August 31, 2012

Best of Blog Posts for Week of August 31st

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

Planet Money discusses What Americans Actually Do All Day Long, In 2 Graphics
Note for the full time employed people they look at watching TV is just 1hr 34min.

They also share good news on Household Debt : Falling. Slowly.

And they also had what I thought was an interesting story about What The Apollo Astronauts Did For Life Insurance

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August 30, 2012

Teenage Labor Participation versus Unemployment and Inflation

I recently took a look at the labor force participation rate for teenagers age 16 to 19 years old versus the minimum wage rate.   I found no correlation between the two.    Today I'll look at the teen labor participation rate versus unemployment and inflation.  

Unemployment is from historical A1 tables at the BLS.   Inflation index is the CPI from the BLS.   For inflation I took the annual sum for each year.

First here is the teenager labor participation rate versus unemployment :

I do think there is some correlation here.   Just looking at the chart it does seem the labor participation rate and the unemployment generally move in opposite directions to some degree.    Lets look at the year to year % change for each and plot those together to see what that looks like :

I think that makes it a lot clearer.   For the most part the two values are usually moving in opposite directions.   When employment goes up we get more teens dropping out of the labor force and when employment goes down we see more teens in the labor force.      That generally makes sense.    How easy it is to get a job is going to impact the % of teenagers who try to get jobs.   If the economy really sucks then more teens will sit at home and not even try but if there are 'help wanted' signs all over then more teens are likely to end up working.

Next lets look at the teen labor participation versus inflation:

I don't see any real solid relationship between inflation and teen labor participation.  But high inflation periods are not common.  

Bottom Line :  To me it does seem there is a pretty strong correlation between the unemployment rate and the teen labor participation rate.   On the other hand I don't see any particular relationship between inflation and teen labor participation.

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August 29, 2012

Trends in Unemployment versus Discouraged, Marginally attached and Underemployment

Normally when people talk about the unemployment rate they are discussing the officially reported unemployment figure.   For example the latest figure for July 2012 was 8.3%.    Once in a while someone will say something along the lines that if you include discouraged or unemployed workers then the "REAL" unemployment rate is much higher.      The government does track alternate measures of unemployment that include other groups.  In addition to the normal unemployed there are also discouraged workers, workers who are marginally attached to the workforce, and people who are working part time cause thats all they can find.   

Its not as if these groups didn't exist before we hit the recession.   And I don't recall people talking about the alternate measures back in '07 when unemployment was low.   Of course I'm not saying that the alternate measures are meaningless or that they should be ignored.   But they are just different ways to look at individuals who are either not working for various reasons or who are not working much.   In good times and bad there are always going to be a certain % of the population that falls into these various groups for varying reasons.   Generally speaking they each get larger during bad economy and shrink when the economy is doing well.

The BLS site has historical lookup for the Table A-15. Alternative measures of labor underutilization
There we can find the official unemployment figure as well as the totals including discouraged workers, marginally attached workers and the underemployed.  

U-3 : Official unemployment rate.   This is the normal number we hear reported.
U-4 : Unemployed + Discouraged
U-5 : Unemployed + Discouraged + Marginally attached
U-6 : Unemployed + Discouraged + Marginally attached + Underemployed (part time for economic reasons)

The different groups are described as : "Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work. Persons employed part time for economic reasons are those who want and are available for full-time work but have had to settle for a part-time schedule."

For July 2012 the numbers are :
U3 = 8.3%, U4 = 8.8%,  U5 = 9.7%, U6 = 15.0%

Therefore the individual groups would be :

Unemployed = 8.3%
Discouraged = 0.5%
Marginally attached = 0.9%
Underemployed = 5.3%

So there are quite a few people who are considered discouraged, marginally attached or underemployed in addition to the people who are in the normal unemployed category.

I'm going to look at the unadjusted numbers for a few years and pick out the annual rates.   I'll subtract the different groups to see how much of the labor force each of them represents.

Here's the data :

unemployed discouraged marginal under employed SUM
2002 5.8% 0.2% 0.7% 2.9% 9.6%
2003 6.0% 0.3% 0.7% 3.1% 10.1%
2004 5.5% 0.3% 0.7% 3.1% 9.6%
2005 5.1% 0.3% 0.7% 2.8% 8.9%
2006 4.6% 0.3% 0.6% 2.7% 8.2%
2007 4.6% 0.3% 0.6% 2.8% 8.3%
2008 5.8% 0.3% 0.7% 3.7% 10.5%
2009 9.3% 0.4% 0.8% 5.7% 16.2%
2010 9.6% 0.7% 0.8% 5.6% 16.7%
2011 8.9% 0.6% 0.9% 5.5% 15.9%

And here's a picture version :

OK, so as you can see the different groups go up together.    When the job market gets bad all of them grow a bit.   In fact the normal unemployment and alternate unemployment figures are roughly proportional to one another.   Consider the difference from 2006 and 2011.  In 2006 the numbers were all very low but then by 2011 they were all quite high.   If we look at how much each group increased from 2006 to 2011 we get :

Change '06 to '11
Unemployed 48%
Discouraged 50%
Marginal 33%
Underemployed 51%

So you can see they grew about the same rate mostly with the exception of the marginally attached group. 

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August 28, 2012

Teenage Labor Participation versus Minimum Wage

The other day I wrote about how we've seen a 2% drop in the labor force participation rate.   One group that dropped significantly was teenagers age 16-19 years old.   PK commented in reply to that article and suggested I take a look at the teenager labor force participation rate as it relates to the minimum wage rate. 

Historical lookup table for the Table A-1. Employment status of the civilian population by sex and age
I found the history of minimum wage rates at The Digerati Life.

Lets look at how the two relate over the past 50 years : 

(click image for full size)

Looking at that chart I don't see any kind of consistent correlation between the labor force participation rate of teenagers versus the minimum wage.

During the 60's and 70's both the labor force participation rate and the minimum wage were on steady upward slopes.   Then in the 80's and 90's the labor force mostly flattened out with some bumps up and down.   Yet the minimum wage was flat most of the 80's and 90's but there were a couple increases.   In the 21st century the labor force rate has been declining steadily while the minimum wage has been flat then up then flat again.

Part of the time they are going in different directions and other times they go in the same direction.   Its not at all consistent.   I don't see any real relationship between the two values.

We just went through a major recession so I wondered if the teenage labor force participation rate was impacted by recessions in general.    The average change in labor force participation during years we had recessions was -0.7%.    For other years the average change was 0.0%.  

Lets plot the recession years on the graph of teenager labor force participation.

This looks more like  a trend to me.   During the 60's and 70's the labor participation for teenagers was going up steadily but flattened during the recessions.   Then in the 80's and 90's the participation rate dropped along with the recessions but was inching up otherwise.    In the 2000's the rate has been dropping and it dropped the fastest during the most recent recession.

Bottom Line :  I don't see any real correlation between teenager labor force participation rates and changes in the minimum wage rates.    I do think there is some direct impact on teenager labor force rates and slowed economy during recessions.

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August 27, 2012

$5 MP3 for FREE by Depositing $20 in Coinstar

If you deposit $20 in coins at a Coinstar location and reimburse it for an Amazon gift card then you can get credit for $5 of MP3's for free.

Follow this link for the deal on Amazon :
Pour $20 for any Gift Card at Coinstar, get $5 in MP3s

The deal is good from August 27th to September 23rd.

Not all Coinstar locations give out

I found this deal on Fatwallet
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August 25, 2012

2% Drop In Labor Force Participation -- Who Quit Working?

The other day DQYDJ discussed how the employment-population ratio has dropped below 59% and hasn't really been going up.   The cause of that is a drop in the labor force participation rate as well as the changing unemployment rate.   That raised an interesting question in my mind...  Why did the labor force participation rate drop 2%?  

Labor Force Participation (click to enlarge)
For 30 years between 1988 to 2008 the labor force participation rate was about 66% give or take 0.5%.   Between 2008 and 2011 about 2% of the nation dropped out of the labor force.  (see chart to right)  It was a sharp drop which seems related to the recession.   That 2% equates to about 4.5 million people who are not working now  versus 2008 after adjusting for population growth.    In 2008 there were about 233.7M people in the civilian population over 16 years old and 66% of them were in the labor force.   Then in 2011 the population was 239.6M and 64.1% of them were in the labor force.  If we still had 66% participation rate in 2011 then that would equate to +4.5M more people in the labor force versus not.

Most of this data I discuss today is from the A-1 Employment status historical tables from the BLS. 

People in the Labor force versus Not In the Labor Force
The labor force includes people who are employed as well as those who are unemployed.   When you say someone is not participating in the labor force that means they are not employed but they do not wish to be employed or are disgruntled with the labor market enough to not even try to look for work.   So if we totally set aside the unemployed people and look at the people who aren't even in the labor force then theres now 4.5 million more people who simply aren't counted in the labor pool.

I'm going to discuss various groups of the population and how they contributed to the change in the overall labor force participation rate.    The numbers I'm using all come from the BLS.    I'm breaking down the total number of people who dropped out of the labor force and the percent this is of the net change in labor force for the total population.   These groups do have some overlap so the percentages will overlap some, for example I discuss people age 20-24 and then also discuss college students and theres certainly overlap between those groups.

1.3 Million Various Discouraged Workers -- 29%
A large chunk of the additional 4.5 million people who don't participate in the labor pool are in the group who are not in the labor force but who DO want a job.  In fact there are about 1.3 million more of those people now which accounts for about 29% of the total change in labor force participation.   About half of these people have not searched for work for over a year.    About 20% of them are 'discouraged' from the job market.   10% are currently not available to work.   The other 20% are mixed reasons like illness, helping family, returning to school, etc.

Side note :  Unemployed versus Discouraged
Above I discussed 1.3 M people who are not in the labor force yet who want a job.   Now you might ask : "if someone wants a job and doesn't have one then doesn't that mean they are unemployed?"     Well no.    The people who are not in the labor force yet want work are not included in the unemployment figures.    If someone stops looking for work for long enough they are dropped out of the unemployment figures and moved out of the labor force.   The unemployed portion of the labor force are people who are actively hunting for work on a regular basis.   The people who are not counted in the labor force yet who do want work are not actively job hunting.

800k Fewer Teenagers Work -- 18%
Teenager Labor Participation (click to enlarge)
About 18% of the drop in labor force participation is from higher % of teenagers who are not in the labor force.   The % of teenagers (age 16-19) who participate in the labor force has been dropping steadily.   Between 2002 and 2011 their participation rate dropped from 47% to 34%.  (pictured at right)   Thats a much larger change than the general population.   From just 2008 to 2011 the # of non participating teenagers increased 800k.   The total labor force dropped from 66% to about 64% and that equates to around 4 million more people who aren't in the labor force.   The drop in teenager labor force participation doesn't seem like a reaction to the recession alone.  It appears to be a longer term downward trend.

650k in Early Twenties -- 15%
If you look at the age group from 20 to 24 years old they also had a steeper drop in their labor force participation rate.    In 2008 their participation rate was 74.4% and by 2011 it was  down to 71.3%.  Thats a faster drop than the overall population.   About 650 thousand more people age 20-24 were not in the labor force in 2011 versus 2008.   That 650k amounts to about 15% of the total change.    This group had seen decreasing participation in the labor force already.   From 2000 to 2008 the participation dropped from 77.7% to 74.3%.   SO it was already going down about 0.4% a year.   However from 2008 to 2009 it went down 2.7% which is far faster than the existing trend.   This group quit the labor force partially due to existing trends but mostly due to the recession.    I believe a major on this age group is the impact of college enrollment trends.

288k are probably non working College Students -- 6%

Fewer younger people aged 18-24 are working.    We might assume that this could be due to higher college enrollment.   However enrolling in college doesn't necessarily mean you aren't in the labor force.  In fact as of 2011 about 39% of the students in college or high school were in the labor force.  Yet there is a lower labor force participation among college students as compared to people who are not students.   If we look at total college enrollment, I find that in 2008 we had about 18.6M students and then by 2010 it had increased to 20.2M.   2010 is the most recent year I could find data.   As a % of the population that means we went from 8% of adults in college to 8.5%.   This is about 1.1M more students than population growth alone would have caused.   Now if we assume that about 40% of those students are in the labor force then this would result in about 288K fewer people in the labor force due to higher college enrollment.    This 288k would be around 6% of the total drop of 4.5M in labor force participation rates.

Aging population -- 10%
From 2008 to 2011 the number of people over age 65 that are in the population increased.   When we look at labor force figures this increase is amplified since it excludes the children.   Among the population over age 16 the portion who are over age 65 increased from 15.9% in 2008 to 16.6% in 2011.   So over those 4 years thats 0.7% more people who are over 65 among the potential labor pool.   People over age 65 are usually retired and work at much lower rate than the people age 16 to 64 years.   This aging of the population due to the Baby Boomers hitting retirement has contributed to about 0.2% drop in the labor force participation rate.

The Whole Picture

These are the major groups of demographics that I can find data on and try and determine how their individual labor force participation has impacted the entire populations labor force.  

Again, keep in mind that there is overlap between those groups.   I've figured the numbers myself using the BLS  data.   I also tried in general to account for population growth while doing so.

Now lets look at some other demographic factors and how they are or aren't leaving the workforce faster.

More Men then Women -- 63% Men and 37% Women

If you just look at the men over age 16 versus the women over age 16 a much larger number of men dropped out of the work force. 

For men in 2008 the population was 113M and it went up to 116M in 2011.  The percent of men who don't participate in the labor force went from 27% to 29.5%.   Thats a total of 3.75M more men who are not in the workforce.   If the labor force had stayed steady at the 2008 level then we'd have had about 2.88M more men working based on 2011 population.   That 2.88M change is 63% of the total.

For women on the other hand the population grew from 120.6M to 123.3M between '08 and '11.   In '08 we had 40.5% of women who didn't work which went up to 41.9% by 2011.   That is a smaller change then the men.   The total number of women who don't work grew by 2.75M.   If we held the labor force participation rate steady at 2008 levels then with the 2011 population of women we'd have had 1.69M more women working.    That is about 37% of the total.

There are different longer term trends in labor force participation for men and women.   Men have been on a downward trend over time and from 1990 to 2000 the labor force participation rate dropped from 76.3% to 74.6%.   Then from 2000 to 2010 it dropped from 74.6% to 70.8%.   For women on the other hand the labor force was growing in the 90's and it went from 57.4% in 1990 to 59.8% in 2000.  But then it turned around and dropped to 58.4% by 2010.     Both men and women saw a fairly steep drop around 2008-2009.    From 1990 to 2007 the rate dropped an average of 0.19% annually for men.   With the recession from 2008 to 2011 the rate tripled to an annual drop of about 0.6% a year on average.  

Early Retirement is NOT a Factor
One theory about a lower labor force rate might be that older people are dropping out of the workforce early.   If this were true we'd see a larger spike in the change for people around age 55-64.    However, there has been little change in the labor participation rate for people 55 to 64 years old from 2008 to 2011.   For that age group the labor force participation rate went from 64.5% to 64.3%.    Thats much less of a change than the general population group saw so this group actually stayed in the labor force more than other age groups.   While some people might be signing on for social security early rather than continue to job hunt, that is not the overall thread and its not adding to the over all drop in labor force.

Fewer People are Retiring at 65
Over 65 labor force (click to enlarge)
In fact if we look at people age 65 and older their participation rate in the labor force has actually increased by about 1.1% from 2008 to 2011.     In 2008 the participation rate for people over 65 was 17.2% and by 2011 it had grown to 18.3%.   While you might expect this is due to the recession its actually been a trend for over a decade now.  (see graphic at right)    In the 1990's the participation rate for people over 65 years old was around 11-12% with a very slight upward trend, then around the year 2000 it hit 13% and has been going up since then.    Theres no spike around 2008 during the recession, its just a gradual increase over the decade.    This factor actually lessens the impact of the Baby Boomers retiring on the overall labor force participation rate.    If Baby Boomers retired at the same rate as they did in 2008 then there would be about 400 thousand more retirees in that age group and the national labor force participation rate would have been about 0.2% lower than it is.

Change for Disabled People On Par with General Population
One thing I've heard is that more and more people are signing up for disability benefits.   That could explain some people dropping out of the labor force.   However I don't see strong evidence of this.   In fact the BLS data indicates the % of the population with disabilities is down marginally from 2008 to 2011.   In 2008 they counted about 26.9M people with disabilities and by 2011 it was at 27.3M.   However as a percent of the total population the rate went from 11.50% to 11.41%.    But another thing to consider is the labor force participation rate of the disabled population.   Most disabled people do not participate in the labor force.      The % of disabled people who participate in the labor force was about 23% in 2008 and down to 20.7% in 2011.    That 2% change is about the same change we see in the overall population.   The total number of disabled people who don't work went up about 470k after figuring for the population growth.   That amounts to 10% of the total increase which is proportional to the % of the population that is disabled.    The labor rate did not drop due to people switching to disabled status.

Medium Education Hit Worse than College Grads and Dropouts

People with four year college degrees stayed in the labor force a bit more than people with Associates degrees or just a high school diploma.  Interestingly the people with less than high school didn't change much in their labor force participation rate.  But a far lower portion of that group works in general so its not anything for them to be thrilled about.   Here is the comparison of labor force participation rates for people over age 25 in different education attainment levels :

2008 2011 drop
Less than High School 46.9 46.8 -0.1
High School 62.8 60.2 -2.6
Associates 76.1 73.1 -3
College Graduates 77.9 76.1 -1.8

I'm not going to take any guesses about why the trends differed among education groups.   Part of it is probably due to demographics.

Bottom Line :   There are a variety of reasons that the labor force participation has dropped since the recession.   While it may be tempting to attribute it to particular factors like aging Baby Boomers or discouraged workers, its actually a combination of several varying as well as continuation of existing trends.

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August 24, 2012

Best of Blog Posts for Week of August 24th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

MyMoneyBlog points us to ThredUP Used Kids Clothing: $10 Free Credit

Planet Money looks back at  Child Labor In America, 1920

GetRichSlowly has a Reader Story: In Defense of Clutter
Personally I think personal finance bloggers tend to criticize owning 'stuff' far too much.

RitHoltz shares Historical US Tax Rates Poster which has the top marginal tax rates for personal income tax, corporate and capital gains from 1916-2011.

RetireBy40 who has recently retired asks What does it mean to be retired?

Money Crashers Personal Finance Round-Up: Give Your Finances a Sporting Chance
featured my article It Doesn’t Really Cost $287,000 to Raise a Child

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August 23, 2012

The Trend in Natural Gas Prices

I used to mull around the idea of changing my home furnace from electric to natural gas.   But then for several years gas prices kept going up and up while electricity wasn't increasing much at all.   I projected that trend into the future a few years and saw that it wouldn't take long before gas was not cheap enough to warrant a new furnace.   I mean if gas is 1/2 the cost of electricity today thats great but if gas doubles in price in 5 years then I wouldn't have saved much.   The price of natural gas has turned around in the past couple years.  Whether or not I should switch to natural gas to heat my home or power our appliances would depend on the future natural gas trends.   Given that, I should have some idea on the recent history and forecasted future of the price of natural gas.

Last year I wrote an article about the history of natural gas prices from 1967 to 2010.   You can see the trend there.   You can also look at the annual residential prices from EIA with latest data and you can see residential gas prices were going up steeply from 2000 to 2008.   In fact from 1999 to 2006 the price doubled which equates to 10% compound annual growth.  But also you can see there that prices have dropped about 20-25% for residential customer in the past 3 years or so.

Those were residential prices.   EIA has wellhead prices too which are at the producer side.  Well head prices have dropped in half in the past year.  In May 2011 it was $4.12 per 1000 cubic ft and by May 2012 it was down to 1.94.

There is of course a relationship between wellhead prices and residential prices but they don't move in lock step and change the same % at the same time.   Residential prices include fixed overhead costs and other factors that don't change based on the raw wellhead gas price.   Plus generally utilities don't and often can't simply raise or drop prices day to day.  The utility rates are often regulated by state agencies that have to approve price changes. We will probably see further residential price decreases as wellhead prices drop but its not going to be cut in half like the wellhead prices.

OK so natural gas prices were going up steeply for year over year for around a decade and then in the past few years they started dropping.   Does this mean its a good idea to run out and buy a gas furnace?    There isn't going to be any solid answer to this because I can't tell the future.    But we could get a better idea on what natural gas prices might do by getting a better idea of why they are dropping. 

First, why did natural gas prices start dropping?    I would have guessed that it was simply due to the recession and market forces caused lower demand and prices dropped due to it.   However it appears theres a bigger non-cyclical reason gas prices have dropped.    The website article Natural Gas Goes Down in Flames says for the price increase "You can blame the new “fracking” technology, which in the last four years has unlocked a 100 year supply of natural gas in shale fields,...".    A doubling in supply availability would have a huge impact on prices and it seems clear that this is the key reason prices have dropped.    In addition to that, a Businessweek article points out that oil drilling produces natural gas as a byproduct so higher oil prices cause more oil drilling and also increases natural gas production.   Now that is more of a cyclical impact but it only worsens the current drop in natural gas.

Given that gas prices have gone down due to increased supply, whats that tell us about the future of the prices?   There is a pretty big glut in production right now and the producers are trying to cut production to decrease supply and hopefully see their prices stabilize or go back up.   That Business week article also mentions how at current prices its hard for the gas producers to be profitable so I think we've likely hit a floor in prices.   Further the article also says : "There is probably a second 100 year supply out there, but with prices so low, what is the point in looking."    However I don't know how much truth there is to that idea, though its something to consider.

The amount of natural gas available on the supply side will impact prices.   The actual amount we can get is unknown.  There are estimates but they aren't perfect.   On one hand I find an article on Reason that suggests we could have 250 years worth of natural gas around the world and on the other hand Slate questions the 100 years worth currently estimated is accurate.   Its possible we could find ways to get even more natural gas in the future.    On the other hand its also possible that regulations could limit fracking and restrict the supply.   There is already a lot of talk about negative impacts from fracking.   I haven't followed that myself but its easy to see how public perception and legislation could limit an energy source, just look at nuclear energy in the U.S.  

I think you could make a reasonable prediction about the short term trend for natural gas prices.   Currently theres a glut of supply and prices have been trending down sharply.  It seems likely that prices will bottom before too long when the price hits the point that production costs make it unprofitable to produce gas.  It look like prices are likely to go up significantly in the short term for the next few years.   After that, the longer term future in 5 years or more is anyones guess as far as I'm concerned.   There are a lot of variables and unknowns that could cause natural gas to change in price in the long term.

My opinion is that natural gas will drop a bit and then stabilize over the next few years.   I wouldn't even attempt a guess on the price trend in the longer term.

Back to the original topic of switching my home furnace to natural gas..   For the short term I don't expect large increases in natural gas prices.   Therefore I could look at the current natural gas prices for my predictions on the return on investment in a conversion to natural gas for my heating.   However I have no idea on the longer term price trends for natural gas and this unknown is something I should consider when evaluating the financial return of a conversion to natural gas.
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August 20, 2012

Shopping for a Good Cheap Car Under $5,000

Occasionally I see people saying they can't find a good cheap car.   They insist that the cheap cars are not safe, or that they are unreliable or that they simply aren't to be found.  Now there are varying levels of 'cheap'.   If you're talking about $500 for a car then I agree thats quite hard to find anything reliable for under $1000 nowadays.   But if you look under $5,000 level I do think that still qualifies as pretty cheap and at that level it should not be too hard to find a good, safe and reliable car.

Today I'll run through an example of how I might search for a good, safe, reliable car under $5,000.
This is just one way to go about it.   But the point is to show some basic steps and methods of research that you could use to find a decent sub $5,000 car.

Total Cost of Ownership (TCO) for cheap used cars

I've said more than once that you should consider the total cost of ownership (TCO) of a car and not just the purchase price.   For new cars its easier to find the TCO.   However for older cars you may not find the data.   Without knowing the TCO you can either chose to just use sales prices and adjust it for your known costs or try and figure a TCO figure on your own.   Today I'm going to set the idea of TCO aside and assume you the cars have similar enough maintenance and operation costs.  Also some people really do have to worry about the out of pocket costs more than possible maintenance costs 3-5 years from now.   I plan to discuss how to figure TCO on your own in the future but thats another topic.

This is NOT meant as a total guide to car shopping.  Just an example of steps you might use to find a reasonably priced, fairly reliable car.  

Some basic points on hunting for cheap cars.

1. You don't need a new car for it to be safe.   Car safety changes gradually over years and theres no giant leaps from year to year in general.   Most 10 year old cars are just about as safe as a new car.   You should however check the safety testing for the cars and make sure they have good crash test results and verify they have airbags and the standard safety features.  
2. Reliability is important.  You do certainly want to look at the manufacturer reliability history. We want a cheap car but we don't want it to break down.  If we don't care about reliability then finding a cheap car is simple.
3. Higher but not too high mileage is a good sweet spot.   You don't want a car with too many miles as any car will eventually start to break down.  But you are looking for a cheaper car so low mileage isn't a realistic choice.   I'd shoot for a car with 75,000 to 150,000 miles.   Of course the fewer the better.
4. An older, low mileage car could be a great bargain.   Most people don't want 10 year old cars so their value is lower.   But there are older cars with low mileage.  If you can find a car with 50,000 to 75,000 miles that is older then could give you many miles of reliable driving for a good price.
5. Don't limit yourself to 1-2 brands.   Many people simply stick to their favorite car brand or buy Hondas since they're reliable.  If you're' looking for a good car that is cheap and reliable then limiting yourself to only a couple brands or models will keep you from finding some good cars.
6. Do a LOT of research.    I'm doing a quick and simple search today with what I consider basic research.  If I were spending up to $5,000 on a car I'd do a lot more research.   I'd want to check out JD Power, Consumer Reports, search on Craigslist and scour the web for all the information I can find.

Find Lists of 'good' cars

Of course this isn't a new topic and there are some lists out there for good cheap cars.   I searched Google and found a few.  These kinds of lists can give you a good starting point to find some good cheaper cars.   No sense in doing all the work from scratch if someone else has already done it.   However, I wouldn't simply rely totally on such a list and I'd put in some time to check out the cars in question myself. 

A couple lists I found for under $5000 cars are :
Top 5 Best Used Cars under $5000 from 2009 from Yahoo and  AOL Autos has an article Our Picks For The Best $5,000 Used Cars

Other lists are a little pricey but hey give some good ideas :
CNN Money had a list of Best Cars under $8000 but thats a little rich for our blood.
ConsumerReports has a list of cars Best in used car fuel economy but that focuses on fuel economy specifically and they only drop down to 'under $10000' level so those aren't especially cheap.

From the lists I come up with a short list of models and the minimum model years to look for :
Honda Civic >1994
Subaru Impreza > 2000
Hyundai Accent > 2003
Honda Accord > 1995
Toyota Camry >2002
Subaru Outback > 2000
VW GTI > 1999

This list is based on recommendations from a couple websites.    But if I were doing this for real I might want to check out the history of these brands a little more and make my own judgement.   I wouldn't just trust one source.   In the list when I say >1994 for the Civic for example, I mean models that are 1994 or newer.  So if a 1994 model is OK then I assume a 1995, 1996.. would also be good.   

Given this short list I go to and do a search for the make & model, year range and price maximum of $5000.
That only gives me two hits :
2002 Honda Civic with about 95k miles for $4900
2005 Hyundai Accent with ~90k miles for $5000

Cast a Wider Net for all cheap Low Mileage cars

Next I expand my search to other makes but limit it to only cars with under 100,000 miles on them.   I figure that most brands are pretty good now under 100,000 miles and should have some considerable life in them.   I also don't want to miss some bargains because I made my search too limited.  

If I search for cars under $5,000 with less than 100,000 miles, any year and any make I get 85 hits.

I picked out a few cars that might work :
1999 Chrysler Sebring with 60k miles for $5k
2004 Ford Focus with 90k miles $5k
2001 Saturn LW300 42k miles for $4k
1996 Dodge Intrepid 80k miles just $3000

I didn't look through the whole list and there may be some other good ones out there. 

Check Into Individual Car Reliability

I go to and look up the reliability reports for each of these cars :

 2002 Honda Civic = significant transmission problem, 4/5 overall
2005 Hyundai Accent = one moderate problem, 4/5 overall
 1999 Chrysler Sebring  = significant engine problems, 4/5 overall score
2004 Ford Focus = minimal problems, 5/5 overall
2001 Saturn L series wagon = several moderate problems 4/5
1996 Dodge Intrepid = couple significant problems, 4/5

Turns out that Ford has the best reliability record according to the data from Edmunds.   If I pick that Ford and put it on my short list then that gives me 3 good candidates to look at : 

2002 Honda Civic with about 95k miles for $4900
2005 Hyundai Accent with ~90k miles for $5000
2004 Ford Focus with 90k miles for $5000

I'm now a little wary of the significant transmission problems reported on that Civic.   I would probably want to research that issue a little more and see how common it is really if I want to keep the Civic on my short list.  

Going back to Edmunds. I can also check what they think these cars should be worth.
2002 Honda Civic = dealer retail $5100
2004 Ford Focus = dealer retail $4300
2005 Hyundai Accent = dealer retail $4500

The prices the sellers are asking are not too far off from what Edmunds thinks the cars should be worth at a dealer.  

What you might do next is call the sellers for each of these three and get some more information on the cars.   You might ask what kind of maintenance its had, why are they selling, what kind of driving its had, is there a CarFax report available, or similar questions.  This might help you cross a car off the list or add detail that make the cars more or less appealing.   For example if the dealer selling the Civic says it was "bought at auction" and they have no history and they dodge the question when you ask about CarFax then thats not so good.   But on the other hand if the dealer says the car has its full maintenance record from one owner and its been serviced at the dealer and they'd be happy to show you the CarFax then thats better.

Once you call the sellers and check them out you might then arrange to go see each of the cars in turn.   You could visually inspect them and take a test drive.  The condition of the cars is best to judge in person.   Photos on websites don't do a great job of showing rally what kind of shape a car is in.  I wouldn't go to see cars in person until I've got a short list of just a few, otherwise you're driving around town all week long looking at cars.  Its most efficient to only look at your top few choices.
Taking a test drive of the cars will also help you get a feel of how you like driving it and how it feels for you.   Just because a car has a good reliability record and is good 'on paper' doesn't mean you'll enjoy driving it. 

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August 17, 2012

Best of Blog Posts for Week of August 17th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

MyMoneyBlog gives a tip on using Otixo: Combine and Manage Free Cloud Storage

MMB also shares Zillow Map – Percentage of Underwater Homes By Zip Code
My ZIP is at 21%.  Whats yours at?

yet one more, MMB also gives us a tip to get Free 500 US Airways Miles With Toolbar Download

GetRichSlowly discusses being too nice and resulting in The Politeness Tax

fivecentnickel tells us about Free Museum Visits that are coming Sept. 29th.

Planet Money from NPR observes Everybody Always Thinks Inflation Is Higher Than It Really Is
I think they're totally right on this one.

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August 16, 2012

Why Don't Some People Have Bank Accounts?

You may have heard about the 'unbanked'.   The unbanked are people who do not have a bank account.   They don't have a checking or savings account.    The FDIC has a whole web site discussing the topic.   In December 2009 they wrote a report all about the demographics of and reasons for people being unbanked.

I've pulled out of that 2 specific charts showing why people don't have bank accounts.   There are 2 groups among the unbanked, first the people who have never had a bank account and second are the people who once had a bank account but do not currently.

First lets look at the never banked.  

(click image for full size)
Now the previously banked:
(click image for full size)
All this data is from the FDIC report dated Dec. 2009.   Note that the numbers add up to more than 100% because people could choose more than one reason so some people have multiple reasons.    The sum of each is about 137% so about 2/3 or more of the people only gave one reason.

As you can see for both groups the top reasons are lack of money, lack of need and high fees.    That seems to cover most people.   Past that though there are a variety of reasons people don't have bank accounts.  Everything from not trusting banks, having language problems and not having a bank nearby.
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August 15, 2012

Do You Accept Section 8?

If you are a landlord then its likely that you've been asked if you take Section 8.   We currently have a rental vacant that we're advertising and we've had three separate people call asking if we take Section 8.  My wife and I do not take Section 8.   Thus far we've not wanted to deal with "the hassle" of it.   But by not taking it we are missing out on an under served portion of the rental market.   If you're a landlord then you should know about Section 8 and how it works.  

What is Section 8?

Section 8 is a housing voucher program where the government helps subsidize the rent payment for families with low income.   The Housing and Urban Development (HUD) department runs the Section 8 program.   They call it the Housing Choice Voucher Program Section 8.   The system is funded by HUD but administered at the local level by public housing authorities (PHA).   Generally the program is set up so that the family will pay up to 30% of their gross household income towards the rent and utilities and then the government will pay the rest of the rent.  So for example if a family has $2000 income then they'd pay up to $600 in rent.  If fair market rents are $1000 then the government will pay the remaining $400 via the Section 8 voucher.   The tenants pick the rental they want independently so they're free to live in any rental that accepts the vouchers.

Do you Have to Accept it?

Generally landlords are not required to take section 8 vouchers.   Federal law does not require landlords to take Section 8.    However there are some states or cities that may have laws mandating that you do not discriminate based on such a program and/or simply require that landlords accept Section 8.   While in general its not mandatory in most areas, you should check your local laws to see if its optional or not.

What does a Landlord have to do?

If you do want to take section 8 then theres a few things landlords need to do.   First is that the property must pass a HUD inspection.     The inspection ensures that the house meets HUD Housing Quality Standards.  The inspection checklist doesn't look bad to me and is mostly concerned with basic safety features.   They do have particular attention to lead based paint so that could be a issue in older houses.    In addition to the inspection the landlord also has to maintain the house in a satisfactory manner.   This part shouldn't differ significantly from normal laws that already require you to keep the property safe and habitable but there could be some details that are different.

- Portion of the rent is automatically paid by the government
- Cater to a specialized renter audience, there may be more tenants with section 8 vouchers than landlords willing to accept it.
- Tenants may be more likely to stay after they find housing that accepts Section 8.
- Good rental rates, you can charge the fair market rent which is usually fairly good rent rates.
- Have to submit to the government inspection.
- Extra scrutiny of your rental by the housing authority.

Basic Steps for Section 8 Rental

1. The family applies for and gets Section 8.  This is usually a difficult thing for the low income family to get and theres usually waiting lists.
2. You rent your property and the tenant finds it.  
3. You agree to rent to the tenant and accept their section 8.
4. You and the tenant fill out a government form.
5. You schedule an inspection with the housing authority.   They come out and inspect your house.
6. Assuming your house passes inspection and your rent isn't too high then you sign the lease with the tenant.
7. When the tenant is moved in you will get a portion of the rent from the tenant and a portion direct from the housing authority.

What the government does and does NOT do.

For section 8 housing the government pays a portion of the rent and inspects the housing.    Thats mostly it.   The government housing authority does not screen tenants and they do not match renters and landlords.   As a landlord you will still need to property screen the tenants, check references, etc.   You should not assume that just because someone has a section 8 voucher that they are in any way screened by the government as thats not part of the process.

Are they good tenants?

This is a topic with a lot of disagreement.   Some landlords dislike Section 8 and have a negative stereotype of the type of tenants they get.   Other landlords are perfectly happy with Section 8.   I'm sure it varies as much as anything and you can get good or bad tenants with Section 8 just like you can get good or bad landlords.   I personally would not want to stereotype the tenants nor develop prejudices.   And keep in mind that in some areas you are legally banned from discriminating based on Section 8.

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August 13, 2012

Been Busy

Sorry I haven't posted any real articles for about a week now.    I've been busy with a few things at work and home so I just haven't had the time to get anything written.   I should hopefully be back on track sometime later this week.

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August 10, 2012

Best of Blog Posts for Week of August 10th

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

retireby40 discusses How early retirement will impact my Social Security Benefit

FMF jumps into rentals with My Road to Becoming a Landlord

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August 6, 2012

Finally A Cheap Electric Car : Mitsubishi's i-MiEV

Thus far electric cars have not been particularly cheap or ultimately practical financially.  Chevy Volts cost about $40,000 and the Nissan Leaf is about $35,000.   Even with the hefty $7,500 federal tax credit the electric cars have not been especially cheap to buy. 

Mitsubishi has a new electric model named the i-MiEV.   MSRP on the iMiEV is $29,125.    After the $7,500 tax credit you end up paying $21,625.  [edit: Clearly 'cheap' is a relative term.   I've never paid over $15,000 for a car myself, but as far as new cars go and cost efficient cars like electrics, this is cheap.]

When you figure in the savings on fuel the i-MiEV becomes very practical.    The TCO cited by Yahoo is just $25,547 for 5 years.    They don't seem to say, but I think the TCO figures in the price after the federal tax credit.

The $25,547 TCO for the Mitsubishi i-MiEV makes it one of the cheapest cars to operate.   In fact it might be the cheapest new car on the market in terms of TCO compared to all gasoline, electric and hybrids.

I found a list of best TCO cars from Kelly Blue Book.  They have the Nissan Versa as the cheapest TCO coming in over $29,000.     If anyone knows of a cheaper TCO new car, let me know but I can't find one. 

Of course you can do better with used cars but I'm trying to compare apples to apples.  I like to buy used cars myself and I recommend it as a good frugal tactic.   If you wait a few years you might find a good deal on a used electric i-MiEV.   But these are brand new models so I can only compare to new to new.

State incentives
In addition to the federal $7500 credit there are also various states that also have more rebates or tax incentives.    Some state incentives are minimal like waiving your license fee or emission testing but some states have large credits.  Colorado residents are apparently eligible for up to $6000 or $7500 tax credit.   Georgia,  Illinois, New Jersey, and Utah have state credits ranging from $3000 to $5000.

Other costs
On the down side, I don't think the TCO figures in cost to install a 240V charger.    Most people will probably want a 240V charging station in their house if possible.    The 120V charger takes about 22 hours to charge the car and the 240V charger takes only 7 hours.    The charging station costs about $1000 plus installation.    Also, I believe the TCO figure would assume a national average electricity cost of 11-12¢ per kWh.  Mitsubishi's FAQ says it will cost about $3.60 to go 100 miles assuming 12¢ per kWh.   If your electricity is much more or less then that will impact your costs and the TCO.

Don't Worry about battery life

One of the common complaints or worries about electric cars is the lifespan and replacement cost of the battery.   Its reasonable to worry about battery life and costs.   But generally with hybrids and electric cars the concerns over battery life is full of misinformation, myth and confusion.   The battery in the i-MiEV is backed by a 8 year / 100,000 mile warranty.   That means that even if there is a premature problem it will be covered by Mitsubishi.   And the fact they are giving such a long warranty is clear evidence that the battery should last.  

Its a Small car
The car is a smaller car and does not have a lot of interior space.   It is also limited range vehicle and Mitsubishi claims a range of 62 miles but of course that kind of thing varies depending on use. Edmunds has a full review  of the i-MiEV.  They say they could only get it up to 82 MPH on the freeway.   Thats well above the speed limit but if thats the maximum speed it may be difficult to get it up to freeway speeds.    The size and power seem much more suited for city use.    This car is clearly not to everyone's tastes and needs, but for a lot of people looking for a practical and cheap car that doesn't guzzle gasoline the i-MiEV may suit your needs.

I'm glad to finally see an electric car that is practical financially.   I personally like the idea electric cars and hope to see more Americans buying them so we can reduce our dependency on foreign oil.   I'm not in the market for a car myself so I won't be buying one.    I also have to be honest that I don't know if I'd buy such a small car, but I'd at least consider it as a 2nd commuter car to supplement a full size family car to share between my wife and myself.

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August 5, 2012

Do you Have to Pay Taxes on Tuition Paid For by Your Employer?

Like many companies my employer has some free education benefits.   They will pay for me to go to graduate school assuming I get it approved.   I've heard its harder to get approval nowadays but theoretically I have the potential benefit to get free tuition.   Skimming over my employers website they mention potential tax implications.  

You may or may not have to pay taxes on tuition that your employer pays for you.
Generally here's the short answer :

  • If the benefit is under $5,250 then it should be tax free.
  • If the education provided is worth more than $5,250 then you may have to pay income tax on the amount over $5,250.   
  • If the benefit is required as part of your job then it may also be entirely tax free.

IRS Publication 970 addresses employer provided educational benefits.   There it says that

"If you receive educational assistance benefits from your employer under an educational assistance program, you can exclude up to $5,250 of those benefits each year. This means your employer should not include those benefits with your wages, tips, and other compensation shown in box 1 of your Form W-2. This also means that you do not have to include the benefits on your income tax return."

and then
"If your employer pays more than $5,250 in educational assistance benefits for you during the year, you must generally pay tax on the amount over $5,250. Your employer should include in your wages (Form W-2, box 1) the amount that you must include in income."

BUT they also mention a 'working conditions fringe benefit' saying " However, if the benefits over $5,250 also qualify as a working condition fringe benefit, your employer does not have to include them in your wages"   Then they point to Publication 15-B which covers taxation of fringe benefits.

In pub 15-B they say :

"Certain job-related education you provide to an employee may qualify for exclusion as a working condition benefit.  To qualify, the education must meet the same requirements that would apply for determining whether the employee could deduct the expenses had the employee paid the expenses.   The education must meet at least on of the following tests.
  • The education is required by the employer or by law for the employee to keep his or her present salary, status, or job. The required education must serve a bona fide business purpose of the employer.
  • The education maintains or improves skills needed in the job.
However, even if the education meets one or both of the above tests, it is not qualifying education if it:

  • Is needed to meet the minimum educational requirements of the employee’s present trade or business,
  • Is part of a program of study that will qualify the employee for a new trade or business."

All right thats pretty wordy.   Basically what it means is that IF the education is necessary to continue your current job then it can be a tax free benefit.   Also they say that education to obtain your current job or a different job doesn't qualify.

You might ask how they can count education required to maintain your job but exclude education to meet the minimum requirements of your job.     I believe the difference there is renewing your current level of education versus obtaining the level.  

Lets look at some examples
Lets say my company goes out and hires an engineer to do regulatory testing based on government rules.   To do this testing you need a special certification.    Every year you have to go take a week long refresher course and pass a test.   That week long class costs $15000 (expensive, I know) and the employer pays it.    You can't be a regulatory testing engineer in the industry without that certification.   This is one of the situations that meets the first bullet of education that is required by the employer or by law to maintain your current job.   The entire $15,000 amount is a tax free condition of working.

You're a civil engineer working for a construction company.   A new piece of software relevant to your job comes out and you take a course at the local university to learn how it works.  This would be a tax free benefit related to your job since it maintains or improves skills related to your job and it isn't something to qualify you for a different occupation nor a minimum requirement for your current job.

Now lets say my company goes and hires a senior in college a semester before they graduate.   They give this new hire a job as a regulatory engineer.   The new hire still hasn't graduated from college but the company is short of staff and decides to get a jump start on training the new hire.  They pay $10,000 for the new hire to finish school and $15,000 to take the certification class.  This new hire hasn't obtained the minimum requirements for their job and this would make the fringe benefit a taxable  item.   The total benefit was $25,000 but the first $5,250 is tax free.   That means the student could owe taxes on  $19,750 of the education benefit.

I am working as an engineer but I think I might want to instead be a pastry chef.  My employer pays $10,000 for me go to to night classes in culinary school.   This education has nothing to do with my current job and is intended for me to get a new career entirely.   This would be a taxable benefit.   I'd have to pay taxes on anything over $5250.  I'd have to pay taxes on the $4750 above the tax free amount.

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August 3, 2012

Best of Blog Posts for Week of August 3rd

Every Friday afternoon I share some of the more interesting or notable posts that I have seen in the personal finance blogs and other sources for the past week.

Bargaineering covers 2012 Sales Tax Holiday Scheduled Dates

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August 2, 2012

FREE - Personalized Greeting Card from

By using promo code FRIEND12 you can get a free personalized greeting card from   The offer is good til 8/5.   Shipping is even free.

Sounds like a good deal.   I haven't used them yet myself, but this should be a good way to try em out.

If you don't have a need for a card right now you can always order a Christmas or birthday card in advance and hang on to it for a few months.

I heard about this one on Slickdeals

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Car Cost : MSRP versus Total Cost of Ownership

 Normally when people shop for cars they look at the sticker price primarily.  However it is also very important to consider the Total Cost of Ownership (TCO) for a car and not just the up front sticker price.   Its been a few years since I talked about TCO.  

Say for example you had 2 cars to choose from and both cost $17,000.  If one of the cars had 20 MPG and the other got 40MPG then the car with better mileage would be cheaper to operate and therefore cheaper overall.    Expanding on that idea the TCO number figures the total cost of operating a car including fuel costs, insurance, financing charges, maintenance, and depreciation.  

Lets look at how this concept can impact your shopping for cars.    I'll look at a selection of low MSRP cars and some hybrids as well.   I used Yahoo Auto website to get the MSRP and TCO figures.   These are new 2012 model cars and I limited the filter to cars that seat 4 people minimum.   I picked a few cars to do an example comparison but this is by no means any kind of complete list.

Note : If you're looking for a cheaper option then you should consider used cars.   Edmunds has data on used cars and they figure a TCO number too.   I'm using new cars on Yahoo for the example simply cause they have TCO data on more cars and its easier to compare 2012 models across the board.

OK... on with the example. 
Here is a selection of cars with low MSRP and some hybrid models:

Nissan Versa $10,990
Hyundai Accent $12,545
Ford Fiesta $13,200
Kia Rio $13,400
Chevy Sonic $15,065
Toyota Yaris $15,140
Kia Forte $15,200
Mazda 3 $15,200
Honda Insight $18,500
Toyota Prius C $18,950
Toyota Prius II $24,000
Honda Civic Hybrid $24,200

As you can see the hybrids are not the cheapest cars on that list as far as purchase price.   But do the hybrids cost less overall based on TCO?

Lets look how the cars rank as far as TCO on an annual basis :

Nissan Versa $5,691
Hyundai Accent $5,764
Kia Rio $6,068
Toyota Prius C $6,149
Ford Fiesta $6,203
Kia Forte $6,321
Toyota Yaris $6,366
Honda Insight $6,623
Chevy Sonic $6,789
Mazda 3 $6,873
Toyota Prius II $6,950
Honda Civic Hybrid $7,206

The Nissan Versa and the Hyundai Accent are still the cheapest cars on the list but after that the order changes.    Notice that the Toyota Prius C jumped to #4 on the list.  

But what if you drive a lot?   Hybrids with their high gas mileage ought to do even better in a comparison that assumes higher mileage.   The standard TCO figures are based on the assumption that you drive 15,000 miles a year.   But you can also choose to look at TCO based on 20,000 miles per year.   If we do that then the list gets changed a little more :

20k miles
Nissan Versa $7,537
Hyundai Accent $7,699
Toyota Prius C $7,849
Kia Rio $8,065
Toyota Yaris $8,179
Ford Fiesta $8,217
Honda Insight $8,369
Kia Forte $8,538
Toyota Prius II $8,749
Chevy Sonic $8,751
Honda Civic Hybrid $8,893
Mazda 3 $8,973

Now the Prius C has jumped to 3rd on the list and is only about $300 less than the Versa.   Still the dirt cheap Versa with its sub $11,000 price tag is your cheapest car in the long run.

If you were comparing just the Nissan Versa and a Toyota Prius C then the Versa wins in any comparison.    But what if you were looking at a Kia Rio versus a Prius C?    Thats a situation where the winner varies depending on the circumstances.  

If you drive less then the Kia Rio is $6,068 a year and the Prius C is $6,149.   With average driving the Kia Rio is marginally cheaper than the Prius C hybrid.   However with higher driving of 20,000 miles  a year the tables are turned and the high mileage of the Prius C puts it ahead of the Rio.   For 20,000 miles a year the Prius C costs $7,849 and the Rio is $8,065.

It should be pointed out that the TCO numbers are based on some guesswork and averages.   The depreciation of a car isn't known in advance and they based the depreciation rates on the history of the brands in question.    So we don't know for sure that a 2012 Toyota will depreciate less than a 2012 Chevy but thats what has happened for those brands lately.   Also the costs assumed for things like insurance, maintenance and repairs are based on averages as well as some brand history.  If Mazdas have higher maintenance costs thats based on general assumption on Mazda part prices and quality history.    Your own costs for repair and maintenance are not known and will vary.  You may luck out and have a car that runs without repairs for years or you may get stuck with a semi-lemon that keeps breaking down.   Without a crystal ball the best we can do is make assumptions based on the history of the brands.   Of course people make assumptions based on brand perception when making purchases anyway but the TCO actually puts some real data into the formulas.

Clearly there are many other factors to consider when buying a car.   Safety ratings of the cars, warranty coverage, interior and exterior features and aesthetics are generally important elements to consider.    For example a Nissan Versa may be a little quicker than a Toyota Prius C but the Toyota may have a little more passenger space.  Either of those factors may matter to a buyer.

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