I thought this was a good article. One of my philosophies in life is definitely, “Never finance a car.” Even if it was a good deal (0% interest) and I could afford to pay cash but thought it would be better to invest the money, I still wouldn’t finance a car. I think it just helps you be more conservative about the car you buy when you have to write a big check for it. It’s easier to say Bye to $10,000 than $25,000.
From the link:
You can afford a car if you can pay CASH for it while still making timely progress on your other goals. I repeat: If you can’t pay cash for it, you can’t afford it. By cash I don’t mean retirement savings in an IRA, I’m talking about actual cash in the bank (or at least something you could quickly sell for cash in the bank).
If you have to justify it with “I’m in medical/law/computer/finance/basketweaving school and I’ll be making the bucks soon!”… no you still can’t afford it. If you justify it with “I need a brand new car because I need something reliable and anything less will explode! Do you want me to die???”… no you still can’t afford it.
On a similar note, my personal financial goal right now is to get my mortgage down to five figures. There’s nothing like taking a year off to clarify the importance of a salary (and health benefits) and hence the importance of using that money wisely. Once we get down to five figures, my goal will be to pay it off. We’re starting to look at where we might move to for better schools, and I don’t want to sell this house right now, and I also don’t want two mortgages. I’ve been paying down the mortgage a bit for a few months, and what I really like is seeing the percentage of my monthly payment that gets applied to principle increase more sharply than it had been.
On an unrelated note, can anyone recommend a replacement for Google reader?
I actually don’t agree with this entirely. I used to.
But the financial crisis has taught us when you actually need credit it is not available or very expensive. When Byron was laid off, he found a job, but it required a (let’s just say) $10k type rating. The first month of the job had a $20k bonus, so it would more than pay off the type rating. Because we were down to one income, we decided it would be better to charge the training and pay it after his first months salary than dip into our cash, just in case. So we charged the type rating, immediately after, ALL our credit cards called and raised our interest rates from low to 21% APR, including on that debt (that’s actually illegal now). But the point is, when you are in financial trouble, or don’t have an income, credit is really really predatory. Cash in the bank is king. So, we keep a padded cash reserve in the bank (some say 3 months salary, some 6 etc.), the rest is invested for medium or long term returns that far exceed the interest rate (currently running 1.74%) on car loans. But I’d rather have that cash in the bank and a $200/month car payment than less cash in the bank in a time of a personal financial crisis. You can always use that cash in the bank to pay the car loan.
If you need to pay in cash to create the “psychology” of purchasing a modest car, that’s fine. I feel I am financially responsible enough to understand that psychology and make the decision for the most responsible priced car (or splurge if we want… my car is very modest, but Byron has always wanted a fancy sports car so eventually we will be buying him a car that is far more expensive than practical, but that’s part of our financial plan and we’re saving for that). I do agree that some people do need the psychology, they go down to the dealer, add all the features and buy a car more expensive than they need or can afford all because its $400/month or whatever.
Also, yeah, its awesome when your mortgage is paid down so much that your payments are going to principal! What are you going to do with your house, rent it? I approve :). But I wouldn’t worry too much, down payment on next house will probably be worth more than a paid down current house — if you have renters they will make the payments for you (even better!) Anyway… in the upper income classes, I have heard paying down mortgages too fast can create a tax disadvantage if a loss of the interest deduction pushes you into a higher tax bracket or prevents you from being able to itemize. I wouldn’t know. Our houses are so cheap in Houston, the interest is low that we haven’t been able to claim the deduction or itemize since getting married (boo).
I also disagree. I think that for many liquidity is more important than paying off asset backed loans. I think it depends on how safe you feel in your job/life. As someone up for tenure this coming year we’ve been purposely keeping as much cash on hand as possible. Hard to get cash out of a house unless you sell it or rent it. Which means you cannot live in it.
i think a lot of people with a well paying job most of their life forget (or have never experienced) how hard it is to get credit without that pay check. i was really surprised when byron was laid off at how predatory banks were compared to before, and we still had my income..
We really have too much cash right now, so it needs to either go into the market, into the house, or into bonds or something. Rates on bonds are crazy low right now, so I don’t see the point. The market is high – not a good time to buy. Because Jonathan’s job is “sketchy,” we’ll have trouble getting a mortgage on the basis of his salary, so we can’t hold too much debt in housing.
Becca – regarding the car, I say if you don’t have enough cash to maintain a safety buffer AND buy the car, you should buy a cheaper car. There may be exceptions to that rule, but for “people like us” – engineers who have been employed around 10 years – we should be able to have plenty of cash and pay cash for a car by living frugally.
Of course, I have to admit I’ve never bought a car. 😉
Karen – I definitely don’t advocate everyone paying off their mortgage. You guys are in a unique (and stressful) situation. I’m pulling for you!
I do differentiate between house and car. Mortgage = OK. Car payment = undesirable.
well, so take my latest car purchase. we actually bought the car in cash, but it ate into some of my safety buffer, but it was done on purpose because after we bought the car we were going to sell the Jeep which will re-build the safety buffer. The delta price from the sale of the Jeep and the new car is projected to be ~$10k. The Jeep retained its value quite well compared to its new price (something I considered when buying it) and I replaced it with a 3 year old used car, so I am not taking the off the lot depreciation hit. The Jeep is 8 years old, low mileage, been paid off for years (though when I bought it, I would not have been able to afford it in cash, my Toyota was falling apart), could have driven it for longer, but realized we were looking at having to replace Byron’s and my car the same year if we didn’t stagger a little. Its taken several months to sell the Jeep though, its not exactly a liquid asset, that said, its worth doing because we can get something like $4k more than the trade in value if we sell private party. In the meantime, I went ahead and financed the new car purchase after the fact for a tune of $15k at 1.74% — we actually talked about financing even more given the low APR. At 1.74% even paying down my 4% mortgage is a better way to spend that money (don’t get me started on the airplane loan APR). But ultimately, that cash in the bank is even more important to me given the instability of Byron’s current job. I think the story is different if you are already sitting on huge amounts of cash in the bank, we aren’t because we did “irresponsible” things like buying an airplane :), so I am still at a point that more cash matters to me. Anyway..
(You could argue that I could have the car paid in full and then go finance it if Byron lost his job and I needed the cash… but, that said, given our experience with credit, I feel that if I went to finance it then, they’d probably try to charge me some ridiculous APR and fees…)
Yeah, on the mortgage thing, having a home business certainly makes documenting income harder. I’ve decided the key is that 20% down payment — remember, you can always take equity out of this home to make down payment on the next. That’s what a lot of people who have rental “empires” do, keep exactly 20% in each home/unit and then when they have enough equity to make another, pull from that. Byron and I have our own mortgage issues since we have two houses between us, apparently mortgage on house three (if we decided to move) is the magic number that somehow makes us risky..
I dunno. I always feel like articles like this always make a LOT of assumptions about how people manage their money or what they choose to do with it. It may be good advice for most of the people we know who have high salaries and generally have significant cash reserves…although we chose to finance 2/3 of our car because the interest rate was so low it didn’t make sense to take it all out of our cash reserves. And we bought new because we wanted new. 🙂
But there are TONS of people who live paycheck to paycheck and don’t have the luxury of cash savings. Sure, you could say “well save $100/month until you have enough” or whatever, but come on — a reliable vehicle is a necessity for more families. Save $100/month vs. pay $100/month on a cheap car loan? (Ignoring the issues Becca mentions with predatory banks, but that’s also an issue.) Waiting until you have the cash just not always practical.
And the “use public transportation or bike” advice, while great in theory, is also not practical. If I wanted to ride public transportation…oh wait, I couldn’t, because there is none. If I wanted to bike to work, it’s technically possible but it would be dangerous, plus at least 50% of the year it is hot enough that I’d need a place to shower once I got to work.
Oh — re: Google Reader. I am trying out Feedly. It seems decent at the moment…
I think on the poorer people front, they don’t actually even realize how predatory the new-car/leased-car situation is. They bring in their car every three years, selling it back to th edealer for pennies on the dollar, and then getting their old loan wrapped up into a loan for a replacement car for more than the replacement car is work, in an endless cycle. When we took out the loan on my car they offered us “gap insurance” for the difference between the amount we owe and the insured value (the amount the car is actually worth). Someone should really ask themselves whether they should buy a car without enough down payment to cover that gap (or accept the gap at all) . The bank person we talked to said there are a growing number of people coming in for loans from Carmax and other used car lots asking for loans greater than the value that the bank is allowed to loan on the car (which based on a market assessment about what the car is worth, they aren’t allowed to loan more than that). She said no one, no one, even seems to realize that maybe they shouldn’t be paying more for the car than its worth — she keeps waiting for someone to say “hm, maybe we’re paying to much for this car” but they never do. That’s the psychology problem with loans, right, people only consider their monthly payment, they don’t consider the total price, and that’s a huge problem.
I am not completely happy with feedly. The chrome (and maybe the firefox) extension want permission to track ALL of my web browsing: http://lifehacker.com/5990769/why-do-chrome-extensions-need-to-access-all-my-data?tag=chrome
I am waiting for theoldreader to import my RSS feeds. It seems simple and nice. Once the import is done, I will try it out more extensively.
Hmm. theoldreader looks interesting too, I’ll try that one as well. I really just want someone to recreate Google Reader for me!!