Friday, July 3, 2015

Short Takes: Fee for Service, 100% Mortgage Financing, and more

Here are my posts for the past two weeks:

Guilt-Free Spending Through Planning

I Don’t Want to Go into Debt for This

Here are some short takes and some weekend reading:

Jason Zweig explains why you’re paying too much in financial advisor fees. He says we should be paying fees for service rather than paying a percentage of our assets. Another article from Zweig clearly explains why you should be skeptical of investment strategies that worked in the past.

Canadian Mortgage Trends report that one form of 100% mortgage financing will no longer be available after the end of June, but that combining an unsecured line of credit with a mortgage to get 100% financing will still be possible.

Gail Vaz-Oxlade does a great job of answering many questions from her readers, but I found the last question and answer in this post particularly interesting. It illustrates how banks have more power than some people realize and that some forms of protest are just self-destructive.

John Robertson at Blessed by the Potato reviews the book Wealthing Like Rabbits. He was pleasantly surprised, but did find some problems.

Forbes told Frugal Trader’s story of his Million Dollar Journey.

Boomer and Echo explain how customer loyalty programs have evolved to collect ever more information about us.

Big Cajun Man offers some signs that your debt load is getting out of control.

My Own Advisor explains why he still drives his 15-year old car. Until recently, I was saying the same thing. But then a cluster of needed expensive repairs forced me to get another car.

6 comments:

  1. Thanks for the inclusion this week, enjoy "BLOW THINGS UP DAY!" on Saturday.

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  2. The car thing is widely misunderstood, and badly analyzed. The My Own Advisor post is a great example. Maybe you could write a better article?

    Let's compare that fellow and his 15-yo Mazda to me, who will lease a brand new equivalent small car every 4yrs. Notes:
    I'm going to look only at purchase price/maintenance, ignoring (a) fuel costs (assuming economy between his car and a my new equivalent to be largely similar), and insurance (also similar, for equivalent drivers in the same class of car)

    Old Car Guy: His purchase price: $16000 (not clear if this included tax or not, but let's give him the benefit of the doubt and assume yes) = $89/mo over 15yrs. I'm also benefiting him by ignoring time-value of money which is not small in a 15-yr case.
    His annual maintenance = $110 according to him.
    Total cost over 15yrs = $199/mo

    Me: I can do a $0 down, 48/mo lease on a 2015 Chevy Cruze (4cyl, manual equivalent to the poster) today for $216/mo including taxes. Just go to the website and try it. Or a Hyundai, or whatever equivalent small car you want, doesn't matter, they're all similar.
    Maintenance: I'll be generous and say $20/mo over 4yrs. Basically a few hundred dollars over 4yrs - perhaps one set of tires, the odd oil change.
    My total: $236/mo

    So for $32/mo more, I get a brand new car every 4 years. No pushing it out of the garage. No wondering if it'll go today, and missing work to deal with it when it does. No driving around in a rusted hulk. And not insignificantly, if I'm going to be in an accident, I'd much rather be in a 2015 anything than a 2000 anything.

    Bottom line: I don't think one should feel he is a hero for driving his car into the ground. In fact you could easily be missing the forest for the trees. Is driving an old beater the absolute cheapest path? Yes. Can you very probably get VERY much more as a consumer for marginally more dollars? You bet. Way better overall value.

    Look I'm a frugal guy myself and I watch my pennies. But you can lease all kinds of awesome (when compared against 15-yo rust buckets) new cars for low 200's/mth. If you do the math, you will find that even if you manage to drive it for 15-20yrs, you simply cannot BUY a car and maintain it for a whole lot less than that. Maybe save $50/mo over 15yrs at best - and for that, you get to drive a crapbox for the last 10yrs, never knowing when it's going to strand you or your family. Nice work.

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    Replies
    1. @Anonymous: Any time I've run the numbers, the results heavily favoured buying vs. leasing by quite a bit. If your analysis were representative, it would mean that car dealerships are bad at figuring out how to price their leases (not very likely). The truth is that leasing is complex enough that most people can't figure out what is a good deal and they end up being taken advantage of.

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    2. No doubt it's a complex calculation that depends on a lot of variables (assumptions) that can take it in either direction. Specific points that will skew heavily in favor of buying:
      -Larger/costlier vehicles, and perhaps more precisely, vehicles with low residual values. Because your lease payments will be terrible.
      -Drivers with "non-average" use cases such as high mileage, or happen to be a mechanic, etc.

      No doubt these cases are some where you would never want to lease. But I'm not talking about outliers.

      For small, "cheap" vehicles, like the poster, the numbers don't lie. For very marginally more money, you can have a LOT better product than a 15-yo Mazda Protege.

      I just checked Hyundai, you can lease a 2015 Elantra base w/ manual for $205/mo. The poster admits himself to presently spending $110/mo on maintenance of a 15-yo junker (sorry, no offense intended, but it is) on top of the $90/mo (at least, being generous) that he's paid out over 15yrs to own it.

      Smart people own appreciating assets, and lease depreciating ones.

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    3. @Anonymous: It's not unusual for car companies to advertise lease rates that end up increasing by 50% by the time all the add-ins take place. I've never seen a case where leasing a car worked out well financially, except in the case where someone is able to write off the lease payments against self-employment income.

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  3. @Anonymous, thanks for your critique however purchase and leasing costs are only one part of the equation. Newer vehicles typically cost more to insure. My insurance has been on the downward trend for ten years. I don't think you can say the same for your continued cycle of newer leased cars. I also prefer to avoid lots of restrictions when it comes to leasing (renting) as well, add-ons, mileage limits, etc.

    Regardless, if your leased 4-year old car brings you joy, great.

    To Michael, thanks for the mention and enjoy your weekend!

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