The Best Decision vs. The Financially Smart One

May 3 26 Comments latest by Patrick Bateman

The financially smart decision isn’t always the right one. When I say this, it usually irritates engineers and economists, who love to believe that we all behave rationally. This just makes me even more gleeful, resulting in an upward spiral of doom. Seriously, I love messing with them.

Anyway, my friend told me an interesting story the other day: After graduating, he had about $12,000 of debt from college loans at a ~4% interest rate. He also had a good job and about $15,000 lying around in a money-market account. Now, because his interest rate was so low, technically the financially smart decision would be to invest that $15k and pay the minimum monthly payments on his loan, profiting off of the difference. In other words, assuming he could get a 10% return on his investment, he would make approximately 6% (i.e., 10%-6%) because his loan’s interest rate is lower than the returns he could theoretically get. Yes, I’m leaving out trading fees/taxes/risk/etc, but you get the point. If he went by the book, he should have invested the money and paid off his debt slowly.

But he didn’t do that. He paid the loan off entirely, all at once, despite my loud protests. Why? Because he hates debt. Like really, really hates it.

When I first heard this, I wanted to hit him with a bat, attach him to a long string, push him out of a plane, and then instruct the pilot do to 25 or 50 lazy loops in the sky. I would also make him wear one of those striped propeller hats, just for fun.

But I realized that he made the best decision for himself, even though it wasn’t necessarily the financially smart decision. Even though he technically should have made monthly payments, he hates having any debt and it would have been intolerable for him. (You know how certain people act badly with debt? They forget to pay it off, it makes them really uncomfortable, etc? That’s him.) His move isn’t the right move for most people, but there’s a larger point behind it: There are some things with money–e.g., having debt, lending to friends, having money sitting in our checking account–that drive us so crazy that we start doing weird things. The question is, can we recognize it? And then what do we do? My friend was smart to recognize that having debt drove him crazy, and he did something about it. It wasn’t the textbook move, but it was probably the right one.

Another friend of mine has had to borrow small amounts of money from her family a couple times in the last few years. Technically, when she paid it back, she should have calculated the time/interest rate and paid back the precise amount. Instead, she just paid back the amount plus $100. There’s more to life than interest rates.

“But Ramit,” anal calculation-loving dorks might point out, “you always talk about budgeting and making smart financial decisions. If she only owed $15 interest and she paid $100, she made a mistake. And now you’re writing an article to try to justify what she did!”

printf(”get a life dude”);

The truth is that your money decisions should (1) get you closer to being Rich and (2) make you feel increasingly confident and comfortable about what you’re doing. The minute your financial infrastructure starts making you feel oppressed is the minute you start ignoring it. No, don’t be stupid and use this as an excuse to do dumb things (”It makes me comfortable to buy this new $2000 flatscreen TV, so I’ll do it! Thanks Ramit!!!”). But if it makes you feel really happy, go ahead and hide $20 in your coat pocket for next season. If having debt absolutely, truly makes you go crazy and do stupid things, you don’t always have to go by the book.

Think big picture. What could you do today to make you less hesitant about managing your money for the long term?

(4 votes, average: 4.5 out of 5)

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26 Comments latest by Patrick Bateman

Cost vs. value: Why I bought a new car

March 29 118 Comments latest by BK2U

In college, I drove a rickety-ass minivan that my parents let me use. Here’s how bad it was: It shook so badly that when I drove it on the freeway, I always drove in the right lane so that when it broke down–not if–I could simply pull over gracefully. When I took it to get a smog check, which of course it failed, I just put my head in my hands. The funniest thing is that one day my dad went to get new tires for the van and he came back with whitewall tires. I don’t know if any of us are old enough to know what whitewall tires are, so here’s a picture from Steelthundercc.com:

The damn van looked like a pimp’s hoopty ride. Dear god. I made my dad take them back so quickly.

I always found it odd that almost every personal-finance pundit recommends buying a used car. (Here’s a list of links submitted by readers where you can see.) Why is there such universal agreement? Apparently, among the reasons they list, cars depreciate quickly, they’re built better than ever, used cars have lower insurance, etc–so every young person should buy used.

I disagree. Now, used cars can be a good way to go. But to apply a broad rule that “used is the best” is idiotic. While used cars are a good purchase for some people, new cars are a great choice for others. Here’s why I chose to buy a new car.

I was in my last year of college with lots of business meetings that I would rather not have missed because my stupid 12-year-old van broke down. In November, I started looking for a car to buy. This was intentional: You can get amazing deals at the end of the year when dealers want to beat their quotas. First, I test-drove a few cars and researched them, narrowing it down to a Honda Accord or a Mercedes C230. (Both were 4-door models because Indian people hate coupes. Seriously.)

Now I want to take a second to explain how I decided between the two. The Mercedes was sporty and cool and kinda affordable (if a little bit of a stretch for me). But I decided against it for a few reasons: Service is absurdly expensive and I would just be angry every time I had to get stuff done at a dealer, plus insurance is more, etc. But the real reason I didn’t want to get the Mercedes is, where do you go from there? You can’t get a Geo Prism after driving a Mercedes for a few years. So I decided it would be stupid to get a Mercedes as a 22-year-old. Plus, cars are important to me, but not that important.

I decided to get a Honda Accord. Now I had to choose between new or used.

Why I chose a new car: value (not just cost)
Sure, a new car costs more. But over the long-term, not that much more. And the value–not just monetarily–is much higher. Here are a few things I debated before choosing:

• Reliability. Above all, I didn’t want to get a car that would break down. I have enough stuff going on in my life and I want to avoid car-repair issues (time, $) as much as possible. I was willing to pay slightly more for this certainty.

  A decently-nice-to-pretty-nice car. Buying a car takes an enormous amount of time. I planned to have this car for many years and I didn’t want another piece of crap. As a result, this baseline requirement reduced the disparity between new and used prices. In other words, I wouldn’t save a ton of money getting a used car because I wanted a pretty good car, regardless. Quick note: This is admittedly a little bit of vanity. But I’ve written time and time again about spending on things you love. I love driving and I do it a lot; it’s not strictly functional for me. I even sprang for the V6 model. Plus, there are other ways to minimize your total cost, which I’ll get to in a minute.

  New-car smell. Good god, is there a better smell on earth? This wasn’t really a requirement but I just wanted to mention how much I love it. This, and the smell of Payless Shoe Source. Find me at the mall, walking in and out of Payless over and over.
  
  How much cash I’d have to put down. This is important. If you don’t have any cash (or very little), a used car is more attractive because the down payment (i.e., money you have to pay immediately) is typically lower. And if you put $0 down, the interest charges on a new car will be much more. In my case, I had cash available to put down.

  Interest rate. This becomes more important over a longer-term loan.

  Resale value. At first, I was resistant to this idea. After all, I would probably just drive whatever car I got into the ground instead of selling it. Well, fine, it was pointed out to me, but at least calculate what would happen if you sold it in 5 or 10 years. A lot of people point out that “You might have an accident, so the resale value will be totally shot!!” I find that pretty dumb. Yes, it’s good to also know what would happen (financially speaking) in that case, but having a total accident is such an edge case that I think it’d be foolish to plan an entire purchase around it. If you’re that worried about getting in an accident, maybe you should put away your cellphone AND COSMETICS WHILE DRIVING. Also, you have insurance. Anyway, having a car with good resale value can considerably decrease your total cost of ownership.

  Insurance. The insurance rates for a new and used car can be pretty different. Even if they’re only slightly different (say, $50/month), that can add up over a few years.

  Gas. Everybody loves to debate the minutiae of gas prices, but the actual differences were, financially speaking, insignificant for me. I didn’t pay attention to this. (For example, see why hybrid cars don’t save you money.)

Here’s the deal: Buying a crappy used car will save you up-front money, but it may cost you a lot more over the long-term. If you decide to buy a pretty good used car, in my opinion you might as well spend a little more to mitigate the risks of car repair, etc. That’s the risk/reward perspective.

Another perspective, cost vs. value, influenced me more. Buying a new car seems scary because they numbers are so high ($20,000!). But that’s what financing is for–especially at extremely low rates like 2-4%. You can put down as much money as you’re comfortable with. But the biggest factor in my purchase was the total-value concept: You can get a new car for a relatively low cost over the long term by doing a few sensible things. Now, most of the pundits who talk about buying new vs. used seem to assume that people are completely stupid and will do things like pick a bad car that looks sexy but is poor choice financially (e.g., a Dodge Neon vs. a Honda Accord), spend a lot on the initial purchase price, not shop around for competitive insurance, not take good care of the car, and sell it when they see something shinier.

If you do these things, then yes, you are a moron.

But if you actually think about this, one of the biggest purchases you’ll ever make, you can save a lot of money. So do some commonsense things that will make you much happier over the long term:

• Christ, pick a good car. There are some cars that are objectively bad decisions that nobody should ever buy. Yet sometimes they’re shiny and popular and we buy them. Take the VW Jetta, which got popular during high school and everyone wanted one. I know of exactly 1 person who’s happy with his Jetta, and I still scratch my head that he’s had such good luck with TWO Jettas. The rest hate them. Why would you buy this? Pick cars that are reliable and have a decently high resale value. This doesn’t mean you have to pick a boring car, but it does eliminate about 80% of cars right off the bat.

• Negotiate mercilessly with dealers. I have never seen so many people make bad purchase decisions as when they get in a car dealer’s office. If you’re not a hardball negotiator, take someone with you who is. Better yet, don’t even go to the dealer! I bought my car for $2,000 under invoice by spending a month researching and planning. When I decided to buy, I had 17 car dealers bidding against each other to get my business (by fax/email, while I reclined and watched Laguna Beach) and I only went in one dealer’s office: the winning one. Also, I started negotiations at the end of the calendar year, when dealers are salivating to beat their quotas. Your saliva is my salvation! (I highly recommend http://www.fightingchance.com to get more info on this technique. The $35 I spent saved me thousands.) Also, your interest rate matters, and this is why having good credit score matters–if you have multiple sources of good credit, your interest rate will be lower.
• Don’t do stupid things like getting an upside-down loan. An upside-down loan is when you owe more on the car than it’s worth. I know a girl who bought a new Lexus, but decided she didn’t like it 5 months later and traded it in for something else. She now has an upside-down loan and a distinct lack of common sense. Treat your car like a stock and plan to hold it for a long, long time. This is hard because we’re judged on how new our car is. But with each year you drive your car payment-free, you’re saving tons of money.
• Your car’s price is vastly dependent on its condition. Go to http://www.kbb.com and experiment with pricing. Try the same car in Excellent, Good, Fair, and Poor conditions. You’ll see what I mean.

Ok, so I decided to get a new car. Let’s assume my car cost $20,000 ($25k sticker price, negotiated). If I can pay it off in 5 years, and drive it for 3 years afterwards, I can sell my car for about $10,000. (Extrapolate data from KBB and realize that it’s a bit hand-wavy.) That’s about $1,250/year. And it only gets better as you drive the car longer with no payments. In other words, you save more in non-payments than the car depreciates.

Now, some caveats: First, don’t forget insurance, registration, repair, etc. But remember that a used car has all these things, too–just in different amounts. (In my case, insurance for a 5-yr-old used car would save me about $100 every 6 months…not very compelling.) With a used car, the risk goes up (likelihood of repair increases, resale value decreases). The question is whether the reward of lower payments is worth it. Second, this doesn’t work with all cars. If you’re buying a Dodge Neon, your resale value is going to suck and you’re going to be angry every day of your life.

I expect this post will generate a lot of debate, and that’s cool. Here’s the bottom line: I don’t like when pundits say that buying a used car is the only way to go. It’s not. Buying a new car can be a smart choice if you pick the right car, negotiate extremely well, and stay disciplined about shopping for insurance, maintaining your car, etc. (It doesn’t have to be a purely numbers-oriented decision. I love my car–it’s fun to drive and if I had 10x the money, I would still get it.) Because buying a car is such a big purchase, I’m fine spending a little more money and time up front to mitigate risk and get a great car that will last for a long time. And by being sensible about how long you drive your car for (longer is better), you can get a new car for a great value.

(12 votes, average: 3.33 out of 5)

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118 Comments latest by BK2U

Your College is Not a Technical School

November 17 112 Comments latest by Rachel GT

I went to school with some of the smartest people in the world–people whose knowledge and insight would stun you regularly–but you wouldn’t always know it. Maybe it was the guy who didn’t know how to pump his own gas, or the girl whose monotone voice and paragraph-long questions made me want to jump off a bridge and stab myself on the way down (want to be doubly sure). I don’t know.

But one of the stupidest things I heard thrown around was the question of which major would help get a job. It went something like this: “All the econ majors get jobs in consulting, so maybe I should do that…” (thousand-yard stare).

I’m so tired of hearing this that I am seriously considering walking a crocodile on a leash wherever I go and having him chomp off the arms of the stupid people who say this.

Your college is not a technical school. If you simply want a job, you can go to ITT Tech. Instead, I think college is about meeting interesting people, doing what’s interesting to you, becoming very good at it, and marketing yourself.

What I’m saying is different than the old, conventional thinking about life (”Go to school, pick a safe major, get a good job, and be a cog in the machine for the rest of your life”). I even know some parents who insist their children get master’s degrees. Why? “It looks good.”

When senior year rolls around and people are looking for jobs, it’s amusing to see the contradictions in what we believe and what our opportunities really are. For example, a funny but sad barrier people use on their own job hunt: “I’m an English major, so I can’t apply to be an investment banker.” No, the reason you can’t be a banker is that you selected yourself out of the applicant pool based on your ignorant assumptions.

Your major isn’t as important as you think. It’s what you’ve done that distinguishes you.

I think the point of school is much more than to simply get some credentials, and it’s certainly much more than to learn the stuff you do in class. In fact, ask your friends who graduated how much of their coursework they use on a daily basis. For almost every major, the answer is exactly the same: not much. Instead, college should ideally teach you how to think and give you a broad-based skill set that you can apply almost anywhere.

Priorities are important
When I was in school, my priorities were (in order)…
1. Friends
2. My own business stuff
3. Classes

Before you write me telling me that grades come first because your parents are paying $3895823523, please note that I agree–you have to get decent grades. No argument: If you have a 2.0 GPA, you’re probably not getting a good job right out of college.

But I have a couple of things I want to talk about: First, grades are important for grad school and, to a limited extent, for your first job. After that, nobody gives a damn. Second–and this is my own personal opinion, of course–I’d rather get moderately good grades while having a social life and doing a bunch of interesting stuff, rather than focusing exclusively on school so I could get an A+. What’s an A+? It’s a letter and a character…on a piece of paper.

Plus, it’s often prohibitively hard to get from a B- to an A. In other words, it’s not too hard to get to an 85%, but getting from there to a 95% is really hard. If you can do it while managing your time, great (and frankly, most top students do). Is it worth it every time? No way.

Oh my god, Ramit!!! Are you suggesting we don’t get the best grades we can?!?!?

No, but I like when you get really agitated like that. Of course everybody should try to get the best grades they can. But there’s more to school than grades. And this is why I think that doing cool stuff that produces tangible results is really important. For example, do you have a portfolio of projects you’ve designed? Do you have a blog? Do you have a strong network of great people who can help you find the right job? Do you have articles you’ve written for different newspapers? What do you have besides a conventional, boring transcript to show what you did for the last 4 years?

I think I could probably learn 80% of my college career simply from reading the books. But the last 20%–the hardest and most valuable part–came from talking to people, bouncing ideas off them, doing my own startup stuff, and making a bunch of mistakes. And I did all of this in the relative safety of college, where the worst that can happen is you get a “-” next to one of the letter grades on your transcript.

I wrote about a similar thing in my article on greed and speed, where I said that if you build something valuable, the money will come. The same is true of jobs: If you do interesting work, have great friends, build a great network of supporters, and market yourself, the employers will come. In fact, if you’re really good, instead of you seeking them out, they will seek you out.

Look what business luminary Tom Peters says about GPAs:

Never hire a human being who had a 4.0 in college. If they had a perfect GPA, it means they bought the act and never screwed around. Now a 2.0 is probably not so good. But the ones who had 3.0, yeah! Those are the freaks you want!

(More commentary on this from Ian Ybarra.)

Most people don’t think this. They want a job after college, and that’s where their 4 years goes. I would ALWAYS hire a B-student who can show me she understands technology and is passionate about what she does, over someone who shows me he spent 4 years in the library and has no tolerance for risk or real skills (except test-taking).

Are you stuck by convention?
Let’s see what a couple of other hardcore entrepreneurs have to say about it.

Paul Graham notes this in his absolutely excellent essay, Hiring is Obsolete:

I asked managers at Yahoo, Google, Amazon, Cisco and Microsoft how they’d feel about two candidates, both 24, with equal ability, one who’d tried to start a startup that tanked, and another who’d spent the two years since college working as a developer at a big company. Every one responded that they’d prefer the guy who’d tried to start his own company. Zod Nazem, who’s in charge of engineering at Yahoo, said:

I actually put more value on the guy with the failed startup. And you can quote me!

So there you have it. Want to get hired by Yahoo? Start your own company.

You don’t necessarily have to start your own company. But if you want the jobs that aren’t announced on the email list, and you want to just have a more fun time at college, you do have to do interesting stuff. Publish papers. Start a student group. Travel a bunch and take cool photographs. Get 10 friends together and meet the CEOs of the biggest companies around, and write up what you learned. Do anything beyond just your classes!

In the end, I think it’s actually more risky to focus exclusively on classes. Why? Because you have to compete against everyone else who will be trying to get jobs using the same critera: grades. I hate competing against other people directly, so I’d rather simply go around them.

Finally, Seth Godin weighs in:

I had two brushes with higher education this week.

The first was at a speech I gave in New York. There were several Harvard Business School students there, invited because of their interest in marketing and exceptional promise…

Anyway, they asked for my advice in finding marketing jobs. When I shared my views (go to a small company, work for the CEO, get a job where you actually get to make mistakes and do something) one woman professed to agree with me, but then explained, “But those companies don’t interview on campus.”

Those companies don’t interview on campus. Hmmm. She has just spent $100,000 in cash and another $150,000 in opportunity cost to get an MBA, but…

The second occurred today at Yale. As I drove through the amazingly beautiful campus, I passed the center for Asian Studies. It reminded me of my days as an undergrad (at a lesser school, natch), browsing through the catalog, realizing I could learn whatever I wanted. That not only could I take classes but I could start a business, organize a protest movement, live in a garret off campus, whatever. It was a tremendous gift, this ability to choose.

Yet most of my classmates refused to choose. Instead, they treated college like an extension of high school. They took the most mainstream courses, did the minimum amount they needed to get an A, tried not to get into “trouble” with the professor or face the uncertainty of the unknowable. They were the ones who spent six hours a day in the library, reading their textbooks.

The best part of college is that you could become whatever you wanted to become, but most people just do what they think they must.

There’s more to school than grades and getting a job. What are you going to do?

—
Articles I quoted:

• Ian Ybarra: Are you a freak?
• Paul Graham: Hiring is Obsolete
• Seth Godin: The power (and the fear) of self determination

What now? See my other articles on personal entrepreneurship.

(2 votes, average: 5 out of 5)

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112 Comments latest by Rachel GT

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