Something I have learned...

[carstea]

I have been reading some very wise comments on the postings where folks say when you buy a truck try to limit the cost as much as possible because you want to work for you not for the truck. If my calculations are correct if someone borrows $65,000 for a truck and finances it for 5 years at 10% interest compounded semi-annually the monthly payment would be around $1,375. After the 5 years are up you will have paid $82,500 of which $17,500 would be interest. And if a driver averaged $0.96 a mile it would take over 18,000 miles just to pay the interest on the loan! Seems to me the best way to get into this business is with as little debt as possible so...

1) you won't be cash strapped,
2) you won't be paying so much on interest, and
3) if something unforeseen was to happen or a bad recession occurred and you couldn't take loads, you could weather the storm much easier without worrying about creditors making the situation worse.

My numbers shouldn't be viewed as official as I am not an expert but I think the concepts still apply. Debt is never a good thing, especially in a new career or business venture. I just wanted to know what the common practice was among new drivers...do most folks go into debt big time to get started or do they try to compile as much money beforehand to limit the debt? Any advice you folks can give would be greatly appreciated.

 

[ATeam]

We (wife and I) agree 100%! Debt is evil. Debt-free is the way to be! The world is full of people that will happily finance your cars, house, home improvements, trucks, wedding rings, vacations, lake home, education, etc., etc., etc. The trouble is, if you finance your posessions, you don't own them, they own you.

That said, I'd love to hear responses to comments offered to us by more than one experienced driver. They urge us to finance our truck and extend the payments. They believe it is good to make truck payments because of the tax benefits the interest deductions provide. They practice what they preach. They run trucks for three years and then buy new (depreciation is a factor they point to as well). That puts them in a perpetual truck payment situation.

Perpetual debt is intolerable to us. It's not the way we live our lives. But perhaps debt has benefits after all, espeically in a business setting.

There are some pretty sharp business people out there (non-truckers) that routinely leverage their assets to the hilt. These folks range from investment bankers, to bowling alley owners, to rental property investors. Such business people are often held up as role models in their peer groups.

With all other things being equal, which is better for the one truck owner/operator: perpetual truck payments where you buy and depreciate new equipment over and over again, or debt free ownership of a truck that you run for many years?

 

[x06col]

For one horse organizations a paid for truck can't be beat. When you expand some there will be the need to borrow for the cause. Mainly the reason is, there are very few used units available, spec'ed to provide capacity, or, other features needed by the customer and, requires a substantial investment. My personal rule is 2 units paid for and, 1 not. I certainly wouldn't put out 10% when 5% is available at almost any bank in todays invironment. Also,
sometimes the writeoff is rewarding, but, you never know when with the way things change in this business. So,,,, just put you're craps hat on, and, jump in.

 

[terryandrene]

My not so humble opinion: After you've done your homework, ala a-team, et. al., and you've decided to jump in, your financial future will be in question until you've learned the who, what, why, when and where of it all. In a small way its kinda like the casino atmosphere. Some people are comfortable at the nickel slots and others are doing three coin pulls on the dollar slots. Hopefully none of them are in need of gamblers annonymous. Well This business was a gamble for each of us who came into this from other professions. Most of us have done well, but many were forced to abandon ship when misfortune came their way. Some had paid large down payments and could not bail out debt free cause they were upside-down on their truck notes. I met one couple from OK that refinanced their house to put a large down on an E unit. He fell off a loading dock, broke his leg and was off-the-board for only three months. In that time he defaulted on truck and house payments and lost them both. Sadly he had no nest egg nor adequate insurance.

the moral of my story: Do that with which you are financially comfortable and make sure you have the capital to weather the unexpected.

 

[ATeam]

When I worked as a securities broker and financial planner, I spent a great deal of time teaching my clients the difference between gambling and investing.

In gambling, you position your money where you'll have an increased chance of loss. In investing, you position your money where you'll have a decreased chance of loss. We invested client money in a variety of asset classes so as to simultaneously increase their wealth and avoid the loss of purchasing power.

Numerous risks had to be managed simultaneously: tax risk, inflation risk, market risk, etc.; and all that within each investor's personal risk tolerance. One hated taxes above all else. Another could not stand the idea of seeing stock market swings affect their net worth. Yet another feared rising prices on a fixed retirement income.

Motivational factors were also considered. Some people invested money to create a nest egg to pass on to their children. Others created trusts to keep the money out of their rebel-kids' hands. Still others were in a self-defined contest to beat the market or do better than their neighbors.

Emotions and motivations should not be underestimated. I remember a widow that did a fantastic job managing her husband's estate. His investments did great. But year after year, investents in her name grew by exactly zero. When I presented the numbers to her and asked her to explain the difference, she said, "It's because I'm a zero."

I suggest that a good expediting business plan is a risk management plan. It addresses liability risks, freight cycle risks, business continuation risks, etc. It also addresses the emotional reasons...the reasons why a driver (team) is in the business in the first place.

Is it to prove a point? Is it because he or she can't stand being home? Is it for the love of travel and tourism? Is it to build a retirement nest egg? Is it to be more successful than one's neighbors or relatives?

The example cited by terryandrene is not a case where a driver gambled and lost. It's a case where capitalization and business continuation issues were not addressed in a business plan. The driver's motives may have also been overlooked when the decision was made to mortgage the house to buy a truck.

It was not a case where the driver lost his business and home due to the luck of the draw. It was not even a case where the driver broke his leg and suffered a financial catastrophe as a result. It's a case where losses occurred because certain risks were not properly planned for and minimized.

Yes, it was a stroke of bad luck that the driver broke his leg. Accidents happen. Ruling out carelessness, an accident may be properly considered an unlucky event. But good business plan don't deal with luck. Good business plans anticipate the unanticipated and minimize risks accordingly.

An injury, illness, family emergency, traffic accident, mechanical failure, loss of a co-driver, or business slowdown all produce the same result: reduced income. Insurance can be purchased to cover some risks. Addressing other risks may be as simple as making a smaller down payment on a truck and keeping more cash in reserve.

Without a plan, expediting may be the biggest gamble you'll ever take. With a plan, it can be the smartest move you'll ever make.

 

[Twmaster]

>Without a plan, expediting may be the biggest gamble you'll
>ever take. With a plan, it can be the smartest move you'll
>ever make.

Good post A-team. I will add to this by pointing out the above line. This holds true for any business you may consider owning.

Nothing is ever as simple as 'buy a truck, make a living'. As somebofy else also pointed out in another thread we all should be business persons first. Drivers second.

Without a plan for sucess you are likely doomed to failure.

--
Mike N

 

[davekc]

plan for the unexpected. The above case is a good example of having enough of the right types of insurance. New folks need to make sure they have enough cash reserves, and don't overspend on equipment. I must have typed that comment 100 times, yet I see single drivers financing 80 and 90 thousand dollar trucks at high interest rates. A year later, they have usually crashed financially.
Unless you have previous experience, getting equipment is getting harder and harder. Alot of finance companies are requiring higher down payments and higher interest rates. You can find decent rates, but you have to do your homework.
The other current issue is that interest rates nationally are on the rise. That will effect truck buying as well as a house, car, ect. It went up a half percent just last week.
As far as cash reserves, you should have at the least, 3 to 6 months of living and operating expenses. Of course that is my personal observation. You never know what slow period and or bumps along the way that you may encounter.