I figured with the economy the way it is that i should get back to saving your seld some money and working on your credit. Here are a few articles, if nothing else i hope it gets you to think.
Tolerating Spiders, Using Your Credit Cards, and Other Depression Survival Tactics
by Karen De Coster
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I loathe spiders. My Dad always used to joke that I reacted as if they were man-eating creatures the size of tall buildings, as seen in the B movies. As a kid, I trounced through the woods at night, remarkably unaware of webs caressing my face and giant, hairy things clinging to my clothes. As an adult, they became my worst nightmare. I don’t know why – it just happened that way.
Living near a big lake, my house can be a refuge for crawling things that are out to get me. I am awful when it comes to killing spiders in the house. I have broken or bent more blinds than I can remember because of all the times that I used a hiking boot to kill off a tiny green spider. Accordingly, I have been using a pest control service to spray my house exterior, garage, and porch areas for spider control. This has always helped to control those nasty devils, especially during the warm months.
This year, however, with a depression looming, the spider control service came under my budget-cutting axe and got chopped. So it was the spiders versus me, alone and unarmed. I bought the most effective pest control sprays I could find and began to spray my own house, interior and exterior. I’ve had to do battle with a few killer tarantulas the size of a basketball, but thus far it’s been a success. I have even relaxed around spiders and don’t fear killing them. I don’t like it, but I no longer stare them down for twenty minutes planning my exact point of attack. When I finally set aside the hiking boot for a (very large) wad of paper towel, I knew I had successfully conquered my fear.
The point is that doing my own pest control – something that is most difficult for me to do – has saved me a chunk of dollars annually. We are living in unprecedented times, and as a result, each of us needs to examine our lifestyle, budget, savings and investment plans, and needs vs. wants. The times ahead will demand a level of fiscal restraint that my generation has never before had to endure. I have spent a lot of time in the last two years counseling friends and family about cutting their budgets, eliminating the wants they can do without, and generally, helping them to clean the financial house. Accordingly, I have put together a short list of items to consider for conserving financial resources and keeping yourself prepared in case of a job loss, wage or hours cut, and other events within the depression economy that can negatively affect your personal or financial status. One thing I will not do is provide silly, impractical ideas such as turning down your thermostat (mine is comfortably on 74; I will not shiver and wear triple layers in my own home), cutting back on quality food items that are essential for good health, or riding your bike to work. Instead, I have provided some basic, libertarian-influenced ideas to think about in order to prepare for the tough times ahead.
Credit, Credit, Credit
Your credit score is more important than ever in these unstable times. Let’s look at some things you can do to help preserve or boost your credit condition.
First off, don’t jump to conclusions and think you have to shed your credit cards. Credit cards can be a real asset if you know how to use them. Banks favor people who use credit lines responsibly and pay debt down timely. Before the have-pulse-will-loan credit bubble was born, young people – with no credit history – used to have a hard time accessing credit. If underwriting standards go back to where they should be (and used to be), this will be the case once again. Don’t close down credit cards you have had for a long time, especially if you have generous lines of credit on them. Unused credit lines impart to your creditors a message of control and dependability. Keep longer-term cards with larger credit lines and dump the cards with the "starter" credit lines. Credit cards with puny credit lines – $1,000 or 2,000 – aren’t very favorable toward your credit score. Also, since banks frown on debtors who carry a balance of more than 35% of their total line of credit, a $400 charge on a card with a $1,000 balance can ding your credit score. If you do keep balances on your card(s), keep more cards with lower balances as opposed to dumping it all on one or two cards and blowing over that 35% figure. If you do have a credit card with debt that is over 35% of the credit line, call the bank and ask for an appropriate credit line increase that will drop your balance below that point.
Also, banks are starting to reassess their risks, and hence their exposure to consumer credit. If customers are not using their cards, many banks are closing out their accounts without them requesting any such action. I have heard from many acquaintances and readers who report that this has happened to them. The loss of an unused credit line may ding your credit report. Use your cards that you want to keep. Charge bigger ticket items and pay the bill in full when it comes due. That keeps your account active. Or even pay an occasional interest bill for one month to keep the bank happy. Paying customers will be retained by the banks. It is worth an occasional, small interest charge to keep open a credit line that 1) benefits your credit score, and 2) you can use in a worst-case scenario (just ask someone who has been fired/laid-off without warning).
Or better yet, game your credit cards. J.H. Huebert wrote an article on this recently – I enthusiastically support his position. Use your Discover – if you have one – for cash back on gas and auto expenses. As you roll up your points you can turn the points into cash to pay off the balance. Use ‘cash back’ and ‘airline miles’ cards – this is smart money management. You can borrow money in the short term for no charge, pay off your balance upon receiving the bill, and earn free money. A secondary benefit of this type of credit use is that it will be beneficial for your credit score.
Cars!
Avoid buying a new car unless you absolutely have the cash flow to absorb the payment. The credit bubble put people into the bad habit of perpetually buying or leasing a car and making endless payments. The credit bubble warped peoples’ time preferences and their perceptions of their own financial condition. Decisions to finance items – especially cars – were based on "Can I make that payment with my current situation remaining the same?" The fact that people were living paycheck-to-paycheck in order to make their payments on debt didn’t seem to matter. As long as they could make the payment from current available cash, the purchase was deemed practical.
If your budget can accommodate it, however, this is a great time to be buying a car. Rebates are bountiful and interest rates are zilch for people with a solid credit history. Otherwise, remember Gary North-a-nomics and think used car (See Part I and Part II see below). Pay cash for a well-used car in great shape with higher miles at a good price. As an adherent of Gary North’s used car credo, I drove the same truck for 250k miles and 14.5 years. I’d still have it except the engine bearings were wearing down, and plus, the 11 miles per gallon at $4.40/gallon was a bit much. I looked at replacing the engine, but the truck was also going to need $2,000–3,000 of bodywork to stave off the rust that was starting to appear. So I bought a 2003 vehicle with 70k miles in mint shape. I immediately put some Pirelli tires on it. The interior looks entirely unused, still, even with 115k miles.
If you are stuck with a new car with a hefty payment (thereby crimping your cash flow), get rid of it. Instead, pay cash for a used car or put a sizeable down payment on a used car that you can pay off in a year or two. Take care of your car. Do all maintenance and fix things when they break. Little things matter, like maintaining your fluids and keeping the interior clean. Spend the money to keep it sharp. You don’t need the over-priced meal at P.F. Chang, but you do need your car.
Eating Out
Consider this a worst offense for many of us. Stop eating out so often, and for goodness sakes, do some grocery shopping and put the brakes on the carry-out orders. The biggest culprit is eating lunch out because you are too lazy to pack food each day to take to work. Eliminate most lunches out and save yourself a ton – those lunches are a waste of resources. Dinners out are enjoyable because you share that with good friends, family, and lovers, but cut back on that habit and keep it to a minimum. Nowadays, restaurants are going coupon crazy because they are trying to draw you in as a customer and stay afloat in hard times. When you do go out to eat, be flexible as to restaurant choice and use the coupons. I now get coupons in the mail from some of the nicest places in town, and this is something these restaurants have not done in the past.
One obvious occurrence of the boom has been the development of the seemingly trendy, high-priced restaurant. Mom-and-Pop, family-style restaurants, though reasonably priced, became bland and boring while overpriced and mediocre bistros, steakhouses, and entertainment-theme restaurants flourished. People who couldn’t afford the pricey family outings did so anyways, eating beyond their means thanks to an excess of Mastercard moments. These places are losing their attractiveness as the banks reel in credit lines and people return to a more cash-based existence. Those restaurants that offer something truly unique – healthy, organic, vegetarian, genuine upscale, or just great service/food – will survive and figure out a way to retain customers and make a profit in a downturn. Look for deals from the survivors – they will be there. But never, ever put a meal on a credit card – unless the card is used for budget, business, or convenience purposes and will be paid in full when due.
Coffee, Caffeine, Starbucks
This is a tough one for me because I don’t like to diss Starbucks. Two years ago, I waited for Starbucks to mark down its Barista expresso machines to half-price, which I knew was always the case each year right before Christmas. Now I buy fresh beans and grind them myself and I make my own lattes most of the time. That means I have to get up five minutes earlier, or be to work five minutes later than usual. No big deal. The cost of each cup of latte, with sugar-free syrup and whip cream, does not exceed fifty cents. The same latte at Starbucks costs $4. Starbucks should be an occasional treat for most of us. On a consistent basis, it is a huge waste of your money. Unless you are upper-middle class or above, you cannot afford the Starbucks lifestyle. Think about buying your own machine – you typically have to spend $200 or more to get a good one that will work dependably and last, but it will pay off in the long term.
Coupons
A co-worker recently said to me: "I don’t have time for cutting and using coupons." I’ve never heard such bloody nonsense. Neither do I "have the time," but I do use them and always have. I use coupons for my dry cleaning, airport parking, oil changes, car washes, pet services, manicures/pedicures, and all of my favorite retail stores, including Bath & Body Works, New York & Company, and Borders. Sign up for emails from your favorite retailers to help make coupon collecting painless. However, don’t use the excuse of coupons to buy something that you probably shouldn’t be buying.
Food
I may go to three grocery/food stores in one evening in order to take advantage of sales, double coupons, buy-one-get-one-free sales, freshness/quality options, etc. I rarely pay the regular price for anything, except for differentiated food items or items that don’t often go on sale.
Learn to substitute for foods when the prices are up. For instance, produce prices can be erratic. If vine-ripened tomatoes go from $1.29/lb to 2.99, don’t buy them. Don’t buy blueberries, strawberries, iceberg lettuce, seedless cucumbers, green onions, or other items when they are double the typical price. You have to be willing to change your habits in order to adjust to price changes. If you are a creature of habit, set in your never-changing ways, learn to get out of that rut, and quick. Learn to change. Buy frozen foods, canned goods, and paper products in large lots when they are on sale. I have a basement fruit cellar – the size of a small bathroom – for storage of food and essentials.
Too Many Sales
Don’t use the excuse of a clearance or sale to buy something that you probably shouldn’t be buying. Don’t cripple yourself financially with discount addiction. Don’t use clearances and sales and bargains and Black Fridays as an excuse to overspend or rack up debt. The same goes for Wal-Mart, Costco, or the other discount stores. Buying too much crap on sale at Wal-Mart is no more honorable than buying too much crap from Best Buy or Ann Taylor.
Home Security
Security in your home becomes more necessary when economic times are harsh and the riffraff become more daring. Crime is already up in many areas, especially home burglaries and invasions. Here’s where money spent can make you more Depression-proof. A home defense shotgun is a good start, followed by a pistol and a concealed weapons permit. Don’t just buy guns to stuff them in a drawer until the moment comes – learn how to use them and master them. If necessary, go to your local range or gun shop and pay about $70–100/hour (or thereabouts) to spend a few hours with a professional who will show you how to use and master your guns for personal protection purposes. Also, learn the basics of home protection such as picking a "safe room" and keeping an extra cell phone and a high-intensity, tactical flashlight in the room. I hang out on Internet gun boards occasionally in order to get some valuable tips along these lines. I also recommend Boston’s Gun Bible for everyone.
Since the one thing you want to ultimately do is keep the intruder from entering your home, there are steps you can take to deter an unfavorable situation. A security system – from a major company such as ATD or Protection One – costs about $300–$400 to install and about $40 per month for monitoring services. The signs will deter all but the professional criminals. The neighborhood undesirables who are looking to kick in a door or break a window so they can walk away with your DVD player, jewelry, or other items with street value will go somewhere else where the pickings are easier. You can also install driveway and/or landscape lighting to keep your property well lit at all times. I stuck those new, environmental bulbs in my front and side exterior house lamps, and I leave them on all the time. They last a long time. This electricity cost is not where you’ll want to save. My additional electric cost, in addition to occasional bulb replacement, is very minimal. A motion detector light (or two) on the house, when it is set correctly, is an excellent deterrent. Lowlifes scrounging for goods to turn into cash for their next bottle of liquor, Whopper, or drug purchase don’t want to deal with layers of impediments to their plan of action. Spend some money to make your house a difficult option for them.
Mall Wandering
For most people this is too great a temptation to survive. When people wander malls with no purpose, they tend to buy things they don’t need, and yes, things they don’t even want a week or a month later. Mall wandering has become a great American pastime because the credit bubble enabled people to buy what they didn’t need without justifying the expense that is to be spread out over years, with interest. I see whole families wandering the mall together. It’s become the way to fight boredom. People who are bored should stay home and be bored away from the temptation of buying stuff.
Get Rid of Your Land Phone
Ditch it if you can do it safely. Most people, including the kids, have cell phones, so why the landline? Even the cheapest calling plan is still too much to pay. The worst part of having a landline is the government taxes that are attached to the bill. Push aside your many excuses and determine if you really need one or if it’s just a crutch you lean on because you dislike change. Family plans for cell phones are so cheap now that it rarely makes sense to have a land phone anymore.
Wine
Sorry, there’s too much to say that this one gets its own article in my upcoming "Wines for the Depression," coming soon on LewRockwell.com.
The House
This is essential. Take care of your house. Don’t let things crumble and become withered. Avoid outlandish expenses that became a ritual during the McMansion mania of the credit bubble. As far as your maintenance equipment, it is time to stop thinking everything is disposable. Snowblowers, lawnmowers, edgers, leafblowers, etc. – they all can be maintained.
Many people who over-indulged during the boom are now selling off their assets in order to stay afloat. Look for used appliances, furniture, and lawn & garden equipment on Craigslist and elsewhere. There are a lot of good bargains out there right now, and if you have cash you can take advantage of them.
Fitness/Health
Take care of your fitness needs. Don’t eliminate your gym/sports/fitness expenses if you use them. Now is the time to be healthy and fit, and to stay that way. On that note, if you are overweight and you need to spend money (Weight Watchers, health clinic, gym/personal trainer, special foods or supplements, etc.) to bring that under control, do it. Cut the budget elsewhere, but don’t give up your health.
Miscellaneous
I have a few personal spending traps – iTunes, books, and useful electronic gadgets like computers, iPods, satellite radio, and BlackBerry. Not bad, because it could be worse, like using my house as an ATM, being addicted to new cars, or even pricey clothes, shoes, and jewelry – none of which describes me. I have also cut back on a favorite purchase of mine: magazines. I stopped buying them altogether. Determine where your spending waste is and try to cut back on that stuff where and when it makes sense. For instance, I know I need to replace a computer or BlackBerry every now and then, but I don’t need magazines and I have not found it necessary to toss my old-but-working Toshiba television in favor of a trendier $1,200 plasma TV.
Surviving a Depression is going to demand financial strength which is acquired via fiscal restraint. Even people who have exercised restraint and have not taken part in the debt-for-stuff orgy need to re-assess their financial condition and determine what moves they need to make to ride out the tough times ahead. Some items we deem essential, and others we just like to have. It is up to each individual to determine his or her highest-priority needs and most useful wants, and strike a sensible balance between them.
http://www.lewrockwell.com/decoster/decoster139.html
Used Cars
by Gary North
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It's that time of the year again. It's new car season. You are going to be pressured to part with a lot of money. You may be tempted to do this by the siren call of the new car ads. I write this report as a way to help you get through this month of temptation with your finances still intact.
I write this report as a man who had two cars die on him last month, who then bought a "new" used car, and whose son is driving another of his cars that is sounding like it, too, is becoming terminal. I presently drive a car that is in such a state of decrepitude that my wife has said she will no longer ride in it – an extreme view, in my opinion. I have another car in the repair shop today. But there is a real possibility that this car can be resurrected for another two years for under $500, and I can then turn over my car to my son. I'll sell the terminal one for $1,000.
At present, my newest vehicle is the recently purchased one. It's a 1994. The dead ones were a 1991 and a 1981. The one in the shop is a 1991. My car is a 1987. The one my son drives is a 1984.
My entire inventory of used cars at the beginning of last month was probably worth about $11,000. I do not tie up a lot of my wealth in cars. And, most of the time, most of them are running. They get me from here to there and back.
My wife did use our AAA card a lot last month. Statistics ganged up on me. That can happen once every decade if the inventory value of your fleet of cars isn't worth the price of a new Toyota Corolla.
I bought a new car once, in 1972. It was a Corolla. It was a lemon. The engine blew up three times in the first two years. Finally, a local dealer was authorized by Toyota to rebuild the engine at company expense because the engine for that model had been poorly designed. I kept the car for another 14 years. I drove it from 1972 to 1988.
I recall one day when I parked the car at church. My assistant was in the parking area. He was standing with another man – younger, always in debt, and who lusted after hot new sports cars. My associate pointed to my then decade-old Toyota, and said to him, "Maybe someday you'll be rich enough to afford a car like this." Exactly!
THE FREE MARKET IN ACTION
Over the next four weeks, the American public will be subjected to a concentrated advertising barrage that takes place every September. After Labor Day, the industry's new cars are rolled out on the nation's TV screens.
The annual month-long mass redistribution of wealth will now begin. Keynesian economists regard this as America's month of months. The auto industry constitutes something in the range of 5% of the U.S. economy. What happens in September to the auto industry points to the entire economy's performance for the next twelve months. What consumers are willing to spend on new cars is indicative of what they will spend on everything else.
Unlike Christmas, the other great indicator of consumer sentiment, the auto market has a used goods sector. What used car buyers are willing to spend influences the trade-in value of the new car buyers' existing inventory of used cars. This, in turn, influences the trade-in price offered by car dealers to new car buyers.
There is no more comprehensive, interconnected, top-to-bottom income distribution market than the American auto market. It is the consummate example of free market voluntarism in action.
I regard the system of car sales as the free market at its best, despite the fact that it is regarded by critics as the free market at its worst. When the Democrats wanted to torpedo Richard Nixon's candidacy for President in 1960, they put up a cheap, mass-produced drawing of him, with this phrase: "Would you buy a used car from this man?" Because of the closeness of that election, that poster probably cost him the Presidency. The suggestion was that Nixon was more crooked than a used car dealer. As it turned out three elections later, he was.
Used car salesmen have bad reputations. Used home salesmen do not. Why the difference? It is probably because of the different levels of pricing ignorance in the two markets. There are lemon houses, just as there are lemon cars. But, because of the size of the loans made to buyers to buy homes, there is more money charged to the buyer by the lending agencies and other support agencies to increase their amount of information regarding the value of the loan's underlying asset. The lender wants to reduce the risk of default by the buyer. He adopts various techniques to reduce his risk, and these techniques reduce the buyers' zones of ignorance. Buyers are willing to pay for these third-party services because of the unit price per house. The buyer is more concerned about the possibility of winding up with a lemon house than a lemon car.
There is another factor: gender. Men buy cars. Women buy houses. Husbands may veto a house purchase due to its price, but they don't make the decision about what to buy. Wives do. So, women are more heavily involved in the purchase of homes than they are in the purchase of cars. Also, female salespeople listen far more closely to what female buyers say they want to buy than male salesmen do. "Men don't listen to what women say," women complain. This is why there are so many female realtors. They do listen to what women say. They can actually understand what women mean, despite what women actually say.
There are almost no car saleswomen. They don't have the stomach for it. Macho sales techniques have more to do with the sales of cars than with the sales of homes. Car sales are determined more by specialized sales pressures from salesmen than by the buyers' decisions. This is true in home sales, too, but not to the same degree. Wives spend more time in houses as consumers or trying to keep them running than husbands spend in cars as consumers or trying to keep them running. Buyers of houses have more knowledge about houses than buyers of cars have about cars. Sellers of cars therefore have an advantage over buyers of cars.
Fortunately, the World Wide Web is beginning to offset the sellers' advantages.
CAVEAT EMPTOR
In Tyler, Texas, there used to be the most accurately named used car dealership in American history: Caveat Emptor Motors. "Let the buyer beware." It was a clever name, but the company went out of business. I guess the buyers bewore too much.
Because the zone of ignorance is larger regarding used cars than new cars, there is more room for skilled negotiating and deception by sellers. A buyer can find out on the Web what a car dealer paid for a new car. He cannot find out what the dealer paid for a used car.
The ignorance factor is why there is such a fast rate of depreciation for a new car. A new car that is running well is unlikely to be sold. When a very new car is sold, the prospective buyer thinks, "What's wrong with this car?" He doesn't think, "What's wrong with the seller's situation?" To make the sale, the seller has to offer a believable reason. The usual reason is this: "I have an emergency." But this reason produces lower offers. Buyers seek to take advantage of the seller's lack of liquidity and lack of time. So, prices of recently purchased new cars fall like a stone. Drive a new car off the lot, and you have just lost at least 10% of the sales price, and maybe 15%.
For new car buyers, the re-sale value of the car is less than the money they owe on the car. This remains true for at least three years. Only after year three does the rate of depreciation slow enough to allow the borrower to catch up with the re-sale value of his car. But then, in year four, he buys another new car. He never really gets ahead. This is why I will not buy a new car.
I won't borrow money to buy a car. I don't borrow money to pay for any depreciating asset. So, I limit myself to used cars, and normally used cars that are at least five years old.
Last month, I bought a 1994 Lincoln Continental for $3,500. It runs almost flawlessly. It has only one defect. The oil pressure gauge is hooked up to an electronic gong, and the thing beeps for no reason from time to time. The driver has to whack the dashboard to get it to quit. I am hoping there is a wire that some mechanic can cut to stop this. But it's a small price to pay in annoyance for an otherwise smooth-running car. My wife plans to drive it for at least six or seven years. At the end of that time, it will probably still be worth $1,000.
I do have to take each of my cars to the repair shop twice a year or maybe more. So what? If I spend (say) $200 per visit, that's way less money spent in that month than most people pay to their lender every month to drive a new car. I could spend $200 every month per car in repairs, and I would still be ahead of a new car buyer, except for my lost time. I own several used cars, so I have always one in reserve. If one car is in the shop for a few days, it's no problem.
I don't have to pay extra money in auto insurance to cover the repair cost of a new car. It doesn't pay to buy collision damage insurance for a car worth less than $5,000, which mine are worth. That's more in insurance savings per car per year than I normally spend per car in normal repairs.
One of the dead cars died on my wife on the way back from a trip to Nashville, a drive of about 450 miles each way. She had just visited my daughter. So, we sat down and figured a better way. We should have done this earlier. We can rent a mini-van for a week for about $375. If we shop around, we might get it for $350. If she visits twice a year, that's no more than $750. What would the depreciation and insurance be for a comparable used mini-van that is two years old? It would cost $16,000 to buy it – probably from Enterprise Car Rental. It would then depreciate by at least $2,000 a year. It would cost money to insure it, and I would probably buy collision damage coverage. On the road, if a rental car breaks down, you get a replacement car that day and an apology. If your 2-year-old $16,000 car breaks down, you are stuck in a distant city with a mess to sort out. You may face a repairman like the one in that TV ad ten years ago. "How much will it cost to repair my car?" Answer: "How much do you have?"
How many long driving trips do you take each year? Most people take no more than two or three. So, rent a car for long trips. It's cheaper than buying a new one that you would trust on the road. Buy older cars that don't depreciate fast. Use them around town.
REDUCING YOUR IGNORANCE, CHEAPLY
The reason why used cars sell for so much less than new cars is buyer's risk. The buyer is taking a greater risk when buying a used car than a new car. Also, the seller is in a weaker bargaining position than a new car dealer. He is not a skilled salesman. If you can reduce your risk by obtaining better information on the make and model of the car, and if you are in a position to walk away from a deal, you will save a lot of money when buying a used car from a private party. There are two wonderful free Web sites, Kelley Blue Book and Edmunds. You can look up any brand of car, any model, any year. Kelley has a great feature: the used car price from a dealer (retail), and the price from a private party. Here is where you regain your advantage as a buyer. You can find out what is a reasonable price for any make, year, or model, in one of five levels of condition. You can even put in the mileage. Kelley lets you identify your zip code. You will find out what prices in your region are.
Nobody likes to pay for car repairs. You can consult Consumer Reports to find the reliability factor for most cars. It's in the book that they put out annually. Your local library has it. Or you can subscribe for $3.95 for one month to the on-line version of Consumer Reports. Cancel after one month if you like.
CR also runs a "Used cars to avoid" list. That one, you must consult. Another list: "Used cars: best and worst." Read it.
Subscribers can search for any make or model and find out its reliability history and used car price range. The Toyota Camry is always at the top of the list. Most of the top-rated cars are Japanese.
Note for economy car buyers: A Chevrolet Prizm is identical to a Toyota Corolla, but it usually costs less to buy used. Most people don't know they are the same car, produced in the same Fremont, California factory.
Another way to reduce the likelihood of buying a lemon is to buy a particular brand of used car only at a car lot where that brand is sold new. If you want to buy a used Chrysler, buy it at a Chrysler dealership. The used car on the lot was a trade-in from someone who presumably bought a new Chrysler. He was satisfied with the older car, so he bought the same brand. He was reeled in by the ads for the new model. Too bad for him. Good for you.
Buy a FAX-based report on any car that you really are ready to buy. The service is called CARFAX. CARFAX's report will reveal if the car was ever involved in an accident. If the car was ever in an accident, don't buy it for anything but a super-low price. As a run-around-town car, it may be OK, but only at a very good price.
GETTING THE BEST DEAL FROM A DEALERSHIP
I suggest that you go to this Web site: http://www.carbuyingtips.com/used.htm
The article is long, detailed, and really hard-nosed. If you will do what it says, no used car salesman will have an advantage over you. The author of the report has certain rules, such as these:
1. Have a mechanic put the car up on a lift for inspection. Check for accident damage.
2. Run a vehicle history report (CARFAX).
3. Never sign an "sold as is" paper at a used car dealership.
4. If you need financing, have it lined up before you go to a used car dealership.
I would add these rules:
1. Don't buy the car without going home, running a CARFAX check, and thinking carefully about buying.
2. Be sure you have a top price in mind that is lower than the dealer's asking price.
3. When you return to negotiate, have in your possession a filled-in check for your top price, including tax & license. When you sit down with the salesman, hand him the check. He can take it or leave it. Don't ever negotiate with a pro. Put the burden to decide on him. A signed check does this. Because nobody buys cars without debt, your check in his hand will unnerve him. This is good.
4. If he doesn't accept it, come back when he isn't there, go to another salesman, look at the same car, and go back to his office. Write out a new check right in front of him, with the same top price. He may take it.
Shop during daylight hours. You can more easily see any defects in the car's exterior.
Shop in the morning. Negotiate the first round before noon. Then come back in the afternoon, if you like. Deal with the same salesman.
If the morning's salesman doesn't capitulate, come back in the evening and try to find another salesman, preferably young. Make a beeline for the youngest guy on the floor. Don't let an old, experienced salesman intercept you. Spot the young guy before you walk into the showroom.
Don't tell him that you made an offer earlier. Have him walk around with you. Then, lo and behold, you just happen to find the car you'd like to buy. Go back to his office. Write the check in front of him. Don't use the original check. He may catch on that you have been there before.
There is another strategy to get down the price. It's a good one when you have a particular car in mind. Don't come back to buy it for 30 days. Any used car that is on a lot for more than 30 days is a loser for the dealer. He ought to sell it. The salesman has an incentive to sell it.
There is an ultimate fall-back strategy for any negotiation, once you have decided to buy any item. It is a good strategy when you really don't know what an item is worth in the open market. The better the salesman is as a negotiator, the better this strategy works for you. Rarely does anyone use it.
Tell the salesman that you have a top price in mind. You absolutely will not go higher. In fact, if you don't get this price, you will walk out of the dealership and go to another. You will not be back until the next time you buy a car – but not for this purchase. The salesman must believe you for my strategy to work. You must be willing to do what you say.
Tell the salesman to write down his absolutely lowest price on a piece of paper. You will write down your top price. You will then exchange the papers. If your top price is above his lowest price, you will split the difference: 50-50. For example, if your top price is $7,000, and his lowest price is $6,000, you will pay him $6,500.
Make sure that he knows that this price is for everything: taxes, license, whatever. The check will be exactly this: no add-ons.
If he accepts your challenge, do the exchange of papers. If his price is lower, split the difference, write the check, and hand it to him. A check in a used car salesman's hand is a powerful motivator. He can go back and talk to his manager, or whatever other ritual song and dance he wants to perform for you. But his manager will know that it's all or nothing. "Take this offer or lose any sale whatsoever."
Go shopping in the first week of the month. Then wait for a month to buy the vehicle you want. Have three or four in mind. Don't feel pressured to buy. There will be other cars. By the way, this is another reason to have a spare car in reserve: less pressure on you to buy when your main car dies, or you get tired of taking it to the shop.
A salesman has a monthly quota to meet. If he has met his quota by the end of the month, he is less pressured to deal. At the first of the month, he is under more pressure. Make your offer in the first week. But let the cars you're interested in sit there for a month.
Sell your existing car in the local newspaper. Don't try to trade it in to the dealer. If you do, it will confuse the issue, and a salesman makes more money when the issue is confused. Better yet: keep the car as a reserve car. This will reduce the future pressure for you to "buy now." You want the pressure on the seller to "sell now."
The more valuable your time, the less time you should invest in shopping for a used car. But take your teenage son or daughter along with you. Make it a teaching experience. If your children don't get into the habit of going into debt for cars, this will help them immensely in later years.
NEWSPAPER ADS
Go onto the Web and go to your local newspaper. It probably has classifieds listed on-line. Our local paper has an auto section on-line, divided into a van section, an SUV section, and a trucks section. Each is broken down by brand, then by price. It's easy to use.
Start looking. Call around. If your top goal is a low price, keep looking for two or three weeks. You're looking for an ad that keeps showing up in the classifieds. At some point, the seller may get discouraged.
Go see the car. Take a print-out from Kelley or Edmunds. Tell him that you won't pay more than this price. Tell him that your offer will stand for three days. Hand him the print-out. Put your first name and phone number on it. Then get in your car and drive away. If he calls, fine. If not, keep looking.
The ads in the weekly Thrifty Nickel-type newspapers are probably run by people with less money in reserve and more immediate pressure to sell than the person who runs an ad in the daily paper. Be ready to negotiate with these people.
One way to find out over the phone why the person is selling is to say, "That sounds like a really great car. Why would you want to sell it?" The person is more likely to tell you the truth if he thinks you are interested in his car, unless the truth is that it's a lemon. Most used cars aren't lemons, which is why their owners keep driving them. You want to discover his motivation for selling, so that you can make an offer he won't refuse. His motivation probably has more to do with alimony payments than auto repair expenses.
CONCLUSION
When a new car costs as much as a used house, buy the used house and rent it out. It will probably appreciate. The new car won't.
By buying used cars and avoiding debt, you will reduce your lifetime costs of transportation by a significant amount. If the barrier for you to avoid debt on a depreciating item is for you to buy only cheaper used cars, then buy cheaper used cars. Assume that you'll buy a lemon once in a while. I bought a 1994 Lincoln for $3,500. I can afford to buy a dozen of them that way, year by year, rather than a new Lincoln. They won't all be lemons. Also, there is no guarantee that a new Lincoln won't be a lemon.
Note: before you buy any used car, rent a copy of the 1980 comedy, "Used Cars." It is my favorite Kurt Russell movie. The segment on the interrupted Jimmy Carter TV speech on inflation is worth the $1 it will cost to rent the movie.
September 6, 2002
http://www.lewrockwell.com/north/north124.html
Used Cars: A Follow-Up
by Gary North
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Last September, I wrote about how to buy a used car.
When you can save thousands of after-tax dollars, you should. I have a particular philosophy of local transportation that some readers may not share, but those who are doing their best to increase their net worth do share it.
LAST GASPS
On Sunday, as I drove to church, my 1990 Chrysler Town & Country minivan’s odometer rolled over 230,000 miles. I bought it for $8,000 when it had 120,000 miles on it. That was in 1996, I think. I had to make a few repairs, such as CV joints, but on the whole, I have limited repair costs to about $500 a year. Adding this money to the initial purchase price, we get about $11,000. A new Chrysler T&C minivan in 1996 was about $28,000, plus taxes – call it $30,000. Instead of shelling out that kind of money, I paid about $8,250 with taxes.
Not including insurance and gasoline, I have driven that car for about ten cents per mile. It got about 15 mpg, so with gasoline at $1.30 per gallon on average, my gasoline cost per mile was about nine cents. That adds up to under 20 cents per mile, total. For purposes of comparison, the IRS allows 36 cents per mile as a business deduction.
The car is finally reaching the limits of my patience. It handles OK, but the heater is bad, the air conditioner is gone, the lifters are noisy, and I don’t trust it for anything other than local diving. It’s great for hauling stuff around on the property, including my dogs. If it dies, so what? Still, I could probably get $1,200 for it by running an ad in the local newspaper. The fact is, almost any car that still runs is worth about $1,000. That’s the bottom end of your used car investment risk.
I like minivans. I can drive in them comfortably all day long. I can’t do that in a car with bucket seats. If I were in the market for a new minivan, I would buy a Toyota Siena. But I don’t buy new cars. The depreciation is too high.
A used Chrysler doesn’t command the higher price that a used Toyota or Honda minivan commands. Yet the quality is close enough for just driving around, which is all I am interested in paying for. So, I went shopping for a used Plymouth/Dodge/Chrysler minivan, which are essentially the same car, especially after years of normal wear and tear.
Our local newspaper has a nice feature on its free website. You can go to "classifieds," look under "transportation," click "vans & buses," and get a list of available vehicles, arranged alphabetically by make and by year: oldest first. This makes shopping incredibly easy.
I was looking specifically for a 1993. According to Consumer Reports, the 1989-92 Chrysler minivans had a major problem with transmissions. The 1994-97 minivans are listed under "Used cars to avoid." However, when I checked the specific ratings on the model, the page said the 1997 model was average.
I was after a bargain: low price, low risk. That narrowed it down: a 1993 minivan. I checked the paper. Sure enough, there was a 1993 model for $2,300. That price seemed reasonable to me. I went to see it. It was clean.
THE NEXT STEP
We have used a car repair company for several years. I got permission from car’s owner to take it to that company for an inspection. This is only reasonable. The owner agreed.
There is an old line: "Never ask a barber if you need a haircut." When you get a used car analysis from a repair shop, you are liable to get an inflated list of things that are wrong, several of them high-ticket items. Of course, if the company overdoes it, you may decide not to buy the car. It’s a trade-off.
The estimate came in at $1,340. That seemed high to me. I wanted a second opinion.
I called a local repair shop. It’s located closer to me in the low, low rent part of town. I listed the items I had been told needed to be repaired. They called back in an hour. Their price was $650 – under half.
That caught my attention. Maybe I was being misled by repair shop #1. I drove over to the second shop and had them check the car for the two most expensive suggested repairs, a total of $711. They checked them both. "No problem," was their answer.
That made my decision much easier: (1) buy the car; (2) from now on, always get a second opinion after the first opinion by the first repair shop.
Will I still go to the first repair shop? Only if I decide to have them inspect another used car. That costs $27. If they spot something wrong, I’ll verify this with the second shop, and then ask for a competing bid.
The point is, the free market provides lots of competition. When we are talking about hundreds of dollars, I’m willing to spend a couple of hours shopping. If I were Bill Gates, I’d hire someone to do this for me. Of course, if I were Bill Gates, I would not be shopping for a decade-old car.
IS THIS REALLY WORTH MY TIME?
On a pure cost-benefit analysis of the value of my time, probably not. My time should be spent writing. But we are creatures of our youth. I grew up middle class. For me to abandon that mindset at this late date would probably be close to impossible. In any case, the middle-class mindset is a good one. It is careful in budgeting money, though it trades off with budgeting time.
The middle-class buyer wants his cars and tools to work well, but he is willing to buy a car or a tool that doesn’t look new or impressive. In fact, he has a sense of victory when he locates a bargain.
That same attitude is beneficial in business, when a lack of a budget is almost a guarantee of overspending and future bankruptcy. The middle-class mindset is what we read about in The Millionaire Next Door and The Millionaire Mind.
The author tells the story of a very rich executive whose staff planned to buy him a new Cadillac as a present. They had all done very well with bonuses and what-not. (This was pre-Enron.) The man got word of it and told them not to do it. The plan’s organizer wanted to know why. After all, it was a free car. No, it wasn’t, the boss said. A man who drives that kind of car has to live in a neighborhood to go with it. Then his wife has to buy the furniture to go with the new home. The free car would cost him a fortune. (Mattel exploited this budgeting pressure with Barbie.)
A person who shops for bargains when he has the money to buy premium stuff is like a driver who signals that he’s going to turn even though he is driving down a deserted highway. Habits save us when we don’t have time to make careful decisions. When you have a good habit, it’s wise to honor it. It may be a life-or-death matter, and you want instincts to take over. It’s like checking a gun to make sure it’s not loaded if you haven’t had your eyes on it the entire time. I say this as a man whose great uncle was shot dead by an unloaded rifle. His son pulled the trigger.
THE DETROIT CAR SHOW
"Sunday Morning," my favorite TV show ("As Time Goes By" is second), did a segment on the Detroit auto show. The show featured lots of "muscle" cars – cars so low that a man my age could not get into it, and if he did, his wife would think he was nuts. (His first wife, anyway.)
There was a 1,000 horsepower, low-slung monster with 1,000 foot-pounds of torque. A Ferrari? No. A Porsche? No. A Cadillac. I have an award-winning ad campaign in mind: "This is not your great-grandfather’s Cadillac." I can see it now: some 70-year-old guy struggling just to get into the driver’s seat. He turns on the ignition. Vroom. He gets it onto the highway. Vroom, vroom. He floors it. He blacks out. This makes about as much sense as J. Howard Marshall marrying Anna Nicole Smith, with similar effects.
A non-muscle car was the $325,000 Rolls-Royce. It has a deep lengthwise hole in the door for storing an umbrella. This shows "attention to detail," the salesman told the interviewer. My wife pays even more attention to detail. "You have to open the door to access the umbrella, and if the wind is blowing at you, the rain will get on you while you’re trying to get it out of the slot and then open it." If it’s on the floor in the back or tucked behind a seat, you can open it part way before you open the door, and then try to get it completely open before you get soaked. OK, this doesn’t work, either, but it’s about $320,000 cheaper.
Then they showed a new model SUV. Guess which manufacturer is selling it. Take a wild guess. Make it preposterous. . . .
If you guessed "Ferrari," you came close. Maserati. Back when I was a something of a grand prix racing buff (1957–59), the idea that Maserati would someday target soccer moms would not have occurred to me. The thought of either Juan Fangio or Stirling Moss racing at the Targa Florio inside a Maserati SUV makes me giggle.
Can you imagine the repair bills on a Maserati SUV?
The show is nuts. It would make more sense for a Grosse Point matron to buy one of those anorexic outfits shown at a Paris fashion show. What alternative uses for a rich man’s money would be superior to buying one of these cars? Only about 500 immediately come to mind. Just give me a little more time.
I’m not quite at the tail end of the automobile food chain. That honor goes to recent immigrants from Guatemala. But if my spending pattern were to become widespread, the auto industry would go bust. I am not quite a free-rider on the industry, paying nothing, but I am surely a steep discount-rider.
LOSS-LEADERS IN DETROIT
I must admit, the following report from Rick Ackerman's site offers an alternative car-buying strategy for someone who has a General Motors credit card with a pile of rebate points. This story gives you some indication of the desperation in Detroit, due to the recession. What you read here comes from a really dedicated new-car shopper.
"In December I finally got off the fence. GM sent me a voucher for an additional $500 over and above the $3,800 I had still had on my credit card. Further, I noticed that $3,000 rebates were in effect on new 2002 models that needed to be cleared out. In addition there was a $1,000 holiday cash bonus.
"When I got to the first car dealer, on a purely exploratory mission – one of many I have made over the years to no avail – I was told I could get a 2002 Grand Am SE with a sticker price of about $21,000 for $19,500, but since the manager knew I was on my first stop and might be looking around he threw in another $1,000 (of $5,000 factory cash to the dealer) if I took delivery by the Monday following the weekend on which I stopped by. That brought the price to around $18,500, then take away the $3,000 rebate and you get $15,500, less the $1,000 holiday cash and we're down to $14,500. They had to see my voucher to give me the $500 but that got me down to about $14,000 and then my $3,800 credit card rebate points got me down close to $10,000 – less than half the original sticker price (which was a package discount from over $21,500 for the options separately).
"You still had to add back the sales tax (calculated unfortunately on the car price without the rebates) some rust proofing and other protections I chose to have and an extended warranty for about $1,000 (6 years or 72,000 miles) and the final price was about $13,000, but however you figure it I cut over $10,000 off the price of this car and I haven't had a chance to do that for years.
"I think next year we will not see these kinds of bargains, but only time will tell for sure. For now the facts say we have been having deflation in automobile prices. Oh yes, they offered me only $500 for a trade-in, so I kept the old car and am still driving it until the weather gets better and driving the roads around here isn't so much like taking a salt water shower. I guess I am cheap."
This is a man after my own heart.
CONCLUSION
You can save a pile of money by refusing to buy a new car, even at 0% interest. The new car’s depreciation is far more than the interest charge savings.
January 16, 2003
http://www.lewrockwell.com/north/north154.html
Owners find themselves trapped underwater
Michael and Cynthia Russell wanted to move to New York City, where they both work. Jobs are more plentiful there than in their town of Poughkeepsie, N.Y. But like millions of Americans today, the couple are stuck. They owe about $80,000 more on the home they bought in 2004 than it is now worth.
So instead of selling their home, Cynthia is going to school to become a registered nurse and Michael is working from home.
"We have had to find opportunities closer to home," Michael Russell says. "We actually began trying to refinance in June 2007, but absolutely no one would take us."
It's a problem that's only expected to get worse for legions of homeowners across the USA. Nearly one in seven homeowners is underwater, owing more on their mortgages than their homes are worth. That's about 12 million homeowners, nearly double the number underwater at the end of 2007, according to Moody's Economy.com. Most are homeowners who bought between late 2003 and 2007.
Home prices are projected to drop on average another 10%, bringing to about 14.6 million the number of homeowners who will be underwater on their mortgages by fall 2009, says Mark Zandi, chief economist at Moody's Economy.com. By contrast, about 2.5 million homeowners had negative equity in their homes in 2006.
Increasingly, job seekers find that their homes are albatrosses imperiling their ability to relocate for higher incomes or more secure job opportunities. In fact, the greatest drop in home prices, in many cases, is in areas with the sharpest rise in unemployment.
"It's a pretty alarming trend," says Alan Steel, general manager of AOL Real Estate.
In California, about 18% of homeowners owe more on their first mortgages than their homes are worth. In Florida, it's nearly one in four. Half of homeowners in Louisiana are underwater on their first mortgages.
Paying on 'a lost cause'
Ken Schimpf, 61, a retired carpenter in Lancaster, Calif., briefly toyed with the idea of moving to Wyoming so he could be closer to his oldest son and live in an area where he could find work more easily. But he's trapped by his house.
In August 2005, Ken and his wife, Juli, bought their home in Lancaster for $330,000. It seemed ideal at the time. The 1,900-square-foot, three-bedroom house includes an expansive master suite with a Jacuzzi, a pool, and 2.5-car garage where he keeps a 1923 T-Bucket hot rod that he and his wife worked on.
They got an interest-only loan at 5.25%, with the rate locked in for five years.
But in January 2006, Juli was diagnosed with leukemia. She spent months in and out of the hospital. Ken eventually took a leave of absence from work to help care for her. She died last March. Now Ken is trying to make his mortgage payment of $2,600 a month by relying on his retirement pension of $1,900 a month and savings. He doesn't want to lose the house because it's also home to two adult children: a son who was laid off and a daughter who is working temporary jobs. In September, his mortgage payments will increase by almost $500 a month when the interest-only teaser runs out.
He's selling his hot rod collection, looking for work and fast depleting his savings to make ends meet. Plans to sell the house were thwarted when he discovered the property is worth about $90,000 less than he paid for it. He doesn't want to just walk away from the home because he fears that would devastate his credit.
"I really hate putting the money out each month into what appears to be a lost cause," Schimpf says. "I just hope the economy turns around before too long so people can once again realize that owning a home is the American dream and not the American nightmare."
The inability to relocate because of negative home equity isn't just hurting workers who want to move for better jobs. It's also straining employers. Employees and new hires are increasingly turning down relocation opportunities because of the housing market. A 2008 corporate relocation survey by Atlas Van Lines found that "family ties" was the top reason (62%) cited by companies for workers declining relocations. That was a sharp drop from 84% last year. By contrast, 50% of companies said employees cited "housing and mortgages concerns" as the reason for turning down relocation offers, vs. 30% in 2007.
The dramatic shift is forcing businesses to offer more generous relocation assistance at the same time they're facing significant pressures to curtail costs because of the lackluster economy. In fact, the number of firms offering lump sum payments to transferees and new hires is at the highest in six years.
Some homeowners are so certain that their homes won't appreciate anytime soon that they have pondered simply walking away. Accountant Jason Khan, 33, owes about $80,000 more on his Phoenix home than it's worth in today's market.
"I am not in danger of losing my house. I have no problem paying my mortgage payments," he says in an e-mail. "However, I have considered walking away from my house and buying another … or making late payments to see if my mortgage company will renegotiate my principal with me."
For the most part, lenders will only ease loan terms for homeowners who are at risk of default or foreclosure.
Home prices keep on falling
Economists say a rebound in the housing market is still months away. The drop in home prices has shown no signs of letting up. And at least $500 billion worth of option-ARM loans are expected to reset from mid-2009 through 2012, driving up monthly mortgage payments for homeowners.
That could lead to a wave of new foreclosures that "could drive down home prices and leave more people underwater," Zandi says.
Jim Fawcett of Houston says the 6% decline in his home's value is just enough of a drop to keep him from retiring and moving inland from the coast.
"There's probably no way I could even sell my house in this market — short of giving it away," says Fawcett, 70. "Homes in my area, a newer development, sit on the market for six months, don't sell, then are taken off."
Mara Stefan's house is an unwanted reminder of her life before divorce. "As part of the settlement, I'm stuck in a house I don't want to live in," says Stefan, 42, who works in consumer technology and whose suburban Boston home is $60,000 underwater. She would love to move with her sons, Eric, 15, and Ethan, 6. "But it looks like I'll have to be here awhile."
http://www.usatoday.com/money/economy/housing/2008-12-18-under-water-late-mortgage_N.htm
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