This is the second post I am making in the “Turn Back the Clock” series. As I reflect on my younger days, getting a second hand car was probably the best financial decision I have made.

We have all heard that cars are the worst investment you can ever make. Countless Financial Gurus like Suze Orman and even Peter Lynch in one of his books mentioned how getting a second hand car makes much more financial sense compared to getting a first car.

When I first graduated and got my first job, it seems that most of my classmates quickly got their first “brand new car”. They quickly saved for the downpayment and because they had pretty decent jobs, the swanky new car was one of the first big ticket item purchase that they made.

I actually resisted that temptation because my granddad always told him that properties are one of the best investments you can make and that I should be making that my priority. So while I did not have the latest wheels and gadgets, I just got a crusty old Toyota Corolla (BTW - I still have a Toyota Corolla today), which is perhaps one of the best second hand cars you can ever get. It never gave me any problems and it just went on and on without breaking down!.

One of the tricks that I did to get the best deal was to actually get a friend of mine who was familiar with cars (because his father used to sell second hand cars and because he was kind of a mechanic). He did the negotiations for me! (was very bad at that). He managed to get the seller to let us inspect the car and then managed to negotiate a well good price for me. He got a nice big meal as a thank you!

Over the next year after I got the car, all I had to change was the brakes. Everything else worked out fine for a long time because my friend had the car inspected. I think I probably paid about $1,500 to $2,000 (in cash) for the good old Toyota. In contrast, most of my friends paid that amount for a downpayment and continued to pay about $200 a month for their lease or loan payments. I sure saved a lot of money back in those days. One thing that I did not mention earlier is that I waited until one year into my first job before getting the new car (needed to save some money). If I were to do it all over again, I would still get a second hand car as my first car. This is what I did and would do to make sure I got the best deal.

1. Get someone (preferably someone who used to sell second hand cars) to negotiate for you. Buying a second hand car is very tricky because price variation could very imply quality variations.

2. Ask the seller to allow you to get an inspection. Get to know the mechanic well before you bring the car to him. The inspection required to pass the test for a second hand car sale is not very stringent. I had friends who had to spend $800 on suspension alone not long after they had bought their second hand car.

4. If I had my way now, I would apply for the Citi® Driver’s Edge® Platinum Select® Card or the Citi® Driver’s Edge® Card for College Students, earn rebates and use them to reduce the amount I pay on my car!

A couple of post ago, I mentioned that I met Mr X at a party and he started talking to me about how he got out of debt because he found out that I had a credit card review site.

One of the things that Mr X did quickly reduce his debt was to sell any unnecessary junk that he had lying around the house. Mr X told me that he was quite a compulsive shopper and bought many unnecessary things and gadgets! But he first had to develop the habit of not spending money impulsively. Then he told me his story of how he got rid of his junk and clutter in his house.

All his electronic gadgets (like cell phones) which he got sick off was sold on ebay. His next big ticket item was his car. Yes his car. He sold his car and bought one that was 12 years old and had 150,000 miles on it. He chose a Toyota Corolla (which he figured was give him less problems and claims that till this day, it has not). He even sold his Rear Projection DLP TV set which he bought on credit and lived for a couple of years without TV (no cable bills either). He managed to raise a few thousand dollars through clearing his whole house of stuff that he did not want or need (including an extra refrigerator that he got free from his old rented house!),

While he still had debt even after this asset sales, it did reduce his debt load and his monthly payments. But more importantly (according to Mr X), it made him realize that he did not need a lot of the stuff that he always buys on impluse. So his advice is that if you have credit card debt, look around your house and see if you could sell anything that you really do not need or have bought on impulse. This may be the quickest way to cut down your debt load.

Should you give credit cards to your kids? Well, to be honest with you, my oldest son will turn eight years old this year. Hence, this problem is a distant one for me (at least for now). What I have friends who have teenage kids who will be in college in a couple of years. Once, they are in college, most will be able to get their own credit cards since lots of credit card issuers offers college students relatively easy these days.

This is how I would like to look at it. First, let’s look at the pros and cons of giving your teenagers a credit card.

First, the pros :

1. You start to educate them early about credit cards and how they work.

2. If you give them a supplementary credit card (not debit card), you can start them on the road to building a credit history. (that is assuming you have a good fico score).

3. If you are afraid of get going crazy on the card, you can get them a debit card and set a budget for them.

Here is where I see the downside to this :

1. If you have not educated your teenage kids on money, and you do not monitor their spending, then you will be spoiling them by giving them a credit card.

2. Access to “easy money” could be a bad thing for some.

Teach Your Teenager the Following Before Giving Them a Credit Card

Before I give my teenage kid a credit card, I would definitely be educating him or her about how credit card works. This is what I would tell my kids before I give them a card.

1. Teach about FICO score and how important they are to their financial lifes.

2. Explain to them the concept of credit and why they should always pay in full.

3. Do some math revision and explain to them what is apr! If you know, try explaining to them how to calculate the real effective interest rate to them if they are good in calculas.

4. I will make them plan a spending budget and make sure they stick to it religiously.

5. Lastly, I will monitor the spending on the credit card.

I met this gentleman (let’s call him Mr X) at another party I attended. We did the usual chit chat and when he heard that I ran a credit card web site, he started to get really interested.

“So do you have any advice on credit card debt?” was his question. “Yes was my answer”, although I explained to him that my site focused more on credit card reviews and my blog posts are credit card related and personal finance related with some debt reduction posts. It turns out that the reason he was interested in what I was doing was because he was on the verge of getting rid of his credit card debt (which peaked at $25,000).

What he told me was very interesting. He said that the key to his credit card debt reduction was when he decided to face it and acknowledge it. He originally had about $18,000 in credit card debt from his student days. But he did not want to face it. So the debt slowly spiralled. he thought that afterall, if he added another $500 to this $18,000 debt, it did not make a difference. Well, after a few $500 additions, the total at the peak reached $25,000. That was when Mr X realized that he cannot afford not to confront the fact that little additions add up and do indeed snowball.

It finally dawned on him that if he just did the reverse and reduce his debt bit by bit, then he will be debt free before he knew it. To help him face up to this debt, Mr X placed a note on his table, bathroom mirror and bedside table with the amount of credit card debt he had. This way, he had to “face it” everyday. It stuck in his head and he started watching his spending, setting a budget and setting a plan to actually get rid off the debt.

I asked him to write a blog post for me but he refused. Instead, he said I can quote him anonymously! But he wanted me to convey the fact that the road to a debt free life begins with the acknowledgement that you are in debt. Once you have accepted that, a huge load will be taken off your shoulder and you can then begin to take the necessary steps to reduce your debt. If you do not acknowledge or face, all that will happen is that you will incrementally increase it, and before you know it, it will spiral out of control.

I recently met a new friend, Tom, through an introduction at a party. Tom is a graduated from college 4 years ago and when I told him I have a credit card review site and personal finance blog, he started talking to me about his student loans that he has to repay and the credit card debt that he has got into during his college years.

Tom told me that when he graduated, he was saddled with about $40,000 in student loans and credit card debt. It was up to his eyeballs and he just did not know how to reduce them in the beginning. But four years later, he had cut his debt by half and it now stands at about $20,000.

Tom said that one of the most important things he did was to actually breakup his debt reduction goals into biweekly and monthly goals. He felt that if he was staring and thinking about the whole amount, he would simply get discouraged and lose his spending discipline. So what he did was to break them down into monthly goals.

To arrive at his monthly goal, Tom set out a detailed budget based on his monthly salary. He made a point not to accumulate any more credit card debt or any other debt for that matter. He had to make some sacrifices. At certain points during the last four years, he had to take a second job and moved in with his parents for a short period. But his goal was to reduce his debt by $500 a month.

It has not been a comfortable ride. Instead, there are lots of sacrifices. Unrepaired stuff in the apartment, driving around a really beat up third hand car are just some of the sacrifices he is making. But Tom does not want to take another four years to get rid of his debt. Hence, he is planning paying off his debt faster.

Tom says that by just focusing on monthly debt reductions, he is essentially taking a big burden and breaking them into “smaller burdens”. By consistently meeting his monthly target, it motivates Tom even more and reinforces his determination to reduce his debt even faster. Tom also does not feel as burdened as before because he knows that if he can just repeat what he is doing every month, he will be out of debt before he knows it. Paying off his debt is as Tom says a “monthly routine”.

I am thinking of getting a car sometime later this year and I guess it is research time as I am not exactly a car fanatic. Fortunately, I just met a new friend who used to be a car dealer and boy did he give me a few tips for car shopping. This was what he told me.

1. Do your basic research on the model you want

Well, sounds very basic, but it is a necessary step. Do research on the internet. Find out how much the model is, what features you are looking for, their second hand value etc. There are also many forums arounds so he adviced me to check them out as well.

2. Obtain a Pre-approved Loan before you approach the dealer

Sounds elementary again, but my friend insisted that I should have a pre-approved auto loan in hand to bargain with the dealers. That should be easy enough.

3. Never Shop the Dealers over the Phone

While I thought this was a very tempting proposition, my friend told me never to do that. The reason is that dealers know it that you are just stringing them along that they never give their best prices. To get dealers to take you seriously, you have to visit their showroom and show interest in the car that you may want to buy.

4. Buy a car close to Month End

Every car salesperson has a monthly budget or quota to meet. Checking them out during the third week of the month and trying to close a deal by the last week is a great tactic according to my friend. I will definitely keep this in mind. Timing is the key.

5. Never Agree a Deal in the Showroom

The last advice my friend gave was never to agree a deal in the showroom. Always say that you have to talk to your partner about this, then leave. Wait for the salesperson to call you again (which will probably about a day later). When the call comes, try to negotiate for one last price reduction. Close the deal over the phone and then go to dealer for the paperwork and your car keys.

I appreciated his advice about the negotiation tactics. I will sure use them. I was thinking about getting the Citi® Driver’s Edge® Platinum Select® Card plus an Auto Rewards Credit Card for the specific brand that I want to help me save even more money. However, given that I would like to buy my car in the next few months, I probably do not have enough time to spend enough money on these cards to get me a significant rebate. Using these auto credit cards probably require a couple of years of planning to get the best bang for the buck.

I will update you on my car purchase when it happens.

My first mutual funds were purchased back in 1995. I had just started work a year earlier and was pretty tuned in to my “personal finance”. My first funds were Stein Roe Opportunity Fund (acquired by Columbus Management), AIM Constellation Fund and American Century Ultra Growth Fund.

Looking back, I took months to research what funds to buy. I went over Morningstar a gazillion times, going over past performance. Back then, these funds had some of the best 10 year performances. I could only dream what they would be worth 10 years later with such “stellar performances”.

Well guess what? Ten Years is up and sadly speaking, these funds gave me an average return of 5-6% (nominal return) over the last 10 years. To say that I was disappointed was an understatement. Historically, stocks have given holders a 6% real return. With inflation at about 2-3%, we should expect norminal return to be about 8%-9%. 5%-6% falls short of that.

What did I do with these funds? Well, I have sold them. But looking back, I have learnt a few things as choosing funds and investment philosophy.

1. Past performance is certainly not an indicator of future performance.

2. You should never bother about the index.

Why do I say that? It is because during the bear market in the earlier 2000s, I did not care about the fund outperforming the S&P. A negative return is a negative return. What disappointed me was finding out that there were actually funds that had positives returns during the bear market.

Proponents of indexing do not address the underlying flaw of indexing, which is the index could be overvalued at set for a dramatic fall as witnessed during the late 90s and early 2000s. Which leads me to my next lesson?

3. The investment discipline of a fund manager is so important.

When I went through the fund prospectus of each of the funds that I held, I realize that each one was set up and invested just to “beat the market”. The fund managers chose stocks that they believe would “outperform” because of “earning momentum” or because they looked “relatively cheap compared to the sector”. Yet when I looked at funds that really did well during the bear market, they had one thing in common. That one common thing was they only bought stocks that were deemed to be “undervalued by the market”. Buying stocks that a discount to where they think intrinsic value is minimizes the risk of a “permanent loss of capital”. After the tech bubble, many investors and fund managers suffered a permanent loss of capital. The best example is to compare an investment in Coke and a busted tech stock. If you had invested in Coke over the last few years, it really has not done much. It was priced at a 40 PE back in the mid and late 90s. Buying this “great company” at expensive prices would not have been wise. But at least, you do not lose your capital. You lose opportunity cost. In contrast, had you bought any internet stock with no earnings in the late 90s, you would have suffered a “permanent loss” in your capital. Unlike Coke, it is gone!

These are the few takaways I have from Lessons from Past. I will soon be discussing how I chose my new mutual fund. Stay tuned.

I know many friends who are immigrants and expatriates. Many come from Europe and Asia. When they hear that I review credit cards, the first question is always “What is the best credit card to earn miles for their overseas travel home on my domestic airline?”

Having reviewed lots of credit cards, I know the perfect card for these friends. The card I am referring to is the Starwood Preferred Guest® Credit Card from American Express . At first glance, this is just another affinity card for Starwood Preferred Guest Members. However, if you are familiar with the Starwood program, you will know that Starwood allows you to transfer points into air miles for many airlines at a very favorable rate. You can transfer 20,000 points into 20,000 miles for many airlines and furthermore, Starwood Preferred Guest Program gives you an additional 5,000 miles for that program! The Starwood Card allows you to earn one point for every dollar that you spend on the card. Hence, you can earn 25,000 miles with just $20,000 in spending on your card. (Remember that most airlines frequent flyer program requires 25,000 miles for one roundtrip restricted economy ticket).

But the real beauty of the Starwood Preferred Guest Credit Card is that there are over 30 airline partners. As I mentioned earlier, these friends of mine come from Europe and Asia and their number complaint is that there are no airline credit cards for their favourite foreign airline. But by getting the Starwood card, their problems were solved. Below is a list of Starwood’s airline partner.

Aeroplan Air Canada,
Air China Companion,
Air New Zealand and Air Points,
Alaska Airlines Mileage Plan,
Alitalia Mille Miglia,
All Nippon Airways (ANA) Mileage Club,
American Airlines AAdvantage,
Asiana Airlines,
British Airways Executive Club,
Cathay Pacific Asia Miles,
Continental Airlines OnePass,
Delta Airlines Skymiles,
Emirates and Sri Lankan Airlines Skywards,
Flying Blue,
Hawaiian Airlines,
Japan Airlines (JAL) Mileage Bank,
KLM Air France Flying Blue,
LAN LANPASS,
Lufthansa Miles and More,
Mexicana Frecuenta,
Northwest Airlines Worldperks,
Qantas Airways Frequent Flyer,
Qatar Airways,
Saudi Arabian Airlines Alfursan,
Singapore Airlines Krisflyer,
Swiss Travel Club,
Thai Airways International Royal Orchid Plus,
US Airways Dividend Miles,
United Airlines Mileage Plus,
VARIG Smiles,
Virgin Atlantic Flying Club.

There are a couple of caveats. All of the above airline partners allow one starwood point to be converted into one miles with the exception of United Airlines Mileage Plus (2:1), Varig Smiles (2:1), LAN LANPASS (1:2), Japan Airlines Mileage Bank (3:2) and Air New Zealand and Air Points (65:1). So please be aware.

When you have credit card debt which you are trying to pay off, everybody will tell you to set up a debt reduction plan and budget and stick to your plan. But when you look at your budget, how do you decide which items to reduce? Here is how I would look at it.

I would first seperate your budget and expenses into 3 groups.

Necessary Expenses

The first group is what I’ll call the necessary expenses. Your mortgage, auto loans, credit card debt, essential utilities, education expenses, groceries, gasoline fall under this category.

Expendable Expenses

The second category of expenses is what I would call expendable expenses. These are expenses you can actually do without. They include cable tv, netflix, gym memberships, club membership etc. These expenses tend to be recurring. These items in the past would have been considered luxuries, but are now considered essential!

Self Improvement Expenses

These expenses include spending on books, seminars, networking events that will help your career.

3 Ways to Deal with Each Type of Expense

There are three different strategies to deal with each type of expenses. For the neccessary expenses, you cannot do without them. But there are ways to reduce these expenses. You can refinance your mortgage, save on your groceries and utilities etc.

It is in the “expendable expenses” where you can actually save the most. Or at least sacrifice them temporarily until your finances improve. Stop going to the gym and work out at home or run outdoors. If you really wanted to, getting rid of your cable tv may lead to a more productive life. Netflix forces you to watch lots of movies where time can be spent at perhaps “money generating activities”.

While, it is tempting to trim all the fat, make sure you do not cut any muscle off! Activities like business networking and self-improvement may help you in your business or career and if anything, you should invest more in yourself.

Conclusion

When I graduated and just started work, I had very few “expendable expenses”. It was only after I had a few salary raises did I start adding some of these expenses. I did not have cable tv for a couple of years. I also stopped paying for my gym membership when I realized that me paying a monthly fee did not force me to work out regularly!. For what it’s worth, looking at my budget this way early in my working life has helped me trememdously in my finances.

If you are up to your eyeballs with credit card debt, or any debt for that matter, one possible solution could be debt negotiation or debt settlement. This involves negotiating with your creditors to settle your debt for less than the face value. You could potentially reduce your debts significantly and/or reduce your monthly debt interest payment. However, this method is not for every one. And here is why.

Credit Scores take a plunge

When you negotiate with your creditors to accept a lower payment of the face value of your debt in return for a swift payment, they may report this to the credit bureaus. This will hit your credit scores significantly.

Hence, if you have very good credit scores, but your debt is piling up, debt negotiation or settlement with your creditors may not be the best thing to do. In this case, you should resort to budgeting, setting a systematic plan to pay of your debt and perhaps getting a 0% apr balance transfer credit cards to help with your debt reduction plan. You could also consider a home equity line of credit and consolidate your debt.

But if your credit score is really bad to begin with

But if your credit scores are really bad to begin with, then you may want to consider debt negotiation or settlement. The advantage of going this route is that you will considerably reduce your debt load, reduce the time to pay off your debts. If your credit score is poor to begin with, then getting a hit in your FICO scores will not matter as much.

DIY or Hire a Professional?

There are two ways to go about doing it. You can obviously do it yourself. Or you can hire professional firms to do it for you. The advantages of hiring a professional is that they will know which creditors will likely to accept a 30% of what you owe, which will accept 60% and which will not negotiate at all!. They also have experience doing this over and over again for many people.

Ending Thoughs

When you are deep in debt and your credit score is really bad, you may want to consider debt negotiation or debt settlement as you can drastically reduce your debt and the time it takes to fully pay it off. If your credit score is good, then you should not consider this. Instead, develop a systematic debt reduction plan or consider taking a consolidation loan instead.