Careful with Vehicle Expenses

For most American households, transportation costs eat up more of the annual budget than anything other than the house itself. Nearly all of that transportation money is spent on cars and car-related expenses. Data collected by the Bureau of Labor Statistics shows that transportation is the second-biggest expense for most households across the U.S. Hence, we need to be careful with vehicle expenses. Here are some general rules of thumb:

1) 20/4/10 rule: This simply states when purchasing a car put at least 20% down, finance for no more than 4 years and keep the monthly payments to no more than 10% of your gross income. If you need to finance for more than 4 years it is a sign that you cannot afford the vehicle.

2) Vehicle expenses including vehicle payments, insurance, and maintenance should not exceed 20% of your monthly take home pay.

3) Total value of your vehicles should be less than half your annual income.

Why do we want to be smart with vehicle costs? Seems like a no brainer, but for those of you who need a basic rule of building wealth, remember rich people buy assets that appreciate and most vehicles depreciate in value. After 5 years of ownership most new cars are worth 37% of what you paid for it. If you weren't following these guidelines and purchased a new car for $40,000 while making $50,000 per year you'd lose $25,200 in 5 years or $5,040 per year on average. If you were making $50,000 per year that is a negative savings rate (-10% per year $5,040/$50,000=0.1008x100=10.08% per year). Your car is literally killing any chance you have of getting ahead in life.

Let's run this example through our guidelines:

Guideline 1: To purchase a $40,000 vehicle, you would need 20% down ($40,000x0.20=$8,000), per month payment for 48 months equals $667 to $730 (0% loan to 4.5% loan),  10% of gross income is $5,000 for the year or $417 per month. Your monthly payment $667 is greater than $417 per month. Result: don't buy this vehicle.

Guideline 2: If you make $50,000 per year your take home pay is roughly $38,700. This is $3,225 per month. Your total car expenses should not exceed $645 per month ($3,225x0.20=$645) Monthly payment on a four year loan with 0% interest equals $667. Not factoring in your other vehicle expenses like registration fees, insurance, etc. $667 is greater than $645 per month. Result: don't buy this vehicle.

Guideline 3: This is the simplest calculation, half of your income is $25,000 and $40,000 is greater than half your income. Result: don't buy this vehicle.

"Car payments and big car purchases will make you broke and keep you broke," Dave Ramsey. The alternative to an unaffordable car, if you make $50,000 per year in income, you can most likely afford a car worth $15,000-$20,000. Click for useful auto loan calculators.

American Savings Challenges Continue with Shift to 401(k) - How Can We Fix this Picture?

The State of American Retirement: How 401(k)'s have failed most American Workers by Monique Morrissey, Economic Policy Institute (EPI)

US News - Why the Average Family Has Only $5,000 for Retirement by Brian O'Connell

401(k) & IRA Balances - Fidelity Q3 Analysis

Bloomberg's Suzanne Woolley reported the following findings from Fidelity:

The average IRA balance rose 5 percent in the third quarter and is up 6 percent year over year, to a balance of $94,100, up from $66,100 five years ago.

The average 401(k) balance gained for the second quarter in a row, inching up 2 percent, to $90,600 for the third quarter. That amount is a 7 percent jump from 2015's third quarter and up from an average of $64,300 five years ago, according to Fidelity Investments. Fidelity administers 401(k) plans for more than 14 million plan participants.

People who have had a 401(k) with the same company for 15 years have average account balances of $331,200.

Fidelity press release with more information.

Pre-Election Market Update

What a week for the market? Down, down, down we go as the rally has started to stumble and everyone is concerned about the United States presidential election on November 8th. Let's look at the data to see where we are in terms of price, sentiment and valuation.

Price

Price action remains positive for owning stocks, however price action has deteriorated. The monthly moving averages for the S&P 500 are barely holding up and both the bond(IEF) and real estate(VNQ) markets have turned to monthly sell signals. Meb Faber's Timing Model shows all main asset classes near or below their 10-month simple moving averages. As I noted in January, we could be topping from the rally that started in 2009. Chris Kimble at Kimble Charting Solutions further demonstrates this peaking scenario with his recent post, Broad index at 2000 & 2007 levels, another top? Here is the graph he posted showing the Value-Line Geometric Composite Index:

Chris notes that this index remains inside of a 6-year rising bullish channel, despite the weakness over the past 18-months. If the index would break below this 6-year rising channel, suspect selling pressure would take place.

Sentiment

This gauge has dropped from 44 at the end of September 2016 to below 19. When sentiment drops this low it often makes sense to go against the crowd and invest. We'll know more at the end of November.

Valuation

Market remains overvalued, near the peak it reached in February 2015. Let's illustrate this with a chart from Advisor Perspective's Jill Mislinski writing for the Doug Short blog.

Jill writes: "As we've frequently pointed out, these indicators aren't useful as short-term signals of market direction. Periods of over- and under-valuation can last for many years. But they can play a role in framing longer-term expectations of investment returns. At present market overvaluation continues to suggest a cautious long-term outlook and guarded expectations. However, at today's low annualized inflation rate and the extremely poor return on fixed income investments (Treasuries, CDs, etc.) the appeal of equities, despite overvaluation risk, is not surprising."

In summary, price action barely remains positive for equities (negative for REITs), sentiment is too pessimistic and the market remains overvalued. Traders will probably add money back to the market after the election. They probably raised too much cash. The next U.S. president must face one of two scenarios during the first term: Either the president will have to deal with a recession in office, or the U.S. will have the longest economic expansion in its history. Barry Rithotz wrote a fantastic piece for BloombergView titled, Shift From Active to Passive Investing Isn’t What It Seems. It is a must read if you want to further understand the current popularity of passive investing. As John C. Bogle says, "The miracle of compounding returns is overwhelmed by the tyranny of compounding costs." Wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

Morningstar 2016 529 Ratings

Source for an interactive version of this map.

Rally! Rally! Rally?

Source: Bloomberg

As Lu Wang wrote October 14, 2016 for Bloomberg:

One ominous signal that marked trading in 2015 has begun to reassert itself, a pattern in which the benchmark index hovers near a 52-week high while the proportion of stocks that are similarly elevated dwindles.

On a more positive note for the market listen to Barry James, President and CIO James Investment Research, speak during this Bloomberg radio interview (Listen from minute 7 until 10). Their indicators are starting to look a bit better for stocks and they are increasing their stock allocation for their James Balanced Golden Rainbow Fund from 47% to 52%. This is a tactical fund focused on growth and capital preservation and can allocate between 20% and 80% to stocks. Wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

The One Monthly Payment Killing Your Wealth

Jeff Rose wrote this for Forbes as a contributor:

According to a recent State of the Automotive Finance Study from Experian, the average new car payment reached $499 per month last quarter. Worse, the average new car loan is 68 months long! Like my man Dave Ramsey says, it’s entirely preposterous when you really think about it.

Have you ever imagined what you could do with an extra $499 per month? Let’s face it; probably not. These days, we blame everything but our car payments for our inability to get ahead.

We blame our employers for not giving us the raises we deserve, or our parents for not educating us enough. We blame health insurance premiums, the price of groceries, the housing market, and even the price of gas. But, do we ever throw shade at our car payments? Heavens no.

Somewhere along the line, we’ve become socially conditioned to believe a huge car payment is a fact of life. We tell ourselves that everyone has a car payment, and that it’s normal and okay. And heck, if we’re going to have a car payment, we might as well get the car we want, right?

This kind of thinking is so widespread it’s practically an epidemic. The thing is, it’s also absolutely wrong….and it’s killing our wealth.

He ends with this:

If you work hard and still can’t get ahead, your car payment might be the culprit of your money woes. Before you head to the dealership, you should ask yourself if that new car smell is worth losing out on $179,640 the next thirty years – or up to $820,483 in investment returns. Chances are, it’s not even close.

Source: Jeff Rose, CFP