Wednesday, August 27, 2014

Tesla's Image Management
A couple of weeks ago, Elon Musk announced that the Tesla’s drive unit warranty would be extended to 8 years and unlimited mileage. This was generally seen as a reaction to Consumer Reports’ one year review of the Model S, in which it stated the car had “more than its share of problems.” Tesla has been quick to respond to anything that might damage its reputation as a high quality vehicle – remember when it added the titanium underbody shield after a couple of cars caught fire after a crash? These are all wise moves and I applaud Tesla for making them. Electric cars are still at a critical time in their development. If they get the reputation, deserved or not, of being unsafe, temperamental, or a pain to own, the whole electric car industry will collapse. Musk is making shrewd moves to prevent consumers from forming negative opinions about electric cars.

But I’m concerned about the future, specifically when the Model X and Model 3 hit the stores. Their lower price will mean more and more people will start driving electric cars. In general, this is a good thing. But the increase in drivers also means we should expect an increase in the number of news stories about people getting stranded because they ran their cars out of power. If this happens to people, they will get an experience that is quite different than running out of gas in an internal combustion engine vehicle. When the Tesla Model S runs out of power, the car shuts down. Hard. There will still be enough power to operate the emergency flashers and door locks, but the console and dashboard will turn off. Additionally, you will need to put the car into neutral or Tow Mode before everything shuts down. Once this is done, you’ll need to block the wheels so the car doesn’t roll away. Failure to get the car into tow mode before the power is completely gone will mean a tow truck operator will have to drag the car onto a flatbed without the wheels turning. Ouch.

Once lower priced Tesla models are for sale, I fully expect to see a slew of news stories about people being stranded in their Teslas because they ran out of juice. The news agencies will probably play up stories about how people had a hard time getting the car towed or how they supposedly had enough charge to get to their destination, but they still mysteriously ran out of power. These stories could feed into the range anxiety people feel, and hinder the widespread adoption of electric cars. The bad thing is there is no action Musk and Tesla can take to counter these stories (short of building more supercharger stations). There is no quick fix Tesla can implement or additional warranty coverage they can provide to counter these stories. Further, Tesla will need to walk a fine line in their responses to such stories to not come off sounding like they are calling their customers stupid for failing to properly plan their trips. But in reality, that’s the problem – people are stupid. And the more Tesla owners you have, the greater the chances that many of them will not understand battery power levels and range.

It’s too bad. You have the exact same problems with ICE vehicles. People run out of gas every day and it’s not a news story.

Wednesday, August 20, 2014

Details Of My Refinance

The biggest monthly expense in most people's live is their housing payment, be it rent or a mortgage. So if you are trying to reduce your expenses, it makes sense to start by taking a look at your biggest payment and see if there is any way you can reduce it.

In my case, I knew I could. I bought my house 10 years ago using a 30 year fixed rate loan at 6.375% interest. Since that time, interest rates have dropped considerably. I probably should have refinanced two years ago, but, for various reasons, I did not. Thankfully, interest rates have remained low and, this month, I finally completed a refinance. I switched to a 20 year fixed rate loan at 4.125% interest.

The Problem With A 30 Year Loan

Why didn't I get another 30 year loan? I've been involved in real estate investing for over a decade and one of the areas I invested in was foreclosures. When buying properties at foreclosure or just before they go to foreclosure, an important piece of information a potential buyer needs is the outstanding amount of the mortgage. That information is not publicly available, but, because the mortgages themselves are publicly recorded documents and they include the length of the loan, the original loan amount, and the interest rate, it's relatively easy to calculate this figure using loan amortization tables.

My rule of thumb was that if a 30 year mortgage was five years old or younger, virtually none of the principle had been paid back. Those first five years of payments go almost entirely towards interest. Now, this isn't strictly true, as we shall see, but it was close enough for my purposes while investing.
30 Year Amortization Chart

Given that I have been paying my mortgage for ten years, I had already passed the five year threshold and was making noticeable progress on paying down the principle. I didn't want to get a new 30 year mortgage and start that five year clock all over again. My age also played a bit of a role in the decision to go with a 20 year loan - I don't want to still have a mortgage while I am in my mid-70s.

30 Year Loan Vs. 20 Year Loan

Let's look at my rule of thumb and see how close it is to the actual numbers. For simplicity, we'll assume a $200,000 loan at 6.375% interest. On a 30 year loan, after the first five years of payments, the outstanding balance would be $186,950. (You can use an amortization calculator like the one found here to figure this out.) You would have paid off about 6.5% of the original loan amount.

So my rule of thumb wasn't too far off - very little of the principle has been repaid after five years. (From a foreclosure investor's viewpoint, it's actually more accurate because by the time a home goes into  foreclosure, the bank has already added on several months of late fees and other penalties which would also need to be paid off.)

Now let's look at a 20 year loan. Again, we'll go with a $200,000 loan at 6.375% interest. In this case, after the first five years of payments, the outstanding balance would be $170,837. You would have paid off 14.6% of the loan.

In other words, you would have paid back an additional $16,000 in that first five years. Of course, that comes at a price - your monthly payment on a 20 year will be higher than on a 30 year loan.
20 Year Amortization Chart

I Refinanced From A 30 Year Mortgage To A 20 Year Mortgage And My Payment Went DOWN

In my situation, I had a couple of things that were working in my favor that made this possible. First, of course, is that interest rates have gone down drastically since I took out my original mortgage. My original loan was at 6.375%. The rate on my new 20 year loan is 4.125%. Also, because I had been paying my original loan for 10 years, I had achieved a fair amount of principle repayment. My refinanced loan was approximately $36,000 less than my original loan. The result of these two factors is that I was able to refinance my 30 year mortgage to a 20 year mortgage and still see a reduction in my monthly payment of about $200!

Had I opted instead to get another 30 year loan at 4.125%, I could have saved even more money per month. However, I would have had to go through those first five years of almost no principle reduction again.  Let's see how that would have turned out.

Taking our hypothetical $200,000 loan again and a 4% interest rate (instead of 4.125%, just for simplicity), after five years the outstanding balance would be $180,895. I would have paid back 9.6% of the loan principle. Not bad. Definitely better than the 6.375% scenario.

Using a 20 year repayment, after the first five years, the outstanding balance would be $163,847. I would have paid back 18.1% of the loan principle. Wow!

By refinancing with a 20 year loan instead of a 30 year loan:
  • I'm repaying my principle (or, to put it another way, building my equity) almost twice as fast
  • I'm still saving over $200 a month compared to my original loan payment
  • My home will still be paid off completely at the same time it would have if I had not refinanced

Wednesday, August 13, 2014

Are Car Payments Inevitable?'m probably in the minority when it comes to attitudes about car payments. I hate them. I try to get them
paid off as soon as possible. I'm not one of those persons that advocates paying cash for cars, but I also am not one of those that figures a car loan to be an expense that you pretty much always have, like a rent or mortgage payment.

My wife and I bought new cars at the same time back in 2010 - we each got a new Prius. (Aw, hubby and wife have the same car - how adorable is that?) This was nice in that buying two cars at once helped us get a better price from the dealer, but it did produce some additional strain on our budget that we wouldn't have had otherwise. We took on two new cars loans at once, with payments due the same time each month. And because we bought them at the same time, our license renewals are due at the same time each year. All in all, I'm not sure I would buy two cars at once again for those reasons. (Although I probably could have requested the loan payments be due on different days, had I thought about it.)

As soon as we had the cars, I concentrated on paying off the car loans. I paid off the loan on my car first, simply because my trade-in was worth more, so that loan balance was smaller. I think I paid off the original 5 year loan in a little under two years. Last month, I paid off the loan on my wife's car, so we are now car-loan free.

A Life-Long Loan...

I ran across this blog post a while ago about car loans. The article advocates avoiding new cars and saving money to have as small a car payment as possible. I don't agree completely with the part about avoiding new cars, but really, that's just a personal opinion. I'm well aware that buying a new car means you take the brunt of the depreciation expense. There's nothing wrong with the approach the article advocates. What struck me, though, was the title - "Car payments: 'Til death do us part." That's the attitude I think some people have and I don't understand it.

My In-laws buy a new or used car every two years, like clockwork. I've known them for about 12 years and they have purchased more cars in that time than I have in my entire life. I find that amazing. Clearly, they are people who figure a car payment is one of those expenses you will always have in your life and they have no problem with that. That's fine.

...Or A Lost Opportunity?

To me, however, a car payment represents a lost opportunity. That's a big chunk of change every month that is going towards something that is depreciating in value. It is money I could be put to some other use, particularly investing. As the blog post I mentioned states, if you invest $471 a month (the average new car loan payment) in a savings account paying 4%, you'll have over $31,000 after five years. And I know I can invest at more than double that rate, so I'd have an even bigger lump of cash after five years.

This view of car payments is more or less the whole basis for this blog. My goal is to buy a Tesla and to do so by investing enough money that the income from that investment will cover my car payment, so clearly, I'm not completely anti-car payment. I do however, want to stop spending money on a depreciating asset. I'll let my money work to pay for the car and, when the car is paid off, that money will still be working to pay for something else.

Now that my car loans are paid off, I'll be putting some of the money that was going toward the loan towards investing, but I'm also going to start up a new car fund (besides my Tesla fund) and put some of that cash there. There will come a day when we will need to replace a Prius and I'd like to have some cash on hand for that.

Wednesday, August 6, 2014

Goal Progress: End of July 2014

At the end of each month, I post an update of my goals, including a brief discussion of any notable events that might have occurred during the month. The latest month's figures can always be found under the Featured menu in the menu bar at the top of the blog.

Last updated: End of July, 2014
Current value: $6,690
Change from last month: + $531
Percent of Goal:  6.15%

Note that the funds in this account are invested in stock, so there will be fluctuations in value that are outside my control. I never withdraw money from this account, so any dips are purely due to stock price changes.

Events Of Note Last Month: I had a pretty good July. First, I had the second largest monthly payout from my online courses. Second, my work paid out another quarterly bonus. And lastly, I sold another signed Stephen King book on eBay. I put 100% of the monies I received from each of those into my Tesla fund. My total this month would have been more impressive, but I lost about $200 in value during the last two days of the month when Realty Income stock dropped about 1.5 points.

Looking to the future, my free cash flow should take a big jump next month or the month after. I paid off my wife's car loan, freeing up $383 a month. I also started the refinance process on my house, which should drop my payments about $250. More details on that when it has been completed. And once that is completed, it'll be time to take a new look at my budget and set some savings goals!