Plan These 6 Steps To Get a Good Deal On a New Car

I recently bought a new car and the process was downright enjoyable compared to yesteryear – because I was prepared. In contrast, I have a distinct memory of Lisa and me buying a Honda Civic about a quarter century ago and negotiating – and walking out of the dealership twice – for about 5 hours until we finally struck a deal. When we were signing our young lives away the dealership manager brought me an umbrella as a nice gesture. I told him, “If I’d known there was an umbrella in the deal, I would’ve signed a long time ago.” Well, if looks could kill this blog would have to be ghost-written.

Today, buying a car can be quite simple with much less stress – if you do your homework ahead of time. Here is what I did and my suggestions for how to prepare yourself.

Plan Your Budget

As always, plan to continue “paying yourself first” by saving the amount from your financial plan into your workplace retirement account – 401(k), 403(b), etc. After that, what amount can you afford to pay per month? Let me be quite clear, you don’t want to negotiate with the dealer based on what your monthly payment will be, but it is important for YOU to know what you can afford within your budget.

Research Vehicles and Features

I am proud to say we have never owned a minivan. Because, of course, I am WAY to cool for that. But, I will be quick to add, they are absolutely perfect for many. Similarly, I have never owned a truck but they are perfect for many. The key is finding and buying what is perfect for you.

First, avoid looking at manufacturers’ or dealers’ websites to get information at first. Instead, research at Edmunds or Consumer Reports to get their analyses of vehicles as well as reviews from others who have bought them.

Determine The Market Price

This used to be the hard part. Back when we bought that Civic 25 years ago the only way to negotiate was from the sticker price down. And when you finally had a deal there really wasn’t any way to know if you’d reached a fair price or not. Today, through the magic of this internet thing, you can go to Kelley Blue Book or Edmunds and determine not only the invoice of the car to the dealer but the average purchase price of people near you. For instance, I bought a new Honda Accord, because I’m boring after all, and Kelley Blue Book could tell me what other people were paying within a 60-mile radius of my zip code. Now, that’s the average price – meaning some people paid more and some people paid less – but it’s probably fairly indicative of what a fair price is.

Determine the Value of Your Trade-In

I know that I could get a higher price for my used car if I sold it myself but I’ve always traded it in because it’s just easier. Either way you choose, however, it’s important to know the value of that trade-in. Again, Kelley Blue Book can tell you the approximate value of your car. Two keys here: 1) Be sure to select the Good category, rather than Excellent, when it asks the car’s condition. Most cars fall here and better not to over-estimate the value; 2) Look at the Trade-In Value, not the value if you sold it yourself. The trade-in value will be less but that’s what you’re doing.

Research Financing

Since you’ve budgeted the monthly payment, look for attractive financing options. I purchased my last Accord through Honda Finance with an interest rate of 0.9% for 60 months. That’s practically FREE money! In fact, the difference between an interest rate of 5% and 0.9% on a $25,000 car over 60 months is $2,760. There are many car manufacturers that are offering deals similar to this now – take advantage of them.

At this stage, if you question your ability to get a loan, you might want to get pre-approved for one. You now have an informed idea of the price you can expect to pay for the new car. Subtracting the value of your trade-in from the price will produce the amount you expect to finance. So, plug in this amount at the interest rate you expect to pay and you can determine your monthly payment and can submit that to your bank or credit union for pre-approval. Remember to include an estimate of sales and use tax plus the destination charge charged by the dealer, you can’t negotiate that away. In Kentucky, sales and use tax is based on the difference between the sales price and the trade-in value of the deal, by the way. These can be financed too and I almost always do.

Test Drive and Negotiate

You, of course, can test drive a car anytime during this process. I always wait, though, until I’m pretty sure what I want and what I’m willing to pay before I test drive. Assuming the car drives how you’d hoped and it’s what you researched, time to negotiate.

Now, my experience in recent years has been vastly different than that of 25 years ago. After the test drive we go to the salesperson’s desk and they ask me what I think is fair for the car. At the same time, someone else in the dealership will provide a trade-in value for my used car – what they’re willing to pay me. I say, “I think $XX is fair for the Honda Accord I’m considering.” The salesperson says, “Where did you get that number?” I say, “Kelly Blue Book.” The salesperson then calls up the site right there and turns the monitor so we can both see the screen.

Now, some dealers automatically add options such as mud flaps and all-weather floor mats to all new cars and attempt to charge you for them. That kind of a package can be priced at about $1500. I’ve found you can usually negotiate that cost away since you didn’t ask for it in the first place.

Finally, the key to reaching a deal is to get BOTH the price for your new car and the trade-in value to the number, or close, you researched. It is easy for those two numbers to get conflated or to get focused on the final monthly payment, but it is vital to negotiate those two numbers separately. Because, if you get those two right, the monthly payment will be just as you’ve already calculated and for the amount you were pre-approved. Remember, if you don’t get the deal you think is fair, don’t fall in love with the new vehicle. You can always walk away. In fact, if you walk away more than once, you might even get a new umbrella out of the deal.

 

 

Fee-Only Versus Fee-Based Financial Planners: What’s the Difference?

Simply put, fee-only financial planners – like Moneywatch Advisors – are compensated by the clients they serve, no one else. As a result, their loyalty is to their clients and only their clients. Fee-based financial planners charge you and then are often paid a commission from a 3rd party company to sell you their products, too. So, where is their loyalty?

“Fee-only financial planners are registered investment advisors with a fiduciary responsibility to act in their clients’ best interest. They do not accept any fees or compensation based on product sales. Fee-only advisors have fewer inherent conflicts of interest, and they generally provide more comprehensive advice”, wrote David John Marotta in Forbes Magazine. Moneywatch is a FEE-ONLY financial planning firm that is required, by law, to provide advice to our clients that is always in THEIR best interest.

The whole fee-only versus fee-based debate is admittedly confusing and has been the subject of some debate in the last year or two as the U.S. Department of Labor issued a new fiduciary rule that requires that “brokers act in the best interest of their clients in their retirement accounts.” (The rule applied to stock brokers because they don’t act under that standard now) Amazingly, a lot of firms objected to that. I don’t know about you, but if someone I hired to help me refused to act in my best interest, I would tell them to pound sand and head for the door.

In fact, Jason Zweig of the Wall Street Journal wrote 19 questions to ask your financial planner/advisor and the 1st question was, “Are you always a fiduciary and will you state that in writing?” His correct answer is “Yes”, the same answer that Moneywatch provides to that question. His 2nd question was “Does anybody else ever pay you to advise me and, if so, do you earn more to recommend certain products or services?” This time he suggests the correct answer should be “No”.  Again, the same answer Moneywatch provides to that question.

“The stakes are so high in investing that you should consider fee-only planners. They’ll give you a fixed price up front for their services, regardless of the product they recommend. You won’t have to worry about conflict of interest”, wrote Clark Howard, the consumer expert and nationally syndicated radio show host.

When Bob Bova started Moneywatch Advisors in 1980 he was among the very first in the country to try a new approach to wealth advising – provide clients the help and advice that is in their best interest, not the advisor’s best interest. What a concept! Back then, the industry was dominated by stockbrokers and insurance salespeople, mostly men, that were paid by commission. In other words, they were paid when they sold you a stock or an annuity – regardless of whether that product would actually help you achieve your financial goals. Bob’s approach was vastly different. Coming from the world of stockbrokers, he knew there was a better way. So, Moneywatch was born with an objective to align the firm’s interests with those of the client – a fee-only financial planning firm.

In an effort to explain the difference, I will confess a minor transgression. As you probably know, my wife and I were clients of Moneywatch for 25 years before I joined the firm. However, several years ago I thought I’d take a little cash and see if I could do even better for myself than Moneywatch was doing.  (Please don’t tell them) So, I took about $30,000 to a local firm that does not act as a fiduciary and invested some the way I wanted and some the way they recommended. The result: middling, at best. Over four years I earned a little less than 4% annually. Meh. My biggest complaint, however, is that I still don’t have a clue how much I paid them. Why? They don’t ever put their fees on their statements. More important, were they getting paid by someone else to recommend an investment to me? Who knows?

Now, this is a reputable firm and my contact is a good, honest person. They aren’t broken, their model is.

How Am I Doing Financially?

I get asked all the time by both clients and prospective clients – how am I doing? Personally, I like Chris Rock’s line on relative wealth: “If Bill Gates woke up with Oprah’s money, he’d jump out the window.” Perspective is an amazing thing.

It’s tempting to benchmark yourself against what “experts” say we should have at each age milestone. For instance, a commonly quoted rule of thumb is “At age 30, you should have 1 times your annual salary saved for your retirement.” The flaw with this is obvious: all of our circumstances are different. Maybe you have saved 1 times your salary by age 30 but your current circumstances don’t allow you to save more right now. Maybe you are a good saver but you are invested incorrectly and your money won’t grow at the rate you need it to.

That’s why we always encourage personal benchmarking. Compare your current situation with where you want to be – now and in the future. So, I usually answer the question, how am I doing, with a quick checklist of items to consider:

Your net worth: Just like establishing a weight loss goal, the first step is determining what you weigh now. In financial terms, your weight is your net worth, calculated as your total assets minus your liabilities (debt). Debt can be a real drag on people’s ability to save for their financial freedom, particularly young people with student loan debt. By using the one-size-fits-all rule of thumb above, you may have 1 times your current salary as an asset but, if your debt outweighs that, you may not be making the progress you should toward your financial goals.

Current cash flow: Examining your monthly and annual expenses can be an arduous, and eye-opening, task but it is a vital step toward evaluating your current situation. First, are you living within your means – spending less than you earn?

What are your financial goals? Would you like to retire at 65, 67? Or, do you dream of changing careers at age 50? Have you saved for your kids’ educations? After determining where you are currently – your current financial weight, if you will – the next step is to determine where you are going. A good financial plan will help you determine how much investment assets you will need to generate enough income to support you after you stop working and throughout your lifetime, specific to your goals.

What is the amount of your savings? While one’s net worth is instructive to your overall financial health, the current amount of your savings, and how it is invested, is an important measurement toward your end goal. But, only relative to your own personal goal, not your neighbor’s.

How much are you saving now? How much investment assets – savings – you require to meet your goals will determine how much you need to save each year to get there. Parkinson’s Law says that “work expands to fill the time allotted for completion.” (Anyone who has ever watched the Kentucky General Assembly at work understands this to the core) The financial version of this law says that “expenses will fill the amount of income available.” Let’s face it, if we have it to spend, we will. That’s why we always encourage clients to Pay Yourself First. Put the amount you need to save to meet your goals in your workplace retirement accounts or some other investment vehicle, and live on what’s remaining. You won’t miss what you never saw.

So, want a real answer to the question “how am I doing?” Rather than compare yourself to an arbitrary benchmark, compare yourself now to where you want to be.

 

Don’t Feel Guilty About Your Debt, Take Control

I have a fond memory of my maternal Grandfather sitting me down soon before I graduated from college and telling me, “Steve, whatever you do, don’t borrow money.” While Grandpa John lived far from an easy life as a dairy farmer in Nebraska, he and his mother did inherit the farm when his father died so he didn’t have to incur debt to get started. Circumstances are just different now. Buying a home or even a car is almost impossible without a mortgage or car loan. According to AARP, larger mortgages, higher student loans and a greater overall comfort with debt than displayed by earlier generations has increased the average debt for households approaching retirement by nearly 160% from 1989 to 2010.

Consider Fred and Ethel, both age 45. While they both have good jobs, they have just paid off their student loans and, as a result, are worried they’re a little behind getting started saving for their financial freedom. In addition, when their two children were born they purchased a home and minivan whose payments are stretching their budget. Plus, because their monthly cash flow can be tight, they occasionally build up some expensive credit card debt that takes a few months to pay off. Now, their situation is quite common and really isn’t their fault. Given a choice of incurring student loans or not going to college, they clearly chose the right path for them. So, if Fred and Ethel asked us for advice here is what we would say:

1. Don’t feel guilty, your predicament is not about the past, it’s about the future. Now is the time to plan in order to get where you want.

2. Create a budget that attempts to limit household debt to no more than 36% of gross income – mortgage, car loans, credit card debt. This might not be possible right away but, when the minivan is paid off, keep driving it for a few more years rather than buying a new one.

3. Create an emergency fund by including a regular payment within your budget until you have accumulated the equivalent of about three months of expenses. This will help you avoid incurring ridiculously expensive credit card debt when unexpected expenses pop up.

4. Pay yourself first by making regular contributions, pre-tax if possible, to retirement accounts. Whether it be a workplace retirement plan like a 403(b) or 401(k) or an Individual Retirement Account, include a monthly contribution in your budget. Make the contribution automatic, preferably taken from your paycheck, as you won’t miss what you don’t see in the first place. So, pay for items you want but don’t necessarily need with dollars leftover at the end of the month, rather than leaving retirement contributions for leftover dollars.

5. Not all debt is bad – read here to learn the difference between good and bad debt:  Continue reading “Don’t Feel Guilty About Your Debt, Take Control”

What I Learned In My First Year As A Financial Planner

Although I prepared by studying evenings and weekends for two years to meet the coursework and exam requirements of the Certified Financial Planner process, leaving my friends both at the University of Kentucky and in Frankfort wasn’t easy. After doing the same thing professionally for over 20 years, though, I was ready for a new challenge that would engage my brain in a new and different way. So, after 25 years’ experience as a client of Moneywatch Advisors, I joined the firm. After my first year in the financial planning profession, here is what I have learned – about our clients, about the financial services industry and, most important, about myself:

  • Work-Life balance is the way to live: I’ve always known this intellectually, but I have now learned it emotionally as I now have time to take my son to school every day, drive him to soccer and lacrosse practices and travel with my wife to see my daughter dance ballet in college. I still work hard because I really enjoy what I’m doing but I also prioritize spending time with my loved ones. I am living the life I want and my goal is to help my clients do the same. 
  • Our real value is our clients’ peace of mind: Our niche is serving busy professionals who are consumed with their careers and busy with their families and don’t have time to plan and manage their financial futures. From UK faculty and staff to CPA’s to government relations professionals, we help our clients determine what amount of investment assets they will need to achieve their financial freedom, how much to save to reach their goal, how to save taxes while they save and how to invest their hard-earned savings to help them reach their goals as soon as possible. Our clients are smart but don’t have the time and inclination to tackle these issues on their own.
  • Short-term goals are as important as retirement goals: I probably should have learned this earlier in life, but we all must enjoy life now while also saving for our financial freedom. Whether it be a travel experience or a vacation home, include those desires in your financial plan too.
  • Trust between advisor and client is vital: Let’s face it, other than going to the doctor, opening one’s finances to a professional is about the most personal business transaction there is. Trust is key and we have to work every single day to build it and keep it.
  • Numbers are fine but people are what matter: While the planning and investing advice we provide is the core of what we do, how we relate to people is the key. The more we know about our clients’ hopes and dreams, the better we can help them achieve them. Being a good listener is clearly a core competency of a good financial planner.
  • The financial services industry doesn’t have a very good reputation: Both the New York Times and the Wall Street Journal have written about advisors in some of the huge firms being compensated for pushing clients into products that may not be right for them. As independent fiduciaries for our clients, we are required to provide advice that is in the best interest of our clients, not just advice that is suitable. I don’t know why anyone would choose an advisor that isn’t required to meet that highest standard, but we have to work hard to distinguish ourselves from the rest of the crowd.
  • I really like helping people in a personal way: Since Moneywatch helped guide Lisa and me to our own financial freedom that allowed me to tackle a new challenge, it has been really fun helping others do what we’ve already done.

People sometimes ask me if I wish I made this move years ago, and I always answer, “no.” I really enjoyed my time at UK advocating for the students, faculty and staff that  make it such a special place. And I am more well-rounded as a person because of that experience. But, if you have thoughts of a profession change later in your career, I would wholeheartedly encourage you to explore that opportunity.

Take The Right Financial Road In 2018

I recently read about a 28-year old New Jersey man who typed the wrong address into his rental car’s GPS in Iceland and drove six hours in the wrong direction – SIX! – from the airport to a fishing village in the north of the country….when he was just trying to get to his hotel. Now, his first mistake is quite understandable. I’ve been to Iceland and they are apparently too cheap to buy a vowel because every word is virtually unpronounceable. But, despite the long drive and “poor road conditions” he plowed on because that’s, ahem, what the GPS told him. And he never questioned that Reykjavik’s airport would be 6 hours from, well, Reykjavik. That’s like assuming Lexington’s airport is in Detroit.

This was really quite funny until I realized how many people figuratively make this same mistake in their financial lives. Unfortunately, they assume they’re on the right road until told otherwise. Maybe they assume contributing just enough to their employer’s retirement plan to receive the match will eventually produce enough to support them in retirement. Or maybe they’re contributing as much to debt payments each year as their savings. Or maybe they’re invested completely wrong for their long-term goals.

These people aren’t stupid – they usually just don’t have the time to properly plan for what they will really need in the future. To complete the comparison with our Icelandic mis-adventurer, it is quite common for people to be on the wrong road but not know it until they’ve hit a destination that’s figuratively six hours from their desired destination. Only, the stakes are much higher if you don’t realize your mistake until you hit age 60.

So, here are some suggestions for getting on the right road in 2018:

1. Pay yourself first

Automate your contributions to your employer’s retirement plan and any other investment plans first. Then, develop your budget from what’s left. How many times have you heard that cutting out that daily latte will aid your retirement? No, I like that latte, you say. So, don’t make the choice between your financial freedom and your latte. Pay toward your financial freedom first, then choose between a latte and maybe a beer that evening. That approach is not only better for your long-term financial health but you’ll feel a lot less guilty each day too.

2. Pay down high-interest debt

Not all debt is equal and not all debt is bad. In general, if all of your debt – student loans, mortgage, car loan or lease, credit card debt – is more than 36% of your gross monthly income, that’s too much. Additionally, if a loan has a high interest rate – probably about 6% or higher – that should be taken care of too. (Read more on how to determine if debt is acceptable or a problem here -https://lexingtonfinancialplanner.blog/2017/10/27/should-cal-and-rick-pay-down-debt-or-save-for-retirement/.  If you find yourself in one of those situations, make a plan to retire that debt as soon as you can. Again, automate your payments so you don’t have to choose between making that debt payment and your daily latte.

3. Save for some short-term fun

Around the office I’m kind of known as the saver-police. “No soup for you, save!” (A paraphrased Seinfeld reference, by the way) But that’s not true, Lisa and I are good savers, but we also prioritize our spending for fun too. After we save for our future, we have chosen to use our dollars to travel rather than buy expensive cars or buy a bigger house. We would rather enjoy a nice vacation each year, like two weeks in London last summer, than drive a Mercedes. Now, that’s not a choice for everyone, just us. In any case, choose a short-term saving goal for 2018 and make it part of your monthly budget. Recently, new clients wanted to build saving for regular, nice international trips into their financial plan. We showed them how to do that while still making significant progress toward their financial freedom.

If you would like to talk about your long-term and short-term financial goals, please email me at steve@moneywatchadvisors.com or call me at 859-268-1117.

 

What You Can Learn From Reviewing Your Financial Situation in 2017

Don’t read this blog post now – save it for the week between Christmas and New Year’s and read it then. Let’s face it, you’re running around like your hair is on fire trying to finish work projects, attend parties and finish your gift buying. But that week after Christmas is usually pretty slow. If you’re working, there aren’t a lot of phone calls. If you aren’t working, outside of a movie or maybe ice skating, there’s plenty of free time. Take one hour during that week and 1) Read this blog post; and 2) Review the following items:

Did you meet your short-term goals for the year?

We should always write down our goals for the year, right? Exercise more, read more for pleasure, etc. Because writing down a goal helps make it real and measurable. But, do we? Uhhh, did I save that cocktail napkin somewhere?

Whether we have our 2017 financial goals written down or not we probably still have a pretty good idea of what we intended to do. Did you want to establish a budget? Did you intend to save a certain amount of money for retirement for the year? Did you want to pay down student loans or maybe refinance your student loans? Did you shoot to establish an emergency fund to cover 3-6 months of living expenses should something interrupt your income?

Take just a few minutes and measure whether you accomplished those items you intended to – even if you didn’t write them down as a specific goal. If you hit the mark, raise a glass of eggnog for yourself. If not, choose one goal – the most important financial goal for 2018 – and write it on your computer somewhere where you won’t lose it. Make it measureable and achievable and, if possible, make it systematic where you don’t have to think about it each month.

How did your investments perform?

The stock market has been amazing this year. Not only is the S&P 500 up about 18%, there has been very little volatility – ups and downs of the market. In fact, this year has seen the lowest volatility since 1970. So, how did your investments perform?

Because the stock market has performed so well, this is a good time to look at your asset allocation: what percentage of your investments are in categories like Long Term Income, Growth, Real Estate and International? As stocks increase, including stock mutual funds, it’s easy for your portfolio to get too heavily weighted toward stock mutual funds, exposing you to unnecessary risk when the stock market declines at some point. One of my favorite quotes comes from the former boxer, Mike Tyson, who once said, “Everybody has a plan until they get hit in the mouth.” In our context, when you’re figuratively hit in the mouth when the stock market declines, do you have a plan? In other words, are you properly diversified so your portfolio includes funds that aren’t tied directly to the stock market and they hopefully zig when the market zags? In addition, is your portfolio structured for your personal time horizon and goals?

Did you follow your long-term plan?

Did you save as much for retirement as your long-term plan calls for? Is the total of your investment assets where you planned for them to be at your age? If you are behind, what is the cause?

A well thought-out financial plan should examine your current lifestyle/expenses and inflate them to a point in time when you would like to stop working. Age 55? Age 65? Then, how much in investment assets are required in order to produce annual income sufficient to cover those expenses for the rest of your life? Then, your plan should have concrete steps and measurable goals along the way to eat that elephant one bite at a time.

Merry Christmas, Happy Hanukkah and Happy New Year! Thank you for reading my blog – you can subscribe at the bottom of this post and have it delivered via email each week – and look for it again on Friday, January 5.