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Financial Literacy

Frequently asked questions about investing in FGN Bonds

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Investing in FGN Bonds

I’m sure you’ve probably come across the word “Bonds” before. Either in the news, online or on the pages of a newspaper. I can also guess when you try to figure out more about it, they just confuse you the more with all the financial jargons you are so not interested in.

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I’m going to try to explain in such a way even a dummy would understand it. I hope and do at the end of this blog. If I start to sound like one “over sabi” guy please let me know.

What are bonds?

Ans – Bonds are simply a term for loans that you give to the Federal Government, State Government, Companies etc.

Is it a document or what?

Ans –It’s simply a piece of paper issued by the Borrower (e.g the Government) stating the amount borrowed from you, the tenor (no of years with which to repay), interest rate, and repayment period

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Why me? Can’t they go to a bank to borrow money?

Ans –You because you may have some money that you wish to save. You may say you have just N10k to save a month from your salary and wonder how that helps the government. Imagine that there are 1million people with N10k to save, that transcends to N10b already. Also have in mind that the money the banks actually lend are money deposited by you and I. So you and I are the major source of money for government, banks, corporations etc. That is why they tax us, pursue us to open accounts, and pressure us to buy their goods.

What’s in it for me?

Ans –Bond issuers (borrowers like the government) typically attach a coupon to the Bonds. Coupon is basically interest rates attached to the Bonds issues. For example, the Government can issue a bond for say N10b, 10year bonds at a coupon of 6%pa. What they mean is that they want to borrow N10b from the public and are willing to pay 6% interest rate for it per annum for a period of 10years. Usually they pay you the principal amount at maturity meaning at the end of 10years and sometimes they can have the option to “call back” which basically means the can pay you the principal before the 10 year period. Bonds with “Call Back” are always clearly stated in the prospectus.So, in a nutshell if you borrow them N10k, you form part of many others who must have lent them as well. They pay you N600 per annum and pay you the N10k a the end of 10 years.

What? Just N600? Yes just N600.

Ans –Well, you may think of it as low but the if you put that same amount in a Savings Account of bank you’d probably get N200 and stand the risk of loosing it if the bank collapses. Besides if it is N1m you invest then that’s N60k every year, N10m is N600k and N100m is N6m per annum.

Are you saying Government Can’t collapse?

Ans –Well technically they can but it’s very unlikely. Even if they do, it’s if there is a war but then they must repay after the war is over. Government bonds are mostly secure and are guaranteed by the full faith and credit of the Government.

So I have to wait for 10years to get my money back? Off course not. The beauty of bonds is that you can exchange them just like shares. You can decide to sell your bond on the bond market if you want your money back.

Oh, so I put in N10k and get my N10k back plus interest?

Ans –Yes if you decide to hold to maturity and wait for 10years. But if you wish to sell before then you can except that it could be worth more or less. Just like shares the value of bonds go up and down depending on economic factors. So, the bond you bought for N10k may be worth N11k or N9k when you are selling it. Just like shares, today it’s up tomorrow it may be low. But at maturity (the repayment day) the government or borrower must pay you the face value. The face value is the N10k you paid them. Movement in the market does not affect what the borrower pays you.

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So are bonds really like shares then?

Ans –Not exactly, whilst both are investment securities they are different in their nature. When you buy shares, you buy right to earn a dividend of a company. Meaning that you only get dividends when the company decided to pay you. For a Bond, the borrower or issuer (that is the Government or company) MUST pay you interest (coupon) a the stated date. In other words, owners of shares are equity holders, whilst owners of bonds are debt holders.

I have often heard of yields, what is that too?

Ans –Well yields are basically interest on traded bonds. In my previous illustration I explained that the government pays you a coupon of 6%pa on your N10k bond. Since we understand that bonds are tradable, supposing the value was 9k at the time you sell the bond. It then means whomever buys it will earn N600 on the N9k he paid out. Thus his actual interest otherwise called yield is 600/9000 = 6.66%. So he gains an extra .66% and still gets to get another N1000 if he decides to wait till the maturity of the bond. They often say the yield of a bond moves in opposite direction to the value. Just as above, as the value dropped to N9k the yield increased to 6.66%.

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That’s cheating me isn’t it?

Ans –Nah not true. Remember, there is an opportunity cost you may incur if you do not sell. Imagine you had a business that will probably get you twice that amount if you sell. So instead of holding on just so it gets to 10k or higher, you sell and use the money for something more tangible. Also remember that you would have collected some interest as well. And then you can simply just hold on till maturity, it all depends on your opportunity cost.

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Ok now I get it! How do I then invest?

Ans –Bonds can be purchased either through the primary or secondary market.

The primary market is where you buy bonds that have just been offered by the seller like the Government (just like buying a public offer). The secondary market is where you buy tradable bonds that is, bonds from the bonds market (just like buying shares in the stock market). Bonds traded in the secondary market are usually done on the floor of the Nigerian Stock Exchange or Over the Counter (OTC) through the PDMM

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Bonds sold in the primary or secondary market are bought through a PDMM(Primary Dealer Market Maker). PDMM are operators licensed to buy and sell bonds. Most of them are banks like First bank, Zenith, GTB, UBA, Diamond Bank to name a few. They also have discount houses like Kakawa Discount House, FSDH who sell as well. You get the application form from them, fill it, include your cheque in full for the amount you wish to invest. You can invest as much as you can, from N10k to N1b depending on your capabilities financially. But the minimum is N10k and multiple of N1k thereafter.

The bonds purchased are confirmed through issuance of depository or issuance of certificates. The depository is the CSCS (Central Security Clearing System) an online storage for securities such as shares and bonds.

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How do I get my interest?

Ans –Interest on Government Bonds are paid Semi annually.For example in June and December or in January and July. Payment is through issuance of cheques or warrants, similar to the dividend warrants you get for shares.

Also note that interest rates can be fixed or floating. Fixed means when they say they will pay you 6%pa then it is 6%pa you get till the end if the maturity. Floating means they may pay you an amount that is linked to a are that moves with the market. For example they might say Nibor 8% plus 2%. Meaning the rate is benchmarked o. The Nigerian Interbank Official Rate (Nibor) of 8% plus 2%. The Nibor is a rate that banks use to lend money to each other and it always changes in response to market conditions and is thus the floating rate.

So what do u think? Is it clearer to you now or did I just confuse you more? Do not hesitate to ask if you require more information

This article first appeared on Nairametrics on September 25, 2011. It has been updated with new information.

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Ugo Obi-chukwu "Ugodre" is a chartered accountant with over 16 years experience in financial management, corporate finance and financial analysis. He is also a retail investor and a personal finance advocate with over a decade experience investing in the Nigerian stock market. Ugo is the founder/Publisher of Nairametrics and blogs regularly on the website.

7 Comments

7 Comments

  1. Pingback: How Investing ‘Thousands of Naira” Periodically Can Turn You Into A Millionaire | UGOMETRICS BLOG

  2. Celestine

    March 24, 2015 at 4:11 pm

    1) Please which of these interest rate is recommended especially for a beginner like me FIXED or FLOATING?

    2) Dough i have stocks which i bought from the floor of nse, that mean i have an account with CSCS. If i want to buy bonds now can i get through my stock broker?

  3. Momentum

    June 19, 2018 at 9:42 pm

    I just got more confused with the Nibor Gist. Please, can you clarify. By the way, you have great content on this blog, just carved your niche. Well done Sir.

  4. Anonymous

    August 23, 2018 at 12:47 am

    Thanks for the information. It’s very helpful

  5. Abelazuh

    January 6, 2019 at 2:02 pm

    Am always enriched with nairametrics. Pls what’s the requirements for opening CSCS account.

    • Onome Ohwovoriole

      January 7, 2019 at 11:01 am

      Simply open an account with a stockbroker, who will provide you the necessary forms.

  6. Paul

    March 20, 2019 at 9:30 am

    What is PDMM???

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Investment Tips

If you had $100,000 in cash, where would you invest it in US markets?

What an American investor would do if he had to invest $100,000.

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America is a nation of options. Take water for example, you can buy bottled water, water with mineral salts, water without salts, carbonated water, fruit-flavored water, or even water that is infused with oxygen. This example holds true when it comes to investing.

You may walk into your financial adviser’s office with a clear idea of what you want to do. Let’s say you want to save for retirement, and then you are presented with options — do you want long-term investment options? Should you buy bonds? Okay… what kind of bond; interest-paying or non-interest paying? Inflation-indexed? Real Estate backed bonds? Convertible bond? 100-year bonds? The options are endless.

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How would an American invest $100,000?

Let us start from a plain vanilla bank savings account. I got Fig 1 below from a J. P. Morgan Asset Management (JPMAM) presentation, and it tracks savings account return from 1994 to 2020. If that investor had put $100,000 into a savings account in 2000, those funds would have earned 6%. Today, however, those same funds put in the same account will only return 0.28% per annum. Keep in mind that inflation in the United States is currently at 0.3%. So, the investors are just barely hanging on in terms of earning a yield.

More questions to consider…

  • What if the investor decides to earn a return that is higher than US inflation?
  • How can the investor beat inflation?
  • What about bonds?

Well, the US Treasury Bonds are quite safe. The US dollar is also very strong. Can a dollar bond beat inflation? The simple answer is no. Take the 10-year bond yield in Figure 2; the yield has fallen from a high of nearly 5.5% in 2007 to just about 0.74 in 2020. Bond yields move in the opposite direction as interest rates. So, as interest rates in the US fall, bond prices rise, thus yields fall.

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(READ MORE:5 key steps to a successful investment journey)

Investing in bonds does get the US investor a real rate, but certainly no daylight. How else can the US investor boost his returns to real gains? Keep in mind this desire for yields will necessitate having to expose the portfolio to more volatility (risk). What about equities?

Investing in US equities 

In 2020, the US stock market has been essentially flat, as Figure 3 shows. However, 2020 is an outlier and can be attributed to the economic malaise caused by the COVID-19 shutdown. The annualized return of the S&P 500 index between 1919 and 2019 is 10.47% (dividends included). So, whilst we cannot predict future earning, we can use the average returns as a guide.

So, if that investor was looking at a fixed guaranteed return, with lower risk, the US Treasury Bonds will be the way to go. If, however, the investor wanted to take more risk and potentially grow his capital, investing in the capital market is the way to.

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Figure 4. shows the relationship in terms of yield between both asset classes. From 1901 to 1958, the dividend yield earned on US equities exceeds that paid by US bonds. From 1959 to 2008 however, the dividend yield on US Government bonds surpassed that from Equities.

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What is happening is simple —as stock prices rise, their dividend yield falls. This is because there is an inverse relationship between the two. Thus, in the earlier part of the century, bonds did not pay a lot in terms of coupons. Therefore, dividend yield from equities outperformed bonds. However, as America raised interest rates in the 1970s to combat inflation, bond yields rose and overtook stock yields. Fast-forward to the year 2007 when the Federal Reserve dropped rates to combat the global financial crises, equity yields again started to do better than bonds.

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Explore Advanced Financial Calculators on Nairametrics

The lesson from this analysis is clear, and that is the need for investors to know what exactly they seek: returns or yields. While stocks may have outperformed bonds by returns, bonds have beaten stocks in terms of yield earned.

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In closing, the asset class with the best return in the US for the last decade has been Real Estate Investment Trusts (REITS).

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Investment Tips

5 things you can do to attract equity funding for your business

Equity financing is a reliable funding option.

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5 things you can do to attract equity funding for your business

One challenge that is peculiar to all Micro Small and Medium Enterprises (MSMEs) is that of funding. Of course, the level of challenge depends on the size of the business and the plan that needs to be executed. It is even more so for start-ups looking for funds to bring their business ideas to life.

To solve this challenge, entrepreneurs and business managers explore several sources including applying for loans, grants, partnerships and so on.

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Equity financing is a reliable funding option. It basically involves giving out some equity or ownership in your business, in exchange for capital. This could come from friends, family members or potential business partners, and it is often aimed at raising money to pay short-term bills or financing long-term expansion plans.

READ ALSO: COVID-19: Abuja Sheraton suffers 88% drop in revenues

Recently on the weekly Nairametrics “Business Half Hour” with Ugodre, Tokunboh Ishmael, Co-Founder and Managing Director of Alitheia Capital, discussed the topic “Private Equity Funding for SMEs” in detail.

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Among other things, Tokunbo gave some pointers as to how business owners could attract the right equity financing for their business options. The points summarized below tell you what potential equity finance partners (individuals or partners) look out for.

READ: WARNING: Why you should avoid investing long term in Nigeria’s stock market

Management (Who is the manager?)

Any company or individual who puts up money for your business, in exchange for equity, is definitely concerned about the management.

They want to know if the manager of the business has had any experience managing a similar business before. This is considered a form of apprenticeship and it is expected that whatever knowledge gained would help make you more efficient in dealing with issues that may arise in the course of the business.

READ MORE: UK’s CDC Group invests $39.2 million in West Africa

Does he have the requisite educational background? It does not always take someone with a Masters in Business Administration (MBA) to grow a successful business. But that MBA degree could suffice, especially when you do not possess any other relevant experience.

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Do you have the relevant track record? What happens if you have overseen a business which eventually went bankrupt or crashed due to management problems? Does this make the Equity fund partner more or less willing to put money into the business? Obviously not!

Some people can wake up and be successful entrepreneurs at first try, but this is not usually the case. Most will go through years of rising and falling, or working under others to gain the relevant experience of running a business.

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Management is a critical point that any company or individual will look at, when you approach them with the offer of equity in exchange for funding.

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READ ALSO: Between loan and equity funding, which is best for startups?

Opportunities (What opportunities does it bring to the investor?)

Every business idea is an attempt to solve a problem. But what separates successful business ideas from others is that there is something unique about your solution.

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First identify and understand the problem you want to solve, and from there work out a sustainable business solution. Every equity investor will be concerned with the uniqueness of your solution. Is it peculiar to you? Or is it something that everyone else is doing?

If your business idea has an easy entry point, meaning your idea is not unique to you, it would be difficult to get equity funding. Why? The potential investors already understand that you would soon have to deal with serious competitors who might end up doing what you do even better.

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READ MORE: Digital economy: How to move your organisation from ‘surviving’ to ‘thriving’

If your business idea shows a potential to make investors part of something big and unique, then you are more likely to get the funds you need. No company or individual wants to invest money in a business idea that will soon be drowned by competition.

You may get some sympathy funds from family members and maybe friends, but not any significant sum that will take you far.

ROI (How soon can investors get returns?)

Returns on Investment (ROI) are a key consideration for any investor (except perhaps charity organisations).

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An investor’s concern with returns can best be likened to a retiree’s concern with pension. It is a most sacred topic and in fact, one of the first things they want to find out before putting in their money.

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Based on your business idea and model, do I have to wait a year, two or three years before getting any returns?

A quarter may be too short to expect returns, but maybe three years would also be too long to wait. It all depends on your business venture, and of course, the investor’s plans. If he has plans to start channeling the returns into other ventures within six months, then a two-year wait would not be for that investor.

READ ALSO: Google’s advertising revenue plunges

Returns are not always financial, they could also be social. If the equity company is one that is more disposed towards a certain sector of the economy, say tech or agriculture, then the success of the company brings not only financial returns, but social returns to the company.

This is something you should also look out for before approaching any company for equity funding. You do not want to approach a company with an agricultural business idea, when the company is more disposed towards technology or education.

Ability to scale (Is the business expandable and replicable?)

A private equity partner is also concerned about how soon your business can expand, and how replicable your strategy is. Can it scale up?

Do you have a business idea that is so built around you, that it cannot function without you? Do you have a business idea or structure that will likely crumble if you die? Do you have a process that can be replicated?

The investor wants to know for sure that there are growth and expansion potentials. There is a need to be sure that the business idea you have is not one that can only remain confined to your bedroom. They want to know that you can move from offering your services in one state to serving several states and even the global community.

READ: Why you should consider selling Bitcoin now

Why is this even necessary?

Because, it affects how attractive the business will become to the next level of investors who will take over from the private equity investors. This leads us to the next point they consider.

Exit potential (How can they sell out their equity and exit the company?)

Private equity investors are often not interested in taking over your business from you. Their aim is to bring in money for you when you are starting up, provide you advice and partnership, and sell out when it grows. They are not interested in having investments in different sectors of the economy. This explains why they are often concerned about the exit potential in your business.

Is there the likelihood that we can exit sometime in the future? Or do we just invest and get stuck? How attractive can this business become for the next level of investors – the institutional investors who will come in to own the business with you and stick to the end?

One of the most frightening possibilities to the private equity investor is that when he is ready to exit, there is no one to buy in and take over. So you need to answer the question – how attractive is your business idea to investors, and what is the exit potential?

If all five questions are dealt with satisfactorily, then you are well on your way to getting a good private equity partners to provide you financing for your business.

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Personal Finance

5 indispensable money advice for the 21st century working adult

Some excellent finance tips for the 21st-century adult to keep in mind.

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A lot of people argue that the digital century has made it much easier to make money. With a simple tap on your phone screen, you could invest in global stocks and resell at a high price within a short period.

Some others are making money by simply entertaining the world on their YouTube channel, and some others have built a loyal community of followers on social media platforms like Twitter and Instagram, turned into ‘mini celebrities’ and brand influencers who now make serious money by helping to bring merchant’s products into the consciousness of their followers.

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Now, whereas the ability to make money has become easier, managing one’s finances is, however, a different ballgame. As a matter of fact, it is guided by completely different laws from those of making money. We hereby bring you some important tips on how to manage your money.

READ MORE: Instruct EFCC, ICPC to monitor spending on Coronavirus, group tells Buhari

Below are some excellent finance tips for the 21st-century adult to keep in mind. Why the 21st century? Well, this age has completely different trends and a whole different kind of financial challenge.

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Never regard gambling or money doubling ventures as investments

Such ventures are ‘for-profit’, meaning that they are out to make more money than they payout. So what are the odds that you, out of the millions who play the game, will end up as winners? Probably less than 0.000001. That said, you are more likely to lose your money than win more.

Playing or not playing such games may completely be a thing of moral disposition. However, if you want to play the game, consider the money as one that many never come back, instead of as one that is expected to come back in multiples as return on investment.

Better still, find other pastimes or distractions if you enjoy playing games. Once again, these are not ‘investments’. It is gambling.

READ ALSO: Investors are rushing into cryptos, as market capitalization surges to $323 billion

Understand what promotions and discounts really mean

Discounts and promotions often come across as saving some money. But of a truth, you are not saving, you are spending – maybe less, but you are still spending nonetheless.

It is not an unwise decision to take advantage of discounts and promotions, but if you do not already have the item listed in your budget, it is better to disregard it.

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Unfortunately, this is not often the case as young adults continue to be overwhelmed by the sense of urgency when a merchant declares a 30% discount of sales of his products for a limited period.

The emotional pull is to cash in on this promo while it last, especially since the message says you can save a certain amount of money by buying it. However, the practical reality before you is that you are spending and not saving at the moment you make the purchase.

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READ ALSO: Crypto: Investors flocking in large numbers into altcoins

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You are only actually saving some money when you already have the item in your list of expenses and end up spending a lesser amount to purchase the same item.

However, if a discount is being offered on a product you absolutely need, you can go ahead to make the purchase even if you have not planned for it, so long as you understand the difference between needs and luxuries.

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This should not be a habit because it makes a mess of the financial discipline you have been trying to build on so, it’s something you should be mindful of.

Whenever you go shopping, go with a list and stick to it

Never go shopping without a market list. It probably seems like a weird thing to do but having a market list can and should prevent you from impulsive buying, where you buy items you do not need and forget the things you need.

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Every Merchant is out to make sales and the result of this is that they try to make their products as appealing and captivating as possible.

No matter how few items you want to buy make a list and stick to it. You have no idea how much heartache it can save you.

Place a cap/limit on your weekly spending

Nothing truncates your financial goals like unplanned spending. Having understood what makes up your weekly budget, make some allowance for emergencies and place a weekly limit.

The attitude of ‘lets-see’how-it-goes’ is not the best for managing your finances. The choice to place a weekly limit is akin to checking your expenses, especially since you know that spending on unnecessary items could result in you sacrificing some of your actual needs till the next week.

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READ: Dogecoin gains 50% in less than 24 hours, highest single-day gain since 2017

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Banks and financial institutions can help you activate this feature, thus preventing you from making any debit transaction on your card once you have reached your limit.

With this, you are compelled to postpone other expenses until the start of a new week.

Make buying decisions based on value and not cost

For the purpose of clarity, cost is what you pay for the product and value is what you get. The summary of this point is that you should know when an item actually costs more than it is sold, and make your buying decisions based on this knowledge.

READ MORE: Why this is the best time to buy Bitcoins

John and Francis both decide to get a car, but while John decides to buy a brand new car, Francis opts for a fairly used car at less than half the price.

Three months later, Francis’ car has spent more nights at the mechanic shop than in his garage, while John has only now remembered to take his car for the regular maintenance and check.

READ ALSO: Would you have invested in buying a plot of land in Abuja FCT in 1980?

On the surface, John might have paid more but he got his money’s value, while Francis has come to discover that he paid more (cost) for less (value).  For all the troubles it has given to him, he would probably have been better off going for the newer car or staying without a car at all.

When you want to make a buy, decipher the cost and the value and let this be your guide. You might spend much, but make sure it is right for the value you are getting.

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