Are We Gaining Ground or Going Broke?
In a recent survey, 71% of respondents felt that their standard of living would be lower coming out of the current recession.
What? I was shocked when I read that. But what is the definition of a lower standard of living? Is it less income? Is it less cash (or room on the credit card) to buy all kinds of stuff? I would bet, for the majority of people, those two make up the vast majority of the responses.
But does our standard of living decrease when we cannot buy the latest iPod every year? Are we somehow deprived when we cannot afford to go out for dinner twice a week, or when we live in something smaller than the average 2,300 square foot house?
Since there are more vehicles on the road than there are people with driver’s licenses, are we somehow reducing our standard of living without a new vehicle every three or four years? Or more accurately: when we cannot buy a new vehicle every three years that’s financed for six or seven, and just roll our over-financed balance into the next purchase? Is that about a lower standard of living, or about being financially dumb?
Is our standard of living somehow affected when we DON’T drive a new car? I would bet for most people that may be their thinking. But isn’t it exactly backwards? If we drive a new car, we now have a big payment going out the door, and our standard of living decreases exactly BECAUSE we have this new car to finance! So is someone better or worse off when they are able to bank a ton of money by NOT having car payments?
How many of us are confusing consumer spending with wealth building? How many would take a cut in pay, if we were assured we would have more savings, a growing investment account, and at least an emergency savings account? All of those build wealth, whereas our spending is a wealth robber!
At a recent seminar, a 20-something man really wanted some help in getting his monthly expenses under control. When I asked him how much a month he wanted to save, he didn’t have a number in mind at all. Isn’t that kind of like getting into the car and starting to drive, with no idea where you want to go? In order to save money, you need a number – a firm goal of where you want to go, and what you want to accomplish! After that, it’ll become a whole lot easier, exactly because you have a goal and a fixed plan.
But while I was talking to him, he couldn’t get his iPhone out of his hands. When I asked what the monthly bill was for the iPhone, he confessed that it was around $120 a month. Yikes! Mine is around $25 a month, and it makes phone calls, too. Yet, he proceeded to attempt to “sell me” on the cool features and gadgets. Nice try.
There is something economists refer to as our marginal propensity to consume. It’s a fancy term for saying: when we make more income, we spend more money right along with it. A $500 raise, and pretty soon, we’re spending to our new and higher income level. It works for us average people just as much as the rich. It’s how Michael Jackson earned around a billion dollars, yet died with a reported $500 million debt!
We need to be careful with the yardstick we use to measure our standard of living and not confuse “stuff” with wealth. For many people, their thinking is backwards: It is their stuff which reduces their wealth, and not the other way around. Financial freedom and our net worth is measured by what we save, not by what we purchase. Our financial success cannot be measured by what we have in the garage, or our closets!
What's the Real Cost of Your Vehicle?
Last week, I bought a new car. No, it isn’t new, new. It is a 13-year old Buick, but with 96,000 miles, it’s a major upgrade from my Chrysler, which I retired after 185,000 miles.
Anyone who has ever read the vehicle chapter in the It’s Your Money book knows that I am not likely to buy a brand new model. No matter what the incentives, there is no chance I want to pay for the average 20 to 30% depreciation in the first year. And low-rate financing doesn’t interest me, because adding interest costs to a car makes things worse, and more costly. Even at zero percent financing, I would be giving up the alternative of a rebate, and would now have monthly payments. That isn’t going to happen, because a car payment is the biggest monthly cash flow robber, and I would always be financing something that is worth less and less each month.
For anyone who does want to consider a new vehicle, www.edmunds.com has a great calculator which estimates the true cost of ownership over the first five years. They include gas, depreciation, insurance, and a host of other factors. Before heading for the dealership, it’s well worth a trip to their site, if only for the comparisons between models.
In my case, since new wasn’t really new, I was happy to just write a cheque for $2,400 for my Buick. I’ll let you know in a couple of years what it’s actually costing me.
What I did want to figure out, without attempting to be smarter than a fifth grader, or doing more than a few minutes of math, is the real cost to drive my old Chrysler. In my case, the car cost me $133 a month. That’s an amount I can live with, even though my brother is quite a bit better off than me, at less than $71, with his old Olds Achieva!
If you believe that a vehicle is a status symbol, you are likely destined to be broke. If, however, you think of a vehicle as basic, reliable transportation, you will likely be way ahead of millions of people, financially.
First, however, you need to know what your current vehicle is costing you per month, or per mile. You can easily calculate your cost below, and do send me a note if you can beat my figure, which is used as an example on the worksheet. And remember three other points which will help you to avoid making your vehicle into a money pit:
• Avoid having a finance payment on your vehicle at all costs.
• If you have one, keep the vehicle after it is paid off and re-direct the same payments to a savings account. You won’t miss the money – you’ve been paying it all these years. But now it’ll grow for you, instead of going away.
• If you are in a lease – get out. There is very little chance you will ever have any equity and all those payments are just treading water before you’ll likely be giving the vehicle back to the dealer.
Vehicle Cost to Drive:
Original cash price of
the vehicle: $10,200 $__________
Or:
The total of all payments:
(add up all the monthly payments,
because this will include the
interest you paid to finance the
vehicle) n/a $__________
Or:
On a lease, add the monthly
payment with taxes AND the
end of lease buyout amount n/a $__________
Add the rough total of any
repair bills: $ 3,600 $__________
Do not include insurance, gas,
basic maintenance, such
as oil changes, tires, etc.
Yes, they have to be paid,
but they won’t be too different
between vehicles.
Subtract the current value of the
vehicle, or the actual sale price: $ 2,300 $__________
Equals the total cost to own: $11,500 $__________
Number of months you owned
the vehicle: 86 months __________
Total miles you have driven:
(That is the mileage right now,
less the mileage when you
purchased the vehicle) 128,000 __________
Your cost per mile: 11 cents/mile __________
(Divided the total mileage you’ve
driven by the total cost to own)
Your cost per month: $133 $__________
(Divide the total cost to own by the
number of months you’ve owned it)
Don’t Even Think About Buying a New Vehicle Just Yet!
In January we talked about GM and Chrysler, and the possibility of bankruptcy. Right now, it’s one down and one to go, as I believe a GM bankruptcy is probably just weeks away. GM is working on a June 1st deadline to eliminate $27 billion of bondholder debt and come up with a new labor agreement or they’ll be pushed into bankruptcy.
For six months now, there’s been a cry that we can’t let them go bankrupt, because it would lose a gazillion jobs and end car manufacturing. I said then, and it’s obviously true, that the fear tactics were and are nonsense. Major changes were going to happen – with our without a bankruptcy.
Even GM has started to terminate dealers, shutting down production for months at a time, and laying off people. That has nothing to do with the possibility of bankruptcy. It has everything to do with a business model that’s not working! When the foundation of your house is collapsing is not the time to put in new windows, or paint the deck.
GM wants to close one out of every six dealers in the U.S., and get from 6,000 down to 3,600 by the end of next year. They call it dealer rationalization, and Chrysler is in the same position of closing around 30% of their dealerships.
If you have the cash to buy a new vehicle, it is critical that you hold off on your purchase for another month or so. If not, you may be losing out on a huge amount of money.
Right now, the U.S. House of Representatives has passed a junker rebate program, and it is now in the Senate for consideration. The program is designed to get old junkers off the road, and supply a rebate of up to $4,500 towards a new vehicle purchase that is more fuel efficient. Buying a new vehicle before the program becomes law would cost you the 20 to 30% first year depreciation, and you’d miss out on that huge rebate of up to $4,500.
The government claims this program is to promote fuel efficiency. Don’t believe that – it’s purely to boost car sales. For anyone trading a pickup, they only need to buy something that gets two more miles to the gallon to qualify for the maximum $4,500 rebate under the current proposal. Even Hummers just need to be traded for something that gets five miles per gallon more. That’s not fuel efficiency – that’s a sales promotion. At least the European model, on which this program is based, includes one-year old vehicles in a number of countries, and that would be the best program – but it won’t happen.
If you are in the market for a vehicle:
• Hold off until this program is in place and you understand how it works and may apply to the vehicle you’re thinking of purchasing
• Pay cash for your new vehicle, or better yet, buy a one or two year old that has some warranty left to avoid the new car depreciation. You won’t get the rebate, but you’ll still be way ahead, financially
• If you’re going to ignore the “pay cash” advice, never finance a vehicle for more than four years
• Never ever make the buying and financing decision on the same day. You’ll need to know the rebate that’s available and compare it to the low-rate finance offer. More times than not, you’ll be better off, financially, taking the cash rebate off the price, and financing it with the credit union
• Hold off, too, if you’re considering a one or two year old model right now. When the new program becomes available, it not only drops the price of new vehicles, it also drops the value of one and two year olds about the same amount!