Issue time 8:22 am, by CTreit
Category:Budget and Expenses, setting up a budget
Do renters really save money in the end?
August 20th, 2010The news is out. Homeowners spend more money on their living quarters than renters do. They spend $1000 in monthly housing costs in 2009 compared with $808 for renters according to a new study by the US Census Bureau. So, renters save money – almost $200 per month or $2400 per year. You would think that these savings mean renting is more frugal than buying. But we have to look a little deeper to see what is really going on.
While homeowners spend more on housing, they end up spending less on housing as a percentage of income (20%) than renters do (31%). In other words, on average homeowners can afford owning their homes much easier than renters can afford their rented places. Think about this in real money terms. If $808 represents 31% of your income, you get to spend about $1800 of your monthly income on things other than housing. Using these average numbers, we’d calculate that a homeowner has another $4000 to spend (or to save), which is twice as much as the renter. In which position would you rather be?
This survey tells us that homeowners tend to be in a better financial position than renters. It does not even include any appreciation in home prices, which could potentially add to the wealth of homeowners. It does sound like a ludicrous idea right now since the bottom fell out of the housing market recently, but I’ve got the funny feeling that house prices might be a bit higher in 25 years than they are today.
Other bloggers have discussed this issue recently.
Jeff Rose ponders “Rent Vs. Owning” where he lists a few situations in which it makes sense to rent rather than to buy.
Hank makes his readers aware of the hidden cost of homeownership in his two posts, “Look At The Numbers When Comparing Renting Vs. Buying A Home,” and in “Sneaky Costs That Can Bite The First Time Home Buyer.”
Kyle wonders whether you really can afford to buy a home in “Can You Afford To Buy A New Home?”
Trina recounts her experience with the real estate market in a guest post at “Punch Debt In The Face.”
We are happy to report that our post “How to Eliminate Debt with an Upside Down Mortgage” was included in the Carnival of Personal Finance hosted by “Live Real, Now”.
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Issue time 1:11 pm, by CTreit
Category:Budget and Expenses, setting up a budget
Save Money with 2 Rules to Negotiate for a Good Bargain
August 18th, 2010If you’re in a situation where you are able to negotiate the price of a purchase, you should take advantage of the negotiating opportunity and save money. Usually, you can negotiate on higher priced items like cars and some services like home improvements – some people don’t bother, but I hope you’re aware that it’s possible!
Things get a little complicated when the thing you want to buy has no clearly specified market price, like services you need for the house. For example, you would not want a contractor use bad materials and do shoddy work at your house because you made him agree to a price too low to make the job worth his time. But when you buy a car, or appliances – things for which the quality does not change once you decide exactly what model you want – you want to negotiate, no, you want to negotiate HARD to get the right price.
To negotiate, there are two important rules to follow.
ONE: Do your research in advance. Find out what exact model with what kind of add-ons you want to buy and how the store derives at the retail price it expects you to pay for the car. You want to know the answers to questions like these: What are the dealer mark-ups? What are volume incentives for the dealer? What prices can you find in advertisements or on the Internet? Are there any specials or coupons out there? (One place to start? ConsumerReports.org has car reports available for purchase. They can tell you an awful lot about the model you’re seeking.) Once you have a good idea how a product is priced, set a price you are willing to pay. I usually take a price that I believe allows the dealer and the sales person to make some money, too. I don’t want to be ruthless; I just want to get a good and “fair” price.
TWO: Adopt the right mindset that allows you to walk away. When you start talking to the dealer, make sure that you hint that you can live without this particular car – but you have to mean it! There are so many models and brands out there, I am sure that more than one car fulfills you needs. Even if that’s not true, know that there are a bazillion dealers – so you can get the same car from some other guy/gal! If you are willing to walk away from a deal, you automatically get the stronger bargaining position. Remember that your counterpart, the car dealer, has more incentive to sell you the car since his purpose in life is to sell cars. You, on the other hand, don’t need to buy one particular car if the price is not right – there are plenty of cars in the US of A, and plenty of car dealers. Do this right and the dealer will be more willing to lower the price than you will be willing to raise yours.
Here’s a real-life anecdote that provides further illustration. When we bought our last car, we had to go to three different dealers until we got the price we wanted. Yes, you read it right. My wife and I researched how much this hunk of metal cost to build and how much the dealer markup should be, and before I walked in his door I had a number in my head of what a fair price should be. Using this method, I built up a little history of walking away from quite a few cars that I wanted to get because I could not find a dealer who would agree with my fair price. Guess what? I don’t think my life has taken a turn for the worse just because I have not bought certain cars. I have always gotten over it and I have always found a very good substitute. And I never ever went over my fair price. The lucky guy who knew I meant business (hey, I was honest after all, and I was honest right from the start) was the one who made the sale.
One last thing, when you do get a good price, don’t give it all back by buying into all kinds of silly after-sale deals! Undercarriage protection, extended warranty, special tire treatment, etc. – all these things don’t do you any good. They only let the dealer take away from you some of the money you just negotiated away from him!
Good luck!
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Issue time 12:14 pm, by admin
Category:personal finance
Net Worth Calculator: Case Study
August 13th, 2010Every week we will feature a modified case study of a member of MoneyObedience.com – a virtual finance coach. (Even though all members of MoneyObedience are anonymous anyway, in these essays we modify the data a little bit to further protect the privacy of members.) This week we present the net worth analysis of a user who wants to get his personal finances under control. Keep in mind that all reports are automatically generated and fine-tuned to a user’s personal circumstances by a net worth calculator. The reports we publish on this blog are all in plain English (not laden with numbers) because MoneyObedience.com is designed that way. We developed it to help users who are not very comfortable with numbers or personal finance topics.
Hope is a 27-year old married woman with a one-year old baby. She and her husband have a monthly net income of $3,730.
Their asstes:
Home: $125,000
Retirement Savings: $22,000
Cash: $1,500
Investments: $3,500
Their debts:
Mortgage: $96,000
Car Loan: $17,000
Student Loan: $5,500
Credit Card: $4,500
Below is the net worth analysis she gets from MoneyObedience.com, in the form of a personalized letter, with bullet points of the important issues summarized right at the top.
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- You have accumulated a net worth of $46,000
- I suggest that you keep $17,000 to $20,400 in emergency cash available.
- Your total debt in relation to your total assets is not quite at a level that would give one comfort, since you carry a bit of debt relative to the size of your assets
- You are on the right track
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Dear Hope,
In this report you will get an overview of your net worth, which is the sum total of all the assets and debts you have acquired so far in your life. Calculating your net worth is an important exercise, since having this knowledge is crucial if you are to know where you stand financially right now. From this starting point you can then decide where you want to go financially and what financial goals you want to pursue.
Now let’s dig right in and take a look at the overall picture of your financial assets and liabilities. Your total assets amount to $169,000 and your total liabilities amount to $123,000. So you have accumulated a net worth of $46,000. Congratulations on accumulating that much wealth — this is a very commendable achievement at your age! Very well done!
Given how your work and family life defines your financial situation, I suggest that you keep $17,000 to $20,400 in cash available. You have $1,800 in cash available — that is in cash, savings, and money market accounts. This is less than the suggested amount of cash available. Make an effort to add more money to your financial emergency money. You are already recording your expenses on MoneyObedience.com. This will help you save money not only to establish a good emergency cash balance but also to realize some of your financial goals.
Your mix of assets is mostly within a normal range. Your real estate may represent a fairly large portion of your net worth, but that is the case with most people. So you don’t have to worry much about your mix of assets. You may still want to check in the asset allocation report to get an idea how much of your money you might actually want to keep in various asset classes.L
Let’s take a look at how your assets stack up against your liabilities. Your total debt in relation to your total assets is not quite at a level that would give one comfort, since you carry a bit of debt relative to the size of your assets. As a risk-averse person you would probably feel better if you could lower your debt balances. Looking at your net worth, your financial situation looks fine. So far you have been able to utilize debt to build assets and net worth. This strategy is one possible way to build your net worth, but please exercise caution when assuming high debt to build assets. In the long run an asset’s value can vary, possibly even decrease, while the debt you accrue will still have to be paid in full.
You are on the right track. I don’t have any suggestions on how you can improve your net worth. I enjoyed analyzing your net worth and your good performance. “Keep up the good work!”
This completes your net worth analysis. I suggest that you keep updating your personal information, doing so annually. With each annual update I can run your net worth analysis again and I can again compare your new data with this current data to check on your progress.
Meanwhile I wish you all the best!
Yours,
M.O.
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What do you think about this new worth report?
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