Wednesday, April 27, 2016

A story of 2 fire departments - Chapter 1

I regularly talk with 2 different types of fire departments.

And their stories are dramatically different. 

The story of fire department #1

This fire department is all about fighting fires.  All they talk about is the operations of the department, what kind of fires they fight, what kind of trucks they have, the training they have, and what kind of service territory they have.

They don't think much or have anyone that works on the business end of operating a fire department.  They don't think that is much fun and don't try to get or develop the expertise in this area.

They don't have a budget.  They run some fundraisers, beg for money from their local government, and check to see how they are financially doing by looking at their bank balances.

They are tactical in nature and don't really have a long-term strategy.

The story of fire department #2

This fire department takes a more broad view of operating their department.  They understand the importance of being able to fight fires.  They train and buy equipment just like the first fire department.

But they also focus on the business aspects of running an organization.  They set a  budget each year. They know what it costs to have a fire department they want.  They manage their financial results by comparing themselves against the budget - are we spending more or less?

They have a long-term strategy.  They know when they plan on replacing trucks and have conversations and discussions with their stakeholders about adequate funding.  They can show them what it costs to run a modern and safe fire department.

Summary

I am not trying to blame anyone for their fire department.  I want to tell people what is possible, what is the best practice, and to have a fire department that serves its community well.

Over the next few weeks, we'll share some other differences between these two fire departments.


Stay safe!
John R. Hill
President
First Bankers

Wednesday, April 20, 2016

The killer fire truck financing issue solved

Everybody asks about paying off early to save money.... so why doesn't it work?

As we've shared over the past few weeks, it's because almost no one actually does itthey make decisions that actually cost them money, and they miss the real savings opportunity.

So, how can a fire department actually save money?

Everyone believes that paying off early will save the money but we've explained why it doesn't work.

But there is a fool-proof way to get the results that is implied when you ask this question.

Here it is:

Calculate the biggest payment your fire department can comfortably afford in its budget and repay your fire apparatus with that payment- right from the start.  Also, calculate the largest down payment your department can afford without endangering sufficient cash reserves and pay that toward your fire truck.

Committing to a low payment and then planning on paying off early is like going on a diet where you will eat pizza upfront and then plan on eating salad later in the diet. It doesn't really work.

Summary

It seems safe to commit to a lower payment and then plan on paying more later but it's not safe.  Everyone's worry is that they are committing to a payment that is too large for their budget and may be unable to pay if an emergency arises.

Here are 3 thoughts about that:


  1. Your banker should be able to help you calculate a safe and comfortable payment budget even in the case of unexpected events.
  2. You should keep enough reserves on hand to shoulder any unexpected events or repairs.  That's just good financial practice.
  3. Your banker should be versed enough in fire department financing to understand that things happen and lower your payment for a year or two to help when the unplanned happens. 
Knowing this and following the advice above, your department will achieve the results implied in the paying off early question.


Stay safe!
John R. Hill
President
First Bankers

Wednesday, April 13, 2016

The killer fire truck financing issue explained - Part 3

It's the paying off early question. 

Everyone asks "can we pay this off early?" and "is there a penalty for paying off early?".

And I mean, everyone.

Why this is a killer issue

As almost everyone knows, the first payments on any loan are almost all interest with only a little principal repaid.  At the end of a loan, almost all of the payment amount is paying principal and very little is paid toward interest.  That's because the interest is calculated on the principal balance.

So, most fire departments intend to pay off early and they pay off (if they do at all as we discussed before) in the last few years. Which means they save very little interest.  In other words, by paying off near the end of a loan, they are just paying for the truck, not really reducing the cost of financing.  Which is the purpose of paying off early - to reduce borrowing cost.

So, they never save money, which was the intent of their question up front.

Summary

It's the math.  And if you don't understand how the math works, you can get burned.

Next week, we'll show you how you can get what you want when you ask this question.

Stay safe!
John R. Hill
President
First Bankers

Wednesday, April 6, 2016

The killer fire truck financing issue explained - Part 2

It's the paying off early question. 

Everyone asks "can we pay this off early?" and "is there a penalty for paying off early?".

And I mean, everyone.

Here's why this question actually costs you money

Even though we said last week that very few people actually pay off early, this question costs money for a dramatically different reason.

That's because when someone thinks they are paying off early, they begin to choose a longer term for the lower payment, thinking that they will pay more and pay off early later one.

The longer term has two very expensive side effects.

First, the interest rate is higher.  The longer you finance your fire apparatus, the higher interest rate you'll pay.  So the idea of being conservative (choosing a longer term/lower payment and paying off early) actually commits your fire department to a higher borrowing cost.

Second, the longer term means you'll be paying less principal each year.  So, each year, your borrowing cost will be calculated on a higher balance.  Which means you pay more interest.

Summary

No one I ever speak with understands how the intention of paying off early can actually cost more.  They haven't done the math and thought through the consequences of their decision.

I'm not trying to shame anyone for not knowing this information.  They don't have the experience to know the difference. My only goal is to help fire departments understand and make informed financial decisions.

Stay safe!
John R. Hill
President
First Bankers