How to win the financial battle vs. your automobile

This time of year many people’s fancy turn to owning a new shiny car during the upcoming New Year.  Dealers will need to liquidate their current year inventories to clear space for the new models.  They will be pulling out all the stops including colorful free brochures, demonstrations, and pitches by beautiful ladies telling you all about the New Year models.  Be careful not to get sucked into these sweet offers.  A new automobile is one of the biggest wealth drains for you and your family.  However, that being said a car is very close to mandatory to survive and thrive in most areas of the country.  Let’s talk about some tips on how to save a fortune on every car you ever own over your lifetime.  Many families own at least two cars which means you are getting robbed twice as fast.  Use these simple yet powerful tips to take control of this expensive item.

  • Buy the car you want but only after it is at least two years old and three years old would be better. When you choose this option you automatically will save yourself hundreds of thousands of dollars over your lifetime.  A very real life example of this comes from my own life.  When I was 23 years old I decided I wanted to buy a nice 4 door sedan and I was drawn to the Cadillac STS model and began doing some research.  The brand new model year of that car was stickered at over $50,000 and with any kind of little extras the sticker was almost $55,000.  I was very fortunate to be doing very well financially at a young age but I was not doing that well to blow 50 grand on a new car.  I was thumbing through my local paper (yes this was before the internet changed everything) and saw an ad for a 2 ½ year old Cadillac STS for $19,500.  The car had less than 40,000 miles on it and came with an extended warranty to 90,000 miles.  It was gorgeous, shiny, and just serviced.  Of course it seemed too good to be true but then someone shared with me the secrets of buying automobiles.  The largest depreciation losses on cars occur in the first three years.  According to Edmunds.com the average car will lose 11% of its value the second you roll it off the lot and additional 15 to 20% the first year you own the vehicle. That makes your first year loss of value 30%!  The second year depreciation (loss) is another 15% for a total first two year loss of at least 45%!

 

It is important to keep in mind that the depreciation is usually calculated off of the base price and does not take into account all the extras you pay for when the car is new.  This could be the sport package that raises the price $10,000 but only gives you $2,000 back after the first year or two.  So it is very possible to find beautiful cars with manufacturer warranties still in place and pay 35 to 50% less than the first owner did when purchased new.  Since the biggest percentage of depreciation occurs in the first three years, let someone else eat the depreciation and buy it used (or pre-owned as the car dealers like to say) after the second or third year.

 

I was able to drive a gorgeous car with a warranty for far less than it would have cost me new and I drove that car for 4 years and still sold it for $3,500 and had very little repairs during my ownership that came out of my pocket. This strategy works with exotic cars as well.  When I was a young man one of the dream cars then was a Ferrari Testarossa and its price tag was around $200,000.  You can buy one now for right around $50,000 and most don’t have that many miles on them because they are babied by the owners.

 

  • Another way to save a lot of money is to try and keep your term for your loan (assuming you finance through a bank or finance company) for no more than 36 months to build equity in the car faster and save on additional interest. This will be the most difficult suggestion for most people to utilize because of that seemingly large payment if you finance it for 3 years instead of 6 or instead of just leasing the car new for less money per month.  If you finance $25,000 with a bank at 5% interest for 3 years your payment will be $749.27.  If you extend that loan out to 6 years your payment drops to $402.62 which seems much more reasonable and affordable.  It may be more affordable monthly but will cost you much more in interest and less loan buy down.  You could also lease a newer model of the car for even less monthly (read part two of this article to see why you might not want to do that even though on the surface it looks attractive)

 

If you pay over 6 years you will pay out $28,989 vs. $26,974 for a difference of $2,015 more out of your pocket to own the car.  In addition, by financing it for the 6 years your loan pay down is going at a much slower pace than the depreciation on the vehicle creating an “underwater situation” on the car almost from the initial purchase date. (Assuming you buy the car with a small down payment)  During the 3 year program you are paying down the car faster than it is depreciating giving you options if you should have to sell the vehicle.  If you truly can’t afford that 3 year payment take out the 5 year option and try to send a little extra every month toward the principle to pay it off sooner.

 

There are several other ways to save loads of money when purchasing an automobile that we will discuss in part two of this article next week.

Revealing the Self-Directed IRA

There are 11 types of IRA’s; that’s right Eleven! But do you know about the Self-Directed IRA and what the benefits are?

Most investors mistakenly believe they have a “self-directed IRA” when in fact they have one that limits their choices to a few investment types. Within your plan, you can choose stocks, mutual funds or bonds. And while you may have hundreds and even thousands of choices of where to put your money inside that account, chances are you won’t be able to invest in nontraditional retirement assets — especially if your IRA or 401(k) rollover is with a traditional brokerage house.

So just what is a true self-directed IRA? It’s an account allows you to invest in many other options within your IRA, including:

  • Rental real estate
  • Fixer uppers to resell at a profit (flip)
  • Private loans made at higher interest rates to other investors
  • Discounted private notes
  • Tax liens or tax deeds
  • Privately held companies and startups
  • Precious metals
  • Leases and lease options
  • Straight options (real estate options, not stock options)
  • Partnerships

Such investments receive the same tax treatment as more traditional IRA assets. Any tax due is deferred until withdrawal, typically at age 70½, when your are required to start drawing down your savings, or possibly sooner.

This is an account for hands-on active investors with unique knowledge of some of the asset classes in the approved list, not for a “set it and forget it” investor.

By using this type of account it is possible to make some sizable returns from a relatively small amount of money. Here’s an example:

You have an opportunity to buy a rundown house from an estate that would like a quick sale. You determine the house is worth $200,000 — after you have spent $40,000 in upgrades. You contract to purchase the property for $120,000. But lacking the $160,000 to proceed with the sale, you enlist a partner who agrees to provide the full amount, provided you handle all the details, including closing, rehabbing and reselling the home.

You further determine that you would like your share of the profits to go inside of your IRA for the obvious tax benefits. You only have $10,000 inside your IRA with which to invest. The proper play given these set of circumstances is to have your partner buy the property in his name or an entity he controls, such as a limited liability company. You enter into an option agreement to purchase half ownership in this property. You pay $100 from your self-directed IRA and fill out option paperwork and give all the papers to your plan administrator.

This deal now moves forward, and the property is rehabbed and ready for sale in 60 days and sells and closes quickly for $200,000. You have $10,000 worth of sales and holding expenses, netting a $30,000 profit on this deal in five months. The actual title owner to the property agrees to pay you $15,000 for you to close out your option. This $15,000 is a return on the $100 option investment and is deposited back inside your IRA tax-deferred or tax-free (for a Roth IRA).

Your investor put up $160,000 and received $15,000 for a five-month investment. This represents more than a 20 percent annualized return on his money, which is pleasing to almost every investor. If he used his IRA money for this investment, then his profit would be tax-deferred as well.

Rental Income

Here’s another example: An investor from New York became aware of the self-directed IRA and used some of his IRA to acquire four rental homes in Metro Detroit. Each home was purchased for around $55,000 and rents for about $900, and the cash flow goes back to the IRA on a tax-deferred basis. If he sells these for big gains years from now, that profit will also be tax-deferred.

Be warned: There are also some prohibited investments with your IRA (see IRS Publication 590-B):

  • No loaning of money to yourself, your spouse or any family member in your direct linear family chain.
  • No investing in collectibles.
  • Your IRA can’t personally guarantee any loans in which it borrows money. This means that any money borrowed by your IRA must be “non-recourse” funds, which means that only the asset can be put up for collateral and may be foreclosed upon for nonpayment. The creditor may not file suit against the IRA for any shortfall in the loan goes delinquent.

Christmas Shopping Equals Creating Wealth?

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Here comes the end of year and Christmas season bargains you just can’t resist! Many of us will be spending more money than usual this holiday season.  Instead of worrying about it, create a simple wealth building game for you and your family. Combine wealth principles, Christmas, and technology to create additional wealth for you and your family starting this holiday season.

The question you need to ask yourself is, are you a “saver” or a “wealth builder”? There is a huge difference because most “savers” die broke and “wealth builders” die wealthy and live a wealthier lifestyle, especially in later years. So this holiday season and for 2017 try this little trick to get ahead and be a “wealth builder”.

When you are shopping for bargains this holiday season on gifts, food, wrapping paper, etc. save as much money as you can off of normal retail. Do this by shopping as wisely as time will permit either online or at some of the special sales events by retailers. So let’s assume you would have spent $1,000 on average this holiday season on gifts and holiday extras like meals and wrapping paper. According to the November 2016 Gallup poll the average American spends $752 just on gifts so the $1,000 is very realistic when you factor in food, decorations and wrapping paper.

Now assume you are a good shopper and you are able to save $300.00 off of your total retail bill of $1,000. That is fantastic but what happened to the $300.00 you saved or did not spend? For most of us it stayed in our checking account and we spent it on other items that were “non holiday” items. So the goal is not just to save money but to use those savings to create wealth. We will only accomplish this goal by focusing cash flow and getting it out of the spending account once it is saved. If you don’t do this the money is not “saved” contrary to popular belief but it’s just spent on something else.

Let’s use technology to our advantage when it comes to cash flow. First of all make sure you have a checking and a savings account at the same bank. Then pay for your items and run your life out of your checking account. Get set up for online banking, and if possible, mobile banking on your smart phone. Now you just have to do a little fourth grade math twice per week. Keep track of every item you buy on sale or use a coupon for and make a note of its retail or close to retail price. Then add up what you actually paid versus what you would have paid without the discount. The difference goes into your “wealth account” which is your savings account. This whole process will take no more than 10 to 15 minutes twice per week and does not even require a trip to the bank. So during the week you were going to spend $500.00 anyway on different items but you got discounts or used coupons and got that bill down to $400.00. Now take the wealth step and go on your mobile banking application and move that $100.00 savings over to your “savings account” and have it start to build wealth for your future. You pull out your smart phone and do a 15 second transfer from your checking to your savings account and without breaking a sweat or missing the money you are taking the first steps on creating more wealth.

In the Christmas example above that $300.00 savings is put away and generates even a 6% compounded rate of return will turn into almost $1,000 in 20 years if it is first put away and then put somewhere where it will grow. So if this is done for one year faithfully and you are able to “save” $5,000 and move it over to your savings and then invest it at the 6% rate of return you will have an extra $16,500 in 20 years for your retirement savings. Now do this every year and get better at it and you will have saved hundreds of thousands of dollars for your retirement years because you focused your savings. You’re not just a “saver” like every other shopper out there you are a “Wealth Creator”!

So next time you get a discount on something make sure you pay yourself the difference and you will very quickly establish a savings account and fund your retirement savings with tens or hundreds of thousands of extra dollars for you and your family. Now make this a truly Merry Christmas and Wonderful Holiday Season!