Fed funds historical rates.

There was a time not that long ago when people believed higher interest rates slowed the economy, caused higher unemployment, dampened demand and put pressure on prices. The Federal Reserve in the United States and Central Banks around the planet held this belief tight to the chest. When the economy overheated, causing inflation to creep up, the Fed would start increasing interest rates until demand weakened as consumers faced higher borrowing costs.

The opposite also held true. Low interest rates were thought to spark strong economic growth as lower interest rates freed cash in family budgets for more spending while encouraging businesses to ramp up production with cheap credit. Since the Great Depression this theory held true and worked, even if slowly, in controlling economic activity. Then we had the twin recessions of the early 1980s.

All Downhill from the Peak

Stagflation in the 1970s proved difficult to contain. Two OPEC oil embargoes ramped up prices on oil, causing virtually all goods and services to increase without growing real wages to fund the price increases until wages started getting cost of living (COLA) increases each year. Inflation for the first time was chained with a weak economy.

High inflation encourages spending because the money in your pocket will be worth less in the morning. Businesses faced an opposite effect. Funding capital expenditures became more costly as Paul Volcker, the chairman of the Fed, racketed up interest rates at a steep rate. Killing inflation would require painful medicine. A weak economy was crushed. Housing suffered most. Mortgages rates were comfortably in double digit territory if you could get a loan at all.

The medicine worked. Demand dried up from the higher interest rates causing inflation to abate. It was the last time interest rate changes were so effective on economic performance.

Good Medicine Going Bad

Lower interest rates followed the brutal twin 1980s recessions. The stock market and economy rallied strongly. Pent up demand for housing lifted housing stocks and the building boom was off. The 1981 Tax Code overhaul gave businesses additional deductions for capital expenditures. It might be hard to believe expensing of assets worked this way. Back then the limit on Section 179 expensing of assets was raised from $10,000 to $25,000. Small business was ecstatic.

Increased tax deductions for capital expenditures caused a boom in production which required more workers. Increased production reduced inflation while employment skyrocketed. The world was good with only one warning cloud on the horizon: debt.

Current chairman of the Federal Reserve, Janet Yellen (left). Former chairmen (from second left to right) : Alan Greenspan, Ben Bernanke and Paul Volcker.

The tax cuts were funded with massive amount of new federal government debt. The annual federal deficit broke $200 billion and kept climbing. The credit card was getting a workout.

The smart money believed the excessive government spending would pay for itself with higher economic output increasing revenues. That promise has never been realized.

Lower interest rates were the perfect medicine for housing and housing creates lots of job, most good-paying jobs. By 1984 the economy was on fire with 7.4% growth that year while inflation was still easing.

The Fed was concerned by the heady growth and started increasing rates until it triggered selling by program trading. The economy barely missed a beat. In 1987 the economy expanded 3.5% and another 4.2% in 1988. The 1987 stock market crash be damned.

High interest rates took some time to reduce economic production, but not real long. Lower interest rates had an almost instantaneous reaction in the markets and marketplace. From Wall Street to Main Street, these were the good times.

The first warning signs something was fundamentally wrong showed up in the next recession which began in July 1990 and lasted for eight months.

Interest rates trended down from 1982 onwards. Periodic rate increases gave the economy indigestion causing the Fed to resume lowering rates again. Each peak in the rate cycle was lower and the lows were lower.

And the recoveries were longer, less steep and left more people behind as many high paying jobs never returned.

As the economy began climbing in April 1991 it was like watching water boil or grass grow. Growth was a heck of a lot slower than the liftoff from the 1982 recession. Some blamed it on the first Gulf War. There was merit in the observation. People stopped spending as they sat around the television absorbing their newfound entertainment: bloodshed.

One More Party

The slow growth out of the 1990/1 recession eventually broke loose with several years of 4%+ GDP expansion at the end of the millennium.

The terrorist attacks of 2001 set the tone for the next recession. President George W. Bush came on television and encouraged Americans to keep spending to show the terrorists our nation could not be deterred. The Fed added liquidity to the system (lowered interest rates) to unheard of levels. People began wondering what would happen when rates went to zero. What weapon to spur the economy would the Fed have then?

Lower interest rates did the trick. The 2001 recession was so short and mild the U.S. GDP still expanded 1% for the entire year.

But the economic expansion lower interest rates should have caused didn’t work as well this time. What was a concern in the post 1990/1 recession expansion turned into full-blown panic. The stock market lost half its value. The new money the Fed created stopped the pain on Wall Street. Main Street was not nearly as happy. Job growth was steady, but low. Only two years of the first decade of the new millennium had GDP growth over 3% in the U.S.

The stock market climbed from depressed levels and eventually made new highs. It was an unconvincing multi-year rally.

Then all the printed money that disappeared into derivatives and sub-prime mortgages came home to roost.

Current Economic Cycle

When the first cracks appeared the Federal Reserve had very few weapons in its quiver. Interest rates were already the lowest in recent memory prior to a recession.

Housing was in bad shape after the 2008 recession. My house could’ve used a few new shingles.

The 2008 recession was fast and brutal triggered by a cascading set of events which culminated in money-center banks and investment banking houses on the verge of collapse.  Low interest rates were not enough to stop the bleeding. Rates were now touching 0% and the economy was still in dire straits.

The Fed toyed with negative interest rates and the Japanese, Swiss, and European Union Central Banks all sent rates into negative territory where the borrower gets paid (!) to borrow money instead of paying to borrow. The lender took all the risk for a guarantee to lose money to boot.

In the U.S. the Fed started early in experimenting with alternative methods of pumping more liquidity into the banking system. It worked, sort of. The economic recovery from the 2008/9 recession never exceeded 3% in any calendar year, the slowest recovery in the nation’s history. The growth once again was steady, but painfully slow.

Wages were slow to increase as family budgets struggled to pay the bills. Low wage growth kept a lid on demand, inflation and job growth.

The current economic cycle started from the lowest interest rates in this nation’s history. The federal government kept spending at a rapid pace, all put on the credit card. The current federal national debt is over $20 trillion and growing at around a half trillion more each year. And we couldn’t manage 3% growth.

Where is the Inflation

There have been more predictions all the money printing would cause rampant inflation soon than there have been calls for the world ending. Prices fooled the experts. A basket of goods followed by the Bureau of Labor and Statistics (BLS) hovered slightly above zero with a few extended periods of deflation.

For eight years the Fed kept interest rates at 0% and the economy slowly clawed forward a few percent per year. And I think I know why.

Typical human blaming a bovine again.

Low interest rates were the medicine our parents and grandparents used to spur economic growth. But this time WAS different! Technology had finally advanced so far it was hurting the economy! Or more accurately, technology was increasing faster than demand could absorb.

Low interest rates no longer increases demand. Even businesses didn’t spend aggressively in the low interest rate environment until the last few years. What business did spend went further than ever. $4,000 computers two decades ago now cost under $1,000 and do a thousand times more and faster. Business spent less because the cost of capital expenditures had declined for many technologies and the cost of capital was nearly free. If technology costs would have remained unchanged, businesses would have created and capital expenditure boom.

Low interest rates after all these years seem to cause deflation instead of spurring economic growth like the good ol’ days. And higher interest rates, if the economic model is truly turned upside down, should cause the economy to overheat and inflation to expand. Here’s why.

New World Order

Keeping Interest rates so low for so long must have caused a few academics to rethink the classical model. Low rates caused bubbles and imbalances in the markets without any money trickling down to Main Street to create jobs and more demand for goods and services. It was a Wall Street pile-up where average people paid the price for the sins of a few with control over the newly created money.

It’s called pushing on a string. More money pushed into the banking system either didn’t find its way into the general economy or people refused to spend it if they did get it. This isn’t all bad if the savinga rate climbs as households save and invest a larger portion of their income.

This wasn’t the case either. The savings rate climbed slightly, but not anywhere near the levels money creation would dictate if the money weren’t spent. Where was the money going? Nowhere. The money supply was larger than ever as the Fed’s balance sheet bloated, but it all sat in money-center and Central Bank vaults around the world.

None of this matters since it was a wasted exercise carried out by central bankers. The money was created, yet most never entered the economy. No wonder the GDP was anemic.

Low Rates Caused Deflation, Now Rising Rates will Cause Inflation

Most businesses today have plenty of capacity. Here is an example from CNBC showing how low interest rates caused a glut in domestic milk supplies. Low interest rates allowed factory farms to add capacity at virtually no cost, over supplying the market and driving down prices. Industry after industry is in the same boat.

Low interest rates encouraged the over production. Higher interest rates will increase the cost of capital expenditures for businesses, eventually reducing supply and increasing prices. This is the opposite effect we might expect in the past. Higher interest rates usually slowed the economy and if raised far enough still will. But the initial effect will be to decrease supply as marginal production is taken offline.

The experiment isn’t over and my supposition could be 100% wrong, not that my batting average is any worse than that of economists. Interest rates are slow on the takeoff this economic cycle. Eventually a trigger point will be reached, causing the economy to overheat and prices to climb faster.

The higher interest rates will not work any better controlling inflation than low interest rates encouraged economic growth.

My concern is the trend. Since 1980, interest rates have been cycling lower. We went negative this time around and the fed funds rate peaked at 5.25% during the prior economic expansion. This cycle the Fed worries the current 1-1.25% fed funds rate might slow the economy. Crazy!

If lower rates don’t encourage inflation and rapid GDP growth, then higher rates probably will. At no time in history has this amount of money ever been created and hyperinflation hasn’t followed. There are no indications of rapidly increasing prices on the horizon, however.

Higher interest rates might do the trick or we could head still lower this interest rate long cycle. Only time will tell.

The earnings stream from a company is worth more in a low interest rate environment. If inflation starts the rear its ugly head the Fed will worry and jack interest rates, causing business investment to slow, marginal production to be taken offline, causing prices to increase. Remember, you heard it here first. And earnings are worth a lot less as rates rise.

Just a few things to consider as you plan the family budget.

 

Side Notes

Ever wonder how your favorite accountant takes notes for a new post idea? Below are my notes used to prompt the writing of this post, unedited. Writers might find the evolution of an article of interest.

The old world paradigm hasn’t worked for a few decades now. The old school says lower interest rates spurs demand and eventually inflation. At no time in history has so much money creation taken place for this long without a massive upturn in inflation. What is different this time?

Lower rates lead to a muted economic expansion with slow growing demand and modest job growth. The economy should have overheated by now. Why?

Instead of inflation, technology made it easy to increase production and the cost of capital was near zero encouraging this capacity expansion. Everything seems to be in a glut. From oil to food, there is plenty enough to satiate 100% of demand. Low interest rates now seem to fund capacity expansion faster than demand.

Higher interest rates will increase the cost of capacity expansion and will lead to higher interest rates.

What worked in the past is turned on its head! The Fed reduced rates for a decade and printed money with reckless abandon to further spur demand. It didn’t happen the way the textbook said it would. Higher rates, the traditional fix for inflation, may also have an inverse effect from the expected norm. When inflation does show up as the Fed increases rates the Fed may overreact and keep raising rates to kill inflation. It will work if rates go high enough. Demand can be quashed by high interest rates.

It would be easier and less painful to consider doing the opposite of what we always did in the past. It might just work this time.

https://www.cnbc.com/2017/09/22/dairy-glut-in-us-leads-to-problem-of-spilled-milk.html

 

When you begin your journey towards financial independence you can’t imagine some of the problems along the way. Investing starts out larger than life and scary until you see how simple index funds make investing in large successful companies is.

Before long you have a large nest egg in your 401(k) and IRAs. Eventually your savings rate starts building your non-qualified accounts (non-retirement) as well.

As your net worth reaches for the sky you have the latitude to try some alternative investing in a mad money account. You start reading books on super investors like Warren Buffet and Ben Graham and decide it is worth learning the process of buying outperforming individual stocks with a small portion of your portfolio. Besides, you might really have a feel for finding great underpriced companies to buy stock in.

Bad Choices

As you search for a diamond in the rough you give no consideration to your index fund investments. They always chug along with the market without any effort on your part. All automatic. Set it and forget it. But you are about to blow your portfolio out of the water without realizing it.

The tendency is to buy winners. Apple Inc. is at the top of the pile and is the largest market capitalization stock in the S&P as I write, which means you own more Apple in your S&P index fund than any other company. They have winning products and lots of cash to weather any storm so it sounds like a good investment. Heck, they just released a new phone for a cool thousand bucks! How can you go wrong? Good thing the index fund loaded up for you.

Index funds invest more in the winners by default. The bigger the company the larger the market capitalization (determined by the stock price and the number of shares outstanding) and index funds buy based on market cap. Therefore, since Apple has the largest market cap, the S&P index funds hold the most of it. The index fund’s next largest holding has the second largest market cap and so on.

As long as you are buying individual stocks you may as well diversify a bit. Facebook is a household name with plenty of prospects. Facebook, Class A stock is number three in the S&P 500 weighting list. Amazon is another highflyer at number four.

These winners are virtual no-brainers. It’s like shooting fish in a barrel. Warren Buffet isn’t so great after all. Your short list of winning stocks is on a roll.

Here is the current weighting of each company in the S&P 500. The list changes as the component’s prices change in relation to each other. Today’s top dog is not yesterday’s top dog.

Today’s king is dethroned without fanfare. Today Apple tops the list, unseating Microsoft. Someday Apple will be unseated, maybe by Amazon, who knows? If you look back in ten year chunks you will notice the top stock by market capitalization always changes! Eventually fallen kings leave the top ten list and some fall even further. General Electric and Wal-Mart are showing us how this is done live.

Portfolio Bloat

So what does this have to do with buying individual stocks when you also own index funds?

When you own an index fund you still really own a pro-rata share of the underlying securities in the fund. It doesn’t always feel that way, but when you own the S&P 500 index fund at Vanguard you actually own a slice of 500 companies!

Let’s go back to Apple. Apple is the highest weighted stock in the index at 3.948665 as I write. This means if I have a million dollars invested in the S&P 500 index fund I effectively own $39,486.65 of Apple stock!

If you don’t like the high price of Warren Buffett’s company, Berkshire Hathaway, don’t worry. As the sixth heaviest weighted stock in the index you own $15,824.96 of Berkshire through the index fund for every million dollars of index fund investment.

Then we get to the bottom of the list with News Corp, Class B. Your million dollar index fund investment grants you an effective ownership of $69.85 of News Corp, Class B.

Astute readers will have already noticed the problem. If you buy more of the winners, you are overweighting and already overweighed investment! You already have over 3.9% of your portfolio in Apple. We also know Apple may continue to rise for a very long time. But the record is clear; the top dog never stays on top for long.

Buying more Apple when history says Apple will not stay on top forever—even another decade most likely—means other companies will grow faster! Adding too many additional shares of individual companies already at or near the top of the index weighting leads to portfolio bloat.

As these winners keep pace you will be a very happy investor, but when it goes south it will create an overweighting of drag on your overall portfolio. Apple’s stock price affects the index fund the most and if you also own Apple individually as well, Apple will cause outsized moves in your portfolio. The real question is: Do you want to own more Apple if you already own more Apple than any other company through your index fund investments? You need to make the call.

Total market index funds run the same risk. All index funds will have a weighting of how much to own of each company. It would be impossible to own an equal share of the smallest firm as the largest. Bigger companies are therefore more important inside the index fund.

Buying a smaller company’s stock may therefore compliment your index fund as the smaller company could be on the rise as it heads to the top.

The Antacid for Bloat

Don’t be glum. You can have your cake and eat it too.

I bought my first shares of Phillip Morris (MO), now called Altria, back in 1984. Morris has been steady near the top of the list so it kept pace with the leaders while throwing off a massive and growing dividend I managed to reinvest in more MO stock.

If my count is correct, MO is number 40 on the current list, down from the top ten years ago. But. . . , MO did something in the mean time. It spun off Phillip Morris International (PM) several years ago and PM is the current number 23! The spinoff is bigger than the original firm! And both pay dividends like manna from God! (Yes, that is a lot of exclamation points. I made a lot of money from my MO investments over the years.)

MO isn’t part of my mad money account. It is part of an old DRIP (dividend reinvestment plan) portfolio I held in trust. There were twelve total stocks in the original DRIP portfolio. Only AFL and MO remain as memory serves. (Don’t trust an old farm boy’s memory too much. I didn’t double check to verify since it’s irrelevant to the story.)

Coke (KO), GE, ITW, JNJ, Hershey (HSY) and Paychex (PAYX) were some of the companies in my original DRIP portfolio. The one that bothers me most is Wrigley’s (WWY). My good buddy, Warren Buffet, funded Mars, Incorporated so Mars could pay cash to buy out WWY. Mars is a private firm so I received cash only and no stock in the new company. Bye-bye dividends and free case of gum every Christmas. (grumble, grumble) My kids still cry over that one. They also held Wrigley’s. Darn Buffett.

Many of these companies did well after I sold. I just wanted to consolidate. The index fund gave me diversification. My individual company investments needed to complement the index fund. I am not interested in top-heavy investing.

The best cure for portfolio bloat is to search for gems down the list or even from smaller companies not on your broad-based index fund’s list. The odds are better a company not at or near the top will outperform the index itself. And if you have no chance of outperforming the index fund (a tall order in and of itself), then why bother. Stick with the index and do something else with your time.

Finding Winners

The tricky part is knowing which companies will move up the list (performing better than the index’s average). The top market capitalization companies on the list can and frequently do rather well. But for your individual stock investments to do better than the index you need to buy companies which are moving up the list or if you buy the top dog, the top dog needs to keep expanding its distance from the rest of the pack.

The law of large numbers makes this harder and harder as time goes on. Getting on top is really hard; staying there a really long time is near impossible. In fact, nobody has done it for decades at a time. GE and KO and MO have been perennially at or near the top. But unless the company also throws a massive and growing dividend and still remains on top you will find buying these stocks on your own doesn’t help performance, it hurts it.

This post doesn’t have room to discuss how to find a quality company down the index list.

If you feel up to the task and have done your research, you can invest a small portion of your portfolio on your own. For most people the index will do better on its own without your help.

Of course, you can buy Apple because it is such a hot stock and awesome company. They could stay on top forever. This time could be different.

Or maybe not.

 

Start your rewards card search here.

The biggest problem most people have with credit card bonus programs is meeting the spending requirements for the bonus. Business owners have an advantage. Landlords do too. Meeting a $3,000 spending requirement in 90 days is a snap of the finger for even a relatively small business or side gig.

But not every side gig has enough spending that can go on a credit card and if you only own a few rental properties and maintenance is not currently required you will need another source of spending to earn a bonus.

Readers of this blog tend toward the frugal side. Spending for the sake of spending for a bonus is crazy and you guys know it. Your personal spending is probably too low to earn many bonus cash awards or miles. Travel hacking gets harder when you save most of your income.

Manufactured spending is the solution bandied around the blogosphere. It sounds so simple at first. Find a source where you can recycle fake spending into cash and miles rewards. Well, how do you do that?

There are two problems with manufactured spending. First, it frequently requires a lot of running around and effort. It boils down to time and what you value your time worth. Running to the store to refill a debit card or jumping through hoops to add a few more dollars toward a spending requirement is a poor use of precious time.

The second problem with manufactured spending is cost. Recently I wrote a post on using the IRS and taxes as a way to manufacture spending. It’s a great idea to create massive amounts of spend, but it has a cost. The cost can be small, but costs, even small ones, add up. The cost of manufactured spending digs into the value of your rewards.

Turning Manufactured Spending Into a Cash Cow

I have never been a fan of manufactured spending. Recycling spending through a program to generate benefits is a fool’s errand. As fast as you can find a program to game the rules change. Siphoning off value costs somebody somewhere something. That somebody soon discovers the issue and changes the rules. Then you get to start the hunt for another source of spending to max out credit card rewards programs again.

There has to be a simple way to increase spending without real cost to the budget. To maximize the value of manufactured spending, the costs of creating this spend must be reduced or eliminated. Cost in this instance is more than just money; it is time, too. To be effective it must be fast, simple and no or low cost.

The ultimate manufactured spending would allow you to buy a large value amount of gift cards of a general use credit/debit card—a Visa gift card, perhaps. This in effect would extend the spending deadline, as required spending to meet reward qualifications are met, while the true spending could happen at a future date using the purchased gift cards.

Top Cash Back (affiliate link) has a unique program where you can buy American Express and Visa gift cards and get cash back. Buying a gift card frequently has fees attached and this case is no different. However, in this instance the cash back covers most, or all, of the fee.

Step-by-Step Process

Let me walk you through the process before I let you get on with your day.

Step 1: Research a credit card with a high cash back or miles reward that meets your goals. You can use this link to review just about any credit card reward program imaginable here. (If you use this link as your gateway into the CardRatings site and apply for a credit card and are approved this blog will receive compensation.)

Step 2: Apply for the card best fitting your cash back or travel goals. Maybe you are looking for a large cash back reward. Maybe you have a miles goal with a specific airline as you plan some travel. You can hone your efforts to any credit card you want without concern over meeting spending requirements.

Step 3: Once you have the credit card use it for all spending, as you have in the past, to get as much of the required spend used within the timeframe required by the credit card. Do NOT spend extra just to meet spending requirements for a reward. That kind of defeats the purpose of the program.

Step 4: As the deadline for bonus rewards required spending approaches, review your spending to see if you are short of the required spending.

Step 5: Go to Top Cash Back and order Visa or American Express gift cards to complete your required spending to earn the reward.

Step 6: You can either cash out the gift card (Visa only) immediately (there is probably a cost to this) to pay off the credit card bill or you can use it to cover future spending needs.

Many of the best rewards programs have daunting spending requirements. This no longer should be a concern for you.

There are many ways to manufacture spending. This is one additional tool to add to your workbench. No one program fits everyone’s personality or needs. The more ways you have to meet spending requirements the better and the more rewards you can earn.

Please consider using the links on this page to support this blog.

Bookmark this page for future reference and as a starting point in your research for additional rewards cards.

Please share this page on your social media. My ego needs the boost.

Share additional ideas in the comments section below.

Sometimes accounting can be a downright boring subject. It is the job of your favorite accountant to spice it up a bit with stories and jokes so the message resonates and therefore gets through. No matter how brilliant my idea to increase wealth or lower taxes, it is worth nothing if I can’t keep you reading to the end.

Many people find blogs like this by accident. The people hunting for blogs like this already are open to the concepts. Not so the wayward traveler finding her way here from search engines. I write for the choir, but always consider the wayward, too.

I use stories to convey the message. Money is fun to read about and have. To keep readers engaged I impose secret formulas to keep them coming back. It’s almost like a sickness the reader can’t quite put her finger on. How come I am so draw to this blog about (egads!) accounting, saving money, investing and retirement? the wayward soul asks.

Let me be clear. The message is simple: Save half your gross income and invest in a broad based index fund. All done. Now you have another 23 hours and 58 minutes to fill today. Money stuff is done.

Easy as it is, I still need to make a living writing this blog. I enjoy the writing process and telling stories. Changing people’s lives for the better is a bonus.

Didn’t See It, Did You?

The opening to this post contains a hidden secret. Writing is generally done in solitude and this writer gets lonely sometimes. His mind also wanders. Telling an engaging tale is no longer enough. Your friendly accountant includes a special something in about 10% of posts on this blog and you probably missed all of them.

Writing time is playtime for me. Everything is choreographed with a purpose in mind. Sometimes I deliver better than others, but under the hood there is a structure holding the whole thing together.

During tax season there are fewer hidden secrets within my posts due to time constraints and because I am sleep deprived. Writing a quality post takes time. Then I have to edit the thing until secrets are interlaced within the text.

A few weeks back I received an email asking if I knew my writing creates words in unusual places. The reader discovered the secret. But even this reader had no idea how deep the hidden messages are buried.

Take a look at the opening section of this post. The first letter of each paragraph spells SMILE. A casual reader will miss it every time. Of course this is waaaaay too easy. I’m a numbers guy so using the numbers in pi (3.14159265359) or a Fibonacci sequence happens more than once. The first letter of certain words, paragraphs, or even certain letter spacing is part of the game. There are a few instances where I use the screen width (will not work on mobile devices) to get letters to line up to create passages at angles across the page. Think of it as The Wealthy Accountant’s Bible Code.

Writing (and reading) should be fun. Finding hidden passages is only one kind of Easter Egg hidden in my work. If you crack the code you will gain access to work of mine not widely disseminated. Over the years I set up simple blogs with personal musings. They are not meant for public consumption. But I love to hide the url or other clues to my hidden writings to see if anyone figures it out. Since search engines don’t include these blogs in their search results I know when an intent reader finds the clue because I see the one lonely traffic data point in Google Analytics.

There is a second kind of hidden message buried within the tomes of this blog. The best way to describe these Easter Eggs is to point one out, kind of. Last Christmas I wrote a post titled: Silent Night. The storyline is true, but underneath is a reference to a movie that has a depressing Silent Night. Your job is to figure out the movie I refer to.

Of course, none of this searching for clues is required to enjoy this blog. However, some people keep coming back again and again. I provided something extra for these people who want to pull apart my work for additional meaning.

Yeah, I know. I’m messed up in the head. (Wasn’t it good enough to just write an interesting post and move on? No.)

The Sick Bastard in the Room

Before you shoot me an email asking for the location of all the secret messages, know that I plant the messages, but don’t keep a record. Kind of fucked up for an accountant not to keep a record. What can I say? I am a sick bastard.

Imagine the thrill I have when accidentally running across one of my previous word games! After a year or two I forget (I forget a lot sooner) where I buried the cash box in the back yard. Me bad.

All I can tell you is have fun. If you don’t like puzzles, feel free to keep reading as always. If you like a challenge, pick at the carcass of a few posts and see if you can rip some flesh loose. Some stuff requires inside information. Don’t worry about those Easter Eggs. Maybe I said or did something at a conference and then include a subliminal reference to the event only those in the room at the time would catch.

There are still plenty of goodies for everyone. Most of all have fun.

The End of another Tax Season

As you may have noticed, I wrote a bit shorter the last week or two. I needed the time to get as many tax returns as humanly possible out the door. Think nice things about me. (Or not. I’m good either way.) I also leaned toward simple subjects to write about (for me). I am burnt out on taxes so another tax problem to work through could have sent me into a psychotic rage. My brain just not could take another tax return right now. Besides, you wouldn’t want me to lose it on page, would you? (You in the back. Yeah, you. Sit down and shut-up. One more attempt to get me to flip out and the police will be involved.) (SECURITY!)

Okay, I like to have fun. Tax season is winding down and I am getting most stuff out the door I wanted done. There are a few things I need to focus on after the due date, but it is manageable. Regardless, I will have my life back. Lack of sleep has me a bit punchy. As if anyone could tell.

Preview

So this post isn’t too short, here are the posts coming up later this week:

Wednesday: The Risks of a Side Gig. A side gig is the easy way to check out of the rat race early and fill time once retired. But watch out for the side gig that becomes you.

Friday: The Trauma of Retirement. People don’t understand how traumatizing retirement can be. If you think you can save a ton of money, tell the boss to “fuck off” and travel the world, “See you in the funny pages (yeah, people used to say that 60 years ago), you have another thing coming. It takes a plan if you are going to avoid the emotional pitfalls of early retirement (retirement at any age for that matter).

It’s the best I can give you, this last blog post of the 2017 tax season. I hope all your returns were pleasant. I love all you readers. Thank you for stopping by and being a friend. Hopefully we can share more ideas over the rest of the year to make our worlds a better place. (Yes, I meant to say worlds, as in, we each have our own world we live in. How our worlds intersect and interact is what we call reality. Now go on a word hunt.)

Heather Bresch, chief executive officer of Mylan Chris Goodney | Bloomberg | Getty Images

Heather Bresch, chief executive officer of Mylan
Chris Goodney | Bloomberg | Getty Images

The health care system is broke in the U.S.; few doubt that fact. Mylan NV and its CEO Heather Bresch symbolize everything wrong with medicine today. In this short post I will show you how to ferret out BS from public companies using their own words. Bresch is on CNBC this morning defending Mylan and the company’s position.

In the interview Bresch makes several comments about the price increase of a Mylan product: EpiPens. Prices increased steadily from $164.98 for a two-pack in May 2011 to $608.61 for the same two-pack in May of 2016. Bresch uttered frustration because the price increases are the result of all the middlemen touching the product (“…four or five hands”). Bresch said, “That $608 is a list price. What Mylan takes from that, our net sales is $274, so $137 per pen.”

But don’t worry. She and Mylan have a heart of gold. They are reducing the price by up to $300 with savings cards. Thank god for all their love.

But wait a minute. Your net sale is $247 for a two-pack and you are refunding $300? What are you, an idiot!? Well, no, Bresch is not an idiot, just a greedy _________. I never use naughty words so you can fill in the blank. And Mylan stock has been drifting down lately; must be all the refunds they are giving. No. Just a big pay increase for the CEO. Talk about a bullshit story.

As an accountant I am a solutions type of guy. Here is my fix for the problem of monopoly powers used by big pharma to abuse people. Since society grants patent protection to companies like Mylan, society also gets to make the rules. Never mind how pharma extends patents and jacks prices based on minor tweaks to a formula. From now on when the price of a medicine is 10% greater than the next ten highest priced countries for the same medicine or increase prices more than 10% in any twelve month period we pull the patent and the protections patents provide. Now the free market and competition can solve the problem.

When a large corporation says they only net $247 on a product but will now offer a saving card for up to $300 you know they are mentally challenged on math issues or full of crap. Since Bresch’s compensation skyrocketed with the price of EpiPens I think their math skills are just fine. For some reason I feel an invisible hand slowly bending me over to service the account. Oh, this is going to hurt.

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Nathan Haberman, the new district attorney of Calumet County. May he bring dignity, security, and compassion to our community.

This spring I attended Camp Mustache III in western Washington State. Between our leisurely learning sessions we hiked Mt. Si.  When our hike was over a group of us gathered at the base of the mountain as we started walking back to the Rainbow Lodge where we were staying. I was a guest speaker so people were interested in my personal life, including where I lived.

“Wisconsin,” I said.

“How close to that Steven Avery thing on Netflix are you?” a woman asked.

“I live six miles from the doorstep of the courtroom where it all happened.”

The woman looked at me with a twisted stare. “How can you live in such a corrupt community?”

I did my best to defend my hometown, but I was not making a sale that day. The conversation bothered me, but there was nothing I could do about it, so I accepted the facts like a good little Stoic.

Big Mouth Strikes Again

Ken Kratz was the special prosecutor in the Steven Avery case and the district attorney of Calumet County at the time. Ego got the best of Kratz as he was exposed in a sexting scandal a few years later. Governor Doyle filled the district attorney vacancy with Jerilyn Dietz. Nicolas Bolz beat Dietz in the next election in 2012. The district attorney’s office has struggled since the Kratz sexting scandal.

In May a client we will call Bryan wanted to speak with me privately. He wanted to support a local candidate, Nathan Haberman, for district attorney, but was afraid a past criminal record of violence would be used against Haberman if he provided any support, a man he felt was a strong defender of our community. Nicolas Bolz is the current district attorney of Calumet County. Every law enforcement agency in the county endorsed Haberman instead of the current DA.

Bryan’s criminal record stems from the 1990s. A lot of time has passed and he made changes to his life, starting a business, creating jobs, and making the community a better place. He wanted to make a difference, to exercise his civil rights. He is a strong supporter of community events and helps people in need. I like the guy; he has a good heart so I wanted to help.

Bolz, on the other hand, is a character. I did not think he would make an issue of someone contributing to a political campaign. (Small town should not mean stupid.) There was no doubt he would see the contribution, as it is a public record anyone can review. Candidates always want to know who is donating to the competition. The risk was small, but Bryan was understandably nervous.

Regular readers of this blog know I ran a hedge fund for many years. The fund bought charged-off receivables from banks (mostly credit cards) and then we scrubbed the massive files to determine who to file suit against and who to contact for payment plans. It has been a few years since I ran the fund. (There were actually two funds. When one reached its predetermined expiration date we started a second fund which had a close date of December 31, 2012. I never started a third.)

I still had all the software from the hedge fund in my server so I told Bryan we could set up a semi-scientific survey using the software. My office has multiple phone lines and a predictive dialer in place. The phone system is VoIP so the whole process would cost me nothing. Bryan and a few family members would run the phones when someone answered. It was discovered people would not care if his crime was revealed; it would not affect the election. The poll reached 223 likely voters with +/- 6.5% margin of error. Eighty-two percent of likely voters reached felt someone exercising their civil rights after committing a crime twenty years ago was a plus, not a negative. It was a violent crime so I was surprised the results were so favorable, but the overwhelming positive response gave Bryan comfort.

The Road is Long with Many a Winding Turn

Bryan made his political contribution and gave verbal support to Haberman. Bryan was still nervous and wanted to know if any polls were taken for local elections. There are not. So we went back to the software and conducted our own poll. We used a random number generator with all the phone prefixes in the county and let the predictive dialer go to work. This was the only scientific poll we took using live pollsters. We gathered data from 214 likely voters picked at random. The margin of error was +/- 6.5%. The results were clear: Haberman had an edge (4.2%), but it was inside the margin of error. It was up to Haberman to win the election. The poll was taken in mid-May and the election was August 9th.

Last week Bolz decided to spring his trap revealing Haberman’s contribution from Bryan. He called the local newspaper. They ran a small article listing Bryan’s name. Bryan’s business and the respect he has in the community meant the contribution did not hurt Haberman, it helped, as I expected. Bolz was leaving nothing to chance. He wanted an article printed in a larger newspaper; they refused. Bolz decided he would make his own news article and place it in the newspaper mailboxes around the county. Before sixty were out people were complaining to the newspaper. Now the newspaper ran the story. It read: CALUMET DA UNDER FIRE FOR LETTER. Bolz blamed his wife for the letters in the newspaper mailboxes. It was political suicide.

Bryan was in tears he might have ruined a good man’s chance of changing the county of “Making a Murderer” and Ken Kratz into a community people would be proud to call home. Last Thursday the newspaper article hit the stands. I started another poll, except this time it would all be automated, including the answers collected. We asked four questions:

  • Will you vote in Tuesday’s Republican primary? If they answered yes,
  • Will you vote for Haberman or Bolz for district attorney? Next,
  • Has any recent news affected your decision of who you will vote for in the district attorney contest? If, yes:
  • Who did you change your vote to due to the news report?

This is where it gets weird. The program worked the phones Friday through Sunday. The numbers kept changing as the weekend progressed. The margin of error was still +/- 6.5%, but now Haberman was winning by 14.2% and his polling numbers improved as the weekend progressed! People were changing their vote to Haberman as the poll was conducted. Voters were turned off by Bolz’s playground bullying behavior as it spread.

Here I am writing this Monday night. I am nervous about tomorrow’s election results. I told Bryan to go for it and he did because on my advice. My poll was scientific, but I never conducted a poll before. I expect about 10,000 people to vote tomorrow with 7,000 of those voters to vote the Republican ticket. In thirty hours I will know how smart I really am or what went wrong. You get to keep reading; I have to wait a day to finish this post.

Wednesday, August 10

Whew! I was going to publish this post even if it made me look like an idiot. Haberman won as the poll results indicated. There are some notable differences in the polling results that need review. Only 4,513 people voted the Republican ticket. Haberman won with 62.6% of the vote, winning by more than 25 points. My polling results accurately predicted the outcome, but was off by such a large margin it becomes meaningless.

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Nicholas Bolz, Calumet County’s departing DA. We wish him well in his future endeavors.

What Worked and What Didn’t

Bolz was sinking in the polls fast for his schoolyard bullying shenanigans. The poll could not predict within the margin of error because Bolz had committed political suicide at the last second with no time to make a come-back. I also noticed on Monday going to work a large number of Bolz signs were down and more Haberman signs were up; unscientific, but telling.

When it comes to my impromptu polling there were several issues involved:

  • It was my first attempt and my efforts may not have been entirely scientific due to my inexperience.
  • I used local phone prefixes, but did not consider cell phones. I worried about this from the beginning and did not know how to resolve the issue.
  • The pollsters were inexperienced.
  • In college I took a graduate class where we conducted a poll. I used this experience to conduct the current polls. College was a long time ago. There is a serious risk I was a bit rusty.
  • The final poll was all answered by touch phone; no pollsters were involved. It may have affected results.

Why did Bolz lose the election? Was there anything different he could have done to win? Yes!

  • Bolz’s own words and actions made it look like he planted the political contribution. It just looked bad, beating up on a guy who did something back in the 1990s. Really!
  • He blamed his wife. Ouch! A leader takes responsible! Blaming his wife made him look incompetent.
  • Bolz ran his campaign as if it were 1987. Newspapers don’t move elections the way they used to. He could have won the election if he:
  • Used social media. Facebook allows you to target your advertising dollars. For the amount he paid to mail flyers he could have had his ad front and center on all Facebook users in Calumet County. If he would have started dishing dirt sooner and repeated the lie often enough he might have gained some traction.

How Does This Apply to Personal Finance?

My little experiment teaches lessons applicable to money matters. First, I was too confident in my polling results the same way I can be too confident in an investment idea. Arrogance precedes a fall; “Ego is the Enemy”. Next, my opinion on Bryan helping the best man for the district attorney’s office without encouraging full disclosure to Haberman was an error on my part. I felt it was a remote possibility Bryan’s past would harm Haberman. It turned out okay, but it was no guarantee. It was not my decision to make; it was Haberman’s. I was wrong and I should know better. Bolz made plenty of rookie mistakes this election cycle; so did I. I’ll be a lot smarter next round.

Business needs government on its side. Businesses thrive in the communities they serve. Business owners should have a comfortable relationship with local officials, working toward a common goal of building a better community. Even non-business owners have local investment opportunities if they are aware of them. Getting involved in your community is of vital importance.

Finally, every event in our life is a learning experience. Bryan and I learned a lot this round. All the stories you read on the Wealthy Accountant are true with some literary license to protect the guilty and fit the story into one neat post. The goal is to teach lessons you can use to improve your life. You have civic rights; use them! Your community and your nation need you to get involved. Participatory government works! I don’t care what mistakes you made twenty years ago or yesterday, you have an obligation to facilitate improvements in your community. Then, maybe we can prevent the next Netflix documentary from ever being produced.

 

New israeli lottery ticketThe lottery is back in the news with promises of a rich reward for a very small number of people who randomly pick numbers matching the officially drawn numbers. The odds are hundreds of millions to one. But you can’t win if you don’t play. Just one ticket, one little ticket. A single dollar. Better buy two; make that three.

Lottery sales shy rocket when the jackpot rises to mega levels. The impossible odds are still just as bad when the jackpot is massive. The one question I don’t hear people asking is: If nobody won the last time they drew numbers and millions played, what chance do you have of winning?

Eventually someone will win the jackpot and the madness will recede until the next jackpot reaches nosebleed heights. I have been fortunate to have worked with a small number of lottery winners over the years. There are lessons buried in there all of us can benefit from.

Warnings from Winners

I will share parts of the stories of three winners. Their backgrounds are different only in the details. All had jobs and were solidly in the middle class. They had great lives until their dream of quick riches changed their lives forever.

1.) Our first victim came to my office after he had won the lottery. His prize is the smallest of our group: $250,000. Around these parts we have a fair number of manufacturing and mill jobs; he had one of these jobs. Unfortunately, the notoriety of his luck spread around the mill like wildfire. Soon it was impossible for him to do his job so the job was gone. He bought a home paying cash. I agreed with this decision. Then the stupid started. Well, he thought, if I can win the lottery once, I can do it again. And so it goes.

He started buying lottery tickets like mad. The year he won the $250,000 he had over $80,000 in lottery ticket purchases, a deduction on his federal return resulting in a large refund; Wisconsin said fuck you to any tax deduction. You see, in Wisconsin everyone who plays the lottery loses; it is kind of like donating to the governor. Back to our victim. The large federal deduction gave him a substantial refund that year. Determined to never work again he kept, ahem, investing in the lottery. His refund was very small the next year. You can only deduct gambling losses to the extent of gambling winning so all those lottery ticket purchases meant nothing on the tax return. He now had a mortgage on the home.

The following year the home was sold and he was living out of his car. This is where my client and I parted company; there is no need for a tax accountant once all the money is gone. It was another client who informed me our lottery winner was living out of his car. All I kept thinking back then was, Thank the gods he had no children.

Lottery-winner parking spots at the Atlantic Lottery Corporation (2009)2.) Our next lottery winner hit close to home. The parents of an employee struck gold in the lottery, winning several million dollars. They lived down in Iowa at the time. Dad worked as an Emergency Medical Technician and loved his job. As a lottery winner certain jobs are no longer available to you; an EMT is one of them. As an EMT, every call would have ended in a lawsuit, as a lottery winner would seem too easy a target to pass up. At least this story has a happier ending. The money was invested in quality stocks; they lived on dividends only. Over the years their portfolio has grown and most everyone has forgotten about their moment of extraordinary luck. They live in a modest home and are happy. For the most part, money did not change them, it only solved any money problems they would ever have. This is about the best outcome you can hope for if you win the lottery. It also highlights how important it is to have a team of professionals on your side.

3.) Our last winner won a massive jackpot, the largest in history at the time. Our young victim had everything going for him: a job and a beautiful fiancé he loved dearly. He decided to buy a ticket because the news was playing up the world-record jackpot. Little did he know that when he bought that ticket he was selling his future wife and life-long happiness. He bought his ticket at a gas station in Fond du Lac, Wisconsin. He was the first jackpot winner from a stretch of road nicknamed The Miracle Mile due to several jackpot winners buying tickets on the short avenue. For some reason the miracles stopped after the nickname was coined. Go figure.

He was overjoyed when his numbers hit. The joy ended soon enough. His fiancé sued him for half the money and won. Then she left him for another man. Now that I think about it, it was probably best she left now rather than later; a woman like that is a divorce waiting to happen. (Just my opinion.) Once he lost the love of his life things turned up. He hired a team of legal, tax, and investing experts. He did well, as far as I know. He now lives a few miles south of me. He bought and upgraded a horse farm. He spends his days of quiet with his animals (something I understand very well) and from what I hear, a quality wife.

It Does Not Have To Be This Way

We are all familiar with sports stars blowing tens, even hundreds, of millions of dollars in a short period of time, which leads to:

Keith’s Rule # 17: There is no amount of money you cannot spend.

Don’t believe me? Look at the government. Now tell me how much is enough if your spending knows no limits?

The problem is falling into a large amount of money without any experience, planning, or preparation for the windfall. Add to the challenging new experience, a world watching your every move and wanting a piece of what is yours, and disaster will be the default rather than the anomaly.

Keith’s Rule #18: It is easier to get money than it is to keep it.

Some people are better at keeping it than others. Sport heroes landing a massive contract are ill prepared for the demands they face. Our star player is great at playing ball, but has spent virtually no time thinking about handling a large amount of money. They think money is for spending. It’s not! Money is for investing! Money is a tool, a group of hard working employees who never taker a day off. Money reproduces so you don’t want to blow it as fast as it shows up. The average household will bring in several million dollars over a lifetime (easy to get). How much is left at the end? (Hard to keep. Hence Keith’s Rule #18.)
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Business Owners

Business owners are a different class. I have the great fortune of working with a large number of business owners for long periods of time. Business owners frequently land accounts with windfall profits. Because the business owner manages his company and finances daily, he has an advantage over lottery winners: experience. And very few know of his new-found wealth. Our business owner socks the excess cash into management accounts for later business use or investments for later personal use (retirement).

One windfall most longtime business owners enjoy comes from the sale of the business. For some reason business owners do much better when they receive millions from the sale of a business. They pay the taxes first, talk with their legal and tax team to protect their liquid asset, and spend considerable time reviewing investment options. Successful business owners have a plan. That is why they have a business to sell. They carry the same habits that created the wealth into their personal lives. It works.

There is one risk area for successful business owners when they plan on selling. The windfall is sometimes traded for a succession plan involving the kids. Now, I don’t want to say it never works, but it is rare when it does. I can’t count the number of businesses dad built and the kids pissed away. Whether you sell the business to the kids on installments (and payments dry up soon after) or the kids get a loan (which you later feel obligated to bail out), family is frequently a poor choice when selling the family crown unless the kids have been heavily groomed to manage an ongoing operation. The worst part is dad has to watch his lifetime of work destroyed. My advice to most clients is: sell for cash to a stranger. Once the transaction clears, do not look back. It only hurts when you do

Odds

The chances of winning the lottery are long. The chances you keep it and are happy after you win are just as long. What chance does a lottery winner have of having a happy financial outcome when they are the kind of person to spend money foolishly on lottery tickets? You might want to hold off on that lottery investment for a while.

Personally, I win every time the lottery is played. I win because I don’t play. The money you spend on a lottery ticket, I put into the First National Bank of Wallet, also known as an index fund. My lottery ticket non-purchases have accumulated well over the years. Dividends keep going up and up. The reinvested soldiers of fortune also start pulling their weight. They don’t ask for holidays, paid vacation, health care, or any other fringe benefits; they just keep pounding out more of the same: money. I stand back in awe at their relentless productivity and exponential growth. If man lived to be a thousand years old the process would crumble. We would all be multi-billionaires due to the compounded returns. Now you understand why nature requires we die when we do; to keep the world in balance.

When a lottery ticket is purchased it is with the hopes a win will solve problems. The quick fix never works. If you are unhappy before winning the lottery, you will be even more unhappy after. Your money problems will disappear, at least for a while. The only people who do well when they come into money are those who are already well-adjusted, happy people. If you start happy, money can make you happier because it allows you to do more. But these people have no need for a lottery ticket

If you already bought that ticket, oh well. If by some stroke of luck you win, assemble a trusted team of professionals to help you. Understand these trusted professionals will have their life turned upside down, too. Lottery winners tend to throw a wide circle of misery. The pressure from society and the media is intense. It might be better if you did not win.

Classic Car

By Liftarn – Own work, CC BY-SA 3.0, https://commons.wikimedia.org/w/index.php?curid=215686

Cars are a leading cause of wealth destruction; they are also a necessary evil in our society. The only way to win the “car” game is to prepare for battle with a fully loaded arsenal. Today I am going to show you how I buy cars for $4,000 or more under Blue Book.

Before we begin battle you need to understand my car habits. I drive 6,000 – 8,000 miles per year, mostly for business trips. I bike to work around 100 days per year and drive another 100 days. The round trip to work is 30.2 miles. I always buy a used vehicle. Once I claim ownership of said vehicle I drive it for 15-20 years. There are two cars in the garage. This means I buy a car every 7 to 10 years on average. I keep my cheapskate skills honed by helping clients and family members engage in the same mischievous auto savings activities.

The Opening Salvo

In the past I have purchased used vehicles from owners, but my favorite victim is the local bank or credit union. In my neck of the woods the credit unions handle the bulk of the auto lending. Some of these loans go bad and the credit union takes possession of the vehicle. I am not picky about what I drive. If it starts and gets me from Point A to Point B cheaply I am a happy man.

My preferred target is approximately 1-2 years old, gets good gas mileage, has low maintenance issues, and has not been abused. An internet search can reveal issues with a make and model. Minor issues don’t bother me; major issues like the transmission are a deal breaker. The local credit unions usually give the car a safety check prior to selling. I still take the vehicle to a trusted mechanic to give it the once over to verify the car has no major issues.

You need inside knowledge I will share with you for the next step. The financial institution needs to unload that vehicle fast. The regulators do not want a wasting asset sitting on the credit union’s books for any lengthy period of time. If they don’t find a buyer fast it goes to auction where only licensed dealers (in most states) can purchase it. A vehicle at auction goes for a lot less than the credit union wants. In other words, you have a motivated seller (my favorite kind).

The Process

515u04Cs5sL._SX311_BO1,204,203,200_There are a couple of ways for the financial institution to facilitate a sale. The two most common are:

  • Make an offer. They will haggle just like an auto dealership.
  • Make an offer in writing and we will get back with you. With this method, the bank takes in all the offers and makes a decision in a few days.

Most banks use method two now, so we will focus on cracking that nut. First, the offer is non-binding. If the bank insists it is binding I give them 12-24 hours to make up their mind. I prefer a non-binding offer since I can bid on several vehicles they have available; on the vehicles they respond to, I can choose the best offer. Regardless, never make an offer valid for more than 2-3 days. Don’t worry, if they are still interested in selling to you they will call even after the offer expires.

Before I make an offer on a vehicle I take it for a test drive. Each car I am interested in after the test drive gets looked over by me first and a mechanic second. You can have a trusted mechanic check the auto or if you are lucky like me, you have a neighbor who has a small auto shop in his garage.

The test drive is over, the mechanic found the car in good shape, and the credit union called to say they accepted my offer. At this point I know my offer was the best, but I don’t know by how much; my offer may also be the only one. I agree to meet with the banker. With a million dollar smile I tell my friendly banker I am no longer interested in the car. The reason: my research online indicated it is worth less than the offer. In half of the cases the bank only has one offer, yours. If I back out of the deal this thing is going to auction with a massive haircut.

Large purchases are more emotional head games than true purchases. The bank wants out bad and fast; I want a sweetheart of a deal or I keep driving the Junker I already own. I am always polite working with the bank officer. I am their friend. I also know the guy trying to unload the vehicle is frequently the guy who wrote the bad loan. People are unfairly motivated by the site of cash and I use that to my advantage.

To finish the process I will share my last auto purchase from a local credit union. I own a 2001 Honda Accord (purchased from an employee in 2003) and a 2007 Toyota Camry (purchased from the credit union in 2008). This is the story of how I became the owner of the Camry.

The offer was accepted after the offer expired. (Surprise! Surprise!) The Blue Book on the vehicle was $14,850 at the time; my offer was for $10,800. I smiled and told the banker I was no longer really interested in the car unless I could steal it. He said the offer was $10,800 and that was all he was authorized to accept. I said I will pay $9,500 or it is not worth putting another vehicle in the garage. He started chocking on his tongue. He also said the credit union was taking a loss on the vehicle as it was. I replied I was not in business to guarantee the profitability of every loan the credit union makes.

Here is where psychology takes over. I softened the poor guy up, now it was time to go for the jugular. I ask the banker if it would make a difference if I took a loan so the credit union could recoup some loss by collecting some interest. Only once in over 30 years did they say yes, take the loan. (I did take the loan and paid it off in full less than two weeks later. I did save another $800 in that instance.) With the loan issue out of the way I unleash an unfair mental manipulation: Cash. I bring cash with me to an auto purchase. The sight of cash creates all sorts of effects on the seller. Even bankers fall for it.

I dig into my bank bag and pull out $9,500 in hundred dollar bills and count it out on his desk. “This is all I have,” I say. “Take it or leave it.”  By now the banker is as white as a ghost. He still claims there is no way to close the deal at $9,500. “Well, how much then?” The banker came down to $10,500. I explained to the banker that if I walked the car goes to auction where my offer will look like a King’s Ransom. I also explain that if by some miracle he sells the car before auction they will lose another month or more of time value. I make up some BS lost interest number at this point. The banker stuttered a bit more and said $9,800 was the best he could do.

His shoulders slumped. I knew I had the best offer. I pulled out my wallet and added $300 more to the $9,500 already on the table. I win.

It does not always go this well. My average auto purchase is around $4,000 under Blue Book. A decade ago I had an itch for some fast cash and bought a small number of vehicles, drove them for a few months and then sold them from my office parking lot for more than I paid for them. (Someday I’ll tell you the story of the cute little Z28 I drove for one summer.) Unfortunately, in Wisconsin, if you sell more than four cars a year you are a dealer and need to be licensed. Well, it was a good idea for a year! I went back to my old ways; buy’em and hold’em forever.

Mak’em Last

Once you own a vehicle it is time to make them last. In northeast Wisconsin we can have snow and ice six months of the year with a guaranteed four months of such weather. Salt and sodium chloride on the roads wreck havoc on cars. (I once had a car where I needed to replace the gas tank; it had rusted through.) Making a car last 15 or so years is a challenge. Your climate will require modest changes, but what I do has worked for me in a harsh winter climate.

Here is how I maintain my vehicles:

  • In the summer I wash the car myself by hand; in the winter I also do it myself if a warm spell shows up. Otherwise, the car does not get washed much.
  • I change the oil like a religion. I read the owner’s manual and follow the recommendations. Most cars can go 5,000 to 7,500 miles between oil changes now. I follow other maintenance requirements, as well. I change my own oil, but enlist my neighbor mechanic for issues like tire changes and brake jobs.
  • I drive sensibly. I refuse to pound my car.
  • That is it. Nothing special. Drive intelligently, change the oil, and give the girl a bath every so often.

Wrap Up

Buying a car is not that bad. You can get a reliable vehicle at a cheapskate price if you know how. Cars today last a long time if you change the oil. The cheapest car is the one you never buy, so maintaining your mode of transportation is vital.

Remember the two cars I own? The Honda is getting old. She runs like a charm, but the body is really getting bad. Salt will do that. Soon I will visit my friendly credit union. I know they will be prepared for me. It will make no difference. They are a motivated seller with nowhere to go and I am armed to the hilt when I come knocking for a deal.

Am I acting in an unfair manner? I guess that all depends on if you are in the market to buy a car or a bank with a repo on your parking lot.