By Emerson Hartzler
It’s a great country, and the good news is there is virtually no limit to the “stuff” available for purchase. The bad news is there is virtually no limit to the “stuff” available for purchase. For seniors on “fixed incomes,” what we buy and how we buy it can make a real difference in our financial health.
Now there are a lot of honest, hard-working people in stores, banks, car dealerships and brokerage houses. However, these people are facing the ever-present temptation to sell us something that makes their business profitable, but may not be in our best interest as buyers. My advice to clients faced with a major purchasing decision is to ask two questions of the seller:
- How much do you (or your business) get paid for this transaction?
- Upon what basis do you get paid?
Once you have this information you, the buyer, are in a much better position to understand what might be in the seller’s best interest, but perhaps not in yours.
For example, cars have always been a fascination for me, and I find the way they are sold and serviced most interesting. Car dealers have three major “profit centers.” It might surprise you that the first profit center, the actual sale of a car, is a distant third in the profitability “food chain.” The service department is the most profitable, and the finance department runs a close second.
If you buy a car and pay cash, the dealer makes very little money. When was the last time you saw an ad that showed the actual purchase price of the car? News flash: They don’t want you to pay cash! They want you to lease the car – that way they have a multi-year stream of revenue, and at the end of the lease you may be in for some unpleasant surprises. Your actual mileage may be way over the “low mileage,” lease limit, and of course those door dings need to be fixed. If you don’t have the cash – “no problem, we’ll just roll that bill into your new lease,” and they’ve got you for another five years! No thanks, I’ll pay cash.
And of course most of us seniors wouldn’t think of buying a used car, yet a new car is one of the most rapidly depreciating assets you could ever own. We grew up in an era when “manufacturing quality” was an oxymoron. My first car (yes, I paid cash – all of $200), was on its second engine at 90,000 miles. However, the last car I sold had 203,000 miles on the odometer with nothing major in its repair history. The prices of the last two (used) cars I bought averaged 35 percent of the new car sticker price, or a savings of $21,000 per car.
Now you might think $42,000 is not too much to pay for the advantage of driving a couple of new cars, but that’s not the end of the story. There is also the opportunity cost to consider. That $42,000, invested at an 8 percent rate of return would double twice in 20 years (at which time my driver’s license probably should be confiscated), and that would have a $164,000 impact on my heirs! Now you may not want to accept the risk that accompanies an 8 percent return, but more modest earnings rates would still compound to a number much larger than $42,000. So you might think about those kinds of numbers the next time you are enticed into a new car showroom!
Well, that’s just one (fun) example of the impact of “buying right”. Maybe you can’t change your “fixed income” situation, but you can sure improve your financial picture by knowing the seller’s motivation when you buy those big ticket items.
Emerson Hartzler, MBA, is a Lakeview Village resident, and, though he lives in a retirement community, he continues working as a financial advisor for Triune Financial Partners, LLC, at Lighton Plaza, 7300 College Blvd., in Overland Park, Kan. Reach Triune at 913-825-6100.