Friday, February 26, 2016

How much do I charge? Let’s see what you drive first

Not many of my co-workers live nearby, so it was nice when I met one guy from work who lives in the next neighborhood over. We both moved to the area from out of state about 3 years ago and we've frequently shared tips about things around town we discover. We swap restaurant recommendations, hardware store suggestions, and even suggestions on which routes to take to work.

Earlier this week, he came to me and had a horror story to share about an oil change place in town that he went to with his wife's car over the weekend. He normally changes his own oil but in this instance was in a hurry, so he went to a national chain oil change shop. When he got there, he told them he's just looking for the most basic oil change and they had him go inside and sit down and then shortly came to him and gave him the rundown of what they were going to do. They told him that his car required a full synthetic oil and that the oil change was going to be $129.99! Of course by the time they told him that, they were already draining his oil so he couldn't leave and try to find a cheaper place.

They went back to work on the car and left my friend in the waiting room. He had never changed the oil on this particular car before, but knew enough to realize that $129.99 didn't sound quite right. While they were doing the work, he hopped on the free Wi-Fi and in a few minutes found that his car did NOT in fact require what they were telling him was a requirement. He quickly got the attention of the person that had been helping him to discuss the discrepancy and was told that "Oh well, it may not be required, but we recommend it." And of course, an oil change doesn't take that long so they had already put the new oil in the car.

Long story short, they went back and forth about him feeling misled and they ended up charging him the price he would have paid if they had done what he originally asked them to do instead of the much more expensive service they actually did under the guise of it being 'required'.
So my friend tells me the story and the name of the shop so that I never get ripped off. I appreciated the tip but told him that I had actually been to that exact shop previously, and had a completely different experience.

It didn't take long for me to realize why our experiences were so different. Care to guess what I drive and what he was driving?

Yep, that 11 year old Corolla pushing 200k miles would be me (although mine could use a carwash…). My friend was driving a $50k Lexus that was bought brand new less than a year ago.
It shouldn't happen that businesses try to take advantage of people who look like they have more money, but clearly it does happen often, and not just at oil change shops. I've seen subcontractors set their base rate based on how nice your neighborhood is and how much they think you can afford. I've seen cell phone kiosk shops not put price labels on cell phone accessories so they can charge a higher price to someone who pulls out a corporate Amex card since they are more likely to buy it at any cost. Most car dealerships these days will have their inventory and prices online, but when you go to the lot the prices are either not on the vehicle or are higher than the online price.
Even though this may feel a bit shady, it is completely legal to charge different prices to different people for the same product or service, and companies spend a lot of time and money trying to figure out how to make sure you pay the most you can for whatever it is you're buying.
So how can we avoid being a victim of this 'price discrimination'?

Driving a crappy car generally may send a signal that you don't have a lot of money to spare, but you probably don't want to do it forever.

Likewise, living in an inexpensive neighborhood would likely avoid any 'fancy neighborhood' markup, but this isn't really an option if you ever want to live in a nicer part of town.

Maybe you do like a friends' grandpa who, when shopping for used cars, would take out his dentures, wear old clothes, and borrow a beater car so that he showed up at the dealership looking broke when in reality he planned to pay cash for a car. That could work, but I probably wouldn't do it even for a one-time purchase.

In some other countries, I have friends who will send local friends shopping for them since the 'English speaking price' is so much higher than the 'Local language price', and even if you know the local price you can't haggle down to it if you don't speak the language. I really like this one, but it doesn't really apply since I live in the U.S.

All of these may sound good but what really is going to work comes down to the basics of being an informed consumer. Don't forget to shop around and get multiple price bids, especially for larger ticket items. Evaluate your alternatives and substitutes. Be willing to walk away and wait for a later time to buy. Call ahead to get a quote. Do your research enough so that, like my friend did, you can tell when something doesn't seem quite right.

So if you do decide to buy that fancy car, be ready to be treated differently. And not always in a good way.

Wednesday, February 17, 2016

The Joys(?) of Homeownership – Part 2a

Blank Slate

In the early part of 2008, we sold our first home and narrowly escaped being one of the millions of Americans who couldn't afford to sell their underwater house. We found ourselves living in a crappy apartment across the country with a completely blank slate. Our plan from the outset of our move was to rent as cheaply as we could to reduce the financial burden of paying rent and a mortgage and to buy another house as soon as we sold our first home, which ended up being just about three months after the cross-country move. I was planning to start my MBA part-time later that year and we anticipated being in the area for 5 years or so.

Looking back, I find it almost comical that even though we barely avoided losing tens of thousands of dollars in value on our first home we still had a mild case of house fever. In our new city, housing was much less expensive and even though my wife hadn't yet found a new job to fully replace her previous income, we found that we could still qualify for way more house than we really felt we needed.

We began looking at housing in the $150-200k range and found several homes in our price range, but most of them had long laundry lists of things to fix to get the house to be what we wanted.

Along those lines, am I the only one who hates watching people on HGTV shows walk through houses making crazy comments like 'oh, that whole kitchen just has to go', or 'blech, this is a complete teardown' even though the house they are looking at is already at the top of their max budget? I hope that we weren't that obnoxious when we were going through houses, but what differentiated us from most other people is that we had a budget where our max price included the purchase price plus desired upgrades. Also, unlike most people, we were willing and able to do home improvement projects ourselves. I've seen many instances where people buy houses with the intention of doing all sorts of projects but end up just settling for what they originally purchased because of the expense and difficulty of dealing with renovations. Not here.

We quickly realized that, for about the same price as many of the houses we were looking at, we could build a brand new house exactly the way we wanted. We came across a neighborhood that was mostly developed but still had a few lots left and within the next few days signed a contract to have a new home built. The entire process would take about 6 months, time that we needed in order to build up a down payment since we didn't have much to show from the last house we had sold. Some of the mistakes we made in buying our first home were not repeated, but we still made mistakes.

Lessons Learned

Know the Neighborhood

When we decided to build our house, we had only lived in the state for a few short months and naturally didn't know the area extremely well. I'm not sure it would have changed our decision to build where we did, but there were a few things about the neighborhood I felt dumb for not considering. Since we didn't have kids yet, we didn't consider school districts. Only after we had lived in the house for a while did we realize how bad the schools were that our neighborhood was assigned to (I'm talking really bad – the school actually lost their accreditation). Again, it didn't affect us immediately, but certainly had an impact on the property value and may have made it slightly harder to sell. I also would have liked to have noticed how close we were to another neighborhood that had high crime rates (the road leading to the neighborhood entrance we used was beautifully rural, not so on the other side).

Know what you can afford

We ended up paying $168,000 for this house and had saved up enough for a 10% down payment by the time we closed. Our household income wasn't quite as high as it was before we moved, but our mortgage payment was easily manageable at between 15-20% of our take home pay. This was especially important because the whole reason for the move was for me to go back to grad school. We had developed a plan to go through school without any student loans, something that would have been impossible had we borrowed as much as banks told us we could 'afford' on a new home. It's been said that you can afford anything, but you can't afford everything. This was just one of several instances where we had to prioritize and chose to spend less on housing to avoid debt for education.

Know what your neighbors can afford

How do you know what your neighbors can afford? A friend once told me that his rule of thumb is that in any neighborhood, 1/3 of the residents can easily afford their home, 1/3 of the residents are treading water, and the last 1/3 truly can't afford their homes. In our neighborhood, I think the numbers were more like 10%, 50%, and 40%.

I haven't come up with a surefire way to tell how a neighborhood rates on this metric, but one of my hypotheses is that when it's easy for basically anyone with a pulse to qualify for a mortgage, neighborhoods with a higher percentage of first-time home buyers are more likely to have homeowners that are in over their heads. When too many homeowners are in over their heads, HOA dues don't get paid, more houses get foreclosed, and more short-sales occur. Since people don't have as much money to upkeep and upgrade their homes, the entire neighborhood can lose its 'curb appeal'.

Shop for Insurance

I'll never know if we had a good rate or not for our homeowners insurance because we simply went with the insurance provider the homebuilder partnered with. I had never heard of the company before or since having a policy with them, and because they were paid from our escrow account I never had to write them a check. If nothing else, I'm sure we missed out on some savings by not bundling our homeowners insurance with auto insurance. Insurance companies tend to get more policies renewed when they are automatically paid, and I am proof of this. We have since learned and now shop around for insurance periodically to make sure our rate is competitive.

Negotiate and Investigate

A mistake we made with our first house was that we didn't negotiate on price very hard at all. When building a new house, it felt like buying something at a store where there is a price tag. I'm not the type to haggle at Wal-Mart or Home Depot, and adopted a similar approach with the home builder. Strike 2.

Even though we may not have been master hagglers on the total price, we did recognize that where builders really make their money is on options and upgrades. Since we know how to do most things around the house, we were able to analyze and evaluate each option we were considering and only have the builder include the ones we wanted that we couldn't do ourselves for cheaper. For example, our house came with a fireplace but if we wanted a nicer (still mediocre) mantle the builder wanted an extra $800. Instead we took the basic fireplace built into the price and spent $100 on trim and a few hours later had an even nicer mantle than what the builder would have done. Other things saved us even more, like building our own deck and putting in our own yard. Things we did have them do were things like electrical upgrades, sub-plumbing for a basement bathroom, and a higher efficiency heater.

Home sweet home, for a time.

Looking back, I think we can all agree that buying our first house was a mistake. We knew we weren't going to be there for a while, and we really weren't ready for it financially. As for our second house, I'm still undecided. We learned a lot and enjoyed it while we were there, but it wasn't exactly a stellar investment. I'll discuss later selling this house and buying our next (and current) home and you can judge for yourself. We've learned from our successes and failures, and hopefully you can too.

Sunday, February 7, 2016

Book Review – Piggybanking

1 star
Image result for jeff opdyke piggybanking

Sorry Jeff Opdyke, I didn't like your book. I hesitated on whether to review it here at all since I don't recommend it, but figured I would write this up to hopefully save some readers from wasting a few hours and subjecting themselves to some pretty poor advice. It's been on my 'to-read' list for a few years and I finally picked it up from the library since I've been looking for more ideas on things to teach kids about money.

Overall, I felt that the book was well written and that the author's intentions were good, but following the teachings in this book will really help readers and their children achieve financial mediocrity. Sure, I guess financial mediocrity is better than being destitute and impoverished, but I'd like to aim higher.

This book spends an inordinate amount of time focusing on teaching kids how to build credit, borrow money, and pay interest. Little, if any, talk is given to teach your kids how to save up and pay cash for big purchases, avoid paying interest, and develop other habits of wealthy individuals. In fact, he even proposes loaning your children money at high interest rates with the idea that it will teach them to not borrow. It is my belief that what this actually teaches kids is that there is no need to wait to get what they want. Even at high interest rates, they still have the thing now.

All of this was largely excusable, but what turned this from "this book is ok, even though I won't really follow the advice" to "are you kidding me, what is this guy thinking?" was when he recommended buying a whole life insurance policy for your kids as a way to build up cash value. This is wrong on sooooo many levels. Anyone who spends 10 minutes comparing whole life insurance to other investments will tell you what a terrible investment it is (some examples are here, here, and here). That is, anyone besides the people who sell it. Buying whole life insurance is a bad idea for you or for your kids and I'm proud to say that in 10 years of holding a life insurance license, I never once sold a whole life policy. You will be much better off if you remember that Investments are not insurance, and insurance is not an investment. Mixing the two will result in below average performance.

If I wasn't clear, I don't recommend this book. I have a few others on this same topic that I should get to soon and hopefully they are better.

Tuesday, February 2, 2016

January 2016 Net Worth update

It's hard to believe that another month has already ended. January was a bit of a roller coaster for the stock market, but we continued plugging along towards our Net Worth goals by socking away $1,200 towards retirement accounts and paying extra on our mortgage.
Even with adding $1,200 to investments accounts our investments went down by $7,800 and our total net worth went down by $5,925. We're still over the $500,000 mark, but cutting it close. In February we're expecting a nice bonus and a tax refund, which will help towards our annual goals, but a lot still depends on the stock market. As you may expect, we also have some home improvement projects planned and are striving to find the right balance between investing, saving, and spending.

The market had a rough start to the month and has only recently posted some strong daily gains. In fact, as I was leaving the office on Friday one of the TV's was tuned to CNBC and they had a headline that read something to the effect of "Safe to get back into stocks?" OH, BROTHER. I know that somewhere out there someone sold out of all their stocks at the mid-January lows, and already could be thinking about getting back in, having missed several percentage points of gains since selling. This is the exact behavior successful investors avoid, but it inevitably happens when you have people turning to financial news channels looking for advice and those same news channels cater to viewers by providing 'actionable' news. If the news channels really showed you how to build wealth, the ratings would be terrible because it is so boring.

Our trading activity in January was limited to one small transaction where I moved some money into the stock market that had been sitting in some bond funds that hadn't gone down like the overall market. I am working on transitioning our assets entirely out of bonds in line with the philosophy outlined in Simple Wealth, Inevitable Wealth, and the recent stock market decline provided an opportunity and reminder to do so.

With that little rant out of the way here's where we stand in the net worth department:

Our cash balance went down slightly as we had some large expenses, such as our auto insurance, which we pay in full every six months. We've always paid a bit extra on our mortgage, but beginning in January we have increased the amount of additional principal payment we'll be making. We've wrapped up our taxes and anticipate receiving a refund in February that will help replenish our cash reserves, but will also be used for investing.

Going forward, I plan to update my net worth more frequently and to use this as an opportunity to discuss some of the other financial decisions we make throughout the month.