Thursday, January 31, 2013

What is profit?

Every once in a while, a story that I read a long time ago bubbles through the depths of my memory into my present attention.  This post is about one such story.  I don't read very much, other than required reading, and this story is one that was part of our English curriculum while attending high school in India.

At first, I could vaguely remember only some of the details of the story.  It attempted to explain what  profit was.  The gist of the story was that it is possible to make a profit without taking from the work of someone else.  It used a primitive community as its example where the members of the community spent all day doing mundane tasks for bare existence.  It then discussed how the community evolved and everybody in the community benefited from ideas of one of the members of the community.  That member noticed they could improve the way they did things in such a way that everyone benefited, and in exchange, asked for slices of time saved by the other members of the community.

Thanks to Google, I was able to locate the story on the 'net.  The story is titled "Letter to His Grandson" by Fred I. Kent.  Here's how it starts out:
Mr. Kent’s grandson, then a schoolboy, was disturbed by the current fashion of disparaging the profit system. He had asked his grandfather to explain just how there can be a profit which is not taken from the work of someone else. 
April 1942 
My dear grandson: 
I will answer your question as simply as I can. Profit is the result of enterprise which builds for others as well as for the enterpriser. 
You can read the rest at the website of the Free Market Foundation.

(I stole the title of this post from a friend who incorrectly remembered the title of the essay as being "What is Profit?" And I was disappointed that most of my high school peers didn't even remember that we had such a story as part of our curriculum!)

Wednesday, January 23, 2013

Resources for buying a car

This post is a collection of resources that I've found to be useful for buying new cars.  Because I tend to research things endlessly, I figure I might as well put all of my findings in one place.  One significant issue that I have no experience with is leasing, so that is not addressed.

Let's begin with the first question.

How much car can I afford?

A question that immediately comes to mind when thinking of a car purchase is "how much can I afford?"  Some people think it's as simple as having sufficient savings to pay cash for the car, while others look at it as the ability to afford the monthly payment of financing the car.  Yet others will say "If you have to ask, then you can't afford it."  I see this as a personal decision because people do their financial planning differently (some prefer to be more conservative than others), but here are a couple of resources that I have found useful.

Bankrate.com has an article titled "How much car can you afford?", which states:
How much should you spend on a new car? Not more than 20 percent of monthly income, say experts. "This includes payments on all the cars you may own, whether you have one vehicle or six," says Karl Brauer, editor-in-chief at Edmunds.com. "And we're talking about your take-home pay, not your gross income."
They do have some exceptions to the rule which are stated in the article.  But it also leaves some open questions:
  • Does this rule assume that the car is being financed?  Or leased?
  • Does it include maintenance costs and the cost of insurance?
Another respected name in the financial planning world, Dave Ramsey, in response to a similar question, says:
The total value of all of your vehicles—things with a motor in them—should not be more than half of your annual income.
Again, there are some open questions:
  • Is he talking about pre-tax or post-tax income?
Which leads us to the second question.

What is the cost of owning and operating the car?

While purchase price is one factor, cars that are more expensive to purchase are often more expensive to maintain as well.  For this, we can get some guidance from Edmunds.com's True Cost to Own (TCO) calculator.
And now there is a new tool that reveals the hidden costs -- all the costs -- associated with buying, owning and operating a car over a five-year-period.
There are some issues with the calculator.
  • It assumes you're looking for ownership over 5 years.  If you own for less, it will probably cost more per year than the 5 year number.  Conversely, if you own for longer than 5 years, it will cost you less per year than the 5 year number.
  • It assumes that the car will be driven 15,000 miles a year.  Most will drive more or less than that number, and some, significantly so.
  • It assumes that the car is being financed, but there is no mention of the interest rate.  If purchasing with cash, one can get rid of the finance charge.  (But there is still some loss of income since the money would have been earning interest in a savings account.)
Yet, it is useful for getting a ballpark figure for what it would cost to own the car.  Even though some manufacturers offer free maintenance, they don't cover the cost of tires.  And tires on high-performance cars wear out pretty quickly and are more expensive to replace than tires for regular cars.

The tool also has the capability to price the car with options.

So let's take an example.  Running the calculator for a 2012 Honda Civic DX sedan with an automatic transmission, we find that the purchase price of the car is $16,924, but the total cost of ownership over a 5 year period, 15,000 miles a year is $37,113.














This gives an average annual ownership cost of $7,422.60.

Putting it all together

Now that we have the annual true cost of ownership of the car, we can decide what percentage of income we're willing to spend on the car (which in turn would depend on several factors such as the number of cars in the household, other debt/obligations, etc.) and decide whether or not we can afford it.

The purchase process

There are a couple of websites that will allow you to build the car and price it with options.  These sites also provide the "true market value" (TMV) which is the average price people in a certain area have paid for that car.  This can be useful for knowing what would be a reasonable price to pay for the car.
  • Edmunds: This site provides the ability to get quotes for the car and contact dealers that are willing to offer it at that price on your behalf.  From the homepage, click New Cars, scroll down and select a make, then select the year and the model, and that will take you to the page where you can price the car with options.  It provides the invoice price, MSRP, and TMV.
  • KBB: Offers a pricing tool that is similar to Edmunds.
  • Truecar: A number of banks, credit unions, and credit card companies, offer a car buying program where they provide one with a quote and contact participating dealers on one's behalf.  For example, the American Express program is available here.
  • AAA: Members can take advantage of AAA's car buying service.
The quotes and dealer contact are offered with no obligation, so it's always OK to walk away if a dealer doesn't honor the price that was quoted by the website.

Extended warranties

Most cars come with a bumper-to-bumper warranty for some period of time -- usually 3 yrs/36000 miles, while luxury cars come with a longer warranty of 4 yrs/50,0000 miles.  Whether or not an extended warranty makes sense depends on the reliability history of the brand/car.  I've always purchased extended warranties on my car.  Here are a few things that I have found helpful:
  • Wait until close to the expiration of original warranty.  It may be wasted money if one decides, for whatever reason, to get rid of the car while it's under the original warranty.
  • Buy only the extended warranty that is offered by the manufacturer of the vehicle.  Normally, the dealer tries to push other third-party extended warranties, but I stay away from those.
  • Pay attention to any exclusions.  The last warranty that I bought specifically excluded the radio/CD player and navigation.  My car didn't have navigation so the latter wasn't an issue, and fortunately I didn't have any issues with radio/CD player.
  • Shop around by calling several dealers.  Often, it is possible to buy these remotely by just sending in recently used key (many car keys contain information about the mileage of the vehicle), so there is no need to limit yourself to dealers that are close by.  Prices can vary quite significantly.  Usually, you'll be dealing with someone in the finance department at the dealership rather than a regular car salesperson.
Prepaid service plans

Some manufactures offer service plans for the car.  Sometimes the service plan is already included in the cost of the vehicle; e.g. as of this writing, all BMW come with prepaid service for 4 yrs/50,000 miles.  Other manufacturers may offer pre-paid service for an extra charge.  Some things to check on about these plans are:

  • Do they cover all wear and tear items (e.g. brakes and wiper blades) or do they just cover scheduled maintenance items.
  • How long is the plan valid for?
  • If the car comes with a prepaid service plan, can an extended service plan be purchased?
  • If the car comes with a prepaid service plan, wait until close to the expiration of original plan.  Otherwise, it may be wasted money if one decides, for whatever reason, to get rid of the car while it's under the original plan.
  • Shop around by calling several dealers.  Often, it is possible to buy these remotely by just sending in recently used key (many car keys contain information about the mileage of the vehicle), so there is no need to limit yourself to dealers that are close by.  Prices can vary quite significantly.  Usually, you'll be dealing with someone in the finance department at the dealership rather than a regular car salesperson.
Wheel and tire insurance

Some car manufacturers offer wheel and tire insurance plans.  Depending on the type of car, these could make sense.  Car with low profile tires, run flat tires, and large rims (18" or 19") are especially prone to being damaged by hitting potholes or curbs.  And they are usually very expensive to replace.

Other add ons

Many dealers try to sell other add ons such as paint protection or fabric protection.  Personally, I don't think these are worth it, especially if it's not something that is coming from the vehicle manufacturer.

A few more inputs for the decision process
Driving reviews from magazines are useful because they provide insights into some quirks that one might not otherwise notice during a test drive.

Related reading

Wednesday, January 16, 2013

Going green, living healthy: Food

This is part of a series of posts on Going green, living healthy. The first post is here. I'm not an expert on this subject, so if you find errors please let me know. I have tried to provide pointers to my sources where possible.

From my standpoint, "going green" with food means being more in touch with raw ingredients that go into making food and minimizing consumption of processed and packaged foods.  It takes quite a lot of effort to do that given the time constraints imposed by modern living.  Let's look at some of the things that I have found matter to me by look at the following 4 questions:
  • How is the food grown?
  • How does the food get to you?
  • How is the food processed or prepared?
  • How is the food packaged?
How is the food grown?

The most important thing here is to look for food that is grown without pesticides, without chemical fertilizers, and non-genetically modified.  There are local farmers that I've encountered that claim they don't use chemical fertilizers or pesticides, but they can't afford the cost of organic certification.  At the same time, we have big businesses that will try to game the organic certification process by getting regulators to relax the requirements.  Obviously, the only way to know for sure what you're getting is to grow the food yourself or buy locally from a grower that you trust.  It's kind of hard to do that exclusively, but some ways to get going in that direction are shopping at farmer's markets, and looking at options for community supported agriculture (CSA).

There are several other types of farming that I've recently become aware of, but I'm not an expert on these to really know what they are all about and be able to compare them.

  • Veganic refers to food that is grown without any animal byproduct such as bone meal and blood meal that are permitted for use as fertilizers when growing organic produce.
  • Biodynamic farming seems to be about farming in a way that heals the earth.
  • Permaculture seems to be about sustainability and while it includes how food is grown, it goes beyond that aspect covering issues such as home building and landscaping.
How does the food get to you?

A closely related question would be "where is the food grown?"  Naturally there is a difference in the resources it takes to ship food a few miles versus shipping it thousands of miles across the globe.  Food that is local is likely to be fresher and I've heard from proponents of Ayurveda that it is healthier to eat seasonal, locally grown foods.  To be shipped half way across the globe, all sorts of extreme measures would be required including picking the produce before it ripens and possibly freezing it.

How is the food processed or prepared?

Unfortunately the nutrition labels on packaged and processed foods simply don't do justice because they typically only tell you what is required by law and no more.  Let's say for example we buy potato chips cooked in olive oil.  We know that olive oil heated beyond the smoke point becomes toxic.  While this is a simple example and is probably not a cause for concern, in general, the more the ingredients, the more one has to be careful about how it was prepared because combining certain ingredients and heating or cooling them a certain way could cause them to become toxic, or at the very least, something that is hard for the body to process.  Nutrition labels, for example, won't tell how the salt that is used in the product was processed and a variety of chemicals can be used in the processing of commonly available table salt.

In general, I try to buy foods that have the least amount of processing, but it's not always possible.  Got to satisfy those cravings for processed foods every once in a while.

How is the food packaged?

In general, less packaging is better because it's easier on the environment and we don't have to worry about the safety of the packaging materials.  Many canned foods, for example, have been found to contain traces of BPA.

A word about restaurants

Restaurants, at least in the US, depend a lot on processed and pre-prepared ingredients for their menus.  Even though the food that arrives at the table appears fresh, they are often made with sauces or other ingredients that are processed food.  This is the reason why they can maintain consistency of taste even across geographies and regardless of the chef preparing the food.

Additional resources

These here some organizations that bring us information on what is happening with our food supply.