Paying Cash for a Car

 Debt Reduction  17 Responses »
Feb 252013
 

Does anybody really like debt?

Of course, some people just think debt is great.  Those who are making money on the loans just might be among those :)   However, I’m certainly not.  I tend to think that its good to practice debt-free living in most cases.  In the case of buying a car, this applies too.

I say this from personal experience. Now, this experience doesn’t make me any different than anyone else, in that many people have taken out a loan to buy a car.  That seems quite typical, as a lot of people try to buy a car based on being able to borrow.  It’s almost like a rite of passage for a lot of people, their first car loan!

Well, I think it’s better to pay cash for a car.  The one time I actually took out a car loan, I couldn’t stand it.  Sure, the vehicle was nice though! The best one I’ve ever owned, and one that frankly I’d buy again if I had the right income level to fit that in.  But I had to make payments on it each month, and it really took away from the enjoyment of the car.

Just the notion of actually making a payment every month reinforces the reality that you really don’t own the thing outright.  The loan I took out was for just a few years, but that payment each month wasn’t fun to make.  When you make a few payments, and realize that you have years – not just a few more months – to pay off the loan, it becomes yet another burden.  I eventually paid the car off, and later got rid of it.

I learned from the experience, and bought the next car by paying all cash.  It was used this time, but that’s okay.  The feeling of owning it in full provided some sense of freedom that taking out a loan didn’t.  Naturally, not everyone is in a position to do this at all times.  If truly need a car, you’ll want a reliable one, and that might entail taking on a small loan if your circumstances dictate.   But WOW is it better to just pay cash and forget about it.

A good way to make paying all cash for a car is to regularly set aside money in a car fund.   You can almost pretend that you’re making car payments, but instead you’re saving money in a fund.  Here is one example of go about it:

  1. Start years ahead of the purchase
  2. Figure out the kind of car you think you will need, rather than one you’d like to feel cool in.  Don’t be one of the Big Hat, No Cattle people.
  3. Determine the cost of buying a quality used version of the car
  4. Calculate a monthly savings amount that will allow you to finish saving for it in 3 years
  5. Make sure whatever you’re saving does not take away from ample retirement savings or an emergency fund
  6. Regularly save each month in a dedicated account, and make it automatic

No interest paid, and you’ll have the peace of mind of knowing that you own the car outright when you buy it.

If you want to delay the process of saving for the next car, then truly embrace the idea that a car is something to safely get you from point A to point B, and not a status symbol.   Accepting that car longevity is important is what got me to drive a car well past 200,000 miles.  Sure, a few folks teased me about it.  But isn’t saving money worth getting teased by others who overspend?  I think so!

What About You?

How do you save for buying a car?

Do you take on car loans when buying a car, or do you pay in cash?

Student Loans and Senior Citizens?

 Debt Reduction  14 Responses »
Apr 092012
 

Don't carry those loans late in life

Those of us who are interested in personal finance are aware of notion that student loans can be that proverbial monkey that people want to get off their back.  A loan taken when young can take years to pay off, and keep a person in debt for a while.

We’ve talked about the value of college in debates on college vs. entrepreneurship, as well in a discussion on how education can increase wealth.  One of the other factors in the equation, which we touched on in those posts, is the reality that student loans can be a real burden. Thus it’s important to choose schools and programs wisely, and consider ROI.

A recent article in the Washington Post actually brought this last point to light in a way that certainly caught my attention.  According to the article, there are many people in their 50’s and even 60’s who are paying down student loans.  That’s right: student loans can be a burden for senior citizens!

A chart in the online article indicated that of the student loans that are past due as of the 3rd quarter of 2011, 12.1% were for people in their 50’s, and 4.8% were for people in their 60’s!

That’s really something else. Those debts just don’t go away. Now, to be sure, some of those people might have taken on loans later in life upon returning to school. That doesn’t make it any less unpleasant to have debt later in life though.  But more eye opening is the notion that some people are still dealing with their initial round of loan obligations as they near retirement eligibility!

While I think that it can be said that a lot of debt is bad, student loans can be a more tolerable version of debt since it is being used to invest in one’s future and potential earning power. That’s different from buying an overpriced house or car. However, this goes to show that not all student loans are smart, and good loans can become bad if the repayments aren’t managed properly over the years.

To avoid such a situation, it seems like a good idea to strongly consider ROI when picking out a school and program.  Unless a school is a world renowned name brand, such as an Ivy or Ivy equivalent, it seems like a really good state school might be a better investment than an expensive private school without the name brand.  Does that make sense? Also, majoring in underwater basket weaving or some similar non-marketable endeavor is sure to wreak havoc with that ROI as well.

The big thing I see is that getting a good foundation of financial knowledge when growing up, from a parent or guardian, can be invaluable to people.  Signing up for significant debt shouldn’t be considered a rite of passage for everyone, when the idea for many of us is to work toward financial freedom.

Can you imagine not being able to buy a grandchild a toy, because you had to pay off your own student loan?

My Questions for You

Does this surprise you at all, that there are people out there in their 50’s and especially 60’s that are still paying off their own student loans?

What do you think a solution can be for these types of situations to be avoided?

Did you have any student loans at any time, and how long did it take to pay off? Or, if you still have them, when do you envision getting them paid off?

Is Most Debt Bad?

 Debt Reduction  20 Responses »
Mar 142012
 

When you think of debt, do you get warm and fuzzy thoughts? Didn’t think so. Do you think of debt as something that you’d like avoid or work toward eliminating? This latter viewpoint seems to be the prerogative of many folks in the personal finance blogosphere, at least based on what I’ve read in numerous articles over the last several years.

A recent short article on Moneyland caught my attention, as it discussed the notion that more young people are leery of debt these days. Instead of viewing debt with the same mindset that their parents did, many are making decisions that reflect a greater reluctance to take on debt than prior generations. For example, making decisions such as living at home with parents or renting instead of going out and buying a place.

My take on this: Bravo!

Now, it’s probably true that instead of absolute fear of debt, it’s better to look at it objectively and realistically. It can be really bad, but at times debt can be a tool for getting certain things done – as well as an emergency safety net, dealing with totally unforeseen medical expenses, etc. Also, if there was no money to borrow, the business world would come to a standstill. So admittedly, debt does have an important role in the big picture.

That being said, however, for the average person out there, most debt is simply not worth taking on. There is something to be said for aspiring to debt-free living.

Here are some different thoughts on types of debt and their legitimacy:

Bad Debt

What do many people borrow to buy? Often times, it’s for consumer goods purchases. Buying clothes, electronics, furnuiture, etc. With such purchases, if we can’t afford to pay it off in full as soon as the credit card bill is due, it shouldn’t be bought.  Carrying balances means that you shouldn’t have bought the thing in the first place.

What about cars? Are these worth taking out loans for? Well, probably not in my view. If somebody is solvent enough to have a decent emergency fund, then why not pay in full for a car? It doesn’t have to be a $25,000 new car if that’s not affordable. Why not get a functional $5,000 used car instead, if that’s what you can afford to buy in full.

I remember a guy I worked with over a decade ago who bought a brand new SUV despite being a few years out of college.  He said he needed to buy it because he needed to feel like he “arrived”.  Smart guy, otherwise.  I’ve kept in touch with him, and he’s totally got his head on straight now. But back then, he made a decision that showed too much comfort with debt.

Borderline Debt

It’s safe to say that most home buyers, particularly first time buyers anyway, take on a mortgage. It’s just the way things are done. However, no matter what anybody says about tax deductions, the pride of home ownership, or things of the like - a mortgage is still debt. If you live in a dream home and finance it with a large mortgage, you will be working many hours and possibly years to pay for it. Sometimes it can be helpful to think about how time is money, and determine exactly how much we have to work to finance such dreams.

It seems to make sense that one should ideally buy something that fits legitimate needs in terms of space, location, schools, etc. Some debt is realistic in this case, but should be manageable with the goal of paying it off sooner than later. Trading up for a McMansion, luxury condo, etc – not sure about that if it requires extra financing versus what’s truly needed.

“Investment” Debt – To a Point, Anyway

Now, not all debt is bad of course. When people start questioning if college is worth it, I think that’s going way, way too far. It’s worth it, necessary, and needs to happen for most younger folks if possible. Such debt should still be minimized though, and choices can be strategically made to pick the right college based on quality and value. Then, this debt can be considered to be an investment in one’s future.

My thought is that burdening somebody with tons of debt to start out life is not ideal. But, since college is absolutely necessary for most people, why not view the choice of which college to attend as a strategic investment? You know, one that requires an analysis of costs and expected/potential returns.  Perhaps it’s a matter of financial literacy, reframing the college decision, or thinking more pragmatically than emotionally.

My Questions For You:

Do you see as I do, that most debt is truly bad and unnecessary, other than a few of the specific examples I noted above (medical, limited home, smart college choice)?

Do you think that this recent aversion of debt by young adults is a good thing for our society as a whole? Or, is it irrational and has it gone too far?

 

Make Sure to Review Your Credit Card Statement

 Debt Reduction  17 Responses »
Jan 242012
 
Review Your Statement!

Review Your Credit Card Statement!

Do you carefully check your credit card statements, and review the transactions? It can help ensure that you’re not being charged unnecessarily for any ”phantom” transactions, unauthorized purchases, or mistakes.  I had an experience recently that serves as another example of why we take the time to at least scan through our statements each month.

First off, I make it a practice to pay off any bills in full each month. I don’t like to carry credit card balances, and simply don’t do that. Rather, I pay it all in full and on time each month. So, when reviewing a credit card bill, I typically don’t think of there being any issues in those areas. I’m usually focusing on transactions instead.

A recent review of a statement showed that all the transactions seemed fine, but something else jumped out at me: an interest charge! Impossible, right? After all, I pay may bills on time and in full, so there should be no problems.

Immediately, I called the credit card company. After describing the situation, and asking why it happened, it turns out that my last payment had been received late. Now, that’s not something I wanted to hear, since you just don’t want to be paying bills late.  There must have been some kind of mistake on their part!

Well, after they described the situation, I froze for a second and realized that I had been busy the month before and my payment was made close to the deadline. I normally don’t do that, but it was just one of those things. However, I pay bills online and the payment date was supposed to be right at the deadline date. Apparently, it must have hit right after that so thus the late fee.

Ouch.  Obviously, if you read this blog, you know that this is NOT something I would be happy about. Being someone that takes pride in financial responsibility, I didn’t like that this happened.

I explained the situation to the person on the phone, and stated that I pay my bills on time in full every month, and that was the reason I was surprised and called. The guy on the line then said he would make sure that the fees were reversed and charges removed. Great!

After getting charges reversed, I felt some satisfaction in knowing that reviewing a credit card statement saved money. Of course, I also learned a lesson that even people who are responsible can slip and make a mistake by procrastinating. Best to pay bills well ahead of the deadline, to avoid any situations like this where you have to call.  Minimizing credit card expenses is a good thing.

Finally a big thing I learned from the experience is that building up a stellar track record of paying in full on time can build goodwill.

My Questions for You

Do you review your credit card statements each month?

Have you ever found any surprise charges on there? If so, how did you handle the situation?

What is your process for making the payments each month?

 

8 Benefits of Using Credit Cards – For those With Discipline

 Debt Reduction  26 Responses »
Nov 162011
 

Have you ever been in credit card debt?

Personally, I’m fortunate enough to have never been in credit card debt. It’s always been a part of my financial ways to try to pay off credit card bills in full during each billing cycle.  So, thankfully, I’ve avoided the stress involved with over reliance on credit cards, and the need to pay off credit card debt.

A few months ago, I was talking to a friend about somebody we both knew. I don’t keep in touch with this other person, and see her extremely infrequently, as in once every few years. However, my friend is more involved in a different circle of people, and communicates more with this other person. Anyway, he shared with me that this person – we’ll call her “Jill” – was unemployed and running out of money. Being single, she didn’t have a spouse’s income to help her. Clearly, she hadn’t saved much, and now was carrying a credit card balance.

My friend was suggesting (to me, not her) that Jill should just stop using cards altogether, as that’s what probably got her into the mess in the first place, or at least contributed to it. In his view, anyway.  To me, this isn’t the problem. If overspending is the issue, it’s more her self-discipline and financial literacy that’s the problem. I don’t know her that well at all, but recall talking about jobs and careers with her once. She seemed to have her head on straight and seemed otherwise intelligent. This is why I’m guessing it’s discipline and knowledge that are the culprits.

Now, I do think that Jill should focus on A) finding a source of income, some way, some how; and B) eradicate that credit card debt as soon as possible.  However, In my view, credit cards in general can be a valuable tool for people to use. Thus, I don’t advocate her giving up credit cards altogether.

Here are some benefits of using credit cards:

  1. Rewards. First off, I will say that paying cash can sometimes provide a benefit. When you ask for a discount and offer to pay in cash, you might get a deal.  However, this is tough to do for most purchases. Thus, if you charge a lot of your day to day shopping, you’re not missing out on cash discounts and can in fact receive rewards. I slowly accumulate airline miles with one of my credit cards, and have a round trip airfare awaiting for my efforts!
  2. Cash Back. Some cards can offer a different kind of “reward” – money back. There are some interesting cash back credit cards out there, and quite a number of people like this option.  An effective discount on purchases, if possible, is a nice perk.
  3. Building Credit. By having credit, and paying off bills regularly and on time, people can prove themselves to be creditworthy. When buying a home, for example, having a good credit score can help secure a good interest rate, much less a loan in the first place.
  4. Float. By paying cash, you’re shelling out money right away. By charging, you’re delaying payment. If you could let the money sit in an interest-bearing account for an extra 20 days, for example, you might earn a little extra money this way. When aggregated throughout the year, this can amount to something more than just a few pennies. Why not take advantage?
  5. Tracking Expenses. With credit cards, each transaction is automatically recorded, and you can easily view a summarized list of expenses for a given time period. By paying cash, it makes it that much more time consuming to keep track of expenses. More knowledge can result in taking action on potential overspending, and can engender better habits.
  6. Consumer Protection. In some cases, there is some level of insurance involved with credit card use. In other words, some cards can offer you warranty protection in certain cases, travel insurance, or even rental car insurance.
  7. Ability to Make Certain Purchases.  Whenever I have rented a hotel room or a car, I’ve needed to have a credit card to complete the transaction. Avoiding having a credit card can make such transactions more difficult.
  8. Convenience.  Let’s say you charge something that cost $11.02. Yeah, it’s a random number, but work with me for this example. If you pay with a credit card, you get a receipt back. If you pay by cash, you get change. If you hand over a $20 bill, you’ll back get one $5 bill, three $1 bills, three quarters, two dimes, and three pennies. That’s the best case. Who wants to lug around that much change?

Now, these are all great reasons to use credit cards. However, use of credit cards should be accompanied by self-discipline. Pay your bills on time, in full, every month. Additionally, don’t buy more than you would otherwise buy if paying in cash. If you can do those things, credit cards can be an essential part of one’s finances.

As for Jill, from the discussion above? I think that the notion that she should abandon credit cards altogether is overreacting. Self-discipline is the key for her, along with reducing that card balance ASAP.

My Questions For You:

What’s your view on self-discipline and credit cards? Is it different than mine?

Do you know of any other advantages (or disadvantages) of using credit cards, that you can share?

What do you think of the notion that Jill’s biggest problem is self-discipline, as opposed to the use of credit cards?

 

5 Rules for Achieving Debt-Free Living

 Debt Reduction  35 Responses »
Dec 312010
 

I absolutely detest debt.  The idea of having a financial obligation as a monkey on my back is not something that works for me.

By carrying debt, and using cash flow to pay it off, you’re not directing income toward savings. By postponing savings, you’re forcing yourself to work more – whether more hours during the week or month, or for more years in total. To me, financial freedom is a long-term goal, and debt inhibits the accomplishment of that goal.  Most of us would like to reach financial freedom, right?

So, with that in mind, I have come up with 5 rules for staying free and clear of debt:

  1. Visualize Working Hard While Old.  Does this take you by surprise? Well, I know it’s a bit unusual, but it’s what works for me. Give it a try, and think about it. Realizing how people that are well past traditional retirement age tend to have less energy and more health issues that those of us much younger, it stands to reason that we don’t want to be in that position of having to work then. Envisioning it is a real motivator to avoid debt, and free up cash flow for retirement savings.
  2. Pay Yourself First.  Put money away for yourself upon receiving it through your income. Set it aside, then forget about it. Well, don’t really forget about it, but make the effort to prioritize savings. This way, if you really need money for whatever reason, you have it.  You won’t have to go into debt, and can prevent such a situation from arising.
  3. Pay Off Credit Cards in Full Each Month.  No matter what you might charge within a given month, focus on debt reduction and make a plan to have it paid off in full when the bill comes due. Interest charges and late fees can be very costly. If you do have it, pay down debt without taking from other sources. For example, using 401k for credit card debt.
  4. Know Your Expenses.  This can also be seen as learning how to budget, or spending within your means. Either way, the key action point is to understand where your money goes, and how much you can effectively spend each month. And part of knowing your expenses includes knowing wasy to reduce those expenses; for example, if you have to make home improvements, think about shopping around, getting multiple bids for work, and remembering the 2011 home improvement tax credit. Bottom line: know what you’re spending and how it can be smartly reduced.
  5. Discern Wants from Needs.  There are some things that are needs, such as food, shelter, and basic medical care. Then, there are are similar things that are wants – an expensive dinner, a newly constructed McMansion, or cosmetic vanity procedures. Or, more pervasive, smaller expenses that chip away at your cash flow. Wants are wonderful, and needs are just that: things you need. Understanding this distinction can help you get out of debt, or avoid it altogether.

Do you have any rules for keeping out of debt?