Thursday, May 28, 2009

Of Used Cars and Other Mostly Boring (but useful) Matters…………

Russ Ege was one of the original members of the Coffee Shop. He had a great saying that I still repeat about a place where he bought cars: “I like going there because you don’t have to worry about whether you got a bad deal – you did!”
Now, not every car buying experience needs to make you feel like Russ did but it is a major purchase with lots of unknown variables. Without knowing what you are getting into, it is possible to spend money unnecessarily.

This is why most people, especially younger people just starting out, should consider buying a used car. First and obviously, the price is less (no duh as my nieces would say). But it is more important than you think because the lower price equates to a lower monthly payment. This extra “cash flow” can be used to create a source of savings. Since saving earlier makes a tremendous difference in the ultimate value in any investment, this simple decision could lead to a substantial savings balance. The reverse is too common: the payment is so high, the buyer ends up living “check to check” which puts them at risk for needing to borrow more money if something unexpected pops up. The ultimate situation is to have the vehicle long enough that the loan is paid and you can drive the car for at least a little while with no car payment. Then you really can rack up the savings.

Another very important reason: the depreciation factor (fancy word alert: depreciation is just the act of something losing value over time). A very large percentage of the total depreciation in a vehicle takes place in the first 12-18 months. In other words, when you buy new, your purchase loses substantial value (sometimes 40%) right away – kind of like a bad stock that you can drive to the coffee shop. Now, different vehicles depreciate at different rates but it isn’t hard to figure out. Just go to www.cudlautosmart.com (or click the link from our website) and look up the value of the newest model year and then compare it to the value of a vehicle that is, say 2 model years old. Do this for each of the vehicles you are considering and you will see how the rate of depreciation differs from one vehicle to the next. Regardless, buying a vehicle after the big drop in value will put you way ahead of buying new.

Want another good reason? You can get many 12-18 month old vehicles that have very low mileage and are in great shape. You still get to have the vehicle for a good long time, just like a new car and it will even have substantial warranty coverage left.

Here are a couple other good buying tips: call your insurance agent and find out what insurance will cost for each of the vehicles you are considering – it can vary greatly and really adds up over the life of the vehicle. The other thing is to make sure and shop around and compare prices for similar vehicles. This can also be done via the internet pretty quickly (again www.cudlautosmart.com is excellent) but the bottom line is that you need to have some idea of what the market is for the car before you start talking about the price. This can vary depending on the area you are in and the type of vehicle. The only way to know for sure is to check around.

If you take a little time and do the math, I think you’ll see why it makes sense to consider buying a used vehicle. You potentially can save thousands of dollars (maybe more) and still drive something with the new car smell. One more thing - you’ll get less irritated from the inevitable first door ding.

Wednesday, May 13, 2009

The Dismal Science…..

Well this is quite a change – over the years hardly anybody has asked me questions about the economy or economics; not so much as one question about the Laffer Curve – hard to believe. Not only is economics today’s coffee topic, some people are actually interested. One wise guy from the end of the table is declaring the profession worthless, and this guy was a philosophy major of all things. Talk about fishing with no bait……..

Half a lifetime ago when I was an economics major at the U of M, I had an econ professor named “Crazy Ed” Coen. He got his nickname because he had kind of a wild, Albert Einstein look to him. A frequent occurrence in his class would be this: Crazy Ed would start at one end of a series of blackboards writing some completely confusing math theorem to prove the economic theory of the day. After 45 minutes and several chalk boards, Ed would frequently come up with the wrong answer. Completely covered in chalk dust, he would turn and face his class for the second time of the day and ask “Does anybody know what the #%*@ is going on here?” The answer for nearly all of these future economists was a resounding I-have-no-idea. Of course there was always some hotshot in the front row that would eagerly point out where he went wrong (their initials were never M.S. if you get my drift), and Crazy Ed would live to teach another day.

Little did I know that his question would be so pertinent to economics a mere 28 years later. Does anybody really know what is going on here? The economics part is not easy to nail down – it’s really a messy social science much closer to sociology than people might think. The US and global economy is so intricate, complicated, powerful and just so darn big that it really is not possible to come up with neat and tidy conclusions. The simplest explanation is that econ is the study of how people react and make decisions given their economic circumstances both at the individual level (microeconomics) and at the aggregate level (macroeconomics). (Shoot, you are not supposed to use the word you are defining in the definition of something). OK, I better get to the point because the philosophy major just hung up his cup and is heading for the door.

Here’s where I am going with this: analyzing the current economy is as much about psychology as it is about numbers. Consumers’ fears become self-fulfilling prophecies as they stop buying things or making investments which, in turn, reduces demand for goods and services which lowers manufacturing and other economic activity which results in layoffs which makes consumers skittish and reluctant to spend money and you can see where this is going……

Let’s take the housing bubble. It’s clear that in many parts of the country, property values were vastly inflated before the recent downturn. Well, the “correction” as economists call it, has pretty much taken place. The excesses have been wrung out of the system and housing is now more accurately priced according to the fundamentals of supply and demand. Why no rebound in real estate activity? Media reports would lead you to believe that it is because there are not sufficient sources of mortgage credit. Coming from somebody who works in this business I clearly disagree – mortgage money is available and the credit policies are reasonable for most people. I think the real answer is people just don’t feel confident enough to make those kinds of financial decisions yet. When enough people feel confident in their lives, jobs, etc., their actions (combined with others) will finally get the economy going again, but not until. Studying that sounds like psychology to me which may have been useful in figuring out Crazy Ed Coen.

Wednesday, May 6, 2009

You Better Pay Attention to the Man Behind the Curtain…………

Mornin’,
Lots of people here - must be the morning chill that just doesn’t want to go away very fast. Coffee is fresh ‘cause we are going through it pretty good. Anyway, pull up your chair on this end of the table – they’re talking government bailouts at the other end and even the Norwegians are starting to get worked up, so steer clear of that.

Remember at the end of the Wizard of Oz when Dorothy and friends start to figure everything out and she is told to “pay no attention to The Man Behind the Curtain”?

That’s what I think of every time I’m asked to explain credit scores. For those of you who are unfamiliar, credit scores are ratings (it’s a number, the higher the better, up to 850) provided by the three major credit bureaus and they are used for many things, from loan and insurance underwriting to apartment rental applications. Incidentally, the three credit bureaus use the same company to calculate the score so, if the credit information on file is the same, the credit score will be the same no matter which credit bureau is used.

The problem isn’t that these scores are being used (they are really accurate) rather it’s the fact that they are next to impossible to explain. It kind of feels like The Man Behind the Curtain is pulling his magic strings and out pops a number. Because of that, it is easy (too easy) for people to say “I don’t get it so I am not worrying about it”. Well, you better pay attention to this number because it will affect many different parts of your life. The most direct way is that you may be denied credit or pay a higher interest rate because of your score. While NSFCU does not have different rates for members based on their credit scores, many places do and the mortgage market is now utilizing these scores in a big way after the mortgage / housing mess. It can also effect whether you are approved for insurance, how much it will cost, etc. The list goes on and on.

What to do - here’s the explaining part again. There are literally hundreds of factors that go into the score and they all interrelate in different ways. Some of it is very easy to understand: pay your bills on time, don’t have too much debt, etc. Others can be confusing like sometimes closing an account raises your score and sometimes it lowers it. Because of the complexity of the process it makes sense to go right to the source. Here’s how you can pull the curtain back – check out this brochure and get all the details:

http://www.myfico.com/Downloads/Files/myFICO_UYFS_Booklet.pdf

The most important thing to remember: know your score and protect it. You don’t want that return trip to Kansas cancelled because your credit card isn’t approved.

Mark