Saturday, November 29, 2008


Is putting a fart muffler on your car going to increase performance or just empty your wallet, make your car loud and unreliable, and mark you as a dork?  Yes, to the latter.

Further to my previous article is one I wrote quite a while back, which really pissed off some folks in the car hobby circles, particularly those who like to sell expensive add-on accessories to young kids who can least afford them.

As I noted in my previous article, when evaluating how far to go with any hobby, you need to keep in mind three basic principles:

1. Don't take it a step too far.

2. Be aware you might outgrow the hobby.

3. Don't fall for the hype of the hobby industry.

With regard to automotive accessories, it is easy to fall into all three traps. You can easily overmodify a car, spending thousands more than the car is worth, with less than stellar results.  As you get older, such a "modded" car may seem less desirable.  And the aftermarket accessory industry is certainly full of its own hype.

Anyway, here is the controversial article:


For as long as there have been cars, there has been an “aftermarket” of automotive accessories and add-ons. I’ve read old catalogs from the days of the Model-T, listing hundreds of things you can buy to make your car “better.”   But are they really worth it?

The aftermarket business is quite brisk.  Take a trip to the SEMA show sometime and see all the junk you can buy for your car.  It staggers the mind.  Television shows such as “Pimp my Ride” and their ilk, glorify the concept of “customizing” a car with aftermarket goodies.  It sure is fun to look at.  But do you really NEED or WANT all this stuff?

Before you pull out your wallet for the latest coffee-can muffler, consider the following points:


On many automotive websites, one common posting I see is “I just bought a (brand) car, what should I ‘upgrade’ first?”  The real answer is often: nothing.  But you will find someone posting a response of the “must have” upgrades for such-and-such a car.  Only a lamer would fail to install a power-widget!

To begin with, bear in mind that many, if not all, of the car chat boards are monitored and shilled by representatives for aftermarket products.  Sometimes, these shills are careless enough to be caught, on boards where domain addresses can be traced.  In once case recently, a poster claiming to be a customer, lauded the service of a used-parts company.  However, this “customer” had a domain address from that company.

SO, when you see a posting on a car board saying “Oh, you MUST get the power chip and performance intake!  It will double your horsepower!” be wary.  Oftentimes, these laudatory postings (and the inquiries that generate them) are put-up jobs by shills for the aftermarket companies.  In short, they are advertisements and attempts to brainwash you.


Most of the marketing for aftermarket parts is directed towards males aged 16-35.  You can sell this group ANYTHING if you tell them it will make them look cool and more masculine.  Young adult males are horribly insecure, and you can sell them a clear taillight, if it comes with the implied promise that it will make them look less faggy.

The cold hard truth, however, is that most of these “performance upgrades” do very little to enhance the performance of a car, in terms of performance per dollar.  And many of these “upgrades” are purely cosmetic in nature - even (or especially) the ones marketed as performance upgrades.

For young kids today, the “in” thing is the “rice racer.”  These are older Japanese cars that they hop-up to make into (alleged) race cars.  The reason the kids today use these Japanese cars is the same reason kids in the 1970’s hopped up old 60’s coupes. The source cars are generally whatever hand-me-down they get from their parents, or whatever car can be cheaply bought.

But, like the jacked up '68 Oldsmobiles with big slicks, Crager mags, and “Thrush” mufflers we drove in 1975, these “rice racers” are little more than stock cars with cosmetic bolt-ons that do little to enhance performance and sometimes make the car less safe to drive.


Your typical kid, having such a car, will first gravitate toward cosmetic “upgrades” and then (if ever) add performance upgrades.  Bear in mind that much of what you might think is “performance” is actually cosmetics. In the 1970’s the first thing we’d do is add a loud muffler (not much has changed!) and if we could not afford that, take the muffler off, poke holes in it, or just let it rust out. The thinking was, LOUD=FAST.  The lack of horsepower robbing “back pressure” was good for at least 20-30HP, right?

Well, not exactly. What you are really getting is just LOUD, and maybe a noise violation ticket. Lack of back pressure can actually burn valves, and in some instances, decrease performance.  In many modern cars, loud mufflers do very little, as most of the back pressure is a function of the catalytic converter system, which in most instances cannot be removed due to emissions requirements. So what you get is just LOUD.

And today, exhaust systems last a good long time.  So ripping out a perfectly good exhaust system to put in a “stainless” job just makes the car louder and your wallet thinner.  The sound gets annoying after a while (especially on long trips) and no one will want to ride in your car.  In most instances, aftermarket exhausts are a pure waste of money.

The purely cosmetic items like clear taillights, turn signals, little blue lights on the hood, neon lighting and other junk really need not be addressed at all.  If you think this stuff looks “cool” and is worth the hundreds (or thousands) of dollars it can cost, go for it.  Much of the lighting stuff is illegal, and makes your car an excuse for the cops to pull you over.  Moreover, much of it is of very low quality (more on this later) and will cause all sorts of reliability problems down the road.  How “cool” are clear taillights that don’t work?


Your typical teen today also wants to spend a lot on air dams, giant wings, side skirts, rear valences, and other “ground effects” to make the car look like the race cars you see on TV.  Again, this is purely cosmetic.  For street driving, most of this junk makes no difference in performance. Aerodynamics and downforce play a role only at high speeds (60 mph and up) and most street cars are run at an average speed of 20-30 MPH over their lifetime.  The only place a car can really be run safely on the street at high speeds is on the Interstate.  And on the Interstate, there are no reverse-camber hairpins or other challenges where down-force will really make a difference.

Aerodynamics are a true waste of money.  And since most kids are on a budget, much of the aftermarket air dams and the like are poorly made, fit badly, and look worse.  Most of these kids never get around to painting them to match, and even then, they tend to look “tacked on” not “built-in.”  In the real world of steep driveways, parking lot curbs and dividers, the average fiberglass air dam lasts about 6 months before it has a huge crack in it.  All that money spent, and the car looks like hell!


But what about performance upgrades? What about them? Most provide only incremental improvements in performance at a huge expense.  A recent posting in the ROADFLY BMW forum was most illuminating.  A fellow tried to “upgrade” his 1997 328i by adding a cone filter, “chip”, exhaust header and loud exhaust, aftermarket cam, and a high performance intake.

Total cost was over $3000 to install, including labor, and the gain in rear wheel horsepower, as measured on a dynamometer, was 25 bhp (from 149 to 173) or a 16% increase in power.

Bear in mind this was $3000 worth of unnecessary work on a car worth maybe $8000 to $9000 on a good day.  For 1/3 the price of the car, he gained 17% increase in horsepower.

For $12,000 he probably could have bought outright, a car with much more horsepower.

The point is, it is far cheaper to buy horsepower (or handling) from the factory than it is to try to “add” it to a stock car.

The other side of the coin is that much of these add-ons can make the car worth less in the resale market, or make the car nearly impossible to sell.  If you take a Honda Civic and bolt on all sorts of fiberglass crap, put a loud muffler on it, and all sorts of glitzy kid stuff, no one (other than one of your friends with similar tastes) will ever want to buy it.  As a result, the car is worth less, as the market for resale is smaller.

And frankly, no one wants to buy a car that looks like it was hot-rodded.  Aftermarket performance upgrades usually mean the car was driven hard, which in turn means the car will have reliability issues.

If you have a friend who says he will “do you a favor” by selling you his hopped-up Civic, WATCH OUT.  Chances are, he’s beat the tar out if it, and you’ll end up with the repair bill.

In the 1960's it was possible to buy a car and literally bolt-on horsepower.   Large American V-8s were overbuilt and under-carburated.  By putting in a hotter cam and a bigger carburator, you could easily and inexpensively add horsepower - lots of it, too.

But modern cars are designed to much more stringent emissions and fuel efficiency standards. Engineers can no longer afford to leave horsepower lying on the drawing board.  Engines are built as small and lightweight as possible, with the most specific horsepower than can be reliably had. You can't change a cam or a carburetor (the latter doesn't even exist) and expect to add 50 HP to the mix. Any major changes are likely to make the car fail emissions.   Even if you don't live in an emissions testing State, this means it will be much harder to sell the car later on to someone who does.


So why do people buy this stuff? Well, as set forth above, much of it is sold on marketing – that the chicks will dig you and the guys will respect you if you have a “hot ride.”  While this may be true, trust me when I say that the chicks will dig you more, and the guys respect you more if you drive a Porsche rather than a lime-green Civic with a big wing on it.  And for what a lot of kids spend "modding" their Civics, they could buy outright, a secondhand Porsche or BMW.

The other part of the equation of marketing is blatantly false advertising.  Aftermarket sellers sing the siren song of unleashing “hidden horsepower” from your car, that somehow the factory engineers forgot to give you.  Nowhere is this more true than with so-called “performance chips”.

Modern cars use an engine management computer to control the fuel injection and ignition timing. While this may sound all sophisticated and complicated, it really is not that high-tech.  The timing and duration of the ignition and fuel injector pulses is controlled to provide the power and acceleration for given conditions. This programming is a compromise between performance, emissions, gas mileage, engine service life, and what we call “drivability issues.”  The latter includes stumbling and hesitation, NVH (Noise Vibration and Harshness), and other things that affect how the car feels when you drive it.

Since the fuel/air mixture has to be controlled to the 14.7% stoichiometric ratio for optimal emissions and catalytic converter operation, the only thing a “power” chip can do really is advance the timing.

This is a trick that has been around since the early days of hot-rodding.  If you advance the timing by twisting the distributor a few degrees, the car will accelerate a little better. These “power chips” just do this electronically.

Many chip companies claim HP gains of 20HP or more.  But if you read the fine print, it usually says “up to” 20HP or whatever.  You might get 20HP more out of that 400HP car, but your 150HP grocery-getter might only get 5-7HP at most.  And this IS at the expense of gas mileage.  Often, these HP gains are also mostly at or near redline, where you really shouldn't be running anyway.

Now in racing, a gain of even one horsepower makes the difference between winning and losing a race.  But in commuting to work, it will make no difference whatsoever.

By the way, right behind the “chip myth” is the cone filter myth.  I’ve owned a few of these, and they have provided mixed results.  They certainly SOUND cool, creating a throaty intake noise.  The stated HP gains are not always in line with some of these manufacturer’s claims.  One filter maker at least posts honest HP numbers on its website.  I was chagrined to discover that the horsepower gain on my 5.0 Ford was only about 8 bph at redline, and more like 3-5 hp elsewhere.  Is that worth $250? It is even noticeable on a 200+ HP engine?

These cone filters also need to be oiled RELIGIOUSLY, and the oiling kits cost more than a typical stock filter. So you are not really “saving” any money there.  Many mechanics I have spoken with hate them.  Since many owners do not oil them properly or frequently enough, they let a lot of dirt into the engine, resulting in premature engine failure.  In addition, if you over-oil them, the red oil will wick up the intake, gumming up the works, and possibly damaging your MAF (Mass-Air Flow Sensor) or TPS (Throttle Position Switch).

I've given up on cone filters and gone back to the plain old factory paper filter.  Guess what? I can't tell the difference at all in terms of performance.  The car is merely quieter.


Another area of real “performance” enhancement that is of dubious value is in suspension “upgrades.” For many enthusiasts, a strut tower stress bar is de rigeur as is upgraded shocks and lowering springs, urethane bushings, and the like.  And most kids simply HAVE to have oversized “bling-bling” wheels with wide tires.  Extreme camber is a new trend, or was, and makes the car barely driveable.

Are these “upgrades”? YES and NO.  Stress bars are a popular upgrade, but I am not convinced they are little more than deer whistles.  Drivers SAY they “feel” better in the ”seat of the pants”, but again, for commuting purposes, I doubt you’ll notice much.  In addition, adding weight to a car really just seems like the opposite direction to go.

They certainly LOOK cool when you open the hood, and everyone will know what a “serious” driver you are when the see it!  Tellingly, most are sold with flashy chrome or stainless finishes.  If these were really all about performance, they’d be painted flat black.

I have never seen any stress bar manufacturer post performance data proving these improve handling.  Most advertise that they make the car "feel" better, and some are just blatant about how shiny and cool they look, which pretty much tells the story.

A good set of shocks is probably the best upgrade to your suspension (best upgrade PERIOD) as they will provide you with better handling and wheel contact.  However, I question the value of ripping out perfectly good factory shocks to do this.  Consider waiting until replacement time to “upgrade” to  Bilsteins or whatever.

And upgrade carefully.  Some shocks are too stiff and may result in less tire contact.  Also some shocks work best with aftermarket springs, or vice-versa. The wrong combination of strut and spring can result in pogo-stick like handling, which is dangerous.  Experimenting with suspension design is not for amateurs.

Lowering springs are another attractive “upgrade”, but again, I would advise caution. For daily driving, you may find a lowered car a pain-in-the-butt in terms of scraping air dams, bottoming out suspension, and a harsh ride.  Let’s face it, most people go with lowering springs because the car LOOKS COOL when it is “lowered.”  The supposed benefit of a “lower center of gravity” (1”?) is pretty illusory for the daily driver.

A lot of other suspension “upgrades” should probably just be avoided PERIOD. Just because the racers use something does NOT mean it will work well on the Beltway.  In the 1970’s the big thing for racing a 2002 was “camber plates.”  These worked well for racers when used in conjunction with other suspension upgrades. But bear in mind that a racing suspension is often designed to be UNFORGIVING.

Today, it is "coilovers" which are pretty expensive and can make a car harsh to ride in and unforgiving when you push it too far.   What works for the track often doesn't on the street, no matter what you saw in "The Fast and the Furious".

When carmakers design cars, they want the steering and handling to be forgiving.  As such, cars tend to “plow” and tires “squeal” long before you reach the limits of handling. They want the car to FEEL like it is going to “let go” long before it actually does.  For racing, this is an anathema.  Racers want a suspension they can push right up to the limit.  However, once you reach that limit, it quickly comes unhinged with little or no warning.

For an experienced racing driver, this is not a problem, as they practice a lot, and can “spin out” into a gravel patch or the infield with little damage.  For you, the street driver, this can mean wrecking the car or killing someone.  Just because you bought it, does not mean you know how to drive it.

Before you spend a lot of dough on esoteric suspension parts, see if you can ride in or drive a similar car with the same parts. You may find the difference negligible, harsh, or even scary. Like I said, for driving to the Safeway, you won’t notice a thing, other than all the expansion joints in the road.


Big wheels are often a performance DOWNGRADE, as they make the car slower and handle worse. They are worse than purely cosmetic!  Your average kid wants the largest wheels possible, preferably as gaudy as possible as well.  Hey, all the rappers have them, so they must be ‘da bomb”, right?

The problem is, if the overall diameter of the larger tire is GREATER than that of the stock tire, you have effectively increased the final drive ratio of the car. Net result? Slower acceleration. An “upgrade” that makes a car slower than stock is NOT an upgrade at all!

In addition, many of these really tacky wheels are HEAVIER than stock.  The whole goal of good suspension design is to “reduce unsprung weight.”  Unsprung weight includes the weight of the brakes, the spindle, the hub, the wheel, and the tire.  This is the part of the car than oscillates up and down in response to bumps in the road.  The more unsprung weight you have, the less responsive the car will be.  The tires will be less likely to be in contact with the road, and the handling will SUFFER.

There are also daily drivability issues as well.  The boards are abound with sob stories from folks who bought 19” rims, only to bend them within a few months on potholes.  Really over sized rims, rims from the wrong car, and/or rims with the wrong offset can rub against fenders and wheel wells, which is downright unsafe and can lead to catastrophic suspension failures. Rims that are really big or have huge offsets also can accelerate suspension wear.  Ball joints and wheel bearings in particular, are stressed more by larger wheels, as they act like a pry bar on these components.  If you horse the car around a lot in the corners, expect to visit your suspension mechanic more often.

Truly huge wheels are all the rage in some sectors. Folks are wedging 19”, 20” even up to 24-25” wheels into cars.  Oftentimes the only way to do this is to jack up the suspension, usually using rudimentary techniques. These wheels are recognized even by their owners as purely cosmetic upgrades.  Often setups like this are so unwieldy, that the owner cannot drive much more than 50 MPH, even on the freeway.  If this sounds appealing to you, go for it!  But bear in mind you are basically tossing money away trying to impress people.


Brake upgrades are one area where it would seem there should be no argument – better brakes are a good safety feature.  And in that regard, you’ll get no argument from me.  However, before you spend, think about where you are going with this.

Most “big brake” kits, with larger rotors, calipers and pads, may require larger rims.  So a $2500 brake upgrade might require a $4000 rim and tire upgrade.  And the problem is, you can’t put your stock rims back on.

I hate to say this, but a “big brake” upgrade is often purely cosmetic.  If you read the boards, you’ll see over and over again, messages from youth who want to paint their brake calipers.  Why? Well, so they look cool poking out from behind those new Italian rims!

The same can be said of “big brakes.”  Nothing looks more ridiculous on a car than huge rims with teeny, tiny brake rotors behind them (and worse yet, drums in the rear!).  It just screams “lame!"  Big wheels and big brakes certainly look cool, that’s for sure.

Stainless steel brake lines are another area where one has to wonder if cosmetics are at work.  The theory is that stainless steel braided lines will expand less, resulting in less mushy pedal feel and less fade.  However, as a guy who majored in industrial hydraulics at GMI and worked at an Aeroquip distributor, I am not sure this is really the case.  Hose is hose, and the stainless steel braiding on the exterior of a hose is to protect the hose from abrasion, not prevent it from "ballooning". Braid expands quite nicely when flexed.  So much for the "pedal feel" theory.

(And yes, when I worked at Aeroquip, I made umpteen zillion sets of stainless steel lines for bikers and hot rodders.  It was mostly for show).

I’ve experimented with cross-drilled, slotted and other rotor types. Again, they look “racer” (or “ricer” take your pick) but I am not certain they really improved my braking performance.

Again, if you are driving to work every day, maybe stock brakes will work just as well for you, for a lot less money.  Many racers use stock rotors, but will change pad compounds to improve braking. Racing pads often are not suitable for street use, however.  They may wear fast, create a LOT more dust, and tend to “stick” to the rotor when you come to a complete stop.

And please, don’t buy your pads on the basis of which ones leave the least amount of dust on your precious bling-bling rims!


Another area where young folks like to add-on is the big “boom-boom” stereo.  If you are a real audiophile, and like to listen to accurately reproduced sound, then go for it.  Just bear in mind that most of the aftermarket junk is just that – flashy looking stuff that makes a lot of NOISE and really doesn’t reproduce sound very well.

The next time you are in your stereo store, take the time to notice how much of the stuff they sell is cosmetically enhanced.  All the stereo “headend” units have displays what would put a Japanese Pachinko Parlor to shame.  They are chromey and glitzy, and usually have two or three garish lighting colors, faked-up “equalizer” displays and the like.

I, for one, would like to upgrade to a better stereo in my car. But until I find one that doesn’t look like a pinball machine on crack, I’ll have to take a pass.  From what I read on the Boards, this is a common complaint.  But, since the aftermarket sells to mostly young folks, don’t expect restraint from the stereo boys anytime soon.

The same is true even of components that under ordinary circumstances, you never even see!  If a subwoofer is an audio performance item, then why does the enclosure need to be gussied up with plexiglass (excellent acoustics there!) and even neon?  And wouldn’t it make more sense to protect the sensitive woofer with a grill than expose it to the elements?  Why do power amplifiers have all those flashing LEDs on them?  Isn’t this something that is supposed to be bolted under your seat or in the trunk?

Well, as you might have guessed, cosmetics sells, even in something like stereos, which you would think would sell on sound alone.  The reality is, kids want something LOUD and something that LOOKS COOL to impress their friends.  Gee, sounds a lot like the aftermarket mufflers!

The other problem with aftermarket stereos, and you see this all the time on the Boards, is that kids get paranoid about someone stealing them (because other kids will do just that).  So they spend a couple of grand on the bling-bling radio, only to discover the window smashed out the next morning. The aftermarket stereo leads to the aftermarket alarm (again, loud and annoying).

The reality of automotive stereo is that the car is a horrible place acoustically, so spending a lot of dough on high resolution sound makes little sense, unless you plan on living in your car. Most of the stuff sold these days is more “boom-boom” than high resolution, anyway.

Considering what passed for a “factory” radio back in 1975 (Delco mono AM radio), today’s “factory” CD players don’t seem so bad to me. I never have to worry about them being stolen, they sound pretty good, and with the top down you generally don’t notice much finesse on the sound.

I have installed a subwoofer on one car, and it was a big improvement. I plan on replacing some (blown) speakers on another.  But for my purposes, I’m not sure I need to go much further than that. From what I read on the boards, the results of aftermarket systems are mixed at best.

And please, don't think for a second that spending $2000 on an aftermarket stereo increases the value of your car by even a dollar.  And by the way, when it gets stolen, chances are, it isn't covered under your car insurance, unless you declared it when you bought the policy.

Another problem with aftermarket stereos is that they often draw a staggering amount of power and can lead to electrical problems.  The Pioneer AVIC Z2 I installed in the X5 was great, but it drew so much juice (it was basically a PC for your car) that it would drain the battery flat in 30 minutes!   Many young people report electrical problems with their cars after installed aftermarket stereos, as these usually aggravate weak batteries and charging systems.


One of the un-talked about topics when it comes to aftermarket accessories is quality.  There are some manufacturers that make aftermarket (usually replacement) parts that are of the highest quality. I’ve been impressed with Bilstein shocks, for example.  But that is a company that is also an OEM supplier.

A lot of the other stuff leaves much to be desired. Why is this? Well for starters, your average aftermarket product has a service life of only a couple of years.  A teenager with a Honda Civic will either crash or destroy the car within a year or two (this is a basic fact of life).  So a bolt-on “ricer” accessory need not be of the highest quality.  Even if the car is not destroyed, most folks change cars every 3-5 years or so, and if the aftermarket product is bolted on halfway through that cycle, it need last only 2 years, tops.  They aren’t selling to the second owner!

The other part of the equation is that many aftermarket suppliers simply don’t have the R&D budget and manpower to life-test products for 10 years or more. When GM builds a new car, hundreds are made and destroyed and driven to death to find all possible defects before production takes place (and even then, they miss a few!).  Your average aftermarket purveyor cannot afford that. You, the consumer, ends up being the test lab for new products.  The better suppliers have generous warranty return policies.  The worst ones won’t return your phone calls.

In the electronics business, the problem is exacerbated by what we call “infant mortality.”  For an OEM supplier, electronics are “burned in” by running them for a few hours before shipping. Defective products will tend to fail during this “burn-in” period and are culled from the crop. The remaining units will have a higher reliability rate as a result.  Small time suppliers don’t have the space or labor to do “burn in.”  As a result, you the consumer, do the burn-in for them.

A LOT of aftermarket products are sold by companies making racing products.  Racing is a pretty limited market, so it pays if you can sell some racing goods to the street market.  The more of a product you sell, the lower the cost to make it.  Some suppliers will unscrupulously try to persuade you to buy racing gear for your street car, even if such gear is not really suitable for street use.  I guess you can’t blame them for trying. But you can blame yourself for buying.


The easiest way to “upgrade” you car is to buy a faster one.  If you have a four-cylinder BMW, fix it up, polish it real good, and sell it.  Spend the money you would have WASTED on an “upgrade” and buy a six cylinder BMW.  You are going to have to buy a new car some day anyway.  Better to spend the upgrade money buying more car than to make your existing car worth less.  Or, you could just learn to appreciate the car you have for what it IS, instead of what it will never be.

If you already have a six, and that’s not fast enough, think about getting an M3.  If you already have an M3, think about getting a Porsche.  If a Porsche isn’t fast enough for you, then no one can help you.

Faster cars have better suspensions, better brakes, and better handling – all tested and certified by the factory.  In terms of cost per HP, they will cost LESS than a “modded” car, as they will carry a higher resale value.  Your “modded” car is worth less than the plain-jane stock model your kindergarten teacher drives.

And for God’s sake, don’t try to “make” an M3 out of old parts and a 318.  I’ve seen this on the Boards many times, where some high-schooler tries to “upgrade” his 318 by bolting on all the M3 parts he can find at the local junkyard.  If this is your idea of a hobby, go for it.  But bear in mind the resulting car is NOT an M3, and don’t come whining to me when your subframe rips out of the chassis.  The 318 did not get the reinforcing plates!

Of course, the other alternative is to keep what you have and appreciate it for what it is, not what it is NOT.

A 4-cylinder BMW is never going to be a rocket ship.  Adding a supercharger, turbocharger, or nitrous is just going to shorten your engine life.  And the rest of the car (suspension, brakes) will need a corresponding upgrade to keep up.  These cars were never designed to go fast.  They handle decently and provide a nice ride.  Acceleration is not their strong suit.

In that vein, suspension and brake upgrades probably make the most “sense” as they are going to at least improve (hopefully) the safety of your car.  But wait until the existing components wear out before throwing a lot of money into upgrades.  Bear in mind that the car will have its share of MAINTENANCE expenses, and if you blew your wad on clear taillights, you might not have enough left over for a transmission fluid change.  If you “upgrade” at the expense of basic maintenance, you are really throwing money away.

What I see on the boards a lot is young men who spend thousands of dollars on “upgrades” only to find they have drivability and reliability problems, and then get socked with a hefty repair bill, whcih they have no cash to pay for.  An older car will require more maintenance, so think about setting funds aside for things like brakes, tires, and radiators, before you max the credit card on that aluminum wing.

And often, after so many upgrades (taking the hobby too far) the car is so weird that no one in their right mind would buy it.  One over-modded 4-cylinder automatic Z3 (the lamest of the lot) was recently auctioned on eBay.  The owner had removed the steering wheel to replace it with a poor quality aftermarket job - with no airbag.  As a result, it would be hard to register in any State with safety inspection.  Not surprisingly, it failed to meet the sellers "reserve" price.

The only real “upgrade” I plan for my E36’s is to replace the struts with Bilsteins when the OEM ones wear out.  I have had good luck with Bilsteins and I’ll stick with that brand.  The jury is still out on lowering springs.  Bear in mind the E36 bottoms out on speed bumps as it is.  I am not sure I need to make it more undrivable in real-world conditions.

Besides, if I really want to “upgrade” the performance of my BMW, all I have to do is move over one bay in my garage and slide behind the seat of the M Roadster.  That car is more than fast enough for me.  Believe it or not, some folks will tell you that even an M car is a total POS and any “serious” driver will tear out the shocks, springs, etc. for aftermarket “upgrades.”  I think this is more shilling going on, personally.


I get flamed a LOT on car boards. SEMA (Specialty Equipment Manufacturers Association) members do not like what I have to say.  After all, if teenagers stop buying their ugly airdams, how are they going to put their kids through college?

I used to work for GM many years ago and studied Automotive Engineering there.  I’ve owned over 30 cars so far in my lifetime, and I’m now outside the “while male, age 16-35” age group that SEMA members market to.

And I’ve done a LOT of the upgrades listed above, with mixed results, and some regrets.  In many cases, the results were less than the spectacular performance improvements promised by the manufacturers and touted on the boards.  In some cases, the results made the car unpleasant to drive and ride in.  Loud mufflers and bone-rattling suspensions are not enjoyable for more than a few minutes.  Four or five hours behind the wheel of such a car can be torture.

And if a car can no longer serve its intended purpose (general transportation) then what good is it?  It no longer is a car, it is a talisman of a car.

The myth that your stock car can be converted into a “race” car using aftermarket parts is just that: a myth.  If you are going to be a racer, great! Join SCCA and buy (or build) a race car.  However, what you will find, if you carefully examine even the various “stock” classes of racing, is that a true race car has little in common with a street car, other than exterior sheet metal.  The labor and parts needed to build a true race car is far more than the cost of a few aftermarket bolt-ons.  And a real race car is no fun to drive on the street.

Rather than spend all your money on aftermarket “goodies”, consider putting that money in the bank. When you’ve saved up enough, then you can afford to buy a really nice car – one with all the performance enhancements that come standard, not bolted on.  And by then you’ll be able to afford the insurance on it!

Good Luck!

P.S. –My apologies to all SEMA members. The emperor has no clothes!

Hobbies Run Amok!

Hobbies Run Amok!

Almost everyone has a hobby, be it stamp collecting or world cup yacht racing or something in between. Having a hobby makes life worthwhile and fun. But for many folks, hobbies get way out of hand, not only dominating their lives, but ruining their finances as well.

By ruining their finances, I don't necessarily mean making them bankrupt. What I mean is the squandering of huge sums of money on hobbies while failing to properly fund your retirement or savings, the net result being that later on in life, you are broke.

Living here on Retirement Island, I see this all the time. People who "lived large" in their 40's and 50's with large yachts and motorhomes, only to find themselves destitute in their 60's and 70's when these horribly depreciating assets....depreciated.

In the recent economic downturn, many folks who bought large yachts or motorhomes a few years back (with easy money financing) are finding themselves now "upside down" - owing more money on these behemoths than they are worth. Many, not surprisingly, walk away, leaving the bank to repossess and re-sell them at far below market value. Like in the housing sector, this further depresses prices, causing more people to go "upside down" and the process repeats. However, unlike homes, depreciating assets like cars, motorhomes and boats will never again increase in value. They depreciate from the day they are made. So "hanging in there" is simply not an option.

If you are lucky enough to have cash these days, you can pickup one of these white elephants for a fraction of what they would have sold for even a year ago. But be careful, owing and operating expenses can dwarf the initial purchase price.

I use expensive hobbies such as yachts and motorhomes as an example. However there are other hobbies out there that can start off inexpensively and get totally out of hand. It need not be this way though.

Now, don't get the wrong idea. I am not anti-hobby. I have many myself, so I know from where I speak. Some hobbies can end up being careers, if you are lucky. But that happens to so few of us. The key is to think about where you are going with a hobby. Here are the three basic points I've learned from my own mistakes as well as those of others:

1. Don't take it a step too far.

2. Be aware you might outgrow the hobby.

3. Don't fall for the hype of the hobby industry

One thing I have observed with most hobbyists, is that they seem to be happiest when they are just starting out or at the intermediate level. Often this stage of wanting rather than having is most fun. The mistake I often see is that people take it "to the next level" and buy that "ultimate" hobby machine or whatever, only to find out it was not as good as anticipated, and worse yet, their interest at this point in the hobby had waned.

If you are truly rich, these things are simply not an issue. You can afford such hobbies and squandering thousands or even millions on them is no big deal. But for most middle-class Americans, hobbies can get out of hand and lead to severe economic consequences.

To illustrate these points, let me use some real-world examples based on my experiences and those of others:

1. Dan liked to water ski. He was pretty good at it, and every chance he had, he'd head out to the lake and throw a ski in the water. He had a hoary old Glastron that he bought from a junkyard. It had been in a fire, and he sawed the last foot off it and fiberglassed in a new transom. He rebuilt and old six-cylinder white Mercury and bolted it on the back. It was fast, if not fancy, and it cost him nearly nothing to own or maintain. Every weekend, he'd tow it to the lake behind his old Toyota Supra and go skiing. He had a lot of fun.

Of course, he'd look longingly in the ski magazines at the pictures of the fancy go-fast boats, with their metal-flake hulls and cushy interiors, complete with matching trailers. Wouldn't it be cool to have one of those? Of course, the cost of such a boat was out of the question for a 23-year-old.

Then the unexpected happened. His Father passed away, leaving him a $50,000 life insurance settlement. Rather than invest this once-in-a-lifetime windfall, Dan went out and bought a brand new metal-flake boat and trailer, and a Corvette to tow it around with. He finally had the boat and car of his dreams. He should have been on cloud 9, right?

Not exactly. A boat is just a boat, and a fancy boat can be more of a headache that a "beater". Dan was worried that that metal-flake hull would get scratched easily. They are difficult to repair, and even the smallest scratches make them look horrible. So he didn't let anyone drive it. He stopped skiing altogether. He'd drive the boat around real fast, trying to impress girls. When he wasn't driving it, he'd anchor it in shallow water and wax it.

And he discovered, after a year or two that a boat or a car is a depreciating asset, and that even with the best of care, they wear out and are worth less. His $50,000 windfall was worth less than $40,000 after the first year. Within a few years, it was worth less than half of what he had inherited. While he could strut his stuff and impress people with his shiny Corvette and boat the first year, after four or five years, it was just another used car and another fading boat.

And he discovered another thing. As he started approaching his 30's, he started thinking more about getting married and settling down. The boat and the Corvette were eventually sold, of course, when the new baby came along. I think he got a few thousand for each. His wife was just happy to have them out of the driveway. I don't think the boat ever saw water that last year.

Dan wishes now that he kept the old Glastron a few more years rather than buying the fancy new boat. As it turned out, he outgrew the hobby, which is typical of water skiing. You don't see a lot of 40 and 50-year-olds water-skiing regularly, as it is a young man's sport. He was much happier when he was in that old boat, wanting, instead of having. And the promises of the slick sales brochures and boating magazines paled in comparison with the reality of owning that fancy new boat. He took his hobby a step too far, he outgrew the hobby, and he fell for the hype of the hobby industry.

Note that in the boating world, they have a term known as "two-foot-itis" which refers to the desire by many boat owners to buy a newer boat that is two feet longer than the one they have. Many boat owners go from boat to boat, increasing their debt load over time, hoping the next boat will be "the one" that the wife likes, the kids like, handles well, and impresses everyone at the local marina.

Usually the last boat in this chain ends up being too much for the owners, and is rarely used and gets sold rather quickly. I would suggest that keeping it at the previous level and being happy with what you have might be more cost-effective in the long run.

2. Chuck like to race motorcycles. He had an old Husquavarna motorcycle, which at the time was out of fashion. All the hot-shot motocross racers had Yamahas. Still, in the amateur class, he managed to beat some of those hot-shots with his old beater bike. Some of the other "kids" got new bikes every year, and their fathers would equip them with the latest gear. They would ride to events with custom trailers complete with team graphics. Chuck would throw his bike in the hatch of his old Chevy Nova. The other kids would laugh, until he beat them soundly at the track.

Motocrossing, like water-skiiing, is a young man's sport. Broken bones and torn ligaments are part and parcel of the game. When you are 20 and can heal quickly, it is no big deal, But as you push 30 and your joints start to creak, it is another matter entirely.

Chuck got so good at racing his old "Husky" that he eventually rose to the top of the Amateur class, accumulating more points and trophies that anyone else in the area. According to the racing rules, he had to graduate to the "Expert" class. He bought a new Yamaha 500 and set out to conquer the Expert class. It was a disaster.

The expert class was a whole new world. Not only was he competing with the best of the local riders, he was competing with factory teams and professionals from all across the country - and even the world. Not surprisingly, he finished last or near least in nearly every event. It was a sobering experience.

Then a horrible thing happened. Coming out of the starting gate, he got the "hole shot" and leaped ahead of the other racers. Overconfident, he dumped the bike in the first turn and ended up getting run over by several other riders. His arm was broken in several places and required pins to set properly. His knee was smashed. His racing days were over, and the medical bills were piling up into the tens of thousands of dollars.

He kept the Yamaha for quite a few years after that. Once his bones healed, he would take it out occasionally to ride local trails. But it wasn't the same. And more and more, he found it not worth the bother to get the bike tuned up, trailer it out to the powerlines and ride it. It sat for a year, then two, and finally was left covered with dust, in pieces, in the corner of his garage.

Chuck realizes now that he failed to think about where he was going with this hobby. Taking it to the next level turned out to be a mistake, as he was ill-equipped to handle the Expert class. Although he enjoyed teaching those rich boys with their shiny new bikes a lesson with his old Husky, the international riders in the Expert class did the same to him quite quickly once he moved out of his own league.

Knowing when to quit is the key.

3. Edna likes to go antiquing. She and her friends enjoyed riding out in the country, having lunch and then combing through old barns and yard sales for unique and interesting items. She started out buying small things to decorate her home, and then bought a few pieces of furniture as well. One day at an antique shop, she was delighted to discover that the dealer was selling, for $50, the same antique egg-beater that she had bought at a garage sale for a $1.

Excited, she decided to turn her hobby into a part-time business. She rented a cubicle at the local "Antique Mall" and set about furnishing it with items from her country trips. At first, it was exciting to go shopping every weekend for things, but quickly, it became more like a chore. She had to carefully examine every item in a barn or yard sale and compare it with the potential retail price she could get. Rather than leisurely linger over these old things, she found herself racing through the rural barn sales in a businesslike manner, and then moving onto the next sale. She had to cover a lot of ground, fast.

And in doing so, she noticed one thing she had never noticed before - others just like her, coolly and professionally viewing all these old goods in a detached manner. At each yard sale or barn auction she would attend, she would see the same cars and same faces of the other professional and quasi-professional collectors like herself.

At first, she managed to make some money on the items she sold at her cubicle at the Antique Mall. She bought some items cheaply and sold them at a decent markup for reasonable prices. However, other items in her cubicle were bad purchases that she either paid too much for, or were damaged or otherwise not as desirable as she had thought. While the good merchandise sold quickly, the "dogs" started accumulating in her cubicle. She was loathe to lose her "investment" by selling anything for less than she paid for it.

Within a year, her cubicle became quite crowded with "dogs" - items she had paid too much for and would not sell. She started taking these items home, figuring that if they couldn't sell, she could at least enjoy them, and perhaps someday, the market for a broken colander from the 1930's would pick up. While this cleaned out her cubicle at the Antique Mall and allowed her to buy more things, the same thing happened again and again.

The business of buying and selling antiques was becoming less and less of a joy and more like drudgery. I n fact, all the joy was gone. If you asked her about her business, she would regale you with a litany of complaints, from surliness and mean practices of the owner of the Antique Mall, to the sharp practices of her fellow "dealers" to the rude comments made by window shoppers to the breakage and shoplifting of teenagers. It was a lot of hard work and difficulty. On top of this, while she was spending a considerable sum of money buying all this stuff, she was not really making any money on it. What profits she made were quickly plowed back into buying more things. Eventually, her home was filled with antiques, some valuable, some not. But most worth exactly what, if not less, than she paid for them. She was merely converting money into stuff, not making money.

The problem with making a hobby into a business is that there are a million other people out there (quite literally, perhaps more) trying to do exactly the same thing. While you might enjoy accumulating NASCAR collectibles, setting up a store to sell them is probably not a good idea, as there are simply way too many outlets for such items in comparison to the demand.

Antiques might seem like a market with limited supply for a flexible demand, but every year, more and more recent vintage items are deemed "antique" and the stores keep filling up. Items from my childhood are now deemed "antique." While it is fun to look at some of this stuff, a lot of it is just junk, and not things you'd want in your home, "collectible" or not.

Running any retail business is difficult, at best. The cost of overhead is staggering. Hiring people to help you is not cost-effective. And today, much of what you can buy at a retail store can be bought more easily and quickly online. The competition is fierce, as the barriers to entry are low, and everyone else, it seems, has the same idea, and customers can be scarce.

Think long and hard before you make a hobby into a business. It is possible to be successful. However, in order to be successful, you have to approach it as a businessperson. In doing so, you might find that all the joy of your hobby is lost.

4. Joe liked old BMWs. He bought his first one in 1974 and enjoyed tinkering with it. He joined the BMW car club and was active in events. He worked at a car dealer, and whenever an interesting trade came in, he'd arrange to buy it. Before long, he discovered he had over a dozen old BMWs.

He tried to make a business of his hobby. However, since he was not a businessman, he had no idea how to proceed. He thought there would be a market for "rich people" who wanted their old BMWs restored for huge amounts of money. However, he discovered that "rich people" would simply rather buy a new BMW. Moreover, the restoration business was already quite well populated with shops that specialized in that service. After a few years, he closed his doors.

As he got older, his collection of cars increased, much to his wife's and neighbors' dismay. He had nearly 50 cars at one point. The cars were usually older "interesting" cars, but in need of total overhaul or major repairs. They sat out on his lawn, gathering dust and slowly rusting. He had a long-running battle with the local zoning enforcement officer.

When asked about the cars, he would tell his wife that he would "fix them up someday" or that they were "his retirement" and that someday, someone would pay him hundreds of thousands of dollars for his "collection."

On BMW forums and magazines, he held forth as the "old expert" and snarled at any newcomers who dared question his expertise on any subject BMW-related. Of course, since his collection was mostly from the 1970's and 1980's, any car newer than that was "junk" and not worth talking about. He was not outgrowing his hobby, but it was outgrowing him.

Ironically, at any BMW meet, he would show up in his wife's rusty Subaru, as all of his cars were unserviceable, or not in very presentable condition.

The car hobby was not fun for Joe anymore. He was alienating his neighbors, his wife, and even others in the car community, who viewed him as a cranky old misanthrope. Yet he felt trapped by it. Selling any of his cars would be "giving up", as he had forged an identity as "Mr. BMW." And of course, he wouldn't sell any of his cars for less than he felt they were worth (regardless of what the market felt they were worth).

A better idea for Joe would have been to keep one or two cars of interest, that could be readily restored, and sell off the rest. With the money he raised from clearing out his junkyard, he could restore one car to pristine condition and actually enjoy it, instead of looking out over a field of rusted metal.

By the way, Joe (like the other characters mentioned here) is an amalgamation of a number of people I have met, not one specific person. I have met such people in nearly every car forum, whether it be BMWs, old Fiats, Russian Motorcycles, Bayliner Boats, you name it. I can guarantee you there is a similar Jaguar guy, MG, guy, and Ferrari guy - you name it. I know there are more than one Edsel guys out there - I have seen pictures of their "collections" of rusting Edsels. They are cranky and not fun to be with. T hey think that their "basket-case" rust buckets are worth zillions because they are "rare". They suck all the oxygen out of the hobby, reducing the love of cars into a battle of expertise and experience.

I have met a number of Joes in my lifetime. They keep rusty old hulks of cars and pretend they are worth millions - based on auction prices they see on TV or read about in the magazines. You know, a little paint and upholstery, and that rust bucket will fetch a half-mil in Arizona! I just don't have time to get to it, today.

The reality of the car hobby is that in order to restore a car to the shiny condition you see at those over-hyped auto auctions, it takes considerably more money that the car is worth. You can spend $20,000 restoring and old BMW (or whatever) and it will be worth $10,000. If you spend $40,000, it might be worth $20,000. In other words, in terms of an "investment" cars are about the worst thing you can invest in, unless you consider losing half your money a good deal.

And the cars reaching those stratospheric prices at auction are professionally restored, most often to a standard higher than when they were made. Forget about your rust-bucket ever being in the same company.

Yes, occasionally the collector car market goes berserk. But it usually corrects itself rather quickly, and many folks get burned in the process. In the 1990's Ferrari's soared in value as "Dot-Com" millionaires looked for flashy places to stash their cash. Just as suddenly, the Ferrari market crashed, with many of the cars dropping to half their former auction values.

Similar things have happened (or will happen) to American Muscle Cars. In the 1980's and 1990's, Mustang convertibles from the 1960's soared in value. Clever body shops would find cheaper hard top cars and "create" new 1966 Mustang convertibles using reproduction parts that wer vitually indistinguishable from the real thing. The supply, it seems, was not as limited as first thought.

By the way, don't believe the hype in the car magazines about "numbers matching" or "only 1 of 17 made", "original build sheet" or "original window sticker", etc. All of these things can be forged or manufactured in such a manner as to be untraceable. You want "matching numbers"? It is just a matter of buying a metal stamp set. The number of 1960's cars running around with their "original window stickers" defies the law of probability.

The other problem with the American Muscle car fad is that, despite all the hype, they are essentially poorly made American cars. Back in the day, they were considered a disposable commodity, not a collector's item. Many a "vintage" car buyer is woefully disappointed to discover that a 1960's car with a live-axle and bias-ply tires handles worse than today's pickup trucks. And for many of these cars, driving them is the last thing you every want to do. Once you put miles on them, it destroys the value.

You can enjoy and older car, and actually save money in the process (this is the subject of a future article). However, like any hobby, car collecting can be easily taken too far.

5. Frank and Shirley decided to buy a Motorhome and become RV'ers. Selling their home, they bought a fairly inexpensive Winnebago and decided to hit the road, full-time and "see America." They had camped in camper trailers before and read all the RV magazines, which promoted the "RV Lifestyle" and "full timing" in luxurious "Motor Coaches".

The first year on the road was fun. But they were spending more money than they expected. While they didn't have a mortgage payment or property taxes, they did have to make payments on the motorhome, keep it full of fuel, and also pay to camp somewhere nearly every night.

The fantasy sold in the RV magazines is that once you have your luxury motor coach, you can pull off by the side of the road, and park next to a pristine lake, and then wake up in the morning with the birds chirping, while your wife makes coffee over the open campfire.

Unfortunately, this is all a fantasy. In reality, you cannot simply pull off the road and park on someone's private land without permission. All the pristine lakes are spoken for, usually by vacation homes. And even if you could find such a spot, your motorhome would likely get stuck in the mud. And campfires? It takes an hour to start them, and making coffee is almost out of the question. Not to mention how smoky it will get your new rig!

So Frank and Shirley ended up staying in State Parks and RV Parks. The State Parks were OK, although Frank scratched the beautiful paint on his motorhome on a tree in one State Park. Why don't they cut down all those trees? It would make camping easier. On the weekends, the State Parks could get crowded with families and noisy children. Frank and Shirley stayed in their rig and watched satellite TV.

RV Parks were easier to get in and out of, as nearly every tree had been cut down. However, the row upon row of pads were not very attractive, and oftentimes, they'd end up parked next to rowdy campers who would build large fires and talk loudly all night. In the morning, Frank and Shirley would wake to find a litter of beer bottles and their shiny new rig dusted with campfire smoke.

They tried some of those new "RV Resorts" but found them to be hugely expensive. "For what we are paying a night here, we could stay in a hotel!" Shirley exclaimed. While the RV resorts were clean and full of mostly older, "full timers" like themselves, Frank and Shirley were chagrinned to discover that their simple RV was looked down upon by the "Motor Coach" set. Worse yet, some resorts refused to let Frank and Shirley stay at all, as their coach was deemed "too old".

During a trip to an RV dealer for service, a salesman showed Frank and Shirley a higher-end motor coach. "You know, for the same payment as you are making now, I can put you in this coach!" the salesman explained. Frank and Shirley were only months away from "paying off" their old coach, which they had (smartly) put a very short term three-year loan on. The new loan would extend 12 years, and what little equity they had in their old coach would be swallowed up as the down payment on the new one. The smell of new leather and carpeting, along with their memories of being humiliated by the "Motor Coach" set in the RV resort was all it took. They signed the papers.

Excitedly, they set off for their favorite RV Resort to show off their new purchase. They were big-time now! When they arrived at the resort, however, they found that their mid-priced motor coach drew less attention than their inexpensive starter model. Although they considered it special and new, it was merely just another RV when parked next to the $500,000 and Million-dollar custom bus conversions.

You see, no matter how much you spend on a hobby, there is likely to be someone who will spend even more. Trying to impress people by purchasing things is a very silly thing to do. Only the shallowest of folks are impressed by your ability to sign loan documents. It takes no special talents to "buy" or own something, only a checkbook. Moreover, the people you are trying to impress are usually people you don't even know! What is the point of that?

Unfortunately for Shirley and Frank, it got worse - a lot worse. Their huge and expensive (to them) motor coach was hard to handle, and taking it to inexpensive State Parks was out of the question. It simply wouldn't fit. Even RV parks were problematic.

Frank started doing the math on the "RV Lifestyle" and discovered, to his horror, that they were going through their retirement income at twice the rate they were when they lived at home. To save money, they tried parking at Wal-Mart and Flying J parking lots whenever possible. "This is great", Shirley said sardonically, "We're spending twice as much as we did before, and now we're living in a truck stop!"

Now, to be sure, RV'ing wasn't a total downer for Frank and Shirley. There were occasions when they would wake up parked next to a pristine mountain lake and enjoy the sunshine and birds chirping - before someone in a neighboring RV would start their generator. RV'ing can be fun, but full-timing it was getting old, and costly. And Frank was getting old, too.

Since they had to have a car everywhere they went, Frank and Shirley had to tow one behind the motorhome. Driving this huge rig, with a car behind, was not much fun, as cars would weave in and out of traffic, and honk, and trucks would blow by, pushing their coach sideways with the wind. S etting up and taking down camp was tiring and difficult, particularly for someone pushing 70.

Then Frank got sick. It happens, particularly when you get old. They had to stay for a while in one place, while Frank went to the VA hospital. They found an RV park where they could get a monthly rate, which helped cut their costs. But now, instead of traveling and seeing the country, they were in effect, staying in a very small condominium in a very bad part of town. Once Frank got out of the hospital he found it hard to get in and out of the RV, climbing the steps. Setting up camp and stowing gear exhausted him. They needed a place to settle down.

Unfortunately, the RV was now worth less than what they owed on it. But the monthly payments kept coming. With their retirement savings almost gone, they could not afford to rent an apartment and make payments on the RV. When the repo man came for the motor coach, they quietly handed him the keys.

As a lifetime Good Sam Club member, I get all the RV magazines, and I read all the hype about the latest and greatest (and larger and larger) motorhomes, costing in the hundreds of thousands of dollars. I also read, in the classified section, the ads for used RVs, with notation "Poor Health Forces Sale". Frank and Shirley's experience is not an anomaly, it is the norm.

We've seen, firsthand, in trailer parks, elderly people living in rundown motorhomes, too poor to move into assisted living, their coaches no longer worth anything to anyone, not having been run for months or years. We've also seen, firsthand, EMS rescue people have to break out the windows on such coaches to extract the occupants, who usually leave, feet first, in a gurney or body bag.

While RV'ing can be a fun hobby, the idea of spending your declining years in a motor home simply defies common sense and financial mathematics. There are some more economical ways to RV that might make some sense.

For example, Joe and Suzy have a travel trailer they keep in Florida. Such trailers, which are huge inside, can be purchased for as little as $20,000. Since they don't have an engine and drive train, they are inexpensive, and depreciate very slowly. They keep the trailer at an RV park on a golf course, and every winter, they drive South and spend several months in their "Florida Home". The RV cost them very little, and the monthly "lot rent" is less than a few days stay at a "Motor Coach Resort".

The only disadvantage to this model, is that while it is quite inexpensive, it also really isn't RV'ing in the sense that they are seeing the USA and camping out. It is just a cheap way of having a summer home - one that, if it blows away in a hurricane, you won't care too much about.

A better model could be to simply buy a condominium on a golf course, back in the day when such things were affordable (and may be so again soon!). The overall costs could be the same, or similar to that of monthly rent in an RV park, but with the added bonus of having some equity over time.

I've had four RV's over the last two decades, and I've learned some of the same lessons, at a lower cost. Three of the RV's have been second-hand trailers, and they've held their value over time. One we actually sold for more than we paid for it. Properly maintained, a travel trailer or 5th wheel holds its value. Our one excursion into motor homes was a depreciation nightmare. After only a few years, it was worth about half what we paid for it. Anything with a motor depreciates, period.

Going camping for a few days or even weeks is fun. But spending months in an RV can be wearing and also costly. Most campgrounds charge $30 or more per night. Even State Parks charge $15 a night or more. Throw in an armload of firewood for the campfire, and you're over $20. For the extra cost in fuel to tow the trailer, you could probably stay in an inexpensive motel for less . With the motorhome, add in the depreciation, and you're talking a nice Hotel with room service. If you have to pay for RV storage, it adds up even further.

RV'ing can be fun, but don't kid yourself that you are "saving money" or "getting back to nature". Like any other hobby, taking it "to the next level" is often the fatal mistake.

Getting back to Frank and Shirley, you can see they fell prey to all three of my hobby rules:

1. Don't take it a step too far: They should have stayed with their first motorhome, which was almost paid off. When they decided to give up RV'ing they would have been able to sell it for a tidy sum. Instead, that money was swallowed up in the down payment on their new rig.

2. Be aware you might outgrow the hobby: Outgrowing a hobby is not just something that happens to younger people. If you are older, chances are, changes in your life circumstances will force you to retire a hobby eventually. They should have anticipated that eventually their age would force them to give up on RV'ing.

3. Don't fall for the hype of the hobby industry: The magazines hype and promote RV'ing as they are magazines that the industry pays for, in terms of advertising dollars. You will NEVER see, in any hobby magazine, a cost-benefit analysis of the hobby or any warnings not to take it too far. The downsides of RV'ing full time are rarely discussed. But if you read between the lines (such as the "health forces sale" classified ads in the back) you can separate the hype from fact.

While these examples may seem a bit depressing, they are based on real-world examples, and illustrate how a simple hobby can get seriously out of hand and literally bankrupt a person, while providing less and less enjoyment with each level of increased spending. Oftentimes, not owning things and dreaming is more enjoyable (and less expensive) than having.

The key is to figure out when it is time to call it quits, and whether going to the "next level" makes any sense. Oftentimes, it is not.

Sunday, November 23, 2008

Getting Started with Investing

How do you get started investing?

Many young people are interested in getting started in investing, but have little or no idea how to get started. Everyone, it seems, advises them to invest, but how do you get started?

When I was in my 20's, I faced this same problem. I talked with an investment counselor, and his advice was, "Well, if you've got $5,000 to $10,000 to start with, I can set you up with a mutual fund..."

Of course, I didn't have $5,000 to $10,000 to start with. If I did, I wouldn't need his advice. The problem with investment counselors or advisers, is that they are working on commission. So they want to "sell" you an investment, usually with a certain fee (as high as 5%) as their sales commission. If you don't have money to invest, they aren't interested in talking to you.

Fortunately, there are many ways for a novice to start out investing, without having to use an investment counselor or having a lot of money up-front to invest. For most folks, setting aside small amounts of money in after-tax and before-tax investments is not hard to do.

So what are after-tax and before-tax investments, anyway? You should know the difference between the two before you start.


After-tax investments are investments you make with money from your pocketbook, after you have already paid taxes on it. This is the money in your pocket. So any cash you have in a savings account, for example, is an after-tax investment. You have already paid taxes on the amount you've put in. You only need to pay taxes on the interest you earn.

After-tax investments primarily are for immediate needs. Most money gurus suggest that you have anywhere from 6 months to 1 year's salary in after-tax investments, to cover emergencies and other contingencies, such as losing a job, or a major health crises. If that amount scares you, don't feel bad - most Americans have little or nothing in the way of after-tax investments or savings, and as a result, when they lose their jobs or experience other financial difficulties, they are often out on the street in short order.

The problem most people have (and that I had) was that if there is money in the checking account, it gets spent pretty much the week it is earned. Like most Americans, I was a spendthrift, and if I got a pay raise, I simply expanded my lifestyle by spending more money. While this is typical of the spending habits of teens and 20-somethings, if you are still doing this well into your 30's and beyond, you are headed for financial ruin.

The secret, I found, was to squirrel away money in different accounts - some being hard to access, so that I would not be tempted to spend right away. There are different ways of doing this that can be setup to automatically save money from your accounts.

For example, many corporations have shareholder savings plans. If you purchase one share of stock in, for example, Virginia Power, you can have a certain amount of money per month (e.g., $50) deducted from your checking account and used to purchase stock. Over a year, this amounts to $600 in stock, and after several years, you may have a few thousand dollars of stock, without much difficulty.

The magazine The Money Paper has (or had) a service that allowed you to purchase single shares of stock in companies that participate in shareholder savings programs. You'd be surprised how $50 here and $50 there can add up to a small portfolio of stock.

The only problem with this approach is that it requires you to keep track of all these different stocks and what you paid for them ($50 at a time) so you can calculate your capital gains when you sell.
Most online brokerages (etrade, Ameritrade) allow you to transfer money on a regular basis (e.g., monthly) into your online account, so you can then use that money to invest in stocks and bonds. You can setup an account with etrade or Ameritrade using an initial deposit of cash or stocks, and then have money automatically deposited into that account. Once a certain balance has built up, you can then purchase stocks. The only problem with that approach is that even at their low trading fees, the purchase price for small lots of stock can be high, and the temptation to "trade" (buy and sell and lose your shirt) can be high. After accumulating a number of stocks, I transferred the shares to an Ameritrade account for easier management.

Back in the old days, we used to have something called the Payroll Savings Plan, where a certain amount of money (e.g., $25) would be taken out of your paycheck each week and used to purchase U.S. Savings Bonds. Most companies have dropped the Payroll Savings Plan, but you can still participate in automatic deduction in, which allows you to have automatically deducted from your checking account, every month, a certain amount (e.g., $50) and put into U.S. Savings Bonds. Again, after a few years, you'd be pleasantly surprised to discover that you now have a few grand in that account, which might come in handy down the road.

Thus, it is not hard for the "little guy" to invest in both Stocks and Bonds without having a huge wad of cash to start with. You can start an investment portfolio with as little as $50 and go from there. The secret is to have the discipline to keep at it and the patience to wait over time for money to accumulate.

You can also play other games to trick yourself into not spending money. For example, I had an account with a Credit Union in another State, where I had a job (Credit Unions, by the way, ROCK. If you can join one, do it!). Rather than closing the account when I moved, I put aside $50 each month and deposited it into a savings account there. If I wanted to get at the money, I would have to write to them and ask for a check to be mailed, so it prevented me from using that as a source of "easy money." Once a balance had accrued, I converted the savings account into a Certificate of Deposit (CD) which is even harder to tap into on a moment's notice.

You can see there is a pattern here - $50 here, $100 there, no big chunks of money going into any one thing. I started small and worked my way up as I made more money over time (if you can resist the impulse to SPEND every pay raise you get, you will become wealthier instead of spinning that gerbil wheel faster and faster).

The only problems I see with this approach is that some folks bite off more than they can chew. They assume that if putting $50 a month aside is a good idea, then putting $500 a month aside is even a better idea. While this may sound good in theory, if you try to save too much, too fast, you'll end up starving yourself for money and then be tempted to "tap in" to your new savings plan, defeating the whole purpose of the thing. Once you've "tapped in" to it, you'll start doing it again, get discouraged at the progress of the whole thing, and probably quit.

So, if you have no savings and don't know how to get started, start slow and work your way up. I started with one stock at $50 a month. After a year, I added another, and so forth. As a result, I didn't miss the money much, and after several years, I had a portfolio worth quite a few thousand dollars.


Before-tax investments, as the name implies, are investments made with money you haven't yet paid taxes on. These are long-term investments that are designed to fund your retirement. The most common of these are 401(k) plans, IRA, SEP plans, and the like. If you work for the government or are the military, you may know these as the FERS plan or some other moniker.

While the details on each type of plan differ slightly, the basic premise is the same: You have a certain amount of money taken out of your paycheck each week, and that amount is invested in stocks, bonds, or mutual funds (usually the latter) through some investment management company. Your income tax is calculated on the amount of your paycheck AFTER the deduction is made, so the money invested has not been taxed at all.

Someday, when you make it to retirement, you'll have to pay taxes on that money. But that is a long way off, and as we say in tax law, a tax deferred is a tax denied. Retirees usually pay lower rates of income taxes, so not only do you delay paying the tax, you end up paying less. It is a sweet deal, to be sure.

If your place of employment has a 401(k) plan of some sort, you should participate in it as much as you can. In many cases, it can be literally free money. Although fewer and fewer employers are doing it anymore, many used to "match" contributions dollar for dollar. So right off the bat, you make 100% return on your investment.

Most financial advisers will tell you to participate to the maximum amount allowed in your 401(k) plan or the like. This is good advice, but can be difficult for many young people who are just starting out. The cost of rent, car payments, insurance, and the like can make it seem hard to save.

But bear in mind that contributing to your 401(k) plan REDUCES YOUR INCOME TAXES. So in addition to any "matching" funds you may get from your employer, you may also get nearly 50 cents knocked off your taxes for every dollar you invest. This is on top of all the interest you earn on the money as well or any matching funds your employer provides. So you can see, a 401(k) is the best opportunity for the average working Joe. You can make money three ways!

How does the tax thing work? Simple. If you make $100,000 a year (I am choosing this only because it is a nice round number) you are in the highest marginal tax rate of 36% (soon to be 39.5%). If you put $10,000 in your 401(k), your "taxable income" will drop $10,000, but your taxes will also drop $3600. So in effect, the net cost to you is only $6400 to make a $10,000 investment.

So you see, it is a heck of a deal for the investor. Why don't more people take advantage of it? Well, they are taking the short-sighted "weekly paycheck" view of things. If they take money out for a 401(k) they feel they won't have enough to spend on food and beer. Of course, they aren't taking the longer view - or taking into account that their taxes will be lower (larger refund check at the end of the year).

Bear in mind that while a 401(k) is designed for retirement funds (age 59-1/2 or later) the money can be accessed for other needs. For example, if you are buying a first home or going to school, you can often borrow against the 401(k) or take money out in some instances. And in a worst-case scenario, you can always take money out and pay the tax and penalty if you had to.

But to avoid that, I would start out with a comfortable level of investing - and work your way up. I've seen over-eager young people at low wage jobs contribute the maximum amount allowable (usually 15%) only to later drop out or borrow against the plan. This sort of defeats the purpose of the plan.

Note that for young people, time is your ultimate friend. A dollar invested at age 21 is worth maybe $20 invested at age 55. Putting off starting a 401(k) plan is foolish, as the longer you wait, the harder it will be to "catch up" later on. Participate now to the most amount you are comfortable with. Doing something as simple as giving up cable TV and investing that money in a 401(k) could put $100,000 more in your pocket by the time you are 65.

Note also that money in 401(k) plans and the like is usually exempt from attachment through judgments or bankruptcy. So savings in one of these before-tax plans can be a "safe" investment in more ways than one, even if you later make some financial mis-steps.

Life Insurance can be another way to invest over time. Simple term life insurance is nothing more than a gamble - you pay a premium, and they pay a death benefit if you die prematurely. If you are young and have children or other obligations, a simple term policy can be very inexpensive (shop around, they are marked-up heavily). A $100,000 term policy can be had for less than the cost of "credit insurance" on your car loan.

But term insurance is not an investment. Whole life insurance is a product that has an investment as well as insurance component. The theory is, by paying "extra" the policy accumulates funds and eventually will be "paid off" and no further premiums will be due. Upon retirement, it can be converted to an annuity, cashed out, or borrowed against, usually tax free.

Whole life insurance isn't for everyone, and it certainly should not be the main part of your portfolio. Run away from any agent who suggests putting all your eggs in this basket. About 1/3 of all people who buy whole life insurance drop out within the first few years when they don't see any big gains or returns (most policies are "upside down" for at least 5 years or more). This means, of course, more money for the folks who remain. The best companies are MUTUAL companies, where the policy holders are the owners of the company as well. STOCK companies have to pay dividends to shareholders and thus have lower returns.

I bought a $100,000 whole life policy from Northwestern Mutual when I was 29. It cost $99 a month for the policy, which was an affordable amount for me at the time. Again, picking an affordable amount insures that you will stick with it over time. If you stop making payments on the policy, you lose EVERYTHING, so it is not for the faint of heart. At this point (20 years later) , every dollar I put into the policy increases its cash value by nearly $2, so over time, it has been a good, steady investment, and a good way to diversify a portfolio.

* * * *

Starting an investment porfolio isn't hard and doesn't require a lot of up-front cash. Even spendthrifts like myself can build up savings by putting a litte away here and there over time.  The secret is to start small - make a regular monthly or bi-weekly investment in before- and after-tax accounts.  If you can cut expenses, see if you can increase this amount slightly.  And when you get a raise, consider putting more into savings before spending on a new car or toy.

The only mistake I see people make is to try to save too much right away - putting $500 a week into savings, when they are living paycheck-to-paycheck.  Such overly-ambitious schemes end up falling apart quickly, and the saver ends up cashing in his savings, and thus gets discouraged and quits.

If you can start saving $50 a week at age 20, invest it at 7.5% interest until age 65, you will end up with over a million dollars.  But you have to put away that $50 a week - you have to save.

Start out small, start early, be consistent.  You'll get there.

Thursday, November 20, 2008

The Greatest Invention - MONEY

Money is not a force of nature, but an invention of mankind.

As a Patent Attorney, oftentimes I get asked, "What do you think was the greatest invention of all time?"

Without missing a beat, I reply, "Money."

This usually generates two negative reactions. First, there are some that think that money is not an invention at all. But if you think about it, it is not a part of nature, it is an invention of man. Actually, if you think about it, money exists totally in the mind. Today, we recognize "methods of doing business" as Patentable, and if such Patents had existed in 10,000 B.C. (or whenever), money could have been Patented - if the actual inventors could have been tracked down.

However, like most great ideas, money evolved in a number of different places in the world at around the same time, with no one birth mother claiming credit for the idea. Nevertheless, it is an invention. It did not occur in nature.

The second objection I get is from folks who say things like "Money is the root of all evil! It says so in the Bible! Money is bad! Money is the cause of all the problems in our society!"

These sort of rants can be difficult to parse. To begin with, the Bible does not say that "money is the root of all evil" unless you take the quote out of context. That would be like saying Bill Clinton once said "I. . ... had sex with that woman!". When you delete the words "did not" from the quote it changes the whole meaning. By the way, people who do things like that (Second Amendment types, for example) really annoy me. The actual quote is:
“For the love of money is the root of all evil.” Timothy, 6:10.
Note that this quote from Timothy is neutral on money itself, it is the LOVE of money that is bad. So forget alleged Biblical admonitions. And besides, the whole point of this blog is just what this quote from Timothy is getting at - that chasing after and spending money is evil - and destructive. You can live a "rich" life without loving money. That does not mean you shouldn't respect it as the powerful and potentially dangerous invention that it is.

All inventions are dangerous and destructive in some applications. From the first inventions ever made by man (the blunt club, fire, the sharpened stone tool) to the latest (nuclear power, the internet, the automobile). All can be used for good or evil purposes. Cars kill 45,000 people a year in America alone and also pollute the air and diminish resources. A sharpened stone can be used to scrape an animal hide or kill the caveman in the next cave. It's all in how you use it.

And yes, money can be used in very evil ways. But oftentimes, it is the "love of money" that is the downfall of the victims of money. People who end up being scammed by evil people are scammed because they are greedy. In your typical MLM scam or Nigerian scam, or Invention Broker scam, or Real Estate scam, who is the "evil" person? The one raking in all the money, or the greedy victim who thought he could make "something for nothing" and "get rich quick"?

The folks who decry money as inherently "evil" are usually the ones who do not understand it or treat it carefully and with respect. They get burned by money a lot, so they blame money for their woes, when in fact it is often their own actions that are the real source of their misery - money is only the scorecard of their difficulties.

And that is the point of this blog. If you treat money carelessly, like a loaded handgun, it will probably hurt you or someone you love. If you treat it carefully - like a loaded handgun - it will be safe and might be useful to you.

So why do I think money is the greatest invention of all time? Well, without it, most subsequent inventions would not be possible. You cannot build a moon rocket without money. Bartering chickens or eggs for a Saturn-V booster just is not practical. So any major undertaking of mankind usually requires some sort of money or money-like medium of exchange. Money allowed the creation of modern societies. Money allowed us as Humans to do things other than scratch in the soil all day long. Money allows me to sit here and type this blog, rather than be out hunting for food all day long.

Money also allows us as humans to time-shift wealth. In many more primitive societies, people try to have as many children as possible in order to insure that in their old age, they will be cared for. Overpopulation has often been the result of this practice. Without money, and a means of storing it over time, the only option for insuring wealth over time is to have a large family and hope they will take care of you later on.

Now, one might argue that such an arrangement tends to strengthen the family unit more. Since parents rely on their children in their old age, they might tend to treat their children better, and children tend to honor their parents (as it says in the Bible) as part of a cultural tradition. And these cultural traditions are precisely the outgrowth of such human necessities.

However, such arrangements can be grossly unfair. A couple without children might find itself destitute in such a society, whether they cannot conceive or whether their children die off. People without families are left with few options other than begging. In an industrializing society, where mobility of the workforce is essential, such arrangements may not be practical. And finally, such traditional arrangements prevent one from breaking free of traditional roles and boundaries.

Money allows a person to create wealth and also store it for future needs. You can invest money in stocks or bonds or whatever, and later on in life have a resource to rely upon to support yourself. Money allows a person to live independently and provides freedom. I'll take money over bartering, any day.

Now, with the recent downturn in the stock market, some folks might argue "Well, that defeats your argument - how can you save for retirement if the market crashes or is manipulated?"

Well, that's why I mentioned that you have to respect money. It takes a long and painful time to save up even a few dollars. With all the expenses of living and the scarcity of wages, saving even a buck or two is a heroic process. One would think that after all that sweat and toil most folks would be vigilant of what they do with their savings.

One would think, anyway.

In reality, most folks have little or no idea where their money is. They might put it all in a mutual fund and occasionally glace at the Statement every month. "I don't know what to invest in" is a common thing I hear from regular folks. Or, "I just don't understand these things, so I let my broker handle it."

Even more disturbing is when people actually try to invest their money and things go horribly wrong. Most phoney investment schemes target the poor or lower classes, as they tend to be less educated and respect money less. How can I say this? Well, think about it, why are they poor in the first place (lack of education and respect for money). So things like MLM (Multi-Level Marketing) schemes are targeted at the poorest segment of our population, with the promise of easy riches - for a small initial investment.

Let me just note the obvious here. If there were such a thing as easy riches, everyone would be doing it, and you wouldn't be hearing about it through an e-mail or on a cardboard sign tacked to a utility pole. If you could make a fortune in MLM, Warren Buffet would be hawking health products door-to-door. The reality is, MLM is nothing more than a pyramid scheme, and only those running such schemes make any real money. Period. And no, this is not open for discussion.

In my line of work, we have what are called "Invention Brokers" who promise starry-eyed inventors riches beyond their dreams - if only they can pony up $5,000 to $20,000 in fees. Oftentimes the victims of these cons are from the poorest segments of our society. How they come up with the money is beyond me. But they do. And the largest invention brokers rake in tens of millions of dollars a year in these fees. They don't really care about the inventions (which never go anywhere) they want the fees.

But even middle class America ends up getting screwed through their own ignorance. Several older friends of mine have complained that, during the recent downturn their retirement incomes have been cut way back. I was flabbergasted to hear this from a number of people, as all the literature I've read has said that, by the time you reach age 70, you shouldn't be playing the market.

A person in their 30's or 40's should have 3/4 of their retirement savings in equities (stocks) and maybe 1/4 in "safe" investments like bonds or government funds. By the time you are nearing retirement, the ratio should be reversed - mostly bonds and "safe" investments and maybe a small portion in stocks and other riskier investments.

But for some reason, my friends, based on advice from brokers, ended up in stocks, and now, at age 70, are looking at a bleaker retirement as a result.

Respect for money means that you have to take advice from investment managers, brokers, retirement planners and the like with a grain of salt. Bear in mind that all of these folks get commissions from your investments. They are not your friends giving you advice from the goodness of their hearts. They are out to make a profit.

So the onus is on YOU to educate yourself the best you can as to how to invest. Many people think that this is impossible to do, as the subject is too complicated or difficult to understand. Nonsense. Libraries are full of books with investment advice. And most of it is just plain common sense.

Anyone can figure out basic investments without too much difficulty. The first thing to rely on is your gut instincts. If something doesn't sound right to you, or you are being asked to invest in something you don't understand fully, or if someone promises crazy returns for your investment, then just GO with that gut feeling and walk away.

The second thing is to DIVERSIFY. Handing over all your money to one investment adviser or broker or mutual fund, or stock, or whatever is never a very good idea. If that adviser or broker turns out to be a crook, or the mutual fund is run into the ground, or the stock crashes, you are dead broke.

In my short time on this planet, I've seen all of these things happen. People who invested all their money in Enron stock, only to lose everything they have worked for. People who put all their money in one mutual fund, only to see it mismanaged into the ground. People who handed over all their money to a crooked broker who "churned" their account for trading fees until nothing was left. Warren Buffet has said "put all your eggs in one basket - and then watch that basket" but I disagree. Even the best-watched basket can fall and break all your eggs. Better off to have multiple baskets so that at least SOMETHING is saved if the worst happens.

The third thing is to avoid fancy investments. The invention of money has also allowed the creation of many derivative investments. When I say "derivative" I mean this in the Calculus sense. In mathematics, speed (change in distance over time) is the derivative of distance. Acceleration (change in speed of over time) is the derivative of speed, or the second derivative of distance. With money, things like "futures" are called "derivatives" for the same reason. You are not betting on the price of a commodity or stock, but the direction of travel (and how far) the price will change over time - which could be considered the second derivative of price.

Such investments are complex and require skill and management. For the average investor, playing with derivatives is like playing Russian Roulette. You have to respect a loaded handgun. You have to respect money. I know folks who tried to "bet" on the price of a stock, only to end up losing tens of thousands of dollars, maybe more. Such "investing" is little more than gambling. And gambling is no way to respect money.

Similarly, other "schemes" like day trading of stocks are a really, really bad idea. Betting on the direction of a price of stock during one day is little more than gambling, unless you have insider information, which is illegal. Yet may do it, claiming to have a "system" for always coming out ahead. But here's the deal: Money doesn't conform to some "system" where prices and values go up and down according to anything other than the perceived values of the underlying stock. Betting on stocks based on phases of the moon makes as much sense as betting on horses based on numerology. You are better off betting on the fastest horse.

Which brings us to the ultimate in disrespect for money: Gambling. Gambling is just plain bad, and if you one of those people who likes to throw biblical verse at me about "Root of all evil" check your Bible to see what God has to say about gambling.

Gamblers always lose. Period. Movies, television, and literature are full of romantic stories about how "professional gamblers" make big money at gambling. James Bond saunters into the casino in his white dinner jacket, and bankrupts the evil opponent at Baccarat. It is a glamorous fantasy. The casinos and other gambling businesses (who euphemistically refer to gambling as "gaming") love to perpetuate these myths. The cold hard reality is that if you gamble at a probability game long enough (slots, roulette, etc.) you will eventually lose all the money you came in with. The house always takes a percentage, and for every dollar that enters a casino, less than 90 cents goes back out (if that). And no one in a modern casino is wearing a dinner jacket. There is no glamor in gambling, just ugliness.

Gambling games which are not entirely dependent on probability, such as card games (poker) or sports events (races, football, etc.) are also losers. Yes, someone who is a good bluffer in poker might be able to win - against players with less skill, but on the average, most people walk away from the card table with less money than they came in with. The popularity of poker tournaments in the US recently has illustrated that even "professional" players can lose on more than one occasion. In many instances, some unknown player of mediocre caliber wins the tournament, not because of skill, but the sheer law of probability.

Playing with your money is not respecting it. And yet many folks do just that, and lose enormous sums in the process - money they can ill-afford to lose. Gambling ties into the compulsive-addiction parts of our brains, and those who have addictive personalities are particularly susceptible to gambling's allure. Like drugs, you can't do "just a little bit" and kid yourself that you have the problem "under control". The best thing to do, is just say "No" completely.

The only people to make money gambling are the casinos, the people running numbers, or the folks taking bets on college football. Governments make billions on lotteries and payout maybe a few million to some "lucky" chump once in a while. If you want to make money gambling, open a casino. Otherwise, forget it.

So, money can be powerful. Money can be dangerous. Money should be respected. But what exactly IS money? It is an IDEA, plain and simple - and nothing more.

In popular action movies, there is usually a scene where the bad guys open an aluminum briefcase filled with neatly stacked $100 bills. Everyone in the audience drools at this point. Lookit all dat money! But often in the same movies, the villain (or hero) replaces the briefcase with one filled with worthless pieces of cut up newspaper. Boo! Hiss!

But what, exactly, is the difference between the two? Both are suitcases filled with paper. Why is one valuable and one worthless? The difference between the two is all in your head - literally. (And if you think about it, it is just a movie, and even the "real" suitcase is just filled with fake prop money and has no real value other than the suitcase itself.)

Money is nothing more than an IDEA. It doesn't physically exist anywhere. Those hundred-dollar bills are merely an expression of the IDEA of money, not actual money itself. Most money exchanged today doesn't even have a physical embodiment, but exists merely as numbers in banking computers, representing balances, charges, debits, and credits.

For example, I go to a restaurant and have a meal. I give the owner a card encoded with a number on it. He processes the card through a computer, which then debits a balance sheet with my name on it by a number deemed equal to the value of the meal.  Later on, a client sends me a slip of paper with another number on it.  I give this to my bank, and they credit the same balance sheet with another number deemed equal to the value of my services. The entire transaction really doesn't "exist" anywhere except in the bank's servers and other records.   We might exchange slips of papers with numbers on them to "prove" the transaction took place, but more and more, we are dispensing even with that.   Receipts are often just a waste of paper.  And mailing checks is giving way to electronic transfers (and with Check-21, a check is little more than a request for an electronic transfer).

In the early days of money, precious metals or other materials were used to represent the idea of money. Why was this? Metals like gold and silver were valued for their relative rarity, to be sure.  But the real reason earlier cultures used metal-based currencies was simply to help prevent counterfeiting. Think about it. In Roman times, counterfeiting their primitive coins was not a difficult matter, given the primitive dies of the time.  But if the coins were made of precious metals, it made it harder to make fake ones, unless you scrounged up more metal that the counterfeit would be worth.  It was a pretty good self-policing system.  Detecting fake coins (made of lesser metals) could easily be determined by the weight and density of the coin.

By the way, the penalty for counterfeiting, in most primitive societies, was usually death.  This alone tells you how important it is to police the idea of money.   If people get it in their heads that money is nothing more than slips of papers, well, then, the game is up.  Chaos would result.

Many (idiots) are calling for a return to the "Gold Standard" or some other metal-based money. However, even if you based currency on the price of a commodity such a Gold or Silver, it still does not make your money anything more than a concept or idea.  Gold and Silver have some industrial values.   However, their perceived value is based entirely on the IDEA that they are valuable. We tell ourselves they are "precious metals" and as a result, they are. Gold has no intrinsic value in and of itself, other than as an industrial material.

Diamonds fall into the same category.  Despite the fact they are made of one of the most common substances on the planet (carbon) the folks who mine and market diamonds are careful to insure that the perception of diamonds as "precious stones" is not tampered with. Industrial processes can now make flawless diamonds artificially. Such stones have no value, as you can make an infinite amount of them. The diamond people are not happy about that!

You can't eat gold. You can't eat diamonds. You can't burn them in the engine of your car, or use them to build tall buildings or rocket ships. They have some industrial uses, but that's about it. When we exchange gold coins for merchandise or services, we are trading the IDEA of wealth for those goods or services. The recipient of that gold coin, in turn, hopes to exchange the coin for goods or services that he might need. He cannot use the gold coin in and of itself, unless he melts it down to make jewelry or electrical connectors.

And that is the point of money - and its genius. Money provides a means whereby one can exchange any good or any service, anywhere in the world, with any other person, for any other good or any other service. Corn grown in Illinois can be traded for a car made in Michigan, which can be traded for a computer made in Taiwan, which can be traded for a barrel of oil from Saudi Arabia, which can be traded for a load of timber from Canada, which can be traded for a week's labor in Utah, which can be traded for something else, and down the line. No complex system of bartering is necessary. And the system is self-regulating in terms of exchange. Each user finds the correct "price" for the goods he wants (or the best price he can get, anyway).

Now to be sure, there is a dark side to this intellectual fantasy.  Money also allows an hour of prostitution from New York to be exchanged for a bag of cocoa leaves in the mountains of Colombia. Money has the power to do good or evil, depending on how it is used by the user. Money itself, however, is value-neutral.

Money can also be used to buy money. You can spend money to borrow money, and you can also make money by lending it. These are the first derivatives of money. And yes, some say the Bible warns against money lending. Ben Franklin is alleged to have said "neither borrower or lender be". Given the potential for mishaps in borrowing or lending money, it is not hard to understand why some folks would prescribe a blanket proscription of such practices. If you loan out money to someone who defaults, you could be broke. And if you borrow too much and cannot pay it back, the same thing could happen.

However, loaning money is probably the cornerstone of our economy. In fact, the real value of money today is not determined by the value of Gold or Silver, or even a barrel of oil, but by the interest rates set by the Federal Reserve. Big M, they call it, the Money Supply, controls the value of money, and Big M is tied to the prime rate. The more money in the economy, the cheaper it is to borrow it. But the more money, the higher the inflation rate can be. So the Fed controls Big M to try to control the value of money. It is not an exact science, to be sure.

The value of money is what it will be worth tomorrow. This means, however, that since not all of us have access to loans at the "prime rate" or can earn interest at the highest rates, money has a higher value to some folks than it does to others. And as you might expect, since the rich have access to the best rates, money is much cheaper to them than it is to the poor.

And that, perhaps, is the most interesting thing about Money. Even though it is an age-old invention, and we've had tens of thousands of years to play with it, experiment, examine it, and understand it, mankind still does not have a real handle on this deceptively simple invention. Economics is still considered a dark art - more magic than science. And even today, new "theories" of economics are still being developed.

The more complicated aspects of money are still not fully understood. Every time some young hotshot claims to have a new computer model for trading derivatives, you can be sure that a major market crash is right around the corner. Most of the new models (like "mark to market" accounting) end up being less science and more people telling themselves what they want to hear. When fantasy clashes with reality, the inevitable happens.

Dealing with money requires little more than common sense, respect, and perhaps a little luck. But bear in mind, it is an invention, not a force of nature.

UPDATED, reformatted, and corrected, June 2015