Several months ago, Molly and I attended a few financial management classes by Dave Ramsey. It was part of his "Financial Peace University" series. I would highly recommend it to everyone. It is not just for those that struggle financially, because, let's face it... We can all make better decisions when it comes to money. Dave Ramsey says there are usually two personalities when it comes to finances - the nerd and the free spirit. I'll let you determine which one I am.
So I was looking at depreciation rates for our 3 cars (I know there are only two drivers in our household, but who doesn't need an extra car now and again to keep around) and was trying to track the monthly depreciation in Quicken (it's ok to scream nerd, now). To my dismay, our 2003 Suburban had decreased in price radically and the other two cars (both around 10 years old) were looking like we might as well pay someone to take them off our hands now rather than continue to spiral uncontrollably towards worthlessness.
I was amazed to find out that most vehicles depreciate between 15% - 20% per year. Even if you buy a nice used car for 10,000 that's around $150 a month down the toilet. And that doesn't even consider the 6% - 8% interest rate that you're paying on the car loan. So, for a newer car that you finance, you're looking at losing anywhere from 21% - 28% per year. YIKES.
So, it got me thinking, how can you avoid such high costs. Intuitively, I thought there was probably a break even point where as soon as your repair bill started to exceed what a monthly car payment would be, you might want to think about buying a new car. The problem with that thinking is that repairs never come as consistently as a car payment. And, by the time the big repair cost hits, it's too late, you might as well keep it for a while longer, because you know you won't have to repair that item again.
Being an engineer, I knew that there must be a way to calculate the breakeven point when one should off-load their old car and upgrade to a newer vehicle. So, I was ecstatic to find this article that modeled the life-cycle costs of owning a vehicle. (http://css.snre.umich.edu/css_doc/CSS04-01.pdf). (Feel free to scream nerd, again). This article is amazing (for a nerd) and looks at everything from increasing car prices, gas prices, gas efficiency, insurance premiums, etc. and models vehicle reliability, depreciation rates, everything. The findings of this study is that the economic breakeven point of owning a vehicle is somewhere between 17 and 19 years. Here's what the article says:
"In other words, it is economically advantageous to purchase an older vehicle in good working condition and pay for any additional repairs while avoiding the low repair but high depreciation newer vehicles."
Although, the paper is quick to point out the empirical observation that leasing programs are very popular and that newer cars makeup a majority of vehicles on the highways. The paper concludes that consumers are willing to pay a premium in order to drive newer vehicles. This paper looks at the ownership costs of replacing your vehicle at regular intervals (i.e. every 3, 5, 10, 15, 20 years) and concludes that the ownership costs are exponential and are considerably higher if you replace every 3 years. Based on the graph, it looks like the ownership costs are fairly level for replacing the vehicle every 7 years or more.
Considering all of this, it looks like Dave Ramsey was right. We have allowed advertisements and marketing agencies to control our spending habits. Why else would we replace our vehicles (or pay for leasing programs) at the most expensive point of the curve (3 years) when we could save thousands of dollars by keeping it for only 2 additional years?
What if we were different? What if we started making spending decisions based on facts and smart choices. Maybe, we would find that people don't like to ride in our 10 year old cars. But hey, at least it's paid for.
Wednesday, September 19, 2007
Tuesday, September 18, 2007
Organic Foods
We've all heard the rage about Organic Farming, Free Range Chickens, and Hormone Free Beef. There seems to be a whole subculture developing for those that want to go all-natural. It has even been heard in pop culture music like the song "Big Yellow Taxi" by The Counting Crows that proclaim they don't care about "spots on my apples, leave me the birds and the bees". I think it begs the question, what does it take to be called an organic farm, and what are you really supporting when you purchase that Free Range Chicken?
Let me be the first to say that I am no expert in this area. There are however, very knowledgeable scholars in the agricultural field that work hard every day to keep our food supply safe. I think it only takes a moment to realize how fortunate we are in America that we can go to just about any store or restaurant and order anything off the menu and feel safe to eat it. That is truly a luxury that we should not take for granted. It was brought to my attention that even the rare occurrences of food related illnesses are the result of improper consumer handling, and not at all related to food source issues. Another issue that must be introduced is the difference between food safety and food quality, and that they are not necessarily synonymous. I would also like to point out the difference between acutely safe and chronically safe. While the double bacon cheeseburger may be safe to eat today, if you make poor choices and eat too many over a life-time, they have become unsafe.
Nonetheless, there is a large population in America that believes that our farmers and ranchers have polluted their food source and damaged the environment by overusing pesticides, antibiotics, and hormones.
(Again, let me remind you that I am not an expert in this field. However, I do know that the usage and control of these chemicals are well documented and studied. i.e. most people don't know that pesticides and herbicides photo-oxidize in the presence of sunlight. So, eventually the chemicals degrade into inert chemicals. Additionally, there are strict regulations that you must wait for a period of time after applying these pesticides and herbicides to your crops in order for the residual to photo-degrade. If you are truly interested in this topic, or other topics, contact someone from the industry and talk with them. They are more than happy to provide information and education to the public. They will give you facts and let you make your own decision - something that environmental, animal rights, and other controversial literature will not do.)
The popular solution to regain control of our food source (if you believe that it has lost its way) tends to be that people spend more money on groceries to buy foods labeled Organic, All-Natural, Hormone Free, etc. In addition, a similar movement (probably somewhat parallel to the food quality movement) is the animal rights movement. My favorite statement from people is that they only buy free range chickens because they like the thought of the chickens being out in the sun and scratching in the dirt. It seems easier to digest a chicken if you think that it was happy and healthy. Somehow, the connection between quality of life for the chicken is translated into quality of food source for us.
Let me also stop for a brief moment and say that I agree with the intent of many of these programs. Below is a quote from the USDA - National Organic Program brochure. You can read more about it at this website (http://www.ams.usda.gov/NOP/Consumers/Consumerhome.html).
"Organic food is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water to enhance environmental quality for future generations."
I think this is a great idea, and intuitively, most farmers and ranchers do this. I can't think of people that are more genuinely interested in heritage (passing the family farm on to younger generations), and sustainability (conservation techniques, etc.) than America's farmers and ranchers. Most farmers and ranchers are very progressive thinkers and are ahead of the curve when it comes to sustainability.
My personal belief is that everyone should become closer to their food source. What I mean by this is to become involved and get educated. Learn where your food comes from, how it was produced, what verification is available that it was produced at a certain standard, and what that really means. One of the most important concepts in food purchases is understanding labels (nutrition as well as nomenclature). We have been given the luxury of going to a grocery store to do our shopping and given 17 different brands of milk each with 5 different percentages of milkfat packaged in 3 different sizes of containers and different materials of containers (yeah free market). Before you make the decision to go completely organic or completely free range, read both sides of the argument and understand what those labels mean and understand how they relate to food quality, food safety, and whatever other motivations you have.
Let me be the first to say that I am no expert in this area. There are however, very knowledgeable scholars in the agricultural field that work hard every day to keep our food supply safe. I think it only takes a moment to realize how fortunate we are in America that we can go to just about any store or restaurant and order anything off the menu and feel safe to eat it. That is truly a luxury that we should not take for granted. It was brought to my attention that even the rare occurrences of food related illnesses are the result of improper consumer handling, and not at all related to food source issues. Another issue that must be introduced is the difference between food safety and food quality, and that they are not necessarily synonymous. I would also like to point out the difference between acutely safe and chronically safe. While the double bacon cheeseburger may be safe to eat today, if you make poor choices and eat too many over a life-time, they have become unsafe.
Nonetheless, there is a large population in America that believes that our farmers and ranchers have polluted their food source and damaged the environment by overusing pesticides, antibiotics, and hormones.
(Again, let me remind you that I am not an expert in this field. However, I do know that the usage and control of these chemicals are well documented and studied. i.e. most people don't know that pesticides and herbicides photo-oxidize in the presence of sunlight. So, eventually the chemicals degrade into inert chemicals. Additionally, there are strict regulations that you must wait for a period of time after applying these pesticides and herbicides to your crops in order for the residual to photo-degrade. If you are truly interested in this topic, or other topics, contact someone from the industry and talk with them. They are more than happy to provide information and education to the public. They will give you facts and let you make your own decision - something that environmental, animal rights, and other controversial literature will not do.)
The popular solution to regain control of our food source (if you believe that it has lost its way) tends to be that people spend more money on groceries to buy foods labeled Organic, All-Natural, Hormone Free, etc. In addition, a similar movement (probably somewhat parallel to the food quality movement) is the animal rights movement. My favorite statement from people is that they only buy free range chickens because they like the thought of the chickens being out in the sun and scratching in the dirt. It seems easier to digest a chicken if you think that it was happy and healthy. Somehow, the connection between quality of life for the chicken is translated into quality of food source for us.
Let me also stop for a brief moment and say that I agree with the intent of many of these programs. Below is a quote from the USDA - National Organic Program brochure. You can read more about it at this website (http://www.ams.usda.gov/NOP/Consumers/Consumerhome.html).
"Organic food is produced by farmers who emphasize the use of renewable resources and the conservation of soil and water to enhance environmental quality for future generations."
I think this is a great idea, and intuitively, most farmers and ranchers do this. I can't think of people that are more genuinely interested in heritage (passing the family farm on to younger generations), and sustainability (conservation techniques, etc.) than America's farmers and ranchers. Most farmers and ranchers are very progressive thinkers and are ahead of the curve when it comes to sustainability.
My personal belief is that everyone should become closer to their food source. What I mean by this is to become involved and get educated. Learn where your food comes from, how it was produced, what verification is available that it was produced at a certain standard, and what that really means. One of the most important concepts in food purchases is understanding labels (nutrition as well as nomenclature). We have been given the luxury of going to a grocery store to do our shopping and given 17 different brands of milk each with 5 different percentages of milkfat packaged in 3 different sizes of containers and different materials of containers (yeah free market). Before you make the decision to go completely organic or completely free range, read both sides of the argument and understand what those labels mean and understand how they relate to food quality, food safety, and whatever other motivations you have.
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