Extended Warranties: Are they a good idea?

I might not put this issue to bed but I can at least tell you my thoughts. I know many people swear by them and I know some people who say they usually get their money's worth out of them.

I am fine with people having that point of view. However, in my experience I have not gotten my money's worth out of them and I usually say that in most cases it isn't a good idea to get the extended warranty. Now before you get mad at me I can show my work behind how I came up to this reasoning.

An extended warranty is basically insurance. And the price/cost of insurance is driven by 4 factors: commissions, overhead expenses, the statistical probability of the event occurring, and profit. The cost of your warranty has to cover all of those things and I do not like the sound of that. What I actually would recommend is to set aside the amount of most extended warranties and I would be able to cover average repair costs and still come out ahead.

Generally, extended warranties are extremely profitable for those that are selling them and a bad idea for those buying them.

How much is too much house?

Earlier this week I mentioned that one of the most often ways people get themselves into a struggling financial situation is they allow their car payments or house payments to be larger than what they can afford.

If you did not read the post on Car Payments you can check it out here.

The stage of life that I am currently in (early to mid 20's) is extremely foundational. I find that a lot of financial (mis)behavior habits go into effect around this time in a person's life. Usually after graduation you will find yourself with more cash than you ever have had before. For the first year or two you are allowed much freedom and seem to spend money on whatever you want, whenever you want it.

However, this might work out for the first year or two but this develops a habit that is not easily broken. As you get into later years you begin to commit to more financial obligations, which leaves you strapped and in a tight situation. This is the turning point and usually people will resort to using unsecured debt as an option which puts them in bondage that they cannot break free of for many many years.

More times than not, this "financial obligation" that leaves you in a tight situation is usually caused by the house. Because your house payment might end up being too much for your take home pay, it leaves you extremely tight in all other areas of life. And if this is combined with a lack of adamant budget and preparation its seems like there is no other choice but to turn to debt.

Now on the flip side I want to offer a guardrail to guide your house buying decision that may come up in the near future. This is not scriptural this is just what I believe to be wise after listening to many financial "guru's" over the years.

House Rule #1: Do not have a house payment that is more than 25% of your household take home pay.

When I get opposition to this from people my age it is always because they want to have a standard of living that is comparable to what their parents have. The only problem with that is it took their parents 20+ years to obtain that, which should not be obtained within the first few years of working.

I want to provide an easy to understand grid that might help put some skin on this rule. The assumptions to this grid is 100% financing (which I do not recommend but will talk about later) and an interest rate at 6.5%.

30 Year Fixed Loan

Annual Income	Monthly Income After Taxes	Monthly Payment	House Value
$30,000	$1,875	$468.75	$74,161.32
$35,000	$2,188	$546.88	$86,521.54
$40,000	$2,500	$625.00	$98,881.76
$45,000	$2,813	$703.13	$111,241.98
$50,000	$3,125	$781.25	$123,602.20
$55,000	$3,438	$859.38	$135,962.42
$60,000	$3,750	$937.50	$148,322.64
$65,000	$4,063	$1,015.63	$160,682.86
$70,000	$4,375	$1,093.75	$173,043.08
$75,000	$4,688	$1,171.88	$185,403.30
$80,000	$5,000	$1,250.00	$197,763.52
$85,000	$5,313	$1,328.13	$210,123.74
$90,000	$5,625	$1,406.25	$222,483.96
$95,000	$5,938	$1,484.38	$234,844.19
$100,000	$6,250	$1,562.50	$247,204.41

15 Year Fixed Loan

Annual Income	Monthly Income After Taxes	Monthly Payment	House Value
$30,000	$1,875	$468.75	$53,810.82
$35,000	$2,188	$546.88	$62,779.29
$40,000	$2,500	$625.00	$71,747.76
$45,000	$2,813	$703.13	$80,716.23
$50,000	$3,125	$781.25	$89,684.70
$55,000	$3,438	$859.38	$98,653.17
$60,000	$3,750	$937.50	$107,621.64
$65,000	$4,063	$1,015.63	$116,590.11
$70,000	$4,375	$1,093.75	$125,558.58
$75,000	$4,688	$1,171.88	$134,527.05
$80,000	$5,000	$1,250.00	$143,495.51
$85,000	$5,313	$1,328.13	$152,463.98
$90,000	$5,625	$1,406.25	$161,432.45
$95,000	$5,938	$1,484.38	$170,400.92
$100,000	$6,250	$1,562.50	$179,369.39

Use this grid as a guideline when deciding how much house too buy. I do not care how good of a deal you get on a $200,000 house. If you cannot afford it, it will end up put you into a financial mess. When this is the case you cannot even enjoy living in the awesome house because things are so tight financially.

Never Have a Car Payment

If you have a car payment, you need to get rid of it. As a philosophy of mine I try to avoid anything that requires a recurring monthly payment. I understand some things are inevitable but I want to stress that a car payment is not one of them.

From talking to financial counselors many times when people are struggling and broken in their financial life, it is often because they find themselves in a lousy car situation or buying too much house. I will talk about buying too much house later this week, but for now let me stick to the car.

What I mean by a lousy car situation is they bought a new car and have been paying huge payments on it rather than paying cash, and now that they are in trouble financially because there was no buffer for life to happen they find that their car is worth LESS than what they still owe on it.

This happens far too often.

My advice and philosophy on this is pretty simple. I have 2 basic "car rules."

Car Rule #1: Don't buy new. My suggestion and personal philosophy is to get a 2 year old car. The reason for this is strictly numerical. As soon as you drive a new car off the lot it is taking a huge chunk of value off. In fact a large percentage of the value gets taken off in the first 2 years. By buying a car after 2 years you have avoided taking a huge depreciation hit.

Car Rule #2: Make payments to yourself.

Right now I am driving a 99 Honda Accord that does not have payments. Yet I am paying a $350 car payment to myself. There is a reason for this. It is smart. I can either make payments later and have a lot of that going to interest and be making someone else money, or I can make payments to myself now in my money market account that earns 5.05% and have interest coming in. Then when it is time to buy my 2 year old car I will have the money to pay cash for it. Side note: If you have cash you can get a major deal on a car, especially when looking to buy from individuals. When you show them you have cash and can give it to them as soon as they agree that is extremely enticing.

If you are thinking: "But I need to buy a car now but have no money saved up. What do I do?"

I will answer your question by giving you 2 scenarios and you can decide for yourself which is better.

Normally we buy:

$18,000 car; 7 years at 10%; payments of $300; value after 7 years, $800

Or we could buy instead:

$6,000 car; 7 years at 10%; payments of $100; value after 7 years, $400.
The other $200 per month is saved at 10% (mutual fund) for 7 years = $24,190

Now who may the right choice:

At Year Seven
The car is fully depreciated, in either plan, but in the 2nd plan:

Savings $24,190
One year old car for cash <$16,000>
Left in savings $ 8,190

No Car Payments!

Another Seven Years
Saving $300 per month from year 7 to year 14
plus interest on $8,190 (10% return) the car is fully depreciated again.

Savings $52,245
One year old car for cash <$25,000>
Left in savings $27,245

No Car Payments!

Which scenario do you choose?

After 14 years you are in a position where you are set up to never have to make another car payment just because of a decision you made 14 years ago.

It is a shift of thinking from, "I will always have a car payment" to "I never want a car payment."

Use the compound interest factor for your advantage and not against you. It is powerful either way.

Ways to Cut Down Your Entertainment Budget

Entertainment can be very expensive if we are not careful. I wanted to offer some great ways to spend less on this category while still having fun.

Not so much Traveling
This one hurts me because I love driving and more than that, I love driving to Braves games. I am a huge fan and I try to find good deals on eBay for tickets. While I figure I am saving money on tickets that most people would spend, I am killing a ton of money on gas to get there and back. Traveling really is a sneaky way to creep up your expenses and then when you look at your bank account balance you wonder where your money went.

Find Alternative Sources of Entertainment
I know quite a few people who have joined an ultimate frisbee league which is a great way to be entertained while not spending a lot of money. I also have friends who have a basketball night where they all get together on a certain night of the week or on Saturday morning and play. When you find things to do with friends and loved ones like these options you will feel no need to go out and spend a large amount of money on ways to entertain yourself.

Cancel some Memberships
Lots of people have gym memberships or other types of revolving expenses that they hardly ever use. This is sucking a good amount of money up. Most of the time you have signed up for a lot of little monthly fee type things which add up when put all together. If you go to a gym, health club, country club, or other service only once a week, chances are you are not getting your money's worth out of it.

Lower your Cable Package
I know this is crazy talk but I am serious. Most cable companies will have a low end basic cable package that usually cost a significant amount less. I know we are living in a world of HD, DVR, and premium packages and everything has to be HD but it is worth a thought. I am not saying you are irresponsible if you have a big cable package; I am just throwing out an idea for it in case it sticks somewhere.

Newspaper/Magazine Subscriptions
I am guy that LOVES sports. And I love reading/watching/talking about sports all the time. Therefore, I used to have a subscription to Sports Illustrated, Sporting News, and ESPN the magazine. The problem is that I never really read them. I looked through them, read some blurbs here and there but I realized that I needed to cancel. This took a good shot to the pride because I am a man and men read Sports, but I am glad I am saving that $10-$15 a month now.

Use the Library
The library is freakin awesome. I love books (more like books on tape), I love movies, and I love free. Did you know the library has all 3? I suggest to use this amazing service that we are given by the state.

Anyway, there are tons of ways to keep our entertainment seeking hearts occupied without spending a ton of money. The key is to just make a little effort and it will go a long way. If you end up cutting down on movies and dining out you will more than likely save a LOT of money.

Giving God Control Part 2

To compliment us talking about the heart yesterday, I wanted to point out a few things that scripture speaks on that is on the practical side.

Proverbs 21:20 "In the house of the wise there are stores of choice food and oil, but a foolish man devours all he has."

Scripture actually says saving for a rainy day is cool; and rainy days are coming. Let me also clarify; most of us are suffering from a disease in which we need more and more stuff for ourselves. That is not what scripture is saying is okay, in fact let me just clear it up, that is wrong. An example of this is when Joe gets a big screen tv. The issue isn't that he spent money on the big screen tv, the issue is why did he get the big screen tv.

Let me use a friend of mine as an example...they bought a big ole 55 inch HD TV. The reason why he got that is so that he would have a reason to invite people (ie co-workers, college students, and everyone else) to come over and watch a big football game or basketball game and use it as a ministry tool. God has been glorified through his TV and that is cool.

Another friend of mine has a sweet boat; the reason why he has that boat is for ministry. It is the heart behind this stuff that matters, it is not just an excuse to get more stuff. That is the difference. It is not a numbers issue, it is most definitely a heart issue.

More coming tomorrow on giving God control by practical application of Scripture.

Is Christmas time here yet?

No, it is not...but it will be.

I love Christmas time; not only is it a cool time to remember Jesus but just to be completely honest I get really excited about getting presents (and giving). Don't get me wrong the Lord and Savior of all creation should be #1 on the list and He is, but that is everyday. On Christmas the only thing that changes is I get presents and I am okay with that.

I think Michael Scott said it best "Christmas is awesome. First of all, you get to spend time with people you love. Secondly, you can get drunk and no one can say anything. Third, you give presents. What's better than giving presents? And fourth, getting presents. So, four things. Not bad for one day. It's really the greatest day of all time."

It quite possibly could be the greatest day of all time, Michael. If you are like me, you like to go all out. And afterwards you end up feeling a lot of pain in your bank account right afterwards. I never want to go through that and do not want you to go through that ever again. The simple solution is this:

Christmas is 129 days away. Right now figure out how much you are going to spend on presents...it's really easy to do just try it. Then put it in your monthly budget and plan for it, in fact if you put it in an www.ingdirect.com account you could get 4.5% interest until you spend it.

Christmas is not an EMERGENCY. It comes the same time every year. Can you imagine how great it would be to get to enjoy all the great things that come with Christmas AND to not have buyers remorse!

Realtor or No Realtor

I know several people in my life that are currently either selling their house or thinking of selling their house. The age old question in this is, "Do I NEED a realtor?"

The positive to not getting a realtor is you save on the commission that is rather sizable depending on how much your house will be sold for.

However, if you had to ask me I would say yes, I do recommend you have a realtor when you sell your house...BUT, I do not just want a realtor, I want you to get a high quality, highly motivated, won't slow down realtor with a great track record.

I have heard Dave Ramsey say to interview people when they are going to make money off you. So that is my suggestion. If you go in there and have questions ready for them and they don't want to oblige or are being a jerk, move on quickly and thank them for their time. If they don't feel that they are good enough to exceed all your expectations and know that they will stand up to a tough grader then you did not want them in the first place.

Interview Questions to ask:

1) Why should I list my home with you? (Find out what the agent will do to help your home stand out.)

2) What’s your company’s track record and reputation? (If one agent or company sells more than the rest, ask why and what they’re doing differently.)

3) Does your broker control the advertising or do you? (If your agent doesn’t control the advertising, your home may compete for ad space with listings from every other agent in the brokerage.)

4) On average, how close is the selling price to the asking price? (This information is available from your local Real Estate Board. The agent’s performance in this area can help predict how much you’ll get for your home.)

5) On average, how long does it take your listings to sell? (This information is also available from the Real Estate Board. It will help determine about how long your home will be on the market. )

6) Do you have a reference list of clients I could contact? (Make some phone calls. Ask them to describe their experiences with the agent.)

7) What if I’m not happy with the job you do? (See if the agent will cancel your contract without penalties if you’re not satisfied with the service they provide.)