Before talk of $4 gasoline (and airlines going bankrupt and charging you to check luggage) dominated the nation’s transportation attention, global positioning system units were all the rage. Now it sounds like GPS units have become more of a luxury good, something you only get it if you are hard pressed to spend your stimulus check (perhaps there’s a second stimulus check coming?). However, I argue that GPS units might be a good investment because it makes your driving more efficient (hopefully). Let’s see, shall we?

Fuel Cost Per Mile

If you drive a 30 mile per gallon car, $4 a gallon for gas means that each mile costs you approximately 13.3 cents. If your car only gets 20 miles per gallon, $4 gas equates to 20 cents a mile. This gives you a baseline for comparison, how many miles do you need to save in order to make one of those units “worth it?” We don’t consider other costs per mile, such as car depreciation and maintenance, because that would introduce far too many factors for our simplistic calculation. If you went through the exercise of calculating the cost per mile of your car, use that figure instead of 13.3/20 cents/mile as calculated above.

Breakeven Analysis

If you get the Magellan Maestro 3200 3.5-Inch Portable GPS Navigator for $131 at Amazon, the unit pays for itself if you can save 985 miles (at 30 MPG, 750 miles at 20 MPG) over the lifetime of the unit. If you assume that the lifespan of the unit is a conservative five years, that’s 197 miles a year, or, 1.31% if you drive 15,000 miles year.

Is it really possible to save 197 miles a year? I think that if you do a lot of driving in areas you don’t know very well, it’s very possible. The class of users that I believe benefit the most from GPS units are real estate agents. What about someone who drives the same commute every day five days a week? Chances are you won’t benefit greatly from a GPS on weekdays but you might benefit on the weekend. If your GPS has integrated traffic, which the 3200 doesn’t (I just picked the cheapest unit on Amazon at the time), you could save more by avoiding traffic trouble spots.

Or, for those who are fans of The Office, strict adherence to the units could leave your car in a lake (after the jump).
(read full article…)

That One Caveman recently took on the task of managing his home mortgage’s tax and insurance payments, essentially replicated the services of his lender’s escrow account, because of a very favorable appraisal. The appraisal raised the listed value of his home by $15,000, lowered his debt to value ratio to 80.4%, and thus enabled him to manage the funds himself (80% appears to be the sweet spot for this).

I thought about doing this myself but scrapped the idea for two big reasons. The first, the profits are small. I do the math for Caveman’s situation, a max $5500 escrow, but my escrow is lower at around $3500; so I would’ve earned even less than the analysis below. Secondly, while I trust my diligence, stuff happens and the risks are too great.

Profits Are Small

Caveman said his escrow maxes out at around $5500. If we assume monthly payments of $458.33 and a single $5500 payout at the end of the twelve months, 3% interest (or 0.25% each month, if compounded monthly) earns you $76.26 total. That $76.26 will appear on your 1099-INT and taxed at your marginal tax rate. If you are in the 25% tax bracket, that’s $57.19 in your pocket. If your escrow pays out twice a year, your earnings are even less ($57.61 pre-tax, 43.20 after taxes in the 25% bracket).

In return for $57.19, you have to send out payments to the county or state for property taxes and make payments to your homeowner’s insurance provider. That’s a lot of headache for a relatively small payoff.

Mistakes Are Costly

If you miss your tax payments, you start accruing penalties that eat into that small gain you would otherwise pocketing. In the worst possible case, the county puts a tax lien on your home, someone purchases it, and you fail to respond to the mailings for the entire tax lien holding period. Then you lose the house. The odds of losing your home are pretty slim, but they are greater than zero. Perhaps you move out in 5 years, start renting out your home, and forget to change addresses on record. Perhaps you go on vacation and forget to schedule a payment.

I’m always a fan of optimizing your personal finances. This is a case of where you can definitely squeeze a little more out of your money if you are diligent and put safeguards in place, but it simply wasn’t one I was willing to try given the small upside (recall, our escrow is max at around $3500, so we would’ve earned far less).

Do you manage your own escrow?

If you’ve ever lamented the fact that you signed a 30 year fixed mortgage instead of a 15 year fixed mortgage (it was one of 8 regrets of 2007 for Trent of The Simple Dollar) because of how much money you could’ve saved, don’t. I’m going to do some simple Dinkytown.net (using this fixed mortgage loan calculator) math to show that the difference between prepaying a 30 year fixed mortgage and a 15 year fixed mortgage is big. The current rates on Bankrate (as of early morning on April 16th, 2008) for a 30 year fixed mortgage is 5.62% and for a 15 year fixed mortgage is 5.20%, so we’ll be using those. Rates have since changed but the analysis still holds.

If you had a $300,000 mortgage and made additional payments (~$677) onto the 5.62% 30-year mortgage such that the payments matched the 5.20% 15-year mortgage (~$2403), the difference in total cost (principal and interest) is ~$19,153 pre-tax across fifteen years. After you discount it by your marginal tax rate (say 25%), divide it across the 180 months, it’s only $79.80 a month. $80 difference on a $2403 mortgage payment is 3.3%.

You might say: “Jim, you’re just conveniently ignoring the $19,153 and focusing on the smaller monthly number of $80 - that’s just mathematical hocus-pocus. I’m upset about the $19,153! Also, $80 might not be a lot to you Mr. Money-bags, but I’d rather have that money than give it to a mortgage company.”

To which I would respond: “Ah, good point, but let us calculate the present value of that $80 a month and see how much it’s really ‘worth’ to us today. As for the $80, I too would rather have it in my pocket, but I’m not going to cry over spilled milk.”

If you assume that inflation will be at 4% a year, 180 payments of $79.80 is worth approximately $10,788 today (if I did it right in my TI BA-II Plus calculator). It’s a $10,788 difference on a $300,000 mortgage. Ten thousands dollars isn’t a trivial amount of money, but that’s the cost of having the flexibility to make the 30 year payment into a 15 year payment if you want to. If you have a 15 year mortgage, you are required to make that payment.

Lastly, if you still are bothered about the difference, you can always refinance.

(someone please check my math!)

After the wedding, I started taking a closer look at the tax numbers and incorrectly concluded that the only time someone would ever file as “married filing separately” would be if one partner earned a whole lot and one partner earned not as much. The logic was that the lower earner wouldn’t be subject to the same tax rates as the higher earner and thus the difference would overcome the different tax brackets. The only correct assumption I made was that the lower earner wouldn’t lose access to any tax advantaged accounts, like Roth IRAs, because they’d still be over the limits for those types of accounts. I already gave out my hypothesis and my result (I was wrong and am now clueless as to why anyone would file separately if both options were available) but here’s what I did.

Hypothesis: Married Filing Separately shares more of the lower tax brackets as Single filers but you lose practically all of the favorable tax benefits that Single filers enjoy. The benefit of filing separately is if you have a significant disparity in income with the sum total above many of the tax beneficial limits. (this hypothesis is proven wrong)

2008 Tax Brackets

(taken and amended from my 2008 tax bracket post)

Three Scenarios

What happens with a couple earning $100,000 with one earner taking in $80,000 and one earner taking in $20,000?

• Married Filing Jointly: $17,687.50
• Married Filing Separately: $16,772 + $2,197.5 = $18,969.50 (correction)

That’s a difference of $2,802.50 but both individuals lose access to a Roth IRA (among other significant benefits).

What about a couple earning $200,000 with one earner banking $120,000 and one banking $80,000 would pay (this doesn’t take into account deductions):

• Married Filing Jointly: $44,744
• Married Filing Separately: $28,964.50 + $16,772 = $45,736.50

What!? It’s more to file separately… maybe the disparity has to be greater. What if a couple earned $400,000 with one earner banking $320,000 and one banking $80,000?

• Married Filing Jointly: $58,787
• Married Filing Separately: $49,402.5 + $16,772 = $66,174.5

Two Potential Reasons to File Separately

So, I tried to do more research and discovered this great About.com article and according to William Perez, filing separately makes sense in two basic scenarios:

1. “Filing separate returns makes the most sense when one spouse owes a significant amount of money, but the other spouse could get a refund.”
2. “It also makes sense when one spouse is cheating on their taxes, and the other spouse doesn’t want to be involved.” (Nice!)

Let’s ignore scenario #2 because anyone who lets someone else knowingly cheat on taxes doesn’t really need to worry about their tax bill, they have bigger issues. With scenario 1, you have to be in such a small window, for both earners, such that the lower earner’s deductions will save them more than the higher earner loses by filing separately (as evidenced by our 80/20 example above). The 25% tax bracket starts at $32,550 for married filing separately but starts at $65,100 for married filing together! I suppose the numbers have to be in that range for this to make sense… but then you start giving up great benefits such as a Roth IRA, which is available if your total AGI is less than $156,000 when you file jointly but only $10,000 when you file separately! (plus, I don’t know if I’d classify someone earning $80,000 as someone who would owe a “significant amount of money,” hence my 120/80 and 320/80 examples)

Plus, if you read the article some more, there are so many headaches involved in filing separately (both have to take itemized or both take standard, state taxes are a pain in many states, etc.) that I can’t even imagine the strangely specific scenario in which filing separately truly makes both financial and psychological sense.

Why would you file separately if you could file jointly?

Hat tip to Ryan Waggoner for providing this Quicken post with some solid reasons for married filing jointly, the main financial reason happens to be in the blind spot of my analysis, itemized deductions.

A few years ago, with my last car, I did a little calculation to help determine the “cost per mile.” I was doing quite a bit of driving back and forth from Baltimore to Pittsburgh, then Baltimore to New Jersey, to visit my girlfriend (now by wife, so I suppose it was worth it :)) and so this number was important for me to know. I also found that it helped make other decisions in my life easier because it gave me a very tangible cost associated with driving somewhere, such as to the gas station across town instead of the gas station on my route home.

The Calculation

The cost per mile can be broken up into three major categories and one catch-all:

• Gas: Clearly the dominant value in the calculation, gasoline is something that has to be based on actual costs rather than estimated costs. You can’t take the cost of gasoline, the EPA value for your car’s mileage, and figure out based on that. Ignoring the inaccuracy of EPA values, though they’ve made a push to make them more accurate, your car is probably not the standard car. You have crap in your trunk, your tires are probably not inflated perfectly every single drive, and your maintenance isn’t going to be perfect (get that 30,000 mile checkup exactly at 30,000 miles?). So, keep a log for five fill-ups, reset your B trip odometer, and calculate your gas cost per mile that way.
• Insurance: This value is easy, simply take your premium and divide by the number of miles you drive in a given year. The “rule of thumb” is around 15,000 miles a year, but if you have an especially long commute then you can increase that. You can always just throw in a guesstimate because what you use as your miles driven per year isn’t going to drastically affect this number. For example, if you pay $2,000 a year and you drive 15,000 miles, that’s 13.3 cents a mile. At 20,000 miles a year, it’s 10 cents a mile. Sure the difference is 33% but you’ll ultimately use this value for trips in the tens or hundreds of miles… meaning a difference of only 30 cents - $3.
• Tires: Depending on how expensive your tires are, you might want to go through with this calculation or just consider it part of the noise. I know tires say they can last 30,000 miles, but I believe most of my tires run only maybe 20,000 miles. Either way, this math should be pretty simple. Divide the cost of the tires by the mileage and add it to the running total you’ve been using.
• Everything Else: I always throw in an extra 3-5 cents to cover everything else, from windshield wiper blades to routine maintenance to oil changes. I figure that a $20 oil change put across 3,000 miles (I actually changed my own oil with synthetic but do it once every 10,000 miles) is small enough to be considered noise in the equation so I use the 3-5 cents catch-all value.

So, what’s the final number? The IRS business mileage deduction is 50.5 cents a mile, how close was your value to this one? When I did this calculation a few years ago, I found my value was close to the mileage deduction back then (it was 40-something cents) but that was before the spike in fuel prices. For comparison’s sake, my value for gasoline back then was 7 cents a mile based on a car that was running around ~32 miles to the gallon (Acura Integra and I was doing a significant amount of highway driving).

How do you use this number? Let’s say it’s 280 miles between my home in Maryland and my parent’s in New York. The tolls between Maryland and New York, I believe, are around $60 a round trip. Given the cost of fuel alone (7 cents a mile), the cost of the trip is over $100 compared to the cost of a Southwest flight that can be bought for $39 a round trip. So, driving alone would cost over a hundred dollars and nearly 5 hours - flying would cost ~$100 and 3 hours… it’s a no brainer and the math is facilitated by knowing the cost per mile.

Finally, your car’s cost per mile is only part of the story. In my drives to Pittsburgh or to New Jersey, tolls played an important role and often threw the entire equation out of whack. Back then, the toll for the Pennsylvania Turnpike was around $8 a round trip and nearly $50 a round trip to New Jersey. Another factor was time. I could take a $15 Chinatown bus from Baltimore to Grand Central in NYC, then jump on an Amtrak train out to New Jersey… but it would take me like 15 hours to make the trip and time is money! (and back then, that was time I could spend with my beautiful soon-to-be wife, and yes she reads this blog)

(Photo by an0nym0usmuse)

This morning I did a bit of an apples to oranges comparison of a 401(k) and a high yield savings account, showing that the two would meet two years and two months out given a set of probably unreasonable assumptions. It was apples to oranges because the risk involved in investing in the stock market simply isn’t anywhere near the risk involved in saving money in a high yield savings account. So, I took Anne’s suggestion and compared a pre-tax account, in this case the 401(k) again, and a post-tax account.

Results? 401(k) never catches up. Despite starting with more money, $133 vs $100, 401(k) can never get over 25% the marginal tax rate + 10% penalty hit that it takes when you extract funds from it (not a loan, a straight up withdrawal). If you plan on pulling out your 401(k) funds to buy a house, don’t put them in there in the first place. Make the minimum contribution to get your match, then put the rest somewhere else.

Assumptions

• Better is defined as the approach that ends up with the most amount of gain.
• You are in the 25% marginal tax bracket.
• Both accounts return 11% a year, or 0.8735% each month, compounded monthly.
• There is no 401(k) contribution match by your employer. An employer match will bring in the breakeven point and raise the value of the 401(k).

Pretty Charts!

The chart below plots the growth of the brokerage account versus the 401(k) account. The value shown is the final extracted value, but growth is based on the non-extracted value. For example, with the 401(k), it’s the pre-tax dollar amount that is being compounded but the graph is showing that value reduced by 35% (25% tax, 10% penalty). The brokerage account line is growing based on its unrealized gains but the value shown is the realized gain, minus long term or short term capital gains. If you’ll notice the little hitch in the purple line at around month 12, that’s because the brokerage account tax rate fell from 25% (short term capital gains) to 15% (long term capital gains).

If you’re interested in the Excel spreadsheet I played with to reach these simplistic conclusions, I’ve made them available here. Please check it out and let me know if you see any mistakes I may have made.

Using Kanetix, an auto insurance comparison site, I decided to play around with the various driver characteristics to see what effect each one would have on my premiums. I chose Kanetix because it’ll give you multiple quotes and it had the easiest interface for you to change details about yourself, your plan, your vehicles (I’ve never used it to actually get insurance). This little unscientific study won’t tell you how much to expect your insurance premiums to go up if you do something bad but it should give you a relative idea of how “bad” certain offenses are with respect to premiums. As expected, insurance is all about dollars and percentages and the results, while unscientific, are pretty consistent with generally accepted thoughts.

Some interesting takeaways:

1. Confirmation of some commonly held and time tested beliefs, getting married, becoming female, and growing older will always reduce your rates. If you’re considering any of those drastic measures for car insurance reasons, I recommend a psychiatrist because I’d avoid becoming all three as long as you can (for the women in the crowd, I mean that I would avoid going through the process of becoming female solely for the insurance benefits!).
2. Education only has a minor and diminishing effect on rates as you become more educated.
3. While not listed below, your job title doesn’t have much of an effect on rates either (I looked but saw no real changes).
4. Reckless driving and fleeing from police violations are as bad as vehicular homicides!
5. With accidents/claims, only the dollar amount of how much your previous insurer paid out seems to matter with claims, the details of the accident don’t seem to matter much at all.

Some hard numbers after the jump…

All quotes below are for six months and is the average of all the quotes listed. I didn’t put in my social security number so my credit isn’t a factor. Also, I didn’t alter coverage details and only changed one characteristic each time before asking for an online quote.

Benchmark - One car with one driver garaged in the zip code where I live in what can be classified as suburbia. I’m male, 26, single, own a home, Master degree, engineer, with current employer for 3 years, licensed since 16, never suspended or revoked, not been ordered to carry an SR-22, 0 violations, residential insurance policy, no defensive driving-type course. I own my 2003 Toyota Celica, I drive it to and from work (~10 miles, 5 days), putting on approximately 12k miles/yr.

The coverages I selected are $100k/$300k/$100k for Bodily Injury and Property Damage and the same for Uninsured/Underinsured Motorists and UM/UIM Property Damage. Personal Injury Protection-Medical (and Funeral) Expenses set at $2500 Basic (everyone covered). $1000 deductible on both Comprehensive and Collision, yes to Towing and Rental coverages.

Benchmark Rates: 4 results, Average rate of $628.70.

Personal Details:

*For the SR-22 and revoked license you were asked to specify the date of the revokation or when you were ordered to carry the SR-22, in both cases it doesn’t seem to matter when that date was if it was within the last five years. Also for the SR-22, it didn’t matter if it was once incident or multiple. And finally, I received four quotes each time I requested it except for these cases - only Esurance and Drive Insurance from Progressive agreed to supply quotes.

Violation Details (only one):

I’ve had no violations.

Claims History Details:

I’ve had no claims.

For claims it’s assume there is no deductible and values in parenthesis is how much your former insurance company allegedly paid out in damages.

We’ve all heard that the twenty-five year old milestone is the biggest deal in auto insurance. On that day you magically become safer and actuaries have tables and statistics proving this fact, otherwise auto insurance companies wouldn’t be giving you a discount. I invite you to review two posts in which I detail my insurance prices a month before I turned 25 and the insurance prices a month after I turned 25. Essentially I concluded that you can expect somewhere in the realm of ten percent until I opened up my next Geico bill. My six month fee fell even more from $377.10 to $348.30 (7.6%) for a total fall of over 20%.

I didn’t comparison shop with other insurance companies because I felt they may give me the same results, no reason why they wouldn’t, and because it would take a while to compile the data.

20% drop in auto insurance for turning twenty five (and waiting two months) would fall into the category of “big drop” in my book.

About a month ago I quoted auto insurance rates to get a pre-25 year old rate so that I could re-quote and get a post-25 year old rate. Well, the time now has come for me to re-quote and see what the “big 25 year old milestone auto insurance rate quote drop” people always talk about really amounts to…

Given my current plan (Liability only) where I paid $436.60 for six months, my post 25 year old rate dropped -$59.50 to a mere $377.10. Looking back, carrying $1000 deductibles on collision and comprehensive coverage would cost me $959.50 for six months… now, a mere one month later, it only costs me $808.50 (-$151).

As for Progressive, for identical coverage it actually costs more now, $497 - an increase of $49! For full coverage? $816.00, a jump of $79! As for “the rates of other top companies” - this time four companies (one of them Progressive) were listed, including our old friend State Farm Mutual Automobile Insurance Company. Two newcomers to the show are Erie Insurance Exchange and Erie Insurance Company (same company really but two quotes).

For my coverage, the Erie brothers show a rates of $205 to $232 and $230 to $269 (based on credit score) which is ridiculously cheap auto insurance. State Farm came back with a quote of $412 - still more expensive than Geico. For full coverage, State Farm would charge $750 (cheaper than all comers including Geico), and the Erie’s would charge at least $350 and $380 per six months.

(Incidentally, Erie Insurance Exchange is “better” and only accepts folks with at most one violation, all others fall to the Erie Insurance Company, hence the price differences)

To recap, in table form:

So what’s the moral? You can probably expect a rate drop of at least 10% whenever you turn twenty-five. Is it a huge drop? Depends on your perspective but there is definitely a noticeable drop. I think my quoting from Progressive itself may have been flawed either this time or the first time because there is now way the price should’ve increased when all others dropped. What’s interesting is the appearance of Erie Insurance - as if to say they only trust drivers over twenty-five…

What other major auto insurance milestones have you reached and seen a big drop in insurance? I’m curious to see how significant each of these commonly assumed milestones truly are.

I’m reaching what is commonly considered the biggest milestone in a driver’s life, turning twenty five years ago. Aging from 24 years 11 months and thirty days to 25 years will probably save you the most amount of money with the least amount of effort in your entire life (getting married helps, but that’ll win you the award for least amount of money with the most amount of effort :)) because it moves you from a most risky class to a less risky class of driver. I’ll be turning twenty five in August (and I’ll be moving) so I wanted to get a benchmark of auto insurance quotes prior to turning twenty five and then comparing them later on. I currently am insured by Geico but I’ll be using Progressive’s quote system for my research.

Current Insurer: GEICO
Vehicle: 2003 Toyota Celica
Premium per 6 Months: $436.60
Coverage:

You may notice I carry zero comprehensive and collision insurance (yes, risky) but if I carried $1000 deductibles on both coverage’s, my 6 month premium would be $959.50 (more than double!). I have every possible insurance discount available from Geico (5 Year Good Driver, affiliate organization discount, safety restraint discount, etc). I also have homeowner’s insurance with Geico (Traveler’s really) but there is no discount on my auto insurance policy because of it, only my homeowner’s discount.

What was Progressive’s result for the exact same coverage? $448. If you were to add the $1000 deductible comprehensive and collision insurance? $737.00. So it would be cheaper to go with Progressive if I wanted to tack on the extra coverage’s but I don’t really feel they are worth it. I’m currently being “paid” $1,000 a year to insure myself.

Here is where the power of Progressive comes in, they will show you the rates of their competitors. Unfortunately, the only other rate they told me about was from State Farm Mutual Automobile Company and that was $1,162. Unfortunately, I wish they gave me more information than that… no mention of AllState or Nationwide quotes.

Right now I’m sticking with Geico, check back in a month to see how the rates compare with current rates.

Update 7/11/05: When I was logging into the American Express website I saw that they were offering auto insurance so I submitted some information to them to see what they would quote me. For equal coverage to my current coverage (no collision/comprehensive) would be $445 and for “full” coverage, it would cost $844. It stands to reason that there is a lot of wiggle room with regard to comprehensive and collision coverage cost, but not much with the base coverages. Any thoughts?

Click here for the results of my insurance inquiries after I turned 25 years old.