Tips for buying used cars from dealers

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Used car dealers have a bit of an image problem. I’m not going to get into the stereotypes or horror stories, but let’s just say there are additional considerations when buying used cars from dealers:

  1. Check out the dealer’s reputation. Google is your friend. You can see if complaints have been filed with local consumer protection agencies. And talk with friends or family members who have purchased cars from local dealers in the last year or two.
  2. Assume each car on the dealer’s lot is being marked up at least a few thousand dollars. Yes, you can haggle the price down, but no dealer is going to sell a vehicle at a loss.
  3. Cosmetic improvements may hide serious defects. You can bet the dealer has waxed the car and power-washed the interior. But that doesn’t mean the car is in “excellent” condition. There may be serious mechanical or electrical problems that the dealer hasn’t addressed.
  4. Dealers don’t have to offer money-back guarantees for used cars. If a dealer offers one, that’s great — but get it in writing!
  5. The FTC requires dealers to post a “Buyers Guide” in every used car they sell, including demonstration models. The guide has to include warrantee information (if applicable), as well as various consumer warnings. The Buyers Guide becomes part of the sales contract, and overrides any provisions in the signed contract.
  6. Some states don’t allow “as is” sales from dealers. The list includes Connecticut, Hawaii, Kansas, Maine, Maryland, Massachusetts, Minnesota, Mississippi, New Jersey, New Mexico, New York, Rhode Island, Vermont, West Virginia, and the District of Columbia. Some other states have requirements that carefully define an “as-is” sale of a used vehicle.

There are many more things to watch out for when it comes to purchasing a used car from a dealer. To learn more, visit the Federal Trade Commission website at ftc.gov.

The main advantage of buying a used car is saving money. Here’s how Edmunds.com breaks down average used car prices for different types of cars sold by franchise dealers:

Edmunds used car prices chart

Keep in mind that these are average prices sold by franchise dealers. These cars tend to be newer and come with a higher markup than those vehicles sold by individuals, or those sold at auction.

And remember: At the end of the day, a shiny lemon is still a lemon.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities
.

How to cut car costs

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The following post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.

Autos dominate our lives. We depend on cars for work and pleasure. We plan our cities and new homes around them. Even when we’re relaxing in front of the television, advertisements for new cars are constantly paraded in front of our eyes.

Thanks to relentless media exposure and little-understood financing and sales practices, not to mention the perception of autos as important status indicators, most people replace their cars on a regular basis. A rent survey found that a typical new car-owner will keep a vehicle for nearly 6 years.

For many, there is no question that when they get their first vehicle — or buy a replacement car — it is going to be a new car. This is an accepted piece of wisdom.

Photo Credit: Kenneth William Caleno

If you follow the six-year buying pattern listed above, you probably will have purchased three new cars by the time you turn 40. Or, you may have fallen for the dealer pitch that urges customers to “lease a brand-new car for just $199 per month!” Of course, you have to read the small print to see that leases come with all kinds of gotchas, ranging from big down payments to restrictions on annual mileage. And you don’t actually own the vehicle in a leasing situation. That means there’s no trade-in when the lease is up.

While cars are a necessary, fixed expense, a fetish for new cars can lead to real financial pain. Fortunately, there are alternatives:

If you buy a new car, keep it longer. Recently manufactured cars tend to be vastly superior to the cars of decades past, in terms of resistance to wear, corrosion, and major mechanical failures. The old rule of thumb about the need to replace the engine or the car after it’s been driven 100,000 miles has been thrown out the window in the latest generation of vehicles (as recently noted by the New York Times in an article titled “As Cars Are Kept Longer, 200,000 Is New 100,000”). This is party due to better materials and on-board technologies, but it’s also because of an intense desire on the part of manufacturers to stay globally competitive.

What this means for you, the consumer, is a new car can be driven for 10 years or more if it’s properly maintained. Heck, drive that sucker into the ground before you replace it!

Consider used cars. It’s not necessary to buy a new car. You’re often paying a premium for a new vehicle from dealers who will do anything to close the sale with a slew of extra charges, features, and fees that you don’t need. Good used cars can be had for less than $10,000, if you do your research and shop carefully.

Photo credit: Kenneth William Caleno, licensed from Shutterstock

“How to cut car costs” was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities
.

How to limit spending on luxuries

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It may sound easy to limit spending on luxuries, especially if you are someone who doesn’t do much shopping in the first place.

luxury purchase - a new laptop/MacBook ProBut if you have a shopping habit, or a family member who likes to buy luxury items such as high-end laptops or expensive clothes, it’s not so easy. Here are some tactics for taking control of luxury spending:

Set a monthly shopping budget: After determining your income and subtracting rent, food, healthcare, transport, insurance, and other necessities, and setting aside some of the remaining cash for savings and retirement, you should be able to budget the remainder to “other,” including shopping. If shopping is a priority in your life, then allot more — but still stick to the budget. If you need help planning out your monthly shopping budget, consider some of the software tools described in Chapter 4.

Limit shopping trips: My daughter has a thing for shoes. If she steps into a shoe store, there is a 90% chance she is going to leave with a box of new shoes. The easiest way to limit her spending? Reduce the frequency of trips. The second easiest way? Paying with cash — preferably her own!

Use cash: When you use a credit card, you’re using someone else’s coin — usually the bank’s, or the store’s, if it’s a store-issued card. Because the cash is abstracted through plastic and far-off monthly payments, it can seem like you’re not paying anything at the moment of purchase. It’s a mental trick that works against your financial interests. Fortunately, there’s an easy way to counter it: Start paying with cash. The act of handing over a small stack of twenties to buy that fancy-shmancy kitchen gadget sends a pretty clear signal to your brain that your supply of money just got appreciably smaller.

Read the return policy before making a purchase: Think back to any item you’ve bought in the last few months that cost more than $100. Yes, I’m talking about that designer hat that looked good on the store mannequin, but on your head, not so much!

What was the return policy of the store you bought it from? You probably don’t know, or would have to hunt for the receipt and look at the fine print. The next time you make a big purchase, look at the return policy (or ask someone) before you make the purchase … and give preference to merchants who offer the best terms. If you have second thoughts or decide that the hat is not worth it, return it for a refund or store credit before the refund period expires.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities.

Jordan’s credit card problem

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A sobering experience for me occurred a few years ago, when I happened to see the docket at the local small-claims court. It was filled with a long list of banks that had filed suit against people who had stopped paying their credit card bills altogether. Those defendants who showed up had two options: Negotiate with the lender, or watch the magistrate rule in favor of the banks.

Jordan, a fictional character with a credit card problem. If she's not careful she may end up in small claims court.Jordan may end up on the docket if she doesn’t make some changes in her spending habits. She has luxury tastes, but can’t fund them through her middle-class income. She’s resorted to using three credit cards to fund luxury purchases such as fancy shoes and high-end appliances. She hasn’t been able to pay off the amount owed for more than a year.

Now she’s watching things snowball, as unpaid interest and further spending leads to ever-increasing bills and a big credit card problem. Jordan owes $15,500 now, and it’s still climbing. Eventually she won’t be able to meet her minimum monthly payments, which will cause additional penalties to kick in. Failure to make payments will also make it hard to get credit from other sources, including bank loans. If things get particularly bad, she could find herself dealing with the situations described in “What Happens When You Don’t Pay Your Bills” in Chapter 3 of Personal Finance For Beginners In 30 Minutes, Volume 1.

Jordan’s experience is not an uncommon one. According to estimates based on Federal Reserve data and other sources, nearly half (about 60 million) of American households carry a credit card balance that averages over $15,000 per household.

We’ll return to Jordan’s credit card problem in Chapter 3, when I give a big-picture view of debt and discuss practical ways to deal with it.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities
. “Jordan” is a fictional character used to illustrate personal finance concepts and spending patterns.

Considerations when buying your first home

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So you’ve reached that stage in your life when you are considering buying your first home. Maybe you just got married, or are ready to have kids, or have enough stability in your life where it makes sense to put down roots in a particular neighborhood.

Then there are the financial considerations. If done sensibly, purchasing a home can be a great way to strengthen your financial health while providing shelter and stability for you and your family. It’s also a way of eliminating rental payments, which generate no long-term financial value. Long-term, your home can become an important part of your retirement planning strategy.

However, buying a condo, house, or trailer doesn’t make sense for everyone. If local housing prices and/or interest rates are high, the monthly outlay for a mortgage, real estate taxes, and other costs associated with home ownership may simply be too expensive.

The New York Times has an online calculator that lets you determine whether it makes more sense to rent or buy, based on the following criteria:

  • Home price
  • Number of years you will inhabit the property
  • Mortgage rate/term
  • Home price growth rate
  • Growth in rental rates
  • Property and marginal tax rates
  • Maintenance/renovation costs
  • Utilities/common fees
  • Inflation

Plug in all of the variables and the calculator will spit out a price that shows whether buying a home makes sense.

Renting vs buying a house - NYT housing calculator

However, the calculator does not take into account other factors and intangibles, such as local school quality, location of the home relative to your place of work, environmental conditions, and whether or not there’s a decent bar or barbecue joint in the neighborhood. These things really matter, and sometimes are very hard to quantify.

Regardless, when the time comes to purchase a home, you’ll need to understand some of the basics (mortgages, fees, etc.) and be aware of some other considerations.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 2, by Ian Lamont. All rights reserved.

Do you really need cable TV?

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According to the Television Bureau of Advertising, nearly 60% of U.S. households subscribe to cable television. More than 30% use alternate delivery systems, including satellite TV.

If you get full-service cable TV or satellite television, ask yourself the following questions:

  • Do you really need hundreds of channels of cable TV programming?
  • Are you actually watching those four premium services that you added on to your subscription package?
  • Are your kids better off watching 10 hours of Nickelodeon and the Disney Channel every week?
  • Are CNN and CNBC providing information that you can’t get from the Internet for free?

The answer to these questions is almost certainly no. According to Nielsen, which tracks TV viewing habits, the average U.S. household receives 189 cable channels but only watches 17 of them. Yet people don’t hesitate to shell out $100 or more every month.

Take a look at the extra charges on the following telecommunications bill, which piles on more than $50 in premium channel charges in addition to the $135 base price for Internet/cable/phone service. The grand total is $226 per month:

RCN cable TV bill

There are some situations which do require cable or satellite television. Residents of rural areas or distant suburbs may be too far away from broadcast towers to receive over-the-air broadcast signals. If you want foreign-language programming, you will need to pay extra. In some television markets, professional sports are only offered through a cable television subscription. And there are some people who can’t imagine life without HBO or ESPN — they consider the dramas, games, and other programming to be life priorities!

But not everyone needs expensive subscriptions to premium channels. Millions of households would do fine with just the basic service package that brings in the nearest terrestrial broadcasters. A recent FCC study found the average cost of basic service is a little over $20 per month. For people who live near major urban centers, basic cable can be replaced by an antenna that plugs in to the back of a flat-screen TV. For a single one-time charge of $40, an antenna can bring in 20 or more digital television signals.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities.

What is a mortgage?

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The following post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.

If you’ve purchased a house or condo, you probably had to take out a mortgage. What is a mortgage? In a nutshell, mortgages are loans from banks that help homebuyers pay the difference between the cash they have available to pay for a home and the actual cost of the home.

Typically, mortgages have to be paid back in monthly installments over 15, 20, or 30 years. The monthly payments are usually equal (exceptions include adjustable rate mortgages, described below), and include principal as well as interest that the bank charges.

The size of the monthly payment depends on the amount of the principal, the length of the mortgage, and the interest rate offered by the bank at the time the mortgage started. Here’s how a $200,000, 30-year mortgage at a fixed 6% interest rate breaks down:

Monthly principal and interest payments: $1,199
Annual principal and interest: $14,389
Total interest over 30 years: $231,676
Total payments over 30 years: $231,676 + $200,000 = $431,676

The principal declines gradually over 30 years, until the mortgage is paid off:

What is a mortgage example

This is a greatly simplified view of mortgage payments. Not shown in the data above:

  • Even though the monthly payment never changes, interest payments are high during the early years of a mortgage. Toward the end of the 30 years, most of the payments will be paying back principal.
  • Local real estate taxes are not included.
  • There are fees related to setup, late payments, and other situations.
  • Lenders are required to reveal the annual percentage rate (APR), which is the mortgage rate plus fees, points, and some closing costs. If there is a big difference between the quoted rate and the APR, watch out!

Another risky situation that can lead to serious pain down the road involves monthly payments which “balloon” after a set number of years, which is typical of adjustable rate mortgages (ARMs). Here’s a typical ARM offer:

What is an ARM mortgage example
The initial rate is low, but the rate after the first 5 years is unknown. There is a real risk that the rate could more than double in the 6th year, which would greatly increase monthly payments.

You should always understand the terms of a mortgage based on the printed documents you sign as well as professional advice from an accountant, housing counselor, or experienced real estate lawyer.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities.

Rethinking life priorities as a first step to financial planning

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The following post was excerpted from Personal Finance For Beginners In 30 Minutes, Vol. 1, by Ian Lamont. All rights reserved.

The first step in planning for your financial future is seeing where you stand.

But don’t whip out your latest bank statement and pay stub yet. Instead, I’m going to ask you a simple question:

What matters to you and your family?

Oh no,” you say to yourself. “I bought a personal finance guide, but instead of getting down to dollars and cents, the author is one of these touchy-feely types who wants to know about my inner child.”

Not so! By asking you what matters to you, we’ll be able to better align financial decisions with your lifestyle. Practically speaking, this means you’ll be able to spend money on what counts — and have a better idea about what to cut.

For instance, if your family lives for having fun on the water, then spending and savings should be focused around things such as swimming lessons, beach vacations, and saving for a boat. Things that aren’t priorities can be scaled back or eliminated.

Narrowing down the list

One way to focus on your priorities is to review a bunch of broad categories, pick the ones that matter most, and then list the specific activities or expenses within the key categories:
Life priorities and personal financial planning
For instance, someone who prioritizes Business may list “home office”, “seed capital”, “truck”, or “relocation” to support his or her dreams. If you are a fanatic about Sports, either as a spectator or participant, then “season tickets”, “lessons”, or “gym equipment” might be listed as specific expenses or activities you want to invest in. People focused on Education might list “Timmy’s college fund”, “tutoring for kids”, or “grad school.” Religion-focused activities or priorities might include “church fund”, “mission”, or “pilgrimage.”

These are life priorities. Don’t think that you will be able to do financial planning for everything right away. Taking part in a mission, relocating to another state, or leaving your job to go to grad school are serious decisions that might take many years to plan and save up for. But the important thing is identifying what those priorities are, and aligning your spending and saving to support them.

What if all of these categories have specific expenses or activities that are important to you? It’s a common desire to “have it all.” But when it comes to managing your finances and planning for the future, it’s impossible to have everything … unless you’re Donald Trump (in which case you’re probably not reading this guide!)

When listing specifics, don’t include fixed expenses, such as paying back student loans or getting insurance for your car. While necessary, such expenditures aren’t your personal life priorities. As we’ll see in Chapter 3, fixed expenses do have to be addressed when it comes to making spending decisions. For now, you don’t have to include them on your list.

Build your list until you are satisfied with the priorities it contains. Really make an effort to identify true priorities — things that you really want to be a part of your current life, or your future. Knowing your priorities will make it much easier to manage spending as well as financial planning for the future.

This post was excerpted from Personal Finance For Beginners In 30 Minutes, Volume 1:
How to cut expenses, reduce debt, and better align spending & priorities
.

Nolo online will review: My experience

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Nobody likes to plan for death. Yet it’s one of the most important things you can do while you are still healthy. Having insurance policies, legal documents, and other plans in place can make it much easier for loved ones to handle your affairs, and to ensure that your assets are passed on according to your wishes. This blog post explains how to create a will in less than one hour, using the online service offered by nolo.com. It ties into the section in Personal Finance for Beginners In 30 Minutes, Vol. 2 called Four legal documents you must prepare now.

The first reaction many readers might have is, “why do I need to draw up a will now? I’m too young to die.” They have a point: Statistics from the Centers for Disease Control and Prevention show that younger and middle-aged adults are far less likely to die than people aged 55 or older. For instance, 2011 data from the CDC found that people aged 25–34 had about a one in 1,000 chance of dying. That doesn’t sound like much.

However, the sheer numbers are staggering — more than 42,000 Americans in the 25–34 age group died in 2011. For people aged 35–44, more than 70,000 died in 2011. For people aged 45–54, 183,207 died that year.

These numbers aren’t intended to scare you. They are merely to illustrate that people like you and me are at risk, even if the risk is small.

This is not the only consideration. What happens if you don’t have a will, neglect to assign beneficiaries, or otherwise fail to prepare the relevant documentation? Your family members will have to deal with an unpleasant legal mess, and may lose a lot of money that otherwise should have gone to them.

The probate court, which is tasked with gathering assets and distributing them to inheritors and debtors, will almost certainly get involved. In the absence of documentation that spells out your wishes, the court will turn to relevant statutes — and potentially the arguments of lawyers hired by debtors, relatives, and other parties — to determine who gets what. Plans need to be put in place so that if the unthinkable does happen, your family members and loved ones will know what to do — and the people who matter most to you won’t need to waste time or money dealing with the mess.

Finally, online services make it cheap and easy to prepare a simple will. If you have a relatively straightforward situation, you can use online will generators or packaged will-making software. As I will show below, it takes less than an hour and costs less than $50. In other words, excuses like “it will take too much time” or “it will cost too much money” don’t apply — unless you have a complicated situation, in which case professional legal help is required. Ask a legal expert if you are unsure about your own situation.

My situation was relatively straightforward. I started at Nolo.com and read about the online will service it provides. It’s cheap ($35) and is customized according to the probate laws of 49 states (it is not valid in Louisiana or U.S. Territories). I went straight to the FAQ to determine what I needed to prepare. The list included:

  • A rough inventory of your property (but if you plan to leave everything to one or a few people, you can skip this)
  • A list of beneficiaries – that is, the people who will get your property
  • A list of alternate beneficiaries – the people who will inherit your property if your first-choice beneficiary dies before you
  • If you have young children, a list of your first and second choices for guardian
  • A list of your first and second choices for executor
  • Contact information for people you name as guardian, executor, or caretaker for your pet
  • Information about debts that you want to forgive, including the date you lent the money and the amount you want to forgive
  • Account numbers and locations of any accounts you want used to pay debts, expenses, and taxes

There was nothing complicated about any of this. My assets basically consist of my home, car, 401k and IRA accounts, taxable stock accounts, bank accounts, some heirlooms, and business interests in my company and a small startup in which I own some equity. Beneficiaries was also straightforward — everything will go to immediate family members. No one owes me money, and I don’t have much debt other than my mortgage and a relatively small student loan. I decided to pick family members to serve as guardians and executors (with friends as backups).

I paid $35 via credit card and got started. It took less than an hour — in fact, I believe it was closer to 30 or 40 minutes. There were a bunch of basic questions and then I had to answer the questions listed above, often providing backups in case someone named is no longer available or alive. My progress was shown on the screen:

Nolo online will review

At the end of the questionnaire, I was able to save a PDF copy of the will along with instructions for making it official — in my state, signing in front of two witnesses who were not direct beneficiaries, and initialing each page. There were a few other pieces of paper that needed to be signed or prepared, and instructions for how to store them. The document was about 20 pages long, with another 2 pages of instructions.

To be honest, finding the witnesses was the hardest part about this — it’s uncomfortable to approach friends or colleagues to ask them serve as witnesses. But it’s a necessary step to making the will official.

If you’re interested in learning about the three other “must-have” legal documents I recommend, check out Personal Finance for Beginners In 30 Minutes, Vol. 2. It’s all covered in the last chapter.