LIVE like a 20-year-old!

I got to thinking the other day (I do that sometimes) and it occurred to me that approaching 50 years of age, some of the "fun" seems to be lost in life. I watch my friends and acquaintances, most of whom are much older than me, and it seems they worry a lot about things. What happened to the good old days?

The few friends who don't seem to have this problem also seem to have no worries. They sort of drift through life, taking it as it comes, and don't waste a lot of time and effort on worry. Maybe they drink too much. I don't know.

But it occurs to me that what they have found (or never lost) is the ability to think and live young and to stop worrying so much about "things" or their "past" and "future". They are living for today and not worrying so much.

Do you remember what it was like to be 20? I do. At that age, just having a working car was a big deal, as was having food on the table and a six-pack in the icebox. We didn't have much, so we didn't have much to worry about. We didn't worry so much about the future, as that was a far-off event that we had plenty of time to deal with later.

Car insurance was expensive, so we bought a car for cash, if we could, and didn't bother with collision insurance - who needs it? If you wrecked your car (a highly probable event) we would just go and buy a another used clunker. Big deal.

And things like savings and life insurance? Well, you might be putting some money in your 401(k) but you never bothered much to look at it or worry about how it was doing.

Now granted, 20-year-olds do have a lot of bad habits and squander money on a grand scale. But they don't worry too much about things. They take it as it comes. If you can get back to that kind of mindset, it can eliminate a lot of worry from your life.

As we get older, the cost of things like collision insurance drop way off. Why? Because we are less of a risk. So we think, "this is a bargain now, I'll get it!" But what we fail to realize is that even at a bargain price, it is still not a good bet (and insurance is a bet - a gamble). You are far more likely to pay more in premiums than you get paid out in damages. Otherwise the insurance companies would be bankrupt.

We become more and more risk-averse as we get older. To some extent this is a good thing. We need to marshal our assets and protect them, as our capacity to earn money drops off with age. But many of us over-do it and become so risk averse that we end up spending more money than before and go broke in increments. We play it so safe, we end up in the poorhouse.

There really is no point in worrying too much about the future. Your future is pretty much planned out already. You will get older, if you are lucky, and you will get sicker and sicker and then die. Sorry to be the bearer of bad tidings, but that's how it plays out - every time. Worrying only accelerates the process, it does not enhance it.

My insurance agent tried to play on this fear. "You need disability insurance" he said, "And you should buy a nursing home policy."   The cost of these polices would have bankrupted me eventually, and likely never paid off. Yes, there is a risk bad things can happen. But lots of people have no such policies and do just fine. They figure something out. Yes, it means you have to tap into your savings. But when you get old, what are savings for? The disability and nursing home policies were more protection for my "things" (so I would not have to sell my home and investments) than protection for ME. It was fear-mongering and risk-aversion at its worst -and all for what? To protect a ranch home and a couple of cars?

So stop worrying whether you left the iron on. Stop worrying about getting old - it will happen whether you like it or not. Learn to get back some of that 20-something feeling. The folks who live the longest or live the happiest are the ones that never stop being a kid at heart.

Wither the LUXURY CAR?

What is a Luxury Car anymore? And why do people buy them?

Historically, and by that I mean the dawn of the automotive age, automobiles were largely hand-built affairs, reserved for the very rich.

Cars were built to last, and often custom-built to the owner's specifications. A chassis would be purchased and then custom coachwork made to order. Owners were known to change coachwork on the car, sometimes seasonably ("Jeeves, put the roadster body on the Silver Ghost for the season!").

That all changed with the likes of Henry Ford and the assembly line, and the introduction of the disposable car. The Model T was not a bad car for its era. The genius of it lay in the fact that it could be bought, driven for a number of years, and then junked, all at a price that was affordable to the consumer.

Rather that pay mechanics high prices for repairs, the owners simply bought new cars. Cars can be assembled far more cheaply at the factory, on the assembly line, than they can be hand re-assembled in a mechanic's shop.

Initially, the luxury car market was not affected. If anything the profusion of cheap cars enhanced the luxury car market further. A rich person could still distinguish themselves from the unwashed masses by the sheer size, cost, and quality of their ride. Pierce Arrows, Duesenbergs, Packards, Rolls Royces, and the like were quality "investment" automobiles that were built for the ages.

But a funny thing happened. The automobile market changed and technology advanced. Driving a five or ten year old car did not convey much status, even if it was a high-end hand-built luxury car.

And as luxury car owners discovered, the unwashed masses were enjoying modern conveniences and also high reliability with their mass-market cars. A pedestrian Chevrolet was a far more reliable ride than a hand-built Rolls, and required a lot less maintenance. When the Chevy got worn and tired, you just junked it and bought a new one. And for the price of the Rolls, you could buy 10 Chevys. And moreover, you could own such a car and not have to worry or fuss over it.

Luxury car makers started to go out of business or merge with the mass-market makers. Today, only a few of the ultra-high-end makers survive as niche producers - and many of those cars use the pedestrian underpinnings of more mass-market vehicles. Depending on the era, a Rolls Royce might have Chevrolet or BMW parts in it, which is not a bad thing, as they can be very reliable parts - moreso than something hand-made in limited quantities.

So what is a luxury car today? In the 1950's and 1960's, makers such as Cadillac tried to distinguish their vehicles from the more pedestrian Chevies and Pontiacs and Buicks (which often shared the same chassis and major components) by adding more options and features. things like air conditioning, power windows and door locks were considered "high end" options that were usually standard on a Cadillac, but rarely found on the more basic makes.

Of course, that started to change as these features found their way into more mainstream cars. Like the heater, radio, and electric starter, which were once considered state-of-the art high-tech features, the power window, door lock, and air conditioning have become de facto standard features on all but the most basic of automobiles. Power seats, once a feature only of high-end cars, have made their way into basic transportation.

Makers like Cadillac tried to go to ever increasing extremes with gadgets and gimmicks. Twilight sentinal light sensors and outside temperature sensors. Most of these things were poorly made and broke easily. But today even such esoteric (and arguably less useful) features have been incorporated into basic cars. The cost of electronics is such that they are not difficult to install or add.

For the last three decades, overseas makers such as BMW and Mercedes have positioned themselves as "luxury" car makers in the US, often charging more for their cars here than they do in their home countries, where the cars are viewed less as exotic luxury marques than as everyday forms of transportation - even police cars or taxi cabs.

This trend started in the late 1970's. Until that time, in America, there were American cars, and "the imports". Companies like GM tried to sell their cars in graduated increments, "a car for every purse and person". You would start with a Chevrolet and work your way up through Buick and eventually, Cadillac. Or that was the theory, anyway.

Imports were largely grouped into one lump. Most were sold after the war to generate needed hard cash. By the 1970's however, the market had striated into two groups - the Japanese, who sold cars based on reliability and price (often accused of "dumping" to boost market share) and the Europeans, who struggled on both counts. By the early 1980's, most European makers were pushing "luxury" and status, or sporting ability over price and quality, as they could not compete with the Japanese on those levels.

So the Jaguar went from sports car to luxury car. And BMW went from "Sports Sedan" to "Yuppie-mobile". Even Fiat tried to trim their cars in leather and push the vehicle upmarket (with prices higher than a Cadillac for their tiny two-seat roadster!) - and failed. The French and Italians could not compete on the low end with the Japanese and in the high end with the Germans, and left the market entirely.

Those who did not move up-market got creamed. Volkswagen tried to compete with Japan with its "People's Car" Rabbit, only to see margins drop. The company acquired one of the worst quality reputations of any maker when they opened a plant in Pennsylvania (to try to trim shipping costs). It took them decades to recover, and when they did, they found that pushing the upscale Audi brand was a better move than competing on the low end. And even the low-end VW brand started selling larger and larger vehicles.

Quality became the new luxury. People started to complain about spending tens of thousands of dollars on upscale cars, only to see them incur thousands more in repairs. Meanwhile, their "poor" neighbors drove mile after mile in trouble-free Japanese cars that cost little to buy.

Thus, the Japanese jumped on the luxury bandwagon in the 1990's by offering "Luxury" versions of their products - some of which were merely thinly re-badged versions of existing cars. You can buy a Camry from Toyota, or the same car from Lexus, for thousands more.

Even the Koreans are getting into the act. Hyundai, once viewed as the ultimate purveyor of junk - warmed over Mitsubishis - has introduced a line of cars that should give BMW pause. As it turns out, there is no mystique to "German Engineering" and often Asian products are more reliable.

Even the most basic car these days has power everything and is available with alloy wheels and a leather interior.

So what is the point of the "Luxury Car" anymore? It begs the question. Spending $50,000 or $75,000 or even $100,000 on a car which has little in the way to distinguish it from a car costing half as much seems like a pointless waste.

But of course, that is part of the attraction. Many folks spend that kind of money simply to show that they can spend that kind of money (and imply, wrongly, that they have that kind of money to spend). It is a way of validating one's self-worth by trying to impress people you don't even know.

The German car makers are headed for trouble down the road, I think. One problem is that resale value on their cars is dropping rapidly, as the general public, while appreciating these vehicles, does not place a high premium on their value. As older cars, they can be staggeringly expensive for the average person to repair. As resale values drop, it becomes harder to get people into the new cars with attractive lease agreements.

And as our population ages, people will place less value on status and more emphasis on reliability. One neighbor of mine already has done this, trading in his BMW for a Toyota. He felt that at his age, the last thing he wanted to be doing is screwing around with esoteric car repairs. And I think he may be onto something.

Electronic gadgets may be fun to play with, but their attraction wanes rather quickly. And what was "state of the art" in electronics, ages rapidly. Trying to repair a 10-year-old built-in Nav system is an expensive nightmare. Meanwhile, the local big box store sells them as add-on units for $250. So what's the point of having all these electronic toys built-in to your car? Getting back to simplicity and reliability might be the trend of the next decade.

So, perhaps it is time to sell the BMW stock. The world's most profitable car company may be headed for some hard times ahead.

UPDATE:  We bought a fully loaded Kia Soul (Exclaim trim with the "whole shebang" package and nappa leather) for 25 grand.  Our friend with a used E-class coupe was blathering on about all the features of his car - panoramic sunroof, sound system, heated and air-conditioned seats, and so on and so forth.  He got madder and madder, as with each recitation, I said, "Oh, our Kia has that as well!"

So... what is a "luxury" car anymore anyway?  Just a status symbol that says you paid a lot for a car, is all, I guess.

DISPOSABLE INCOME and Cost Cutting

Cutting unnecessary costs out of your life has the effect of expanding your disposable income greatly.

Further to my previous entry regarding Disposable Income and Part Time Work, it is worthwhile to explore the same concept with regard to cost-cutting of your personal overhead.

Many folks, reading a blog like this, will get impatient and say "Well, I make a lot of money, so I don't have to worry about that! Why should I worry about saving $100 when I can go out and make that much money in a couple of hours!"

And it is true, if you are making $100,000 a year, you are making the equivalent of $50 an hour. That's a lot of money. And when you think in terms like that, it seems that an expense of $5, $10, or even $50 is pretty trivial in the greater scheme of things.

Well, "making" $50 an hour is not quite right. You are costing your employer (or your customers) that much, if not more (with employer matching funds, every dollar you make costs your employer $1.15). That annual salary number represents your gross pre-taxable income. Once you deduct Federal and State Income Taxes, Social Security payments and Medicare payments, you'd be lucky to take home half that much.

But as I illustrated in my previous example, most people have fixed expenses that cannot be cut too much. You have to make the mortgage payment, pay home owner's insurance, property taxes, maybe car payments and car insurance. And you have to buy food and clothing for you and your family.

So, when you deduct all those taxes and all those "fixed" expenses, it leave you with little in the way of disposable income. Maybe 1/10th of your income is really spendable (or savable). You might be making $100,000 a year, but you get to "spend" only $10,000 of it, in terms of money in your pocket.

So even assuming you are a big-shot with a six-figure salary, saving $100 on some expense is a big deal. Because to "earn" the same amount of additional disposable income, you'd have to increase your salary by 10 times as much - or $1,000.

Would you turn down a $1000 raise? I think not! Yet many people will shrug off an unnecessary $100 expense as merely the cost of doing business or a trivial amount not to be bothered with.

If you can cut some expense in your life, it is a big deal. And if you think creatively and continue to think creatively about your spending habits, you can live a better life for a lot less money.

Today, for example, I called the utility company about my bill. They charge me a minimum of $25 a month for the electric service for my lake cottage, even in the dead of winter when the power is off. I asked if they could disconnect the power without a service charge, and lo and behold, I discovered that they could - with no re-connect fee, either. For the six months I am not there, I will save $150 in unnecessary expense.

That may seem like a trivial amount, but it equates to an increase of gross income of $1500, if you think in terms of Disposable Income versus Gross Income.

A five minute phone call is all it took - and I am sorry I did not think of this five years ago! I would have $750 more in the bank by now. And for subscription-type services (where you are billed monthly over time) savings do add up over time as well. So saving $10 a month on your phone bill might not seem like a big deal, but over a year, that is $120, and over a decade, $1200, not including interest. It adds up, and if you can squeeze a dollar here, $5 there, or maybe $10 somewhere else, it can end up putting thousands of dollars in your hand, which effectively would be equivalent to tens of thousands of dollars in a pay raise.

Unlike increases in income, cost savings are not taxable. So every dollar you save goes right into your pocket. A big salary and a big pay raise is nice, but one thing you discover quickly about the big salary is that you don't feel much richer as a result of it.

So the next time you hear someone say "Well, it isn't worth it" to cut expenses and save money, don't listen to them. Chances are that person is broke, and they have no idea why...

UPDATE:  Note also that cut cutting isn't taxed.  If you can "save" $100 by cutting unnecessary expenses in your life, it is the equivalent of earning $150 more in income, as you have to pay taxes on income but not on cost-cutting savings.

DISPOSABLE INCOME and Part Time Work

Note: The details of the following example are combined from a number of different people and do not represent any one particular individual

A friend of mine is married. Her husband has a pretty high paying job, making $150,000 a year, enough for them to live on.

The conundrum for her is this: Should she get a part-time job now that their child is in school? She can make $20,000 a year working part time and still be able to see the kid off to school and pick him up afterwords - working on a few hours a day, three days a week.

Her friends tell her "don't bother - the additional amount of money you'll make really won't make much of a difference, after taxes and all".

Such a summary view of finances doesn't necessarily address the whole situation, however. When looking at a part-time job or additional income, you have to look to see how it affects your disposable income, not your overall, before-tax income.

Let assume our couple is presently making $150,000 a year. They pay approximately 35% of that in Federal and State income taxes, or about $52,500 a year. Their mortgage payment is $3500 a month, or another $42,000 a year, leaving a balance of $55,500 a year. Their car payment of $350 a month comes for $4200 a year (their other car is wisely paid for) and their other miscellaneous expenses (utilities, etc. ) comes to $6600 a year. So out of $150,000, they end up with $44,200 a year. They try to put $20,000 a year into their 401(k) plan, so they end up with an effective "disposable" income of $22,200 a year, or about $1850 a month.

That money is used to buy groceries, clothes for the kids, the occasional meal out. It is not a lot of money, and they have to stretch a lot to make ends meet. Like many middle class and upper middle class Americans, they are puzzled as to why, after making so much money, they still have to scrimp and save.

Now, if we look at our friend's part-time job proposal, we see that yes, $20,000 a year doesn't look like much compared to her husband's $150,000 a year salary. It is a mere pittance!

But compared to the couple's disposable income, it is a sizable chunk.

Even if we assume that 35% of this is taken in Federal and State taxes, that leave $13,000 on the table.

If added to the couple's existing disposable income, we can see that it increases their disposable income by nearly 60% ! That leaves money left over to invest or to save - and to build more real wealth, rather than just spend it.

Suddenly the blase comments of her jaded housewife friends make a lot less sense (they would rather see her stay at home and have cocktails with them, of course).

Now you can play with and tweak these numbers all you want. But you'll still come to the same or a similar conclusion, namely that a small increase in overall income can mean a big increase in disposable income. The idea that a small part-time job doesn't add anything to the bottom line really isn't true.

Now there are a couple of caveats in this picture, of course.

If you have been awake and alert and reading some of my blog entries, you might look at their finances and say "Well, gee, they could also increase disposable income by spending less - living in a more affordable home, for starters, or spending less money on utilities, like cell phones and cable TV."

And you'd be right. Cutting expenses and keeping overhead low is the first step toward building real wealth. Making more and more money does not make one wealthy - making more and more money while maintaining the same low-cost standard of living allows you to accumulate wealth, and once you start accumulating it, it snowballs into larger and larger sums.

And therein lies the conundrum of the part-time working spouse. In many scenarios, when the spouse takes a second job, the temptation is to increase spending and as a result have no additional disposable income or money to invest. For example, after a hard day at work, the couple says "Oh, we're too tired to cook, let's send out for a Pizza". And $20 later, they have barely a meal to show for it, when that same amount could have bought food for several meals - if prepared at home.

Similarly, a second job might not make any sense if you have to drive long distances to get there. In addition to the fuel costs, the additional wear and tear on your car will mean you will have to buy a new one sooner.

But overall, if you play it right, that part-time job can be a major influx of usable cash, making the financial burden much easier for a couple, and allowing them to get ahead of bills and set money aside. Don't compare gross salaries when considering such a job - consider the effect on your net disposable income - chances are, you might end up way ahead.

Note that a similar mathematical analysis is also true for those on Social Security. Years ago, Social Security benefits were untaxed. Today, they are taxed, and once you start earning a certain level of income, your taxes will go up. Many Seniors tell me that that won't look for work, or if they do work, try to keep their income low (by working less) so their taxes won't go up.

Again, I think when you do the math here, you have to look at the overall effect on how the additional income from work affects your disposable income, not just your gross income or even income after taxes.

Gas Milage - How Much is Good Enough?

A friend of mine just sold a perfectly good and reliable "paid for" car for a pittance and bought a brand new car for nearly four times the amount he sold his old car. Why?

"Gas Mileage" he said.

He sold a reliable car that got maybe 25 MPG in favor of a new car rated at over 30 MPG. Is this a sound transaction?

The short answer: NO.

Gas mileage, as I have noted before, is a funny thing. The higher your gas mileage goes, the smaller the incremental savings are. The big savings in gas mileage are found in going from a 10 MPG gas hog to a 20 MPG sedan. The savings in going from 20 MPG to 30 MPG are half as much and from 30 MPG to 40 MPG even half again.

Many economists believe that the figure of gallons per hundred miles is a far better way of determining gas mileage. If we compare the mileage of several hypothetical vehicles, in terms of miles-per-gallon and gallons-per-mile, we can see why.

The average American drives about 15,000 miles a year. One way to really save on gas is to drive less - and people can, easily slicing 10-20% of their driving miles each year. The price of gas has fluctuated wildly in the last few years, from $2 to $5 a gallon. For our examples, lets assume an average of 15,000 miles a year driven and gas a $4 a gallon.

CAR# 1 HUMMER-Like SUV
Gas Mileage: 10 mpg (10 gallons per hundred miles)
Gallons per year: 1500
Cost of gas for one year: $6000

CAR #2 LARGE SEDAN
Gas Mileage: 20 MPG (5 gallons per hundred miles)
Gallons per year: 750
Cost of gas for one year: $3000
Savings over Car #1: $3000 (50% cost reduction)

CAR #3 MIDSIZED SEDAN
Gas Mileage: 30 MPG (3.33 gallons per hundred miles)
Gallons per year: 500
Cost of gas for one year: $2000
Savings over Car #1: $4000 (66% cost reduction)
Savings over Car #2: $1000 (33% cost reduction)

CAR #4 COMPACT SEDAN
Gas Mileage: 40 MPG (2.5 gallons per hundred miles)
Gallons per year: 375
Cost of gas for one year: $1500
Savings over Car #1: $4500 (75% cost reduction)
Savings over Car #2: $1500 (50% cost reduction)
Savings over Car #3: $500 (25% cost reduction)

CAR #5 HYPER-MILER
Gas Mileage: 50 MPG (2 gallons per hundred miles)
Gallons per year: 300
Cost of gas for one year: $1200
Savings over Car #1: $4800 (80% cost reduction)
Savings over Car #2: $1800 (60% cost reduction)
Savings over Car #3: $800 (40% cost reduction)
Savings over Car #4: $300 (20% cost reduction)

Note that the increase savings when going from Car #4 to Car #5 are almost laughable - a mere $300 a year. The 75 gallons in fuel saved won't affect the world economy much - or the environment. Fuel savings and cost savings drop off non-linearly as mileage increases.

But the cost of getting ever-increasing fuel mileage does not increase linearly. Engineering required to get hyper-mileage often means resorting to more and more complex technologies, such as hybrid powertrains. Thus, the cost of building such vehicles (and their resultant purchase price) is far higher than the cost savings involved, compared to a standard car getting "reasonable" fuel mileage.

A perfect example is Ford's new Fusion sedan. In a standard 4-cylinder model, it gets a reasonable 30+ MPG at a fairly attractive price. The Hybrid version gets 40+MPG, but at a considerable increase in cost and complexity. Is the extra cost of the hybrid drive worthwhile? Probably not, even at $4 a gallon. Add in the complexity of maintenance as the car gets older, and the picture gets even murkier.

The big savings in gas mileage are in going from the 10 mpg "gas hog" to a 20-30 mpg sedan. Back in the early 1980's America did just that, dumping the "full-sized" American car (with under-performing low-compression engines choked with poorly designed smog gear) to smaller cars with smaller engines, with more sophisticated fuel injection. Overnight, average fuel economy in this country shot up from 10 to 20 mpg, dropping demand in half, and thus causing fuel prices to drop.

Today, similar things will happen as people dump their 10 MPG truck-based SUVs in favor of 20-30 MPG car-based SUVs and minivans. The latter provides most of the functionality of the former, with better fuel economy and at a reasonable cost.

Selling a working and durable car to buy a higher gas mileage car is often false economy. Unless you are driving an 10 MPG car, chances are, the savings will be minimal. For the average consumer, getting 20-30 MPG is more than sufficient. Savings by going to higher gas mileage levels are minimal.

If you are buying a car, yes, you should carefully consider fuel economy, and walk away from any 10 MPG vehicle, unless you are towing a bulldozer or something. I would shoot for 30 MPG in a newer used car, as down the road, that will provide reasonable economy. But if price is the issue, anything above 20 MPG might be acceptable.