In my daily blog reading I came across an interesting discussion on the government debt. There's only so much you can write in a comment, so I figured I'd blog about it myself.
Most personal finance bloggers will proclaim the benefits of being debt free, living below your means, and saving for various reasons. I agree with the sentiment, but I think we need to be careful that we don't over generalize the point here. For example, we save to meet goals, not because we like to stare at money. If you don't set your goals, saving money isn't bad, but it's not really serving its true purpose. Believe it or not, debt can serve a purpose too.
When I was reading in Economics about the government spending and government debt, I found what was not said much more interesting than what was said. There was no talk over whether debt was good or bad, or if the government would be better off in a surplus or not. Reading the textbook, I realized people would be better off running their own finances much more like the government. I know that's probably contrary to everything you've ever heard.
Debt has really developed a bad name over the years. I've had panic attacks in the past, worrying about how I was going to manage to pay my Visa bill or mortgage, so I understand why some people feel that way. Not only that, but while many of us received no real financial advice from our parents, I'm sure most of us heard again and again that debt was horrible. However, I believe this is an over-generalization. Debt can be horrible, but just because it can be, doesn't mean it always is. After all, I'm sure most of you heard the contradiction from your parents that the mortgage was a "necessary evil." I know I did.
The problem is that the word "debt" is being used too broadly. I would agree that consumer debt, which is a form of debt, IS a terrible idea. Consumer debt is debt used to fund the consumption of goods and services for personal or family use. This is what most of us are referring to when we say that all debt is bad. Examples: Any over due credit card balance, car loans, buy-now-pay later loans (appliances, flooring, etc), lines of credit for household items, etc.
On the flip side though, debt can also be a great tool to allow you to invest in opportunities you wouldn't be able to do by your own means. For example, educating yourself with student loans in order to provide your family with a greater income than you're currently receiving. Buying a real estate investment property that translates into higher cash flow. A working capital loan that allows you to start or grow your own business. Of course there are risks involved, but what in life doesn't have risks. There is no guarantee you'll have your job next month, or your so called safe investments will pay off either.
Governments work the same way. They borrow (or should) to expand our future income potential and to improve our economic state. Whereas consumption spending such as health care, schooling, etc. needs to come from our revenue sources. Borrowing for these items (as badly needed as they are) is just a bad idea. Funds for these items can only come by reducing our expenditure in these areas or moving funds from other areas of consumption. Just like we do with our own personal budgets.
Borrowing for the Olympics makes sense because it brings in more tax revenue, future tourism, and greater immigration. Borrowing to house the poor doesn't have that same return unless this leads to increased employment and lowered use of government services.
Have you been lumping all debt together? What are your thoughts on this "great evil"?
Showing posts with label Saving. Show all posts
Showing posts with label Saving. Show all posts
Monday, March 15, 2010
Monday, January 18, 2010
Financing the New Car
OK, Thursday I talked about buying a new car. Today let's discuss the financing options.
Option 1, is to lease the vehicle again. I'm sure there are valid reasons to do this and if you think you have one talk to an accountant. I think for the most part these benefits only apply to businesses and only certain ones at that. Even if you want a new vehicle every 2 years it's cheaper to buy the car and then resell it than it is to continue to pay the lease amount. It's certainly not worth it to me when I want to buy a used vehicle and drive it until the wheels fall off. A lot of companies are starting to drop this option as well anyhow.
The only reason I leased the first time was because I bought a car I couldn't afford. Mind you I think they were pushing the lease and compared a 2 year finance to a 4 year lease, but that's beside the point. I don't think it's smart to buy a car you can't afford any more than it is to buy a home you can't afford. So, for me this option is out.
Option 2, is to finance the vehicle. You could finance it through the bank or through the car financing company. One thing to take into consideration which I didn't the first time around, was any financing fees. The car dealers financing options are almost always going to look better than the banks. However, when we financed the dealer charged us a $500 fee. They wanted to charge us $1000 but I told them there was no way that was going to happen. Even with the higher interest at the bank it would have been cheaper to go with them it turns out.
An attractive offer from the dealerships is 0% financing. Again though, this might not mean what it sounds like. Read the fine print. 0% might exclude any offers you would have gotten if you paid cash. It also might have extra fees to finance, etc. Borrowing the money from the bank might allow more bargaining with the company for those cash incentives.
If you have enough room on a line of credit, you don't even need to go to the bank and ask for the loan. If I buy directly from a personal seller and not through a dealership, dealership financing won't be an option anyhow.
So, I'm going to be looking at some form of Option 2 because I don't have any other funds set aside. I'll use the line of credit if I can free up enough room, but otherwise it will be some sort of financing. However, there is a 3rd option that I plan to use on every vehicle from now on.
Option 3, is to pay cash from a good old fashion bank account. Sounds crazy I know, but let me explain before you give up.
Let's say I borrow the $12,600 from the bank to buy a 2yr old Ford Focus. Ignoring the $1000 push, pull or drag event. Assuming I finance that over 4 years at say 5%, the monthly payments are approximately $275/month. Here's the trick, once I'm done paying off the car, I continue to make the payments. Only this time to myself. Assuming the car lasts my projected 10 years, I then have $13,200 sitting in the bank for the new car.
The next car becomes even cheaper because I have longer to save for it. I could put $130/month aside and be able to pay cash for the next vehicle. You get a much better feeling of satisfaction when you pay for something with your own money. Not only that but earn interest on your money instead of paying interest on the money borrowed.
Now, if you're thinking you can't afford to put the money aside monthly, then how are you going to afford to make the higher monthly payments to finance it yourself? Somehow we always find a way. That's the same sort of mentality you have to bring to this to make it succeed.
Now that you're talking about a significant amount of savings, let's look at a way to make the money grow even faster. This results in lowering our monthly car payment even further.
For example, if you put $125/month aside into a saving account and want a new vehicle every 8 years. After 1 years of savings, you can buy a 7 year GIC. Then the following year you buy a 6 year GIC, etc. Earning much more interest than in a simple savings account. This technique is called laddering. I think the 5 year GIC might be a max, so you might need to buy a 5 year then a 2, but you get the idea.
Using INGs current GIC numbers, you end up with $12,846.59. More than you need with $5 less a month. Money you earned rather than gave to the finance company. If you compared 4 years on your own to 4 years with the finance company you save at least $25 a month. Not to mention the benefits that paying cash gives you.
The best part of all of this is that this technique applies to every big purchase, not just cars. Reversing the cycle of borrow, buy, repay can save you a lot of money in the long run! Not to mention the great feeling of not being indebted to anyone.
I'm going to use this technique on my vacations, flooring, and new electronics as well.
As always I'd love to hear your thoughts.
Option 1, is to lease the vehicle again. I'm sure there are valid reasons to do this and if you think you have one talk to an accountant. I think for the most part these benefits only apply to businesses and only certain ones at that. Even if you want a new vehicle every 2 years it's cheaper to buy the car and then resell it than it is to continue to pay the lease amount. It's certainly not worth it to me when I want to buy a used vehicle and drive it until the wheels fall off. A lot of companies are starting to drop this option as well anyhow.
The only reason I leased the first time was because I bought a car I couldn't afford. Mind you I think they were pushing the lease and compared a 2 year finance to a 4 year lease, but that's beside the point. I don't think it's smart to buy a car you can't afford any more than it is to buy a home you can't afford. So, for me this option is out.
Option 2, is to finance the vehicle. You could finance it through the bank or through the car financing company. One thing to take into consideration which I didn't the first time around, was any financing fees. The car dealers financing options are almost always going to look better than the banks. However, when we financed the dealer charged us a $500 fee. They wanted to charge us $1000 but I told them there was no way that was going to happen. Even with the higher interest at the bank it would have been cheaper to go with them it turns out.
An attractive offer from the dealerships is 0% financing. Again though, this might not mean what it sounds like. Read the fine print. 0% might exclude any offers you would have gotten if you paid cash. It also might have extra fees to finance, etc. Borrowing the money from the bank might allow more bargaining with the company for those cash incentives.
If you have enough room on a line of credit, you don't even need to go to the bank and ask for the loan. If I buy directly from a personal seller and not through a dealership, dealership financing won't be an option anyhow.
So, I'm going to be looking at some form of Option 2 because I don't have any other funds set aside. I'll use the line of credit if I can free up enough room, but otherwise it will be some sort of financing. However, there is a 3rd option that I plan to use on every vehicle from now on.
Option 3, is to pay cash from a good old fashion bank account. Sounds crazy I know, but let me explain before you give up.
Let's say I borrow the $12,600 from the bank to buy a 2yr old Ford Focus. Ignoring the $1000 push, pull or drag event. Assuming I finance that over 4 years at say 5%, the monthly payments are approximately $275/month. Here's the trick, once I'm done paying off the car, I continue to make the payments. Only this time to myself. Assuming the car lasts my projected 10 years, I then have $13,200 sitting in the bank for the new car.
The next car becomes even cheaper because I have longer to save for it. I could put $130/month aside and be able to pay cash for the next vehicle. You get a much better feeling of satisfaction when you pay for something with your own money. Not only that but earn interest on your money instead of paying interest on the money borrowed.
Now, if you're thinking you can't afford to put the money aside monthly, then how are you going to afford to make the higher monthly payments to finance it yourself? Somehow we always find a way. That's the same sort of mentality you have to bring to this to make it succeed.
Now that you're talking about a significant amount of savings, let's look at a way to make the money grow even faster. This results in lowering our monthly car payment even further.
For example, if you put $125/month aside into a saving account and want a new vehicle every 8 years. After 1 years of savings, you can buy a 7 year GIC. Then the following year you buy a 6 year GIC, etc. Earning much more interest than in a simple savings account. This technique is called laddering. I think the 5 year GIC might be a max, so you might need to buy a 5 year then a 2, but you get the idea.
Using INGs current GIC numbers, you end up with $12,846.59. More than you need with $5 less a month. Money you earned rather than gave to the finance company. If you compared 4 years on your own to 4 years with the finance company you save at least $25 a month. Not to mention the benefits that paying cash gives you.
The best part of all of this is that this technique applies to every big purchase, not just cars. Reversing the cycle of borrow, buy, repay can save you a lot of money in the long run! Not to mention the great feeling of not being indebted to anyone.
I'm going to use this technique on my vacations, flooring, and new electronics as well.
As always I'd love to hear your thoughts.
Thursday, January 14, 2010
Thinking about a New Car
I've been thinking about this for awhile and figured I'm running out of time to figure this out. Our Honda has had a good run and while technically running fine now, it's getting up there in age. Car years are like dog years right?
When I leased it originally, I wasn't all that financially savvy. So I didn't give it much thought. My wife wanted a Honda and I figured we'd get rid of our two old vehicles and buy brand spanking new. I figured it would pay for itself just by saving on all our repair costs. Well...I was wrong. Leasing was the only option for us (or so I thought) because of the high cost.
Almost 8 years later it is paid off and I'm thinking of doing it all over again. Only this time I wanted to give this some more thought before I make this big purchase.
OK, now for the details. I'm not married to any make or model although I was pretty happy overall with my Honda Civic. I don't want or need a luxury vehicle and in fact never plan to own one. Although, I wouldn't mind a few more features this time, like automatic windows, mp3 player, etc. My preference is for a new vehicle, but I'm not opposed to buying used.
Seeing as I'm not devoted to any brand like I know a lot of people are, I have to consider domestic vs import. Those terms are used lightly these days as the parts for either are made and put together around the world. I searched and searched for some good statistics, but all I've found are opinions. From what I've gathered the life span and repair bill are roughly the same no matter which option you choose. I'm talking about cars built in the last 10 years or so. Once the vehicle becomes too costly I plan to move on anyhow and a newer vehicle should have few problems regardless of the make and model.
Just like our retirement calculation we have to make some assumptions. I'm going to assume the average car has a lifespan of 300,000km or about 10 years. When I did some searching I found the average age of a vehicle in the US to be about 13 years old.
For my comparisons I chose Ford Focus for my domestic and Honda Civic for my import. "Why?" you ask. I just wanted to keep the comparison simple for now and the make/model doesn't matter too much. I gave them similar features that I consider musts like A/C, floor mats, power windows/locks and MP3 players. The actual vehicle I decide to purchase might be completely different, but it gives us a general idea about which option will win out. Although if import wins out, Honda is likely to be my next purchase.
If it sounds like I haven't made up my mind yet, it's because I haven't. You'll be reading the results as I figure them out.
So my next question is whether to by new or used and when to trade the vehicle in. This is where the import/domestic comes into play again. The domestics are obviously cheaper and will therefore come out ahead in most scenarios. However, if I plan to buy a new car every 2-5 years, having a vehicle with a higher resale value is important. If I plan to drive the car into the ground like I did this time, then the low depreciation of a Honda/Toyota is irrelevant.
One last thing about depreciation. I've often looked at a 1-2 year old Honda and wondered why anyone in there right mind would buy used over new, when the saving was so small. The mistake I was making was that I was looking at the list price. The real price is going to be quite a bit higher on a new vehicle once you factor in taxes, financing fees, rust protection, etc. These used vehicles have all that included.
So let's run some numbers and find out who wins...
The 2 year old and 5 year prices were calculated using a depreciation calculator not actual prices. Although I did find the actual values to be pretty close to this.
I broke the costs out by the monthly amount in order to make the comparison. For example, a 5 year old ford every 5 years would cost $107.17 ($6430/5yrs/12months). The new Honda every 10 years would cost $211/month.
If you want a new vehicle every 2-5 years, the Honda wins out due to the lowered depreciation levels. In fact if it has to be a Honda you're better off buying a 2 year old vehicle and keeping it for 8 years than you are buying a 5 year old every 5 years. Odd I know! This phenomenon doesn't happen with Ford.
If you're looking for the best deal overall though, the 5 year old Ford wins out. So it's not that surprising then that the wealthiest people in the US generally buy used domestics. I learned that tidbit from The Millionaire Next Door (book review one day maybe?).
Preferences would obviously take a big role in this decision. For me personally I can't justify the extra cost of an extra $100 per month (plus the financing costs) to own a new imported vehicle. I have better uses for that money. However, I have decided that it is worth it to me to get the 2 year domestic over the 5 year old domestic. The cost difference is under $30 more a month, but it's worth the piece of mind to me.
I'll talk about how I plan to finance this next. This topic has already grown way to large.
So, what do you think? Is the extra $$$ worth new or import to you?
When I leased it originally, I wasn't all that financially savvy. So I didn't give it much thought. My wife wanted a Honda and I figured we'd get rid of our two old vehicles and buy brand spanking new. I figured it would pay for itself just by saving on all our repair costs. Well...I was wrong. Leasing was the only option for us (or so I thought) because of the high cost.
Almost 8 years later it is paid off and I'm thinking of doing it all over again. Only this time I wanted to give this some more thought before I make this big purchase.
OK, now for the details. I'm not married to any make or model although I was pretty happy overall with my Honda Civic. I don't want or need a luxury vehicle and in fact never plan to own one. Although, I wouldn't mind a few more features this time, like automatic windows, mp3 player, etc. My preference is for a new vehicle, but I'm not opposed to buying used.
Seeing as I'm not devoted to any brand like I know a lot of people are, I have to consider domestic vs import. Those terms are used lightly these days as the parts for either are made and put together around the world. I searched and searched for some good statistics, but all I've found are opinions. From what I've gathered the life span and repair bill are roughly the same no matter which option you choose. I'm talking about cars built in the last 10 years or so. Once the vehicle becomes too costly I plan to move on anyhow and a newer vehicle should have few problems regardless of the make and model.
Just like our retirement calculation we have to make some assumptions. I'm going to assume the average car has a lifespan of 300,000km or about 10 years. When I did some searching I found the average age of a vehicle in the US to be about 13 years old.
For my comparisons I chose Ford Focus for my domestic and Honda Civic for my import. "Why?" you ask. I just wanted to keep the comparison simple for now and the make/model doesn't matter too much. I gave them similar features that I consider musts like A/C, floor mats, power windows/locks and MP3 players. The actual vehicle I decide to purchase might be completely different, but it gives us a general idea about which option will win out. Although if import wins out, Honda is likely to be my next purchase.
If it sounds like I haven't made up my mind yet, it's because I haven't. You'll be reading the results as I figure them out.
So my next question is whether to by new or used and when to trade the vehicle in. This is where the import/domestic comes into play again. The domestics are obviously cheaper and will therefore come out ahead in most scenarios. However, if I plan to buy a new car every 2-5 years, having a vehicle with a higher resale value is important. If I plan to drive the car into the ground like I did this time, then the low depreciation of a Honda/Toyota is irrelevant.
One last thing about depreciation. I've often looked at a 1-2 year old Honda and wondered why anyone in there right mind would buy used over new, when the saving was so small. The mistake I was making was that I was looking at the list price. The real price is going to be quite a bit higher on a new vehicle once you factor in taxes, financing fees, rust protection, etc. These used vehicles have all that included.
So let's run some numbers and find out who wins...
| Ford Focus SE | Honda Civic SE | |
|---|---|---|
| New | 21,805 | 25,365 |
| 2 Years Old | 12,560 | 18,511 |
| 5 Years Old | 6,430 | 13,050 |
The 2 year old and 5 year prices were calculated using a depreciation calculator not actual prices. Although I did find the actual values to be pretty close to this.
I broke the costs out by the monthly amount in order to make the comparison. For example, a 5 year old ford every 5 years would cost $107.17 ($6430/5yrs/12months). The new Honda every 10 years would cost $211/month.
If you want a new vehicle every 2-5 years, the Honda wins out due to the lowered depreciation levels. In fact if it has to be a Honda you're better off buying a 2 year old vehicle and keeping it for 8 years than you are buying a 5 year old every 5 years. Odd I know! This phenomenon doesn't happen with Ford.
If you're looking for the best deal overall though, the 5 year old Ford wins out. So it's not that surprising then that the wealthiest people in the US generally buy used domestics. I learned that tidbit from The Millionaire Next Door (book review one day maybe?).
Preferences would obviously take a big role in this decision. For me personally I can't justify the extra cost of an extra $100 per month (plus the financing costs) to own a new imported vehicle. I have better uses for that money. However, I have decided that it is worth it to me to get the 2 year domestic over the 5 year old domestic. The cost difference is under $30 more a month, but it's worth the piece of mind to me.
I'll talk about how I plan to finance this next. This topic has already grown way to large.
So, what do you think? Is the extra $$$ worth new or import to you?
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