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.

Is It Possible to Save for College?


About 16 years ago I sat down and predicted the growth of my son’s college savings account.  I was planning to put away $2,000 each year into an Educational Savings Account (ESA).  Using an investment calculator, and using an estimate of a 12% return (about the average return for the stock markets), I predicted I’d have about $140,000 by the time my son was ready to go to college.  With in-state tuition at about $12,000 per year, plus money for food and housing, I was figuring a cost of about $30,000 per year, so the ESA would at least get him through undergraduate school.  He could then do research/teaching/etc. to help fund grad school if he went, and hopefully get out debt-free or fairly close.  That was the plan.

              

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Unfortunately, then came the 2001-2003 stock market, where returns were low or negative.  Things finally picked up after the 2003 tax cuts (yes, tax cuts do spur the economy, despite what some Liberal pundits will tell you), but then stocks fell during the 2008 housing market crash.  Since that point things grew at a modest pace, until Trump was elected, from which point on things have been on fire.  Despite the fairly good markets from 2009 – 2016, and the great market over the last 10 months, my annualized rate-of-return has been around 3.5% instead of 12%.

So, sitting here with about two years until the first tuition bills come in, my son’s account has a little over $52,000 in it today, instead of the $108,000 I predicted.  This is enough to pay for about two years’-worth of college expenses, but not four.  Alternatively, it is enough to pay for tuition, but not for room-and-board.  This has left me with a big dilemma:

How should I invest for the next couple of years, if at all?

With less than two years remaining, if I really need the money in two years, I should really put it all into bank CDs.  I cannot predict what the markets will do over such a short period of time, and they have about a 1/3 chance of being lower in two years than they are today,  There is a small chance, maybe one in ten, that they will be 25% lower or more, meaning I may only have around $39,000.  Then again, if we do see some great returns over the next couple of years, for example if Trump is able to pass big tax cuts and spur the economy, I could get 20% returns and have almost $75,000 when the first tuition bill arrives.  Note that my original predictions assumed I stayed fully invested in stocks the whole time, which was probably a bad assumption due to the risk of doing so during the last couple of years.

Another question this raises, however, is

Is it possible for a middle-class family to really save up and pay for college?

Granted, perhaps we should have been putting $4,000 or $5,000 away each year, with $2,000 in an ESA and then the rest in taxable accounts or a 529 plan after we maxed out the ESA.   But I don’t see how most families who don’t make $150,000 per year could afford that.  I mean, we have been very disciplined compared to many people our age.  Despite having an income far less than $150,000 per year, we paid off our home about six or seven years ago, leaving a lot of free cash flow available that many families who keep a constant mortgage don’t have.  Frankly, I don’t know how families who keep a mortgage are able to pay for the things they buy.  (Maybe they don’t, since the median amount of debt families who have a credit card balance is $17,000, according to Nerdwallet.)  Paying for everything and not using credit, including the things that come up like medical bills and auto repairs, I’m really glad we don’t have that $1,000 or $1500 mortgage payment each month.

I do think that many families should be able to get their children through college debt-free or close to it, but saving up everything ahead of time may not be possible.  Once our son gets into college, we could direct some of our regular income towards his room-and-board.  He is also likely to get scholarships that will cover most or all of his tuition.  If he also gets a part-time job and makes $500 per month, that would cover about half of his room and board.  Still, it does make you wonder why college prices are so high that many people need to get loans to get through.

Luckily in our case (and good planning and hard work create luck), we have some resources beyond the ESA to help pay for college.  Because of this, I will probably keep the ESA fully invested in stocks, hoping that we’ll see a couple of good years to boost the account balance.  If we see a drop in the next couple of years, we can cover costs with other funds for the first year or two while we wait for the ESA to recover a bit.  Really we don’t need to assume we’ll need to tap the account right away.

So what do you think?  Is it possible for families making $80,000 per year to save up for college?  Are tuition costs worth the value of the product they provide?  Is it worth it to run up loans to pay for college?

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.

The Conservative’s Welfare Plan


Let’s face it – welfare just isn’t working.  There is a lot of money being spent, but a lot of it is being wasted, to the point that kids are showing up at school hungry despite all of the food assistance money being sent to their households.  The issue is the same one that is always seen when you try to run something through central planning – those setting up the program don’t have the ability or the time to customize it for every person or region, so they create something that really doesn’t work for everyone.  In addition, the power created through centralization leads to fraud and abuse.  We need a better way to do welfare.

 

Some people are incapable of taking care of themselves and therefore need to be handed food, clothing, shelter, etc….  Others could take care of themselves but choose to game the system instead, taking resources from those who really need help (for example, those who abuse Medicaid to abuse prescription pain medications, making it more difficult for those who need the medications to get treatment) .  Rather than a check in the mail or an Obamaphone, many people really need a firm but caring “no” and perhaps an offer of something like a job or job training to get them back on track and being productive (and happier in the long run).  Some parents are struggling and sacrificing for their children and just need a little help to make ends meet, but others just ignore the children and spend all of the money on themselves.  Others have addictions, where giving them money just helps buy the next shot of heroin or fifth of whiskey.  A centralized program, with an army of government workers who quickly have any desire to change the system beaten out of them, gives you what we have:  fraud, waste, abuse, and a lot of hoops for those who really need help to jump through.

              

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The Conservative’s welfare program would rely on free-enterprise.   There would be a plethora of well-funded local groups that provide food, shelter, job training, and other assistance to those in need.  Because they were local, they could learn who really needs help and what kind of help is needed, be it a sandwich or a connection to a next job.  These groups would compete for donations by showing the good works they were doing.  Those who were effective at meeting needs would grow and receive more donations.  Those who were wasteful and ineffective would go out-of-business.  People could decide what was needed and direct their donations there.  If something got over-funded, to the point people for the charity were building palatial offices, people would donate somewhere else.

The issue with going to such a system is converting from what we have now.  Because people are already having a good portion of their tax dollars, on the order of 50%, going to welfare, it would be difficult for them to give additional money to charities (although a lot of them do).  It is also difficult to eliminate existing programs in order to cut taxes to allow for more private giving because there are always tragic cases for those that want to keep the power in Washington to parade in front of the cameras.  Luckily, there is a simple solution, and it would require very little effort.


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Here’s the plan:

Allow individuals to deduct their contributions to charities that provide services that replace government programs (food, shelter, job training, clothing, health care, etc…) directly from their taxes, dollar-for-dollar, up to 10% of their income.  Then, as the needs in different areas are met by private charities, discontinue the government programs, keeping them in place in areas where the needs are not met. 

Here’s why this would work:  

Right now, individuals are taxed, their money taken to Washington.  Washington bureaucrats making high six-figure incomes then hire an army of civil servants making high five-figure incomes to disperse the money they collect to programs such as food stamps and section-8 housing/HUD.  A lot of the money collected is lost in the process, plus the money is not distributed efficiently, resulting in bad results and/or an enormous cost.

By allowing individuals to give the money directly, which they would do if given the choice of giving it to causes they believe in or sending it off to Washington, groups that meet the needs of the poor and disadvantaged would be funded.  Because more money would be available, more groups would be developed and compete for funding by trying to do the most good at the least cost.  By limiting the amount that could be given, there would still be funding for things like Defense and essential government processes.

Advantages:

  • There would be more money available for the needy since there would be less waste.  Wasteful charities would change their ways or go out-of-business as more efficient competitors emerged.
  • People would be helped locally, meaning the charities would be designed to meet their needs, rather than some global need.  We’d see things like families being provided directly with food that met their dietary requirements rather than a check being sent to the home that gets spent on cigarettes and lottery tickets.
  • There would be enough different groups and people working within those groups to determine how to best meet the needs of those around them and actually improve society.  Imagine the minds who create things like the smart phone and FaceBook working on addressing the needs of society!
  • Needs currently not being met would be addressed as individuals looked for new charities to start once the space for things like food and housing became crowded.  Maybe there would be groups who drive people to job interviews or help those who are victims of crime right after they are robbed or assaulted.
  • Taxes could be lowered as needs were addressed more efficiently.
  • Those who are able to take care of themselves would be transitioned into productive members of society with an income, which in turn would further reduce the burden on those currently paying for welfare.  It would also bring pride back to people, which could change futures and neighborhoods.
  • Payers would feel good about their donations rather than feeling bad about needing to pay taxes.  There might be less tax-cheating.


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So in the end, we would all pay less in taxes, there would be more people working and producing things, which would make society wealthier, people would be seeing their needs met more efficiently and with less red-tape, and we would end the cycle of poverty, bringing pride to individuals.  If this sounds good, forward a link to this post to a friend or your FaceBook page.  Then, write your Congressman and your local newspaper.  We can make society better if we all work together for change.

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.