A Solid Auto Industry Bodes Well For The Economy

It’s amazing what a difference five years can make.  Five years ago, the domestic auto industry was a mess.  General Motors and Chrysler were spiraling toward insolvency, resulting in the need for eventual assistance from the government.  Ford, the other member of the ‘Big Three’ had recently mortgaged all company assets to secure credit in an effort to turnaround and stay afloat.

mb-201309trucksBottom line, things were not well and there was a lot of doom and gloom.

Things hit bottom in 2009 when GM and Chrysler did take bailouts.  By this point, Ford had started to show signs of turning around, but their stuck was still mired in the low single digits.  Across the board, the auto industry was in shambles.

Things turned around pretty well for the industry after that.  Many people argued that bailing out GM and Chrysler was inappropriate, but whatever side of the fence you stand on, the fact is that all three companies (as well as other auto companies) have returned to profitability.  The thing that impresses me is that they’ve actually built a solid foundation so that profitability can be expected.  Ten years ago, the companies were making big profits, but sales were inflated largely by big discounts, low lease rates, and other practices which were not sustainable.  These days, the companies can sustain profitability even if sales were to fall.  In the past, a fall in sales would send companies deep into the red, bringing the need to create even bigger incentives.  Eventually, this house of cards had to fall, and it it did.

But the good news is that companies shed a lot of bad practices that had accumulated over the past decades.    It’s my opinion that this bodes very well for the overall strength of the economy.  You see a lot of articles out there on whether the economy is really recovering, with some claiming that another recession and crash is right around the corner.  I know many people who don’t have any ties to the manufacturing industry might be skeptical, but I believe that in the end, a healthy auto (and manufacturing) industry is a very solid foundation for the economy.

Will there be ups and downs in the economy?  Of course.  Will this follow in the auto industry?  Yes.  I’m not saying that the economy and the auto industry are going to grow every single year with no end in sight.  What I believe is that the auto industry, and the economy, will be able to bear these ups and downs much better than in the past.  We might not be growing the economy at a rate that economists are thrilled with, but I think that we have built a solid foundation so that any slowdowns won’t lead us into crisis.

Building a solid foundation is important for longevity, and I believe that the automakers have a solid foundation for success and that this will help lead to stability in the US economy.

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Why I Will Never, Ever Root For Tesla Motors

Tesla Motors gets a lot of attention in the various investment and financial publications that I read on a regular basis.  Many people think they have some great products and that their innovation could propel them to great things in the future.  They seem committed to the idea of the electric car, while maintaining style and ingenuity that customers crave as well.  The prices are pretty steep, but if you’re in the clientele that they’re marketing to, the idea is that price probably isn’t a huge obstacle.    Even though all of these limitations make it obvious that they’ll never crank out millions of cars per year, many investors feel that they have great opportunity.

Personally, I don’t care.  I will never invest in their stock.  But, my reasoning is a bit more close to home than anything else.

In 2006, Tesla decided that they needed a presence here in Michigan, which even though it has lost a lot of clout, is still a huge center of the carmaking industry.  They negotiated with a suburban city for a tax abatement, hired around 50 people, and set up shop with their Tesla Michigan Technical Center, with the doors opening in early 2007.

Less than 18 months later, it was all over with.  They put up a blog post indicating that they were cutting back and would be closing up various locations, including the Michigan location.  The big problem with that is they put up their blog post before management had a chance to let anybody know of their plans, so effectively, dozens of people found out they were going to lose their jobs via a…blog post.

This was right around the time that the economy was starting to crumble, and it was obvious that the domestic auto companies were in a big world of hurt.  At the time, layoffs of hundreds of people were announced almost daily, so the Tesla news was barely a blip on the radar.

The thing was, the other companies stayed in Michigan.  They’re still here.  They came back.  They’re stronger than ever.

Tesla is nowhere to be found.  And, quite honestly, I’ll be happy if they keep it that way.

I know that many people think Michigan is not a destination state.  I realize the reputation of Detroit is bad.  I hear that the fact that the auto companies (two of them anyways) survived because of government intervention left a sour taste in peoples mouth.  I get all that.  But, I still love my state.  I still have pride in where I’m from.  And, while it was ‘only’ 40-50 jobs, and ‘only’ one little old 20,000 square foot building that was taken over and later vacated, it said a lot more than that.

In my mind, Tesla basically said ‘You’re not good enough’ to our state and its citizens.  They said ‘We’re innovative but not innovative enough’ to make it here.  They said that ‘they don’t believe’ in us.  They never said those exact words, but I still read them loud and clear.

And for that reason, I will never support Tesla Motors in any way.  I don’t care if everybody is driving them in 50 years.  You won’t see one in my driveway.  You won’t see it in my portfolio.

The domestic auto industry has come roaring back.  The future is bright here.  I doubt we’ll see Tesla even try to make a Michigan presence again anytime soon (they’d want another tax abatement, and what city in their right mind would grant that knowing their past history of committment?’

Too bad, Tesla.  It could have been great here.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

A New Car Is Little More Than A Drag On Your Net Worth

I got a call from our credit union the other day.  I used to do all my banking at this credit union until we got married, when we decided to combine our finances, and this led us to consolidate checking and saving services into a nearby bank, meaning that the credit union accounts largely became dormant.

Still, I kept the account active with a little bit of money because for several reasons:

  • Fees – I knew credit unions would be less likely to charge fees or would normally charge less fees than a traditional bank.  Although our bank has instituted service fees, we’ve avoided them largely by closing accounts or meeting minimum balance requirements.
  • Other services – I knew that credit unions offered a variety of services, typically at a good cost.  Sure enough, when it came time to open a Health Savings Account earlier this year, our credit union was the only instituion I could find that would service our account with no monthly fees.  Other accounts will waive fees but only with a high balance.  Since we’re just starting our HSA contributions, we expect a low balance for the first couple of years, and the credit union turned out to be our only option for a no-cost HSA.
  • Loan rates – If we ever did need a loan, our credit union typically offered the best rate.  I had financed a loan with them several years back, which was one of my last car loans.

Since we reactivated our services with them by way of the HSA account, I guess they took notice.  I got a call the other evening.  I didn’t pick up because it was a number I didn’t recognize, plus it was bath time for the kids, which is a pretty hectic time.  I picked up the voicemail and it was someone from the credit union calling.

I had just made a deposit into our account using the online bill pay service of our bank (who essentially would write a check to the credit union), and it was our first such deposit.  I thought that they were calling to tell me that I had made an error or something, so I called back immediately to find out what they wanted.

It turns out that the deposit was fine, but that they were calling to see if there were any services that they could offer.  They specifically asked if we had any auto loans outstanding or if we planned on taking out any auto loans in the next few months.

I proudly answered ‘No’ on both fronts.  Both of our cars (a 2007 Buick and a 2006 Pontiac) are fully paid for and have been for a number of years now.  We also drive very little, so both cars have under 60,000 miles and we’d like to keep them for a long time.

Still, I did tell her (with complete sincerity) that I was aware that they had great loan rates and that we would likely consider them first and foremost if we ever needed to get an auto loan.

What I Didn’t Tell Her

The part I left out is that, if it were up to me, I wouldn’t use them for any auto loan, because in my dream world I would never take an auto loan again.  The hope is that we can pay for our cars up front.

How We Would Do This

Our goal is to save up enough to fund replacement cars on a regular basis.  We put a portion of money that comes in from our tax refund every year, as well as extra money (like anything I might make from the blog, for example).  The ideal amount would be to capture the average depreciation of our current car as well as the increase in prices of replacement cars.  That would, in theory, allow us to buy a replacement car.  Obviously, anything bigger or better or with additional features would drive that price higher.

We haven’t been as successful in saving for this goal as I would honestly like.  It may sound like an excuse, but most of that has to do with the fact that I haven’t gotten a raise or bonus of any kind from my employer in several years.  Adding two kids and all of the costs associated takes away a good deal of the opportunity for savings compared to what you had in the past, especially when your take home pay is not increasing (and in fact decreases when you consider that health care premiums typically increase).  Still, we’re doing OK, to the point were if one car needed to be replaced, we could likely swing it, but if something happened where we needed to upgrade to newer cars for both, we’d be in a tight spot.

Replacement Is The Word

Notice that nowhere above did I say anything about a ‘new car’ and that’s because a new car isn’t something I have a big interest in at this point.  I’m not going to go as far as to say that I will never buy a brand new car again, but from an overall personal finance strategy, a new car simply doesn’t make sense.  I would look at buying a used car of some sort.  The issue I would have is making sure we bought one that was reliable and somehow free of problems.  Our last used car purchase was great in this regard since we bought it from my parents, so we knew the full history!  We won’t always be so lucky, though, but that’s a bridge we’ll cross when we get to it.

The Net Worth Effect(s)

See, the reason I no longer like the idea of buying a new car is twofold, and both tie to your net worth.

  • Paying Interest On A Depreciating Asset – For people who actually do consider the effect of a car payment, this one is the one that most will consider.  A car payment means cash flow going out the door, and some of that cash flow is interest.  You’re paying the loan provider money, all while the car is falling in value.  At least with a house, the value under normal circumstances is supposed to stay steady or go up, so while you pay money in interest, normal market conditions will protect the principle amount.  With a car payment, there’s no such expectation.  You’re not only ‘out’ the interest you pay, part of your principle is actually eaten away by the depreciation of the car.  So, if you have a $300 car payment, and $75 of that is interest, that leaves $225 in principle.  But, if the car falls in value by $150 that month, you’re essentially retaining $75 of that $300 payment in your net worth.  The biggest reason to avoid a new car is because you’ll see bigger depreciation up front.  With a used car, the value continues to fall but by lower amounts as the car ages.
  • Percentage – If you have a household net worth of $200,000, consider that a new $30,000 car represents 15% of your net worth.  If you are like most households and have two cars, that can double. You can easily have 30% of your household net worth associated with depreciating assets.  The goal is to grow your net worth, so if you have two assets that are dragging your net worth down each and every month, that’s a lot of ground you have to make up just to stay even, let alone actually increase your net worth.  Cheaper cars will represent a smaller percentage of your net worth, making the effects a bit easier to overcome in terms of how a car drags down your net worth.

New cars are great.  Don’t get me wrong.  I love the feeling of getting into a new car.  Everything is clean.  Everything is new.  It feels fantastic to drive.  It’s a definite rush.

But, just like that new car smell, all that fades.

Except the payment.

That one doesn’t go away.  Well, it might, but that ‘new car’ exhilaration has likely long been gone.

So, next time you’re considering a new car, consider the effect that it has on your net worth, and the amount it could be dragging you back.  Consider how a used car will have less depreciation pulling you back, and will also mean a smaller (or no) loan which means you have less interest to pay.

Readers, how many car loans do you have?  Do you look at the effect a car payment has on your net worth, especially when you consider how depreciation makes the effect of a car payment even worse? 

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Would You Stop Speeding To Pay Lower Premiums?

I’ve heard more and more stories where insurance companies are getting creative with how they come up with their auto insurance premiums, to where some dynamic factors are brought into play.

Traditionally, insurance premiums are set by fairly static inputs:

  • Where you live – The frequency of crime in your area plays a big role in what you pay for insurance
  • What car you drive – Certain cars are more likely to be robbed and I’ve even heard that certain colors of cars (bright red) have a higher incident of accident, so you could pay more for certain elements
  • How much you drive – Our insurance premium factors in how many miles we put on our car during an average period.  The more you drive, the greater chance you have of an accident, I suppose.

There are things here that are within your control, most namely the type of car and the features you have, but a lot of these factors are probably a bit out of your control.  Most people aren’t going to move so that they can drive a few miles less to work, leading to a few bucks getting knocked off your policy.

But what if there were other factors that could directly impact your prices/

One of the things I’ve seen are devices that can track your speed.  Many devices are tied in with the GPS system, so it will know exactly what road you are on, what speed you are traveling, and the speed limit of that road.  Insurance companies can then track whether you’re speeding, and your premiums could be adjust accordingly.  If you are a speeder, they will deem you more likely to be involved in an accident, and conversely, if you obey the speed limit, the idea is that you would be less likely to be involved in an accident.

Insurance companies set their rates based pretty much on the likelihood of events, so if they have additional factors that can go into spitting out the likelihood that you’d be involved in an accident, it could work to their advantage.

Would this actually work?

My gut tells me that the biggest group that would stand to benefit are the people that don’t speed at all or who do so very little.  I think that people who typically travel of the speed limit might say that they could give up speeding, and maybe they even could for a while if the device were installed in their car, but that they would go back to their own habits once the novelty of having the new device wore off.

The thing is, I’m pretty sure insurance companies would count on this. After all, they aren’t going to want less premiums paid overall.  They’re still going to want to collect the same amount of money to cover their costs.  So, while some drivers would save money if they truly were able to go without speeding, the fact is that some drivers could actually see their premiums go up if the insurance company were to really get a glimpse of how they drove.

The biggest ‘what if’ question surrounding these types of devices would be to find out what insurance companies would do about drivers that didn’t accept these devices to be placed in their car.  Would they be given free reign to raise their rates to a higher level with the assumption that they don’t want the device because they drive in an unsafe manner?  I’m not sure.  I think a lot people would argue that they drive perfectly safe, but that they wouldn’t want the device because they don’t want to be tracked.  This is perfectly reasonable, but I honestly think that this day in age, there are plenty of ways that ‘Big Brother’ can track us with or without our knowledge (though I know this is becoming somewhat of a common add-on in cars driven by teen drivers, even if just for their parents peace of mind)

Personally, I drive a bit over the speed limit but I try to keep it reasonable.  I think my habits would be improved if there were such a device installed, though I’m sure that I wouldn’t become a perfect driver.  It could benefit us for some of our trips, because when I’m towing our camper, I almost always drive under the speed limit anyways out of sheer necessity.  So, that could work to our advantage.

As of now, I’ve not seen any offerings of this technology.  I’m not sure if it’s our insurance company or the state where we live, or maybe it’s just too soon.

Readers, what would you do if you were offered this technology with the idea that you could have your rates lowered if the monitor showed that you drove within the speed limit?  Would you have to adjust your current driving habits to meet the criteria or do you drive under the speed limit anyways?

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