Mastering Money

And All You Were Worried About Was the Monthly Payment...THINK AGAIN!!!

You know, these days all consumers seem to be concerned about is how much something is going to cost them on a monthly basis.  “Yeah, I’ll buy that iphone, I’ll buy that HDTV, I’ll buy that new refrigerator…it’s not too expensive when I put it all on my credit card.”  Yeah, right!!  You may be paying for something several times over once it’s paid for and you’ve paid all that interest.

By the time you’ve paid off your 30-year mortgage, you’ve paid for your house three times!!!  Let’s talk about another expenditure we typically finance:  our car.  Not to be forgotten are the extras we put on the car.  A good salesperson (or bad, depending on which side of the fence you happen to be on) will exclaim that the options you’re adding to the cost of the car will only cost you so much per month; they really don’t tell you the cost of the option.  For that matter, they don’t even tell you the cost of the car; they simply tell you how much it will cost you per month.  Researchers say few car buyers know the actual full cost of their vehicles or stop to consider how much more it’s going to cost them by extending their loan on the vehicle.

I’m absolutely amazed at the length of some car loans.  When I was growing up in the days when cars slept up to nine people, three years was the longest one would ever consider paying off a car.  Now days, one can finance a car for eight or even nine years!!!  Jonathan Welsh writes in The Wall Street Journal, if one extends one’s car loan from five years to seven years, it will increase the average cost, or how much the buyer will pay out, by about $3,000 in interest.  The average maturity on a car loan today is 70 months, up from 62 months just a year ago, and those longer term loans carry higher interest rates.  Take a look at these figures:  a five year loan at 6.05% interest will cost about $5,700 in financing, but a seven year loan at 6.59% interest will cost about $8,850 in financing.

All I can say, that better be a trouble-free car for a contracted period of time if you plan to pay it over nine years.  Imagine if the car died after six or seven years and you still had a couple of years left on your loan.  Not fun!

As the average car loan increases, more people are trading cars in before they are paid off.  Unfortunately, at that point the owner owes more on their car than the car is worth.  In 2006 about 29% of car buyers who traded in a car to buy a new one were in this position.  This statistic is up from 20% just five years ago.  Mr. Welch further states in 1990 the average a buyer owed on the car they were trading in was $617, which increased to $1,726 in 2000 and $3,062 in 2006.  This is NOT a good trend.

One of the components of inflation is what I call “technology inflation.”  Take cars for example.  A 1987 Chevy Caprice is not the same as a 2007 Chevy Caprice due to all the technological advancements, such as satellite navigation and entertainment systems, once reserved for the premium vehicles only.  This makes new cars that much more enticing.

What’s the answer?  It’s not necessary to seek out the latest and greatest.  When one buys a new car, all one has to do is drive it home and suddenly it’s worth a lot less than what one paid only a few minutes earlier due to the fact that it’s now considered a used car, and the first payment hasn’t even been made yet!  It used to be when one purchased a used car, one was literally buying someone else’s problems.  The fact is, cars are being made better today.  My suggestion is to buy a decent “pre-owned” car and purchase an extended warranty along with it.  Let someone else depreciate it.  You’ll be a lot happier in that you didn’t pay an arm and a leg for your car and you’re not paying for the rest of your life on the car!

College and the Student Debt Trap

In October I had the distinct opportunity to speak to fourth year students at my alma mater, The University of Virginia.  The university was founded by Thomas Jefferson in 1819 and is steeped in tradition.  You just witnessed one of those traditions:  there are no freshmen, sophomores, juniors or seniors, they are first-year students, second-year students, well, you get the idea.

Speaking in the very room where I learned Business Law, I was amazed at the 100 or so eager faces at 8:00 a. m. (I know I wasn't that eager at that time of the day at that point in my life.)  I used to believe that college students would be fun to teach because they wanted to be there.  Today, that is truly an understatement.  Yes, teaching is fun, and more than ever, students are going into debt in order to receive a higher education, so they definitely want to be there!  They are concerned about the debt they are facing; they definitely wanted to hear what I had to say!

Suze Orman states that college debt is good debt.  I don't believe that any debt is good; my philosophy is to save for something before you make the purchase, including college.  However, here's something to consider:  students who graduate with a bachelor's degree, not even a masters or a doctorate, but simply an undergraduate degree, will earn 83% more than those with only a high school diploma. 

Not everyone can save before attending college and here are some statistics:

• Since 1989, tuition inflation has been running at 6%, twice the 3% rate of general inflation
• College students graduate with an average of $19,200 in tuition debt; graduate students can have upwards of $100,000 in tuition debt
• 25% of all students are putting their tuition on their credit cards
• 75% of all students have a credit card, and 40% of all students have more than four credit cards

For those who aren't fortunate enough to save for college first, or who don't receive a grant or scholarship (grants and scholarships are gifts, and thus don't have to be repaid), here are some tips to weather the student debt storm:

• Apply for financial aid at:  www.fafsa.ed.gov.
• Pay interest on your tuition debt while you are in school; this will help in a two-fold manner: 1) your debt will be lower when you graduate, as you'll only be paying the principal, and, 2) you'll get in the habit of making monthly payments.
• Only take out loans for tuition; don't be financing pizzas with debt.
• Once you graduate, always pay your loan on time, and consider having the payments debited automatically from your checking account.  In both instances your lender may give you a break on the interest rate, or perhaps even forgive some of the balance.
• Ask your lender if you can make smaller payments when you graduate and larger payments as you advance in your career and command more salary.  Lenders are usually willing to work out payment plans such as the accelerated plan mentioned above.
• Lenders may forgive your entire loan, based on your profession, such as teaching and emergency services.

Unfortunately, student debt is a fact of life today, with state tuitions averaging $16,000 per year and private universities averaging $32,000 per year.  An Ivy League education is approaching $50,000 per year.  Stay the course, and stay in school, as your earning power will be much greater. 

Credit Card Interest Rates

When interest rates are decreasing, credit card companies prefer to charge fixed rates on their cards because the lower rates can be passed along to the consumer (you) more slowly.  However, in June, 2004, the Federal Reserve began increasing short-term interest rates, specifically, the Federal Funds Rate, which is the rate banks charge one another for overnight funds. In June of 2004 the Federal Funds Rate was 1%; on January 31, 2006 it was increased to 4.50%.  This increases the rate that credit card issuers charge you.

The increase in interest rates has caused credit card issuers to switch from fixed to variable rates because they can pass that increase on to the consumer much more quickly.  According to The Wall Street Journal, today 66% of all credit cards carry a variable rate, whereas only one year ago only 55% had variable rates.  In February, 2006 the average interest rate on variable-rate cards jumped to 15.75% from 12.84% a year earlier.  On the other hand, the average increase in fixed-rate cards over the same period was only to 14.11% from 13.25%.

Indeed, issuers can increase the rate on a fixed-rate card at any time, or change the fixed rate to a variable rate, with only 15 days notice.  The rate change on a variable-rate card is more "automatic" and is based on a formula that is often tied to the issuing bank's prime rate.  The prime rate typically increases when the Federal Reserve raises the Federal Funds Rate mentioned above.  Issuers don't generally send out notices when the rate increases on variable-rate cards.  Make sure you pay close attention to your statement when it arrives for those rate changes.

Credit Cards Are Good

Most people believe that credit cards are a bad thing.  They are, if one doesn't know how to use them properly.  My father always told me, "Only poor people use credit cards for credit."  I use credit cards for convenience only.  Any time I use my credit card, I have the money in the bank to cover the charge. 

So you ask, "Why not pay with a check or cash?"

Good question.  Using the credit card saves me from writing a bunch of checks all over town and saves me from carrying $100 into the grocery store when I want to buy Oreo's.  Plus the fact, my credit card is known as an affinity card; it gives me one mile for every dollar I charge which can go towards the purchase of an airline ticket.

As long as you are aware of your current credit card balance and you have the funds in the bank to pay the balance in full when the statement arrives, you are using your credit card very wisely.  Otherwise, you are paying a high rate of interest on your charges, and therefore, are paying for your purchases several times over.