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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

Nothing in life is free. This is especially true when it comes to extended warranties and insurance policies for common purchases such as automobiles, appliances, consumer electronics and other household products. One way or another, businesses will find a way to line their pockets whether you pay for it upfront or down the road.

To help you decide if purchasing an extended warranty is a good idea, I’ve created this simple guide.  Be sure to read my detailed report below as well.

extended warranty info graphic

Standard Warranties vs Extended Warranties

Almost every manufacturer offers some sort of initial warranty coverage for their products; this is just part of doing business as mistakes sometimes happen in the design or manufacturing process.

For example, new and certified pre-owned cars are usually protected by a 3 year 36,000 mile warranty (or similar). Home appliance manufacturers (Kenmore, Maytag, Bosch, Whirlpool, etc.) usually offer standard one year or two year warranties, and most home electronics are protected by at least a 90 day warranty.

However, if you’ve bought any of the above mentioned products over the last few years you’ve likely been offered an extended warranty package by the sales associate or the checkout counter associate. These extended warranties offer similar coverage to manufacturer’s standard warranties, but they’re usually not as comprehensive and in some cases they come with deductibles you must pay.

Consumer Alert: “Extended” warranties often run concurrent with regular manufacturer’s warranties. If your new lawn mower comes with a 2 year warranty from the manufacturer, the 4 year warranty you buy from Home Depot or Lowes isn’t really a 4 year warranty, it’s actually just a two year warranty that starts two years after the standard warranty expires. Don’t let the associate fool you when they tell you the additional coverage “only” costs X amount per year (because the first two years are already covered by the manufacturer’s warranty).

Manufacturer’s Warranties vs Third Party Warranties

We all know how expensive repair bills can be. There is definitely a reassurance in knowing that your car, appliance or cell phone is covered in the event that something happens to it. But at what point does it make financial sense to buy an extended warranty? Is there a point at which extended warranties are not worth the cost?

The answer to this question can usually be found when we understand what the motivation is behind the company offering the extended warranty.

Extended warranties do one of two things for the company offering them. The company is trying to make an additional profit by selling extended warranty packages (as is the case with third party issuers) or, the company is attempting to enhance the confidence and choices of its customers by offering an extended warranty as an option (versus building an extended warranty coverage into the sales price).

Manufacturer Warranties:

When it comes to pricing and intent, manufacturer’s warranties can be a better value for consumers than third party extended warranties [but are they still worth buying?].

While manufacturers do sometimes try to inflate their profits by offering extended warranties to customers, they also seek to enhance their brand’s attractiveness to potential consumers.

Take Sears for example. On one hand, they can appease consumers seeking maximum reliability by spending more money on the design and manufacturing of a particular model of washing machine that would theoretically be extremely reliable (we’re talking military grade construction).

The down fall of course is that this washing machine would be much more expensive and would turn away potential buyers who weren’t as concerned with reliability (they’re willing to take their chances and/or make any repairs needed themselves with less rigidly constructed models).

On the other hand, they can build the same model using normal construction techniques and give the consumer the choice of whether or not they wanted to pay more money for the “peace of mind” of the factory warranty and at home service repairs.

Third Party Extended Warranties:

Companies offering extended warranties to cover products manufactured by another company are what I refer to as third party warranty companies. Like virtually every other insurance provider, their entire business model is centered on people paying more in premiums than what they pay in claims for the repair or replacement of the various products they cover.

Third party extended warranty companies are experts in evaluating the reliability of particular products and adjust the costs of their coverage accordingly to make sure (on average) they come out ahead of the consumer.

A good (actually very bad) example of “third party” insurance or extended warranty coverage is the smart phone (iPhone, Samsung, etc.) insurance coverage offered by most major cell phone carriers.

In most examples, you’re spending at least $10 a month for insurance and then have to pay an additional $250 deductible in the event you actually lose your phone (or it is damaged, broken, stolen, etc.). This is an absurd amount of money especially considering most contracts allow you to “upgrade” to a new phone after a year or two anyway. You’re literally giving money away to a third party “business”.

Other examples of rip off third party extended warranties include those “official” looking auto warranty notices you get in the mail, extended coverage options sold at the counter at Lowes, Home Depot, Walmart, Target (you get the idea) and “home owner warranties” that are sometimes offered to you when you move into a new house..

Remember, if it was a good value to the consumers, third party extended warranty companies couldn’t afford to stay in business.

Extended Warranties vs Other Types of Insurance (Medical, Life, Auto, etc.)

One of the common arguments I get from people about my advice not to buy most extended warranties is that using my theories, I “probably don’t need medical insurance or life insurance either”.

Let me be clear that there is a very big difference between consumer product warranties and life or medical insurance (or even regular automobile insurance). The biggest reason why medical, automobile and life insurance is ESSENTIAL is that you are pooling the risk of dying, hurting other people or accruing crushing medical bills.

In other words, insurance companies basically facilitate a bunch of people pooling their money together to look out for each other in the event one (or some) of them get sick or die. Of course the insurance companies get compensated for this but most people can’t “self-insure” themselves (like many large corporations do).

This is one of the biggest advantages to having an emergency fund is that you can self-insure against minor financial setbacks and not give your money away to someone else to cover it in the event something might happen.

Your emergency fund probably can’t cover major medical bills very easily or provide for your family after your death if you don’t have adequate medical or life insurance. On the contrary, you probably CAN afford a replacement phone, blender or auto repair in which case you can self-insure in these areas of your life and avoid lining the pockets of third party extended warranty companies.

Please share your extended warranty coverage comments and suggestions below!

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

How to Agree with Your Spouse About Money

couple-arguing

According to a 2013 study by Kansas State University Researcher Sonya Britt, arguments about money (especially early on in a relationship) are the number 1 predictor that a marriage will end in a divorce.

If you’re serious about paying down your debt and moving towards financial independence, your biggest challenge may not be the interest rates on your credit cards…it might be your boyfriend, girlfriend, fiance or spouse!

Whether you’re just starting out in a relationship, or you and your partner have been together for a while, here are a few tips to help ensure this area of your relationship is on solid footing.

Review Your Finances Together:

In any relationship, its highly unlikely that you and your partner are both equally passionate about budgeting your money and tracking where all of your family’s money goes.  The fact that YOU are reading my personal finance blog is a good predictor that YOU are the one in your household who is taking the lead in making sure the finances are put together.

While its OK for one person to keep track of the money and pay the bills, it is equally important that this person communicates to the other person (even if they don’t really care) about how much money is coming in, how much money is going out and what is left over.  Both partners should have a rough idea of the household’s financial position.

Set Financial Goals:

The best way to get a reluctant spouse or partner on board with you about money is to come up with some basic financial goals.  Where do we want to be “financially speaking” 5 years from now, 10 years from now, etc? Do we want to take a family vacation somewhere special?  Do we want to pay the mortgage off and work at a less stressful job (or retire)?  Setting financial goals that you both can agree on can help make both of you more committed to achieving them.

Establish a Reasonable Budget:

Probably the single biggest issue regarding disagreements about money revolve around the budgeting process (or lack of budgeting process).  You each need to have reasonable expectations of what the other spouse’s needs and wants are and what their commitment level is towards achieving your shared goals.  If there is room for compromise in your budget (i.e. spending a little extra each month on golf equipment, or buying cool new shoes) its better to lose a few battles and still win the war (the war of fighting off debt and getting ahead financially).

To sum it up, communication is key.  Explaining to your partner why something is so important to you (in a way that they can understand it), will help you and your partner on your journey towards financial independence.

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

Build bank

In a perfect world, we’d be able to pay cash for everything and we’d never have to worry about debt.  Unfortunately, the world is not perfect and most of us end up borrowing money at some point or another to make ends meet or “improve” our standard of living.

However, with the exception of buying a house, affording medical expenses and [maybe] paying for college, most of the things we borrow money for could likely be bought with cash if we spend just a little bit of time going through our finances and prioritizing what’s important.

If you simply can’t live your life without going further and further into debt then you’ll have no choice but to change your ways because, eventually, you’re house of cards is going to fall and the banks and finance companies are going to cut you off.

Slowly but surely, this was the path my wife and I were headed on over 10 years ago when we first realized we needed to do something about our horrible spending habits.

If you’re serious about paying down your debt, you need to STOP BORROWING money, period.

If you justify buying a new car because the car dealer was able to keep your monthly payments the same, you’re fooling yourself.

If you get a $200 a month raise at work, and use the money to buy a motorcycle with a $200 per month payment, you’re fooling yourself.

If you take out a personal loan to finance a wedding, you’re really fooling yourself!

The truth is, our brains are wired to justify what we “want” to have versus what we “need” to have.  You’ll never dig yourself out of debt and experience the freedom of being debt free unless you first stop borrowing more money.

 

 

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

Let’s be honest. When it comes to conversations about personal finance and getting ahead, most people just roll their eyes and move on. As individuals, we don’t care about our financial future when we can get instant gratification NOW. If you’ve been reluctant to start taking control of your finances like we were, then here are 5 simple things you can do right now to get started.

1) Keep Track of Your Spending:

If you’re not tracking your daily expenses in a checkbook registry or computer based program, you’re treading in very dangerous waters.  With online bank accounts offering real-time account information, many people have stopped worrying about reconciling their ATM and Check purchases in a checkbook registry.  Maintaining a check book registry to track your expenses (like my free Excel Based Checkbook Registry), not only helps you catch errors with your bank, but it also helps bring to light your spending habits.  You never know what you’ll learn about your spending habits until you start tracking were the money is going.

2) Review Your Credit Reports:

Reviewing your 3 major credit report files (Transunion, Experian, and Equifax) is essential to make sure there are no mistakes on your credit file and to ensure no one has opened an account in your name. For more information on how to receive your free annual credit reports (mandated by US law), check out my article on how to get your free annual credit reports.

3) Set Financial Goals:

No matter what stage of life you’re in, you need to set financial goals and develop a financial plan to achieve them.  Whether its saving for a down payment on a new house, paying off your credit card, or setting aside money for your retirement, you’ll never achieve your financial goals if you go through your life waiting for your goals to find you.

4) Set Up A Budget:

Once you get a hold of your spending, you can follow my step by step guide to getting started on an easy budget that captures your monthly living expenses and helps you set additional money aside for achieving your other financial goals.

5) Review Your Monthly Bills:

If you read my article the other day about the secret expense affecting your personal finances, you might remember the part about paying for goods and services we’ll never use.  Review your monthly bills (mobile phone, cable, internet, etc.) and looks for features you’re paying for that you don’t use.  After reviewing the insurance policy for my wife’s iPhone ($10/Month), we realized that it simply wasn’t worth it to pay so much per month and still have a huge deductible to pay if we needed a new phone. If you can cut back just $80 in utility expenses each month, that’s like getting a $1,000 tax fee bonus each year!

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

No matter how hard I try, I can never remember to bring my reusable grocery bags to the grocery store!

plastic grocery bag meme

This meme pretty much captures how I feel.

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

When it comes to saving money and paying down debt, most financial gurus will tell you the same thing until their faces turn blue:

You either need to earn more or spend less money (or both).

In a nutshell, this is basically what personal finance boils down to. But…when you dig a little further…there is another factor out there that is equally affecting your ability to get ahead financially.

Depreciation: The Secret Factor Affecting Your Personal Finances

depreciation chartAs I explained in a previous article about the cost of buying a new car vs. buying a used car, depreciation alone can eat up a significant amount of your family’s income and savings rate.

Consumable Type Purchases: Most of the items we buy on a daily basis are “consumables” that are either used up or of no value after we use them.  Examples of consumable purchases include food, gas, personal care products, and entertainment (going to the movies, golfing, amusement parks, etc.).   Once these items are used up or “experienced”, they no longer have any value.  With the possible exception of donating used clothing and other items to charity.

“Asset Type” Purchases: On the other hand, there are plenty of “asset” type items we buy that we eventually sell or “trade in” after a certain period of time.  My previous article discussed depreciation on cars, boats, ATVs, recreational vehicles, but depreciation can also affect things you buy like furniture, artwork, sporting items/gear, and collectibles to name a few.

While its true that most of these items (a car for instance) are an essential part of everyday life for most people, its worthwhile to consider the affects of depreciation to limit your exposure and reduce this “hidden cost” on your finances.  The more of these “assets” you own, the more money you are loosing each year in depreciation.

How to Minimize the Affect of Depreciation on Your Finances:

1) Buy Used:

Buying used means that the seller has already taken the biggest hit on depreciation, this is true for cars but it is also true for just about everything else you buy too (real estate and collectible items being exceptions).  This is certainly true on cars, furniture and sporting equipment (like golf clubs or downhill skis).  The better deal you can negotiate on the sale price (whether new or used) the less you’ll have to worry about depreciation.

2) Buy Quality:

It may seem counter-intuitive, but sometimes you can come out ahead by spending more money for a particular high quality item.  For instance, you could buy a brand new table from discount furniture retailer like Ashley Furniture or Bob’s Discount for $1,000  that you couldn’t give away after 10 years or so of use.  On the other hand, you could buy an antique or high quality used table for the same price or slightly more.  The difference is (if you wanted to) you could probably sell the antique table for the same price (if not more) than you originally bought it for.

3) Don’t Buy More than You Need:

While many of the newest features on cars, electronics and other items seem cool, many of them end up not being used or fully utilized.  When it comes to selling your car or trading it in on a new model, you won’t get anywhere near what you paid for the extra accessories, options or gear.  The same is true for sporting equipment, unless you’re a world class downhill racer, you probably don’t need to pay an extra $500 for the latest boots or aerodynamic ski poles.  But, that choice is always up to you.  I’m just trying to save you money.

This may seem all too obvious for some people, but for me, considering the depreciation costs of new items helps me to appreciate the total value of item I am about to purchase.

 

 

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

If you’re not participanting in your company’s 401(k) plan, there is a very good chance you’re leaving free money on the table from your employer. Thanks to provisions within the US Tax Code, many companies will match your contributions up to a certain percentage of your salary and allow you to defer paying taxes on contributions until you take the money out down the road in your retirement years. But chances are you already knew this…

SO WHY ARE AMERICANS SO LAZY ABOUT RETIREMENT?

According to the US Department of Labor, millions of eligible employees have still not enrolled in their companies 401(k) programs (up to 30% of all eligible employees according to their study). This is simply unacceptable.

ENROLL IN YOUR 401K PLAN ALREADY

401(k) automatic enrollmentsThe Problem With Automatic 401(k) Enrollments

Even if you were automatically enrolled when you hired on with your company (under US law you now must “opt out” of your 401(k) upon hiring instead of opting in), there is a good chance that your contribution percentages and investment options are not as optimal as they should be.

At a minimum, you must make every effort you can to contribute enough money to your 401(k) plan to get the full contribution match from your employee (ITS FREE MONEY). However, if you want to have even a remote chance at a comfortable retirement, you should set aside at least 10%-15% or your earnings toward retirement.

Another problem with Automatic Enrollment programs is that sometimes your money isn’t really “invested” in anything, instead it sits in a money market account (basically a savings account) earning a minimal amount of interest.

As far as investments are concerned, most 401(k) service providers (Fidelity, Vanguard, etc.) offer targeted age appropriate mutual funds that adjust the risk of your retirement accounts based on your age and how close you are for retirement. As you get closer to retirement, the fund managers will invest less of your money in stocks (risky) and invest more money in bonds (less risky).

The irony about this whole thing is that anyone reading all the way to the end of this article probably already knows all this, but hey…if I can help one person better prepare for their golden years, then writing this article was worth it.

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

In today’s personal finance analysis, I decided to compare the cost of buying a new car versus buying a used car.  In other words, how much more are you paying for the excitement of that “new car smell”.  The results are shocking.

For my new vs. used price comparison I chose the Honda Pilot as my subject vehicle since Honda’s have a very good reputation for holding their value over time and the 2011 and 2015 are nearly identical in design and performance (you can see subtle differences in the pictures below).

2011 pilot vs 2015 pilot

8 different vehicle expenses were looked at in my cost of ownership comparison including Purchase Price, Interest Costs, Sales Tax, Insurance, Excise Tax, Depreciation, Registration Fees and Maintenance.  The results of the price comparison are summarized in the graphic below:

new vehicle vs used vehicle cost comparison

Based on our example above, you can see that it will cost you nearly twice as much to buy a new vehicle vs buying a nearly identical one that 4 years old.

Purchase Price:

The largest expense in my comparison is obviously the actual purchase price of the two vehicles. The used purchase price was based on current asking prices in online classifieds and the new car purchase price was based on an estimate from the online vehicle pricing site True Car.

Loan Interest:

Another reason buying a new car is more expensive than buying a used car (something that most people don’t think about) is the fact that you’ll pay more in interest on a more expensive new car than you would on the cheaper used model.

Sales Tax:

If your state has a sales tax like mine, you’ll also pay more in taxes on the more expensive new vehicle.

Insurance:

I was actually surprised with this price comparison, but according to my auto insurance company (USAA) the cost of insurance for a new car versus a used car is actually not that different.

Excise Tax:

If your state doesn’t have excise tax you’re super lucky! Unfortunately, if you live in a state like Maine, you’re going to pay a lot more money in excise tax over a 5 year period on a new vehicle than if you bought the used vehicle. In Maine, your excise tax costs bottom out at around $150 after a vehicle is 4 or 5 years old. For newer vehicles like the 2015 Honda Pilot in our example, you’re required to pay a set 2.2% tax on the present value of your vehicle each year. In our case study, you’re looking at an additional $1,700 over a 5 year period in excise tax alone for the excitement of driving a new car off the loan.

Depreciation:

Another factor to consider is the depreciation of new vehicles versus depreciation on a used vehicles. New vehicles tend to depreciate in value much faster than used vehicles. Depreciation values in our example are based off actual prices of vehicles that are for sale that are 5 years older than each of the vehicles in our price comparison.

Registration Fees:

In most states, your registration fees (not including excise tax) are going to be about the same.

Maintenance:

Proponents of buying used vehicles will often cite the cost of maintenance as a reason not to buy used cars. As you can see in our example, you can certainly expect to pay more in maintenance costs for a used vehicle, but certainly not enough to offset the other expenses of operating a new vehicle.

Should You Buy a New Car or a Used Car:

I’m not saying you shouldn’t buy a new car.  As a matter of fact, my family and I bought a brand new Honda Pilot in 2011 (one of the reasons I chose it as an example in my comparison) and we don’t really have any regrets.  I’m just pointing out these price comparisons so you can be a more informed shopper when it comes to buying your next new or used car.

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

Getting started on a family budget can seem like a difficult task, but the actual process of setting up a family budget is relatively straight forward (read my tips for starting an easy family budget here).

personal finance meme budgetsThe problem, of course, is sticking to the budget once you and your partner have agreed to the “final” numbers.  It seems like something “always” comes up along the way and the budget gets blown.  Once the budget is blown we get frustrated and go back to our bad money habits.

Here’s some of the biggest factors affecting the success of your budget and some tips to help you stick to your spending limits.

1) Agree On the Budget:

If you’re putting together a family budget, its important that you and your spouse/partner agree to the process.  Its inevitable that one of you will likely be a little more “passionate” about reducing expenses than the other so it is important to be honest about each  of your expectations so reasonable compromises can be made.  The more communication you have when establishing a budget, the higher the chances of success.

2) Set Realistic Spending Targets:

As I mentioned above, if you’re not successful with your budget from the start there’s a good chance you’ll get frustrated and give up.  Be realistic about how much you spend each month on groceries, eating out, gas, entertainment, etc.  Remember, budgeting doesn’t have to be perfect and you’ll likely make several tweaks to your financial plan over the first few months as you get a better idea what you actually spend your money on.

3) Look at Upcoming Expenses:

Another reason people have trouble sticking with their budgets is because they don’t budget for periodic expenses that come up from time to time  (like buying a replacement vehicle, paying winter heating oil costs, buying new car tires, replacing the rough, etc.).  You might be going along fine with your budget and then one month you’re hit with a bunch of expenses you should have planned for (but didn’t).

4) Establish a Goal (Why are You Budgeting Your Money?):

Last, but certainly not least, you need to have a goal in mind for establishing a budget.  What is it that you are working towards?  What are your financial goals?  Having an “end game” in mind when it comes to budgeting will help you stay motivated in your financial journey and help you and your partner stay focus and increase your success in sticking with your budget.

As I mentioned above, it not necessary that you stick with your budget down to the very last penny.  The point is that you’re moving forward with a plan that involves you and your marking making informed decisions on how you spend your money.  How fast you move forward is up to you and your partner in coming up with a budget that balances your desires to pay down debt and establish financial security, while still being able to enjoy life.

 

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

College rankings play an ever increasing role in where high school students decide to attend college.  Whether they admit it or not, college and university officials salivate over the reports each year in hopes that their respective institutions moved up on “the list”.

When a college does move up on the list, top administrators issue press releases pontificating their success.  Of course, when a college moves down on a rankings list, its always because of a “flaw” in the ranking algorithms.

US News and World Report, Forbes and Princeton Review each have their rankings and guides on which colleges they perceive  to be the “best”.  While these guides and offer a lot of valuable information for prospective college students, they usually only end up determining which school is the most “prestigious” or “exclusive”.  But unfortunately, this doesn’t necessarily help people out when they get into the “real world”.

college memeRecognizing that some people aren’t worried so much with “prestige” and “exclusivity”, Money Magazine set out to find which schools simply offered the best value and the best return on investment (ROI).  What they discovered in their analysis was very surprising and illuminated colleges that many people probably have never have heard of.

Instead of focusing on meaningless exclusivity factors like “acceptance rates” and “% of alumni who donate each year”, Money Magazine simplified the rankings process into three equally weighted areas: Quality of Education (subjective), Tuition Cost (objective), and Alumni Earnings (objective).   You can find their results and the rankings of the 50 “Best Value” Colleges here.

However, I still wasn’t completely satisfied with the rankings guide.  What I wanted to know was which colleges offered the biggest return on your investment when rated solely on cost and average starting salary of graduates and eliminated the subjective “quality of education” out of the equation.  Using the  data from Money Magazine’s report, I was able to come up with the following rankings of which colleges offer the highest expected salary upon graduation compared the cost of the 4 year degree.  Enjoy!

colleges ranked by return on investment roi

*The score used in the above college rankings was calculated using the expected “early career” salary divided by the estimated cost of the respective college’s 4 year degree.

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Hi, I’m Ben and this is my personal finance blog! You can learn more about my site here or you can jump right into the juicy stuff by reading my family’s own detailed debt free success story (which has formed the foundation of this site). Please consider signing up for my free email updates!

How Much Can You Afford to Spend on a Boat

Buying a boat is a very expensive proposition.  Not only does it cost a lot to buy a boat, boats are also much more costly to maintain and operate compared to a car or truck (fuel, insurance, storage fees, repairs, routine maintenance, marina fees, etc.).  Older boats are less expensive to buy but your maintenance costs are going to be even higher (in most cases).

So how much should you spend on a new or used boat?  There are many variables to this decision, but here are some basic rules of thumb to to help you decide how much you should spend on a boat without taking too much risk on your family budget planning.

1) Never Borrow Money to Buy a Boat

boat expense memeThis suggestion is probably going to make quite a few people upset, but I’m just going to throw it out there.  Owning a boat is very expensive and the last thing you’re going to what to deal with is making payments on a boat during the cold winter months while your boat is stored away in a garage somewhere or sitting outside your house in a snowbank (trust me on this).

Another issue with boat loans is that eventually you WILL have a major repair that will need to be made on the boat (trust me on this).  There’s few things financially more discouraging than making a monthly payment on boat that doesn’t run and/or having to pay for a large boat repair job on top of your regular monthly boat loan payment.

Don’t be in a position were you own a boat but you can’t afford to enjoy it.

Another thing that makes boat loans so appealing is that you can get boat loans with 10 year or 15 year repayment periods.  These extended boat loans of 120 or even 180 months mean you’re going to pay a “boat load” of interest over the course of the loan.

Example: A $100,000 boat with no money down would be $1,000 a month for 15 years at 8% (boat loan interest rates are generally higher than auto loans).  Not only would this payment be a steep burden for most people, but you’d end up paying almost twice as much for the boat because of the interest payments.  Banks will almost always lend you more money than you should ever borrow.

But Isn’t Interest on Boat Loans Tax Deductible:  It is true that interest on boat loans is tax deductible if the boat meets certain requirements and you consider it a “second home” (basically, the boat needs to have a kitchen, sleeping area and a toilet).  But as I’ve mentioned many times in the past, you should never finance something for the purposes of writing off the interest payments.

2) Boats Depreciate in Value FAST:

In a previous article about buying a new car, I introduced the concept of “depreciation tax” and how you want to reduce (as much as possible) the value that your vehicles depreciate in value each year because that is money you’ll never get back.  In that article, I suggested that the total value of all your cars, trucks, SUV, ATV, Boats, RVs, etc. should not exceed more than half of your family’s annual salary.  If you do, you’ll likely be loosing a HUGE amount of money each year to depreciation.

If you have $30,000 worth of vehicles sitting in your driveway, chances are next year the value of those vehicle will be around $25,000.  That $5,000 in depreciation ends up eating a large part of your income (8.3%). 

New boats are particularly at risk for loosing a large percentage of their value over the first couple years of ownership.  This is one of the reasons why my wife and I decided to by a used boat.

3) Don’t Go All-In with your first Boat Purchase:

The best advice I can possible give regarding the purchase of a boat is to rent a boat a few times to make sure your family is going to want to use the boat frequently.  If you have your heart set on buying a boat and feel it is a reasonable financial decision for your family, start off small and pay cash for an inexpensive used boat first.  The last thing you’ll want to do is realize your family quickly loses interest in boating (or no longer has the time due to sports, work, etc.) and your $30,000 upside down on your boat loan and you have 8 years left to pay on the loan.

If you save up an pay cash for a boat (you can get a really decent used boat for under $10,000) you can slowly move up to bigger boats as your budget and seamanship skills increase.

Don’t be that guy at the marina with the $100,000 speed boat who doesn’t even know how to safely maneuver the boat away from the dock!

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