Ask Uncle Bill

07 - Car Wars

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“When buying a used car, punch the buttons on the radio.  If all the stations are rock and roll, there’s a good chance the transmission is shot.”

                                                                          Larry Lujack
                                                                          ‘60’s Disc Jockey
                                                                          WLS Chicago

All You Need To Know

At this point in your life, cars are not status symbols nor are they affordable so the goal is to eliminate them or reduce the cost-the initial cost to buy and the ongoing cost to run and maintain.  So we need to do a self-test.

First, where do you live?  If you live in metro New York, Chicago, San Francisco or London, don’t buy a car and either sell your existing car or leave it at your parents.  Take the bus, subway or walk to work and enjoy not thinking about car repairs, insurance or the cost of gas.   

If you live in a suburb and work in a suburb or live in Los Angeles, Atlanta, Dallas, or any other “newer” city you probably need a car. 

Which car?  Either the car you have now that Mom and Dad gave you when you went off to college or a three to five year old A car.  A cars are cars with names that end with an A—Honda, Toyota, and maybe Mazda.  Not Chevrolet, though things are looking up.

Which model?  The cheapest ones as in Honda Civic or Accord and the Toyota Celica or Corolla.

Get it where?  I prefer the want ads in high-end neighborhoods like the north shore of Chicago, Westchester County in New York and any suburb south of San Francisco on the highway to San Jose.  All big cities have rich places.  Look there first.

Why?  Rich people take care of their stuff, don’t really need the top price but are selling because they don’t want to give a perfectly good car away to a dealer.

How to pay for it?  Save, beg, borrow, steal it. 

What else?  Find a good, honest mechanic (they really do exist) and build up an emergency fund to pay for the inevitable repair.

That’s all you really need to know but here are a few of the details.

The Details

Where

This is pretty basic and intuitive.  If you live in a big city that has invested in public transportation over the last hundred years, ditch the car and take the train, bus, subway.  Buy a cheap monthly ticket (it’s subsidized by all the property owners in the city so take advantage) and leave the driving to somebody else.  Take the bus or train to work, to shopping, to museums and ballparks.  Just don’t take it at midnight.  You shouldn’t be out then anyway and the people you meet will know it.

If you live in a suburb and take a train in to the city you probably need a car to get to the station.  If you live in the city and reverse commute, you need a car and if you live in the suburbs and work in the suburbs, you need a car.

So that decision is made.  If you have access to public transportation, leave your old car at home or sell it.  If you don’t have access to public transportation, you need to keep the car you have or, if you don’t have a car, get the most reliable transportation for the least amount of money.

Keeping What You Have (Because It’s In Better Shape Than You Think)

If you got your current car when your were a freshman it is now, let’s see here, about four years old or older if you bought a used car at the time.  If you got it in high school, the car is now at, or about, seven years old.  Time to get a new one.  Wrong, keep the car you have IF you or your dad or somebody kept it in reasonable shape.  Reasonable shape means that you changed the oil about every three to five thousand miles, changed the timing belt when required, got new tires once in awhile, put on new brake pads when needed and didn’t abuse it when driving.  By that I mean driving too fast, stopping too suddenly, and basically whipping it around.  OK, you did that but not all the time. 

You keep the car because it won’t break.  Huh?  Oh, stuff will break like the battery gets old, the starter won’t start, or the air conditioning stops but the basic car will not break.  The engine will not explode, the car won’t rust away, the front of the car won’t detach from the back because of…the Japanese.

I’m a big fan of capitalism but some strategies are based on flawed models.  The basic business model for GM, Ford and Chrysler (when Chrysler was a US company and not part of Mercedes) was to build the cheapest car they could, with technology like carburetors, drum brakes, and lousy exhaust systems that rotted over night.  So the business model was 1) build a cheap car that 2) looked nice but 3) broke early and often causing the US consumer to buy a new car every three to five years.  And the business model worked up to just about the time you were born.  If you want a few laughs ask your parents about the time their Pinto exploded or water splashing in their face driving through a mud puddle. 

But then the Japanese got wise.  In the 50”s, 60’s, and 70”s Made in Japan meant junk.  Sony and Honda were among the first companies to abandon the junk model.  Sony introduced radios and Honda introduced motorcycles.  Not Harleys but cute, little dependable motor scooters and bikes.  The key word here is dependable.

Building on the motorcycles, Honda introduced little cars and the Toyota jumped in and everybody in Detroit laughed but people bought ‘em because they had fuel injection, disk brakes and parts that didn’t break.  And they got great fuel mileage.  And they galvanized the bodies so they didn’t rust out after two years in Chicago. 

The US car companies laughed again because, they thought, and there is a perverse logic here, if the cars didn’t break or rot there was no need for consumers to buy a new car.  The Japanese bargained that people would always buy new stuff when they got bored with the old stuff and they figured people would buy their products again because they were higher quality and a better deal for the dollar.  And the Japanese were right.

Anyway, the US companies have gotten the message and are making better cars and have been for the last ten years.  So if you have an existing car and it works pretty good, keep it.  Take it to a mechanic, have them check it out, fix what you have to, build up your emergency fund, keep your cell phone handy and put the number of a tow truck company in the glove compartment and drive. 

If You Have To Buy

If for whatever reason you do not have a car and you need one, buy a three to seven year old car, preferably an A car-a Honda or Toyota.    

The old adage was that buying somebody’s used car was buying somebody else’s problem.  This old adage is based on the old Detroit business model—build cheap cars that will break so the consumer has to buy a new car every three to five years.  But the old model is out and so is the old adage.

Buy a three to seven year old car because they are well made and if they break they are relatively easy to fix.  But where you buy the car is the key.

Where To Get It

Willie Sutton was a bank robber.  He was captured, escaped, captured, escaped and so on.  After one capture a reporter asked him why he continued to rob banks.  Willie answered, “Because that’s where the money is.”

I have the same philosophy when buying used cars or anything used for that matter.  Go where the good stuff is and that is where people have money.  Rich people are smart because most rich people made their own fortunes, they know value, and they won’t bargain for the last dollar, usually.  They aren’t going to give stuff away but they will settle for a reasonable price.  And maybe you will remind them of their kids or grandkids and they will cut you a break.

It is also fairly easy to find them.  Read what they read.  Find the local magazine or weekly paper and go through the classifieds.  (This is the same strategy outlined in Chapter 6, “Winning At Renting” and same philosophy.  Don’t reinvent the wheel.) 

As an experiment I just “Googled” the Pioneer Press Classifieds.  Pioneer Press does “newspapers” that cover the north shore of Chicago.  It is also the same source we used for finding our coach house described in Chapter 6.  The used car section lists Hondas and Toyotas along with Volvos, Mercedes, Jaguars and every other make but concentrate on the Hondas and Toyotas.  The owners are selling their well-maintained cars at a reasonable price because they know they will get next to nothing for them as trade-ins.  And it just isn’t Chicago, every city has rich people.  Your job is to find them.

Alternative sources for car buying include Ebay (I bought a car off Ebay and still have it), autotrader.com, samba, and other sites specializing in categories or makes.  You might also check out car rental companies.  They are constantly selling cars and the cars have been well taken care of, not by the customers, but by the company.  There are also used car lots that can come in handy but only rarely.  But the categories go pretty much like that--first, an individual seller preferably from an affluent community, then internet sites like Ebay, then car rental companies, then used car lots.  I bought one car from a used car lot and it worked out great but usually car lot cars are the most expensive. 

Now, how to we pay for this thing?

Auto Finance

The best approach is to save up the money.  Individual sellers are usually not going to finance you and cash makes the transaction go really smoothly—in fact; cash makes all transactions go smoothly.  If you can nurse the old car along for a year or so or there is some access to public transportation, save up and pay cash.

But you’re saying “Hey, stupid, I got to get to work now and I don’t have a car.  Now what?”  How about begging?  Call Mom and Dad and say or write them an e-mail laying out the car (remember to note that it is sensible, reliable A car), the cost, and your proposal to borrow the money and pay them back with interest over a period of three years. 

BUT, you say, my parents are bigger spendthrifts than me, financially up against the wall and so strapped with credit card debt that they are thinking of personal bankruptcy.  OK, Plan B.  Borrow the money from: The Seller
                                                       The Credit Union at work
                                                       A Bank
                                                       A Used Car Lot that will finance—‘we tote the note’
                                                       Borrow On Your Credit Card

These are in descending order of costs getting more expensive as you go down.  But if owning the car is an absolute necessity, you have to do one of these.  Your best bet when you are in this situation is the credit union at work or the used car lot that will finance.  Since it is your first time out I would stick with the “Pre Owned” departments on the lots of big dealers.  It is not the best deal but it can be done relatively quickly and the car will probably be in good shape. 

Whichever route you go, the rule will be to pay it back as fast as possible and save up the money so next time you don’t have to go through this humiliating experience.

Finally, like Willie Sutton, you could steal the car but that has other consequences.

06 - Winning at Renting

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“Secure your base.” 

             United States Marine Corps

What To Do Now?

Secure your base.  If you are working in the same city as your parents, live at home, as painful as it may be.  If you are moving to a new city, find an apartment as soon as possible that is probably, almost assuredly, over priced but with the shortest lease period possible.  Look for a better deal later.

The Details

The Long Term Rental Strategy

Renting is widely regarded as a big mistake in the personal finance arena and may, or may not be, depending on one’s personal preferences and geographical situation.  In most of Europe and many urban areas of the United States, renting is a fact of life because of the lack of available houses and condominiums or people grow up in rentals and just prefer it or don’t know any other way. 

You are a renter right now because it is an economic fact of life for you.  You don’t have the down payment for a house and you do not have the salary level necessary to support house payments.  Plus, you don’t want a house right now.  You want to make sure you like your job, your city and your situation before being saddled with the time required and expenses involved with home ownership.  Life is too complicated right now to complicate it further with home ownership. 

So you are going to rent which is fine because you already know how to do it, you have paid rent before and handled deposits and moving and so forth and so on.  But you really don’t know how to be a good renter and get the most for your money.

Student Life

You did it before by opening up the paper and looking for apartments rented to students or went to the complexes where all the other students went, found a roommate or roommates and looked, okayed it, put down the deposit and moved in to what was usually a high priced dump or a not so bad apartment that was really high priced.  But that was okay because the place was temporary plus you probably weren’t paying for it; your parents were.  You would move the next year or go home for the summer or get new roommates so every place was just a place to be tolerated.

Life As An Adult

But now you are working, setting up a household, putting down roots, on your way to becoming a responsible and meaningful citizen--you are looking for a home, not just a house.  At least you should start to think this way because it will mean you are committed to your work, your city and your well-being.  And, most importantly, now it’s your money.

Getting wealthy is really about making money on the margin, stopping leakage.  That means quite simply getting the very best deal for the least amount of money.  A great financial deal may be a cheap apartment in public housing but if you end up dead it is not a great lifestyle move.  Conversely, a three bedroom apartment in a desirable downtown high rise is a great place to live but you won’t live there very long because you can’t afford it.

So What To Do Now? 

If you are moving back to the city where your parents live just move back in and get a job and look for an apartment later.  Financially ok but lacking in lifestyle growth and excitement.  At home you will always be seventeen to your parents and treated accordingly.

Or you move to a new city, don’t know anybody and are starting your new job next week.  First of all, you do not do the best thing financially or lifestyle wise.  The first thing you do is to find something as convenient as possible, as cheap as possible and as fast as possible and with the shortest lease as possible.  You may get lucky and find a great place that meets all your needs but I doubt it because you don’t know the market. 

You want to find the place as fast as possible because you want to put this task behind you so you can devote all of your time and energy to your new job because if you don’t succeed there, finding the right apartment isn’t even on the radar screen.  You want the place to be cheap but this probably won’t happen because you are in a hurry and when in a hurry your choices are limited and price is secondary.  The short lease is important because you do not want to spend any more time there then possible because you will find a better deal and probably fairly fast.  You also must face the realization that you will move twice within a relatively short period of time.  This is okay because you don’t have a lot of stuff and U-Hauls are cheap.

Now What?

So now you have a charmless apartment in a charmless building at an exorbitant rent but with a short lease or, even better, no lease at all.  It is time to plot your strategy.

First, as noted, getting wealthy is about making money on the margin, getting the best deal for the best price.  And if you work hard enough and get a little lucky and use your imagination you will probably find a great place to live at a reasonable rent in an area where you want to live.  In other words you are making money on the margin by getting the very best deal for the least amount of money.

Ok, How? 

The process is simple but does require effort.

First, identify where you want to live.  Just drive around or take the subway, train, bus around your newfound city and suburbs.  All cities and suburbs are neighborhoods with poor, working class, middle class, and upper class neighborhoods.  They all have advantages and disadvantages.  Crime is certainly a negative so eliminate really run down neighborhoods unless you feel invincible. 

Case Study I

Case studies are always used in business class so let’s use one here.  This actually happened and the life lessons are universal.  First job, move to Chicago, no apartment, went through the classifieds, no deals, looked at one apartment run by a management company.  Run down but large, ok neighborhood and close to transportation, expensive at 40% of take home pay and lease of nine months.  Tried to negotiate but the manager, knowing the market of course, told me rather inelegantly that he had me by the “short ones.”  But it met the requirements-again, got it fast, close to transportation, relatively short lease offset by the expense plus run down appearance of the complex and the unit. 

In the ensuing nine months, I got married and we started our search for new living quarters.  Being a newly minted MBA and financial analyst I began a list.  All analysts have lists.  The first list was titled What Do We Want?

• What Do We Want?
  Cheap Rent
  House
  Good Neighborhood
  Quiet
  Out of an Apartment Complex
  Close to Transportation

The next list was Action Steps.  This list didn’t get very far.  We didn’t have any because the want list had no reasonable action steps, or so we thought.  Keeping the Want list we ignored the Action list for the time being and put together a Variable list.  This contained all the factors that went into the area or neighborhood that we wanted to live in.  It ignored our wants and consisted entirely of facts.

Variable List

Our Neighborhood consisted of the North Shore of the Chicago area.  If you have seen Risky Business, Home Alone, Sixteen Candles you know the area.  A lot of upper middle class homes but also large estates and upper class homes--all out of our financial ballpark.

Communications-all neighborhoods have mediums.  On the North Shore it is the local magazine/newspaper that comes out each Thursday.  It has some news but the primary purpose is to list real estate.  And this is depressing when you don’t have any money. 

Available Housing-we continually went through the mental list of available housing, which consisted of apartments, condominiums, and houses, or so we thought.  We had the apartment, which met our needs but only slightly less charmless after we painted the whole thing and we were plagued by noisy neighbors.  Condominiums had all the drawbacks of a house (large down payment and expensive) coupled with the drawbacks of an apartment.  Houses were just too expensive. 

With the Variable List completed we were pretty depressed and went back to the Action List.  It had one step-learn the neighborhood.  So we spent the weekends driving around, going to estate sales, and getting more depressed. 

Trying to avoid coming back to our gloomy apartment one Sunday night we were driving down Sheridan Road in Winnetka when my wife, Sue, looked out the window, saw a light and muttered, “I wonder who lives in there?’
“In where?”
“In the coach house, over the garage.” she said.
“The maid and chauffeur.”  I said brilliantly.
“Nobody has a maid or a chauffeur.”

Of course, she was right, very few people have live-in help but many of the estates, almost all of them, had live-in apartments left over from the days when the elite did have maids and chauffeurs.  But who lived in them now?  And how do we get in one because, guess what, a coach house fits our want list. 

Want List

• Cheap Rent-maybe
  House-A house with a garage underneath on an estate in one of the most exclusive neighborhoods in the nation-close enough.
  Good Neighborhood-by definition.
  Quiet-tomblike disturbed only by the sound of Porsches, Jaguars and Mercedes.
  Out of an Apartment Complex-as far as you can get.
  Close to Transportation-Rich guys don’t like traffic so close to trains.
• Perfect.  But how do we get one?

Back to the Variable List

Neighborhood-found it.  Available housing-found an alternative to buying a house or a condo and renting an apartment in a complex.  Communications-we found the medium of the local magazine.

I was still stumped but Sue figured it out.  Put an ad in the weekly magazine.  My first reaction was that it wouldn’t work and Sue reacted with the fact it wouldn’t work for sure if we didn’t try it and that is another key to getting rich-if you don’t try something there is a 100% probability that it will fail. 

So we went to the magazine, found a heading called Wanted and Sue wrote up the ad.  “Young, responsible, career couple desire coach house.  References available.  Please call ----.”  That was it.  Came out on Thursday and expecting nothing, we got two calls.  The next night we drove to 601 Greenwood-a three-story mansion over a hundred years old in Evanston, Illinois across the street from the Dawes House.  Dawes was Vice President of the United States under Woodrow Wilson.  We met and interviewed with Mr. and Mrs. Stephens.  Tops (his nickname) was head of a large law firm in Chicago and head of the Board of Regents of Notre Dame University.  Mrs. Stephen was a mother of eight and very active in charity and university events.  The kids were grown, they traveled a lot, they wanted somebody to be on the premises and they believed in helping young people.

We saw the apartment over the garage.  Mrs. Stephen apologized for it being tiny but we thought we had died and gone to heaven.  They checked references, we agreed on a rent and a week later we moved in.  The rent was 23% of our income.

Going though a process of planning, wishing, thinking and doing we got a great deal.  And so did the Stephens.  Can you do it?  I don’t know but we did.  And remember, there is a 100% certainity of failure if you don’t try.

Case Study II

I have a friend that did it the other way.  A creative type, Phil got his first advertising job at an agency in Pittsburgh.  He had never been to Pittsburgh, didn’t know anybody there but after a week at a cheap hotel, he found a great two bedroom apartment in a safe neighborhood for a good price even on a first job in advertising salary.  (Advertising starting out doesn’t pay very well because everybody thinks they can do advertising and a lot of people want to.)  On his first day on the job, Phil found the janitor in the office building and asked where he lived.  The area turned out to be a working class, Polish neighborhood.  Phil got the local Polish neighborhood newspaper, checked the ads, found some addresses, drove by, checked the crime rate with the police, called the places he liked and within two days had a choice of three.  Picked one, gave references, paid the deposit and moved in.  A year later he bought a house in the neighborhood.  Buying was cheaper than rent because mortgage interest payments are tax deductible while rent is not.  Phil went on to Chicago, Bangkok, and now owns his own advertising agency in Kansas City.

Phil is a smart guy.  He realized that working class neighborhoods were relatively safe and cheap.  Cheap because landlords in working class neighborhoods can only charge working class rents.  He found the rental availability by going to the medium of the community, the local Polish newspaper, and a landlord that loved him because he had a college degree and a job that paid more than what most working class people made, both rarities in a working class neighborhood.

Case Study III

A more recent example involves our son, Marc, a recent college graduate and newly minted second lieutenant in the Air Force.  His first assignment was a nine-month navigator training class at Randolph Air Force Base in San Antonio, Texas.  His college roommate was from San Antonio and his mother lived five minutes from Randolph and lived alone.  Base housing was full so Marc needed an offsite home and he knew he wasn’t going to be partying a lot as he trained so he moved in with his college roommates mother.  Judy was divorced, her boys were grown and she had the space and could use the money.  Marc paid her $200 rent, $50 a month for cable and mowed the lawn.  His monthly housing allowance from the Air Force was $850 per month so he netted $600 a month and that went directly into savings.  His housing arrangement for those nine months netted him $5,600 tax free in his first year out of college.

Housing is your single largest monthly expenditure.  Any savings there falls straight down into your bank account.  You don’t have the money, time, or inclination to buy a home now but getting the best deal on a rental is vital because it saves money, improves your quality of life and will make you a better homebuyer when that time comes, if ever, because the skills learned in getting the best rental deal are directly applicable to home   buying. 

• For the best deal-
  find a place right off the bat and get settled,
  find an area where you really want to live,
  find the medium the community uses, probably a local newspaper or shopper,
  use your job and references and overall good nature to be a perfect renter for the landlord,
  advertise for your landlord,
  and always, always, ask questions about the area, who owns what, who may know somebody that has a place you want.  Ask, ask, ask everybody.
  and get the best deal because housing is your single biggest expense item.

05 - Stupid Card Tricks

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“I like having the dough to come and go as I please.”

                                                                              Bruce Willis

All You Need To Know

To come and go as you please is our goal and you can’t with a ton of credit card debt.  So we will pay it off.  First we have to lower that rate—Google “low interest credit cards” and find the lowest but don’t get that card.  Call your existing credit card companies, tell them the rate you can get and ask them to lower their rate to match.  If they want you they will do it.  Now throw all the cards, except one for an emergency, in a drawer and lock it.  Pay and pay and pay, starting with the most expensive card first and think about the 31% return you are getting.

The Details

Be Like Bruce 

You gotta love Bruce.  If I’m flipping the channels and hit Die Hard I’m done for the evening.  And I don’t know who tossed who but if a guy can get over Demi Moore, well, enough said.  But more importantly, Bruce doesn’t have credit card debt.  But, you say, Bruce has a lot of money even after making a bunch of dud movies but so what, I bet Bruce never had credit card debt because he wants, no demands, to “come and go as I please.”  That’s where we’re going.

How do we get rid of it?  Pay it off.  Go into financial celibacy and grind it out.  Every cent needs to go to those bad boys at Citibank.  End of chapter. 

Ok, not really.  We will, reluctantly, go into and explain FICO scores and techniques to consolidate and reduce the amount of credit card debt you have to pay.  But once out, we are out.  You’ll be like the ex-junkie, ex-smoker, ex-alcoholic.  A charter member of Credit Cards Anonymous.  First, for FICO.

America is obsessed with FICO scores.  FICO scores measure creditworthiness on a scale from 300 to 850 with, like bowling but unlike golf and cholesterol, the higher the score the better.  For the trivia buffs out there FICO does not stand for the Federal Insurance Company but for the Fair Issac Corporation, the guys who came up with this monstrosity. 

I don’t know who the Fair Issac is, or was, but the important thing to remember is that FICO is important when 1) you buy a house 2) finance a car 3) get insurance.  Hopefully, these things will be in the distant future and you have plenty of time to fix your score so it will be pristine when you need it.  Financial planners will jump up and down about needing a great FICO score NOW so you can get a great rate on your new borrowings.  Let’s look at this logic a bit more closely.  I need a great FICO score so I can borrow more which will reduce my FICO score and limit my future borrowing or increase the interest rate I pay.  The hamster just keeps running around in that wheel.  You need a good FICO score and we will get one but you don’t need it now because you are not buying a house and hopefully you are going to make that car last for another year or two or, better yet, have no car at all.  The impact of a FICO score on the cost of insurance is not enough to really worry about right now.

A good FICO score is not hard to get if you do the right thing.  FICO scores are based on the following items and the following percentages in order of importance.

Paying Bills On Time                 35%
Credit Card Balance
As a % of Total Credit Line       30%
Length of Credit History            15%
New Accounts and Recent
Applications for Credit               10%
Credit Card and Loan Mix          10%
                                                    100%

Is it just me or is this stuff all sounding like things your mother told you to do?  Pay bills on time.  Wow.  Credit card balance as a percentage of total credit line is a little more complicated but, as usual, not much.  If you have a credit line of $100 and you have credit card debt of $98 the smart financial analyst at Bank of America is going to say enough is enough and ding your FICO. 

Length of credit history.  Again, a little complicated but not much as the rationale is the more we know about you, the easier the decision to lend or not.  A person with five years of on-time payments is a lot easier to lend to than somebody straight out of school who was late on the electricity payment five out of six times.  New accounts is self-evident so don’t open an account every time somebody at the Gap offers you 10% off at the checkout counter if you apply for a card.  The last one is the most complex—for some reason card companies like you to have more debt than just credit cards.  They want car loans and student loans along with credit card debt because it tells them just how much they can lend to you before you go over the edge into bankruptcy and then they don’t get paid-ever. 

That’s it, I can’t stand to even think about FICO anymore except to improve it you really only have to 1) pay your bills on time all the time, 2) not max out your credit line (your credit line is a prominent number on your monthly bill so don’t say you don’t know it) 3) keep the cards you have which will maintain the length of your history.  (Don’t cancel any cards, just take one to use in an emergency and put the others in a drawer, preferably locked.)  4) do not apply for any new cards.  Forget about the credit card/other loan mix.  It is what it is and is only 10% of the score anyway.  Do 1 through 4 and your FICO score will be just where you want it when you finally really need it.

I can see the light at the end of tunnel.  Almost through with the subject of credit cards.  One last issue—what can you do to pay the least amount of interest while paying down and eliminating the balance?  That is the question.  The question is not how can I get the best deal on an interest rate so I can borrow more. 

The answer to the original question is go shopping.  Google “low interest rate credit cards” and stand back and then read the fine print before applying.  Then, call your existing credit card company and tell them the rate you can get.  They may look at your balance and FICO score and say good riddance.  If they want to keep you, they will lower their rate.  They will also put a little black mark next to your name as a troublemaker but you’ll probably get the rate.  If not, transfer your balance to a cheaper card but be careful of 1) what the low rate applies to as most apply only to the transfer amount and not new purchases and 2) any hidden fees which are usually linked to late payments and late is defined here in minutes, not days.  And sometimes there are fees to do the transfers. 

Finally, never pay an annual fee for a credit card.  Forget the miles unless you travel for business 52 weeks out of the year and, for some reason, want more.  Google “no fee cards” and millions, most with some kind of reward program, will pop up.

Ok, I can’t take it anymore.  There is more little stuff to know but our goal is to get off financial crack, not make it cheaper.  Pay your bills on time, pay off your credit cards ASAP, and improve your FICO by doing so.  FICO is important so get it in shape for when you will really need it in a few years.   

04 - Debt & Credit Cards, Financial Crack

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“You want the truth, you can’t handle the truth.”                                                                        Homer Simpson

All You Need To Know

Credit card companies charge the highest rates this side of pawn shops and loan sharks.  You will not incur credit card debt as this leads to poverty.  If you have some, your immediate goal and most important goal is to pay it off because the real cost of credit card debt is north of 30%.

Carry one card for emergencies (emergencies are defined here as having money to call the hospital when your arm is cut off, not the ability to buy a pair of shoes) and throw the rest in a drawer.  Do not cancel the cards.

The Details

I hate credit cards.  I hate FICO scores.  I have both. 

Credit cards come in handy but only in emergencies but people differ in defining emergencies so let’s go through some basic rules and basic financial theory on debt overall. 

Rule Number 1-There is no good debt.  There is only varying degrees of bad debt; not so bad, bad but could be worse, and worst.  The interest rate varies accordingly.

Not So Bad Debt is made up primarily of mortgages and student loans.  Interestingly enough they carry the lowest interest rate because mortgages are secured by the house and student loans are guaranteed by the Federal government or more correctly, you the taxpayer.  Secured means the lender gets the house and the downpayment if the borrower doesn’t pay.  Guaranteed means that the lender’s credit risk is not the borrower, in this case a new graduate who is a terrible credit risk, but the government because the government, in an attempt to make college affordable, guarantees to pay if the student defaults.  Because the risk to the lender in both cases is low, the interest rate charged is the lowest.  Finance is easy.

Could be worse debt is stuff like car loans and loans made to buy things like washing machines, home entertainment centers, and other stuff.  The loans are secured by the stuff but you might run the car into a lightpole or not change the oil and the thing wears out so the interest rate charged by the lender is higher than the rate charged on houses and student loans.  This leads to Rule Number 2-The higher the risk, the higher the reward required by the lender.

Which segues into the Worse debt which is credit card debt.  Credit card debt is unsecured debt-Citibank cannot repossess your lunch and doesn’t want to.  The only thing backing the card is you and a lot of us are bad credits so Citibank and the thousands of other lenders that send you cards in the mail have to make up the lack of security and bad borrowers through-all together class-higher interest rates.  In fact, the highest outside of a pawn shop or loan shark.  But this is not the place for a tirade against banks for forcing credit cards on us.  A lot of useful things are dangerous if not used wisely---like fire.  If people are stupid enough to pay 15-20% over inflation and pay only the ‘minimal amount’ each month, so be it. 

Which leads to Rule Number 3-You will never pay off the balance paying the minimal amount each month.   Rule number 3 comes into play because most finance books and finance columnists say that it takes 10 years and three months to pay off a $10,000 balance if you make only the minimal, required payment.  Actually the time period is forever because if you get the balance down you will just add to it and the balance goes back up. 

So what’s a girl to do?  Hopefully, nothing because hopefully you have little, if any, credit card debt.  If you have any, pay it off.  Many planners say to pay it off because if you are paying, say, 20% on the card, that is an immediate 20% return when paid off.  I think this is way too low and here is why.  This is Rule Number 4-If you are borrowing, you are not investing.  There are some exceptions but for the time being, buy off on this because of this formula:  Credit Card Interest plus Forgone Investment Return=True Cost of Credit Card Debt.  In this example, you are paying an interest rate of 20% (low by historical standards) and forgoing the seventy-five year average annual return of the stock market of 11% SO the real rate of return that you are NOT getting is 31% (Credit Card Interest Rate of 20% plus Foregone Investment Rate of 11%=31%.) 

The real cost of credit card debt is 31% and we need to get rid of it and the only way to do it is to pay it off.  Quit using it and start paying it off.  That’s it. 

But how?  I hate credit card debt so much I even hate to go here but I will.  Here goes.

03 - Budget is NOT a Four Letter Word!

Download 3_budget_is_not_a_four_letter_word_.doc

“The lack of money is the root of all evil.”

                       George Bernard Shaw

All You Need To Know 

The average college graduate will have a starting salary of about $35,000 this year.  Not sure where I got that but it is ok for a starting point.  That means you will make $2,917 a month but you will KEEP only $1,895 after taxes and deductions.  You will have to learn to live on this amount using a budget.         

Start with your paycheck.  Deduct your expenses starting with rent, than food, then utilities and so on.  If after all the expenses you still have some cash left over, that is your budget.  If you don’t have cash, look over your expenses and eliminate (this is the hard part) enough of them till you have positive cash and that is your budget...to begin with.  Read on for the details or just live with what you just figured out.  It’s up to you.  The only absolute key to financial independence and wealth is to spend less than you make.

The Details - The B Word
I don’t like budgets.  The word smacks of deprivation, denial, not getting what you want.  Financial planners and personal finance writers love, and I mean love, to write about how not going to Starbucks and not getting some kind of latte will save you a lot.  Stop buying lattes and you are on your way to financial freedom.  Get Starbucks out of your life and budgets take care of themselves.  But lots of people like, no love, Starbucks or there wouldn’t be so many of them.  And, if you are one of those people, great.  Go to Starbucks and order what you want.  To me coffee is just a drug but if you want Starbucks, go ahead.  I’m not going to stop you.  Drink lattes till you drop. 

But, spend less on something else. 

This concept has a name.  It is taught in every finance course and every well-run corporation worldwide.  It is the Capital Asset Pricing Model and like all great concepts, it is simple.  It states that there are always more projects than there is money to fund those projects.  You know this instinctively-you know you cannot afford to live, alone anyway, in Trump Tower on $35,000 a year.  You may be able to afford the payments on a Porsche but not much else so the Trump Tower and the Porsche are out, at least for now.  But you can afford Starbucks. 

The Capital Asset Pricing Model makes YOU determine what is important to YOU and what YOU are going to spend YOUR money on. 

There is another concept that is taught in every university, usually in Psych 101, and that is the Hierarchy of Needs.  Needs says that food comes before shelter, shelter before clothing, clothing before something else and so on…a Hierarchy of Needs.  Your personal Hierarchy of Needs and your own personal Capital Asset Pricing Model will determine how you spend your money.  Not a budget. 

Note: Absolute dollars mean nothing while percentages mean everything.  $35,000 or $50,000 or even $75,000 may be starvation wages in New York while small fortunes in Omaha.  It is necessary to think not in absolute dollars but in percentages as in my rent is 35% of my salary, my car payment is 15% of my salary, utilities are 10% of my salary, savings (including the 401(k)) are 15% of my salary and so on.  It pays to learn how to do the percentages correctly.  Math mistakes involving percentages can be costly, both to your finances and your career.

Percentages limit your resources to a definable amount.  You cannot have more than 100% of something.  When expenses exceed 100% of the money available, you are broke.  (There is one way around this problem and we will address it in the next chapter.  The only problem with the solution is that it is absolutely the worst thing you can do to your financial freedom.)  Let’s see how percentages work with our hypothetical salary of $35,000. 

You have $1,895 to live on for a month.  Hold it, you say, I make $35,000 which divided by 12 months is $2,917 a month, not $1,895.  That’s true.  You make $2,917 a month BUT you take home, put in the bank, only $1,895 because the difference goes to-

• Gross Salary                                      $2,917                    100%
  401(k) Contribution                                  292                      10%
  Taxable Income                                   $2,625                      90%
  FICA (Social Security/Medicare)                263                        9%
  Federal Withholding Tax                           267                        9%
  Medical Insurance                                     200                        7%
  Net or Take Home                              $1,895                      65%

Out of your gross you have to fund the government (income tax, Social Security, Medicare) and your retirement and medical insurance so when everything is all said and done you have $1,895.  We will discuss all of these items in later chapters and how you can tweak them but for now here is your budget based on take home of $1,895.

Beginning Cash                                            $1,895                     100%
                        -Rent                                         566                        30%
                        -Food                                         285                        15%
                        -Clothing                                    190                        10%
                        -Car Payment                              190                        10%
                        -Student Loan                             190                         10%
                        -Electricity, Cable, Cell                190                         10%
                        -Other, aka, what’s left over       285                         15%
Ending Cash                                                    $    0                                    

But you get another paycheck and the process starts over.

The observant Liberal Arts grad will note this budget follows the Hierarchy of Needs-food, shelter, clothing and so on.  Money has to go first to the fixed expenses and what is left over is the fun part so our goal is to minimize the fixed expenses to maximize the amount available to spend on the fun stuff and also to invest which will lead to the big payoff in the form of wealth creation.    

Everyone and everywhere and every budget is different.  The sample budget is just that, a template to play around with.  For example, try to find an apartment for $566 in New York so we increase that allocation to 45%, or $850 which still might not work (solution-get a roommate) but at least you don’t need a car because you are in New York which frees up almost two hundred dollars a month.  And maybe the parents were really great and paid for all of college so no student loans freeing up another two hundred to spend on that apartment or beer or dinners out or savings (had to throw that in.)  If they did pay for college, call them this weekend and thank them-no big deal for you but it will make them happy.  The key, again, is to cover the basics, the Needs in the Hierarchy, to free up money for the fun stuff. 

Congratulations, you’ve done a budget.  And budgets, like diets, are easily broken.  As W.C. Fields said, “I can quit drinking.  I’ve done it a thousand times.”  The way to keep on budget is to track it and the modern banking system is the answer.  The best tools for cash management and budgeting are the debit card and electronic banking.  On-line banking eliminates any excuse for not knowing how much money you have at any point in time. 

So track your budget by using your debit card for everything possible which, these days, is almost everything.  Forget cash and avoid the ATM because cash will go through your fingers and you won’t remember where you spent it.  Cash should only be used for cabs and tips so quit taking cabs and quit tipping-you can’t afford either at this point. 

There are only two groups in society that love cash-drug dealers and politicians.  They love it because it can’t be traced.  There is even a name for this in corporate finance—funds are fungible meaning cash can be used for anything and can’t be traced.  Well, it can but not easily.  So use your debit card and be sure to put the receipt in your pocket and not the bag.  Pull out the receipts at the end of the day and enter them in your checkbook register. 

Each month, better each week, record the expenses from the register in the appropriate category in the Hierarchy of Needs and compare to budget.  Over time, trends will emerge and adjustments made.  Don’t jump out a window if you go over in a category; just don’t let it happen again or better yet, adjust your spending in another group to make up the difference.  And if you keep screwing up at least you know where and why.  Knowing a problem exists is the first step to solving the problem.

That’s it.  The budget is in place to handle the money you have left over after paying taxes and other non-fun stuff.  And you have covered the basic necessities in the Hierarchy of Needs.  And you have some money left over. 

But you know deep inside that you are going to bust the budget and you even know how.  Well, so do I.  It is the call of Citibank, Capital One crack…the credit card. 

02 - Money Topics

Download 2_moneytopics_.doc

A Guide to the Categories

1-What This Is All About

2-Money Topics

3-Budget Is Not A Four Letter Word

      Setting up a budget that won’t kill you based on the money you have to spend

4-Debt And Credit Cards

      Not so bad debt, ok debt and really bad debt

5-Stupid Card Tricks

      How to manage and get rid of credit card debt

6-Winning At Renting

      Finding a place you really want to live in

7-Car Wars

      How to figure if you need a car and how to get one that won’t break your bank

8- Taxes, The System

       It won’t make you like them but at least you’ll understand them

9-Buying A House For 20%, 30% Off-Or More

       The long-term planning process for beating the system

10-Insurance: Winning The Game Without Getting Sick Or Dying Or Going Broke

       What to get and what not to get

11-Marriage:  What Does Love Have To Do With It?

       Money and love are not necessarily incompatible

12-Your One Stop Investment Strategy

       The investment strategy that takes ten minutes, lasts ten years and will make you rich

13-Investment Strategy Number 2-Making Your After Tax Money Grow

       A variation on 12

14-The Next Couple Of Years

01 - What This Is All About

Download 1_what_this_is_all_about_.doc

“Clueless, totally clueless.”  My daughter Margot’s harsh words about her college friends understanding of money and wealth.  They don’t know (and you probably don’t either)

o Why a budget is necessary but not one that sucks out all the joy in life
o How to manage credit cards
o How much to pay for housing
o Finding a place to live that is a home, not an apartment
o How and when to buy a house
o What job is right for now and what job is right for later
o What is needed in the way life, health, and car insurance
o How to invest
o What to invest in.
o -Simply, how to get rich.

How to manage money is not taught in school.  Personal finance is on the job training with no instruction manual.  This blog is set up to provide answers and insights to all these issues in plain, simple, non-preachy, English. 

We will cover real life situations including
• Creating an investment strategy in ten minutes that will last ten years
• Marriage-What does love have to do with it?
• Buy the car that will last five years but pay for it in two years
• Make insurance easy, really
• Beat Citibank, or any other bank, at their credit card game
• Buy a house for 30% off--anytime, anyplace
• Guarantee retirement, when you’re 22
• How much you need to make to live the life you want to live
• What rich really means.

Ask Uncle Bill reverses the odds for you in your battle against debt and a lifetime of living paycheck to paycheck.  This blog maps out simple steps that, applied over time, will make you a winner and independent and, most importantly, wealthy.  And if you don’t see what you want, just Ask Uncle Bill.

99 - Posting Procedures

Notes on posting - the correct procedure.

Download 99_posting_procedures.txt

1) create all the correctly named categories, carefully following the naming and spacing convention to keep things looking tidy "00 - Category Title" is (##SpaceHyphenSpaceCategoryName)

2) open the Word doc for a category

3) do 'edit - select all' and 'copy', then open Notepad and paste the Word text into Notepad, this strips the formatting away, the font should be 10 point Arial, all the bold/italic/etc goes away.

4) save that .txt file for future use in reposting so you don't need to do the above again, using the same EXACT name as you named the Word doc (just for consistency)

5) in NEW POST, select the appropriate category from the pull down menu; also for Title put that same title in with the number

6) edit/select all, copy the text from notepad

7) paste the text from notepad for that category into the new post edit screen

8) remove the title from the top in the posted text, you don't need it there in the text body of the post; it's in the Title and Category

9) put your cursor at the top of the New Post screen, above the text you pasted in, and do the Word doc file upload for that chapter/category using the little document icon, the one with the arrow pointing into it; it will open a Dialog box with a 'browse' button, browse to the place on your computer where the correct Word doc for this category is located, double click it, then click the Upload button - a link to the document now appears in blue hypertext in the New Post screen

10) do any bold, italic etc formatting to the text in the New Post

11) bottom of screen, do save/post and view the updated blog to make sure it looks ok

12) start over go to NEW POST remember!

08 - Taxes

Download 08_taxes_.doc

    The hardest thing in the world to understand is income tax.
                                                                          Albert Einstein

All You Need To Know

Not really, Al.  And you really don’t need to understand taxes, just know how to calculate them, not overpay them, what you are actually paying, and how to reduce them.

The key to taxes is knowing how to fill out forms.  The first tax form when you go to work is the W-2.  If you had any kind of job in high school or college, you already have done one.  The next form is the tax return itself that most people think is hard and thus go to H&R Block but for someone like you making a straight salary, it is easy.  Google tax forms or go to IRS.com and they pop up.  Download the 1040EZ or the regular 1040, follow line to line and pay up by April 15. 

Most people think that rich people find a way around taxes.  They don’t, at least not legally.  Right now you can reduce your taxes in only a few ways and they are 1) retirement plans like your 401(k) or IRA, 2) medical insurance deductions or 3) mortgage interest.  The best way to reduce your taxes is to own your own business but that’s not an option right now.

So what is the purpose of this chapter?  To understand and feel the pain of taxes.  If you don’t want to, quit reading now.  If you at least want to understand, Einstein not withstanding, the tax system in a bit more detail, keep going.

The Details

Doing the form yourself instead of some moron at H&R Block (I don’t want to sound dismissive but, for some reason not to be discussed here, I took the H&R Block training course and it is scary-if you think these people know more than you, think again.) makes you see where your dollars go and just how many dollars YOU earned are not going to you.

The tax code is progressive as opposed to regressive.  A regressive tax is one that costs the same for everybody-a day laborer pays the same for a car registration as Bill Gates.  A progressive tax means the more you make, the more you pay.  Bill Gates makes more than a day laborer so he pays more.  Sounds fair until it is applied to you.

Here are the tax brackets for a single wage earner.

Income                                            Tax Rate
Up to $7,150                                        10%
Between $7,150 and $29,050               15%
Over $29,050                                        25%

It gets worse but let’s concentrate on this now and the lesson is that for every dollar (after confusing things like the standard deduction) you make over $7,150 you pay 15 cents to Uncle Sam.  For every dollar over $29,050 you keep 75 cents and Washington gets 25 cents.  In business this is known as the marginal tax rate, the percentage rate paid on the next dollar of income.  Put another way, this means you are working from January 1 until March 31st for the United States Government.  Think about it.  Then add on top of this the FICA tax and Medicare and state and local taxes.  Ouch.

The W-2

As noted, the first step in tax planning is the W-2 you fill out at work.  Follow the instructions.  You will probably take one or two exemptions.  When in doubt, take one.  Don’t put zero which will result in greater withholding which will lead to a big refund which lots of people love but is really DUMB because you are making a 12 month, interest free loan to the same guys that are taxing you, the US government.  Instead take one or two exemptions and direct your bank or mutual fund like Vanguard or Fidelity to directly debit your bank account, say $50 a month, and put it in a money market account or savings account.  The net result is that you have the money, not the government.

Tax Forms

People are scared to death of doing their own taxes.  They shouldn’t be as the forms at your level of income are pretty easy and you won’t miss anything if you follow instructions closely except a fee paid to H&R Block.  Google tax forms or IRS.com and download the 1040’s and start. 

If you get hung up, go to Best Buy, Staples, Office Depot or any other place that sells software and pay between $10 and $20 for a program like TurboTax by Intuit or TaxCut by none other than, H&R Block.  It’s an interview type program and will automatically alert you to any breaks you might have coming.

It will be pretty easy and you will see where your money goes and how much is going.  The forms and programs will also alert you to the savings of a 401(k) or IRA and anything else you may qualify for in the way of tax relief.  But don’t count on much.  The program will save you about $50 to $100 in tax preparer fees.  You will also feel a little more in control of the system and you can flaunt it at work.  Or you can do the same for friends and colleagues and make some money as a tax preparer as there is no certificate or training needed to do tax returns for money.

The System

The tax code is progressive which means the more you make, the more you pay.  It wasn’t always that way.  Prior to 1913 and with the exception of periods of crisis such as the Civil War, there was no income tax.  The government was funded by tariffs on imports (which encouraged smuggling) and ‘sin’ taxes on tobacco and alcohol.  For some reason, Congress passed and the states ratified the income tax system in 1913. 

The big change in the system came in 1943 when, in an attempt to improve collections, they came up with the withholding tax.  The employer takes the tax out of your paycheck and sends the money to the Internal Revenue Service.  You don’t see it so the pain is not felt.  Can you imagine sitting down and writing a $300 check to the government every month?  I don’t think so.  The guy you have to thank for the idea was the then chairman of JC Penney so think about that the next time you are at the mall.

So, how much is being withheld?  As we said, you are paying 10% for every dollar earned under $7,150 adjusted for details like the standard deduction that you will learn about when you do your return.  The rate is 15% on every dollar earned between $7,150 and $29,050 and 25% on every dollar over $29,050.  That really hurts.  Then add in FICA and Medicare and there goes another $2,600 or so a year on a $35,000 salary.  And then state tax which is everywhere except for six or seven states like Texas, New Hampshire, Florida and a couple others I can’t remember right now.  On top of that add the regressive taxes like sales tax and taxes on your cell phone—take a look at your bill next month and see what that is costing you. 

Finally, this is after Bush cut taxes.  It was even more before he got the rates lowered.  This is also why people in the private (for profit companies) sector want tax reduction and people in the public sector (government employees and mayors and politicians) don’t want tax cuts because that cuts down on money going to them.  But enough of theory.  What can you do to reduce taxes?  Not much but you can do something.

Cutting Taxes

If you pay something (your employer picks up most of the cost) for medical insurance at work, your payments should be excluded from your taxable income.  So if you make $35,000 and you are paying $1,000 a year in health insurance, your taxable income should be $34,000.  A quick call to HR or Payroll will confirm.

If you have student loans and make less than $50,000 single, $100,000 married, you can deduct the interest, not the principal, on student loans.  Turbo Tax or any other program will alert you to this.

The big winner when it comes to reducing taxes is the 401(k).  If you invest 10% of your $35,000 salary in your company’s 401(k), your taxable income is reduced to $31,500.  That’s a chunk.  Go to Human Resources and get on this one.  Most companies also have a match where they will put in money and ‘match’ your contribution..  If your company does not have a 401(k) consider changing companies.  While doing so, invest in an IRA or Roth IRA.  The details are in the section 12.

The other big tax reducer is mortgage interest but you aren’t at that stage yet so forget it for now.  Also, remember that charitable contributions are NOT deductible unless you itemize which you can’t do right now.  If you want to contribute to a charity, church or university, consider donating your time instead of money at this stage-it’s more meaningful for you and less expensive.

Finally, the ultimate tax break is YOUR own company.  If you own your own company every expense, remember that, every expense is deductible because you are taxed on your net income (what’s left over after expenses) instead of being taxed now on your gross income (what you start with before expenses.)  The tax code recognizes that business is risky and it rewards business owners for taking risks.  So everything you use for business is deductible including automobile expenses, travel, entertainment up to a point, meals, even clothing in some cases.  Look around—if your employer is providing free coffee and doughnuts, you can bet they are deducting the expense.

You want to own your own business someday anyway so plan ahead but for now check out your health care cost deduction, max out your 401(k) and think about a house.  And, grit your teeth and pay the taxes.   

10 - Insurance

Download 10_insurance_.doc 

Insurance - Winning the Game Without Getting Sick, Dying or Going Broke

There are worse things in life than death.  Have you ever spent an evening with an insurance salesman?

                                                                        Woody Allen

All You Need To Know

This is going to be a real quick chapter because I hate insurance—you are paying for something that only pays off if you have an accident, get sick or die.  No thanks.  First, here are the insurance products you DO NOT need, right now anyway.

Life Insurance-No, no, no.  If you are single or married with no children, no.  If you’re single and die who cares except your parents and they don’t need the money.  If you’re married and no kids and you die, your spouse has a job and will miss you, for awhile.

Renters Insurance-Just starting out, you don’t have a lot of valuable stuff and the odds of somebody breaking into your apartment and stealing your non-existent stuff is slim, so don’t buy it.

Collision and Comphrehensive Auto Insurance-If your car is paid for and a beater, don’t carry collision or comphrehensive.  Also raise your deductible on your liability insurance after your emergency fund is funded.  This lowers your premium, a lot.  If you have a loan on the car, the lender will require you to carry comphrehensive and collision so pay off the car fast.

Umbrella Insurance-this insurance protects you against lawsuits if somebody slips on the ice on your walk and sues you.  First, you don’t have a walk and you don’t have any money so lawyers will not bother to sue you.  Don’t buy it.

Other Types of Insurance-there are all kinds of stupid insurance products out there, even hole-in-one insurance for golf events.  And burial insurance.  If you die, let them throw you out in the street, you don’t care.

DO BUY these coverages.

Medical Insurance-Your company will probably offer some kind of insurance or a variety of choices.  Get the one with the lowest cost and highest deductible assuming your emergency fund is funded.

Liability Insurance-this is car insurance that pays to fix the other guys car when the accident is your fault.

The Details

Insurance is a fact of life but one of the more confusing facts and needlessly so. 

Any kind of insurance is a bet, a bet between you and the insurance company.  You are betting that you might, might have an accident or an illness sometime and are willing or required to get protection against that event by paying a reasonable(?) fee for that protection.  The insurance company is betting that you do NOT have that accident or illness so they can pocket the premium.  Also, insurance companies are not stupid and they don’t cover stupid things like floods.  That’s right folks—most of those people in New Orleans did not have insurance because the insurance companies did a little thinking and concluded that houses built twelve feet BELOW a lake are not good risks. 

So to figure your insurance needs and costs to protect yourself, you need to figure out your risk tolerance.  We will go into a little more depth on the insurance you don’t need and then on to the levels of insurance you do need.

Life Insurance does not protect you.  It protects those dependent on you from financial ruin when, and if, you get run over by a bus.  But you don’t have any dependents right now so you don’t need the insurance.  Your company may provide some life insurance but unless it is free, decline.  Not suprisingly, the insurance industry has an argument for buying life insurance even when you don’t need it.  The rationale is that you should buy insurance now when you are young because when you do need it you will be 1) older and 2) you may not qualify from a health viewpoint.  The counter argument is that, yes, the policy may be a bit more expensive because you are older but they are ignoring the fact that you saved five to ten years of premiums by not buying the stuff when you were 22.  As far as the health issue goes you probably will be healthier when you are 30 than you are now just because you’re not running all over town at 30. 

The bottom line is don’t buy life insurance now unless you feel a life threatening disease coming on or you don’t have any other use for the money.  You DO need life insurance when you have a non-working spouse and two or three screaming kids running around the house but we will leave that for later.      

Renter’s Insurance  Most thiefs concentrate on targets that have something worth stealing unless they are in training.  Since you don’t have anything really worth stealing, weigh the cost of insurance against the odds of a break-in.  This is an example of determining your tolerance for risk.

Collision and Comphrehsive Auto Insurance  There are three types of auto insurance.  Collision pays to fix your car if you have an accident and it is your fault.  Comprhrensive pays to fix your car if a tree falls on it or you get caught in a hailstorm or some other kind of natural disaster.  Liability pays to fix the other guys car if the accident is your fault.  You have to have liability by law in most, if not all, states. 

You should consider canceling collision and comp if your car is paid for and it is old.  Remember, insurance is a bet.  You are betting that you will have an accident and the insurance company is betting that you won’t.  If you are a safe driver and have not had an accident that was your fault, you may want to agree with the insurance company for once and decide to cancel collision.  Plus, if you think the chances of a tree landing on your car or getting stuck in a hailstorm are slim then you may want to cancel the comphrehensive.  There is an additional, more compelling reason for canceling both.  If you have an accident or the tree does fall and you incur $8,000 in damages, the insurance company will not pay $8,000.  They will pay if the car is worth over $8,000 but if the car is worth only, say, $2,500 they will pay you $2,500 (less your deductible) and you are on your own to find a replacement for old Betsy. 

Again, this is an example of determining your risk tolerance and weighing the cost of coverage against the possibility of an event and the payoff if the event occurs.

Umbrella and other types of insurance aren’t even worth talking about at the moment.

The Two Insurance Products You Do Need Are Auto Liability Insurance and Medical Insurance

Auto Liability Insurance pays to fix the other guys cars if you cause an accident.  It is required by law in most states as a condition of getting auto registration but some people still find ways around this and drive without insurance.  Conversely, if the other guy causes the accident his/her insurance will pay to fix your car and pay your medical bills.  The goal here is to avoid being in an accident and avoid being in an accident with somebody that does not have insurance.  There is no way to tell but practice some auto profiling and give a wide berth to people that weave in and out of traffic, have dragging tailpipes and large plumes of smoke trailing out the back of the car. 

Most states require a minimum of $50,000 coverage per occurrence.  Get $300,000 and think about $500,000.  This is one rare area where getting more than the minimum is applicable.

Car insurance, like all insurance, is confusing but armed with this knowledge you should be able to at least talk with an agent.  I recommend you use a major company but one that does a majority of their business over the phone or internet like GEICO.  GEICO is owned by Warren Buffett (trivia—Margaritaville’s Jamie Buffett is Warren Buffet’s nephew) and Warren is not out to make money by offering shoddy service.  I don’t use GEICO but have been covered by AMICA for a long time so start with these two.  Check them out at GEICO.com and AMICA.com and try a few others to get comfortable with the terminology and costs.

Medical Insurance--you know something about this but have probably never dealt with it as you were covered by your parent’s plan or didn’t go to the doctor much.   

Here are facts that you need to know—

1) You need insurance in case you get in a major accident or come down with a major illness.
2) Your company probably provides some kind of coverage but they don’t like it and you will be paying more for your coverage as time goes on.
3) Since you are young and relatively healthy, you should look for the plan that has the lowest cost which means you will pay more when you visit the doctor and have a higher deductible but you will have a lower monthly cost.  Look for Health Savings Accounts plans, commonly knows as HSA’s. 
4) If your company only has one plan, look at the cost and get quotes from private outside insurance companies for comparison.

Fact One—Because you are young, you should not be getting sick much and you should not be going to the doctor very often, if at all.  Having worked for a pharmaceutical company I learned a lot about the cost of illness and the one statistic that stood out was that 90% of a person’s medical bills are incurred in the year of death.  The corollary is that young people should not have much in the way of medical costs.  So if you are relatively healthy you want coverage for the catastrophes, known in the insurance world as catastrophic coverage.  Catastrophes are pretty much limited to major accidents and catastrophic illness.  Both have low probabilities so your cost of coverage should be low.

Fact Two—Your company may very well offer a wide variety of medical plans.  Be on the lookout for the word “Cafeteria.”  A cafeteria plan is based on the food concept-go in, look around and pick out what you like.  Unless you have some chronic reason for going to the doctor and you need a lot of drugs, the legal variety, you should be looking for a high deductible, low cost plan. 

If there is only one plan then look around at your co-workers and look at the cost of the plan because you are paying the same amount for coverage as the obese guy that sits next to you and smokes two packs of cigarettes a day in between Twinkies.  Check the cost of the company plan versus private companies that offer medical insurance on the open market and compare costs.  Remember that building wealth is about stopping leakage and if you are paying a lot out for medical insurance that you don’t need, you are leaking a lot.

Fact Three—Health Savings Accounts are a great place to start.  Your company may offer them so jump on it.  If not, you will have to do a little work but it is all on the Internet so google HSA.  HSA’s work like this-low cost, high deductible with tax free savings that build up over time to pay the deductible if, and when, you incur medical expenses.  Put another way, you save $50 a month in a savings account funded out of your paycheck.  The savings and the interest income are NOT included in your taxable income.  You pay $50 a month for medical insurance instead of $150 under a regular plan.  BUT you pay a $500 deductible instead of zero.  BUT when you do have to pay the deductible, you use the money from your savings account.  Sound confusing?  Kind of but it is the wave of the future so get on board and figure it out.  Remember, insurance is all about risk tolerance.

Fact Four-See Fact 3 for details.

Finally, if you do go to the doctor ask if they give a discount for cash.  My doctor knocks 30% off the bill for cash.

We’re done with insurance.