Budgeting

Companies Make Big Money Off People Who Don’t Pay Attention

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You hear a lot of people moaning that the rich get rich on the backs of the poor. A more plausible source of riches comes from people who don’t pay attention. This is a frequent warning I give to students, especially when talking about banking and ATM machines. (A couple years ago, I learned that companies like McDonalds pay employees with prepaid debit cards if they don’t have bank accounts for direct deposit, and I was shocked to learn that kids were paying $4 fees to cash $20 paychecks.)

Today I added several more data points to support the “riches from the ignorant” hypothesis. I had my car serviced; just an oil and filter change and tire rotation. (Yes, I can do it myself, but I had a coupon that got it all done for under $30, with tax.) The service scammer (she claimed “advisor”) told me the technician recommended several things: a fuel injector cleaning, a coolant flush, a brake fluid flush, and a wheel alignment “because you have some feathering on the outside of the front tires.” The total bill would be $670. Surprisingly, they didn’t recommend an engine air filter change since the manufacturer’s recommended service calls for it at my mileage.

It was easy to spot the scam and decline all the services because I’m familiar with the manufacturer’s service schedule, which I always review before doing anything to the car. The manufacturer recommended interval for a coolant flush is 6 years or 120K miles, but it’s a very high profit service with low materials cost and very little required labor, so dealers push it as often as they can, especially at the change of seasons to “winterize” or “prepare for summer heat.”

The fuel injector service is also a scam because the service manual does not mention a requirement for such a service… ever… at any mileage. Other dealers offer an “induction system cleaning” which basically means cleaning all the plumbing from the intake up to the cylinders… yes, plumbing that’s kept clean by an engine air filter (and up to the air filter is supposed to be cleaned when the filter is replaced). If it’s not in the manufacturer’s recommended maintenance, don’t pay someone to do it.

The alignment claim could be legitimate, if you haven’t already identified a scammer. In my case, I had just had the front suspension bushings replaced under warranty so an alignment had been done less than 5K miles before. Also, I knew I was getting close on my tires so I looked at them carefully before dropping the car off. The wear on each tire was perfectly even.

At a previous visit to this same dealership, the service scammer brought me a dirty engine air filter and suggested I replace it. I thought it odd that my filter could be that dirty because I only had 15K miles at the time and the manual calls for replacements every 35K miles. As usual, I declined. When I got home, I popped the hood and looked at my filter. It was spotless, and it wasn’t even the same size as the one the scammer showed me.

Dealerships aren’t the only scammers out there. On the way back, I stopped for gas and the pump defaulted to premium even though I pushed the button for regular. I’ve seen that happen at this particular gas station before and I wonder how many people don’t notice and pay the extra $5+ for a fill up (figuring $0.50/gal and 10 gal of gas).

 This isn’t exactly a new idea. The phrase “a fool and his money are soon parted” dates back to 1587 (Dr. John bridge, Defence of the Government of the Church of England). This is your reminder to not be a fool with your money.

Financial Discipline Begins with Personal Discipline

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You’ve heard the saying, you can’t love others until you first love yourself. The same can be said of your personal finance: You can’t have financial discipline if you don’t have personal discipline.

A new study by CareerBuilder shows that 78% of Americans live paycheck to paycheck. Their survey of 3,462 full-time workers and 2,369 full-time employers showed people struggle to make ends meet even at higher wages. People earning over $100,000 (9%) were living paycheck to paycheck; 28% of those making $50K to $99K do too.

The big problem is behaviors that lead to debt. 71% of those surveyed had some kind of debt and 56% said they would never pay off their debts. The same percentage (56%) save less than $100 per month.

Brittany Jones-Cooper at Yahoo Finance reported on the survey and interviewed a financial planner. He said the first step is to look at non-monetary factors like shopping and drinking in bars to “relieve stress.” The Yahoo story offers a bulleted list of ideas to consider, but it boils down to take personal responsibility. For the most part people don’t live paycheck to paycheck because someone else is not paying them enough. It’s because they are spending too much.

The solution is to create a budget to understand where your money is going. Then develop a plan to cut back the bad habits. You need to have personal discipline to stick to that plan. In time, you’ll learn to live within your means and save at least 10% of your income for the future. It’s all covered in Chapter 3 of Basic Personal Finance.

Car Buying vs. Leasing

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Are you looking to buy or lease a car and wondering what the best decision is from a financial perspective? Car and Driver just posted an article based on an interview with Daniel Blinn, a Connecticut lawyer who specializes in automotive financing. Of course, the best way to get a car is to have someone else buy it for you. If that doesn’t work, the next best way (from a financial perspective) is to get a reliable used car that’s as cheap as possible… as long as it’s also a good track car, but that’s for a different blog.

If you must have new car smell, read the C/D post to help decide on buying versus leasing.

Get Your Kids Ready For College

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A new study in England shows incoming college students are woefully unprepared, both for the “reality of life” and for school. Two news articles (Daily Mail and BBC) are based on a Higher Education Policy Institute (HEPI) study of 2,000 incoming university students (incorrectly labeled as millennials by Daily Mail). The study found 61% of respondents are anxious about heading to college, and 27% have panic attacks.

Parents really need to prepare their kids for the realities of college academics. The study says almost half (46%) expect more one-on-one support in college than in high school. A large majority (78%) expect career-planning support. These kids are in for a rude awakening. While students are the stated reason for a university’s existence, many schools receive far more money from research grants, athletic events, and alumni donations than they do from tuition. That means students and their education are rarely the primary focus of a university. The study also says 60% of students expect to spend more time in class in college than in high school. They do not grasp how little time they’ll actually be in class and that they are responsible for their own learning. Professors will not handhold them and “teach the tests” (unlike high schools that have standardized tests linked to teacher pay, for better or worse). The standard rule of thumb is that students should expect to spend at least three hours studying for each one hour in class. I can tell you, from experience, that most students do not follow that advice. Maybe if they’re told to expect to do that work beforehand, they will… call me an optimist.

Since this is a finance blog, I’d like to focus on the fact that more than half the respondents admitted they don’t know how to pay a bill. Over half said they don’t understand student finances, and many underestimate essential expenses. Less than half recognize that rent is likely to be their biggest expense after tuition. Some thought “nights out” or “student societies” would be their biggest expense. Ironically, 78% expect to get more financial advice from their university than they did in high school.

What can you do? If you have or know someone about to start college, take the time to give them some advice on what to expect, both in terms of academics and student life. On the financial side, make sure they know what things cost and how much they have available to them (i.e., make a budget). I’m biased, but I think they should read Basic Personal Finance and realize that a student loan should be treated as an investment (i.e., don’t get one if your degree won’t increase your lifetime earnings).

Retirement Planning Includes Plans During Retirement

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CNBC ran a story last week pointing out an obvious part of retirement planning that they think people don’t consider: “make sure you don’t run out of money.”

They start with the 4 percent rule recommended by “many investors”-only draw 4% of your total portfolio value in any given year. That way, you’re basically living on the gains, and your portfolio remains intact (assuming a 4% real return). Research by Wade Pfau suggests that the 4% rule may be optimistic if people transition their portfolios to safer investments after retirement, hence earning less than a 4% return.

The story then quotes certified financial planners who state more obvious points, that you should consider three things when planning your retirement spending goals:

  • Life expectancy
  • Social Security benefits
  • Taxes

I’ll start with the last one. You have to consider the required minimum distributions from your retirement plans. Try to balance your tax-deferred (traditional IRA & 401(k)s) and tax-free (Roth) distributions to minimize your taxes. Avoid unnecessary portfolio reallocations, which could increase your tax burden for taxable accounts (i.e., don’t use actively managed mutual funds).

When looking at Social Security benefits (for those retired or retiring soon who will actually have them), consider your objectives. Do you want to maximize your total benefits, or do you want to maximize your monthly benefit? For the former, take your benefits as early as possible. If quality of life is more important, and you don’t need the money right away, waiting to draw social security will increase your monthly payments. (I’ll follow up with a post on this soon.)

Life expectancy is a somber topic, but you really do have to consider how long you might be around to make sure you have enough to support yourself in retirement. If you don’t want to put a specific number to it, pick something far into the future (say 100 years old… or 40 years of retirement). Use that number when planning your nest egg requirement. Other alternatives are to plan on smaller returns than you think you’ll get and/or using random returns and simulating your retirement, as shown in my book and discussed in a previous post.

One thing the article didn’t point out is that all the “help” these professional financial advisors give you will cost you 2-3% of your portfolio value every year. That’s the real reason you won’t be able to draw 4% for yourself. It doesn’t take a PhD in finance, or even a CFP, to plan for your retirement. It’s fairly basic:

  1. Figure out what quality of life you want during retirement (i.e., how much you want to live on each year). This will determine the size of the nest egg you need to have ready when you retire.
  2. Figure out how much you need to start saving now to get there.

Take the time to study the basics and make a plan. You can enjoy spending/saving that 2-3% fee on yourself instead of paying for advice you can easily get on your own.

Don’t Let Your 15 Minutes of Fame Be as a Bad Example

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CNBC seems to be highlighting people’s financial mistakes . They started in January with a story about a woman spending $700 a month on Uber. This month, they have two stories: one about a guy with $100K in debt spending $1,100 a month on takeout (nearly 30% of his income!); the other is someone who wasted $41,000 at Amazon on over 1,400 items, none of which she can remember. That last one also links to a story about how consumers underestimate their online purchases.  OpenUp studied 1000 subjects in 2016 and found a big disparity between self-reported purchases and actual purchases (22 items vs 41 items). Fortunately, the personal articles go on to explain the mistakes and show how these people have turned their financial lives around.

It’s not hard to avoid the big financial holes these people dug for themselves. You can learn about financial discipline in Basic Personal Finance (or just about any consumer finance website… of course, my book is better). Don’t let your brief 15 minutes of fame be as a bad example for others to learn from your mistakes.