Category: Personal Finance

There are a number of behaviours which are universally despised, yet often creep up as a scummy way to get a good deal out of someone.  When an offer is made and accepted, to then take back your offer and try to get a better deal is a very low move.  If you’re haggling in a developing country and you make an offer which is accepted by a merchant, try withdrawing it and offering a lower amount.  You’ll see someone go, rightfully, from cheerful and happy to near violently angry.

This creeps up as a scam when people negotiate with you and while you’re negotiating in good faith (and assume they’re doing the same), they are in reality (and without your knowledge) only the first line of negotiation.  Once you’ve reached an agreement with them, they’ll then say they need to get someone’s final permission for the deal.  This permission will be withheld, then negotiation will reopen and the new person will try to get an even better deal out of you.

This often happens with car dealerships, where you think the salesman has the power to negotiate, but all of a sudden at the end the sales manager won’t go for it and the deal you thought had been accepted disappears and you have to pay more.  A similar situation happened to a friend of mine recently where she’d negotiated a trade-in value and told the dealership that she didn’t want them saying the trade-in was in “worse shape then they expected” and try to reopen the negotiation.  She invited them to inspect the car before it was brought in, or stand by the valuation they offered.  Of course, they tried to do exactly this (expecting once she’d had her car towed in she’d take the lower offer) and, good for her, she walked.

A car BUYER could do this in reverse by one spouse going in and pretending they were going to buy the car, get to the final stage of making the purchase, and then say they needed to get the final ok from their husband / wife.  Of course, the spouse would refuse, then show up and use the previously agreed purchase price as the starting point for the new negotiation.  I would recommend AGAINST doing this for three reasons.  1)  It’s a really scummy thing when people do this to you, and it’s just as scummy if you do it to then.  2)  The dealership is going to recognize this trick and not fall for it (they’re happy to play games with you all day – you’ll probably get frustrated and give in before they do).  3) There are ethical ways that you can get a fair deal from a car dealership which are far more likely to work.

Another friend used this as his favourite trick when negotiating real estate deals.  He’d hash out a deal, haggle away and pretend he was ready to do it.  Once an agreement was reached, he’d suddenly reveal something that stopped the deal in its tracks (which he’d known about all along and avoided mentioning in the negotiation), then he’d use this to reopened negotiating, trying to get a better deal than previously agreed to (with him having the new information that he knew a price they WOULD agree to).  With some people he was able to get away with this repeatedly (improving the deal each time).  I was somewhat impressed at the deals he negotiated, but was unimpressed with his tactics (and unwilling to do this personally).  He even tried it with me and it almost killed our deal (and unfortunately would have involved lawyers if he hadn’t honoured what we’d agreed to).

If you’re negotiating with someone, and you reach an agreement, DO NOT accept it if they try to reopen the negotiation by adding someone new to the conversation or by bringing up some previously undiscussed issue and trying to reopen the negotiation as a whole.  In some circumstances, such as if a buyer discovered damage to a property they had agreed to buy, you should negotiate about the new issue (the damage in this case and who should pay to get it repaired), but don’t let them use it to reopen the deal as a whole.

If the deal is very important to you, keep reiterating to them that you’ve made an agreement and an offer has been accepted.  If the deal isn’t very important to you (or you have another option for a comparable deal), refuse to do business with someone who tries to pull this on you.

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.

There’s a saying that when the economy turns bad, techies go to grad school which has definitely been true for me.  After the dot-com boom ended in flames, I headed back to school for my Masters, and by coincidence, soon after I started my PhD things turned south.  It worked out just about perfectly for my Masters, as 16 months later I graduated and companies had started hiring again.

If you want to read more about grad school from someone who has been through it all – check out the new site Ivory Tower Unlocked.

I have friends graduating, and finding academic jobs is VERY tough right now.  It’s a better time to be starting a program than finishing one, and if I was at the end of my undergrad I’d  consider carrying on to a Masters if I had the opportunity (and have been encouraging my PhD friends to consider doing a post-doc).

MBA programs are graduate school for business types.  They’re typically advertised as worthwhile after you’ve spent a few years in the work force, then want to put your career advancement on steroids.  Enough people bought into this that they’ve flooded the market with MBAs.  If the program content is good (makes you a better businessman) or if it’s now the minimum qualification needed to advance (an MBA is the new BA for upwardly mobile executives) it may still would be worthwhile going through a program.

Some people, talking informally, will suggest that the real value of an MBA program comes not from the classwork, but from having a chance to spend extended periods of time with people who are serious about moving up the corporate ladder.  Classmates today will be your network tomorrow, referring jobs to each other (as you reminisce about spending an all-nighter preparing an accounting project or getting drunk together on a Friday afternoon after your last exam).

There are MBA programs at a number of Canadian universities (Queen’s, York, Toronto, Ryerson) and internationally, with varying levels of prestige (and tuition).  Each asserts that their program will more than pay for itself in increased salary over the course of a career.  I think this is probably true for people who know that they want to be managers and spend a couple decades playing corporate politics.  If someone is happy doing specialized work (like a techie), and isn’t interested in becoming management, they should probably do graduate work in their own area.  I’m suspicious that entrepreneurs would be better served using their tuition money as seed capital for a business venture, but John T. Reed often refers to concepts he learned getting his MBA at Harvard Business School that he feels made him a better real estate investor, so there might be value in non-corporate areas of your life as well.

One of my friends is involved with The Rotman School of Business at the University of Toronto.  She’s working on a program which lets students get a taste of what an MBA would be like, by offering 8 three hour classes during evenings in the month of May.  Professors from the school lecture on their area of specialization and let a student know what it would be like if they took a program at the school.  It costs $3000, but half of this amount is credited towards tuition if the student then takes CERTAIN full programs at the school.  It’s like a less expensive “trial version” of an MBA.

While I’m totally biased, I definitely think this is a good way for someone living in Toronto to get a taste for what doing an MBA would be like.  If they’re on the fence, this could tell them (at a much lower cost) whether it’s worth making the time and money investment in an MBA or not.  Often companies are willing to foot the bill for education if you can sell them on how it would benefit the company over the long term.

Full detail about the program (and how to apply or get more information) is avaiable here.

The Financial Blogger is currently working on an MBA and has a number of posts on the subject.

For any readers who have done an MBA, how did you enjoy the program and did you think it was worth taking it?

Last week the Toronto Star broke the shocking news that Derek Foster had sold all his equity positions and was sitting in cash as of Feb, 2009. Currently he is selling put options on various stocks to make some money – a strategy he proposed in his third book Money for Nothing.

For those who don’t know who Derek Foster is – he is the self-proclaimed “Canada’s youngest retiree”, leaving the workforce at age 34 after accumulating a good-sized portfolio of dividend stocks.
His first book “Stop Working” was a pretty good read – although his math is suspect, he espoused a somewhat conservative dividend investing strategy and is also a big proponent of frugal living.  One of the keys to his strategy was to buy and hold stocks “forever”.

If you are looking for more information on stocks, ETFs and mutual funds then sign up for a Morningstar free account.

To answer the title of the post – I don’t think dividend investing is dead – it’s not even “sleeping”.  Here are some thoughts:

Derek Foster wasn’t solely a dividend investor

Although Derek owned a number of traditional “dividend aristocrat” type stocks – he also owned a lot of income trusts which are far from dividend stocks.  Most of them are mid-cap (or smaller) companies that pay out a lot of return of capital.  He also got into a lot of option trading as well – which is clearly not dividend investing.  I think if he had stayed with more traditional dividend stocks, he might have had more luck staying in the market.

Diversification is good

I wrote a post a while back called “Ignore the last 10 years” which contained probably the best advice I’ve ever given on this blog.  I didn’t listen to my own advice and I doubt anyone else did either. 🙂  The problem with relying on a single investment strategy is that if it doesn’t work then you are screwed.

The last 10 years or so (ie 1997 to 2007) have been fantastic for dividend investors – especially in Canada.  Over the last year or two – a lot of investors piled into dividend stocks because they had done so well in the recent past.  This was in part because of Derek’s first book which another blogger has named the Foster effect.  This is a recipe for disaster as anyone who has invested in the Canadian banks knows.

Yes, their dividends haven’t been cut but it is no fun watching your investment sitting at 30-40% of your purchase price – dividend or no dividend, that is a bad investment.  We Canadian bank owners have been very lucky compared to the US bank owners though – I’m not sure if there is a single US bank remaining that hasn’t gone out of business or is owned by the government.  It is amazing how socialist America is becoming.

Derek didn’t follow the 4% rule.

The 4% rule is a basic guideline for how much money you can safely take out of your investment portfolio.  I don’t have the exact details but from what I understand – he was taking more than 4% which increases the risk that he will run out of money (or more likely – will have to change his strategy at some point).

Derek didn’t have much of a buffer

It was clear from reading his first book and several interviews that Derek knew how to live cheaply.  The problem with living cheaply however is that you don’t have anything to cut if times get tough.  Derek’s situation is hard to analyze because he made some money from his books.  Another big factor is that he is still quite young (late 30’s) so it’s not hard to imagine that he could easily get a job of some sort to help pay the bills which might mean that a big safety buffer is unnecessary.

Conclusion

Derek is doing fine – his strategy might have had a big downturn but he is a pretty smart guy and will do ok.

Dividend investing is still a perfectly valid strategy – but like any strategy you shouldn’t rely on it 100%.

If you are looking for more information on stocks, ETFs and mutual funds then sign up for a Morningstar free account.  Morningstar is the industry leader in investment information.

The hosting problems we’ve been having lately are finally over – I’ve moved the blog from Dreamhost to Media Temple.  I don’t normally blog about bloggy stuff but I know there are a lot of bloggers who read this site who might find this interesting.

First of all I’d like to thank everyone who helped out with the blog migration and also to many others who offered to help.  I really tried to do this on my own – although painful, it was a good learning experience.  As a self-proclaimed “serious” blogger – I feel it is in my best interests to learn as much as I can about all the different aspects of blogging – even if I don’t want to!  I’m still not sure if I would have been better off hiring someone like Blogcrafted.com (mentioned below) to do it for me given the amount of time and aggravation it was.

Two people who helped out a lot  were:

Finance Freelance Life – she also runs BlogCrafted.com which is basically a blog consulting company.  Some of the services she provides for very reasonable rates are:

• Migrating blogs from one host to another (like I just did) and from hosted platforms (blogger, wordpress.com) to self-hosted (wordpress on a host).
• Changes to your theme or setting up and modifying a new theme.
• Complete new blog setup on any platform.

Pinyo – this guy has a great website at moolanomy.com as well being the brains behind PFBuzz.com which is a great place to find good blog posts.

Some more hosting stuff

For anyone who doesn’t know – “hosting” refers to the server where the blog material and code is kept – there are lots of different companies around that provide this service and the main differentiators are:

1. Price
2. Service – how quickly do they respond to help requests and how knowledgeable are they?
3. Performance – is the blog slow or completely down at times?

How did I decide on the hosting company?

I narrowed down the possible hosting companies to LunarPages and Media Temple.  Both companies came highly recommended and I know quite a few good sized bloggers who use either.  There are many others out there which I’m sure are comparable but I tend to go with recommendations from other bloggers.

Lunar Pages has what I think is the best value anywhere with their shared server hosting – for only $4.95 per month (if you pay for a year) this is as cheap as it gets.  The great thing is that they are very reliable and have good tech support.  I think the shared server option is best for most blogs – you won’t have to upgrade until you get to at least 2,000 uniques per day or a lot more.

Media Temple has a dedicated virtual server option which is quite good for $50 per month.  This is a lot more expensive than Lunar Pages so not only do you need significant traffic – I would suggest a minimum of 2,000 uniques per day, you also need the revenue to support the costs.  One thing to note is that if you pay for a year up front – the cost is only $500 ($41/month) – not so bad.

I was on the fence for quite a while about which company I should go with but eventually I choose Media Temple because I thought I might have too much traffic for Lunar Pages shared server.

My advice for anyone looking for a host is to go cheap until you know you are ready to upgrade.  Both Lunar Pages and Media Temple have cheaper shared server options all the way up to expensive private server options so you don’t necessarily have to leave the company to upgrade (or downgrade).  I made the mistake of upgrading my Dreamhost account to the virtual private server a long time ago thinking that more traffic and money would be soon to follow.  In the end I think I threw a couple of hundred bucks away.  I should have just stuck with the shared server.

Why did I leave Dreamhost?

The reason I decided to leave Dreamhost was mainly because of an incident several weeks ago where the blog was completely down.  I put in a support ticket (they don’t have phone support) and it took them 22 hours to respond.  In my opinion this is unacceptable and was enough reason to start thinking about switching.  The second reason was that the quality of the support was very poor – in the incident the support person didn’t have a clue what was wrong and thought it was my themes.  I knew this was ridiculous because both of the themes I use are very common (Thesis and Grid Focus) and I never heard of anyone else having problems.

To be fair, I did use Dreamhost for 1.5 years without any incident so they are not bad – it was only when I needed help quickly that they failed.  Dreamhost is no bargain either – I think the monthly base charge was $11 per month and I had a virtual server option which was a minimum of $15 on top of the base rate (you can set it to higher rates for more juice).

What was the problem?

In the end I believe that removing the gravatars from the comments was the biggest factor in getting the blog running properly again.  I have one post that has a ton of traffic as well as comments so all those extra calls were slowing things down dramatically.

No sooner had I labeled the head of the CAW as a dreamer for thinking that he could reach a deal with GM that didn’t involve some sort of wage and pension reductions, then lo and behold – that’s exactly what he did.

[edit]

Apparently the original story was wrong and the union did give some wage concessions – I guess I should have waited a while longer before posting this. 🙂

According to this Globe article – the deal reduces the total compensation (wages and benefits) by about $7 per hour to $63/hour.  This doesn’t seem all that dramatic but it’s a good show of faith by the CAW.  I suspect they will have to give up more in the future but the real cost savings will be in head count – as in a lot less of them.

[end edit]

My first thought was why the heck did GM agree to this deal?  It seems quite obvious to me that significant salary cuts are needed – both in hourly wages and a reduced work force.  It could be just one more example of how GM (and the other car companies) are incapable of negotiating properly with the unions but I think maybe some of these factors might also have been at play:

• This deal was made just to get the bailout money.  The companies and unions have to show some serious money savings in order to qualify for the bailout so they put together a deal which they feel is the “minimum” necessary.  If I was in charge of the bailout money – this deal wouldn’t get a dime.
• Given the worsening financial situation at GM, this deal might not mean much if they file for bankruptcy in a few months which I think is going to happen sooner or later.  Even if they don’t file – financial conditions in a few months might mean this deal becomes irrelevant anyway.

General Electric (GE) announced today that they will be cutting their dividend from 31 cents per share down to 10 cents per share which is a whopping 68% drop.

This is significant because GE is considered to be the proxy of the American economy as it covers a number of different industries and is the 10th largest company in the world.  Cutting a dividend is not the worst thing in the world however since it indicates that management is in cost-cutting mode and willing to do whatever it takes to make the company profitable again.  Companies that hang on to their high dividend too long for public relations reasons could very well end up suffering for it.

Of course, not all companies are cutting dividends – so don’t go and sell all your dividend stocks just yet!