It took me more than a decade of financial reporting to uncover a surprising fact: The vast majority of financial decisions you face in life are very simple. Yes, that sounds nuts given the economic train wreck we are still struggling to clean up. And I'm not suggesting it's easy to get ahead financially. What I am telling you is that there are right and wrong answers to most of the financial decisions life throws at you, and given the necessary information it's fairly simple to figure out which is the right call.
Most money decisions seem complicated only because someone has a financial interest in confusing you. Just try figuring out how much interest you're paying on a car lease, or how whole life insurance works. Ever read a credit card agreement?
That's why I wrote Worth It...Not Worth It: Simple & Profitable Answers to Life's Tough Financial Questions [Grand Central Publishing, $19.99]. My goal in the book is to help you make the right choice in all these situations. And I wrote it to reflect the way you actually face these decisions in life. You don't want to read a novel on personal finance: You're in the checkout line at Target when you wonder whether to pull out the Visa card and charge it, or use the debit card and pay straight from your bank account.
So I set up the book as a series of real-world choices--Is it better to buy a house or rent? Should you give the kids an allowance just for being your kids, or make 'em work for it? Should you hire a real estate agent or sell the house on your own?
Read on for a few answers.
Notice how car salesmen push leasing over buying? That should tell you who's getting the better deal. If you buy a car and pay off an auto loan, the car is essentially "free," and the longer you keep it in the garage, the more you save. If, on the other hand, you lease a car your whole life, well, you'll be making car payments your whole life. That great deal the salesman is pitching -- only $299 a month! -- sounds like less of a great deal when you multiply it times 40 years. Leasing a car is like never, ever, buying an item on sale. When you lease, you are essentially paying for the vehicle's loss of value as it ages, what's known as depreciation. And since the biggest depreciation occurs in the first few years, you are always paying top dollar. Plus, your insurance rates will always be at their peak because the car is at its most valuable point in its life.
Credit cards can be dangerous weapons in the hands of serial spenders, but it you have the self-control to charge only as much as you can pay off every month, they beat debit hands down. Put $30 of gas in your tank and pay by credit, and that $30 charge will get posted to your account. But if you swipe your debit card, some gas stations will put a "hold" on as much as $75 in your checking account, and leave it there for a couple of days, until the gas station reconciles its accounts and transmits your actual purchase to the bank. A hotel might put a hold on $100 in mini-bar charges you never incur. That money won't be available until your account is reconciled, meaning you can get hit with overdraft charges for subsequent purchases -- even if you have enough money in your account. And of course if you buy something online with debit, the money leaves your account before the item even ships. If it arrives broken, you'll wish you used a credit card.
For starters, give your children a small allowance and don't tie it to chores. Instead, teach them that certain tasks are simply part of being a household -- they won't get paid for making their bed as adults. Now, the pay-for-chores crowd says the "free" allowance doesn't teach kids the value of hard work. True. So offer your kids the chance to make more money for taking on tougher tasks-- weeding the garden, say, or painting the garage. One of the most important financial lessons to pass on to your children is how to make choices and set priorities. It's easy for them to hector you into buying plastic princess figurines and other kiddie crap that will end up as nighttime land mines in your living room. But if they have to part with their own limited funds, they are forced to weigh the relative merits of firefly stickers compared with Sour Patch Kids. That's a crucial skill.
The answer is all about where you drive, how you drive, and what you think about the spotted owl. For city drivers, hybrids are the clear winners, because the engines actually shut down when you're stuck in traffic or waiting at a stoplight. Unlike most traditional cars, the Prius is ranked higher in city driving (51 miles per gallon) than highway (48). And even though diesels are getting cleaner, they can't beat hybrids, which have zero emissions in electric mode. For long trips on the highway, however, the answer is not so clear: Some of the new clean diesel engines will get you mileage well north of 40 miles per gallon. And diesels are cheaper. The key question for me: Would you rather attack the turns on the Pacific Coast Highway at the wheel of an Audi turbo diesel or a Prius? It's not a fair fight.
If you want to take a (small) flyer on a hot stock, be my guest. Just put your retirement savings in low-cost index funds that track the entire market. Most professionals, with their human and computer armies, can't pick stocks well enough to beat the market, so you won't either. All known information is priced into a given stock. Companies with great prospects are expensive, lousy companies are cheap. Plus, every time you trade, you pay a commission. Every time you sell for a gain, you pay tax. These costs further reduce the odds that you can beat an index fund. Don't try.
After an epic bust in the housing market, buying real estate might seem like a moronic financial move. But here's why buying is best: You get to live in your piggy bank. Renting is not inherently bad--in a perfect world you'd take the money you save every month by renting, invest it in stocks and bonds, and 30 years from now you'd be richer than if you'd bought a house. But it's not a perfect world; we all know you'd spend it on nicer cars and nicer dinners and nicer sneakers and 30 years from now you'd have the same amount of money but no house.