Kahler Financial

Swimming Safely in the Financial Sea

2013-03-13T21:30:00Z

by Rick Kahler

On our recent vacation, my wife and I visited a nature preserve off the coast of Argentina where we had the chance to swim with sea lions.

Even though they were half-grown pups, some of the sea lions were as big as I was. They were curious, friendly, and playful. Like many mammals, their play takes the form of gently nipping at each other. They seemed happy to include human visitors in their fun and games. We could reach out and touch them, and they would respond.

One pup in particular kept nipping at my ankles, my swim fins, and even my snorkeling mask. Every time I touched him, he would reach around and bite at my hand. We played this game several times, and I kept touching different parts of him with no concern for my safety. Then, about the sixth time, he had my hand in his mouth, I took a closer look. It occurred to me that my hand was in the jaws of a predatory wild creature with very big teeth. It seemed like the right time to end the game.

My wife, busy documenting my behavior with the camera, thought I was totally nuts to let the sea lion nip my hand a second time, much less a fifth and sixth. Ordinarily, I would have agreed with her. Just one bite at my texting fingers by a carnivorous critter nearly my own size, and I would have been swimming for the boat.

The reason I didn't make a mad dash for safety was that I had been told what to expect. Before we got into the water, our tour guides explained what the sea lion pups were likely to do. They told us this was how the pups played. They reassured us that we wouldn't be in any danger.

Since I trusted the guides and believed what they told me, I was able to relax and enjoy the experience. Without knowing what to expect, I may have been frightened out of the water at the first contact with the sea lions. Or I may have chosen to stay out of the water altogether, thereby missing out on a delightful opportunity.

In case anyone is wondering, no, I haven't suddenly switched from writing a financial column to writing a nature column. This story has a clear application to investing.

Diving into the cold waters of investing can be scary. If you don't know what to expect, you might be frightened off the first time you get a statement that shows your investment has lost value. Or you might make two of the worst possible investing mistakes, which are selling out when markets are plunging or being too intimidated to invest your money at all.

When you're prepared and know what to expect, you understand that all markets—stocks, bonds, real estate, commodities, or any other asset classes—will have scary downturns. In the world of investing, ups and downs in the market are normal, just as playful nips are normal in the world of sea lions.

With many financial websites offering basic information on investment terms and how to start investing, you can do a lot to educate yourself before you invest a penny. Before you place your trust in any advisor, ask questions. Insist on explanations of any terms you don't understand. Find out about commissions and fees, especially from anyone selling financial products.

What you need before you jump into the financial sea is knowledge. Knowing what to expect helps you swim comfortably with the sea lions instead of fearing that you're being thrown to the sharks.

Rick Kahler, Certified Financial Planner®, MS, ChFC, CCIM, founded Kahler Financial Group, and became South Dakota’s first fee-only financial planner in 1983. In 2009, Wealth Manager named Kahler Financial Group as the largest financial planning firm in a seven-state area. A pioneer in the evolution of integrating financial psychology with traditional financial planning profession, Rick is co-founder and co-facilitator of the five-day intensive Healing Money Issues Workshop offered by Onsite Workshops of Nashville, Tennessee. He is one of only a handful of planners nationwide who partner with professional coaches and financial therapists to deliver financial coaching and therapy to his clients. Visit KahlerFinancial.com today!

The Ultimate Stealth Tax: Inflation

2013-01-09T19:08:00Z

by Rick Kahler

With all the talk about tax rates and the fiscal cliff, hardly anyone has mentioned what is probably the most effective and least understood tax in the federal arsenal: inflation.

Wait a minute. Isn't it confusing to call inflation a tax?

It is. That confusion is exactly why inflation is the ultimate stealth tax.

One of the few deficit-reducing measures that has the support of both parties and President Obama is a change in the way the government measures inflation. Our lawmakers have agreed on another in a series of adjustments to the way they calculate the consumer price index (CPI). The proposed changes will understate the future CPI even more than the current formula already does.

This maneuver is a brilliant way for deficit-reducing lawmakers to both cut spending and increase taxes, without calling their action either a spending cut or a tax increase.

How is this possible? First, here's a brief explanation of the proposed change, which is called the chained Consumer Price Index. According to an AP article published in the Rapid City Journal on December 5, 2012, “the chained CPI assumes that as prices rise, consumers turn to lower-cost alternatives, reducing the amount of inflation they experience.”

The assumption is that, if the price of pork rises while chicken doesn’t, people will buy more chicken. Yet they're still buying protein. Therefore, no inflation has happened. This argument is like saying if the price of gasoline goes up and the cost of walking doesn’t, people will just walk more, so there's no problem.

The chained CPI is a spending cut because many entitlement programs are indexed to the CPI. These include Social Security, government pensions, veterans benefits, and the interest on some of the national debt. The lower the increase in the CPI, the less benefits will rise.

The AP estimates that once the new CPI is fully phased in, a 65-year old on Social Security will receive $136 a year less. At age 75, the reduction will be $560 annually, and at 85, it will be $984 less.

In addition, as wages increase at the real inflation rate, entitlement programs won’t keep pace. Gradually, fewer people will be eligible for programs like food stamps, Medicaid, heating allowances, and Head Start.

The chained CPI is a tax increase for much the same reason. Many income tax brackets and deductions are indexed to inflation. Smaller annual adjustments to the brackets because of the lower CPI will push more people into higher tax brackets.

Tweaking the CPI is nothing new. Politicians from both parties have done so for years to give the illusion of a lower CPI than that calculated by previous methods.

ShadowStats.com, run by John Williams, calculates the current unemployment and inflation rates using the formulas from the 1980s. According to that methodology, the unemployment rate (U-6) is 15% and the CPI is 9%. Yet the government has tweaked the CPI so much that today the official CPI is 2.5%. Under this newest proposal, inflation would be 2.2%.

You may think understating the current CPI by 0.3% isn’t any big deal, but it is. The decrease represents a 12% drop in the inflation rate, which understates the increase in our cost of living. If your employer reduced your wages by 12%, you'd probably see it as a big deal.

Proponents figure the newest CPI adjustment will save $200 billion in spending increases and raise $65 billion in new taxes over ten years. It doesn't matter whether you call it inflation, chained CPI, or plain old gimmickry. A tax increase by any other name is still a tax increase.

Capitalism, Weeds, and Brotherly Business Deals

2013-01-03T16:45:00Z

by Rick Kahler

What is capitalism? How does it work? For some time now, I've been meaning to write a column on that topic, but it has seemed to be a daunting task more fit for an economist than a financial planner. Then I remembered this story from my childhood.

One summer, we were visiting my grandparents. I was about ten and my brother was seven. Our grandfather hired us to weed his garden, paying us a dime apiece.

That seems like a paltry sum, but it wasn't such a bad wage for a couple of kids at the time. After all, a bottle of soda only cost a nickel.

We started off to work. The day was hot. The garden seemed huge. I kept thinking about getting a bottle of soda and sitting in the shade. Pulling all those weeds seemed like a huge price to pay for that reward.

Then I had a brilliant idea. "Dave," I said, "How would you like to earn an extra nickel?"

My brother was interested. I offered him the opportunity to weed my half of the garden for half of my dime. It seemed like a good idea to him, and we made a deal.

David weeded the entire garden. I bought a bottle of Coke with my nickel, sat in the shade, and watched him work. When the weeding was finished, he was tired and hot but had fifteen cents to show for his labors. I was broke, but I had enjoyed relaxing with my soda instead of having to work in the hot sun.

It seemed like a win-win situation to me. My grandfather didn't see it the same way. In his view, I had taken advantage of my innocent younger brother by coercing or manipulating him into doing my work for me. I'm not sure Granddad ever forgave me for what I did that day.

I suppose there may have been a tiny grain of truth in his perspective. After all, I was three years older than my brother. However, I don't remember any bullying or manipulation being involved. I simply offered him a deal, and he took it. The transaction involved a willing seller and a willing buyer. One thing of value (his work) was exchanged for another thing of value (my nickel). He benefitted from receiving more money, and I benefitted from not having to perform manual labor.

Thinking about it all these years later, it occurred to me that what I did was exactly the same thing my grandfather did. Each of us paid someone else to do a task we didn't want to do. And each of us got the job done at the lowest cost to ourselves.

For Granddad to accuse me of using my position as the oldest to take advantage of my brother wasn't quite fair. After all, one could say he used his position as a grandfather to get cheap labor out of a couple of little kids. I suppose one of his aims was to teach us about the value of hard work and the satisfaction of being paid for our efforts. The lesson I learned wasn't exactly the one he had intended to teach.

The whole process, though, was a small example of capitalism at work. It was a lesson I took to heart.

My brother must have done the same. He's still a hard worker, and he's certainly been a very successful capitalist. And when his son was a teenager and I hired him to do my yard work, I had to pay him a lot more than a nickel.

Do You Know the Difference Between Millionaires and Billionaires?

2012-12-18T22:00:00Z

by Rick Kahler

The difference is three zeroes and a comma. No, this isn't a bad joke. It takes one thousand millions to make one billion. That's a huge difference.

Over the past couple of years, especially during the presidential election, one of the hot-button issues has been whether the wealthy are paying "their fair share" in taxes. A great deal of the media coverage and political rhetoric, from President Obama on down, has lumped "millionaires and billionaires" together.

That makes as much sense as putting a housecat and a tiger into the same cage and saying they're just the same.

The first issue to clarify is the definition of "millionaire" and "billionaire." Is it someone with a net worth of $1 million or $1billion, or is it someone earning a million or a billion in a year?

According to wild.answers.com, only 80,000 Americans make $1 million or more a year. I couldn't find a source listing how many people make over $1 billion a year, but I can guess. If you earned 6% on your investments, you would need a net worth of about $16 billion to provide an annual income of $1 billion. According to Forbes (March 2012), only 40 people in the entire world have a net worth of over $16 billion. Obviously, all those references we keep hearing to billionaires must refer to net worth, not income.

This is in line with the Merriam Webster dictionary, which defines millionaire (or billionaire) as "a person whose wealth is estimated at a million (or billion) or more."

What kind of lifestyle can you have with a net worth of a million as opposed to a billion dollars? Experts tell us the most reasonable sustainable withdrawal rate is 3%. That means your $1 million will provide $30,000 a year. Adding in Social Security of $18,000 a year means a millionaire can retire on an income of $48,000 a year. If you need assisted living, in-home care, or nursing home care in your later years, which at today's rates cost a minimum of around $84,000 a year, you'll be spending down your principal.

Three percent of $1 billion, on the other hand, will give you a retirement income of $30 million a year. At that rate, you could probably get by without bothering to file for Social Security.

Accumulating $1 million over a lifetime is certainly possible for middle-class earners who are willing to live on less than they make. If you started saving about $1750 a month at age 25, you'd have your million by age 65. That's about the same as a married couple each maximizing their 401(k) contributions.

To accumulate $1 billion by age 65, on the other hand, if you started at age 25, you'd need to save a mere $21 million a year.

Equating a millionaire with a billionaire is the same as equating the population of Rapid City, South Dakota (70,000) to the combined populations of California, Texas, and Virginia (70,000,000). There is simply no comparison.

The point here is that in today's world, a millionaire, especially one who is retired, isn’t "rich." Accumulating a net worth of $1 million dollars by age 65 is a completely reasonable and achievable goal for anyone wanting a comfortable and secure retirement.

Lumping “millionaires and billionaires” together might roll off the tongue with a rhythm that makes a nice sound bite. That doesn't mean it makes sense. For anyone willing to do the math, the comparison is ludicrous. There's a world of difference in earnings, wealth, and potential lifestyle in those extra three zeroes.

The Financial Case for Good Health

2012-10-15T18:34:00Z

by Rick Kahler

Does $40 a month for a fitness center membership seem beyond your budget? Do you cringe at the cost of fresh fruits and vegetables? Is your wallet too lean to let you buy lean protein? And the cost of a medical checkup is something you don't even want to think about.

At first glance, the cost of staying healthy might seem way too high.

Certainly, maintaining good health comes at a cost. Yet in the long run, maintaining poor health will cost far more. Let's look at some of the ways it pays financially to take care of your health.

Exercise. Before you decide you can't afford a $40 gym membership, consider this: What do you do with the time you don't spend exercising? Shop? Watch movies? If you're like most people, you spend some of that time spending money. Maybe even enough money to cover the gym membership. There are also plenty of free ways to exercise, like running, biking, or walking. In Rapid City, all our hills provide a great workout at no extra charge.
Diet. Eating a healthy diet doesn't have to mean adding expensive organic produce to your grocery bill. You can buy plenty of real food that's canned or frozen. At the same time, subtract highly processed foods and junk. You may even end up saving money. You'll save even more if you eliminate health-destroying habits like smoking or excessive drinking. This is a two-for-one: you improve your health and save money at the same time.
Preventive checkups. Check your insurance coverage. Under current health care laws, some preventive care is fully covered. And if you think a routine visit to the dentist is too expensive, check out the cost of a root canal or getting a tooth pulled.

Every penny you may save by not exercising or eating right, you'll eventually spend in additional medications, doctor visits, medical co-pays, medical equipment, transportation, and housing costs.

Poor health will directly affect your health insurance premiums. It will indirectly raise your taxes. Even if you're healthy, you'll help pay for those with poor health through Medicaid and Medicare taxes.

Probably the greatest cost of poor health, however, is one most of us never consider. This is the decrease in one’s earning power. For most people, their greatest asset is their capacity to earn. Poor health may hold people back from reaching their potential, or even make them unable to continue to earn any income. A survey of pre-retirees found that 80% of them planned on working after 65. Yet only 19% of people over 65 are actually working. Why? Over 40% are unable to work because of poor health.

There is one financial advantage to poor health: it reduces your life expectancy so you run less risk of outliving your money. However, don’t think that dying younger means you can live more lavishly. A recent study shows the number of unhealthy years—with their related health-care costs—are the same regardless of life expectancy.

There are many ways to define wellness, most of which include a combination of financial, emotional, and physical health. If a person isn’t healthy, money alone isn’t of much value. But take money out of the picture, and good health is almost impossible to sustain. Our health and our money have a direct impact on each other.

Since good health is such a vital asset, it makes sense to use some of your financial resources to support it. Part of good financial planning and money management is doing what you can to stay healthy enough to enjoy your financial independence.

Staying on the Road to Financial Independence

2012-10-01T17:16:00Z

by Rick Kahler

Congratulations! You’ve made the courageous decision to commit to financial sobriety. You’ve committed yourself to creating a spending plan, paying off your debt, creating an emergency fund, and fully funding your financial independence.

This probably means you’ve made a conscious choice to downsize your lifestyle. You may be driving a cheaper car, eating out less, shopping less, and traveling less. You may have moved to a smaller house or even a more affordable city. You may have gone back to school to improve your future income.

Whatever you’ve done, it took a lot of courage, focus, and hard work to put yourself on the road to financial sobriety. Here are some reminders to help you stay on that road:

This lifestyle downgrade isn’t forever, especially if you are paying off debt. Someday the debt will be paid. You'll have the joy of using some of those funds to expand your lifestyle and investing some in your financial independence, paying toward the future instead of the past.
Relapse is certain and necessary. No one follows a spending plan to perfection, especially in the first few months. Remember, your plan is an estimate of the future and a work in progress. You don’t need to get everything right or do it perfectly. You will certainly miss an expense here and there, underestimate, and overestimate. You will probably need to refigure and readjust for the first year before you really hit your stride.
Difficult emotions are to be expected. You may feel a host of emotions like fear, sadness, embarrassment, shame. You may have times of feeling hopeless and overwhelmed. Honor your emotions—they are real—but let go of the negative self-talk that often accompanies them. The land of financial sobriety is unfamiliar territory. It’s going to take you awhile to become accustomed to this new way of being. Don’t berate or "should" on yourself. Let your dreams become bigger than your fear.
Keep your eyes on the prize. No matter how poor your past financial decisions have been, tomorrow is a clean slate, a new day. The past does not define your future. Keep your focus on what you want your future to become and what you want to create with your life. Visualize that life of being debt-free and financially independent. Doing so will help reprogram your brain to gain more emotional impact from imagining future gains rather than present fulfillment. You can learn to gain more pleasure from paying an extra $100 on an outstanding loan and imagining a life free of debt than from buying a new pair of shoes.
Progress comes in small steps. Remind yourself you are not where you were. Progress can seem painfully slow in the early days of reducing debt, building an emergency fund, or growing your 401(k). In my 20's, I started an IRA with $50 a month. I remember looking at a statement that represented two years of investing and thinking I would never get anywhere at that rate. As the years went by, I was able to save more and more. It wasn’t until my 50’s that the compounding growth of my meager initial savings started snowballing. By then I had a sum that could support me with a modest lifestyle if I chose to quit working.

This journey of financial sobriety is not easy. Like most things of value in life, it takes determination and persistence. Set your sights on creating a life worth living, then align your financial behaviors to support that vision. You'll achieve success, and you'll also enjoy the journey.

Gold in That There IRA

2012-09-20T16:46:00Z

by Rick Kahler

Here in the Black Hills, home of the historic Homestake Mine, we know a gold rush when we see one. The last few years have tempted investors to take part in a modern gold rush. The precious metal is thought of as a safe harbor for investment capital during times of economic and political unrest and chaos.

There are many ways to own gold, including holding an interest in it via a financial medium like a mutual fund or an Exchange Traded Fund (ETF). Those who want gold as protection against political or economic turmoil, though, probably are thinking of owning physical gold.

Since Americans' savings and investing rates are so low, most folks don’t have any extra funds to put into gold. Their only investment vehicle may be an IRA. Yet IRAs are specifically excluded from owning collectibles, metals, and coins.

There are exceptions, however: U.S. gold coins minted by the U.S. Treasury, or bullion bars or coins of a fineness of 995 parts per 1,000. Several non-U.S. minted gold coins meet that standard. The key here is that the coins or bars must be in the physical possession of a qualified trustee. That means gold you stash in a safe or bury in the back yard does not qualify.

Most banks, brokerage firms, or mutual fund companies are not interested in holding physical gold, so finding a qualified trustee can be difficult. You must do a reasonable amount of due diligence to be sure the trustee you find is really trustworthy.

A trustee needs to arrange for the shipping, handling, and storage of your gold. For this reason, you will certainly pay much higher fees than you would for normal stock, bond, and cash investments. The fees can amount to hundreds or thousands of dollars annually.

Even if you are willing to pay the high fees, first ask yourself, "What’s the point?" The reason most folks want to own physical gold or silver is to have "real" money available in case of an economic crisis or political uprising. How does owning physical gold in an unknown location that may be thousands of miles from you fulfill that requirement? Wouldn't owning an ETF like GLD actually accomplish the same thing, only without the high costs? Yes, it would.

If you want to own gold, my strong suggestion is to own the GLD ETF and avoid all the high fees. The total cost of purchasing GLD is probably about $10.

Other options are mutual funds that purchase gold mining stocks, which is probably a better way to participate in the gold market. This is because of the leverage factor. In a rising market, the cost of mining gold is much lower relative to the market value of the gold. So if a mining company pays $1,000 to mine an ounce of gold and can sell it for $1,500, the company—and you, as an owner of its stock—make $500 per ounce. Gold could stay at that same price for a year and your company would continue to make a 33% gross profit.

However, if you owned the physical gold and it stayed at the same price for a year, your profit would be 0%. You would only make that same $500 profit if the gold appreciated from $1,500 to $2,000 an ounce.

Of course, the reverse is also true. If gold turns downward, you will stand to lose much more owning the mining company than the physical gold. That's why I recommend owning gold, like any other asset, only as part of a diversified portfolio of investments.

Withdrawing Enough But Not Too Much

2012-06-28T12:36:00Z

by Rick Kahler

One of the biggest adjustments for many people when they retire is making the switch from saving to spending. For years and years, they've been putting money away for the future. It's hard to accept that it's time to start taking that money out because "the future" has arrived.

Financial planners can help retired clients make this transition more comfortably by helping them decide on a reasonable withdrawal rate to answer the crucial question, "How much can I take out of my portfolio every year?" That rate needs to balance the need to have enough money to live comfortably and the need to make sure there is enough money for the rest of the clients' lives.

This is one area of financial planning where pessimism is a virtue. If an advisor claims you can withdraw eight or ten percent, or even more, that's a red flag that you're getting bad financial advice. For most people, rates that high are simply not sustainable. A few planners are comfortable recommending withdrawal rates of five or six percent. The more standard rate is four percent. Conservative planners, myself among them, tend to recommend three percent.

Over my years as a financial planner, however, I've come to realize the futility of anchoring on a set withdrawal rate. This is a number that needs to be established based on each client's needs and circumstances. Because so many variables affect safe withdrawal rates, planners need to keep up on the latest research and continually refine their thinking in this area.

Every time we change the investment mix in clients' portfolios, it changes the standard deviations, which in turn affect withdrawal rates. For example, at Kahler Financial Group, we historically have used a cost-of-living estimate for Social Security of 3%. This was even with our long-term projected increase for the Consumer Price Index (CPI). With some of the current turmoil and lack of confidence that Congress will put Social Security on a firm footing without some type of crisis, we have lowered our COLA expectations to 1% under the CPI, or 2%. Of course, this affects the withdrawal rate we recommend to clients.

Most financial planners have some clients who withdraw significantly less than they could. These frugal types are extremely unlikely to run out of money before the end of their lives. They will almost certainly "leave some money on the table." This is fine if they want to leave money to their heirs. The possible downside is that they could have used some of that money to live more comfortably during their retirement years.

At the other extreme are those who, for various reasons, take out the maximum that the planner recommends, or even more. The higher the withdrawal rate, the lower the probability that they will have enough money to last as long as they live. Only the clients themselves can decide whether their comfort level is at a 99% chance of having enough and even leaving money on the table, a 95% chance, or even down to a 60% or 50% probability of having enough.

A projected withdrawal rate is just that, a projection. It's an educated guess. Markets change, economies change, and unplanned events happen in life. All of those circumstances will affect portfolios and withdrawal rates.

The best financial planners don't make unrealistic promises, but are committed to assessing current information and making the best recommendations they can. They understand that finding the perfect balance—taking out enough to enjoy life to the fullest but leaving enough so your money lasts your lifetime—is more art than science.

Whitney Houston's Estate

2012-05-03T19:00:00Z

by Rick Kahler

Since the death of singer Whitney Houston, I've seen several articles from attorneys and financial advisors about the errors in her estate planning. They have summarized three areas where it was badly flawed:

Lack of privacy. Ms. Houston had a simple will that was subject to public probate, rather than a living trust that would have kept her affairs private. Anyone with thumbs and access to the Internet can see a copy of her will.
Lack of protection from claims, con artists, and circumstances. The estate, estimated to be worth over 20 million dollars, was left to Ms. Houston's daughter, Bobbi Kristina Brown. A vulnerable young woman just barely of legal age will receive three huge payouts over the next decade and become a multi-millionaire by the time she's 30. A trust could have given her some limits and structure, as well as providing for advisors to help her learn how to manage her wealth and protect herself from predators.
Lack of tax planning. The federal estate tax of 35% on anything over $5,120,000 will apply to the estate, so Uncle Sam will take around a third of it off the top.

Unfortunately, this lack of skilled estate planning isn't all that rare among wealthy people. Here are a few of the money beliefs that may be behind inadequate estate planning:

"Complicated estate planning is for rich people, and I'm not rich." This may especially apply to owners of small businesses who don't have a particularly high income or lifestyle but whose land or businesses may be worth several million dollars. Yet good estate planning advice is especially important for them, because their heirs aren't necessarily aware of or prepared for a substantial inheritance.

"The financial advice that was good enough when I was just starting out is good enough now that I'm successful." A tax preparer, accountant, or financial advisor who is highly competent with small individual or business matters may not have the knowledge necessary for more complex estate planning. Seeking out different financial advisors as your income and net worth grow is no different from consulting a specialist rather than a general practitioner if you have specific medical needs.

"When you can afford the best, you'll get the best." Trying to save money by hiring bargain-basement financial advisors is almost always a mistake. It can also be a mistake to assume that someone who charges top-tier fees will always have top-tier skills and integrity. Even if a financial planner or other professional has a reputation as an advisor to the wealthy, it's still essential to verify that the person or firm is right for you. Ask for references and be willing to ask hard questions about compensation, investment philosophy, and services. Make sure you are a client, not a customer. Work only with financial advisors who, like accountants or attorneys, have a fiduciary duty to put your interests first.

"I know how to make money, so of course I know how to manage money." Many highly educated and skilled professionals are high earners but don't necessarily have the knowledge to manage their earnings well. In order to know whether the advisors you hire are competent, it's important to learn the basics of investing and money management. Look for advisors who don't set themselves up as "gurus" but are willing to teach and to work in partnership with you.

When it comes to financial advice, it isn't enough to find someone who will "make you feel like a million dollar bill." It's more important to find advisors who will help you take good care of all your dollars.

What Do Future Millionaires Drive?

2012-04-04T13:15:00Z

by Rick Kahler

Have you ever seen a Super Bowl ad touting how much money you could save if you bought something second-hand? Of course not. There's not a lot of encouragement in our culture to buy used stuff. Even the one exception, a used home, is described as "existing."

Buying used just isn't cool—that is, unless you're a wealth builder. Many of them look upon buying used as more of a badge of honor than an embarrassment.

Certainly, there are many items that are best purchased new. Toothbrushes, toilet paper, and underwear come to mind. Yet there's one thing that's almost always better to buy used—a vehicle.

Let’s look at a few common myths around buying a new car.

"Buying a used car is just buying someone else’s problem." That can certainly be true if you don’t do your homework. When shopping for a used car, be sure you research the model’s repair record. The best place for this is Consumer Reports. An inexpensive online subscription will give you loads of detailed information about every year, make, and model. Narrowing your search to the top used car values will significantly increase your odds of buying a great used car. Before writing a check for even a top-rated used car, take it to a trusted mechanic for an evaluation. The money you spend will be well worth the future headaches you save.
"Never own a car that is out of warranty." This is a good idea only if your heart is set on owning one of the many cars ranked as the least reliable. The warranty will come in handy because the car will spend a significant amount of time in the shop. Also, the value of a new car drops rapidly in the first few years. If instead you buy a used vehicle with a high reliability rating, the warranty become less important, especially when you consider you'll be getting a third to half off the sticker price. If you buy a low-mileage, late model car, your savings will be enough to more than pay for the few times you may need to take it into the shop.
"When a car hits 80,000 miles, it’s time to get a new one because it will start costing an arm and a leg to maintain." Once again, a top-rated used car will often run reliably for well over 120,000 miles if it’s maintained. Yes, the maintenance will increase, but the rapid depreciation of a new car will cost much more than maintaining an older car. Wealth builders routinely buy late model cars with low mileage and own them for 10 years or more.
"I can get a lower interest rate and longer term loan on a new car." Here’s my rule of thumb: If you need a loan to buy a new car, you are probably buying too much car. Those who manage money well create a savings account for replacing their vehicles. That way they can pay cash for a car and drive the best deal. If you must get a loan, borrow as little as possible and pay off the loan quickly. A higher interest rate on a shorter term loan on a used car is still a much better deal than what you would lose in depreciation on a new vehicle.

Americans have a love affair with their cars. Still, for most of us, a new car is a luxury, a big splurge best purchased after we’ve attained financial independence. The best way to travel the road to that financial independence is in a used car.