Good personal finance advice (from Gary North) about how to purchase cars wisely, handle expenses and make financial decisions.

THE MINDSET OF THE SELF-MADE RICH

What you read here, you can confirm by reading the book, "The Millionaire Mind."

The difference between the rich person and the middle-class American is two fold: (1) the rich man takes more risks; (2) he spends money a lot more carefully. Middle-class people try to avoid risk. They also are woefully ignorant and naive spenders.

Here is my slogan for buying anything with a price tag over $300: "Never pay retail."

ON BUYING A CAR

When you buy a new car, you pay retail or close to it. Don't.

The moment you drive a new car off the lot, it drops in value by about 15%. But your debt doesn't drop, if you buy it on a payment plan, which over 90% of all new-car buyers do. If you don't pay 15% down, you are "upside down" from day one. You owe more than the item is worth.

If you trade in your car for the down payment, you get less for it from a dealer than you could get from a private buyer. The dealer has to make enough money on the sale to pay for overhead, which includes his salesmen's time.

A new car depreciates by 60% to 75% in the first three years. Yet it probably is a reliable car if it was taken care of. It has 40,000 miles on the odometer, but it's probably good for another 100,000 miles — maybe more.

Back in early 2003, I devoted an issue of this newsletter to techniques for buying a used car, cheap. Personal Finance Tip: How To Buy a Cheap Used Car

I learned not to buy new cars early in my career, when I got my first full-time job in 1971. I bought my first and only new car: a 1972 4-door Toyota Corolla. I paid $2,200 — about $10,000 in today's money. These days, a comparable entry-level new car is in the $11,000 range, and a five-year loan is commonplace. I bought it with a three-year bank loan. I bought it because, like an idiot, I had not bought a brand-new BMW 2002 in 1968 for — get this — $2,800, plus tax. That was about $17,000 in today's money. How times have changed for BMW. But they have changed for me, too. I would not buy a BMW today.

I learned my lesson with that Toyota. It had a defective engine. At first, it ate a quart of oil every 1,000 miles. That was too high. The dealer's chief of repairs refused to fix it. He said it was all my fault.

Then the engine blew up, just after the one-year or 12,000-mile warranty expired. (That was back when the auto industry had not figured out that by offering extended warranties tied to regular servicing, the dealerships would make more money.) I had to pay over $100 — $500 in
today's money — to get it fixed. The repair lasted less than six months. It blew up it again.

It did this three times. The last time was in March, 1974. I remember this because UCLA's basketball team lost in the semifinals to North Carolina State. I saw that game on the road, waiting for news about my dead car. The local dealer in that distant town (Lodi, California — just as Credence Clearwater Revival had warned: stuck in Lodi) admitted that Toyota had issued a bulletin: this model's engine was defective. The dealer fixed it for free. He said the engine would be like new. It was. I never paid for another engine repair. That was at about 24,000 miles, as I recall. I got rid of the car at about 170,000+ miles in 1987.

Because I had installed a toilet paper oil filter on it, the engine had no measurable wear in 1987. I had a highly skeptical local mechanic strip down the engine and evaluate the wear. He was amazed. There wasn't any. I had changed the oil maybe three times. Even this had been unnecessary. With a toilet paper oil filter, you never have to change the oil; you add a new roll and one quart every 5,000 miles. Sadly, new cars have so little space under the hood that it's hard to install one of these bypass filters.

I learned from that experience that you can buy a new car and still get a lemon. You can buy from a dealer, yet still get stiffed by the dealer's repair manager. I have never bought another new car. I have never regretted this.

MY LATEST EXPERIENCE

Early this year, I bought a 1999 Chrysler van for my wife. It had 95,000 miles on it. It was spotless. I paid $6,700. I bought it from a private party. I find that you get better deals this way. You pay for the car, not the dealer's overhead.

The car was five years old. So, 95,000 miles divided by five years is 19,000 miles/year. The average urban driver puts on 12,000 miles/year. So, these were probably mostly highway miles, which are much easier on cars.

The seller met us way out of town at a public park. This was a good sign. I asked what he did for a living. He was a truck driver. He drove into town to pick up a truck. So, I figured the 95,000 miles were more like 60,000 of stop-and-go urban driving.

After a test drive, I did not argue about the price. The seller said something that persuaded me to buy the car. He said that he would have to sell either the van or his wife's car, and he did not care which. This meant that he was happy with the van; he just needed the money. I believed him. I am glad that I did. The car has run flawlessly.

At $6,700, I did not have to get a bank loan. A lot of Americans would have had to get a loan. They have no savings. This fact impedes many buyers from competing effectively with me. I am ready to buy immediately. The typical used car buyer must first go to his bank and
arrange a loan. A seller wants money right now. A buyer who is ready to drive with the seller to the bank and hand over a cashier's check is in a strong buying position.

I previously owned a Chrysler Town & Country van that I paid $8,250 for. It had 120,000 miles on it. I put 110,000 miles on that van, with only one major repair. I gave it to my next-door neighbor when I decided it was ready for the used car graveyard. He got another year out of it. I think he had to put $1,000 into it. So, call it $80 a month. Cheap.

I own a 1993 Dodge Grand Caravan van that I paid $2,300 for in 2002. It had 125,000 miles. I have had to get three repairs: replacement shocks, cv joints, and a replacement right front axle. These repairs have cost me an additional $2,000 or so. I could probably sell the car
for $1,500. So, I'm $3,000 in the hole. I have put on 37,000 miles. Add to this about 1,500 gallons of gas at $1.50 per gallon. Call it $2,500. So, I have paid $5,500 to drive 37,000 miles. That's 15 cents a mile. The IRS allows a 37.5 cents per mile deduction for business use. I
have beaten this by 60%.

Would I like a 2005 Toyota Sienna? Yes. I might even buy one . . . in 2010. But I am not paying $30,000 for a new one this year.

What am I after in a car? My #1 criterion is avoiding
bucket seats, which bother my lower back after two hours. This means I must buy a mini-van.
Next on my list: low initial price, low maintenance costs, and moderate gasoline mileage: at least 20 mpg on the road. My old Dodge gives me 27 mpg. That's not bad.

If I buy a lemon, I can sell it. If I pay under $5,000, I can probably sell it for $3,000. Even if I can get only $1,000, the loss is minimal: say, two years of driving, or a loss of under $200 a month. A new car will cost $600 a month for five years. When I get ownership, it will be worth a quarter of what I paid.

A MINDSET

If you want to live in careful comfort in your retirement years, you had better live in careful comfort in your pre-retirement years. Get used to careful comfort. Forget about luxury.

If you want to live in luxury in your retirement years, live in careful comfort in your pre-retirement years, but start your own business and work 12 hours a day, six days a week. Reinvest your earnings for at least two decades. Then you can think about giving yourself a raise.

The mindset of the rich man who has made his money on his own is to cut expenses to the bone by buying high-quality goods from high-salary people who have lost their jobs or who get into so much debt that they have to raise money by selling off their nice things. You buy what is in effect the other guy's mistake. You pay half or less of whatever he paid because he is selling under pressure, or selling out of boredom with whatever it is he bought. This is the only way to buy exercise equipment, for example.

The downside of this mindset is that it gets more and more expensive as your income rises. Your time gets more valuable. But I have found that this mindset keeps paying off because, when you buy high-ticket items, such as a house, your eye for a bargain is still operational. The mindset of not paying retail applies to everything you buy.

Let me give an example. Until recently, I did not buy in "dollar" stores: Dollar General, Dollar Tree, and Family Dollar. But there is a Dollar General store about four blocks from my new home. It's at the corner where I turn off the main drag onto the street that heads toward my home. So, I can't miss it.

find that I now shop there for standard items such as paper products, toiletries, and other low-cost items. It's faster than Wal-Mart, and it's usually cheaper. These stores are becoming a major retailing phenomenon. They sell to lower-income people, but they don't sell at high prices. They are not like gas station convenience stores. They have about 6,000 square feet of floor space. Frequent shoppers know where most items are. This saves time. Unlike Wal-Mart, there is always a salesperson near at hand to ask where an item is, and they seem to know.

Usually, you trade off time against price. This is not true in a dollar store. They are spreading very fast. They are all over the South.

CASH ON THE BARRELHEAD

A check talks. A cashier's check talks louder. Currency talks loudest of all.

All three are instantaneous. The seller doesn't have to wait. A seller who cannot afford to wait is a motivated seller. A motivated seller will take less than the listed asking price. I have money in reserve so that I can deal with motivated sellers.

This means that I must not be motivated by a deadline. A buyer with a deadline is highly motivated. Sellers love motivated buyers, who are willing to pay full ticket. I do my best to plan in advance for whatever it is I want to buy.

Use your time to (1) build up cash resources, (2) do a lot of shopping to get a sense of prices and offers in the local market, (3) locate a motivated seller.

Let's get back to that used Toyota Sienna that I would like to own. I can go to the local newspaper and sign up to have an email sent to me whenever a classified ad appears for a Toyota Sienna. That's a very nice feature. I can monitor prices this way. Second, I'm looking for one with over 100,000 miles. Why? Because a Toyota will go for 250,000 if I care for it, mainly by changing the oil every 3,000 miles or installing a Motor Guard, if it will fit.

Note: the Frantz toilet paper filter works upside down, which offers another way to install it–under the engine.

After 100,000 miles, most buyers refuse to buy without being offered a steep discount. I love those words: "steep discount." So, I'm willing to take a chance with a Sienna with 100,000+ miles. I might do the same for a Honda Odyssey.

Third, there are not many Siennas offered for sale. I know that I must be patient. If I want to buy a clean used one, I will have to wait. Then, when it comes up for sale, I must be willing to act fast. That's where cash comes in.

Will I really buy one? Probably not. The larger Dodge and Chrysler vans are really as much as I need. They are more available, and they don't sell at a premium. I spend my life in front of a computer screen or with a book. I don't spend much time in a car. I just want to get from
here to there and back without anything breaking down.

I am tempted to buy a diesel Jetta for local use. There is a reason for this. With a few modifications, a Jetta can get 90 miles per gallon. I said "tempted." I won't do it. Why not? Because the modifications are illegal. I would never do anything illegal, especially not after publishing how it can be done.

CONCLUSION

Test yourself. Did you click on the link to the toilet paper filter, if only to see what it sells for? A millionaire would have clicked the link.

Once you saw what it costs, did you check your engine's compartment to see if there is room for a bypass filter? A millionaire would have.

Do you budget your spending? Do you allow yourself very little leeway when buying anything that is not on your shopping list? Millionaires do.

I am not speaking of multi-millionaires who inherited their wealth. I am speaking of those who created wealth. They created it with entrepreneurship. But they had to possess capital to get started. This is why they are self-disciplined budgeters.

It's better to learn this mindset while you're still in the work force with a chance at accumulating wealth. After you retire, this will be forced to adopt the millionaire’s mindset. Better to learn it now.