It might feel like every salesperson is pulling the wool over your eyes to take as much money from you as possible while delivering the least value.
Not to worry! Here are a few car buying insights that can help you get a ride that meets your transportation needs without sacrificing your financial stability.
Buy a used car
Chances are, you’ll buy your first car with limited financial resources. You most likely just need a vehicle that reliably gets you around town without breaking the bank.
In terms of price, used cars beat new cars almost every time. And reliability is decreasingly an issue–used cars sometimes travel 100,000 before they need a major repair.¹
As a rule of thumb, look for used cars that are three years old or more. They often can have the same features as newer models, still have many miles left before they break down, and can cost a fraction of a brand new car.
Ask for a car’s VIN before you buy it
If you decide to buy used, ask for the Vehicle Identification Number (VIN) of each car you consider. A VIN gives you access to the full history of your car, including…
Once you have the VIN, check it out on the National Highway Traffic Safety Administration and the National Motor Vehicle Title Information System. They have digital resources that allow you to search VINs and discover the history of the vehicles you’re considering.
Say no to bad deals
Don’t sweat it if you find a not-so-great car at a good price. It’s perfectly fine to walk away and keep searching. 40 million used cars were sold in 2019.² You’ll find the car you want at a price you love soon enough!
Above all, do your research. Buying a first car is a serious financial commitment. The last thing you want to do is drive off with a car that costs too much or will need constant repairs and maintenance. Check out sites like Kelley Bluebook and Consumer Reports to find information on car prices and reliability. Then, start asking around. You might be surprised by how many people in your circles are trying to unload a reliable used car!
¹ “How Many Miles is Too Many on a Used Car?,” Autolist, June 27, 2017, https://www.autolist.com/guides/how-many-miles-is-too-many-used-car
² “New and used light vehicle sales in the United States from 2010 to 2019,” I. Wagner, Statista, https://www.statista.com/statistics/183713/value-of-us-passenger-cas-sales-and-leases-since-1990/#:~:text=U.S.%20new%20and%20used%20car%20sales%202010%2D2019&text=Sales%20of%20used%20light%20vehicles,and%20automobiles%20were%20sold%20here.
Every dollar bill is at the mercy of the elements. Think of an unforeseen medical emergency as a pop-up windstorm that whips a few thousand dollars out of the truck bed. And that time your refrigerator gave out on you? That’s swerving to avoid a landslide as it tumbles down the mountain. There goes another $1,000.
Emergencies like a case of appendicitis or suddenly needing a place to store your groceries usually arrive unannounced and can’t always be avoided. But there are a few scenarios you can bypass, especially when you know they’re coming.
These scenarios are the potholes on the road to financial independence. When you’re driving along and see a particularly nasty pothole through your windshield, it just makes sense to avoid it.
Here are some common potholes to avoid on your financial journey.
Excessive or Frivolous Spending
A job loss or a sudden, large expense can change your cash flow quickly, making you wish you still had some of the money you spent on… well, what did you spend it on, anyway? That’s exactly the trouble. We often spend on small indulgences without calculating how much those indulgences cost when they’re added up. Unless it’s an emergency, big expenses can be easier to control. It’s the small expenses that can cost the most.
Somewhere along the line, businesses started charging monthly subscriptions or membership fees for their products or service. These can be useful. You might not want to shell out $2,000 all at once for home gym equipment, but spending $40/month at your local gym fits in your budget. However, unused subscriptions and memberships create their own credit potholes. If money is tight or you’re prioritizing your spending, take a look at your subscriptions and memberships. Cancel the ones that you’re not using or enjoying.
Most people love the smell of a new car, particularly if it’s a car they own. Ownership is strange in regard to cars, however. In most cases, the bank holds the title until the car is paid off. In the interim, the car has depreciated by 20% in the first year and by nearly 60% after 5 years.¹
What often happens is that we trade the car after a few years in exchange for something that has that new car smell – and we’ve never seen the title for the first car. We never owned it outright. In this chain of transactions, each car has taxes and registration fees, interest is paid on a depreciating asset, and car dealers are making money on both sides of the trade when we bring in our old car to exchange for a new one.
Unless you have a business reason to have the latest model, it’s less expensive to stop trading cars. Think of your no-longer-new car as a great deal on a used car – and once it’s paid off, there’s more money to put each month towards your retirement.
To sum up, you may already have the best shocks on your financial vehicle (i.e., a well-tailored financial strategy), but slamming into unnecessary potholes could damage what you’ve already built. Don’t damage your potential to go further for longer – avoid those common financial potholes.
¹ “How car depreciation affects your vehicle’s value,” Dana Dratch, Credit Karama, https://www.creditkarma.com/auto/i/how-car-depreciation-affects-value
Here are some ideas for financial changes you can put in place today that can help get you closer to your saving and retirement goals.
1) Start a budget
There are few things that can paint your future financial picture as clearly as starting a household budget. In the process, you’ll track your spending – both in the past and in the future – and you’ll identify wasteful expenses as well as establish your priorities.
2) Start couponing
Once upon a time, clipping coupons could be quite a chore. Now, mobile apps make finding coupons for popular stores effortless, and there are online websites that provide promotional codes for all sorts of brands. If someone gave you money for buying something you were going to buy anyway, you’d take it, right?
3) Target home energy costs
Is your thermostat programmable? You can adjust your home temperature while you’re at work. Do you need to fix the insulation in the attic or that gap under the front door? Get to it as soon as you can! The longer you let those things go equates to money you might be saving on your energy costs.
4) Buy “pre-owned” items
When we think “pre-owned” we tend to think of cars. But the truth is that almost all consumer items depreciate. How much might you save by buying a refurbished phone instead of a new phone? Used laptops may cost a fraction of what you’d pay for a brand new computer. When it’s time to replace household items, consider buying used.
5) Use the 30 Day Rule to keep impulse spending in check
If you’ve got money burning a hole in your pocket, just wait. It won’t really burn you. By waiting 30 days before making a purchase, you’ll have time to decide if you really need the item or if it was just an impulse buy.
6) Use a shopping list
Want a way to stay focused when shopping and avoid wasteful spending? It might seem obvious, but get in the habit of using a shopping list. Before you head to the store, take a few minutes and write out a list (on paper or your phone), and include only the items you need. Stick to the list!
7) Quit smoking
Smoking seems to be less common these days, but for many households it’s still a costly expense that literally goes up in smoke. Think about how much you could put towards your retirement instead if you kicked the habit. (As a bonus, your health will probably improve.)
8) Stop using credit cards
Credit cards are the most expensive type of debt in many households. If you make a plan to pay off credit card debt and to save credit for (real) emergencies, you’ll probably wish you had given up your credit card habit sooner.
9) Cancel unused memberships and subscriptions
Memberships and subscriptions have a way of becoming forgotten – that is, until they automatically renew. Ouch. Keep the ones you want or need, cancel the others.
10) Cut the cord
Cable TV has become a norm but is your family really using it? Try to find less expensive ways to watch shows or movies online. Major broadcast networks can be picked up for free with an HD antenna.
Bonus ideas: Get a strategy in place to start building an emergency fund. Check your insurance policies to make sure you have the coverage you need. Research some ways in your community to have free (or nearly free) fun with your family.
It might take a little extra effort, but putting any of these ideas in place this year will help you and your family save more of your hard earned money and help get you closer to your retirement goals.
It can be found in the title of this article. The best time to start teaching your children about financial decisions is when they’re children! Adults don’t typically take advice well from other adults (especially when they’re your parents and you’re trying to prove to them how smart and independent you are).
Heed this advice: Involve your kids in your family’s financial decisions and challenge them with game-like scenarios from as early as their grade school years.
Starting your kids’ education young can help give them a respect for money, remove financial mysteries, and establish deep-rooted beliefs about saving money, being cautious regarding risk, and avoiding debt.
1. Co-signing a loan
The Mistake: ‘I’m in a good financial position now. I want to be helpful. They said they’ll get me off the loan in 6 months or so.’
The Realities: If the person you’re co-signing for defaults on their payments, you’re required to make their payments, which can turn a good financial situation bad, fast. Also, lenders are not incentivized to remove co-signers – they’re motivated to lower risk (hence having a co-signer in the first place). This can make it hard to get your name off a loan, regardless of promises or good intentions. Keep in mind that if a family member or friend has a rough credit history – or no credit history – that requires them to have a co-signer, what might that tell you about the wisdom of being their co-signer? And finally, a co-signing situation that goes bad may ruin your credit reputation, and more tragically, may ruin your relationship.
The Lesson: ‘Never, ever, EVER, co-sign a loan.’
2. Taking on a mortgage payment that pushes the budget
The Mistake: ‘It’s our dream house. If we really budget tight and cut back here and there, we can afford it. The bank said we’re pre-approved…We’ll be sooo happy!’
The Realities: A house is one of the biggest purchases couples will ever make. Though emotion and excitement are impossible to remove from the decision, they should not be the driving forces. Just because you can afford the mortgage at the moment, doesn’t mean you’ll be able to in 5 or 10 years. Situations can change. What would happen if either partner lost their job for any length of time? Would you have to tap into savings? Also, many buyers dramatically underestimate the ongoing expenses tied to maintenance and additional services needed when owning a home. It’s a general rule of thumb that home owners will have to spend about 1% of the total cost of the home every year in upkeep. That means a $250,000 home would require an annual maintenance investment of $2,500 in the property. Will you resent the budgetary restrictions of the monthly mortgage payments once the novelty of your new house wears off?
The Lesson: ‘Never take on a mortgage payment that’s more than 25% of your income. Some say 30%, but 25% or less may be a safer financial position.’
3. Financing for a new car loan
The Mistake: ‘Used cars are unreliable. A new car will work great for a long time. I need a car to get to work and the bank was willing to work with me to lower the payments. After test driving it, I just have to have it.’
The Realities: First of all, no one ‘has to have’ a new car they need to finance. You’ve probably heard the expression, ‘a new car starts losing its value the moment you drive it off the lot.’ Well, it’s true. According to CARFAX, a car loses 10% of its value the moment you drive away from the dealership and another 10% by the end of the first year. That’s 20% of value lost in 12 months. After 5 years, that new car will have lost 60% of its value. Poof! The value that remains constant is your monthly payment, which can feel like a ball and chain once that new car smell fades.
The Lesson: ‘Buy a used car you can easily afford and get excited about. Then one day when you have saved enough money, you might be able to buy your dream car with cash.’
4. Financial retail purchases
The Mistake: ‘Our refrigerator is old and gross – we need a new one with a touch screen – the guy at the store said it will save us hundreds every year. It’s zero down – ZERO DOWN!’
The Realities: Many of these ‘buy on credit, zero down’ offers from appliance stores and other retail outlets count on naive shoppers fueled by the need for instant gratification. ‘Zero down, no payments until after the first year’ sounds good, but accrued or waived interest may often bite back in the end. Credit agreements can include stipulations that if a single payment is missed, the card holder can be required to pay interest dating back to the original purchase date! Shoppers who fall for these deals don’t always read the fine print before signing. Retail store credit cards may be enticing to shoppers who are offered an immediate 10% off their first purchase when they sign up. They might think, ‘I’ll use it to establish credit.’ But that store card can have a high interest rate. Best to think of these cards as putting a tiny little ticking time bomb in your wallet or purse.
The Lesson: ‘Don’t buy on credit what you think you can afford. If you want a ‘smart fridge,’ consider saving up and paying for it in cash. Make your mortgage and car payments on time, every time, if you want to help build your credit.’
5. Going into business with a friend
The Mistake: ‘Why work for a paycheck with people I don’t know? Why not start a business with a friend so I can have fun every day with people I like building something meaningful?’
The Realities: “This trap actually can sound really good at first glance. The truth is, starting a business with a friend can work. Many great companies have been started by two or more chums with a shared vision and an effective combination of skills. If either of the partners isn’t prepared to handle the challenges of entrepreneurship, the outcome might be disastrous, both from a personal and professional standpoint. It can help if inexperienced entrepreneurs are prepared to:
The Lesson: ‘Understand that the money, pressures, successes, and failures of business have ruined many great friendships. Consider going into business individually and working together as partners, rather than co-owners.’
6. Signing up for a credit card
The Mistake: ‘I need to build credit and this particular card offers great points and a low annual fee! It will only be used in case of emergency.’
The Reality: There are other ways to establish credit, like paying your rent and car loan payments on time. The average American household carries a credit card balance averaging over $16,000, and the average Canadian owes $22,081 in consumer debt. Credit cards can lead to debt that may take years (or decades) to pay off, especially for young people who are inexperienced with budgeting and managing money. The point programs of credit cards are enticing – kind of like when your grocer congratulates you for saving five bucks for using your VIP shopper card. So how exactly did you save money by spending money?
The Lesson: ‘Learn to discipline yourself to save for things you want to buy and then pay for them with cash. Focus on paying off debt – like student loans and car loans – not going further into the hole. And when you have to get a credit card, make sure to pay it off every month, and look for cards with rewards points. They are, in essence, paying you! But be sure to keep Lesson 5 in mind!’
The Balance: “How Much Should You Budget for Home Maintenance and Repairs.” 4.4.2017
CARFAX: “Car Depreciation: 5 Things to Consider.” 5.18.2017
MysteryMoneyMan: “5 of the Most Dangerous Financial Commitments You Can Make.” 1.16.2017
NerdWallet: “2016 American Household Credit Card Debt Study.” 2016
CBC News: “Canadians’ average debt load now up to $22,081, 3.6% rise since last year.” 12.16.2016