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Archive for the 'Saving Strategies' Category

Friday Q & A: Should I Repair My Car or Buy Another One?

It’s Friday, so it’s time for this week’s reader-submitted Q & A. If you’d like to submit a question, click here for more information or simply email a question. Recently, the questions have been arriving in droves, so get yours in today! As you’ll see from the signature below, they’re also coming in from all over.  (Although nothing from Turkey yet. Istanbul, are you out there?)

Hi Michael,

I own my 2000 Volvo V70 wagon with 140,000 miles outright, but it needs major work to stay on the road –  to the tune of $5,000. I am wondering if I should pay for the repairs or replace the car? The private party sale of the car, once repairs are made, would be $3,000 to $4,000 — less than the cost of the repairs.

Here are a few more details about my situation:

  • My general MO with cars is to buy a newer used car in good condition and drive it into the ground. I don’t like to spend money on cars, but I do like reliable and comfortable transportation for my family.
  • The mechanic who quoted me the repair estimate is fair and has been working on the car since the beginning. We trust him, as much as you can ever trust a mechanic.
  • Also, the 5K estimated for repairs are just the critical repairs. There are other repairs that aren’t critical so we’re ignoring those.
  • My husband and I plan to buy our first house later this year and don’t want to spend all of our cash. Even though I would normally tap my savings to buy a good used car outright, this year I am hesitant to do it because we will need the money for our down payment.
  • I’m considering financing a car, and I’m wondering if I should consider other options, like a new car where there might be some bargains or great incentives.

    What do you suggest?

    Many thanks!
    Genevive, Maui, Hawaii

    Straightforward Answer:  Replace your car with a slightly used car and finance it.

    More Detailed Explanation:

    I fully realize that my short answer above may draw the ire of some.  Although not for that reason, my response is for Genevive’s facts and others in very similar circumstances. Let’s address each of your issues in turn.  I believe you really have three considerations:

    Consideration # 1: Replace the car or fix the car?

    It will cost you more to fix the car than it will be worth after completing the repair.  By definition, this means that your car currently, sans repairs, has a negative value.  (This happened to my first car after only seven years and 90K miles.  You’ve benefited from 9 years and 140K since manufacture so you’ve done okay.)

    It’s not a good idea to put money into an asset that is worthless.  As you describe your car, your repair needs go well beyond routine and expected maintenance expenses.  Furthermore, there are additional expenses, already known, that are needed in the short-term that go above and beyond the $5K amount.

    Still, while your car has a negative value to you, it will have some sort of positive value to someone else.  If you go to trade-in the car, it will have value as a trade, since a reasonable dealer will do what he can to move a car off his lot.  (In this case, the economy will both help and hurt you.  The dealer will be excited at the prospect of moving a car, but he’ll be less excited about the idea of taking your clunker.  (Yet another reason to keep these two negotiations separate.)

    Net: replace the car and get what you can for it.  It’s about to become a money-pit.

    Consideration # 2:  Replace your car with a new or slightly used car?

    This used to be a no-brainer: choose a slightly used car. Doing so enables you to avoid the painful, instant, and dramatic depreciation suffered by any new car buyer.  It is likely still going to be your best strategy.  But it is no longer a no-brainer.  Due to the crazy economy we are now in, new car prices have been punished and, in many cases, severely so.

    A brief illustration:

    My wife and I finally purchased a second car (Until late April, we’d had just one sedan. However, with two growing kids and my new out-of-the home office, we eventually had to concede to running out of room and flexibility).  We fully intended on purchasing a used mini-van (insert Dad joke here).  But after several weeks of looking for used mini-vans, pricing them and doing just a little bit of negotiating with a new car dealer, the value proposition was notably stronger for the new mini-van.

    Because of the economy, certain manufacturers are selling certain model cars at far lower prices than just a few months ago.  Also because of the economy, many people are keeping their cars far longer than they would typically (I’m not talking about financially shrewd people who historically have always kept their cars until they couldn’t run anymore; I’m speaking of the masses who replace their cars every three years or so.)  As a result, it’s possible that, for the make and model of the car you’re looking for, used cars might not be as readily available as during normal times. Supply and demand doing what they do, used car prices for certain models are strong.

    Net: do your research.  Depending on your local market conditions, the car model you desire, and your flexibility to consider other car types, you may very well be better off with a new car.  Run the numbers, keeping in mind that you should expect and plan to keep a new car two years longer than a used 2007 model.

    Consideration # 3: Lease, Finance, or Purchase for Cash?

    I’m hugely against car leasing except in very specific circumstances.  You’re not an ideal candidate for leasing anyway, given your intention to drive your vehicle for a long time and your history of actually doing so.  So the real choice for you is to finance or purchase for cash.  That you are even considering purchasing a car for cash puts you in the great minority.  You are only able to do so because you either have ample savings, a low car budget, or both.

    There are huge upsides in paying cash for a car, most notably avoiding interest charges on your car purchase. Furthermore, you won’t be in the monthly payment trap.  Good outcomes to be sure.

    But, again, there are other factors at work. You have two primary issues that influence my suggestion to you:

    First, there’s the economy again.  If you have the financial strength to be an attractive car buyer (good credit and a job), you will be eligible for significant financing opportunities not available to less credentialed buyers (or even to you, during normal economic times.)  It is financially responsible to consider such low cost financing options. Currently, several new cars are available at low rate or no-interest financing.  While I’m not advocating you sign up for an 8% car loan interest rate, if you can score a 1.9% or 2.9% rate, I’d rather see you with the additional cash in your savings account for emergencies or with the ability to increase your retirement savings.

    Your second consideration with regard to financing the automobile is your intended upcoming purchase of your home.  If purchasing the car for cash would push you below the 20% down-payment required to avoid PMI, the car for cash purchase option should be eliminated (or you’ll just need to shop for a less expensive home). Since you don’t seem like a “car person,” you’re better off making sure you are the most attractive home buyer you can be. This will mean bringing a sizable down payment to the table.

    Genevive: Good luck with your decisions. Let us know how it all works out or if you have any other questions.

    Everyone else: okay, where, and how passionately, do you disagree?  Or do you see it the same way?

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    Sticker price vs. good price - at a jeweler

    Although my wife and I are going to celebrate our 10th anniversary in a few weeks, it was as though we were married only yesterday as I read The Weakonmist’s post How I Saved 15% On My Wedding Ring In 15 Seconds & 45% Overall, which I found while reviewing this week’s Carnival of Personal Finance, hosted by Funny About Money.

    Truth be told, my wife’s wedding ring and my wedding ring are both remarkably inexpensive.  We went for the traditional plain gold matching bands.  However, when I had previously purchased my wife’s engagement ring, I did almost everything wrong.

    You: Tiffany’s?

    I said “almost everything.” I did go to the diamond district in Boston and sought out a wholesaler/retailer.

    You: But?

    But I totally failed to negotiate.

    You: Why?

    Quite honestly, I didn’t know you could, so I blew it (From a financial perspective only; it’s a beautiful ring and, as I said, my wife is still tolerating my nonsense 10 years later).  Nonetheless, I have long since learned that virtually everything in every jewelry store is negotiable. About the only difference between a jewelry store and car dealership is the lack of a negotiation about the value of the “trade-in.”

    The Weakonomist gives a great quick summary of how easy negotiating jewelry can be. My experience echoes his findings. Simply asking for a discount will often garner one and the greater your “ask,” the greater the follow-up discount.  Margins in jewelry (unlike cars) can be very high, so jewelers have great incentive to move merchandise, even at lower than sticker price, rather than stick to their guns and lose a potential sale to a competitor.

    Have you haggled over jewelry? What strategies worked for you?

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    What do extra loan payments, toilet paper, and Monopoly have in common?

    One of the best parts of the weekly personal finance carnivals, including this week’s carnival hosted by WiseBread, it the wide variety of personal finance topics covered.  In addition, I always take the time to enjoy an article or two that I’ve been meaning to write myself but just haven’t gotten to.  This week was no exception, even if my post about The New Frugality made the cut. Here are my three favorites of the week:

    J. Money from Budgets Are Sexy presents Paying extra towards your loans now, goes a long way later! This is so true it hurts. How much pain?  As J. Money says, “It’s like kickin’ compound interest in its head and getting away with it :)”  How could you not enjoy?

    Another favorite:  Save Money By Buying the “Good” Toilet Paper by That One Caveman. Two very important lessons from this title. First, you can never go wrong putting “toilet paper” in a blog posting title, something I learned a while back when I wrote Toilet Paper As an Economic Indicator last fall - still is a bizarre way to look at the world.  Second, sometimes paying for quality is actually cheaper than paying for quantity.  (Amazingly, this was also the theme of the toast my brother gave for my wife and I at our wedding, but that’s another story for another day.)

    Money Lessons from Monopoly is another wonderful article.  Free Money Finance reminds us that Monopoly is a great teacher not only of the importance of cash-flow (how much fun is it to mortgage our properties?) but also of luck (the frustration of your opponent consistently missing your hotels as he marches around the board).

    Quick FYI: The Total Candor web site was featured in the Philadelphia Inquirer over the weekend for savings help.  Did you see it?  If not, see it now.

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    Upromise underdelivers

    I don’t like to talk disparaging about other people or other companies.

    You: So I’ve noticed.

    Life is too short and the world is too small.

    You: But you’re going to bad-mouth Upromise anyway?

    No, I don’t really have an issue with Upromise itself.  However, I am concerned about some of the people who have Upromise accounts.

    You: Why?

    Two reasons. First, because I’ve been asked various times at different speaking venues about my thoughts on Upromise as a key savings vehicle for college.

    You: And the second reason?

    Because I just received an email from Upromise on April 3 that began:

    Dear Upromise member:

    Congratulations — you’ve earned over $25 in your Upromise account.

    You: Okay, so far so good. What’s the problem?

    Here’s the thing: My former employer Toys “R” Us was, I believe, among the very first big merchants to join forces with Upromise (it was also one of the first big ones to discontinue its affiliation).  As a result of my Toys “R” Us employee status and my financial bent, I decided to join Upromise and opened an account way back in May 2002.

    You: That’s almost 7 years ago.

    Indeed. My first daughter wasn’t born until nearly three years after I started participating with Upromise.

    You:  That is an early start for college saving.

    It was an early start to think about saving for college. But participating in Upromise is NOT saving for college.  Let’s be clear: Upromise participation is nothing like the miracle of compounding interest. There’s not much miraculous about Upromise. The premise is pretty simple: if you spend some of your everyday money with certain merchants (like Bed Bath and Beyond) and/or on certain products (Keebler), you’ll receive a small increase to your Upromise account.

    You: How small?

    Microscopic. And therein lies the problem.  After seven years of Upromise participation,

    You: You have over $25!

    Yes.

    You: How much over $25 do you have?

    I have just under $50 in my account at this moment.  At this rate, when my oldest reaches college, I should have enough to buy her about three-quarters of one textbook.

    You: So does Upromise suck? Should I quit Upromise?

    No and no.  There’s nothing wrong with accepting free money and this is fifty bucks I can use in 15 years that I did nothing to earn.  For that I am grateful.

    Still, some people do get excited about UPromise. When they do so in my presence, I politley tell them to calm down and explain to them how little it will matter in the end.  More important, I explain, is look at and begin saving within a 529 plan.  (Upromise says they can help with that too.) Not surprisingly, most of your kid’s education isn’t going to be paid with fruit crackers, it will be paid with the fruits of your labor.

    At the end of the day, buying one text book used instead of new will do more to ease your college financing dilemma than Upromise will.

    Have you checked your Upromise account balance lately?

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    On the Geithner resignation

    April fools.  Did I get you?

    Today’s topic is:

    Spending less on technology

    Until recently, upgrading your computer every two or three years was a virtual necessity.  Now, many people have learned that the PCs of a few years ago can be made into practically new machines by adding memory and hard-drive space.  Furthermore, the total cost to do is often less than $200.  (As a sidenote, my 3.5 year old Mac iBookG4 doesn’t appear to have such improvement opportunities and is moving slower and slower - if you have ideas to improve it’s performance, I’d love to hear from you)!

    Back to the issue at hand.  In 2004, after about five years of solid performance, I finally dumped my grad school Dell Latitude laptop. It had been a solid performer - worked great for about five years until someone (an individual who looked like me and had my initials) accidentally spilled a teaspoon’s worth of water on it. Turns out the water limit for that machine was zero.

    Crazy to think of now, but I had paid over $2,500 in 1998 for that machine (Imagine spending that kind of money on a computer today!  I believe machines that cost $3K can launch missiles.)

    When I began the shopping process in 2004, I was told about Dell Outlet, which saved me about 30%. Yesterday, I saw How to Save $7,500 on Your Technology Purchases It got my attention.  I hope it gets yours.  Why pay more for the same?

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    Friday Frenzy: Twitter, saving money on a phone bill, girl scout cookies, and the credit markets

    After a bunch of requests, I finally got my act together and I’m now on Twitter. So, as the saying goes, feel free to follow me on twitter. I have many ideas for using this (relatively) new medium (to me) some of which I think are going to be fun, so hop on over there.

    My brother, ever the negotiator, forwarded me a how-to guide to saving money on your cell phone bill.

    Like I’ve said before, the dread of such tasks can easily exceed the reality of the undertaking.  For the woman in this example, her efforts were worth over $500/hour. Better yet, her total time invested: 12 minutes.  Most of us will dwell making the call for far longer than the actual call will take. But even if you do, you have no chance to save money until you pick up that phone.  Your hourly earnings are zero dollars per hour.  So: no more dwelling!  Start doing and you’ll begin saving month after month on those recurring minor expenses, key current users of your precious cash-flow.

    On a completely unrelated note and as I posted on twitter yesterday,

    If the girl scouts can sell cookies to every American during a recession, why don’t we see if they can get the credit markets moving?

    I welcome your thoughts on all of these topics. Have a great weekend.

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    Don’t buy stuff you cannot afford

    Adam at Your Money Relationship was kind enough to send this video over to me.

    Now I’m thinking that perhaps my next book could be a lot shorter than I’ve been planning.

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    Skiing through positive influence of saving

    Last weekend, I did something I haven’t done in 12 years.

    You: Play a round golf?

    Nope. I still haven’t done that.

    You: Oh! You watched a round of golf!

    No!  I don’t do golf.  Last weekend, my family and I went skiing in Vermont.  It was only the third time I’ve ever been skiing and it was the first time for my 3.5 year old daughter.

    You: How did it go?

    Fantastic!  No broken bones for me and my little girl asking “Can we go on the chair lift again?”  A good time was had by all.  The weekend served as an excellent reminder of the importance of balance.  Having had just one day off in two weeks, I was ready for a break.  Spending it doing something athletic  -

    You: Falling down on the greens doesn’t make you an athlete.

    They told me there weren’t any cameras on that mountain.

    You: That was a hill.

    Argh. Still, it was great to be outside, comfortably cold, enjoying a new experience with friends and family.  I want to do it again soon,

    You: Really?  Skiing is not cheap.

    No, it’s not.  But like everything else, you can do it a fiscally responsible way.

    You: How?

    Mid-week lift tickets, for example.

    You: How will you get all the way -

    I live in New Hamphsire.

    You: The one time it helps you!

    Not quite, but I know NH is a mystery to some.  Point is that there’s a lot you can do for a little when you plan ahead.  Sometimes, these habits become hobbies and many hobbies can be healthy. One such example was featured in this week’s Carnival of Personal Finance: Positive Influence of Saving Money.

    In that article, MoneyNing talks about a concept I’ve spoken about before: once you start saving, you actually like saving.  When you enjoy getting account statements because the balances are growing and when you start to earn interest instead of endlessly paying it, your financial outlook and your financial attitude change.

    Another article featured in this week’s carnival was my article on not declaring bankruptcy.

    What hobby or habbit do you have that you find endlessly and positively reinforcing?

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    Do you know Bill Creep?

    There was a pretty good article in yesterday’s WSJ called In the Fight Against Bill Creep, Every Extra Fee Is the Enemy.  You’ve probably heard me talk before about the importance of the recurring minor. While I don’t believe every financial problem can be solved by destroying coffee shops (Your problem isn’t Starbucks.) I passionately believe people spend a ton of money on automatic expenses that don’t make sense.

    You: Why do people do that?

    Often, the expense made sense at the time they made the decision.  But their situations have changed. You move, you have a kid, get a new job, enter or leave a serious relationship. For whatever reason, your gym, Netflix, cell phone, and cable bills no longer reflect your true needs.  In the interim, you’ve probably added services to reflect what you need now.

    #    #    #

    Isn’t it interesting how we’re really quick at adding features we need (and paying the corresponding fees) but kind of slow to remove them when they’re no longer relevant.  What expenses have you removed that you should have killed months earlier? What’s still on your to-cut list?  How’s your Bill Creep?

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    Financial Education - Enjoy More Free Stuff

    Much has been going on behind the scenes here at Total Candor.  Today’s blog post highlights some of the most important:

    • MSN Money did a big piece - including a webcast video link to the left of the article - about The big cost of baby. A must-read for new or expecting parents.
    • For your tropical listening pleasure, here’s an extensive interview I did with Hawaii Public Radio last November while in Honolulu for several speaking engagements with ING DIRECT.  Listen to Town Square with Beth-Ann Kozlovich.  You’ll get a lot of useful information and also learn how to say local place names properly. Even “Honolulu” doesn’t sound like “Honolulu” when it’s uttered by someone who actually lives there.
    • Want more free stuff?  Learn about this blog’s Q & A benefit.  Your question just might be selected.

    I hope you enjoy all these links and look forward to any comments!

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