Recently I was taking my routine, virtual stroll through all of my financial accounts when I noticed something funny – and I most certainly don’t mean “ha ha funny”. My CIT savings account was only returning 2.4% APY. That’s odd, I thought. I’m almost sure that had been at 2.45. I did a little checking and sure enough, I was right. Now I don’t want to miscommunicate here; I understand why this happened and I don’t blame CIT Bank for it. Our long overdue recession has started and not only have rates stopped rising, but they’re actually already coming down slightly. Futures traders have even priced in one to two decreases by the FED by the end of the year. So I’m far from the only one making this call and it doesn’t surprise me in the least to see CIT Bank, a for profit business, doing what management feels needs to be done to protect the bottom line in changing conditions.
That said, what’s good for the goose is good for the gander. When conditions change, I also re-evaluate what I’m doing to make sure it still makes sense. Here’s a recent example in case you think I’m making this up. So I spent a half hour or so on good ol’ Doctor of Credit doing a little research. It turns out that currently, the highest rate on online savings accounts that don’t require absurd shenanigans like 10+ debit card (yes, people apparently actually use the things; but they shouldn’t) transactions per month is currently 2.51%. However, interest rate isn’t the only consideration. Many bank accounts also pay bonuses up front, which can quickly shift the balance when we’re talking about such low numbers. After all, in the grand scheme of things, 2.51% is still an awful return on investment, even if I do feel that cash is king in current circumstances.
So ultimately, and somewhat coincidentally, I decided not to
move my savings account money very far, at least from an alphabetical
perspective. I’m moving it from CIT Bank to Citi Bank. Citi’s online savings
account pays 2.36%, even less than the 2.4% that started this whole conundrum
in the first place. However, by performing a little financial gymnastics, which
basically just involves making sure I stay within the rules of the promotion, I
can also get it to pay me a $400 bonus for keeping $15k in the account for
sixty days – more than the CIT account would have paid on that amount in an
entire year! And meanwhile, I’m collecting the 2.36%, virtually the same rate
as CIT was paying, on top of it.
How does the math work out on this? With $15k in the CIT account, I would have made $364 in interest over twelve months. But with that same $15k in the Citi account, I will make $459…in two months! If left in the account for the same twelve months as the CIT Bank account for the purposes of making an apples to apples comparison, that figure becomes $758. That, ladies and gentlemen, is what we call a win. The only downside here is that unlike credit card reward money, bank account bonuses are taxable income. But that’s more about credit card reward money being in an extremely privileged class of its own than it is about this being a bad deal; almost any income under the sun is taxable – even income that isn’t income at all in some cases (Ever hear of imputed interest? Look it up. It’s disgusting!).
The way I see it, there are two lessons here. One is that you should be regularly evaluating your available options, particularly when something changes with your current one. I preach that all day long. But the second lesson is one I need to be taking to heart myself going forward. Given our current economic circumstances, I’m not compromising on holding as much cash as possible until further notice. But with available interest rates on cash being as pathetic as they are, and with sign up bonuses being as large and plentiful, it could very well be worthwhile to move savings account money around two or three times a year. For example, if there were three options as good as the Citi bonus available (I don’t believe there are; but there are others that are close and again, conditions are always changing), I could make over $1500 in a year on $15k of cash – a damn good return considering it’s 100% risk free. Yes, it would be a little bit of work, but with emphasis on the “little” part. When all is said and done, I will have less than an hour into this little project. Would the extra $1200+ over and above what the CIT Bank account would have paid without any bonuses be worth three hours of my time? You bet your sweet ass it would! I do pretty well for myself (for now…) but I don’t make anywhere near $400 an hour…yet.
Words are all well and good. But without numbers, how much do they really mean? I’ve decided that in order to make this blog as valuable as possible for readers, I need to make it specific. As such, I’m going to give you a very intimate look at an important element of my personal finances. In particular, I’m going to show you what I spend on EVERYTHING. Obviously this is all specific to me, but to illustrate things more vividly, I’m going to go into detail on each of these “line items,” one post per week. Hopefully it will give some folks an idea or two on how to cut expenses without sacrificing anything that’s important to them.
Before I jump into the numbers, here is some basic
information about me for context. I’m a male in my early thirties with no
dependents (not even pets) and while I spend my share of time with certain young
ladies, I live alone. The numbers below are average figures between what I
spent in 2017 and 2018. In 2017, I lived in an upper middle class Milwaukee
suburb with a relatively moderate cost of living. But for most of 2018, I lived
in the Galleria area of Houston, which is pricier than almost anywhere in
Wisconsin, but still very reasonable for a wealthy part of a major city.
I work as an outside sales rep in the commercial finance
industry. That affects a couple of areas of my spending. First, since I expense
around half a dozen restaurant meals most weeks, I don’t have much desire to eat
at restaurants in my personal life and as a result, I spend almost nothing in
that category. This also cuts down on my grocery spending somewhat, although I
like to cook and spend fairly liberally on groceries for the meals I do buy.
Second, in spite of my employer’s generous vacation policy, actually taking
advantage of it would cost me much more in income than in any other way. Plus,
I travel a lot for work, resulting in general travel fatigue, and I’m single. So
this is just not an area I spend much in. However, I consider both restaurants
and vacations luxury spending categories and thus, if one were trying to live
as economically efficiently as possible, these numbers would still be very low.
As I said above, I’ll get more specific about what I do in
each area in subsequent posts. But in general, my lifestyle (note, I said
lifestyle, not spending; the difference between the two is the foundation of my
financial success) is somewhere between middle class and upper middle class and
I save over half my gross income. In other words, there is plenty of fat in my
expenses since I pretty much do whatever makes me happy. No economic
constraints limit my spending besides my desire to increase my net worth
The first number in each category is what I actually spent;
the second is about what I would spend if I needed to live as economically as
reasonably possible. I will note that the most advantaged living situation is
two productive people under one roof, assuming they can trust one another and
are on the same page financially. When I lived with my ex-wife and we were
working on paying off a mountain of student loans, we spent more than my bare
bones total figure below but didn’t come anywhere close to doubling it (keep in
mind the figure is for one person, not two). So it is definitely realistically
achievable. If you are astute, you will notice that I’ve omitted one very large
expense: taxes and fees. In the interest of keeping things at least somewhat
private, I’ve decided to leave that exact figure out, at least for now. I’ll
simply tell you it is less than the total of all my other expenses but not by
much. Plus, there is only so much one can do to limit that number when the
majority of your income is W2. I’ve been investing more of my time into improving
that situation and if I find success, I may post about it at a later date.
Anyway, here we go!
My Average Annual
Expenses Between 2017 and 2018
Auto maintenance/repairs: 1300 (500)
Cash donations: 2100 (subjective)
Clothing: 700 (100)
Food – groceries: 1700 (1200)
Food – restaurants: 500 (0)
Fun: 2100 (300)
Gas: 2800 (1200)
Gifts: 1200 (200)
Household expenses: 700 (300)
Housing: 12,600 (6000-10,000)
Insurance: 3000 (2000)
Medical: 900 (0)
Memberships: 300 (300)
Other: 2400 (0)
Supplements: 100 (0)
Technology services: 500 (350)
Utilities: 1100 (600)
Vacation: 300 (0)
Vehicle depreciation: 2100 (500)
Total: 36,400 (13,550-17,550)
How did I arrive at these numbers? And why the range in the housing
category for the minimalist budget? You’re just going to have to stay tuned to
I occasionally hang out with early retirement minded people. Some of them have already taken the plunge, some are thinking about it more and more as I am, and some are much earlier in their financial journeys but are intrigued by an alternative to the “work till you’re either dead or wish you were” program that has been the standard for far too long. Easily the most common question I hear being asked of the people who have already retired ten, twenty, or even thirty years before the traditional age, is “what about health insurance?”
And I admit that was one of my first questions as well. Most
people I’ve met answer this question in one of a few disappointing ways. Some
were able to negotiate some sort of arrangement with their final employers,
some have a spouse that is still working, and many are structuring their incomes
in such a way as to be eligible for subsidies on individual coverage under the
Affordable Care Act. None of these is workable for me. My current employer will
likely be neither willing, nor able, to make any deal with me, I don’t have a
spouse who can keep working so I can “retire,” and I can’t stomach exploiting
badly written legislation for personal gain – particularly not when I’m
currently paying a substantial share of the associated bill.
After I recently learned of some significant challenges my current employer is facing, which threaten not just my job and those of many of my colleagues, but the company itself as a going concern, I’ve been thinking a lot about my options. I could find a similar job at another company. Since I started my latest job search, there have certainly been some encouraging signs that this will be a viable option – although nothing has come to fruition just yet. But aside from maintaining the status quo as an employee/entrepreneur hybrid, I’ve been looking at other, more adventurous options. One common thread among many of them would be stepping out from under the umbrella of having an employer at all. And this has brought the health insurance question back to the forefront.
But as I’ve begun to explore the issue, I’ve actually been
very pleasantly surprised by what I’ve learned. It turns out individual health
insurance is both fairly straightforward and less expensive than I had
anticipated. I acknowledge that things would likely be different if I had dependents.
But at roughly $15k per child, per year, for as long as one is willing to keep
the financial umbilical cord intact, having children is one of the most expensive
financial decisions a person can make. That is one of several reasons I’ve
personally opted out.
Anyway, I searched around and Blue Cross Blue Shield appears to be king of individual health insurance in my neck of the woods. By simply entering my birth date, non-smoker status, and zip code, I was presented with a menu of options ranging from the most minimalist plan at roughly $320 per month to something approaching the top of the line plan I have now at nearly $700. I didn’t see an annual payment option but if one is offered with a decent discount, it would amount to an awesome churning opportunity. One nice thing that I believe came out of the ACA is that it appears all plans now cover the one annual preventative appointment we should all be going to. Of course, that is priced into the premiums. But I digress. Beyond that, as a relatively healthy young adult, I’m almost certain to spend somewhere in the $0-1500 range per year on health care expenses, meaning paying an extra $400 a month for a high end plan that would cover most of that doesn’t make sense. I will note that there are subsidies offered for people with surprisingly high income limits. Sadly, I’m in the group that pays handsomely for those subsidies to be offered, and don’t anticipate that changing, so I’m paying full freight for my own coverage no matter what. But your results may be different – particularly if you have kids. And as the birth rate continues to decline, it is very likely that we will all see the government using more mechanisms like this to force people like me to subsidize your procreation efforts. For what it’s worth, that will likely offset at least a portion of the additional costs you would face in areas like this.
Ultimately, my choice would be a plan that costs $332 per
month because it is the cheapest HSA eligible option. With a deductible of $6k,
an out of pocket limit of $6650, and no prescription coverage until the
deductible is met, I would almost definitely be paying all of my costs beyond
the annual preventative appointment. In most cases, I would probably not even
use the insurance, instead opting to negotiate directly with doctors since my
insurance would effectively cover nothing anyway. I’ve heard there is often significant
room on the pricing if you aren’t forcing the provider to deal with an
But this is where it becomes important to calculate things out for yourself. If you tend to spend a lot in health care costs, it may make sense for you to go with a plan with higher premiums but more coverage. One thing to consider is that it’s not necessarily the end of the world if a plan doesn’t offer prescription coverage (it can’t if it is HSA eligible). Thanks to a wonderful website called Good RX, anyone can pay much less than retail prices for prescriptions whether or not they have insurance. Don’t ask me what kind of sorcery makes it possible, but this can be an absolute godsend if you don’t have prescription coverage and yes, I did use it back when I worked for an employer that offered a very minimalist coverage option.
I’ve mentioned “HSA eligible” twice now. Why? HSA stands for
health savings account and it’s a hidden financial gem. Unlike an FSA, which is
garbage unless you have health care costs you can forecast very reliably, an HSA
is a tax advantaged account that can be built into quite an asset. To put it
simply, it is a miniature Roth IRA for health related expenses only. This year,
an individual can contribute $3500 into one. The money can be invested in
whatever you want, provided you’ve chosen a good provider, and as long as you
don’t spend it, it will grow tax free just like a Roth IRA. It does ultimately
have to be spent on health care expenses, but given the state of the industry,
I don’t believe any of us will have too much trouble accomplishing that. In
fact, remember that quarter million dollars the media is always screaming about
you having to pay for your health care expenses during your traditional
retirement years? Well, if you contribute the max to a Roth IRA for twenty or
thirty years and don’t use any until you retire, that is more or less covered –
without dipping into your other assets. As usual, a little knowledge can go a
long way towards putting out the fires of mainstream ignorance. The important
thing to keep in mind with HSAs is that only certain more minimalist health
insurance plans are eligible for them. If you have a lot of health care
expenses now, you may be better off with a “Cadillac” plan paired with an FSA.
No one can tell you definitively without specific information; I recommend that
you run your specific numbers yourself to figure it out.
But in my case, a disaster only health insurance plan and an
HSA are a home run combination. The only problem is that pesky “Cadillac” plan
I have now. But given that I’m kicking in well under $100 a month for it, and
that’s tax deductible by the way, it’s obviously the best option available to
me as long as I’m with my current employer. However, once that relationship runs
its course, likely by the end of this year, it’s nice to know I will have some
great options available to me and that they won’t be nearly the financial
disaster the media would have folks believing they are.
I wasn’t always where I am now with money. As a newly minted adult with a full time income that seemed substantial at the time, I thought the world was my oyster. I had zero respect for the value of the dollars in my possession. If I saw something I wanted, even a little bit, I bought first and asked questions later. If my friends and I were bored, dinner and/or drinks would solve the problem – maybe with a movie or a round of golf thrown in for good measure. And if I had a bad day, setting some money on fire for any reason, or even no reason at all, seemed to ease the pain. I probably wasted tens of thousands of dollars on almost literally nothing productive in just a year or two. Had I continued along that path, my financial life would be an unmitigated disaster today and I would have been part of the multitude of people who are woefully unprepared to retire in spite of living in the richest country in the history of the world.
Of course, this wasn’t healthy behavior and after I realized I had been working for a few years and had virtually nothing to show for it aside from some stuff that was mostly worth pennies on the dollar I had paid for it, I wised up pretty quickly. But as a relatively wealthy, still young adult, I’ve noticed that most people seem to have either missed that lesson or skipped it intentionally. Maybe they weren’t blessed (seriously) with the harsh reality of financial scarcity when they were kids like I was. Maybe they simply can’t bear to admit the truth about what they’re doing to themselves. Or maybe they simply prefer the bird in the hand of doing what is easy today to a much more prosperous future that isn’t 100% guaranteed, even if it is extremely likely. I really like the way my new Houston real estate mogul friend explained the concept in this post.
Whatever the reason, I see people driving their financial
cars with the e-brake on almost everywhere I look. I’ve long since learned not
to be “that guy” so I neither give unsolicited advice, nor ask any questions
that might lead anyone to the unpleasant experience of looking in the
figurative mirror. In my experience, if people want help, they ask for it and
if they don’t ask for it, they don’t want it. But I often have to stifle a
strong urge to try to help people anyway when I see them destroying their
financial futures because I know how much pain it will cause them in the long
Don’t get me wrong; I don’t consider myself even remotely
frugal and I hate everything about the term. There are very few aspects of my
life where I’ve chosen to spend the absolute minimum possible, or even close. I
live in a luxury apartment that costs more than double what a bare bones living
arrangement would. My car has leather seats, almost 300 horsepower, more electronics
than the spacecraft that took the first astronauts to the moon, flashy 18 inch
rims, and so much more; and I’m probably going to make a huge upgrade from that
in the next year or two. I eat and drink what I want, when I want, where I want.
If I wanted to take a vacation, there would be no practical limits to where I
could go or what I could do and given how difficult it is to find the time, I
wouldn’t be likely to waste the opportunity by going cheap. I could go on and
on but the point is that I’m in no way deprived of anything I could imagine
wanting in life.
So how am I different than my young adult self in the way I handle my money then? Aside from having tons more at my disposal, everything I do is intentional. Spending money is a means of accomplishing some specific purpose – not a pastime or a figurative drug I use to tamp down unpleasant emotions. If I get the notion to spend money, I think about it first. Is it necessary? If not, it’s a want, not a need. If it’s a want, is it something that will truly contribute to my life in a positive and meaningful way? If so, what, exactly, is my goal in spending this money? What is the best way to accomplish it? What is the most cost effective way? Where does it make sense to be on that spectrum in this particular context (between maximum utility and maximum cost efficiency)? Sometimes, I buy the best. Other times, I go with the cheapest option that accomplishes everything I want it to. On very, very rare occasions, I go with the absolute cheapest option. The important thing is that if I’m spending money, I know why I’m doing it and why I’m making the specific choices I am about it. And the good news is that while it may have seemed tedious when I was starting out, over time, this thought process has become almost automatic for me.
This may sound pretty obvious and to some of you, it
probably is. But there are tons of people out there who seem to have no clue
why they’re making the financial decisions they are. And there are tons of
people who are totally broke. And both groups are large enough that there is
almost definitely substantial overlap between the two. For anyone who resides
in both, you need to make some dramatic changes if you want to improve the
situation. Being intentional with your financial decisions, both large and
small, will almost definitely help. Not only will your finances improve, but
you will probably find yourself feeling calmer and happier. Have a wonderful
weekend, everyone! And if you’re in Houston, hopefully you either have a boat
or know someone who does – because that’s what it’s going to take to get very
far down the road pretty soon if this rain doesn’t let up.
Do you love paying taxes? Ok, stupid joke. But today I want to talk about a couple of great ways to pay a little less and help your future self out in the process. For those who ignore the almost nonstop reminders in the media, the United States has a massive retirement crisis in its not so distant future. It seems that in spite of this being the richest country in the history of mankind, nearly half of everyone living here HAS NOT SAVED A SINGLE FUCKING PENNY for retirement. Many of the people who have saved at least something are still woefully short of where they need to be. With obviously unsustainable pensions (otherwise known as defined benefit plans) mostly relegated to the history books, the criminals fine, upstanding people in charge realized they would have riots in the streets if they didn’t toss a little bread out to those pesky subjects citizens. And thus, some new tax advantaged retirement savings options were born. So far, they don’t seem to be helping much, but that’s why I and countless others are writing posts like this one. 401ks and Roth IRAs are the two most common tax advantaged retirement savings options and an overview of the basics of both is below.
Both of these offer tax breaks, but only to people wise
enough to take advantage of them. In my opinion, they should both be maxed out
if possible prior to investing in anything else excluding building an emergency
fund – which is actually saving, not investing. And yes, there are other types
of these but they are less common and I’m writing for a mass audience. And yes,
there are various tricks and loopholes that entire posts could be written on
but this particular post is just meant to be a general primer. Also, I am not a
tax professional and I don’t know the details of your situation so nothing in
this post constitutes specific tax advice. This is for information only. Here
are the basics.
Usually offered by an employer
Maximum contribution for 2019 is $19,000 + $6000
“catch up” for people 50 and older
Employers often match up to a certain percentage
of your income if you contribute at a required level
No phase outs but HCEs (highly compensated
employees) may potentially have their contributions limited
Contributions lower taxable income in the
current tax year
Distributions are taxed when taken
Cannot take distributions prior to age 59.5
without being taxed and charged a 10% penalty
Usually not offered by an employer
Maximum contribution for 2019 is $6000 + $1000
“catch up” for people 50 and older
Phase outs starting at $122k MAGI (modified adjusted
gross income) and completed by $137k for single filers, or $193k and 203k for
married filing jointly
Contributions are made using post tax dollars
Distributions are not taxed
Contributions can be withdrawn prior to 59.5 but
earnings withdrawn prior to 59.5 will be taxed and penalized except in specific
I think the easiest general concept to remember about the
difference between the two is this: 401ks are taxed on the back end, Roth IRAs
are taxed on the front. To get the maximum benefit, you need to contribute $25k
in 2019, assuming you are 49 or younger and not prevented from it by having a
very high income.
If you can’t max out both, I would do the following in most
cases. First, contribute whatever your employer requires to get the full match
that is offered. For example, if your employer matches 3% of your salary if you
contribute 6%, a fairly common setup, you would want to contribute 6% to avoid “leaving
money on the table.” From there, I would work towards maxing out the Roth IRA
unless you are phased out, in a high tax bracket, or have some reason to expect
your income is going to go down significantly in the future. If you can do
that, I would put any additional available money towards increasing your 401k
contribution percentage. Anything you can do is better than nothing and slow
progress is better than none. For example, you could start out contributing
whatever you are comfortable with and set up an automatic increase of 1% a year
on one or the other or both. If you get even a basic cost of living adjustment
at the end of the year, you won’t feel any pain because you will still be
getting a raise after taxes. This would particularly be the case if you’re
talking about a 401k since you would be lowering your taxable income by
increasing the contribution meaning the 1% increase wouldn’t cost you the full
Hopefully this will help some folks get a better idea of how
to handle these accounts. If anyone would like me to get into more detailed
subtopics on this, please let me know in the comments or send me an email at firstname.lastname@example.org. Have
a great day!
With this post we’ve reached a milestone on Health, Wealth, Power. By my count, this is post number 50. So far, readership has been going up steadily and that has been very exciting. To those of you who have been coming here for a while, I’m glad to have you along on this journey. To anyone who has started reading more recently, welcome. Today I want to highlight both some of my most viewed posts and some of my favorites that haven’t been seen as much – in many cases because I posted them before many people were reading the blog at all. Thank you to everyone for reading and here’s to the next 50 posts (and many more) to come!
A window into my raw thought process on a recent night when
I got some seemingly devastating news about my career. I wrote this almost
immediately when I got home so I would have a good record of my immediate
reaction to look back at later. I’m still in the midst of dealing with this
situation but I have a very exciting recent development that I’ll be sharing
This is one of my personal favorite posts so far. It is a
nostalgic look at the way the most difficult event of my life so far has
spawned so many wonderful changes. While I and my life will never be quite the
same as before it happened again, that is mostly a good thing.
Health and fitness is a topic that’s near and dear to my
heart. Medical science is keeping people alive longer and longer today. But
what is it worth? My argument is that we’ve long since passed the point where
quality is much more important (and elusive in many cases) than quantity. This
post is my attempt to lay out the basics for anyone who feels similarly and
wants to do something about it.
I’ve written a number of posts on this theme now – the value
of finding the positives in situations that don’t seem very positive at face
value. But this was one of the first. As someone who has put a ton of work into
thinking more positively and seen firsthand how dramatically that mentality
shift can change life in often unexpected ways, it is very important to me to
share my experiences in this area.
I wrote this post for people who struggle with depression or
have in the past. It’s not comprehensive and I’m no mental health professional,
but it’s a discussion of some tactics and information that have helped me in
the past when the weight of the world seemed to be crushing me with no sign of
relief. If it helps one person, it was worth far more than the time it took to
I’m trying to be less of a bastard in life. But I do tend to
temporarily suspend that effort when it comes to fighting back against what I
view as unethical tactics. In this post, I illustrate how I’ve been mostly
successful at keeping the shenanigans of those damn ISPs from succeeding in
robbing me blind.
Simply put, the methods I described in this post have saved
me five figures by this point in my life. One of the many benefits of living in
the richest country in the history of the world, particularly at a time when
technological advancement has been unprecedented as well, is that extremely
marginal compromises can result in enormous savings. There is an almost constant
chorus in the media about the retirement crisis in the United States. That
means that for most of us, there is no excuse for not taking advantage of
opportunities like this to get so much in return for so little.
If you had asked me to write this post ten years ago, I would have refused to do it since advising anyone to buy a new car would have been a huge disservice. Why buy new when that same car will cost a quarter less in a year and about half in four or five? However, since then, prices have skyrocketed (but so have incentives), people have largely caught on to both that trend and how generally undervalued used cars had been, and depreciation has slowed considerably as a result to the point that today, buying a new car makes sense in some, but still not all cases. But under no circumstances does it make sense to go in uninformed and let some car salesman hit a home run off of you. So let’s see what we can do about that. This is only one of many perspectives on the matter but it should at least give you a good start. The dealership model, much like that of credit cards, is set up to screw customers en masse. However, just as with credit cards, the rules of that exact same game can be turned around and exploited by a savvy customer as well. Let’s get you on your way to being one!
Much like in any sport, preparation is a huge part of
winning. Don’t ever go to a dealership without having done your homework. How
do you know if you’re ready? Before you ever step foot in a dealership, you
should know all of the following things: which make and model you want, the
differences between different model years if there are multiple new model years
available (for example, today you could buy a 2020, a 2019, or a 2018 in
certain cases) which options you want and don’t want, which packages you need
to buy or avoid in order to accomplish that, what those packages cost, the
average pricing (what people are actually paying) of any car you want, what
your current car is worth, and what the terms of your financing approval are.
Yes, that is a lot. It usually takes me a month or so, chipping away an hour or
two at a time.
There are tons of research sites available now. Edmunds.com
and KBB.com are two of the best and most venerable but countless competitors
have popped up in recent years. Most of the information you need is widely
available so the important thing isn’t so much where you choose to get yours as
that you get it somewhere and verify it somewhere else. I recommend working
through the process on multiple sites until you basically have everything
memorized. But don’t be afraid to make yourself a cheat sheet of key figures to
take with you. Your mind can do funny things in the heat of the moment.
Whatever you do, do not rely on a salesman to educate you about cars, pricing,
or especially finance. Why not? First, there is a very low barrier to entry in
the job and many of them are awful at it and incapable of doing so. By
educating yourself, you will ensure that weakness on the part of a salesman can
only get you a better deal and will cost you nothing. Second, information is
power, plain and simple. If the salesman knows more than you do about any of
the items I listed above, he has an advantage that he can capitalize on from
the word go all the way through the signing of a deal – and that’s going to
cost you thousands of dollars.
You also need to know about your end of the transaction
going in. KBB.com will give you a pretty good idea what your current car is
worth, especially if you cross reference craigslist, autotrader, etc to see
what cars like yours are actually being listed for. Pay attention to the type
of valuation you’re getting. Private party (if you sell the car yourself) is
almost certainly going to be higher than trade in. But know the difference
between these numbers because it will be important. Keep in mind that in most
states, you’re not going to pay sales tax on the trade in portion of the deal.
So weigh things out. For example, if your state charges 5% sales tax and your
car is worth $5k private party and $3800 as a trade, you would be better off by
$1010 if you sold it yourself ($3800 + 190 less tax liability = 3990, 5000 –
3990 = 1010). However, if the dealer ultimately ups his offer to $4800, and you
are confident in the $5000 figure, you are now better off trading ($4800 + 240
= 5040, 5000 – 5040 = -40). However, watch out for over allowance here. This is
when a dealer offers more than your trade is worth but then juices the hell out
of the sale price of the new car to more than make up for it. Remember, “there
is no free lunch.” And also keep in mind that selling a car usually involves
investing your time into dealing with at least some “interesting” people so you
have to decide what that is worth to you as well and factor it in.
Finally, there’s financing. Some hardliners will say you should
never finance a vehicle because it’s a depreciating asset. I would say that
technically they’re right in most cases, but that the declining pace of
depreciation and still nearly historically low interest rates have made things
a lot less definitive than they used to be. For example, I took a car loan in
2014 at a rate of 2.9%. Cash wasn’t worth that much at the time but investments
were worth a hell of a lot more. So since I was confident I would be able to
cashflow the loan for the life of the term, I feel I was making a pretty good
choice. I still recommend sticking to a 36 month term or shorter, just like I
would never advise anyone to take out a mortgage with a term over 15 years.
Why? The term becomes a limiting mechanism against both paying excessive interest
and buying more than you can afford. As long as you can cashflow the payments
at 36 months or less, you are pretty unlikely to get hurt. Are you dooming
yourself with a 60 month term on a car loan? No, but you are stretching
yourself thinner than I would prefer if you genuinely need a term that long to
afford the payments.
Whatever you do with the financing, do not make it into yet
another profit item for the dealership. Get your best approval option directly
from a lender prior to ever looking at any cars. Credit unions usually offer
the best rates. This part will involve a little more legwork but there are two
big payoffs. One, the dealership finance manager isn’t going to mark your
quoted rate up by a point (or three). And yes, if you don’t find the financing
for yourself, that is exactly what will happen. The exception would be when the
dealer or manufacturer gives you a subsidized rate. However, keep in mind that
in those cases, you can usually have either the subsidized rate or the
incentives on the car but not both and you are usually much better off taking
the incentives, which have ballooned more and more along with the pricing in
general. So you are always better off knowing what the best available
non-subsidized deal is at a minimum. Two, you will spend a lot less time in a
room with that same finance manager – and make no mistake, he is the smartest and
most ruthless guy on the payroll or they wouldn’t force almost every customer
to go through him before leaving with a new car. He is probably going to try to
push extended warranties and other bullshit whether you finance through him or
not, but if you take the financing out of his hands, you’ve taken away his best
weapon. He loves to say things like “we can give you all this additional
coverage and it will only cost you x per month” because it puts thousands of
dollars in his pocket without some people even realizing what he’s doing.
Before you walk into that office, remind yourself that the only way to walk out
without losing money is to say no repeatedly until the finance manager accepts
that you’re not a rube and gives up.
That brings me to another key point. Any time anyone tries
to talk about monthly payments, stop them in their tracks by telling them
you’ll be basing any and all decisions on the total sale price only. As a
finance guy, I can tell you that from your perspective as a customer, nothing
good can come from conversing in the language of monthly payments. If you are a
lion in an epic struggle for survival with a crocodile, this would be the part
of the program where the crocodile tries to pull you off of the river bank and
into the water, where you go from having a fighting chance to virtually none.
Don’t let it happen. Fight the enemy on your terms only. Negotiate on total
sale price only!
Now let’s get to that most fun part! What? Negotiating isn’t
fun for you? I get it. You’re a normal person and you don’t like awkward, high
pressure situations. But unless you want to donate at least a few thousand
dollars to some “no haggle” (in other words, “take the easy road and just pay
us a lot more”) dealership, this is a necessary evil. First off, shop at the
right time. There is no one best part of the year although there are several
good ones. Late summer is good because business tends to be slow and
dealerships are hungry. Different parts of fall and winter are good for a
variety of reasons. But by far the most important timing related factor is to
shop when it’s good for you. This means you have a functioning vehicle and are
under zero pressure to buy anything now. This is crucial because indifference
is your best weapon.
Only visit a
dealership if you are 100% ready and willing to drive away in the same vehicle
that got you there. I can’t stress this point enough. The heart of the
negotiation process is the power struggle. If a salesman (and by extension, the
finance manager, who you are actually negotiating with through the conduit of
the salesman) has any reason to believe you are not going to leave without
buying something, you are going to get soaked. This is not to say you can’t let
him think you’re serious about buying a car. But make sure he has no illusions
about you being unable or unwilling to walk away. Bottom line, if he gets you
to the point where you have to have his car, he wins. If you get him to the
point where he is ready to let you walk away, you win. And that is exactly the
metric I use to determine if I’ve pushed the deal to the limit.
The battle is usually going to rage for hours. Go in
mentally prepared. Like it or not, you’re in the game and if you want to win,
you have to want it more than your opponent. The salesman will use whatever his
favorite tactics are, often just lowbrow emotional manipulation, but the
structure is usually about the same; he first tries to build up the value of
the car and your desire for it. Ideally, he will succeed in making you feel
that this is not a negotiable situation and he’ll have you paying premium
prices for both the car and every bullshit add on that has ever been dreamed
up. But of course you don’t let that happen and say you want a lower price so
it goes into the negotiation phase. He goes to visit his manager, who coaches
him on his performance, talks to him about a sports team they both like, ogles
that hot new receptionist, whatever. This is a game, after all. But you can
play too. If the salesman is gone too long, you can smile as say something to
the effect of “if you’re gone that long again, I think I’ll go see what kind of
deal the guys across the street are offering while I’m waiting.” Bonus points
for a sarcastic wink at the end of it. The manager visits will usually yield a
few hundred dollars or so each on the total sale price – assuming you’ve been
smart enough to force the conversation to stay focused on it. Keep in mind that
they want to toss in other things – undercoating, extended warranties at
reduced prices, various subscription packages to all the tech bullshit the cars
are loaded with now, and anything else that costs them a fraction of what yet
another of those expensive price reductions will. Think of it like you’re
trying to dig a hole and every manager visit is another time pulling the shovel
up and dumping it. You want that shovel to be full of dirt every time or it’s
going to take you forever to get the job done.
The forever part is the dealership’s goal. The longer it
takes you to get them down on the total price, the more likely you are to just
give up and settle. Have fun with the process. Engage in whatever mental
warfare amuses you. The key is to send the message that you’re here for the
long haul and that doesn’t bother you in the slightest. If you do it right,
they may just give up and make a big cut in the hopes of convincing you it’s
their bottom line. But remember, my metric is whether the salesman will allow
me to leave. If he says something is the best he can do, thank him for the information,
tell him you will compare his numbers to some other dealerships you’re going to
be visiting (it helps if you know which competitors are nearby so you can
mention a name and make the threat more real), and act as though you’re
preparing to leave. Gauge the reaction. He may say “this offer is only good if
you sign now.” That’s bullshit. You can easily come back and renegotiate it
anytime you want – maybe even a better deal. Keep moving. He may say “let me go
talk to my manager and see if there is anything else I can do.” You’ve just
caught him lying since he already said it was the best he could do. The
negotiation phase isn’t over and you would have left money on the table if you
had believed what he said just moments ago. Or maybe, just maybe, he’ll have
nothing to say for the first time all day. If that’s the case, it means he
actually has done all he can do.
Now this doesn’t mean you immediately change your mind and
take the deal. Remember all that research you did? As part of that, you will
undoubtedly know what the average person is paying for this particular car.
Some sites even give you a range from low to high. So all this time, you will
have that in your back pocket and be well aware of whether or not what’s in
front of you is actually a good deal. So when the salesman bows his head in
apparent defeat, it’s time for you to make a decision. Are you at or near the
bottom of the range? Or below it? You should probably have a change of heart
about leaving and sign the deal. If you aren’t where you want to be, it’s
possible that this dealership is just particularly greedy and you’d get a
better deal elsewhere. You’d certainly be more effective at the negotiation
process with this one just recently under your belt.
One other fairly new phenomenon is the internet price. There
are sites where you can choose exactly the car you want down to the particular
trim, options, and even color. Use an email address you’re ok with getting
spammed at, of course, because the next step is that area dealers will spam you
with quotes. It will keep coming, and coming, and coming. But last time I tried
this, I noticed something interesting. Some of the dealers’ offers improved over
time. When I got one that looked almost too good to pass up, I went in. Of
course, I’m a crazy person, so I worked the whole negotiation process without
telling anyone I had the internet offer in my back pocket. When I got pretty
close to it and the salesman seemed unwilling to move any further, I pulled the
offer up on my phone and told him it had made me think it might be worth coming
in since it was “in the ballpark.” The salesman was pissed. But after one last
conference with his manager, he came back with a slightly better offer than the
internet one and an assurance that he would go no further. My leaving ploy
confirmed it and so did various websites.
So the internet price was pretty dynamite in that case as I
was only able to get a little bit lower through negotiating. And my final price
was almost off the chart in terms of the range of prices being paid on the
websites. But I never would have known that if I hadn’t verified it by working
to arrive at it another way. And just because that one internet price was good,
it’s no guarantee that any others are. Dealerships aren’t suddenly going to
stop wanting to make as much money as possible because the internet is here.
I’m sure they will continue to innovate.
I see by the word count that this has been a longer journey
than I had planned on. But I believe everything I’ve said has been necessary
and probably still didn’t cover absolutely everything. A successful car
negotiation often takes several hours (although I did have a very quick one
once) and although it may seem very straightforward at times, there is actually
a lot going on. I will leave you with two more general tips to keep in mind.
One, the salesman is only going to present options that benefit him. Don’t
assume they are the only ones that exist. Two, you are not in this to make
friends. The salesman and finance manager will most likely get very frustrated
if you are well prepared to get an extremely good deal and it may very well
come out in some sort of emotional response. In this narrow context, being
their friends means paying them thousands of dollars more than you have to. I
don’t know about you, but those are the kind of friends I can do without.
I don’t want anyone to get the wrong idea; I spend money, and plenty of it. But there are some key differences between how I spend that money and how most people do that allow me to live what I consider an upper middle class lifestyle for a lower middle class cost. One of these differences is that when I make a major purchase, I usually buy for the long term. I do a lot of research and I choose a high quality option I’m almost certain to love, both today and down the road. And then I take care of it so that I can keep it for a long time and it will stay in great condition. As a result, I’m able to own some very nice things while usually paying a lower overall cost than most people pay to own lower quality versions of them.
This is certainly my strategy with cars. It is not at all
uncommon for people to buy a new one every three to five years. But that is an
incredibly expensive form of vehicle ownership. For the last several years,
used car pricing has been so stubbornly strong that one can make a pretty good
case for buying new in many cases. I won’t argue with that and I’d be a
hypocrite if I did since that is the conclusion I came to when I bought my
current car – although even there I have some hacks – stay tuned. But
regardless of whether you buy new or used, it is pretty indisputable that in
general (there are certain exception situations), the longer you own your
average car, the lower your annual cost is going to be. I owned my last truck
for just over ten years and would probably still be driving it if I hadn’t
failed to save it from a tragic end at the hands of black ice. Thankfully, it
saved me in spite of this lack of consideration on my part. I walked away with
barely a scratch from an accident that would have rendered most of today’s cars
a pile of broken plastic, shattered glass, and twisted scrap metal. And in
fact, the truck was still driveable. Built Ford tough indeed. Anyway, I’ve had
my current car for almost five years now. However, and this is where it gets
exciting, my vehicles are usually in as good of shape, both visually and mechanically,
as just about anything else on the road and I almost never have any trouble
How do I manage this when so many people start having problems before their loan is even paid off? Step one is to do the research and buy a quality product. For example, if you buy a Dodge, I can’t help you; you’re almost certainly going to pay a fortune to keep it on the road and the body is going to start coming apart and rusting before the new car smell is gone. I believe phrases like “you can’t polish a turd” or “trying to put lipstick on a pig” apply well here. This post I did about the best and worst brands is a good place to start and I will likely write plenty more about the ins and outs of car buying before long since it is a process I enjoy very much.
But once you own a vehicle, it is crucial that you maintain
it properly. So today, at just over 60k miles, I spent a little over $400 on a
handful of services: a brake fluid flush, a transmission fluid change (note the
difference between the words “change” and “flush” here), new front brake pads,
and the resurfacing of my front rotors to go with those pads. Before my
minimalist, somewhat lazy new lifestyle, I would have done all of this myself
and spent around a quarter of that much on parts and fluids only. And if you
know how to work on cars or have an interest in learning, I highly recommend it
as an extremely profitable hobby. But the important thing is that you get this
stuff done, one way or another.
The day you buy your vehicle, I recommend you buy a repair
manual for it as well. Haynes and Chilton are good options and shouldn’t cost
more than $20-30, depending on the vehicle. If you spend even an hour or two
reading that manual, it will more than pay for itself in the form of knowledge
gained. And at a minimum, it will give you a comprehensive, realistic
maintenance schedule. Don’t rely on the dealer or even your owner’s manual for
this. The dealer will charge you substantially more than an independent shop
for work that is no better than what a quality independent shop will do. Please
note that I’m not talking about warranty/recall work here; that needs to go do
a dealer. As for the owner’s manual that comes with your car, well, many of
them now claim that transmission fluid is a “lifetime fluid.” Given that the
transmissions in most modern cars are extremely complicated pieces of machinery
that cost $5k or more to replace, I’m going to stick to changing the fluid at
traditional intervals, thank you very much.
What is the payoff for the $400 and change I spent today? My brake system is now working as well as the day I bought the car – potentially a matter of life and death when you live in close proximity to as many attempted murderers horrible drivers as I do. My transmission will continue shifting smoothly for some time to come and is much less likely to develop any problems – any of which would cost easily several times what it costs to do the maintenance I did today. And I can continue to drive hundreds of miles from home without worrying about whether I might wind up stranded somewhere. Simply put, any money you spend on competently performed, fairly priced preventative maintenance is going to be a good investment.
What other maintenance do I do on my cars? Oil changes are a
must. I am a big believer in Amsoil, ridiculously high price tag be damned. I
have never had a problem of any sort while using it and I am confident that if
I did, Amsoil is the kind of company that would stand behind its product. I
only use K&N performance engine air filters and cabin filters. Instead of
throwing them out, you clean/lube them and they will easily last the life of a
car. So the $80-100 investment pays for itself in five cleanings (or roughly
100k miles) at most and provides slightly better performance every day the
entire time you have the car. It is important to replace the coolant in your
car at proper intervals as well to keep the engine running optimally. If you
have a truck or an SUV, there is considerably more to be done – one of several reasons
I don’t have a truck right now.
As for keeping a car looking great year after year, my
program is pretty simple. I pay $20 a month for unlimited car washes at Mister
Car Wash, a high quality local option in Houston, and I run my car through
about once a week. These plans seem to be gaining popularity nationwide and can
make even more sense in a climate that attacks car finishes with a hellish
cocktail of snow, slush, salt, and more. But rather than opting for the more
expensive upgraded plan, which costs about double, I spend about a half hour
around once a month applying spray wax (any decent brand will do and it costs
no more than $5 for at least a few years’ worth) using basic microfiber cloths
(these are great to keep at home for other purposes as well since they are
reusable and do a better job than paper towels at all sorts of things). And
finally, I use those same microfiber cloths to apply Nu Finish, an awesome
polish product, once or twice a year. As a bonus, the waxing/polishing process
is a great way to routinely inspect every inch of your car for any potential
issues, which are almost always cheaper to address if they’re caught early. The
result? People often ask if my cars are new, even when they’re several years
They certainly look and run as if they were. But instead of
spending $5-10k a year on depreciation (yes, it is still an expense if it doesn’t
affect short term cash flow), I usually spend $1-3k and sometimes even less.
Over a lifetime, that will save me well over $100k compared to what the average
person does. And again, I still drive relatively nice cars. Right now I have
only one – a 2014 Hyundai Sonata 2.0T Limited, which offers 274 horsepower, a synthetic
leather interior, a backup camera, blind spot monitoring, heated seats, 18 inch
rims, and much more. And while it is still occasionally mistaken for being new,
it is actually better than that since Hyundai took a tragic step backwards with
the model in 2015 in both design and mechanical engineering (2 mpg city/0
highway gained in exchange for TWENTY NINE FUCKING HORSEPOWER lost to the tune
of a 1.5 second difference in 0-60 time? If that didn’t get some people fired –
or executed if it had been North Korea instead of South – it should have).
My next car is going to be a Lexus, more than likely a certain “radical” coupe that, with the aid of a few minor corrections modifications, puts out over 500 horsepower and sounds like an unstoppable monster from hell. I will probably buy one around five years old due to the way luxury cars depreciate but I will still probably keep it close to ten years and operate the same way I always have. With the combination of legendary Toyota reliability and proper maintenance working in my favor, I believe I will do just fine. If not, I will go back to buying premium versions of regular brands like I have in the past. Either way, I’m happily driving a good quality car with almost no problems and spending much less than average to do so. Everyone is obviously going to make different choices when it comes to cars. But if you take care of yours the way I take care of mine and keep it a while, you are going to get the same kind of results.
I want to do something a little different today. This is going to be a vindicating post, given another post I wrote not long ago, but there is a much more important purpose than my own vanity. I’m not just writing this stuff for the fun of it. There are real people out there getting hurt because they don’t know what they’re doing and I want to help reduce such scenarios. I get my news almost exclusively in written format and in particular, I read a lot of articles about business, finance, and economics. Yesterday I saw one that is relevant to something I think about often and I want to discuss it here.
In this astute, sobering article on CNBC, author Megan Leonhardt illustrates the regrets a healthy majority of millennial home buyers have with their purchases. She theorizes that the common thread in these regrets is the lack of financial understanding far too many people go into these transactions with and then goes into detail on some of the different varieties of disappointment that result. And of course, she’s correct. However, I’d like to take this topic a step further. History is absolutely littered with stories of uniformed marks being misled en masse into major financial transactions that aren’t in their best interests and ultimately paying the price. It’s a story as old as the barter system or the word “speculation.”
I believe this is one major example of the greatest threat
facing my generation: the menace of blindly following conventional wisdom that
developed under very different circumstances than those we live in today. In
this case, following the assurances of well meaning family members or desperate
real estate agents with everything to gain and nothing to lose, people are
buying incredibly overbuilt, overpriced houses they can’t afford in any
remotely practical definition of the word, since “renting is throwing your
money away.” When decent houses that reasonably met people’s needs were widely
available and cost one, or maybe two times a typical annual salary, I would
have been solidly in agreement. Today, the median house sells for roughly $250k
while the median household income has only recently risen to around $60k. As a
finance guy, I can tell you with the utmost confidence that the relationship
between these numbers is neither workable today, nor sustainable in the long
term, and that therefore, renting is not throwing money away, but paying more
than one would prefer in order to avoid a very likely financial catastrophe.
We are looking at a structural problem and mark my words,
something is going to give. It has to. Either the incomes of typical people
will rise or real estate prices will fall; and either change needs to be a
dramatic one if it’s going to bring the situation into a reasonable balance.
Adjusted for inflation, incomes have barely risen at all over the last few
decades. And given that the chief cause, technology/automation, is only going
to continue to progress exponentially, with the graph turning nearly completely
vertical very soon if it hasn’t done so already, I don’t see that trend
changing in any positive way. Another 2008 style housing apocalypse seems far
more likely, but I’m not even sure that would be enough to correct the
imbalance. When it happens, and I genuinely believe it will, the government
will have little choice but to step in and continue to paper over the problems
that have been festering just below the surface of the American dream narrative
for about as long as that dream has been viewed as a widely viable reality. It
has done so many times before and it will certainly do so again. But sadly, if
it is successful, it will probably only continue to propagate our current norm,
in which far too many people live on the very brink of ruin and deal with the
stress of that knowledge every minute of every day. Millions of people are (barely, in many cases)
holding wildly overvalued, impractical assets and precious few of them are sufficiently
capitalized to remain solvent when that overvaluation becomes readily apparent.
Even if you accept the values of these houses for what they
are, the amount of living space per person has ballooned to absurd proportions.
The average household of 2.5 people does not need a house anywhere close to the
2600 square foot average size of the behemoths that were built last year, nor
even half that. We’re talking about numbers that have not been observed on a
large scale at any point in human history. So we’re either looking at mass
overvaluation or the mass existence of ridiculous overproduction that would be
virtually impossible to divide up in order to “right size” it. After all, they
can’t exactly start dividing these monster houses into two or three units each.
Either way, my money is on some serious, widespread attrition.
The good news is that clearly I’m not the only one seeing
this. The article I cited above starts out talking about how millennials are
buying fewer houses than previous generations were at the same ages. Whether
it’s because they see what I see, they’re being held back by financial
constraints, or perhaps they just have an uneasy feeling they can’t quite place,
many members of my generation are making the right choice and staying on the
sidelines until further notice. What about you? If you’ve already bought
something and feel overextended, which is what many of the regrets in the
article boil down to, your options are to sell quickly while you can still get
good value out, assuming you are in a position to, or to buckle up and attempt
to hold on through whatever form the ugliness on the horizon takes when it gets
here. If you’re taken down by another mass foreclosure event, the silver lining
is that assuming you become insolvent, you will at least be free of that brick
and mortar anchor you are currently chained to and you will be in good company
as you work to rebuild your financial life. But if you haven’t bought anything
yet, be thankful. Whatever has led you to the position you’re in today, I
believe it has saved you from one hell of an ass kicking.
I would argue that another example of this unsustainable,
blind following of conventional wisdom that is no longer relevant to current
circumstances trend, is the constant pressure (often from the aspirational
grandmothers, bless their hearts) to have kids very few people can reasonably
afford. We’re talking about a quarter of a million dollars for one – likely a
low end estimate once a couple decades’ worth of inflation are factored in –
paid for by people who can barely keep their heads above water as it is in
literally the majority of cases. And how many people have just one?!? But that
is another post for another day. As a quick spoiler alert, however, if you are
not a member of a stable, long term household with a sustainable income of $70k,
or preferably considerably more, and you have not had comprehensive, realistic
discussions about how you will handle this drastic, life altering change of
circumstances, you’re making a dire error. For now, just remember this: if
something feels off, it very well might be. In spite of what your family, the
media, salespeople, or anyone else might tell you, there are very few times in
life when you will lose out by taking a little more time to make sure you’ve
done your diligence and feel comfortable before making a major decision. Do not
let someone else, who will not be paying the consequences, put you in a
position you don’t understand or are not fully, diligently prepared to take.
This is your life. Take it seriously and your results will be much easier to
You’ve probably seen some of the articles talking about
people screaming and stomping their feet because their tax refunds are smaller
this year. There have been plenty of them. Unfortunately, a lot of people
simply don’t understand how the federal tax system works and the mainstream
media, which makes its money by fanning up any potential controversy into a
firestorm, is all too happy to spread the ignorance around as usual rather than
doing the responsible thing and explaining the reality of the situation. So I
guess it falls on my shoulders to put out their fire by spraying it with facts.
This is not a political post. My goal is not to change anyone’s opinion about
the tax reform package that took effect in 2018. I just want to do my part to
combat the apparently widespread ignorance.
Let’s say you go to the store and buy a candy bar for $.75.
You pay with a $1 bill and the cashier hands you a quarter. Did you just gain
25 cents? No, you simply overpaid and got the change you had coming to you.
That is exactly what happens when you file your tax return. In the case of most
people, your employer has been withholding a portion of your pay all year. The
tax return is a reconciliation. It determines how much you were legally obligated
to pay, compares that to the amount you actually did pay, and either gives you
your “change” in the form of a refund if you paid too much, or demands that you
pay more if you paid too little. You are not gaining or losing anything except
cash flow. And if you’re getting a refund, it’s technically bad news since it
means you gave the government an interest free loan for an entire year. If you
don’t know why that is a bad thing, google “time value of money” and get ready
for the most important lesson you’ve learned in a while. Simply put, it’s how
people like me use our money to create more money. It is also how people who
don’t understand the principle fall further and further behind. Ignorance does
not exempt anyone.
In 2018, most people actually paid less in taxes than in
previous years, assuming important factors like income, dependents, etc didn’t
change. The main category of people who paid more are people who itemized previously.
Roughly 30% did so for the 2017 tax year and that number is expected to drop by
about half for 2018. This is because the standard deduction, the alternative
mechanism to itemizing, was increased at the same time as certain deductions
were limited. But the important point here is that most people paid less.
However, most payroll software (and most employers use the
same handful of payroll vendors) updated to account for the changes in 2018.
Almost everyone who was getting a tax cut got it spread out over every paycheck
– just as they would have if they had gotten a pay raise. It wasn’t a lot; for
most people, it was $500 or less over the course of the year. If you’re high
income, then it was probably more but also a proportionally small amount. A lot
of people probably didn’t even notice their paychecks were $10 or $20 higher.
Unfortunately, some of the payroll software was a little more optimistic than
it had been in previous years and as a result, many people’s 2018 refunds got
smaller. However, this simply means that instead of getting their interest free
loans back a few months into the following year, they simply never made them in
the first place or made smaller ones. In actual financial terms, that’s a gain.
So why all the howling if the majority of people are paying
less in taxes? First off, as I already mentioned, there are a lot of people who
don’t understand the situation. And it doesn’t help when the media has no
interest in doing anything but amplifying that effect. But aside from ignorance,
most people are negligent with their finances. They save little or nothing
throughout the year and as a result, their tax refunds are found money in their
eyes – and usually found money they’re mentally counting on. This is why car
dealerships, furniture stores, and tons of other businesses tend to have tax
refund themed sales around this time of year; it is the only time a lot of people
will have any money in hand. If you’re in this group, it’s time for some tough
love. You’re put yourself in a difficult position and I encourage you to take a
good, honest look at what you’re doing with your money. If you don’t know how
to do that, ask a wealthy person you know to do it for you and give you some
tips. Or email me at email@example.com.
Everyone has to start somewhere and I will be happy to help anyone who is
serious about improving.
There are people who legitimately paid higher taxes in 2018
but a lot of the people who are complaining about their refunds are not in this
camp. For anyone a tax refund is a big deal to, I encourage you to use this as
a wake up call. Keep reading this blog and others like it. Evaluate the way you
handle your money and make changes. Even little ones will make a big difference
if you’re in rough shape, just like how people who don’t exercise regularly
will typically get huge results from just getting started in the gym. Turn a
negative into a positive. I’m here willing to help and there are a lot of
others like me. But at the end of the day, all the information and advice in
the world won’t do an ounce of good if you aren’t honest with yourself and/or
don’t make the necessary changes. But regardless of what you do, please stop complaining,
particularly when the thing you’re complaining about actually benefited you. It’s
not a good look.