1) Financing: Blame Billy Durant

Billy Durant was the founder of General Motors. When the company began to really grow in the early 1900s he proposed the concept of “installment loans” to finance the purchase of cars for which folks did not have the cash. Mr. Durant created the General Motors Acceptance Corporation (GMAC) which at the time was the largest non-bank source for financing auto loans. His chief rival, Henry Ford, was vehemently opposed to the idea of installment loans and this one decision by Henry Ford cost him the lead in the American automobile industry. So, it could be argued that GM became the world’s largest company in the world partially by allowing customers to buy cars they could not afford! This speaks volumes about America’s obsession with driving cars they cannot afford – even back in 1919 when GMAC was formed. Financing a car is generally done by people who cannot afford to pay for the whole car at once.

2) Leasing:The Sacred Cash Cow of Auto Companies

Many struggling and even profitable auto companies make most or all of their profits from their financing division. Exactly like the story of Sears at one point being a finance company with some goods out front, auto companies are often in the same boat. Below are just brief snippets of recent news stories about the auto industrie’s profits:

“Ford Posts Profit as Finance Unit Offsets Auto Losses”

“DaimlerChrysler said Thursday that fourth-quarter profit rose 84 percent on gains in vehicle financing and sales of Chrysler cars…has counted on earnings growth at Chrysler, commercial-vehicle and financing divisions to more than offset declining profit at Mercedes.”

“Ford Profits Surges On Strength of Financing”

The above headlines demonstrate that these car companies are basically making products that lose money year after year, yet consumers that finance or lease through these company’s in-house leasing divisions contribute to the only profits of the companies. So, it could be argued that certain car companies only make profits from customers who lease. They do not even make money on their chief product: cars! Leasing is not only a rip-off for consumers, but it artificially inflates the profits of companies that otherwise would be going out of business if they exclusively stuck to their core industries.

Another reason that leasing is so popular is that it lets you drive a car you cannot afford. Otherwise, buyers would be stuck getting cars within their means and within their budgets which would likely be older, cheaper and less of a status symbol.

3) Paying Cash: The Epitome of Weird

How many people do you know who pay cash for their cars? I can probably count that number on one hand. Paying cash for a car is just plain weird. But borrowing or financing the car is normal, right? Who wants to be weird? Well, those “weird folks” have learned the truth about car payments. The truth about car payments is this: car dealers, on average, make $1200 on leased cars, $700 on financed cars and $72 on cash-purchased cars. Yes, you read that correctly. $72 profit on customers who pay cash for their cars. So, if you are a car salesman which financial product are you going to push?

If paying cash seems out reach for you, then ask yourself this question: have you ever missed a car payment? Has it ever been a stretch to make the car payment each month? If the answer is no, then why not discipline yourself to make a “virtual car payment” each month (say, $350 per month) even when it does not go to a real car payment. Take that cash of $350 per month, save it for 3 years and you’re at $12,600 which can buy a decent used car. You don’t spend a time on financing interest, you can negotiate better with the dealer and you reach a financial goal you set for yourself. This is something on which a price cannot be put.

The envelope budget system works like this: take about five or six envelopes and label them for your discretionary spending accounts. This would include groceries, eating out, vacations, entertainment, household items and gift spending. I would not recommend setting up envelopes for your utilities or house payment since you do not have much control in affecting those monthly amounts. Plus, it is not realistic or convenient to pay your electric bill in cash. Next, go through these discretionary categories and break down how much you need to put into each envelope per month (or per paycheck).

Sample paycheck of $2000 take-home pay per month:

• Approximately $1200 per month of the paycheck goes to the mortgage, utilities and loans. This leaves $800 for the envelopes
• $400 per month for groceries
• $50 per month for gifts (weddings, birthdays, etc.)
• $75 per month for eating out (this could be merged with the groceries account if you wish)
• $75 per month for vacation
• $100 per month for household items (home improvement items, landscaping, home repairs, etc.)
• $100 per month for clothing

Here’s how it works. Every paycheck you go to the ATM and withdraw $400 in cash (and drive home very carefully!) and do that twice per month to get the $800 in the above example. Once you get home you deposit half of the amounts above (example above was monthly amounts) into each of the envelopes. Then as you spend money during the week you take it from each envelope. Each one acts as sort of its own bank account. I’d recommend recording the amount you removed from the envelope on the envelope itself. Two things will begin to happen to you over time:

1. You will control your money. Not the other way around. Who wants your money (how much or little you have) to control you? Not me.
2. Instead of having too much month left at the end of your paycheck, you will have plenty of your paycheck left over at the end of each month.

A perfect example of the envelope budget system in action occurred to me this weekend while replacing our broken mailbox post near the street. The “household items” envelope at the time had about $60 in it. I took that cash and headed to the hardware store. As luck would have it, the mailbox I found and liked cost $52. That left me with $8 to put back in the “household items” envelope. The way most people do it would be to buy any mailbox regardless of what’s in their bank account or even worse put it on a credit card. My envelope system sent me home with leftover cash in my pocket and control of my finances (only having $60 for this category forced me to keep in within the limit).

My wife and I did the envelope system right after we were married in 1995 and now I’m pleased that we’re back on the system. Another benefit of the envelope system is that you pay cash for things. Paying cash for big ticket items has a bit of a sting to it. Imagine buying a new $900 refrigerator and shelling out nine Benjamins one by one by one to the Best Buy salesman. Believe me…it’s painful watching that cash go out of our wallet.

Another benefit of the envelope budget system is that you enjoy the items for which you’ve saved your money. Most consumers charge their Disney trip and then spend months, interest and frustration paying it off later. With this system you are depositing $100 per month into an envelope saving for that vacation. Imagine how much more fun Mickey Mouse or Space Mountain become when you know the trip was paid for before you ever entered the park or hopped on that airplane.

One final benefit of the envelope system is that it forces you to have a front-row view of where your spending is going. Watching one envelope continue to get cleaned out or seeing another build up over time reminds you of your spending habits. For us personally, the grocery envelope gets tattered and worn in about two months of use, but the “Christmas” envelope is still fresh and crisp like the bills in it.

Bottom line: the envelope budget system makes your money work for you, not the reverse.

If you receive unsatisfactory food or service at a restaurant do you?

a) Admit it’s not worth the effort to complain and ignore it
b) Mention it to the server casually
c) Mention it to the server, the manager and anyone else who can help

Most consumers have experienced poor service or bad food while going out to eat. Now, if you are paying someone else to cook, serve and clear your food shouldn’t it be worth your hard-earned money? If you receive poor service or the wrong or ill-cooked food, SPEAK UP! The following polite lines will most often get your bill reduced or your meal for free! Keep in mind that good restaurant managers view you and your party as a lifelong customers worth hundreds or thousands of dollars over the life of that restaurant! What’s one free meal going to cost them if they keep you as a customer who refers other customers.

1. “I’m sorry, but this baked chicken is not cooked like the description. I’m just not pleased with it. What can be done to rectify this situation?”
2. “We waited 35 minutes for our dinner and the order was messed up. IS there anything you or your manager can do?”
3. “I bring a lot of my business clients to your establishment here every month. We were not happy with X or Y today. What can be done to keep us coming back?”

My brother Mike went out on New Year’s Eve with his girlfriend and another couple. To save time he called ahead to ask the restaurant if they took reservations or call-ahead seating. He was told “no” but really wanted to go there, so they went anyway. After a two-and-a-half-hour wait to get seated, he later heard from a server that they do, in fact, take reservations. This was frustrating for the whole party to learn that they spent over two hours in the lobby of the restaurant when they could have been somewhere else (like at home) with a reservation. Mike politely told his story to the manager and the manager to decided to give them free drinks for the drinks they already consumed. Again: another great perk just by asking!

Let’s begin with a statistic taken from the U.S. Department of Agriculture:

“In 1994-95, 57 percent of Americans consumed meals and snacks away from home on any given day, accounting for about half of their daily calorie and fat intake on average.” This is “is 33 percent higher than in 1977-78.”

http://www.bcm.tmc.edu/cnrc/consumer/archives/mealtime.htm

The “What We Eat In America” survey is based on personal interviews nationwide. The 1994-96 study is USDA’s 10th national food survey since the 1930s. Over 15,000 Americans including low-income individuals, children and the elderly were asked to recall their food intake for two days. Now, the purpose of this section is NOT to lecture you on healthy eating versus unhealthy eating (although the odds increase dramatically for unhealthy eating when you go out to eat). The purpose of this section is to, once again, show you how you can give yourself a raise by reducing your eating costs.

Let’s look at three types of eaters:

Frugal eater: packs lunch every day; dinner and breakfast home; rarely goes out to eat

Occassional go-out-to-eater: packs lunch sometimes; goes out for dinner sometimes; Goes out to eat on weekends often

Spendy Eater: eats lunch out every day; dinner out 4-5 times per week; all weekend meals are eaten out

(Short commentary on the Spendy Eater: it is highly likely that this person is NOT a trim person. Also, it is highly likely that this person will tell you that he can’t pack a lunch for less than $4 – $5 per day so why waste his time packing one? )

For the purpose of this example I will eliminate the extremes and not analyze the “Frugal Eater” or the “Spendy Eater” (although I believe more and more Americans and becoming Spendy Eaters). Let’s look at a typical week and potential savings.

The Occassional Out-To-Eater

This person “brown bags” it for lunch at work 2-3 days a week and goes out the remaining days. He goes out to eat for dinner 3 times per week (or orders pizza delivery) and mostly eats breakfast at home. On weekends he eats a couple meals out.

Lunch: 3 days per week X $5 lunch = $15/week

Dinner: 3 days per week X $10 dinner = $30/week

Weekend meals out: Approximately $20 per weekend in meals out

These assumption are for the “average” Out-To-Eater.

Now, this person is spending $65 per week eating out or $279.50 per month eating out! That is a car payment for some people. To reduce these costs I’m not recommending eliminating eating out entirely. Rather, find ways to make it cheaper or reduce just some meals out. Possible suggestions:

• Buy an Entertainment book from someone local or from entertainment.com – the book costs around $30 and it includes $1000s in savings and coupons
• Use coupons for restaurants
• Cut one section IN HALF (reduce lunches out in half or dinners out in half)
• Get carry-out more often (thus eliminating tips, drinks, tax, etc)
• Cook more meals at home and pack your lunch more often

Now, some of these tips are common sense and some require discipline. But look at it another way – if this is you then you are spending $279.50 per month and you have nothing at all to show for it (except for maybe a bigger waist!)

If you still don’t have the discipline to reduce these costs, what if I told you I would give you a $140 per month RAISE if you could only find a way to cut these eating-out costs in half? Well, YOU CAN! You don’t need me to get that $140/month – just cut the $279/month in half and BINGO! … there’s your $140/month RAISE.