How the Real Rich Roll (and how to buy a used car)

When I was 19 I found out I knew 3 wealthy millionaires. I learned something interesting about how the rich roll: Not one of them drove a car worth more than $7,000.

Vehicles are horrible places to put a lot of money.

The wealthy are smart with money.

THE OTHER END OF THE SPECTRUM:

I recently had a friend tell me about a guy at a party telling others about his gorgeous new Tundra truck.

My friend tried to tell him he was throwing his money away. He argued that "It fits my style and I can afford the monthly payments."

Fair enough. Everyone has different values in life. I decided to run the numbers and see the full cost of style and his monthly payments (the email I wrote her):

I just did the true cost to own (clickable link) on that $50,000 Tundra. It'll have a resale value of $19,500 in 5 years. Given that purchase price, he'll lose $30,500 (in depreciation/taxes/fees/etc). If he has a good credit score and put 10% down (generous assumptions), he'll lose approximately $7,200 in interest payment.

Total 5 year net worth loss: -$37,500

That's an average loss of $7,500 a year (37500/5).

He's actually having to earn $10,000 a year in wages to have $7500 after taxes just to cover just the loss in depreciation/interest (not repairs/gas/insurance). Said differently: $833 a month of his monthly wages go to pay for waste on his truck.

HOW DO YOU ROLL?

I took my rich friend's advice to heart and got reasonably good at car bargain shopping and made a system out of it.

1. Start with Consumer Reports. Figure out which vehicles are most reliable, then pick one from that group. This drastically increases the odds of the car lasting twice as long as a less reliable vehicle. The best cars for reliability are Toyotas or Hondas, Consumer Reports studies show. There are other vehicles too. Consult their buyer's guide. Study it and really learn what options are reliable bets. To get a good deal it's helpful to be open to more than just one type of car.

2. Do the math on the "non-price" factors. This is possibly even more important. Smart shoppers focus on price and reliability. The next level is paying attention to depreciation and gas mileage. Most people aren't aware depreciation is the greatest expense in owning a car.

Look at the deprecation for a Toyota Avalon, owned for 5 years.

Year of Car	Depreciation Loss after 5 Years
2011	17900
2009	11200
2005	6700

Compare that getting a car with much better gas mileage (ie, 50% better mileage -- going from 20 to 30 miles per gallon):

Mileage	Gas Cost/Yr	5 Year Cost	Savings
20	1800	9000
30	1200	6000	3000

What these two tables mean is it's important to pay attention to gas mileage and usually much more important to pay attention to depreciation. They're significant expenses/savings that most people don't think of -- it's not posted on the price on the car. It has to be researched and calculated. It’s worth the effort! It only takes 10 minutes of research and you can save thousands and thousands of dollars.

3. Buy older cars with low miles. A cars age should be mostly measured by how much it’s been used (ie, how many miles it has), but the vehicle blue books value the year it was built. A lot. An older car with the exact same number of miles can be more than 20% less expensive.

4. Expand your search. Craigslist, dealerships, autotrader.com, and even eBay.com. To find the older car model with super low miles I wanted, there wasn't a single car in my state I could find that wasn't selling at a premium. I finally got it on eBay and 4 years later, it still drives like a dream. I paid 11k (with shipping) instead of 18-19k for the newer year car with the same miles. I would have paid 8k (70%) more in the car price and $700 just in sales tax. A lot of savings!

5. If you shop online, increase your due diligence. The greater unknowns require more due diligence. Spend the $10 to pull a carfax report on the vehicle before bidding. If using eBay, only buy from someone with 100% feedback. Consider having a mechanic inspect if it's a long ways away. Even then, you just have to be willing to accept the risk. If not, don’t play.

6. Stay focused on the full cost picture. If you have to drive to get it or have it shipped from somewhere, factor in transportation costs. Calculate sales tax. Figure out what it will cost to get the car here in your name. Figure in tires if it will need new tires soon, or a battery, or any other misc repairs. See the total price picture.

7. Take the car to a mechanic. For $50-$100, a mechanic can run a battery of tests. This includes a compression test which is a much better indicator of a vehicles “age” (based on how hard it was driven). They can also spot hidden damage, or covered damage -- only a pro with 20 years might see the signs. Eliminating the lemons from the pool of choices is critical. It's annoying to spend the money, but worth it. Avoid buying cars with anything but minor damage.


Lastly, a note on keeping your eye on the big numbers

Buying a new car to improve gas mileage 50% from 20 MPG to 30 MPG saves $3,000 over 5 years.

Buying an older car 6 years older may save $11,200 (depends on which car/year you buy). Saving that depreciation is the same as 18.6 years worth of gas savings!

Some well intentioned buyers purchase a newer car because it has "much better gas mileage." While true, the depreciation will eat more than the gas savings - frequently much more (even for a new Prius depreciation is still much more than gas mileage savings).

I use the NADA "True Cost of Ownership" website to find depreciation.

To calculate average gas cost per year, take a calculator and punch in 12,000 divided by the gas mileage (MPG) times the current cost of a gallon of gas.

No?! ..... Surely you jest!

First, an AT&T store rep said no. Then her manager said no. Then the AT&T 611 customer service rep said no and her manager said no. Apple said no, too.

Surely you jest.

My mom taught me many things and tops on that list: persistence. You get what you want simply because you hold on when everyone else gives up.

My initial request: $32.49. Reasonable, fair, and rejected.
I was finally given: $264.49

The Background: I wanted not to pay a $32.49 restocking fee for returning my iPhone 4. Figured it didn't make sense to pay 100% for a product that turns out to be defective, and then only get 90% back when I returned it. But everyone said no.

The Result: Today, Apple mailed me a wireless bluetooth headset valued at $80 for the pain in the butt factor experience, and then AT&T paid me $152 for the pain in the butt factor for trying to get my $32.49 restocking fee back, and gave me the $32.49 back.

I tried being patient and reasonable but that didn't work. Instead of caving and trying to forget about it, I stayed with it and got more than I wanted.

If you're struggling with AT&T, I recommend trying to talk directly to a manager at the store, and at a call center. I've used both before and it's resolved the issue. If you exhausted reasonable measures, send an email to: rs2982@att.com, the email for the President of AT&T. Within 24 hours you'll receive a call from his executive response team to solve the problem. Explain what you want reasonably and calmly; it works better than crazy and flaming mad. I also recommend asking what else they will give you for all the inconvenience you went through (that was how I went from just $32.50 to $184.50).

Below is the email I sent. It doesn't need to be this thorough. I took the time (while sitting on hold) to highlight the details and silliness of their response.

----- Forwarded Message ----

From: Jared Fielding To: rs2982@att.com; steve@apple.comCc: bg@boygeniusreport.comSent: Fri, July 16, 2010 6:31:25 PM

Subject: Experience with iPhone return

I am having the iphone 4 reception issue. I attempted to return the iphone 4 to the att store today. Here's how it went from the customer side.

The manager at the Kennewick, WA store "Aaron Laredo" (al257u@att.com) stated that he would not refund the $30 restocking fee. I indicated that the product was defective. Why would I be charged a restocking fee for a defective product? Not only did Steve Jobs say "no restocking fee," I spent $2100+ in 2009 on my AT&T wireless bill for my cellphone. Aaron Laredo was unwilling to budge: $30 was out of the question.

I stayed in the store and called 611. I spoke with customer service and eventually a manager there (Cindy, #CR9603), who also indicated they would not return the $30 restocking fee. Again, I highlight the silliness of being charged to return a defective product.

Getting to this point took over an hour.

Still in the store, I am transferred to Apple, who I am told is my last hope of waiving the restocking fee. "Steven" at Apple states that since it is their defective product, they will handle the refund. I'm told I need to switch the service back to my old iPhone and go home, use my computer to start the return online, and a box will be sent to me to return the iPhone 4. I ask the Apple rep 3 times to please just start the return with him to end this miserable experience. He indicates company policy prevents him from doing so.

I switch the service, return home, and start with the online return. After 20 minutes of trying to figure out how to return it online (mind you, I used to program computers and own a computer business), I call Apple. I'm told that the only way to return the iPhone 4 is to go to ATT. I ask for a manager who says the same thing. I request the manager's ID number for a reference. The phone call hangs up. That call took 35 minutes. At no point did I flame, swear, or do anything detogatory to any rep. You can replay the taped phone calls.

I am persistent. I call back. The new Apple rep indicates that there are no notes on the account from the last call from the rep or manager (amazing.) I ask to speak directly to a manager (as this is the 3rd time I've called Apple in an hour). He confirms everything I described above. Manager (Robby Kinch) appologizes, is very empathetic, and given that I was told bad advice and hung up on, he offers to give me new headphones. I appreciate the gesture (and accept). This call time: 45 minutes.

I return the defective iPhone 4. After doing everything I can think of, I am charged a restocking fee by AT&T for a product that doesn't work. I'm still mystified.

Jared Fielding

2010 Books

Currently Reading:
Work the System: The Simple Mechanics of Making More and Doing Less. Sam Carpenter.
Telling Lies. Dr Paul Ekman. After the first few painfully academic chapters, it gets progressively more interesting.
Property Management for Dummies. Robert S Griswold.

2010 Read:
Inflation and Depression. John T Reed.  Recommend.  Particularly valuable for those of us who are youngin's and who've never lived through really bad times, this offers a look at recent (last 20-50 years) examples of how rough it can get, and how fast that can happen.
The Proper Care and Feeding of Husbands.  Dr Laura.  Highly Recommend.  Best relationship book I've read in years and it highly correlates with the happy marriages I've observed.
The Ten Stupid Things Couples Do to Mess Up Their Relationships.  Dr Laura.  Do not recommend.  It was a repetitive book that I couldn't finish.
The Four Hour Body.  Tim Ferriss.  Recommend. Very interesting book about self-experimenting to improve your strength, lower your weight, increase sex, etc.
The Big Short. Michael Lewis. Recommend. Insider look at the 2008 economic melt-down written by one of the best author's of our day.
Sh*t my Dad Says. (Justin Halpern). Highly recommend. The funniest, most vulgar book I've read in a long time.
How to retire happy, wild, and free. Ernie Zelinski. Recommend. An interesting book that approaches retirement in a reasonable way: think out retirement in the same successful way that thinking ahead got you to the point of retirement.
The Art of the Deal. Donald Trump. Do not recommend. A lot of self-grandulized story-telling. My favorite part of this book is the end where he's talking about how he's king of the world/bad ass. Shortly after the end of the book, he lost almost everything.
Vagabonding. Rolf Potts. Highly recommend. The classic on long-term (months-2yrs) lightweight world travel. As much a life philosophy as a travel manual.
The Four Hour Work Week Revised. Timothy Ferris. Highly recommend.
Chasing the Bear. Robert Parker.
Nothing to lose. Lee Child.
How to be Invisible. J. J. Luna. You've got to be on the paranoid side to like this book - a well written nuts and bolts of how to drop off the grid.
The Science of Fear. Daniel Gardner. Highly recommend. One of my favorite 2010 book, this discusses how from Bush to non-profits fear is used. A fascinating inside look into how ideas are "sold" and the consequences of making decisions based out of fear.

_______________________________________________________

Most Recommended Books on Money:
The Top Ten Distinctions between Millionaires and the Middle Class. Keith Camerson Smith. This book does a better job of condensing the distinctions of the lives of millionaires than any book I've read. A 40 minute read.
The Millionaire Next Door. Thomas Stanley. The financial classic that discusses how 95% of real millionaires actually live. Hint: The rich don't get rich by spending most of their money acting rich.
The Four Hour Work Week Revised. Timothy Ferris. The classic on lifestyle design, it's a fun that is a must for those looking to design their own lives instead of live as a salary slave.
Your Money or Your Life. Joe Domingez. One of the cornerstone books on personal finance, this approaches money from a unique, more honest angle than any other I've read.
The E-Myth Revisited. Michael Gerber. The goal isn't to be an employee of your own business, the goal is to own the business and have it make money without your presence. An awesome roadmap.
Stop Acting Rich and Start Living Like a Real Millionaire. Thomas Stanley. In a sequel to TMND, this is readable albiet repetitive, drilling home the mantra that people who appear rich usually aren't.

Most Recommended Books on Relationships:
The Color Code. Taylor Hartman. This book has helped me understand people, their motivations, how to communicate, and how to predict people's actions better than any other I've read.
The 5 Love Languages. Gary Chapman. A classic that teaches you some of the best ways to build up an emotional bank account with someone: give to them in the way they want to be loved.
Conscious Loving. Gay and Kathryn Hendricks.

Favorite & General Recommended Books:
Ender's Game. Olson Scott Card.

Moneyball. Michael Lewis.

Atlas Shrugged & The Fountain Head. Ayn Rynd.

Any Calvin and Hobbes or Patrick McManus book.

Credit Card Shopping: The Best

I decided to attack shopping for a credit card. The summary of results below.

The cards that offer "rewards" turn out to return 1 to 1.3% when you break down the true value of a "point" or "mile". And you have to jump through all their hoops to redeem their currency. In the end, cash rewards cards are preferred over frequent flyer cards. I'm shifting everything that direction. None of the cards below have annual fees. Business and personal cards are listed.

I'll be running everything from my utility bills to my gas to groceries to anything I can through a credit card before paying it off everything month. Doing so will save approximately $1,000+ cash back a year.

Amex:
Amex Costco Business: Earn 4% back on gas up to $6,000, 3% on eating out, 2% on traveling, and 1% on everything else. They send a check out once a year with what you accumulated. App.
Amex SimplyCash Business: Earn 5% cash back on wireless service and office supplies , 3% on gasoline up $12,000 per year, and 1% on every other purchase. Plus, it is automatically credited to your statement each month. App.
Amex Costco Personal: Earn 3% back on gas, 3% on eating out, 2% on traveling and 1% on everything else. They send a check out once a year with what you accumulated. App.

Additional Benefits:
Extended Warrenty: Extends the term of the original manufacturer's warranty up to one additional year. Damage/Theft Protection: Protects purchases against accidental damage and theft for up to 90 days from purchase. Other Benefits here half way at bottom.

I consider Amex the single best card for customers (and usually the worst card in fees for business owners).

VISA

Penfed Rewards Card: 5% Gas, 2% Super Market, 1% other, no annual fee (3% thru the summer on Electronics & Home Improvement). Requires "membership": that unless you have military ties means you can apply via an "exception":$20 one time "donation" to a non-profit they specify plus $5 one time setup fee (paid with credit card over the phone). They require 2 years income tax returns for verification. :( Took 35 minutes to apply on phone!
Fort Knox Visa Platinum Cashback: 5% Gas, 1.25% all other retail purchases. Asked about the defintion of "retail purchases." Appears to cover "everything except gas." They required the first page of my tax return from my business and personal returns. :( 1.25% is the best catch-all cash back I've seen.
- - -

Failing qualifying for any of these cards, which require good credit and good income, any card that offers 1% cash back with no annual fee is a decent card. I have a Bank of America card that fits this description which was much easier to obtain than the above.
* * *

I'll post new findings here for credit card research.

Social Security Rate of Return

I recently analyzed the rate of return on social security. Now for most people, this isn't really interesting. But as a business person interested in numbers and investing, I care how much of my money is being paid in, and how much of it I'm getting back, and at what rate of return (particularly if it's a negative rate of return).

The formula for benefits used to be very opaque. Nowaday, if you're good at math and patient, you can calculate your expected benefits at home. The formula makes inflation adjustments and takes the 35 highest wage earning years and averages them to determine your "average annual wages." Then the government creates three "wage zones" with differing benefits levels. For "average annual wages" from $0 to $9,132 social security will payout benefits equal to 90% of that per year. Above that, from $9,133 to $55,033, benefits drop to 33%, and from $55,034 to $106,000, the benefit drops to 15%. This means that the more you pay in, the worse (by far) your benfits becomes. Above $106,000 there is no required pay-in to social security. (The raw formula is available at here or more clearly here.)

Here's the graph that shows exactly what this means for you and how much you pay in:

Note the points where the graph bends is where you see a different "wage zone" start/end.









There's lots of ways to look at the money paid into social security. I don't like to think of it as giving the government money and hoping they take care of me. Instead, I prefer to think of it as a forced government retirement plan which, after that money is paid in, has a rate of return. I calculate this ROI the way a bank does with an amortized loan. A bank loans me money and I pay principal plus some interest rate. That's how these investments work.

My Rate of Return

If you click into this graph (I can't get the silly thing to display any better inside this blog), note the highlighted column. This is the rate of return I receive on my social security pay-ins!



Note that for the first 9k, it's ok (4.8%), after that, it's actually highly negative (-13.7%), and not shown is above 55k (remember the other bend point?), the rate of return is substantially worse: -25.5%.

Can this ROI number be different? Definately. For example, this ROI assumes you are a 31 yr old male (me) who lives to an average life expectancy of 76 years old (actuary tables). However, since I have my grandparents genetics, which are ridiculous for longevity, I may well live much longer. The effect of this is a better rate of return. Which makes sense. After I hit the retirement age, the amount paid in is fixed. However, my pay-out amounts depend on how long I live. If I die early, I get screwed, if I live longer, I get more checks from the government, increasing my ROI! Which leads to...

Rate of Return by Expected "Live to" Age

This is a table shows the rate of return depending on how long you live. It breaks into wage zones and then how long you expect to live.





The ROI on wages less than $9,132 is pretty good, particularly as you age. But one has to live until almost 90 before any money paid in on the second wage zone even has a rate of return above zero. For wages paid in the last zone (above $55,033), your return is so negative that you will not see a zero ROI until you're very old (115 years old).

The Short in Six Sentences
Social Security is a government required retirement plan. Benefit payouts are calculated using three wage zones with three different benefits rates. Calculating the rate of return on your investment (the money paid into social security) depends on how long you live and which wage zone you're in. The formula provides that: The less you pay in, the better the ROI; the longer you live, the better the ROI. For the wage zones where most people fall, the rate of return is negative, or substantially negative.

Postscript: I am not writing this to thrash social security. My intention is to look at the formula and analyze the numbers objectively and see if there are ways to optimize for my retirement.

Postscript #2: Later, I will add a few more article exploring how if you and your spouse run a business together, the way to increase your Social Security ROI (based on a wrinkle in the payout formula not discussed yet), at what age do you "break-even" (get all your principal back with no interest) , and other details related to this retirement plan.

If you're automobile shopping, read this

I've been researching auto safety related to accidents (I had a friend total 2 cars in 8 days.... lol). I decided to see what data I could learn about risks related to cars. I'm sharing because I don't want people I care about to die. :)

The highest risk factor of dying ages 1-34 is automobile related accidents (source, Forbes). Which means when I go to protect my family, the safety of the car is the top things I can do to protect my famdam.

All cars have to pass a basic Highway safety (NHTSA) test. Beyond that basic test, there is an enormous difference in safety. Not like 30-40%, like multiples, like 21x. After statistical balancing: 232 dead with a dangerous car, only 13 with a safe car.

The IIHS is somewhat to safety what Consumer Reports is to reliability. They're a non-profit insurance organization that puts out information related to auto-safety. They analyzed 125,000 accidents that resulted in fatalities. From the safest vehicle to the most dangerous vehicle equally certified by the NHTSA, you are 21x more likely to die in a fatal accident. That's a lot more dead people because they bought the wrong car. Incidently, that vehicle is the Chevy Blazer, 2-door (Autumn had a friend's friend die in an accident in one (http://www.iihs.org/externaldata/srdata/docs/sr4204.pdf)

It's a good study. It's adjusted for sex of the driver (men are 2x more likely, even after making adjustments to die in accidents? roar!) and other driver demographics, it's adjusted for number of vehicles on the road, it uses confidence intervals. And if you stare at the numbers for a bit, you see patterns between automakers (Mitsubishi = death, Toyota = happy face) and brands inside of single automaker (my Avalon is somewhat safer than a Camry, which is somewhat safer than a Corolla).

Incidently, greater mass is a significant increaser of safety (in the rock-papper-sissors of car accidents, large beats small). Intuitive. Although it's interesting to note that trucks are usually much less safe than SUV's. Not intuitive.

The IIHS puts out a search engine for determining the safety of different vehicles during different years: http://www.iihs.org/ratings/default.aspx. It's less useful than the study becase it's much less exact (three categories of good, ave, bad isn't nearly as good as an index, which I like to call the death index, which shows degrees of good->bad which vary enormously).

Based on how I drove in HS, it's a miracle I'm alive right now... but my dad was wise to put me in a huge, heavy car.

Couple last comments:
* night-time driving is 3x riskier per mile driven than day-time driving (ie, be more alert, wear eye glasses)
* for a future car, electronic stability control (ESC) reduces single-vehicle accident risk by 40% and fatality risk by 56% and rollover risk by 80% (IIHS article)

If a loved one is in an accident, it may be a random accident. However, the probability of their safety is not random. It's largely based on the automobile they're inside.

The article with safety index for different cars is at: http://www.iihs.org/externaldata/srdata/docs/sr4204.pdf.

How much does a couch cost?

Imagine a new couch is purchased for $1,000 (not an amazing couch, just an ok one).

This is how a person normally looks at it:
$1,000 Couch

How else is there to look at it?

There's the money that had to be earned in taxes just to have the $1,000 to spend (assuming a 25% tax bracket is $1,000/.75=$334 more)
Cost of $1,000 Couch
$1,000 Couch
$ 334 Extra money earned for fed taxes

Then there's sale tax that goes with the $1,000 purchase (10% in WA).
Cost of $1,000 Couch
$1,000 Couch
$ 334 Extra money earned for fed taxes
$ 100 Sales tax

In total, the $1,000 couch actually cost $1434. That's 43% more than the price tag you see! Everytime! Everything personally purchased comes with a tax makimg it 43% more expensive.

That's not the half of it. How much is that couch worth? If you were forced to sell it used, 6 months to a year later, in great condition, it would be worth about less than half, usually 1/3 of what was paid for it. Meaning the $1,000 couch is worth $334. A loss of $665. (By the way, if you doubt it, try buying something used in the Nickel or Craigslist.)

The poor and middle class come from a perspective that they own a $1,000 couch. Instead, they have a $334 couch for which they spent $1434 (4x more money!).

That's the same as a financial planner guarenteeing a 75% loss on all money invested with him -- and the average person just keeps on spending/investing this same way each year.

I don't advocate foresaking everything material and subsisting on rice and more rice (which one friend took as the point). The point is to ask yourself, how can I do better for myself so I have more money left over: to invest in a Roth, play, not have to work so I can spend extra time with my fam -- anything other than lose it as such.