Money Saving Tips When Buying A Car
7 Tips for Buying and Driving a Car You Can Really Afford
Chances are you really can’t afford the car you’re driving. Most Americans spend too much on cars, reconciled that they must always have at least one and perhaps two (or more) car payments. If your car is worth more than you have in your retirement savings, you really can’t afford it.
You can—and should—drive a car that doesn’t require you to borrow the money. Here are some tips to help you do just that:
1. Drive the car you have now for a long time. If you are still making payments on your car, plan to keep driving it for several years after you pay it off so that you can save up for its replacement. When you replace the car, limit your purchase to your savings plus the value of your trade-in, even if that means you have to buy a used car.
2. Take care of the car you have so you don’t have to buy a new one. Don’t defer maintenance; take care of problems while they are small.
3. Don’t try to keep up with the Joneses. It is always tempting to buy a new car, much more so when the neighbors all upgrade. Don’t let your neighbors decide when you need a new car; you decide when you have the money saved and want to make that purchase.
4. Remember that virtually every car ends up in the same place: the wrecking yard. Cars are not investments. They do not build equity—even if your husband says they do. They are productive but depreciating assets. Buy a car for the utility it provides and not the style it evokes.
5. Look for a car that is affordable to own and operate. When you buy a car again someday (see number 1. above) look for a car that is affordable. Intellichoice.com provides ownership cost estimates that can help you compare the cars you’re considering. Sometimes the cheapest car isn’t the cheapest. Sometimes the car with the lowest sticker price isn’t the car with the lowest total ownership cost. But be sure to buy a cute car you’ll be happy to drive for a long time!
6. Educate yourself before you buy a car. When you buy a car be sure to educate yourself thoroughly before going to see a dealer (consider seeing multiple dealers to get the best deal). You should have a good idea about the car you want to buy, the price of the options you want and especially the factory incentives available on new cars. A number of web sites, including MSN Autos, offer this information, some for a small fee. Arm yourself so that you don’t over pay for that new car.
7. The best car is no car. If you can eliminate a car from your garage by using public transportation, car sharing, walking, bicycling or carpooling, you will find yourself saving so much money you’ll never want to have a car again.
I Just Paid Off My Car; Should I Trade It In Now?
Congratulations on paying off your car. There were probably days along the way when you worried the car wouldn’t last as long as the loan on the car, but it made it! You have taken a huge financial step forward. Now what?
Follow this simple system and you’ll never have a car payment again!
1. Keep driving the car you have now. Take care of it. You want this baby to last for years. (If you haven’t told your car lately that you love her, now might be a good time.)
2. Keep making the car payment. What!?! Make the car payment into a savings account. Keep the money sacred for your next car.
3. Buy a “new” car. When the cash accumulated plus the value of your trade-in (which we know is going down every day) combine to buy you a car you’d like, one that you can drive comfortably for years to come (even if it’s a used car), go ahead and buy it.
4. Don’t borrow any money. When you buy your car, don’t borrow any money. If your savings is only $5,000 and your trade-in is only worth $5,000 either buy a $10,000 used car or wait for your savings to accumulate a little more.
5. Keep making the car payment. What!?! I know, I said this before, but you just bought a perfectly good used car for cash and you might think you could stop making a car payment. Don’t stop. Keep putting the car payment into your savings account month after month. In five years, you’ll have enough to buy a very nice used car or an affordable new car.
6. Don’t borrow any money. You’re beginning to see the pattern, aren’t you? Now that your car is paid off, you never have to have a car loan again. Just be disciplined enough not to buy a car you can’t afford to buy for cash.
Let’s put some numbers to this example. If your car payment was $500, you can save $12,000 in two years—plus you’ll earn interest on that. If you had a five year loan on a new car, your car is likely about seven years old—still in very good shape. It may be worth $10,000. You can now purchase a car costing about $22,000. Yes, it may be a used car, but likely only a few years old. You can easily drive it for another five years. At the end of the five years, you’ll have $30,000 plus interest in savings and a car worth about $10,000 as a trade in. You’ll be able to purchase a car as nice—or nicer—than the one you bought five years ago—but this time for cash! Keep making your $500 per month car payment to yourself for the next seven years and the neighbors will really be impressed with the car you bring home,
Chances are, however, when you start spending your hard-earned savings for your cars instead of the bank’s money, you’ll find you have less interest in the fancy car and more interest in the other things you can do with the money. You have kids who want to go to college. You want to retire. Following this system will put you in financial control of your life and empower you to better provide for your family.
How To Master Money So It Doesn’t Master You
Interest is relentless, whether it is working for you or against you. You can make sure that the principles of compound interest are working for you. For instance, if you invest $1,000 each month, earning only 5% interest, you will accumulate a value of more than $830,000. On the other hand, if you borrow money at 5% and make monthly payments for 30 years, as with a mortgage, you can only borrow $186,000.
Most of us will be required to borrow money in order to buy a home. That is wise, notwithstanding the experiences of the past five years. Homes do tend to appreciate in value over long periods of time (though there is no guarantee). More importantly, home ownership tends to help improve the stability of the home. That’s what you’re really about.
Most people choose to drive cars that require car loans. It isn’t, however, that hard to buy a car for cash. A new car payment could easily reach $500. In just six months of saving that amount, you can buy a car that runs and will likely continue to run for several years with regular maintenance, but with no car payment and very little depreciation.
If you save $400 each month for your next car (spending the extra $100 on maintenance) after two years you’ll have put $9,600 into savings on which you’ll have earned some interest, so you’ll likely have $10,000 of cash, plus a $1,000 clunker for a trade-in. You’re not buying a clunker any more. Sure, you’ll be buying a used car, but likely one that you can drive with pride for five years or more. Along the way, you’ll keep saving and at the rate of $400 per month with a little interest, you’ll accumulate $25,000 of cash, plus your trade-in so now you can buy a new car if you want. Drive that for seven to ten years, and your next car will be one you’ll be excited to buy!
This same principal and pattern applies to almost anything. It applies to your vacations (OK, you can’t trade in a used vacation), a new set of golf clubs for your husband, a new bicycle for you—just about anything that threatens to stretch your spending budget. The impact of saving for smaller purchases can be even greater than for your car because the interest you pay on credit cards—the way you borrow money for bicycles and golf clubs —is a lot higher than the interest rate on a typical car loan.
Plenty of people let their consumer debt accumulate until it looks like a car loan and all they have to show for it is used stuff that would be hard to sell at a garage sale and some photos from vacation. You can take control of money by saving for things you want to buy instead of using credit cards and loans. If you do, you’ll find that money works for you and makes your life easier, not harder. You’ll be investing in stocks, bonds and real estate and planning for a wonderful retirement while your friends hold garage sales.
How Much Can You Really Save By Using Public Transportation?
The average commute in America is about 15 miles each way, meaning that a typical commuter drives 30 miles every day to get to and from work. How much could you really save by parking your car and taking public transportation? Let’s do the math together. It may surprise you
First, we need to decide whether you’ll get rid of your car altogether or just park it while you’re at work instead of driving it. If you get rid of the car altogether, you’ll save a great deal more than if you park it.
Let’s consider all of the costs of owning a car, presuming you drive a total of 1,000 miles per month (meaning you’re driving 400 miles per month on top of the commute and you’ll have to find some other way to cover those miles, too).
If your car gets 30 miles per gallon, you’ll burn about 33 gallons of gas each month, which at $4 per gallon results in a cost of $132 per month. Car insurance varies wildly from person to person, but could easily be $100 per month, depending upon your car, your age and your driving record. Maintenance costs tend to be low for new cars and high for old cars, but can easily exceed $100 per month, remembering that one set of tires or new brakes will cost hundreds of dollars.
The biggest cost of all is the cost of owning the car, really the depreciation. Roughly 80% of the car’s value will be gone after 10 years. The simplest way to think about this is that the car will depreciate approximately 15% each year. The average price of a new car in 2012 is a shade over $30,000. Depending on the model and condition, a five year old car might be worth only $13,000. The depreciation for the year will be about $2000 or $167 per month. If you have a car loan with a 5% interest rate and a $10,000 balance, the interest is costing about $40 per month.
The total of all these costs would be $539, assuming you own a fairly average car or about $0.54 per mile. If your car is bigger, newer, fancier or gets worse gas mileage or if you have a poor driving record the cost could be much higher.
What it may cost to use public transportation in your city should be easy to learn. In mine, commuting would cost $78.50 per month or less than $3.60 per day, meaning that I would save $460 per month if I could jettison the car and use public transportation instead. That would leave me plenty of room to use a car share, a taxi cab or even an occasional rental car for special occasions and still be money ahead.
If you don’t sell the car, but park it, you can’t get rid of the depreciation, interest or insurance, but you can reduce the fuel and maintenance proportionally. Fuel and maintenance combine for an average of $0.23 per mile in our example (more if your car is older or larger than average). The fuel and maintenance costs per mile total about $7 per day for 30 miles of commuting. So, using public transportation at a cost of $3.60 per day would save you almost half or $3.40 per day—and it’s very green. If you have to pay for parking, the savings will add up even faster.
Walking Or Biking Can Save More Money Than You May Think!
According to one source, 10% of automotive trips are for distances of less than one mile and more than 20% are less than two miles. If you were to walk or bike for some of these trips, you’d use your car less, save money, protect the environment and get some valuable exercise. Here are some ideas to help you walk more and drive less.
1. Make a list of the places you’ll walk rather than drive. You may need to keep track of where you drive for a while for this to work, but note not only those places where driving requires a trip of less than a mile or two, but also note where you can walk shorter distances than you can drive—many subdivisions feature bike and walking paths where you can’t legally drive, allowing you to shortcut a driving trip. (For instance, to drive to the grocery store is about 1 mile from my home, but the walk is almost exactly half as far.)
2. Measure the distance you’d drive to each of the places you decide to walk or ride.
3. Measure the distance you walk or ride to get to each of these places.
4. Keep track of the miles you avoided driving. If walking and biking allows you to get rid of a car, you’re saving more than 50 cents per mile; if you keep the car, you're still likely saving about a quarter (unless you have a plugin electric vehicle).
5. Keep track of the miles you walk or ride. Note that a typical person burns more than 100 calories per mile walked and up to 50 calories per mile on a bike.
6. Make walking and biking for your errands a key part of your exercise program. Instead of walking 30 minutes on a treadmill or riding an hour on your spin cycle, go walk or ride an errand instead.
7. If nothing else, the money you save on gas can go to something much more fun, like a donut or ice cream while you’re out and about. If you’re disciplined, the money can be saved for something much more meaningful and the calories burned can translate into a skinnier, healthier you.
By systematically organizing your exercise plan to be productive you can save time and money and lose weight too—all while you do something real to help the environment!
Two Ways that Doing Nothing Makes You Big Money
There are two ways that doing nothing saves you big money that can make all the difference in your life and retirement.
The first is when you decide not to sell your car and buy a new one. Most people will do this dozens of times over their lives. We all know someone who buys a new car every year or two, perhaps even the same model in the same color. This is an expensive habit.
Imagine this hypothetical, nonsensical transaction. Let’s say Bob has a year old blue car (pick your favorite make and model). Let’s assume that Bob would like a red one but is otherwise perfectly happy with the car. So Bob heads down to the dealer to trade his blue car for the red car (let’s assume they have a used red car otherwise identical to his on the lot).
In theory, of course, the two cars are economically identical and Bob should be able to trade one for the other at no charge. That won’t happen. The dealer will offer Bob a warranty of some sort, financing, a fancy place in which to do the transaction, a free cup of coffee and perhaps a hot dog. Bob offers the dealer a used car that may or may not have problems he doesn’t disclose, if only because he doesn’t know they exist. For these and other reasons, Bob will get about 20% less for the trade in than he pays for the car he drives away.
On top of that, he’ll pay registration fees, sales tax on the difference and anything else the dealer and the state can think of to charge him while he’s got his checkbook out. When he leaves, Bob has an economically identical car to the one he drove in with, but he’s giving up 20 to 25% of the value in transaction costs to the dealer. (Bob wouldn’t do much if any better selling his car in the newspaper, on Craigslist, eBay, or parked on the corner.)
Of course, Bob would never make this trade—he’d paint the car instead. But the hypothetical transaction helps to highlight a key point. The transaction of buying a car is very expensive. By reducing the number of times you buy and sell a car, you are putting money in your wallet. When you buy a car, plan to drive it for at least seven years and preferably for ten or more.
Given that buying a new car costs about $4,000 in transaction related expenses, if you reduce the number of times you do that in your lifetime from 25 to 10, you’ll save $60,000 over your lifetime—by doing nothing.
The other time when doing nothing pays, is when you get the itch to sell your home and buy a new one. Some people move around town in a frantic hopscotch hoping to find the perfect home, the perfect neighborhood or the perfect school. Each purchase and sale costs about 10% of the value of the homes, easily $20,000 today. If you do that twice in your lifetime instead of ten times in your lifetime you’ll easily save $160,000—by doing nothing!
What You Need To Know About Your Car Insurance But Were Afraid To Ask
Even if you have car insurance, your coverage may not be adequate to protect you and your family in case of an accident. Car insurance terms often seem like a secret code that you can’t understand and hope you’ll never need.
There are two key parts to your insurance: liability insurance that provides financial help to other people when you cause the accident and collision and comprehensive insurance that covers your car from accidents, broken windows, theft, etc.
There are a few key terms that you need to fully understand.
Liability limits: Every state sets minimum limits to define how much liability insurance you need. The limits are reported as three numbers—your agent may have mentioned them to you when you bought your policy. In California the minimum limits are 15/30/5, meaning that you must have bodily injury coverage of at least $15,000 per person and $30,000 per accident, plus at least $5,000 for property damage. If you buy only the minimum required policy you may be in trouble. If you cause an accident with anything other than a 1972 pick-up truck with bolted on wooden bumpers, you’ll be paying for someone else’s car out of your savings account—or future earnings. If more than two people were in that car and needed more than $30,000 in care, again, you’ll be getting the bills.
Deductibles: The deductible is the portion of the damage that you are required to pay. Deductibles don’t apply on the liability insurance; they only apply to you and your car. If you back your car into a concrete pillar in a parking lot (I use that example speaking from experience) you’ll be responsible to pay the deductible. The insurance company will be responsible for the rest of the cost of the repair.
Saving money: Your policy gets cheaper as you retain more risk and ask the insurance company to take less risk. You can do this in two ways. You can raise your deductible or lower the liability limits.
Raising the deductible. The ultimate way to save money is to not buy collision and comprehensive insurance at all. If you drive a clunker, as I’ve done at times over the years, you may be able to afford to assume all the risk of repairing or replacing your car if it is damaged or stolen. If you drive a nice car—anything but a clunker—you’ll want to have collision and comprehensive insurance, but you can choose to have a higher deductible.
Lowering the limits. Many people buy only the state-required insurance limits. This is extremely risky. Not only are all of your current assets at risk, but so is your earning capacity. You can be forced to pay damages from your income for years into the future. Raising your liability limits above what most people in your state buy is good practice for anyone who has a good job or good savings. If you are focusing on frugal living and providing for your family, you likely have a home with equity, college savings and other assets. All of these are at risk. Insuring yourself with unusually high limits is remarkably inexpensive—once you’re past 30—if you have a good driving record. The odds of your having a major accident with lots of injuries and expensive property damage is low. The insurance company understands this and they won’t charge you much for taking this risk off your hands.
As a general rule, when buying insurance, it makes sense to pay others to take risks you cannot afford to pay yourself. Similarly, it doesn’t make much sense to pay someone else to take risks you can afford to take. So, raise your deductible to a level you can afford and use the premium savings to increase your liability limits to cover the risks you can’t afford. Talk to your insurance agent today to be sure you have the coverage you need.