Thursday, September 3, 2020

Dad Wisdom

 

Interest rates along the vertical axis. Years along the horizontal. The numbers in the cells are the multiplier for the principle.

One reason people get into blogging is to create a time-capsule for their kids.

The thinking is that our kids are SURE we are the dumbest humans that ever breathed, if not as individuals than as a generation. "Whatever, Boomer!"

That was one of the biggest reason I was bitten by the blogging bug. I have kids who don't know what they don't know. They cannot hear what I can impart until they get punched in the nose.

There is no guarantee that I will be around when that happens. But they say the Internet is like cellulite, it is forever. Maybe some of these posts will still be out there.

Amazing!

I had two opportunities to impart "Dad wisdom" today.

One of my kids called me up. "My vehicle is a piece of junk. I need to replace it."

I agreed "Yep, the most expensive car you can have is the one that causes you to lose your job because you missed work."

Well, he has his eye on a vehicle. It was listed exactly $1000 above Kelly Blue Book.

He had friends yanking him one way. He had friends yanking him another. The dealer told him that he had six customers chomping at the bit to buy the vehicle.

He called me and wondered if I had an opinion.

"The only person whose opinion matters is yours" I told him. "Not mine. Not your friends. Not customers who may, or may not exist."

Then I told him about "The point of indifference"

"There is some price where you truly don't care if you 'win the bid' or don't win it" I said. "Imagine you are shopping for a gaming computer and you see a system on eBay. You say to yourself, 'I am going to bid $200 dollars because if I get the system, then I will have a bargain. If I don't get the system then I still have ten, crisp, new $20 bills in my wallet and cash money in my wallet makes me happy."

"There is some number...or a range of numbers...that are a watershed. Oh, and get rid of the term 'win the bid' out of your mind. It isn't a matter of winning. The point-of-indifference means you 'win' whether you purchase the item or not. You either have the item or you have the money in your wallet...both are wins."

Rule-of-Seventy-Two

I was having a conversation with Belladonna regarding the advantages of chipping away at her highest interest rate student loan.

I asked her if she had been exposed to "The Rule of Seventy-Two" during her academic career. Sadly, she had not.

The-Rule-of-Seventy-Two is a way to approximate how long it will take for your principle to double if you are on the investing side of the equation or how long it will take for your liability to double if you are on the borrowing side.

One takes the interest rate and divides it into the number "72" and that approximates how long it take to double the principle. Simple, no? 

An 8% interest rate takes 9 years to double. A 9% interest rate takes 8 years. A 7% rate takes ten years. A 10% rate takes seven years. A 3% rate takes about 25 years and so on and so forth.

My brother, the accountant, rather grumpily tells me that it is more accurate to divide into "78" but most common interest-rates don't divide easily into 78.

Sure, Excel or any other spread-sheet can give you a higher degree of precision and can inform you for other time-horizons, but it is still very cool that you can estimate these things in your head.

Incidentally, those car loans for "Everybody gets credit at Joe Isuzoo Motors" can be as high as 25%. If you are forced to pay their rates and take five years to pay it off, then you are paying for the vehicle three-times over.

5 comments:

  1. The market is literally flooded with used cars. I would advise your son not to pay more than market value in this buyers market for any car. Indifference would be exactly the emotion to employ in his search for another vehicle. Even if he 'loses' this supposed deal on this car, there will be another one just as good tomorrow, and the next day, and so on.

    He should also employ logic. If a dealer REALLY had six other buyers clamoring to buy the car, it would already be gone.

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  2. There is a cousin to the rule of 72's. It is referred to as the rule of 74's or 76's when in the context of calculating return interest if you pay your loan off early it means it is and add-on contract whereby the assumption is that you will owe the original amount throughout the loan. They calculate the interest with that assumption and then add it to the loan amount, divide by the number of payments and there is your monthly payment amount. You just have to know that a 4% add-on contract is the same as an 8% simple interest contract. A simple interest contract is interest calculated on what the balance is that month which of course declines over the life of the loan.

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  3. Go to it rightly, full steam ahead.

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  4. Rule of 72...
    so... inflation at 4% means that in 18 years, your money is worth half?

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