Author: Mike Holman

Some big events this week when both Chrysler and GM were denied any long term bailout money unless they come up with better restructuring plans.  The US and Canadian governments have not given up on them however since both companies were given short term cash to continue operations.  I thought it was pretty interesting that the governments didn’t just rubberstamp the recent deals that GM and Chrysler came up with to improve their operations.

I agree with Obama that the threat of bankruptcy is necessary to get a proper restructuring deal.  The problem with the government just giving these companies more money is that when any tough negotiations have to take place, such as between the CAW and GM – the government ends up being the third party in the negotiations and the union and car company are more inclined to bargain just hard enough to get the bailout money.  This was evidenced by the recent sweetheart deal reached with GM and the CAW.

Bankruptcy will be a tough road but when an industry is so far over capacity and has different parties (companies, unions, pensions) then it might be the best way to get the fairest deal for everyone.  It’s kind of like locking 12 people in a room for a day and a half and demanding that they come up with an agreement on something.  That happened to me several years ago on jury duty and I can tell you that although nobody was happy with the final outcome – an agreement was reached.  Ok, it wasn’t really a day and a half – we were allowed out for dinner at a very expensive restaurant (courtesy of the taxpayer) and for sleeping overnight at a hotel.

Homer: Well, Marge, it was horrible. Everyone was against me in that
jury room. But I stood by the courage of my convictions and I
prevailed. And that’s why we had chinese food for lunch.

Should Wagoner have been fired?

I originally thought that the Wagoner – the head of GM was rightfully fired as CEO because the company had gone pretty far downhill under his lead.  However, after a brief discussion with Jim from Bargaineering.com on Twitter – I realized that maybe replacing him wouldn’t be that easy since he does know the company.  I also read that under his leadership the company went from 177,000 employees to 92,000 today which is an impressive feat.  Now, I think that he should have been kept on – it appears to me that he had the company on the right track but given the conditions of the last couple of years (high gas prices, recession) the goalposts kept moving on him which made it impossible to get the company to the right size quick enough to prevent it’s current situation.  Don’t forget that the pressures to downsize that exist today were not present in their current form before a couple of years ago.  Given that GM needs fixing asap – I’m not sure that he wasn’t the best person.

What’s up with Lewenza?

I wrote about Ken Lewenza – head of the CAW a while ago after he got a pretty sweet deal with GM.  This guy does a lot of negotiation through the media and I’m really starting to think that he sounds a bit like the Iraqi Information Minister who reached some fame during the Iraqi invasion.  It doesn’t seem to matter how bad things get for the car companies he still says things like

The message from the Saturday meetings was “almost unanimous that the pattern agreement struck at General Motors must be the objective of the union,” Mr. Lewenza said in a phone interview Saturday.

when talking about ongoing negotiations with Chrysler.

After the government said that GM must come up with a better deal with the union, Lewenza said the union will not reopen talks with GM.   Ok, Ken – good luck with that.

I read a couple of interesting articles recently over at the Simple Dollar – the first article was about a recent car purchase, a pretty good analysis of why they ended up buying the car they did.  This post had a lot of comments that were critical of the fact that he bought the car using financing even though he had the cash.  Many of the commenters took him to task because he had said so many times in the past that you should only buy something if you can pay cash (and can afford it).  The second post was talking about money management from a risk perspective and addressed a lot of the comments from the first post.

The interesting thing I got out of these posts and the comments was that many bloggers (not just the Simple Dollar) often take on an authoritative tone and hand out pearls of wisdom as though they are the 10 commandments.  One common situation is someone who has a lot of debt and then realizes they need to start cutting their expenses and paying off the debt.  All of a sudden they become experts in the field and start doing ‘top 10 [incredibly obvious] ways to save money on groceries’ or whatever.  I used debt reduction blogs as an example but this is common with all types of blogs.

One of the keys to being an expert is to sound confident that you know what you are doing.  As Mr. Cheap pointed out so well in a post called “absolutes” – you can’t be an expert if you are wishy washy on what you are saying.  You have to be firm that your idea or method is not just the best way, it’s the only way and any other possibility will end up in disaster.  Unfortunately very few things are all that clear cut – this is why “rules of thumb” are often quite useless – they just don’t apply that well to most scenarios.

In the case of the Simple Dollar – the author has used the blog to journal his own financial life from being heavily in debt to his current status of being very successful financially.  A large part of his financial success has been to sticking closely to “rules” like only pay cash for items which is a pretty good rule to follow if your number one goal is to pay off debt.  Now however, he’s come to the point where the rules that apply when heavily in debt, no longer apply to the same degree to someone who is doing well financially.

It was interesting to read some of the comments from readers who felt “betrayed” that Trent would go against his own advice from the past.  I think that he made a good financial decision that makes sense for him and his family – it’s the “betrayed” readers that need to look at who they put up on a pedestal and why.  At the same time if a blogger decides to put themselves up on a pedestal then they should make sure it’s not a high one – you don’t want to have big fall to the ground.

One could make the same argument about the recent Derek Foster uproar when it became public knowledge that he sold all his “hold forever” dividend stocks.  While I still question his move to cash, I also would have to question anyone who reads one investment book and plans their entire investment strategy around it without doing any other research.

One of the prevailing wisdoms floating around the internet is that your best value when buying a car is to get one that is only 2 or 3 years old.  The idea is that you avoid some of the heaviest depreciation years in the beginning but the car should still have a number of good years left with minimal repairs.

I’ve been doing some thinking about this topic recently when I’ve been riding on public transit and have come up with the following thoughts which made me realize that this issue is far more complicated than just buying a late model car to get the best deal.

I’m not going to try to come up with a list of things you have to do to save money on your next car – there are many different situations out there and the fact is that a lot of people don’t necessarily want to save as much as possible on cars – they just want to get the best value for the money they are willing to spend – not everybody is flat broke.  The important thing is to consider these factors and include them in your calculations if you think they apply to you.

Car depreciation amounts per year

I did a bit of research on this and came up with a general rule that a car will depreciate about 20% per year.  Now, I’ve seen some ridiculous depreciation estimates like 30-40% as soon as you drive it off the lot.  All I can say is that if you know someone who is willing to sell their car for a huge discount after driving it off the lot then buy it.  Has anyone ever sold their car on the day they bought it?

This is just a rough estimate and given how poor new car sales have been, it’s not surprising that I’ve heard anecdotal stories that the difference in price between new cars and late model cars isn’t that large.  This is not a sustainable scenario however so I’ll stick with the 20% number for my examples.

How long do you keep the car?

I think the length of ownership is often more important than the age of the car when you buy it.  If someone buys a car that is only a few years old and keeps it for a short period of time and keeps buying more cars of the same age – do they pay less depreciation than someone who buys a new car and keeps it for the entire time?

I did a few calculations and I have to admit the results surprised me – I thought that a new car buyer who kept the car a long time would pay less (or the same) depreciation than someone who bought lightly used cars but didn’t keep them very long.  In fact, I was wrong.

Scenario I

• Depreciation rate is 20% per year.
• New car is $30,000.
• New car buyer keeps the car for 9 years.
• Used car buyer buys the car when 3 years old and sells at 6 years old – he does this 3 times.
• New car buyer pays $3486 more in depreciation (16% more).

This scenario doesn’t include potential repair costs which should be higher for the new car buyer – but it’s a moot point since the new car buyer has already lost the competition in the depreciation category.

Scenario II

• Depreciation rate is 20% per year.
• New car is $30,000.
• New car buyer keeps the car for 10 years.
• Used car buyer buys the car when 2 years old and sells at 4 years old – he does this 5 times.
• Used car buyer pays $7781 more in depreciation (29% more).

Ok, that’s the result I was looking for – of course this scenario is a bit silly.  I doubt there are very many people who buy 2 year old cars and only keep them for 2 years.  This scenario would need an estimate for repair costs as well since the new car buyer would have more of them in the end.

Scenario III

• Depreciation rate is 20% per year.
• New car is $30,000.
• “Buy and hold” new car buyer keeps the car for 9 years.
• “Market timer” new car buyer keeps the car for 3 years and then buys another new car.  He does this 3 times in total.
• “Market timer” pays $18,000 more in depreciation (70% more).

I’d be remiss in my blogger duties if I didn’t point out the extremely obvious comparison of two new car buyers – one keeps the car for a long time whereas the other keeps trading it in every 3 years.  Well guess what?  The guy who keeps the car for a long time pays way less depreciation.  Of course his repair bills will be higher but it’s hard to believe that they will exceed that amount of depreciation difference.

Reliability of the car

This is part luck and part design – you can research which cars are more reliable and buy one of those.  You will probably pay more for that car than one that is less reliable so it could be a trade off.  I don’t have any good advice here except to say that I hate paying for car repairs to the point where I might actually be better off just buying new cars and only keeping for 5-6 years just to avoid the aggravation of it all.

Gasoline costs

This cost is hard to analyze using a rule of thumb because it is so variable.  The price of gas alone is quite variable and of course some people drive very little – others will put many miles on their each year.  Some people do mostly highway driving whereas others will do more city driving which will result in poorer gas mileage.

That said, if you use the car a lot then you should factor in the gas costs into your analysis – but only if you have the option of buying different cars which get very different mileage.  If you are a soccer mom and have to decide between 2 similar minivans, then don’t worry about the gas costs since the difference probably isn’t worth worrying about.  If you are deciding between a Mini and a truck AND you are going to use it a lot, then you better factor in the gas when determining the cost of ownership.

In my ‘buy and hold’ example above – the total depreciation over 9 years was $26,000.  If you spend $240 per month in gas – then guess what you will spend over 9 years?….yup – $26,000.  $240 is a lot of gas for one month but some people do it.  Even if you only spend $100 per month – after 9 years, your gas total is almost $11k.  If you have the opportunity to save 30% or more of that amount then you should factor that into your analysis.

Size and style

Larger vehicles tend to be more expensive – are you buying a larger car by choice or situation (ie large family)?  If it is by choice then you should try to compare your large car options with possible smaller (and cheaper) car possibilities.  If you have already decided on the larger car then there is no point in this part of the analysis but it doesn’t hurt to know how much your choices are going to cost.

Luxury models are the same thing – obviously if you are shopping for an expensive BMW then comparing the cost to a Honda Civic is pointless but maybe you can look at other similar cars and see if there are better values available.  There is a difference between falling in love with a magazine picture and actually test driving her on the road.  And yes, I’m still talking about cars here!!  Keep your mind open…and out of the gutter!

Photo credit.