of a “financial move.”

    Final Grade: C+

  • Robert Wiedemer (Economist that predicted “the housing crash, the stock crash, the credit crunch, and the recession”)

    • Robert’s Take: Invest in gold and stable currencies like the Swiss franc, the Canadian dollar, and the Japanese yen via ETFs. He realizes this is high-risk: “The days of comfortable investing are over. You’re trying to make money in a crisis.” Also, he suggests, “If your focus is on protecting what you have, then you might want to keep most of your money in cash and eventually move into Treasury Inflation-Protected Securities (TIPS).” Since “luxury goods will suffer”, he suggests “aiming your career at businesses that produce basic necessities, like medical care, food, repair and maintenance, education, and utilities.”

    Lazy Man’s Response: Regular readers know I have long been against gold for a variety of reasons. It’s the currency of the past, not of the future and it has little practical value (in comparison to its cost). It also is really expensive after the run up over the last few years. I really don’t see currency trading as a practical solution for most people. Not only is it risky, but the average person doesn’t understand it. I’ll give him some points for ways to protect your money, but moving to cash isn’t exactly rocket science and putting most of your money there isn’t going to help it grow. The final advice about business with basic necessities is a very good one. I love it.

    Final Grade: B- (Almost entirely on the strength of the last piece of advice.)

  • Janet Briaud (moved clients money out of stocks to avoid both the dot-com crash and the financial crisis)

    Janet’s Take: “Wait until prices are so low that your friends say they’d never consider buying stocks again, and then buy heavily.” Also “If you’re just starting out in your career… focus on earning more, saving heavily—as much as 20 percent of what you earn—and paying off debt. Are you carrying a credit-card balance at 16 percent? Paying it down is like getting a 16 percent risk-free return on your money.” Finally, if you have an emergency fund and credit card, use the emergency fund to pay off the credit card debt and fall back on the cards if you need to.

    Lazy Man’s Response: Not since Janet Jackson’s Love Will Never Do video has a Janet delivered the goods like this. (Is that too much information?) I almost agree with everything 100%. I’m a little on the fence about on the stock buying advice, but I had the same thoughts in 2002 and 2008 when the market was really low. I considered selling every worldly possession to generate more cash to put in the market. If I had bought in at those points gains of 30-50% were pretty easy to come buy. Yep, it’s marketing timing, but it’s not that bad since you are essentially waiting for a sale on stocks. The rest of the advice is spot on and brilliantly condensed into just a few sentences.

    Final Grade: A

  • Nassim Nicholas Taleb (predicted the Black Monday stock market crash of 1987 and authored The Black Swan)

    Nassim’s Take: Put 80% of your money in safe investments like CDs and TIPS and 20% of your money into high-risk, high-reward investments. The low-risk side protects most of your money from Black Swans (similar to Perfect Storms). The high-risk side exposes you to those that might pay off. Finally he suggests staying out of debt, “The more debt you have, the more precise you have to be about your future income.”

    Lazy Man’s Response: I don’t like this advice. The high-risk portion will likely balance out as some investments will do well and others will fail. The 80% will just stay ahead of inflation as Taleb points out. This plan isn’t likely to help you grow your money much, which isn’t very exciting.

    Final Grade: B- (The final advice to avoid debt, despite being simplistic saves this from being a worse grade)

  • Raghuram Rajan (Economist at the University of Chicago Booth School of Business; predicted the current financial crisis)

    Raghuram’s Take: There’s a growing gap between the haves and the have-nots. Invest in your education. “Finding the best jobs might require moving around. Home prices may seem appealing these days, but beware: The economics of home ownership can lock you in place for years.”

    Lazy Man’s Response: This is sound advice. The only fault I can find with it is that there he doesn’t provide any information on where to invest your money.

    Final Grade: B+

  • Simon Johnson (His book, 13 Bankers, describes exactly how a cabal of big banks gambled with our money, wrecked the economy, and then accepted huge taxpayer bailouts, all the while paying out gigantic bonuses and fighting financial reform. )

    Simon’s Take: Get your money out of the big banks and support smaller banks and credit unions.

    Lazy Man’s Response: I like this a lot. I’m doing more and more of my banking with USAA instead of Bank of America. For me, it’s the perfect combination between a credit union and a big bank.

    Final Grade: B+ (This is fine advice, but it’s going to have a limited impact to your finances)

I was very surprised by the lack of useful information provided by these experts. I’m reminded by the people who are giving the advice, Wall Street economist types. As Abraham Maslow said, “It is tempting, if the only tool you have is a hammer, to treat everything as if it were a nail.”

Suze Orman’s Pre-Paid Debit Card Scam

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I got an email from my friend Kosmo at The Soap Boxers on Monday morning about Suze Orman creating a line of pre-paid debit cards. His exact words, “$36/year just to access your own money?” That was kind of rhetorical question. The point he was trying to make was clear – it’s not the typical product that personal finance gurus typically endorse.

My first thought was that if it was something that helped with your credit, it might be a good idea like a secured credit card. It could, in theory, be used as a bridge to help someone build credit, improve their credit score, and get a bank that doesn’t charge such outrageous fees to access your own money. However, that’s not what is happening with Orman’s card. As John Ulzheimer points out at around the 2:50 mark in this interview it doesn’t help with your credit score.

… and it shouldn’t. It is a debit card, not a credit card. Your credit is supposed to be measured by how you used credit, money that you don’t have. If I buy milk with money I already have through a pre-paid debit card, it doesn’t, and shouldn’t, tell the credit bureaus anything useful about my ability to responsibly handle credit.

This hasn’t stopped Suze Orman from heavily implying that it will help people with credit scores. In perhaps the biggest blogging sacrifice I’ve made for you, the reader, I subjected myself to watching The View this morning. (Okay much of it, I skipped due to the magic of DVR.) Throughout the show, I was thinking, “They couldn’t have gotten Judge Judy to join in to complete the torture?” Though I will admit that Joy Behar’s commentary was actually entertaining.

During The View, Suze Orman heavily implied that it would help with credit scores, but didn’t actually say it. She had a two minute rant about how important FICO scores are in this economy and then introduced her card. Here are some quotes from her:

You use this instead of cash. It’s a debit card… The main reason that I want you to use this is that sometime people don’t use cash, they don’t carry cash anymore, and there’s no record of what they are doing. Overall, the big movement of this card, and the people-first movement, is I want debit cards to create FICO scores. Currently they do not.

If you pay on your debit… if you pay in cash you get penalized because you don’t get any credit for that.

I’m trying to change America. Join me in my people-first movement.

Now if just watched The View and didn’t have any background about this card, you would think that it helped build credit. However, if you watched the John Ulzheimer video above it doesn’t currently work that way. Your transaction history can be reported to a credit bureau if you choose, but they don’t use it their credit analysis. They just say, “Thanks for the free data about your life… Om, nom, nom, nom…”

This is the kind of marketing that is misleading to consumers. To talk about improving credit for 5-10 minutes and then present a card and talk about the issue as if the card is the solution to building credit. Orman is hoping that it will be the solution one day. Perhaps she expects TransUnion to use that transaction data and start applying it to their credit algorithm. However, she should be open and honest in her marketing that it doesn’t help your credit as it is designed today.

This is exactly the kind of thing that the FTC is looking for with their endorsement guidelines. It’s the same kind of thing that MonaVie is getting away with on a daily basis.

If that wasn’t bad enough for Orman, she’s gone full bat-excrement crazy on Twitter attacking personal finance bloggers who call her out on it. She called PT Money “ignorant” and an “idiot”. The blog, 20AndEngaged has a good recap of the Twitter fight. GingerLatte from Girls Just Wanna Have Funds suggested that people use the Twitter hashtag #DenySuzeCard.

In the end, I’m not that disappointed with the card itself. As John Ulzheimer said in the video above, it is the best option in a bad category (“the cream of the crap”). It is Orman’s misleading marketing of the card and her refusal to enter into any kind of meaningful dialog with critics that I have a problem with. Due to that misleading marketing, I think this article has warranted the use of the word “Scam” in the title.

“… and I’m Like, ‘F@#% You!'”

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I’ve been writing this blog for nearly 5 years now and up to this point, it’s been pretty G-rated. I’m going to move that up to PG, by getting a few F-bombs out there. It seems to be the right time for a couple of reasons.

Last week, Jonathan from My Money Blog caught my eye with his post about F@#% you money. It was a great article about how when you have enough money, you can tell your employer to “F@#% you.” Plus it featured the unlikely combination of Dilbert and Humphrey Bogart. I’ve had a taste of this experience over the last couple of years. Income from blogging and other websites has created a stream of income that effectively serves as an emergency fund or pension. Maybe that’s better called, “Go shove it money”, rather than “F@#% you” money.

F@#% you gas prices and iPads

While on the subject of declaring a “F@#% you”, I had a conversation with my wife this weekend. (No there were no F-bombs dropped.) We noted that the news in Silicon Valley couldn’t seem to get off of two topics:

  • The escalating gas prices and people’s complaints about them.
  • the release of the iPad 2 and people’s elation over very minimal changes. I invite you to check out the hilarious Conan parody that includes a censored “F@#% off” to keep with the theme of the day.

It’s an interesting dichotomy. I realize that the people complaining about gas may not have iPads. People having iPads might not be the people complaining about gas. However, there are a couple of times in our daily lives where we’ve seen it be that same person. My wife pulled out a pen and paper and put together a little parody.

To the tune of “F you” by Cee Lo Green:

I see you tweeting from your Macbook ’bout the price of gas, and I say “F@#% you”
You say that 4 bucks a gallon is just too much, and I say ‘F’ you

You say “I have no money” well isn’t that funny,
well that some S#*! (that some S#*!)
I see your Gucci purse and I just have to curse, and say “F@#% you”

Well I don’t feel bad, you own and Ipad and you’re in line for Ipad 2
You have and ipod and an iPhone, hey you can play music on both them.

Well can’t see-hee, you own an SUV, and it’s a gas guzzler, a gas guzzler

Whoo-Hoo you say you just can’t pay
Hey go sell your S#*! on Ebay!

How can you strike back? Use these tips on how to save money on gas and buy an original iPad on Ebay.

Financial Freedom First?

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A funny thing happened when I wrote about my new year motivation earlier this week. I got a comment that was the exact opposite of what I would have expected. Contrarian said:

Lazyman ““

So glad to find a finance/money writer who does a little more than just pound on the same tired topics of austerity, minimalism, and simplicity. Blaaa!

While I appreciate living within your means, enjoy being debt free, and eschew buying stuff for it’s own sake, I don’t believe its a sacrilege to desire and strive for a 2+ million dollar home.

It doesn’t matter what the motivation is so long as the motive is right.

Who knows, maybe we’ll end up as neighbors ;-)?

After I got over my initial reaction (“what does ‘austerity’ mean?”), I thought about the comment a little deeper. Honestly, there was a twinge of fear for mentioning that I was even looking at a $2 million home. I mean, this is an economy where unemployment is high and people are doing all they can to save money in anyway possible. That’s why I write those article, right? What kind of example do I set suggesting that I can even seriously look at a $2 million home? It’s not like I play for the Red Sox.

I thank Contrarian for reminding me that is okay to strive for a home worth $2 million. I’m not there… I’m not anywhere close. In fact, I’d need something like $4 million in the bank to even consider such a thing.

Why?

It is a question of value. I would love a $2 million dollar home. However, I’m not sure the value is there for me. My wife, me, and my dog don’t take up much space. Wait, my dog, well he can take up a tremendous amount of space. Still, much of that space and the amenities that go with a $2 million dollar home would go to complete waste… unless we were retired and could live a life like the Great Gatsby.

That’s why I put financial freedom above all my financial goals. Once we feel confident we hit that mark, which may not be too much further (I hope), we can look ahead adding luxuries. In the meantime, I’ll look at those luxuries as a reason to push forward with my goals.