Car Taxes – Know Your Tax Rate Before You Buy

This past fall, my mom decided to sell her 2006 Honda Pilot and upgrade to a new Pilot. My wife and I had been getting by with just our van for a few months, but we were ready to have a second car again.

So: Rather than go car shopping, we decided to buy my mom’s used Pilot. It had relatively low miles and was still in good condition. Plus, my mom was willing to give us a good price.

I called up USAA because they offer really good rates on car loans. I was already pre-approved, so the car loan was processed quickly. Of course, I had to decide how much of the car I wanted to finance, as well as if I wanted extra to cover the sales tax.

Continue reading Car Taxes – Know Your Tax Rate Before You Buy

Consumer Debt – The Worst Kind of Debt

Consumer debt is the kind of debt you put on credit cards and other types of revolving retail accounts.

What makes this kind of debt so odious is: There are no fixed minimum payments. And there is no fixed term in which to clear the debt. You could be making (mostly interest) payments for decades.

It’s not that hard to rack up large amounts of consumer debt shopping at malls, retail stores, and department stores. Twenty dollars here, twenty dollars there… next thing you know you’ve got some serious financial obligations.

My wife stumbled on a show last night called Clean House: Search for the Messiest Home in the Country. This show shines a light on families who have shopping, hoarding, and cleanliness/organization problems.

Sharon Baglien: Shopaholic in Denial

Last night was a re-run of the third episode of Clean House in which the crew tackled Sharon Baglien’s home in Cincinnati, Ohio. From the first scene, I could not believe what I was seeing. Baglien’s house, garage, attic, basement, and an off-site storage unit were crammed floor-to-ceiling with junk.

I say “junk” because not much of it was getting any use. But the truth is, most of the junk was brand new — still in the box, tags intact!

There was so much stuff in the attic that the ceiling was cracking. There was nowhere to sit for meals. And when the house was finally emptied, it took 400 50-gallon plastic containers, 75 large packing boxes, and 300 large garbage bags to hold everything.

The show’s crew then had to rent a 7,000 sq ft space for the “yard sale” to sell all of Sharon Baglien’s stuff. I was truly stunned.

But what stunned me more than anything else was Sharon’s persistent denial. She repeatedly denied being a shopaholic. She repeatedly excused her own behavior by saying that it was “just 30 years’ worth of accumulation” — as if the amount of time that had passed made everything okay!

If I accumulated for 30 years straight, I wouldn’t have had even a fifth of what this woman had in her house.

Anyway, with such an addiction to shopping and hoarding (she had been paying monthly rent for a storage unit for decades), I have to imagine that Sharon is also facing some substantial consumer debt. And while her situation is extreme, it paints a vivid cautionary picture.

The Problem with Consumer Debt

The problem with consumer debt is that it must be paid off by the sweat of your brow. Clothes and food and dishes and kitchen gadgets and “stuff” all depreciate rapidly. In most cases, you’d be lucky to get pennies on the dollar when you tried to resell your stuff, even if it was barely used.

Cars depreciate, too, but not nearly as fast as consumer goods.

This is a unique quality of consumer debt when compared to secured debt. Debt that is secured can usually be cleared by simply selling whatever was used to secure the debt.

Consumer debt, on the other hand, cannot be cleared by selling the items you purchased. Unfortunately, you will have to work off the debt — or settle it, or declare bankruptcy. And none of those is much fun.

Secured vs. Consumer Debt Ratio

As you take stock of your own finances, pay close attention to the ratio between your consumer debt and secured debt. If you have debt, it’s better to have secured debt.

There was a time not that long ago when the majority of my debt was consumer debt. Now that has changed. I mostly have secured debt now. Which means that in a pinch I could liquidate a few items and clear my debts quickly.

(Of course, being debt free is best of all, but I’m not there yet.)

Another option that I recommend is consolidating consumer debt into a Prosper loan. I did this at one point and it worked really well for me.

What’s nice about a Prosper loan is that there is a fixed monthly payment and there is a fixed pay-off date. You’re not making payments for the rest of your life. The whole point is to pay off the loan. (This is in contrast to credit card companies who want you to carry balances forever.)

Remember: Consumer debt can be ugly. So stay away from it as much as you possibly can. And if you have consumer debt, develop a plan for how and when you’re going to pay it off.

Retail Credit Card – When Credit Bites Back

You might think a retail credit card would be harmless. And you may be right. But my good friend told me a story about his wife that left me speechless. (Well, not really, because here I am now writing about it.)

In this particular case, the retail credit card actually got his wife fired from her job. Here’s the scoop:

My friend’s wife (we’ll call her Liz) has been working at Lane Bryant for a couple years now. She’s had glowing reviews. The customers love her. But there’s one little problem.

Liz does not like to push the Lane Bryant retail credit card as hard as the company would like. Sure, she asks each customer if they would like to open an account. Most either already have an account… or decline because they don’t want a retail credit card.

No matter how the customer responds, Liz never gets pushy and usually accepts the customer’s response at face value. Under normal circumstances, Liz’s behavior would be perfectly acceptable. Except there’s a little detail called a quota

Minimum Number of New Retail Credit Accounts

Apparently, when you work at Lane Bryant, you’re actually not in the business of selling clothes. You’re in the business of getting people to open Lane Bryant retail credit cards… and then getting them to buy clothes. Kinda.

Because you don’t actually want customers to buy clothes with cash or anything other than a Lane Bryant credit card.

This is why each employee is required to open 6 new retail credit card accounts every 2 weeks. That’s 3 new accounts per week.

If any employee fails to hit this quota, they can be let go immediately. Fired. On the spot.

Unfortunately, this is what happened to Liz. Not even her glowing reviews or positive customer feedback could make up for her unwillingness to shove credit cards down the throats of Lane Bryant customers.

Lesson: If you don’t feed the beast, the beast will devour you instead.

Mixed-Up Priorities

During the last few years, strange things have happened to the business landscape.

Cash is no longer good enough. Credit is king because stores can make so much more through exorbitant interest, late fees, and fees assessed when you try to pay your bill by phone or the Internet.

Let’s be honest. These are no longer retail stores. They’re credit card companies disguised as retail stores.

This can’t be good. It’s not good in the short term, and it’s definitely not good in the long term.

One retail credit card I recently canceled charged $10 to make a payment over the Internet.

Worse, they put the fee on my NEXT statement in the hopes I’d forget about it. That way they could charge me a late fee on top of a fee that shouldn’t even have been assessed in the first place!

But, hey, this is American business. Anything to keep the shareholders happy, right?

Banks Give Homeowners a Break

About 10 months ago I wrote a post about how some people who couldn’t sell their homes just stopped making payments. I also shared that my relatives who live in Phoenix were planning to do this. I wrote:

They plan to live in their current home for 3-6 months without making any mortgage payments. They will save up some money so they can move. When the bank finally approves them for a short sale — or gives them the boot — they’ll go get a rental somewhere else.

Here’s an update:

My relatives did indeed stop making payments on their mortgage in November 2008. They started getting nasty letters in the mail, phone calls, etc shortly after that. Fortunately, their realtor had prepared them, so they were expecting this and have seemed to handle it well.

Guess what?

It’s 11 months later… and they’re still living in the same house!!

In fact, we drove down to Phoenix this past April and visited them for a week. It was kind of strange at first because I wondered, “Could somebody show up at the front door and just decide to kick us out?”

Of course, that never happened. We had a great visit (with the exception of my youngest getting sick and vomiting).

It’s interesting to talk to my relative about their house. She’s very detached… and really doesn’t care about the house one way or the other. It’s almost like she’s adopted the mindset of a renter… but to a greater extreme.

She views the house as a place to live — but she definitely does NOT feel like it’s her home. And she and her husband are always waiting to find out when they’ll be forced to move.

Not an ideal way to live, but at least they’ve not had to make a mortgage payment or rent payment in 11 months.

You might wonder, as I did, why in the world a bank would let someone “squat” on its property for that long without making payments. Well, here is what I’ve discovered…

Many banks have bad mortgages on their books. But they don’t have to officially record those bad mortgages — they don’t officially get put on the books — until the bank forecloses on the property.

So here you have a lot of banks that are actually delaying or avoiding the foreclosure process so they can make their financial statements look better than they really are.

Crazy, huh?

The banks want to deceive the public, particularly their account holders and share holders, so they can continue to profit from deposits, transactions, and increase in share value.

And so banks are literally giving homeowners a break to maintain as long as possible the deception that everything is okay and the banks are doing well.

If the banks were dealing with only 10 or 20 foreclosures, this would never happen. But they’re dealing with thousands of foreclosures. The problem is so big they can’t deal with it — at least not all at once.

Anyway, that’s the update on my relatives. Still in the same house in Phoenix… still haven’t made a mortgage payment since November 2008. What crazy times we live in!

Thoughts on Our Money System

Ever since March, when Troy left a comment on my blog, I’ve been thinking about what he said. His comment was in response to my post on hyperinflation. Troy writes:

Ryan, just found your blog and am a bit confused. I believe that the scenario in some form as described in “Ushering in a New Era of Hyperinflation” will materialize. Whether it is nasty inflation or hyperinflation, we will see the value/purchasing power of our dollars decreased. It seems that you are focusing on debt reduction. A very noble and valuable exercise but probably not in this paradigm.

May I suggest an alternative approach? Keep your debt. What is the benefit of debt reduction right now? What is your current debt load preventing you from accomplishing? What opportunities are you missing because you a focused on singular goal — debt reduction. What about investing to expand your business? What about investing some portion of your debt reduction funds on acquisition of physical assests such as silver or gold… as a hedge? What about taking on debt backed property?

If inflation happens, savings become worth less and at worse worthless. If inflation is going to occur, then debt-backed properties and physical assets are the way to go. I am not suggesting one extreme or the other. Simply that debt reduction should be balanced with other strategies. The most important issues is to make sure all variable rates are FIXED. Best of luck. Keep the faith, brother.

I’ve been reading and learning about our money system for a few years now (I’m currently reading The Creature from Jekyll Island by G. Edward Griffin), and I’ve been struggling with what to do.

Because, in a way, what might seem logical in an economy with real money is illogical in an economy with fiat money.

The money I have today has more purchasing power than the money I earn tomorrow. Which means there is a strong incentive to spend that money on physical goods now — and a strong disincentive to save.

I distinctly remember when the real estate bubble was expanding in the early 2000s because Steph and I wanted to buy a home for our growing family. But it was insane. Builders were raising their prices by as much as $15,000 every couple weeks.

If you waited two weeks to make a decision, you would have to pay an extra $15,000. But who could possibly save that much money in only two weeks? Because of price inflation, waiting to buy didn’t make a whole lot of sense. (By the way, I still refused to buy.)

We may be on the verge of a similar situation, not just with real estate, but with the prices of everything. If hyperinflation takes hold, we’ll all be wishing we’d spent our money before it became totally worthless.

Assuming hyperinflation is in our future, it makes no sense at all to pay off debt right now. It actually makes more sense to take on debt, then pay it back quickly with worthless dollars.

I’ve studied the history of hyperinflationary situations, and from what I can tell, most people are able to pay off their debts quickly because the money supply is expanding so rapidly.

I know this probably sounds all weird and strange and topsy-turvy — and it is! You can’t think the same way when you’re dealing with a currency that is being devalued as much and as fast as the U.S. dollar.

All is to say, this line of thinking is influencing my decision about whether to buy a new car or not. I have one in mind, and it would make my debt go up quite a bit. But the car manufacturer is offering 0% interest on a 63-month car loan through July 31st.

Question: Do I buy the car using a 0% interest loan? Or do I go with one car for now and continue paying off debt?

Under normal circumstances, the “logical” thing to do would be to pay off debt. But in today’s circumstances, what is normally logical is illogical. And what is normally illogical becomes more logical.

Which is to say I’m leaning toward buying the new car.

Am I crazy? Leave a comment and let me know.