Would you Rather Have a Million Dollars, or a New Car Every Three Years?


Would you drive a used car until you were 55 if someone would pay you a million dollars to do so?  Understand this doesn’t mean driving a junker – just driving a four-year-old car until it was eight years old and then trading for another four-year-old car.  If you would take this deal – and I think that most people would – why would you go on buying new cars anyway?

The fact is, if you can save up and buy used cars for cash every four years, rather than taking on a new payment schedule and dropping deeper underwater with each new car loan, you can invest the savings and have over $1 million by the time you are 55 just from the savings on the car loans.  Even more insane, that $1 million will turn into $2 million by the time you are 62, $4 million by the time you are 69, and a cool $8 million by the time you are 76 (which will probably be the new retirement age, given current life expectancies).

How could this be so?  Two reasons: depreciation and interest.

Basically, any car will drop in value by 50% in four years.  This means that a new car which cost $30,000 will be worth about $15,000 in four years.  This means that the car will lose an average of $3750 per year during each of the first four years.  This, by the way, is if you sell it to another individual.  If you trade it in, you’ll be lucky if the dealer will give you $10,000 (because he wants to make a profit from the sale of your used car to someone else).

 

              

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The same depreciation rate is true when you buy a used car – it will still lose about 50% of its value over four years –  but because the price of the car is less, the depreciation loss per year will be less.  Let’s say you pick up that car someone else bought new for $30,000 after four years when it was worth $15,000.  Even if it drops in value to $7500 over the next four years, you’ll still only be losing $1,875 per year.  This means that you will save $1,875 per year, which you can invest.

The second reason that what seems like a small amount of savings can turn into a large amount of money in 35 years is compound interest.  Specifically, while you are paying interest when buying a car on payments, you are being paid interest when you are able to save money that would have been going to a car payment and invest.  If you were going to be paying 8% interest on a car loan, but instead pay cash for the car and invest the rest, you will be getting an effective interest rate of 20% on your money, assuming a 12% return on stocks.  This means that instead of working extra hours to pay the interest on your car loan, you will be making money for simply letting others use your money to build their businesses.

So before you fall into the trap of endless car payments, think about what that car payment is really costing you – millions of dollars over your lifetime.  Is that new car smell and 32,000-mile warranty really worth that?

Your investing questions are wanted.  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Why You Should Invest in Stocks


Personal finance begins with budgeting and controlling your money.  You need to make sure you are spending less than you make, putting money away for future expenses, keeping some cash around for emergencies, and staying out of debt beyond, perhaps, your home mortgage.  Do these things and you’ll be way ahead of 80% of the people out there.

But if you want to become financially independent, meaning that you have enough money tucked away to pay for all of your expenses for the rest of your life, saving isn’t enough unless you have a million dollar per year income and you live on $50,000.  Realize that in order to pile up money for a year through work and saving, you need to do enough extra work beyond what you need for daily expenses to replace a future year of work, which takes a lot of time.  Think of it this way:

If you were a farmer with a mule, growing food for your family.  If you worked really hard, you would probably be able to grow enough food for your family during the year, plus put some food on the shelf for winter.  If you really worked the fields from morning to night, growing on all of the ground you could,  in a given year you might be able to grow, can, and store enough food to last an extra month or two beyond the start of the next year.  Maybe three or four months.  This means that it would take you three to five years, working like a dog every day during the growing season (and a lot during the offseason too – farmers work hard) to save up enough extra food to last you a year.  If you wanted to save up enough to last you through a twenty-year retirement, that would take you sixty to 100 years.  That’s a lot of work, and a couple of crop failures in the middle, or an injury that put you in bed for a few weeks, and you might not make it.  Plus, while you might be able to work those hours when you are in your 20s and 30s, you’ll start slowing down and feeling the pain of all of that labor when you are in your fifties and sixties.

                           

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Working an office job or factory job in the modern age is really the same.  If you want to have money to live on when you are not working, you need to put away extra when you are working.  Money is just stuff on the shelves – IOUs for someone to give you an hour of labor in exchange for the hour of labor your gave someone else in the past.  The trouble is that it is difficult to save up enough money before your sixties or seventies through work alone.  You never get that sense of peace that comes with knowing that you don’t need to work to pay the bill until you reach your golden years.  And if something happens along the way like a job loss or a major illness, it can set you back and you may never become financially independent.

The answer to becoming financially independent is to get other people to help you.  You want to provide others with the ability to make a living without figuring out everything themselves, and in exchange get a little of the income produced by their labor.  If you were a farmer, this would be like letting other people farm on your land for a small share of the crops, or letting others borrow your mule and plow for some of what they produce.

One way to do this is to start a business and provide employees with a way that they can make money – feeding people in a restaurant, making something that other people want, or providing places for people to sleep for the night with a hotel – and in exchange you keep a small portion of the money produced through their labor.  For them, it means that they can make a living without going through all of the hassle of setting up their own business and figuring out something they can do that will make money.  For you, it means that you can make a bigger income using the help of others than you could by doing all of the labor yourself.  (Note, another thing you could do is to use machinery or computers to multiply your efforts, but we digress.)

 

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Maybe you don’t want to start a business and deal with the hassles and take the risk, however.   Maybe you also don’t know how to start and run a business and don’t have the money to invest in a building, equipment, and inventory.  Maybe you also would like to just work for someone else and not need to be worried about market conditions, meeting a payroll, or preventing theft.

By investing in stocks, you can effectively own a business – in fact you can own great businesses like Apple, Google, or Amazon – but do so with just a small starting investment.  You get the advantages of ownership without all of the hassles of needing to run the business.  If you buy a mutual fund or an exchange-traded fund (ETF), you can own little parts of dozens or hundreds of businesses, meaning that you can reduce your risk should a particular business see declining sales or other issues.

So once you get past the initial personal finance issues like maintaining a budget, you really need to look at investing.  It can be complicated if you decide to make it that way, but it can also be really simple, in fact downright boring, if you invest through index mutual funds and ETFs.  So look into investing, perhaps starting with one of the investing books shown above (I, of course, recommend The SmallIvy Book of Investing).  In twenty years when you’re financially independent, you’ll be glad you did.

Have a burning investing question you’d like answered?  Please send to vtsioriginal@yahoo.com or leave in a comment.

Follow on Twitter to get news about new articles.  @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.

Is Amazon’s Deal for the Needy a Good Thing?


Recently Amazon announced that they will offer Amazon Prime for a special discounted price for those on EBT cards:

EBT card holders get Amazon Prime for $5.99 per month: Prime Discounted Monthly Offering

Now, Amazon is a private business and they can do whatever they want to do with their pricing, but in some ways this seems like a dangerous precedent to set.  Most things are priced based on the value of the good or service to the consumer, the number of competing sellers, the location where it is being sold,  and other factors.  As long as there is enough competition, the price of goods will drop to the point where the seller receives the minimum amount of profit needed to justify the effort of providing the good or product for sale.

By selling the same goods to different consumers at different prices, based on the life situation of the consumer rather than how they buy the goods (retail, online, with coupons, etc…) as is normally done, Amazon is changing the way things are priced.  They are means testing their customers, which will inevitably result in customers who make more money paying a premium to cover the people who are making and paying less.

 


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If Amazon is the only one who does this, it really won’t matter for the average consumer because the system will simply not work.  If you go to Amazon and it costs $30 for a month of free shipping and videos because others are only paying $5.00 or even getting the service free, but then there is another service that offers the same service to everyone for $19.99, consumers with means can just switch to the lower cost service.  As Amazon loses customers to the other service, they’ll need to increase the price they charge the remaining people paying full price or quit offering the discount.  If they raise prices, that will chase more people off, until Amazon will be forced to change or cease to operate.

If other companies follow suit, however, that would set up a socialist system, where people pay according to their means and take according to their needs.  Prices would rise for the people who had more since they would now be subsidizing those who made less.  Because the goal in such a system is to produce the least amount possible, since producing more simply means you pay more.  Plus, you “win” when you get more than you pay for in a Socialist system, but you “lose” when you provide more than you get.  For examples of this, look at how people will avoid paying student loans back when possible, even choosing a low paying job to keep their income low rather than taking a better job and getting on the path to doing well.

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So what are your thoughts?  Is this a great marketing idea that will just bring Amazon customers it wouldn’t have anyway?  Do you think it is a great way to help the poor?  Are you resentful that you need to pay full price while others get a discount for the same thing?  Let me know your thoughts.

Follow me on Twitter to get news about new articles and find out what I’m investing in. @SmallIvy_SI

Disclaimer: This blog is not meant to give financial planning or tax advice.  It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA.  All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.