What’s Too Much Of A Car?

Posted on July 10, 2010 Written by Leave a Comment

A good rule to follow when considering your modes of transportation (and we’re talking about all of your motorized toys that move you from point A to point B) is to keep the sum of the current market value of all of your transports at an amount equal to or less than half of your annual income.  For example, if you make $40,000/year, you should keep no more than $20,000 worth of vehicles.

Why?  Because all of those vehicles are going down in value, not up, and it’s likely that you have too much money tied up in those vehicles, which means you’re losing even more money.  If you can manage to lower your vehicle lifestyle, you’ll be able to save some of the cash that was slowly trickling away to nothing and put it somewhere it can grow instead.

So when can I buy a new vehicle?

If you’re buying something new that goes down in value (usually 60% in the first 3 years) then you’d better have the type of nest-egg or income that would justify it.  Buying a $60,000 car new that will be worth $24,000 in 3 or 4 years means you’ve got enough passive income from your investments that you can afford to misplace $36,000 and not have it affect you.

Here’s what’s interesting about that behavior.  Rich people don’t do that.  Rich people are the ones who end up bailing you out by buying your previously valued $60,000 car for half the price.

Imagine if you have $1,000,000 saved, earning 5% annually.  That’s $50,000 in passive income annually, the first year.  After that, it compounds.  You’re not going to get to experience that if you have all of your money tied up in vehicles before you can afford to lose the kind of money that having new vehicles causes you to lose.

Too much of a car is:

  • any car or other vehicle that carries a monthly payment.  Paying the bank interest on a loan isn’t a good idea to begin with.  Why do it on something that’s going down in value?  There is no benefit.
  • any car or vehicle that’s worth more than half your annual income.

Dave Ramsey’s rule of thumb is to evaluate if you can pay off the car within 18 months.  If you can, AND the car is worth less than half your income, keep it.  Otherwise, you may have too much of a car.

Filed Under: Baby Step 2, Financial Basics Tagged: , , , ,

The True Cost of Buying A New Car

Posted on May 4, 2010 Written by 2 Comments

There’s no denying that climbing into a brand new car feels good.  The smell of new leather is amazing.  The sound the doors make when you close them, and the feeling of ownership that you get when you drive it off the lot makes it very appealing.

The truth of the matter is, the only one who got owned is you.  I hope that this article will help you make the right decision if you’re on the cusp of buying a new car.

Unless you’re positioned financially to be able to lose 30-40% of your money in one transaction with no possibility of ever recovering it, then buying a new car is a losing formula for you.  No amount of new leather, new car smell, warranty, or low mileage will ever offset the financial loss you’ll incur once you sign up for those new car payments.  Not even paying cash for a new car makes sense, because you still incur the loss.

I Got Suckered

In 2008, I was suckered into buying a new car.  They threw the bait out and I bit hard.  At the time, I had a 1998 Toyota Tacoma that was paid for.  No payments, no worries.  Then, as I was entering the world of Real Estate, I decided that I needed a different vehicle; one that was nice enough to shuttle people around in from house to house.  I found the perfect class of car for me, and headed right out to the dealership to get me one.  Knowing that I could get zero down financing allowed me to purchase the car without trading in my paid for truck, which booked at $8000.00.

I was banking on selling my truck to fund the first 15 months of payments.  How stupid is that?  I was essentially making a decision to throw away a perfectly good truck to get into a car that had huge payments.  I’ll explain how I threw it away in a second.

The car that I chose was a 2008 Honda CR-V.  The sticker price was $27,895.00.  In my mind, I was spending less than $30,000 for a new car.  It seemed affordable, especially with the reserves from my not-yet-sold truck.  Here’s a little tip for you.  If you’re at a dealership, you’ll be sold on a payment, not on the cost of the car.  If the payment falls within your cash-flow budget, you’ll be suckered into thinking you can afford it.  You can’t.  Let me expound.

The tax on my new car was $2,259.50.  License and Registration was another $514.00.  There’s a documentation fee that the dealer “cannot waive” of $368.00.  And then there’s the finance charge.  If you’re planning on borrowing money to buy a car, you’re going to get hosed.  In this case, the finance charge was $8162.47.  Oh, and I forgot, you have to register annually, and new cars in Arizona cost about $400.00/year to register, declining by 12% every year.  So add another fee for every year.

All in all, the total amount that I was committing to purchasing this vehicle over 72 months was $39,199.68.  ???@#$!@#%?

Are you serious?  You’re telling me that I am agreeing to buy something that books at $27,000 new for $39,200?  How much more stupid could I be?  It’s a CAR.  It goes down in value.

I Sold My Car

Dave Ramsey’s theory on vehicles is this:  Add up the current value of all of your motorized toys.  If the sum is greater than half of your annual income, it’s time to sell.  If the sum of your vehicles’ values do not exceed half of your annual income, then the next qualifier is whether or not you can pay them off within 18 months.  If the answer is no, sell them.  “You have too much tied up in things that go down in value,” he’d say.

Not only does it go down in value, it loses nearly 30% of its value in the first 24 months.  My car, that beautiful 2008 CR-V, at the time that I sold it (yes, I sold it), went for $20,000.  At the time I sold it, I owed $23,000.00 which means in order to release title and transfer ownership, I was required to come up with the difference of $3,000 cash, out of pocket.

I made 22 payments of $544.44 for a total of $11,977.68 of which $8000.00 came from the sale of my paid for truck, which means  I came out of pocket and additional $3,977.68.  Add that to the $3000.00 check I had to write when I sold it and you have a total of $6,977.68 + a perfectly good 4X4 truck down the drain.

My Stupid Tax factor for this purchase was $14,977.00.  That’s how much real equity I lost over 22 months.  This would be akin to renting a car for $680.00/month.

What if I Had Waited?

I took on huge payments when I didn’t need to.  What if I had made a commitment to save those payments rather than buy a new car?  Well, it’s pretty clear that I would have $14,977.00 in the bank with which to begin shopping for a good 2-3 year-old vehicle, loaded to the hilt with upgrades which I would currently own, payment free.  Let’s say, for the sake of argument, that I managed to purchase a good vehicle for $10,000.00 leaving me with $4,977.00 in savings.  What would that savings look like if I invested them over 30 years in good growth stock mutual funds averaging 10%?

Well, you’d grow that money to roughly $98,000.

Conclusion?

The true cost of buying a new car is hidden from you by lulling you into submission through the amount of your monthly payment.  You can see both the short-term loss and long term potential loss from a decisions such as this.  I am currently driving someone else’s car, and I consider it a blessing, but I’ve learned my lesson regarding purchasing not just new cars, but new anything.


Filed Under: Paying Off Debt, Stupid Tax Tagged: , , , ,

Should I Buy New or Used Car?

Posted on March 14, 2009 Written by Leave a Comment

Used.  Always used.  Buying a new car is one of the worst financial decisions I have ever made.

Monthly Payment

The monthly payment is the first thing that everyone looks at when they finance a car.  Why?  Because they live in a cash flow mentality.  In this economy, cash is king.  If you don’t have it, you can’t spend it.  If you can’t spend it, you can’t make it.  If you can’t make it, you won’t have it, and the circle continues.

If you’re thinking about a monthly payment, and any portion of that payment is going to be paid to anyone other than yourself (in other words, the bank), then you’ve already lost the battle, because you’re headed into debt.  There may be a reasonable explanation for why you’re seeking financing for something you don’t have enough cash to purchase up front, but my advice to you is to completely avoid it altogether.  In order to succeed at this, you will have to radically change your idea of what you should be driving.  One of the mistakes people make when they consider their monthly payment on a new or used car is how much it really is going to cost them every month.  The monthly payment every month is only the financed amount, and it hides all of the other expenses you’ll incur throughout the life of the car.

Since I’m such a nice guy, I’ll go ahead and lay out my stupidity (Dave Ramsey calls what I’m about to explain a “stupid tax”) for all to see, with no holds barred.

My Stupid New Car Buying Experience

In March of 2008, I purchased a new Honda CR-V, loaded.  The only feature I didn’t buy was the All Wheel Drive.  Big deal.  So what did my car cost?  The sticker price was $27,895.  Divide this by 72 and you have a monthly payment of $387.00, right?  Wrong.

When you buy a new car, you have to add to it the document fee, which in my case was $368.00, sales tax, which was $2259.50, and title and registration, which was another $514.71.  These are just the up front fees.  Then there’s the finance charge.  My loan was at 7.9%, which over a period of 72 months is $8162.47.

Add all of these up, and the price of the car goes up to $39139.68.  Divide that by 72 and you have a monthly payment of  $544.00.  But is that the total cost of owning the car?  No.

In the first year, the car depreciates roughly $4200.00, so for the first year, you’re paying $544 per month plus $4200.00 divided by the first year (12 months) or $350.00.  Color me stupid, but that’s $894.00/month.  Add insurance at $1200/year and that’s another $100/month.  Now we’re up to $994.00/month.  Fuel for me last year, as a REALTOR, was $2937.00.  That’s $244.00/month.

My vehicle, which appears to be costing me only $544/month (which by the way, is ridiculous and I should be stabbed through the eye with the very pen I signed with) is actually costing me $1238/month in real money!

The following is from Edmunds.com.  It shows what you can expect to be the real cost of owning a 2009 Honda CR-V.

.

 Year 1 Year 2 Year 3 Year 4 Year 5 5-Year Total

.

 Depreciation $4277 $2729 $2402 $2130 $1911 $13449

.

 Financing $1801 $1455 $1082 $680 $247 $5265

.

 Insurance $1258 $1302 $1348 $1395 $1416 $6719

.

 Taxes & Fees $2439 $374 $313 $262 $220 $3608

.

 Fuel $1996 $2056 $2118 $2182 $2247 $10599

.

 Maintenance $93 $546 $359 $872 $1108 $2978

.

 Repairs $0 $0 $105 $254 $373 $732

.

.

 Yearly Totals $11864 $8462 $7727 $7775 $7522 $43350

The Used Car Buying Experience

Let’s assume that I decided way back at the beginning, that I would be satisfied with driving the half-way okay car that I had which was completely paid off and only representive a small amount of “inconvenience” in my life.  No NAV, no fancy leather, no sun-roof…etc.  Big deal right?  Right.  Now, with a paid for car, the bank is getting nothing.

At the time, my truck was worth $8000.00.  That actually means that I could have moved from the truck into a car that was more conducive to showing property for the same price, or perhaps a bit less.  But, I would have been able to set my sights on that newer car without losing $1238/month.

Here’s how it starts.  For 10 months, I would sock away $544.00 every month in my own savings account.  Hey, I was willing to pay it to the bank, so why not just pay myself?  After 10 months, I have $5440.00.  Now I trade my $8000.00 truck, which would still have been holding its value, in to a used car dealer for a car that costs $13,440.00 (That’s $8000.00 + $5440.00.)  Not bad.  Yet again, I save for 10 months an additional $5440.00 and I trade my most recent car in for another car at the price of $18,880.00.  20 months into the process I’m driving a fairly nice used car.  Keep in mind, I’m never buying new cars through this process and I’m always upgrading to cars that are holding their value, like a Honda or Toyota.  For another 10 months, I save an additional $5440.00 and I trade my $18,880.00 car in for a used $24,320.00 car.  30 months have gone by and I haven’t paid the bank a red cent, and every 10 months I get to upgrade to a newer car, and not only that, but the $24,000 car I’m in now, was purchased by someone else NEW just 3 years earlier for a whole lot more than $24,320.  Let the first owner take the depreciation.  Let’s do it again.  10 more months of saving $544/month for another $5440.00 and I’m now able to trade in for a $29,760.00 car, paid for, IN FULL!

If you’ll recall, the price of my new Honda CR-V was $27,895.00.  It’s been 40 months or 3.3 years, it’s 2011, and I can actually now purchase that 2008, loaded CR-V with miles on it, for much less than its original sticker price.  In fact, that car that I had to have last year, would probably cost me under $20,000 in 2011, and would have all of the same features!

This is an absolute no brainer.  When you buy a new car, you lose, no matter what.  If you’re in a financial position to be able to take that loss, in other words, if you have the money to blow, then you can buy a new car, but you lose.  It’s a mathematical fact.  Most of us do not have that money because we jump in before we look at the facts.  So here’s where I am now, as a result of my impatience.  I have a one-year-old car with 20K miles that’s worth about $22,000.  My monthly payment is $544, but as we’ve seen, the actual cost of ownership this first year has been over $1200/month.  I still owe $27,000 on the car, which is a hair under the sticker price, and the only way out is to sell it and take a note for the difference.

Instead of having a paid for Honda CR-V in 40 months, I have to get rid of it and take an $8000.00 loss, which means I’ll be paying off nothing for a while.  Are you as stupid as me?

Filed Under: Personal Finances Tagged: , , , ,

We Aren’t Supposed to Be Broken

Posted on March 12, 2009 Written by Leave a Comment

The bottom line?  Broken relationships hurt.

We Aren’t Supposed to be Broken

I had a Honda Civic years ago, and with Honda’s being one of the world’s most reliable cars, I thought that there would never be a problem with it.  I loved how it sat low to the ground, had a fast engine, and a great sound system, and I loved how reliable it was.  It never broke down and I depended on it every day to carry me there and back.  It never even showed signs of breaking, then one day, it broke.  I never saw it coming.

Grinding the Axle

I have been entrepreneurial most of my life.  In high school I sold candy before class that I had purchase from Revco.  It was very profitable.  Every day I would turn 10 suckers for $1.00 into $2.25.  Not bad.  Not long after that, I purchased a Honda Spree scooter that was pretty beat up for $75.00 and sold it for $300.00 after cleaning it up.  Then, I caught wind of a go-cart that was for sale.  I had always wanted one and this was a perfect opportunity.  $100.00 later, I had a functioning go-cart.  At least that’s what I thought.

I was delivering newspaper at the time on a bicycle, and I saw the go-cart as an opportunity to be on the cutting edge.  I wasn’t thinking I would be re-selling it, I was thinking about using it as a business asset.  And I did.  With minimal expense, I had the mini-car up and running as my primary paper delivery vehicle.  Never mind how dangerous or illegal it was.  What I didn’t know, was that the left rear wheel, which was nothing more than the type of wheel you see on a Home Depot hand cart, was engineered to require two separate bearings, one on each side of the wheel’s hub.  Bearings allow the wheel to spin freely while keeping the axle centered so the wheel doesn’t wobble.  I only had one bearing, and the inside hub, unbeknownst to me, was rubbing the axle.  My go-cart, with which I had a great relationship, was slowly failing over time, and I had no idea it was happening.  The wheel was grinding away the axle, which wasn’t a replaceable part.  Eventually the wheel fell off and the go-cart was broken, as was my relationship with it.

Wear and tear will do that to a car, or go-kart, and it will also do that to a relationship, especially when we fail to pay attention our own personal maintenance needs.  In many cases, maintenance works, but what if there are deeper problems that we don’t even know exist?  What if the problems that are causing the grinding are so damaging, that they permanently render the relationship broken?

Building on Sand

Building a relationship with someone requires certain tools and materials.  When we start building a house without a foundation, with the wrong tools and the wrong materials, it falls over, and we have to start over again…repeatedly.  Until we lay a foundation that can withstand the forces that move against a structure under that structure, it will continue to fall.  Even if we build the house out of bent and broken material, if we assemble it in a meaningful and secure way, no matter what happens, the foundation will remain in tact to catch the pieces if they happen to crumble at times.  All of us have a store of bent 2×4′s in our lives; past relationships that didn’t work very well, marriages that caved under the pressure, abuse, death in the family, addictions, you name it, we have them.  That bent material contributes to the path that we travel on every day.

Filed Under: Attention Deficit Disorder, Romantic Relationships Tagged: , , ,