Tag Archives: loan



Be a Smart Shopper When It Comes to Higher Education

Student-Loan

According to research done by the Associated Press, the average Gen Xer with a bachelor’s degree is paying $400 a month on student loan debt.  Does this seem wrong to you?  The federal government says this is more than the average household spends on groceries a month.  You need a bachelor’s degree, right?  So what do you do?

Everyone and their brother has a bachelor’s degree

We’ve been told that a bachelor’s degree is a must-have in today’s society.  But, let’s look at the numbers.  In 1970, the average income for a recent college graduate in their 20s was about $42,000 in 2013 dollars.  In 2013, that same average income was only $40,000.  Yet the bill to acquire said degree has sky-rocketed.  Is this really money well-spent?

The master’s is the new black

So, maybe a bachelor’s just isn’t cutting it anymore.  Maybe the new shiny object is a master’s degree.  Since 1970, the income of recent recipients of graduate degrees has increased by $4,000 in inflation-adjusted dollars.  That’s good news, right?  Well, you have to factor in how much a master’s degree costs – $40,000 – versus $20,000 for a bachelor’s degree.  It just doesn’t seem like you’re getting a whole lot of bang for your buck.  Are there any other options?

I’d like a plate full of hands-on experience, please

If you’re planning to become a scientist, doctor, or researcher, yeah you’re probably gonna need a degree, and then some.  But, if you’re looking at getting into something like sales, software development, or business, you’re really gonna need to get some good old fashion hands-on experience.  The same goes if you’re looking at getting into a trade like carpentry, engine repair, or electrical.

So, how do you find experience?

1) Apply for entry-level jobs or internships.  Even if it’s not exactly what you want to do, get a job somewhere.  Once you’re in, put in some extra hours with people that are doing what you want to do.  Observe what their doing, ask questions, and offer your help with some of the more menial tasks.

2) Work on projects at home.  If you want to be a software developer, get on your computer and start coding something.  If you want to be in sales, start going door-to-door and sell something.  If you want to be an electrician, start re-wiring something.

3) Sign up for a vocational trade school.  Unlike 4-year universities that offer classes from a more academic or theoretical point of view, trade schools provide practical training geared specifically for the job you want.  Plus, they typically far cheaper to attend than a 4-year school.  And, according to Mike Row, blue collar jobs can pay pretty well.

4) Start your own business.  Even if it’s just helping out your neighbors with some odd jobs, you can learn a lot about how to run a business by trying it out yourself.

Full disclosure

I have a bachelor’s degree and I’ve taken several post-graduate classes.  But, I did it on the cheap.  I went to Community College for my first two years and paid for it entirely out of pocket. Then, I finished up my bachelor’s with two years at an inexpensive public state school.  I didn’t start taking post-graduate classes until I worked full-time for a few years and, even then, it was free because my company had a tuition reimbursement program.  I did take out a loan for my undergrad degree, but I paid it off in 5 years.

Would I take out a loan to get my bachelor’s again knowing what I know now?  No.  Would I even get a bachelor’s degree?  I’m not so sure.  I’ve found that, at least in my line of work, employers value experience far more than any degree.



The Fed Doesn’t Move on the Interest Rate – What Does this Mean for You?

will-interest-rates-rise

It’s been a little over a week since the Federal Reserve (or the Fed) announced it would not raise the interest rate as so many in the investment world were anticipating.  As a result, markets are down.  In fact, since the market closed on September 17th (the day of the Fed’s announcement), the S&P 500 is down 3%.

What is this “Interest Rate” you speak of?

Why it’s The Federal Funds Rate of course!  This is the rate charged by banks when they lend “overnight” money to other banks.  Banks are very particular about how much cash they keep on hand, so they borrow from other banks to keep their numbers tidy.  This rate typically affects what interest rates banks set on savings accounts and loans.  So, an increase in the Federal Funds Rate, would likely mean an increase in all interest rates.

Why raise it?

So, why is the Fed considering raising the interest rate.  This rate is currently set at 0.25% and hasn’t budged since it was lowered to that level on December 16, 2008.  Does 2008 ring a bell?  That’s when the last big stock market crash happened and we found ourselves smack in the middle of the Great Recession.  People and businesses don’t like to borrow money when the economy is in the tank.  So, to encourage borrowing, which tends to accelerate economic growth (at least in the short-term), the Fed dialed down the rate.  The idea was to get the economy back on track as quickly as possible.  But, the Fed is playing with fire.  If they keep the interest rate too low for too long, a back-draft of inflation can ignite causing prices to climb and consumers to stop spending, suffocating the economy.

So what does this non-move mean for you?

Well, for the typical investor, this shouldn’t mean too much. Yes, markets fell after the announcement, but that was a short-term reaction.  Don’t sell!  Just hold on and don’t panic.  The key to long-term investing is not reacting to the news of the day.  It’s probably only a matter of time before the Fed does crank up the rate.  But, no one can say for sure what time that will happen.  So for now, just keep your hands in your pockets.

What happens when rates do finally go up?

When rates go up (and they will), savers will rejoice and borrowers will lament.  Rates on savings accounts and some investment accounts will likely go up.  Rates on mortgages, car loans, student loans, and credit cards will also likely go up.  If you currently have a loan or two outstanding and the interest rate is fixed, you’ll be fine.  But if you have an adjustable rate, watch out!  Likewise, if you have lot’s of money in a long-term fixed-rate CD, you’ll probably kick yourself because your rate won’t budge.  But, if you own a liquid savings or money-market account, you might start seeing your rates inch back up above 1%.  Wouldn’t that be amazing!

Are you at all concerned about rising interest rates?



The Final Showcase in Our Car Buying Game Show Series – Cash or Credit?

Last time we played New or Used, and if you were following along, you may have noticed that Used came out on top.  This time, for all the marbles, we’re playing Cash or Credit.  So let’s see what we’re playing for today…

It’s a 2006 Acura TSX!  A fun to drive, very reliable luxury sedan built by Honda.  You won’t regret driving this one home.  But, ask yourself which TSX you’d rather have – the one behind door number one or the one behind door number two?

Sitting on the other side of door number one is a TSX that you pay for with $15k in cash.  You don’t have a car payment, but every month you put the equivalent of a car payment ($276) in a savings account.  After 10 years, you’ll be able to trade-in your car for $900 and the monthly payment you’ve been making to yourself grows to an astounding $34k.  In the end, you’ll have made $20,322 on your purchase!  That sounds like enough to go out and pay cash for your next car!

Door number two is also hiding a 2006 TSX, but you’ll take out a 5 year loan at 4% interest to drive this one off the set.  After making 60 monthly payments of $276 to the bank, you’ll have spent $16,560 for a $15k car.  After 10 years, you can trade-in your car for $900, but since you were making your monthly payments to your loan, you’ll have no money in your savings account.  This time, you’ll have spent $16,460.  Thankfully, you have that $900 from your trade-in to put towards your next car.

Door #1: CashDoor #2: Credit
Price$15,000$15,000
Term10 years @ 0.7% (savings)5 years @ 4% (loan)
Down payment$15,0000
Miles60,00060,000
Miles at End210,000210,000
Payment$276$276
Total Cost$15,000$16,560
Trade-in Value$900$900
Savings at End$34,4220
Net Money Spent-$20,322$16,460

 

Just where did these figures come from?  The price of a 2006 Acura TSX can be found on kbb.com selecting the standard options and 60k miles.  Some of these numbers have been rounded to make things easier.  The trade-in value is based on a 1996 Acura TL (Acura only started making the TSX in 2004 and the TL is the closest equivalent).  For the purposes of this game show, I assumed you put zero money down and were able to get a 4% interest rate for the loan.  For each car I am assuming you’ll drive an average of 15,000 miles a year over the next 10 years.

I don’t know about you, but after 10 years of car ownership, I’d rather have $34k in the bank than just a $900 car to trade back in to the dealership.

But Bob (my game show host name), I don’t have thousands of dollars laying around to spend on a car.  What do I do?  You start climbing the car ladder.  The way it works is you buy the cheapest car you can afford in cash.  Maybe that’s only a $1000, but that’s okay.  As you get some use out of this first car, make payments to yourself for the next car.  Then when you have enough saved up, sell or trade-in the first car and move up to a nicer car.  Repeat the process until you die.  Eventually you’ll probably get to the level of car you can live with and you’ll stop moving up.  But, you’ll still want to keep making payments to yourself for that next car.

Another option is, if you’ve been making payments on a car that you’ve recently paid off, start making those payments to yourself for the next car.  Saving $276 a month could easily get you $16k after 5 years.



Let’s Play New or Used! The Game Show Where You Choose Whether to Buy a New or Used Car

Last week we played Lease or Loan and Loan came out the winner (at least that was my opinion).  Today, we’re playing New or Used!  Daaaa, da, da, daaaa (generic game show music)…here’s what we’re playing for today…

It’s a Honda Accord!  Not only is the Accord one of the most popular mid-size sedans out there, it also won the 2014 Kelly Blue Book award for Best Resale Value of a Mid-Size Car.  No question the Accord is a great car at a great value. The only question is whether you’ll walk away with the Accord that’s behind door number one or the one that’s behind door number two.

If we take a peek at what’s behind door number one, we see a brand new 2014 Honda Accord.  After making monthly payments of $479 for 5 years, you’ll keep driving this Accord for an additional 5 years.  If after 10 years, you trade it back into the dealership for $4,702, you’ll be left with a total bill of $24,038.

Door number two is a gently used 2006 Accord.  You’ll also take out a 5 year loan, but your payment will only be $249 a month.  After 10 years, you’ll get back $900 for the trade-in and you’ll have spent a total of $14,040.  That’s $10,000 less than door number one!

Here’s a chart that breaks down what’s behind our two doors:

NewUsed
Price$26,000$13,500
Monthly Payment$479$249
Down payment00
Term5 years @ 4%5 years @ 4%
Year20142006
Miles080,000
Miles at the End150,000230,000
Value at the End$4,702$900
Total Cost$24,038$14,040

 

So, how did I get these numbers?  Well, the prices are based on what I found on kbb.com choosing standard options and the appropriate miles.  Some of these numbers have been rounded to make the math cleaner.  The “value at the end” number for the new car is based on the current trade-in value of a 2004 Accord in “very good” condition as found on kbb.com.  The “value at the end” number for the 2006 Accord is based on the current trade-in value of a 1996 model in “very good” condition.  For the purposes of this game show, I assumed you put zero money down and were able to get a 4% interest rate on both loans.  For each car I am assuming you’ll drive an average of 15,000 miles a year over the next 10 years.

Before you make your final decision, here are some extra considerations:

1) Insurance and registration for new cars is more expensive than it is for used cars.

2) Gas mileage may be slightly better with a new car.

3) If you keep up with the scheduled maintenance, there shouldn’t be any significant difference between new and used in maintenance and repair costs.

So, which door sounds like a winner to you?



Let’s Play Lease or Loan! The Game Show Where You Choose How to Pay For a New Car

Leasing a car can be a tempting.  Especially, if you’re just comparing monthly payments.  But, if you look at the total cost over a period of say 10 years, leasing starts to look quite expensive.  So, let’s queue the game show music and take a look at what you’re playing for…

It’s a brand new 2014 Toyota Corolla S!  The Corolla is one of the most popular, fun to drive, compact vehicles out there!  Now all you have to do to get the Corolla is choose from what’s behind three different doors.

Door number one involves leasing a new Corolla every 2 years over a span of 10 years.  After making the same payment of $229 every month for 10 years, you will have spent a total of $27,480.  That’s a lot for an $18,000 car!

Door number two is a loan.  I’m assuming you’ll take on a 5 year loan at 1.9% interest.  This means a higher payment than the lease of $315 per month.  But after 5 years you’ll be done with monthly payments and you’ll have paid a total of $18,900.  After 10 years, you can sell the car back to the dealer for about $4,000.  This means your total cost in the end is only $14,900.  That’s nearly half the total cost of leasing for 10 years!

And now door number three – Lease-then-Loan.  With this arrangement, you lease for two years and then purchase the car after the lease is over.  Your lease payments will total $5,496 and it will cost about $13,000 to buy the two year old Corolla back from the dealer.  Your new loan payments will be roughly the same at $228 per month.  By the time you pay off the 5 year loan, you’ll have spent $13,680.  Add that to what you’ve already spent on the lease and you’re looking at $19,176.  Now, you can still sell the car after 10 years for $4,000 leaving you with a total cost of $15,176.  Not too bad.  But, that’s still $276 more than if you had just chosen door number two.

Here’s a chart that breaks down what’s behind each door:

Door #1: LeaseDoor #2: LoanDoor #3: Lease-then-Loan
Price$18,000$18,000$18,000/$13,000
Monthly payment$229$315$229/$228
Down payment000
Term2 years x 55 years @1.9%2 years/5 years @1.9%
Value at the end0$4000$4000
Years101010
Total Cost$27,480$14,900$15,176

 

Now for the fine print.  The numbers in the chart are based on what Toyota posts on their website.  Some of these numbers have been rounded to make the math easier.  The “value at the end” number is based on the current trade-in value of a 2004 Corolla S in “good” condition as found on kbb.com.  For the purposes of this game show, I am assuming you have excellent credit and can acquire the car with no money down.

Okay, now before you choose a door, keep in mind that leases also come with some strings attached:

1) You don’t own the car.  Once the lease is up, you have to give the car back.  Although, you can often turn around and purchase the car for a reduced amount.

2) There is an annual mileage limit.  For your Corolla, Toyota charges $0.15 for every mile over 12,000.

3) The car must be kept in “sellable” condition.  Once you give back the car, the dealer must be able to  sell it to someone else for top dollar.  If the car hasn’t been maintained, or has excessive dirt or damage, rest assured, the dealer will charge you.

4) Other fees may be tacked on at the beginning or end of the lease such as an acquisition fee or a disposition fee.

5) A security deposit may be required.  Some leases will want a security deposit, which you may not entirely get back depending on how well you’ve cared for the car.

6) Gap insurance may be required.  This is additional car insurance that covers the difference between the actual value of the car and the price of the car when leased.  Again if anything happens to the car, the dealer wants to make sure they get their money.

So, which door will it be?