What you should know about car loans, when obtaining one is your only option

By BOB CUNNINGHAM

Most personal finance gurus agree that the one type of debt that is acceptable to have is a home mortgage.  As soon as you can reasonably afford such a hefty monthly output, and provided you have some money for a down payment and closing costs, it’s generally better to buy a residence than to rent.

I agree completely with the second part of the above statement, but not the first sentence.  Well… not exactly as it is written.

I have learned that a home loan is, indeed, okay as long as you’ve avoided going in over your head.  I also believe that under the right circumstances, obtaining auto financing is just fine in the big savvy-money-management scheme of things.

To be clear, not everyone who desires new wheels should be out applying for a car loan. If you’re already in a lot of debt (i.e. credit card debt), and/or don’t have steady employment or another reliable source of income, locking up $300 or so per month for the next five or six years is foolish.  You likely wouldn’t qualify anyway.

However, the old-school thinking that you should pay cash for everything except your house, under all circumstances, is unrealistic and sometimes downright ill-advised.  Under certain reasonable but necessary parameters, you should feel fine about going into some debt for your car.  Why?  Because the risks of buying only what you can afford by paying cash often outweighs the temporary negative associated with using credit, even on a depreciating asset.

In a perfect world, you WOULD avoid traditional financing.  A dividend-paying whole life insurance policy, such as what this website has been detailing periodically since its inception, with sufficient funds in its cash value is a far superior method for buying a car because it is “self-financing,” and allows the policy owner to continue growing his/her money even while tying up funds in the new ride.  Set up properly, you wouldn’t lose the growth that money would earn had you not went car shopping.

It’s a really cool and wise way to go about it, but this particular post isn’t dedicated to that, because I realize many of my readers are younger and either don’t yet have the insurance policy or don’t have enough saved in cash value to collateralize a loan sufficient to buy the desired automobile.

So that means your choices are, 1) walk/ride the bus/ride a bike, 2) buy something so cheap for cash that it could break down at any moment, as mentioned above, or 3) qualify for a loan in order to buy a car that will likely last for several years.

It’s fairly obvious, I would think, that a huge majority in such circumstances will opt for Choice #3.  So here are some tips for making a smart purchase, and getting yourself financially to a point that this doesn’t hurt your ultimate bottom line much, if at all:

1. Buy pre-owned, not brand new.  The beauty of buying a car that is two or three years old is that you can save a higher percentage off the new model’s sticker price than has been spent in terms of the pre-owned car’s expected lifespan. Yes of course, I will explain.

For example, say you’re after a Toyota Corolla.  Not sexy, true, but usually super reliable. A brand new one typically goes for about $23,000, as per my research, but an average of the half-dozen or so appropriate pre-owned Corollas I found was about $14,000. The latter refers to a 2015 model or newer, less than 40,000 miles, and an average of no more than 15,000 miles per 12 months of the car’s life since it was originally bought new (I recommend 12,000 miles).  Most auto-buying websites list not only the year of the car, but info such as when the car was originally bought, month and year.  If you don’t have that information, a CarFax report – free for the asking from dealers – will show it.

OK, so $14,000 is about 61% of the car’s new price today (another way of stating this is the pre-owned car is discounted 39% from new), but 40K miles is only about 20% of the very reasonable expected lifespan (if maintained properly) of 200,000 miles.  That difference (19% in this example) is value for you.  Let the person who originally bought the car absorb that excessive depreciation.  KBB.com indicates a new car loses an estimated 20%-25% of its value as soon the buyers leaves the lot with it.

2. Get pre-qualified for a loan BEFORE you go see and drive cars. You have a lot more leverage knowing what you can pay ahead of time. But don’t qualify for the maximum your credit and other circumstances allow.  Be content to buy a little under your means, so that you have a comfort level with the payment and also have the option to pad the minimum required payments if you wish in order to reduce the principal balance faster and pay off the loan sooner.

Speaking of paying it off, do not apply or sign for a loan of more than five years (60 months).  It’s silly to pay for six or seven years on a car that, in great likelihood, you won’t have or want to retain before the end of the term. Plus, of course, you will pay more interest over the longer the term if you make just the minimum payments.  (Take note, however, that if the interest rate is identical on a six-year term vs. five years, which it frequently is, and you KNOW you have the discipline and willingness to pay at least 10% extra every month, it makes sense to go ahead and get the 72 months.  But ONLY if the above is accurate for you and your circumstances)

With the above said, it is generally best to go with the shortest loan term you can afford considering the aforementioned “padding” and comfort level for the required minimum payment.

3. Know the Kelley Blue Book (or comparable) values of your target car before you head to the lot.  It is important that you make your buying decision based on the total price of the car, and NOT based on the monthly payment.  Auto sales reps make a good living showing prospective customers how they can actually afford the car of their dreams (translation:  a car they really have no business buying) with the loan stretched out far enough.

With that in mind, know what your target car is worth and should sell for, allowing for a modest profit for the dealership – a good rule of thumb is no more than 10% above private party value.  Don’t be concerned with dealer retail or average price of similar cars sold in the area.  You can do better if you’re willing to work at it a little (see No. 4).

Lastly, it’s obvious that you must test drive your car of choice.  But when you do, really put it through its paces.  Ask the salesperson to direct you to a quiet side street and try an abrupt stop to test brakes, complete a sharp u-turn to test radius, and do a three-point turn to assure the transmission’s smooth functionality going from drive to reverse and vice-versa.  Ask for a certificate from the dealership guaranteeing all buttons, switches, lights, etc. are in good working order.  If that isn’t available, personally inspect and test everything.

4.  No-haggle pricing is NOT to your benefit.  Have your info, and stick to your guns while being reasonable.  Many car dealers are advertising no-haggle pricing in an attempt to cater to those who find the car-buying process stressful or even distasteful.  This is nonsense.  Haggling is to your benefit.  Arrive at what you’re willing to pay for the car based on the above parameters… and don’t buckle when the salesperson tells you their price is, “the best we’re going to be able to do I’m afraid.”  I can practically guarantee you that if you’re reasonable in what you’re willing to pay, and you’re willing to leave the lot if you don’t get close to what you’re requesting, the deal will get done to your satisfaction. The dealership wants and needs your business a lot more than the few hundred extra dollars they appear to be unwilling to discount for you.

5.  Make your car payments automatic through your bank’s online bill-pay. Set it to make the payment each month 3-5 days before it is due, and forget it.  And preferably, add at least $25 or 10% – whichever is greater – to the minimum payment when you set up the automatic payments.  You’re unlikely to feel the extra out-go in your monthly budget, and yet you could knock six months, a year, or more off the loan term.

There’s a lot to consider when buying a car, especially if you’re willing (and qualified) to make a long-term commitment by borrowing funds. Use the above as a basic guide, and you will undoubtedly come away pleased, while having not fallen into the trap of over-paying.

Once again, thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

‘Budgeting’ has negative connotations for some, but it doesn’t have to be that way

By BOB CUNNINGHAM

In personal finance parlance, it is known as “the B word.” And not in any sort of positive way.

Budgeting, defined as the excruciating act of creating a personal or family summary of income and expenses for the purposes of determining what can be spent and (hopefully) saved, carries such a negative vibe that some alleged PF gurus claim you can effectively manage your money without it.

Not likely…

Look, it’s really a matter of what you want to accomplish, in life and specifically when it comes to your money.  Are you truly satisfied to wing it from week to week, month to month and hope you have enough to get by?  Or are you willing to put in a little effort, in the boring form of crunching numbers, to improve your circumstances?

If you are among the vast majority of folks who want to make financial progress ongoing, there’s no way around some version of monetary accountability.

Still, that doesn’t mean it has to be painful… or a pain in the posterior. Budgeting is actually relatively simple, if you decide to keep it that way. Here’s how:

Know as accurately as possible your monthly take-home pay

True, determining what you make isn’t always that simple.  Sales professionals who work on commission, for instance, can have a wide variation in what they make from month to month. But there are ways around this.  First, determine an average income.  Go back three months, six months, or whatever time-frame you believe can most accurately reflect your net pay, and come up with a “common” figure.

Obviously, if you are on salary, you simply need to take a peek at your paycheck, or observe the associated direct deposit in your bank account.

Now reduce that number by 20% for budgeting purposes.  For instance, if you’ve determined that your average monthly net income is about $3,000, reduce it by 20% ($600) and work with $2,400 as you figure your budget. The 20-percent fudge factor allows for errors and anomalies while also demonstrating to you (eventually) that you can get by with less than you think. What if you only make $1,500 in a particular month… are you going to have to move back in with your parents?  You may be nodding your head after reading this, but we both know you’ll do whatever it takes to avoid that scenario.

Make savings an integral part of any “spending” plan

Next take at least 5% of the $2,400 (10% is reommended), and mark it down as your monthly savings goal.  Yep, do it now… this resulting $120 for socking away in our example is important – commit to it, even before you figure out what your bills are.  That comes next.

Once you have your typical monthly income established, and your associated monthly commitment for savings, the next step is to mark down your fixed expenses.  These are the monthly bills that are the same every month – rent or mortgage payment, car payment, TV/internet bills, cellphone bill (in most cases), loan payment to Mom and Dad, etc.  It doesn’t matter what they’re for, if you pay them and they are constant, they should be included here.

Determine your expenses in two broad categories first

Now add up the total of your fixed expenses, tack on the aforementioned $120 savings figure, and come up with a total.  Then, take that total and subtract it from the $2,400.  The result is what you have available to spend monthly on what is referred to as discretionary spending – the costs that change every month, such as groceries, gasoline, and entertainment.

Guess what? You’re more than half finished.  Not exactly bamboo under the fingernails, correct?

OK, sure, I’m not claiming this is as fun as Space Mountain on Halloween. But it’s a lot less costly.

Be willing to go back through previous spending history

Now comes a little bit of effort, because you need to go back through your on-line banking or credit card receipts, and determine how much you’ve been spending on those discretionary costs.  My suggestion is that you separate them into the following categories:  groceries, eating out, gasoline, entertainment, and miscellaneous.

After you have those figures determined for the last month (ideally, figure out three months’ worth of each category and average for a more accurate monthly reference), take the monthly figures and add them up.  Compare to what your new budget “allows” you to spend.  Analyze what you’ve been overspending on, and what you’ve been more reasonable about. Adjust accordingly. Let logic and common sense be your guide.

For instance, let’s say your discretionary spending amount that you determined from your income/fixed expenses/savings portion of the budget is $600 per month. And you’ve determined you’ve been spending closer to $900 per month.  That means we need to find $300 to cut, but remember that we took your initial average take-home pay and cut it by 20 percent.  That was $600 lopped off the $3,000 average monthly pay, yes?

Decide on spending cuts if needed, but you don’t have to go overboard

So whatever we determine needs to be cut, it probably doesn’t truly need to be as drastic because we padded the initial income figure by using only 80 percent of it.  Are you with me?

In other words, you have some leeway… as long as you’re prepared to make some needed cuts when it’s obvious.  Are you going out to the movies a lot, or do you mostly stay in and watch Netflix? How ’bout fast-food?  That is the young adults’ most significant bug-a-boo, bar none.  Are you on a first-name basis with the folks at Carl’s Jr.?  If so, that has to change.  Cooking at home typically costs a fifth of fast-food, and a tenth or less compared to eating at sit-down restaurants.  How about at the grocery store?  Do you buy a lot of processed and/or name-brand foods, or do you focus on produce, dairy, and generic stuff?

After you have determined all your adjustments, be sure that the first thing you do at the beginning of each month is put the savings away. “Pay Yourself First” is a universally accepted personal finance adage for assuring you save regularly regardless of your budget.

Ultimately, as long as you’re willing to do a little self-analysis with what you spend, and make some common-sense alterations, it can be pretty simple and only a little painful.

If nothing else, make a commitment to avoid high-interest debt

Last item:  I could easily write 10,000 words about sensible budget decisions, cutting spending, etc.  But that isn’t the point of this post.  Instead, focus on the idea that getting basic organization in your financial life doesn’t have to be difficult and it truly doesn’t have to suck.

A huge take-away is this:  Whatever path you go, do your utmost to stay out of debt… specifically, credit cards that – speaking of sucking – will suck the life out of any possibility of you getting ahead with your money and ultimately being able to reasonably afford many of the things and experiences you desire.

As always, thank you for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Worried about a market correction? I’m not, because it won’t determine my fate

By BOB CUNNINGHAM

As I write this weekly entry, the Dow Jones is coming off a gain of more than 200 points.  Despite predictions of impending doom by some, and the realistic acknowledgement from even the most optimistic of investors that the markets won’t go up forever, they continue their improbable ascent.

It’s a lot like late 2006 and most of 2007, when we hit record highs according to all the major benchmarks… right before falling to Earth like a rocket in 2008, reducing many account balances by almost half in a matter of months, even weeks.

So why am I not concerned about the inevitable decline?  What puts me in a position of being so confident?  Simple… I’m flat broke and, thus, have nothing to lose.

LOL… JUST KIDDING.  How I crack myself up.  Truth is, while my wife and I are far from being considered wealthy, we have some decent retirement savings… we’re doing OK.

And the really cool thing is that our funds aren’t invested in the markets.

“But Bob, you’re missing out on some of the greatest profits ever!”

That’s true.  And we’re perfectly fine with that.  Our nest-egg is invested in dividend-paying whole life insurance, which gives us a steady and predictable gain… with NO chance of loss.

None. Nada. Zilch.

Look, friends, unless you’re brand new as a reader on this site, you’ve read here before about how losses annihilate an account more significantly than the same rate of gain helps.  I’ve demonstrated how average annual rate of return is a fallacy.  Go up 25% one year, go down 25% the next… and instead of being even, you’re actually down 12.5%.  Reverse the order – down the first year, then up the second – and you’re STILL down 12.5% after the second year.

Doesn’t seem fair, does it?

And while it is absolutely true that we are missing out on some pretty sweet gains right now, it is without question that we will be better off over the long run than those who insist on riding the roller coaster.  History says so… and I’m not willing to buck a trend lasting more than 140 years.

“Okay, but hasn’t the S&P 500 averaged about a 10% return all-time?  That’s what I always read.”

Again, that’s a bogus average – taking all the returns and adding them up (since after The Great Depression, I believe), subtracting the losses, and dividing by the total number of years.  The effective return, according to Morningstar.com, was slightly better than 3%.  The effective return is how much your money would have actually grown.  Dividend-paying whole life insurance returns between 4% and 5.5% (depending on dividends) EVERY YEAR, and is tax-free when the money is correctly acquired via withdrawals of principal and dividends and/or non-qualifying policy loans.

It’s truly great having a fairly specific idea of how much money you will have at any given time in the future.

“If this is true, why doesn’t everyone use dividend-paying whole life insurance, and get the heck out of the stock market altogether?”

Many would if they knew about it.  And more and more people are going that route, thanks to the strategy getting more publicity from sources such as this blog.  Still, the same conventional drivel of favoring 401Ks, IRAs, etc. continues to be perpetuated by Wall Street, many personal finance gurus, and our federal government.  It’s a constant battle.

The purpose of this blog is to educate folks… primarily, younger adults and families… that there is a much better way than conventional retirement savings vehicles.  The key is starting NOW.  This superior approach offers more safety, liquidity, a steady rate of return, tax benefits, and a living benefit that allows for self-financing of major purchases and other handy uses that you simply can’t get from traditional savings and investments.

And I’ll continue to plug these in this space and others.  Slowly, the tide will turn in favor of Americans who, like myself, want to retain complete control of their finances at all times.

As always, thank you for reading.

***

DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.

Earning more income these days? That’s great, but be willing to spend less anyway!

By BOB CUNNINGHAM

One of the more common mistakes that folks make regarding personal finance, especially you younger adults, is to believe that getting a raise at work should equate to raising your standard of living.

The smart money managers don’t think that way.

The common mindset for those who simply haven’t yet fully embraced the idea of getting ahead financially, rather than merely keeping up, is to dedicate those extra dollars into new and improved personal benefits… a more spacious crib (I’m so street), a nicer ride, new clothes, or whatever… rather than the simple step of increasing the amount you save every month.

Worse, many still aren’t saving yet and are spending all (or more) of their income, whether it increases or not.

Now please, don’t get me wrong.  If you earn a substantial raise at work (or even a modest one), there’s nothing wrong with a little celebration – going out to a nice dinner, or maybe a splurge on a new outfit not available at Ross Dress For Less.  You probably worked hard to earn that pay increase, and you should feel fine about enjoying the fruits of your labor… to a point.

If, however, you’re the type who figures out that your monthly take-home just went up by $75, and you’re trying to determine which additional expense you can afford, that you couldn’t before, you’ll never really get ahead monetarily.

If you’ve been paying attention to this blog for any length of time, you will know that I am not a proponent of the live-below-your-means philosophy, but I only feel that way in that I believe saving should not be considered part of the means formula.

To clarify, I’m saying that savings should come off the very top (remember, always “pay yourself first,”), before your means is determined.  If you do that, then it’s fine to live right up to your means, provided you don’t go over it by running up debt or doing something else ill-advised.

Of course, a common response to this is “that sounds all well and good, Bob, but I don’t have any money to spare. I’m barely getting by.”  It’s the most common refrain by a wide margin – people simply refuse to believe there’s anything in their current routine that they can go without, but when I press them about how often they eat out (including fast food), shop for goodies on-line, have coffee at the local coffeehouse, or go to the movies, their answers inevitably range from “occasionally,” to “well, a person has to live.”

Sure they do.  But when you eat fast food, can you focus on the joint’s budget menu rather than get the $8 No. 1 combo?  Couldn’t you simply spend less time thinking of crap you want to buy at Amazon or Overstock.com? Can you settle on a Tall rather than a Venti?  Might you go see a flick during the daytime and pay matinee prices?

And then they get a raise, and they start eating out more, frequenting Starbucks twice as often, add E-Bay to their binge shopping, and see movies they liked a second time, under the premise that “I can afford it.  I just got a raise.”

How about, instead, increasing your savings… and potentially knocking several years off your working life that can be added to your retired life?  I don’t know about you, but why in the heck would anyone work until they’re 65, when the ability to retire 10-15 years sooner (or even earlier) is available?  They like their work?  Great… they should put themselves in a position to dictate EXACTLY how much they do, how often, for whom, etc. by making income a non-factor.

To summarize, you don’t have to go without basic needs and a few wants in order to be smart with your money.  But if you’re not saving something every month without questioning it – preferably, at least 10 percent of your take-home pay – and committing it before you pay any of your expenses, you’re missing the financial boat.

If your tendency is toward spending instead of saving, you have a decision to make.  Have a little more fun now.  Or, with the amazing power of compound interest, have a lot more fun later… both in quality and increased number of years you can worry about playing instead of working.

Then, your next raise won’t matter.  Thanks for reading.

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DISCLAIMER:  This post represents the author’s opinions only.  In no way should any part of the content of this post be interpreted as official financial advice, nor does it represent an intention to solicit readers into a specific company or investment.  Results are never guaranteed.  Utilize the information as you see fit, make all money decisions at your own risk.