Monthly Archives: October 2018

More on Transportation (Electrics vs Hybrids) For 10/27

More on Transportation (Electrics vs Hybrids) 

In my last post I rambled on about transportation cost. What I failed to address was the increasing impact on this area via electric & hybrid vehicles. I think this area deserves examination.

At this time full electrics are relatively expensive and range limited. They are extremely effective for in city trips and short commutes. That said battery life is continually improving and so is the range. Over time the prices will become more reasonable. The major hurdle is the recharge time and that issue will always be significant for single car owners.

Hybrids are only slightly more expensive that their fuel only counterparts and they offer superior fuel economy. All most hybrids are actually battery assist with relatively small battery packs and small electric motors. The batteries are recharged while in fuel only mode and operate intermittently, usually for no more than a minute, with a couple of minutes to recharge. The most efficient hybrids will have larger electric systems, but smaller combustion engines which reduces performance. Hybrids offer the advantage of superior range. My 2015 Hyundai Sonata has a range of 650 + miles (of highway driving).

Plug in Hybrids are a relatively recent development. This approach combines the in-city economy of a full-on electric with the improved range of a hybrid. The trade off at this time is a higher initial cost, limited range and reduced performance. I expect to see improvements with all of these issues as more competition enters the market.

One additional electric powered alternative is the Hydrogen powered Fuel Cell. This vehicle is only available in a few markets. While there are several issues with this concept (not the least of which is the required infrastructure [hydrogen fuel stations]) it is potentially the “greenest” alternative. Hydrogen is the most abundant element in our local universe and the output of the reaction is water! Currently most of production is dominated by Honda, Toyota & Hyundai. I expect sufficient improvements in this technology that this alternative will become a significant factor within the next 15 – 20 years.

You get what you pay for (con’t)

  • Transportation (usually the next largest item after housing)

–         Is it better to lease vs purchase a vehicle? There are advantages to both leasing and purchasing. My recommendation if you are buying is to not buy new. Typically, a vehicle will depreciate to 50% of its initial value (value being wholesale not retail price) in 3 ½ to 4 years. When purchasing I recommend a vehicle 4 -5 years old. This would mean a vehicle with an initial “value” of $20,000 could be purchased in the $7 – 9,000 range. Assuming a 36 month bank loan and a “good” credit score the monthly payment would be approximately $240. I recommend leasing only for new cars and only for a person that has achieved an “excellent” credit score and only if you will be using the vehicle for 12,000 miles or fewer. Also, I only recommend a lease when the implied interest factor being offered is less than 2%. Near the end of a model year these lease deals are readily available. Often you can lease a $20,000 value vehicle for zero down and less than $250 per month. Keep in mind that you will probably be restricted to no more than 12,000 miles per year and will be charged at turn in for any damages (inside and out) in excess of minor wear and tear. An added advantage of leasing is that the vehicle will be covered by the manufacturer warranty for the full term of a 36 month lease.

–         Is it more cost effective to purchase new or used? As mentioned on the above topic, I rarely find a deal that justifies a new auto purchase. When it comes to using a new vehicle I prefer to lease and when purchasing prefer to target a lower mileage 4 – 5 year old vehicle. The only exception to this rule would occur when a new car is heavily discounted and in addition the manufacturer is offering a 0% loan for 72 months. I recently took advantage of 2015 vehicle in April (of 2015) that was heavily discounted from a retail of $27,000 down to $19,000. The 0%, 72 month loan put the monthly payment at under $265. The lease rate factor was at 1% which put that payment at under $230, so I still opted for the lease. However, the purchase option was a great deal.

–         Additional cost factors: Insurance (how to shop it), fuel, personal property tax, license, routine maintenance, repairs, etc. Outside of financing the next largest cost element will be insurance. There is more variance in auto insurance premiums that most people realize. Attempt to ignore all of the auto insurance ads that dominate the airways. One solid place to get a decent free quote is via Esurance.  They tend to be near the bottom cost for equivalent coverage. I’m not suggesting that you sign up with this firm, but merely that you use their quote as a benchmark against which to evaluate the quotes you receive from others. Initially I recommend that you get 3 – 4 quotes and also that you requote at least every three years. There can be as much as a 100% variance in premium quotes for identical coverage! In some cases the company will provide a “teaser rate” for the first year. If this occurs, be sure to shop again before renewing.

–         What factors should be considered in choosing a vehicle? The simple answer is cost. Regardless of the type or price range the cost to operate needs to be at the top of the criteria list. Quality is important, but also tends to be somewhat objective. As long as you stick with the top manufacturers it is hard to make a bad choice. Ford consistently ranks highest in quality in regards to USA firms, but the top Japanese and Korean manufacturers are worth considering. I encourage folks to shop for a model with certain specifications and not by brand. When you do this it opens up a lot more options to take advantage of special promotions, which gets us back to cost. After the cost of financing and depreciation the next largest factor is fuel economy. When you open up to several brand options it allows you to factor in this item.

–         What can we do to minimize fuel costs? Once you acquire your vehicle the single largest incremental cost is for fuel. The two variables here are the price you pay for fuel and driving habits.  Of the two, the latter (driving habit) is the most consequential. Research shows that gas mileage can vary as much as 20% depending on just a few factors. These are: 1. slow steady acceleration from a standing start, 2. slow steady stops from to a stop, 3. only pass when you have time to accelerate without having to gear down & 4. Keep you maximum speed at no more than 65 MPH. The price you pay for fuel of equivalent value can vary by as much as 5% or more in the same general location. In that regard I recommend the smart phone App “Gas Buddy”.  It allows you to identify the station close to you with the best price and also will provide precise directions. This is particularly useful when travelling, especially if you are unfamiliar with an area. There seems to be much concern about fuel that contains 10% ethanol. Ethanol provides about 15% fewer MPGs so fuel without the 10% ethanol will achieved about 1.5% fewer MPGs than unblended fuel. It is good to factor this in when making a fuel purchase. It may make sense to pay $.04 or $.05 a gallon more for unblended fuel.

see more on this topic next week

You get what you pay for – Overall factors and housing costs

You get what you pay for – Overall factors and housing costs

  • Key purchasing factors for all items: Many people just do not make “smart” purchases. The old adage that “you get what you pay for” (pardon the dangling participle) is just not always true in today’s economy. At times I wonder if some of us just like to be able to say we paid more! My view, when comparing identical items is, I prefer to pay less. There are two key factors to maximize your purchasing power. First, never allow yourself to be “sold” and next make “time” your asset. 

–         Research (doing our homework vs. “being sold”) When you identify a need it is important to research the market. I’m not suggesting that you not listen to sales pitches. However, I am suggesting that you never make a purchasing decision based on an initial pitch. Always (repeat, always) do your homework before making a purchase decision. By that I mean “research” the market. My policy is always to buy local, but only if they offer what is needed at a reasonable price. By reasonable I mean at or near the “market” price. A few good sources for price information are: EBay, Amazon & Walmart online. If you check these information sources it will give you a good idea of what you should be paying.

–         Timing; making time your asset: Having to make a purchase on the spur of the moment almost always is an expensive decision. Be sure to plan all significant purchases in advance. Give yourself the time to do your homework and thus make an informed decision.

  • Housing costs (the biggie)

–         How much of our income should be dedicated to housing costs? The typical recommendation is no more than 35% of “gross” income, but in today’s economy that is not always possible. The average family income in our area is approximately $38,000 per year. Looking at the average this translates into about $1,300 per month for rent (or mortgage), taxes, insurance, utilities, etc.

–         Is it better to rent or to own a house?  Initially, at lower income levels renting actually can be a good decision. A few of the reasons are: Renting provides flexibility, the overall occupancy cost can actually be less than ownership is some markets and it provides time for first time buyers to evaluate what they want in terms of location and type of housing. Another factor is that loan approval for a purchase can be difficult and expensive at lower income levels. My recommendation is to put off purchasing until a family is fairly certain that they will be located in an area for an extended time period. In times past the recommendation would have been to invest in a home as soon as possible and start building equity in the vastly appreciating real estate market. The promise of market appreciation is much less certain today. It is taking much longer to recover the transaction and ownership costs through appreciation. It is also best to wait until a person achieves a good to excellent credit score prior to applying for a home loan (it will save big bucks over the life of the loan).                                                                                                                                                    –         Utilities – methods to control, this is not a “fixed” expense:  Utility costs have the potential to exceed the cost of rent if not properly managed. The very best way to manage your major utility expense (electric or the combination of electric & gas) is to moderate your temperature expectations.  Setting your thermostat in the 74 – 76 F range in the summer and in the 64 – 66 F range in winter may take some getting used to but it the financial benefits can be substantial. When compared to a constant 70 F setting it can easily amount to over a $1,000 in annual saving. I recommend using a programmable thermostat. A low end model works great and they can be purchased for under $25. The unit comes with easy to install instructions. Even a novice can install one in under 30 minutes. The basic models allow you to manage temperatures in four different time zones each day and have different settings for each day of the week. The potential savings can easily exceed the cost of the unit in just a few months. If you do not reside in a house with a centrally controlled system then the best way to go is with “zoned” units, preferably heat pumps (have the ability to both heat and cool in one unit). This is probably only a viable option for home owners or very long term renters that are able to work out a deal with their landlords. These units only cost a bit more than A/C units and offer the advantages of only using electricity when a zone is occupied and are very energy efficient. An additional energy saving item is to convert to LED light bulbs. They last up to 20 x longer than incandescent and more than 5 x longer than florescent. They also use less than 1/20th of the energy of incandescent and less than 1/5th of the energy of fluorescent. One option is to replace your bulbs as the old ones expire. They can be purchased for about $2 each on eBay and locally at near that price when on sale. I recommend not waiting as the financial payback in energy savings is usually less than six months. Another benefit is that florescent bulbs are not recyclable, while LED bulbs are. While other options like solar are available, the preceding offer the quickest financial advantage.                                                                              –         Insurance (casualty & contents) Most renters do not carry insurance on their contents. It is important to understand that the insurance a landlord carries on rental property does not cover the contents of the tenant. I’m not making a suggestion one way or another, just a point of information. As a homeowner I do highly recommend carrying insurance and if you have a mortgage the lender will require that you have coverage. Insurance rates vary significantly among providers. The difference in premiums can vary by as much as 200%!  Shopping rates every few years is a must! When you do shop I recommend getting quotes from no less than 3 firms.                                                                                 –         Property taxes: This cost applies to the owner of the property. There is little you can do to control this fixed cost. The rate is set by the assessed value of the property and usually represents about 1% (or a bit more) of the fair market value. If the market has declined (which it did from 2007 – 2015) then you have the option of asking for a reassessment through the county assessor’s office.                                                                                  –         On-going maintenance (lawn care, upkeep, breakdowns, etc.) Another factor that apples to the property owner. In a fairly flat market property will decline in value if not properly maintained. If you are a renter your rental agreement may specify that as tenant you must maintain the lawn. It is recommended that, as a property owner, you set aside an extra 10% of the value of your loan payment for ongoing maintenance and repairs. This will insure that when the need arises the ability to fund will be available.

this is the first of several posting on this topic, stay tuned for more next week.