Educating yourself is the key phrase in this installment of the “11 Principles of a Money Crasher” series. If you want to save money and ultimately be wealthy when you retire, then you need to be an educated consumer. Educated consumers get better deals on the large purchases made during the course of one’s life. I’m talking about cars, real estate, boats, and also insurance products. Insurance is a HUGE expense over the span of one’s life, because you will ALWAYS need to carry auto, homeowner’s, and health insurance. There’s also term life insurance, long-term disability insurance, and renter’s insurance that people pay every year. The people that just randomly point at a car or an insurance product are the ones that get ripped off. I’m not saying that you need to become the ultimate negotiator and take courses at your local community college about insurance, but you need to get familiar with these large purchases. The power of the internet has made it so absolutely no one has the excuse that he or she could not do any research on cars, real estate, insurance, or other big ticket items. The information is there at your fingertips. If you decided to cut your internet out of your house, you can STILL get it for free at the library. This article would be brutal to go into great detail about these big ticket items, so I will give you a brief overview of each and reference some of my most popular articles in these subjects for you to reference.
Cars, Motorcycles, and Boats. Basically, if it’s got an engine, it’s going down in value. You should still treat your car or any other “toy” vehicle as an investment, but realize that it’s really an expense. It’s an expense because money is leaving your pocket every year that you own it from the depreciation that it suffers from normal wear and tear. The general rule of thumb is that you should never own cars that are worth 50% or more than your annual salary. So basically, if you make $50,000 a year household income, then you should not own $25,000 worth of cars. If you do, then my suggestion would be to sell them and start over with a $2,000 car. You can’t afford to be taking that kind of hit in depreciation and make that kind of car payment when you make $50k a year. If you would like more information about how to get out of a car loan when you are upside down on it, then click here to read this article. I am not a fan of leasing cars, either. Why would you rent a car long-term? That’s basically what you are doing when you are leasing it, because the dealership dictates how many miles you can put on it, and they will charge you for any body or interior damage when you turn the car in. I know many people that disagree with me about leasing, and they think there is a proper time for leasing, but I just don’t see it. I see why businesses do it, because it’s an expense for them no matter what, but go ahead and buy the car if it’s for your personal use. Here are seven reasons why I think leasing a car is a bad deal.
I recently bought a Hyundai Sonata from a local used dealership. It was a 2006 model with 28,000 miles. The car was formally a fleet vehicle bought at an auction by the dealership. It had a clean carfax record, and it was in generally good shape inside and out. I was skeptical about the Sonata at first, because I had that stigma in my head that Hyundai’s were not reliable. So, I started doing my homework, researching them on the net and asking co-workers and friends about their experiences with their Hyundai. After doing all of that, I realized that they had improved quite a bit in quality, and the price was very affordable. I went with the Sonata and hopefully my research and the car will prove that I made the right decision. The key here is that you can’t just walk on a car lot and get lured into what the salesman is trying to sell you. First, try not to buy new. If you can buy 1 or 2 year old car with reasonable mileage, you will have bought it at a high discount, because so much of the depreciation of a car occurs in the first 18 to 24 months. Second, don’t buy the first day you go looking for cars. Sleep on it for a night, and go home to do more research about the cars that you liked the most. Lastly, comparison shop with other dealers. Dealerships want your business, so they will match and often beat their competitors prices. Set a fair price in your head about what the car is worth and negotiate with it. You will be surprised at your results when you are sitting in that car at the price you wanted to pay.
Real Estate. There are blogs solely dedicated to talking about real estate. It’s a very complex subject, and the process of buying and selling a home can be fun, arduous, and confusing all at the same time. I touch on certain real estate subjects and tips every now and again, but by no means is there enough information on this site to prepare you for buying or selling a home. One of my more popular articles in real estate is how I am using Craigslist to sell my home and avoid real estate agent fees. I have had dozens of leads from Craigslist and a handful of offers without using a real estate agent. Granted, I am selling a small condo, so it is a little less complex than selling a $500,000 home. I would definitely recommend using a reliable real estate agent for selling a higher-end home or for those that do not have the time to show the property at short notice.
One very important thing to consider is the timing for buying a house. Some people think they are ready to buy a house, but in reality they are far from being ready to buy. You need CASH to buy a house. Stop all of this nonsense with 100% financing, no money down rip-offs. These programs will make you get a second mortgage which will be at an ungodly interest rate. Also, you need a cash reserve for the unexpected problems that will occur in a house. Your water heater might break, your roof might leak, anything and everything could happen at any given moment. Don’t go looking for a house until you have a decent chunk of change stashed away for a down payment and an emergency fund. Check out this article about renting versus buying a house. The bottom line is that I want you to be a homeowner. Being a homeowner is a great step to financial freedom. But, I also don’t want you to be house poor. Many people who fell for the interest-only, adjustable rate mortgages, are finding out that they bought a house that they could not afford. You don’t want your first home buying experience to end in foreclosure or come out of the deal losing money. Take a deep breathe and make a plan for homeownership. You will thank yourself 10 years from now.
Insurance. If there is one thing that I know, it’s insurance. In fact, if you ever have any insurance questions, I’d be glad to try and answer them. I’m an all lines claims adjuster, so my expertise is in auto, homeowner’s, liability, renter’s, and other property insurance policies. I do know some about life insurance and health insurance as well. What boggles my mind about insurance is that it is one of the only products in the world that people will buy without knowing a thing about how it works, what it covers, and when to use it. We sign the dotted line blindly, and cross our fingers that our insurance company will have our backs when something goes wrong. Well, in most cases they will, but in some cases they will not cover you. Hurricane Katrina victims found out in the worst of ways when insurance companies were denying “flood” claims. I disagree that these claims should have been considered to be caused by flood, but the insurance companies had a case and they stuck to it. You can prevent this happening to you by reading your policy and knowing what IS and WHAT IS NOT covered. Many times you will walk into your insurance agent’s office and you will say, “What does it cover?” The agent will then reply, “It’s an ALL peril policy”. You immediately think that it covers EVERYTHING. What the agent meant was that it covers ALL perils EXCEPT that which is excluded in the policy. Here’s three tips for being an educated consumer about insurance.
- ALWAYS read your policy. Make sure to read the Exclusions section and also the Conditions section which explains your responsibilities to uphold your end of the contract.
- Ask questions and ask more questions when meeting with your insurance agent. They are your only initial contact with the insurance company, so make sure you come prepared to ask certain questions about the insurance product. So many people are so focused on the price of the policy, that they forget to ask what coverage it is actually giving them.
- Familiarize with the claims process and how it works. Making a homeowner’s claim or an auto claim can be scary if you’ve never done it before. Do some research about how to handle filing a claim and know in advance what adjusters will expect of you.
Check out this article for a comprehensive breakdown of a general homeowner’s insurance policy.
Check out this article for my opinion on what four insurance policies I believe all people should have at all times