When A New Car Can Save Money??

[consultant]

You are reading more into that than you should be and are obviously one of the people in the camp that more debt = bad. More debt for spending on things that don't generate income = bad. Debt that generates income = good.

Let me give you an example. In addition to my consulting business I buy/sell collectibles sometimes as a side business/hobby. There's this guy I deal with occasionally in Saudi Arabia. He's been going through a divorce which is dragging on. He's bought some stuff from me before. He had me buy some of his collectibles to hide them from the divorce and then sell them back to him at a profit later for my fee for helping him. I buy them at a price that even if he can't buy them back I can sell them to someone else for a small profit.

He wants me to do it again for him . About $20K worth of stuff. I just dumped every last penny into some other collectibles which I plan to hold onto for a while. So I have no more capital to put in - unless I take the $20K out of my car. At minimum I make $2K profit. If he buys them back like before I make $4K profit. It's all about using debt as a tool.

As I said before I like my car, but other than the drastic drop in my business, my financial decisions are quire sound. I wouldn't be considering switching to a newer car with warranty unless I though in the long run in would be a net positive (less maintenance costs and increased income by putting the $20K to work.) So far most of the responses are just generalities with a bad view on debt. No one actually crunching the numbers here - or when they do, their in error.

Here's another example how debt is good. A friend of mine was trading Natural Gas futures. He got a margin call when it abnormally went to all time lows a couple months ago. He had to borrow $25K to meet the margin call. If he hadn't he would have had to sell part of his position at a huge loss. Yes there was risk it could go lower and he could get a margin call but it was a kin to gasoline prices at the pump right now being $1.50 - it could go lower but not much more. So he got the loan to make the margin call. Instead of selling and taking a $50K loss, he was able to maintain his position, the price rebounded and he's now $160K in profit and of course the short-term $25K loan was repaid quite promptly.

It's all about risk/reward. When used right debt is a useful tool.

I just read your other thread about credit counseling.

You can't afford to even be thinking about buying a new car. How can you be considering a $30,000 car when you are simultaneously looking into credit counseling? That just makes no sense.

You need to be cutting every expense you can. I know you feel the type of car you drive is important to attract clients, but that's just too darn bad. If somebody would decline to do business with you because they don't like your car, that's probably a client you don't want anyway.

Sell the $20,000 car. Buy a cheaper one. Search around and find a creampuff. They are out there if you look hard enough. For 10K or less, I bet you can find a car with low mileage that was garage kept and well cared for.

[consultant]

Why doesn't this jive? If it's not LBYM, is the debt then "survival debt" caused by the downturn in business?



On this board...some, but not all. Personally, no.

Most of the debt was financing for the business itself, but yes, the additional debt was survival debt until I was able to reduce expenses and get some income back to bring things back in balance. "Financial Health" can mean different things to different people. I've got a net worth of almost a half million but that is primarily equity in my house which I can't easily get at. I'm carrying a much higher load of 10-14% annual interest debt. That is what is causing me to consider my current financial health as not being good right now. I didn't build this debt taking trips to Tahiti and driving $70K Mercedes.

[consultant]

I saw this and probably should have answered with math instead of words

OP needs to make a current line item budget
then do whatever fuzzy math they think appropriate- and make a new budget

Much of the problem is creating cash flow for debt payments
hence the original comment of mine-

you cannot finance your way out of debt
you can finance to improve cash flow, but I don't think OP is presenting that as his situation

Ya went you just explain with numbers, it makes things more clear. I'll do that now:

Insurance is about the same I already checked. Even though the other car is more expensive, my current car has almost twice the horsepower.

Current Car 2-yr costs:

Maintenance/Fuel - $5K minimum (not including any major unforeseen repair)
Depreciation - Estimate 7% avg per yr = $2,800

Total MINIMUM cost $7,800 with no protection for any unforeseen problems since no warranty

New Car 2-yr costs:

Sales Tax: $3,000 (one time cost)
Maintenance/Fuel - All covered except fuel, better mileage = est $2,500
Interest in 1.9% $30K Auto Loan - ~ $550/yr = $1,100 2 yrs
Depreciation - Avg 10% / yr = $5,700
Total cost = $12,300

So so far, newer car costs $5,500 more over 2-yrs / 24 months = $230/month

If the $20K generates income in excess of an average $230/month the move is net positive - meaning I have more income than if I had otherwise not made the change and therefore able to pay down debt quicker.

So that's what it boils down to is can I create more than $230/month of the $20K capital. And the best person to determine the probability of that is none other than myself. Pure numbers. But if I'm forgetting something in the math, please let me know! Thanks.

[am_vanquish]

My personal financial goal is to achieve a high net worth, so I'm in the camp that believes debt can be used as a tool to accomplish this.

HOWEVER, there's a limit to this logic ... it's a balance. It sounds to me (based on your descriptions of your current situation) that you have a tendency to over-leverage yourself. Hence, you got burned when the volatility of your income flamed up.

That said, at what time will you begin to ignore NPV calculations and place value on the stability value of liquidity? I find it hard to believe that you can't sell the car for 20k, find a reasonable replacement car that's still respectable for 10k, and make some progress in finding some financial breathing room.

[maat55]

I think your loose mentality on debt is your problem. You mention in your other thread that you are entertaining credit counseling or BK.

IMO, you are way to aggressive with debt, hence the reason you are in trouble in an down economy.

You say you have 20k equity in your car. I would sell it and buy an 10k car outright, take the other 10k and pay down your 14% interest debt. You will not likely earn 14% on the equity.

Then take whatever amount you allowed for a car payment and any other amount you can find in an tight budget, and apply it to the leftover high interest debt.

You should consider lowering your debt level and building sufficient emergency funds.

[disneysteve]

If the $20K generates income in excess of an average $230/month the move is net positive

can I create more than $230/month of the $20K capital.

You need an after-tax return of 13.8% to break even. Depending on your federal and state taxes, that means a gross return of 18.5% or more. You might occasionally be able to find an investment that generates that type of return (several of my investments beat that in 2009) but there are none that can do it on a consistent predictable basis so I'd say it is virtually impossible to accomplish that with intent.

[aevans1206]

You spend more time explaining yourself when I thought you asked for help, in my humble opinion.

When you are in as deep as you are, you have to learn to stop living the way you have and settle for less for awhile. Get back in the black before worrying about what kind of car you are driving or keeping a large house.

You should also factor into the equation how much the maintenance will cost versus a car payment. Since you own the car outright (or perhaps buying a cheaper car outright), won't paying let's say 1K for maintenance per year be WAY less than a car payment?

[jIM_Ohio]

Ya went you just explain with numbers, it makes things more clear. I'll do that now:

Insurance is about the same I already checked. Even though the other car is more expensive, my current car has almost twice the horsepower.

Current Car 2-yr costs:

Maintenance/Fuel - $5K minimum (not including any major unforeseen repair)
Depreciation - Estimate 7% avg per yr = $2,800

Total MINIMUM cost $7,800 with no protection for any unforeseen problems since no warranty

New Car 2-yr costs:

Sales Tax: $3,000 (one time cost)
Maintenance/Fuel - All covered except fuel, better mileage = est $2,500
Interest in 1.9% $30K Auto Loan - ~ $550/yr = $1,100 2 yrs
Depreciation - Avg 10% / yr = $5,700
Total cost = $12,300

So so far, newer car costs $5,500 more over 2-yrs / 24 months = $230/month

If the $20K generates income in excess of an average $230/month the move is net positive - meaning I have more income than if I had otherwise not made the change and therefore able to pay down debt quicker.

So that's what it boils down to is can I create more than $230/month of the $20K capital. And the best person to determine the probability of that is none other than myself. Pure numbers. But if I'm forgetting something in the math, please let me know! Thanks.

Unless the depreciation is being captured on an expense report or tax return, your math is fools gold. Depreciation is "intangible"- its not money coming out of your account or going in your account, its just an accounting trick.

Focus on cash flow and you should see a lower net cash flow with a different car, unless the different car is worth less than the one you drive now (sell 20k car, buy 5k car, apply `5k towards debt).

I agree with others you need to rethink how you view debt.

[myrdale]

This is what I gather from the OP.

You have an expensive, Paid For, low mileage, luxury car. You dislike the idea of paying for the Optional expensive recommended services and want to sell it. You expect to receive $20k from the sell of the car.

Personally I would sell the car. Many would argue against buying a new car or a used one. I will only argue against spending $30k on the next car. I would not purchase anything that cost more than what I am trading in. Additionally you are still going to have to maintain the new car, regardless of if it is $5k or $30k.

The reason I would sell and buy another car is because you seem to stress the expense of repairs for the European luxury car.

I am going to assume you purchased your current car new. I don't see a price listed, but can I ASSUME you paided $40k for it and probably $550/month payments?? (No calculator on me, fuzzy math). Also let me assume you just paid it off.

That all folds back into what aevans1206 said also, maintenace is far cheaper than a car payment, especially if that car is not an European luxury car.

I have never bought the "debt is a wealth building tool" argument. I don't believe that having debt to purchase stuff in general = $0 net.

I would use what extra money I received from the car sell to pay down the credit accounts.

Also I would consider making the car payments you were making on the European luxury car on the credit accounts. You would be able to pay them off quickly by that measure.

As the others have said, work on your budget. With what you were paying on your luxury car every month, in a years time, hopefully you can say "I am in improving financial health. And in two or three years at the most you can say "I am in great financial health!"

Lastly I consider mortgage debt to be a means to and end. Also I believe in doing all one can to pay it off.

[consultant]

Myrdale - Best response yet. You are right on the mark. A few things though...

Yes the car was low $40's when I bought it. I paid it off a long time ago though.

- The maintenance cost on the new car will be far lower because the new car (pre-owned) includes all scheduled maintenance up to 50,000 miles in addition to the full warranty. I've owned 21 cars in 26 years (a new car every 2.5-3 years with a the last 13 years owning 2 cars at a time after I got married. I bought used sometimes new other times. I'm steering clear of brand new when possible - to big of a depreciation hit.

The current car is a semi-lemon. Until now that hasn't been an issue as everything was covered under warranty. Now, when I go in and ask to have the rotors resurfaced, they dealer will only replace them along with the pads - a $700 job. That's just an example and I admit maybe not a good one. I can't imagine what the total repair bill would have been over the last 4 years on all the warranty issues. Again I say SEMI-lemon. If it was a full lemon I would have gotten rid of it a long time ago.

Also, one of the main reasons for exploring this now is not just trying to get out of the older, higher maintenance car, but to put the money to work. I have some unique opportunities to invest the $20K in low-risk, high return via my side business. It is turning into an important source of income and I'm finding my income is currently only limited by my available capital. I have no other sources of low-interest capital other than selling my car and financing another, taking advantage of very attractive rates even on certified pre-owned cars from may car dealers.

So in my mind even though on the surface it seems odd and counterproductive to be taking on more debt when I'm already financially strapped, based on a unique set of circumstances and timing it may make sense. As inflation kicks in from high US debt the Fed will be forced to start raising interest rates so down the road not only will cars and everything else be more expensive due to the lower value of the dollar but debt will be higher cost. Considering with a conservative numbers estimate I only need to generate $230 of income a month of $20K of capital to break even, is an interesting proposition and that doesn't include the peace of mind of having a warranty which costs upwards of $3K if I wanted to buy one for the current car.

I've also considered going the $10K car switch route. But there are other factors to be weighed. The lower priced car will need more maintenance and will most likely have less safety features than my current Volvo or the cars I'm looking at. I'm not sure I want to make that sacrifice. Then there's the issue of having to take business executives out to lunch and dinner in my car. There may be a cream puff out there but it may just involve more time and money to fix it up to the condition I deem acceptable and time is money. In fact I calculate based on my $120/hr consulting rate, all the time I spent taking my car back and forth to the dealer cost me several thousand dollars in the past 4 years. And finally there is an emotional factor. You take worse care of things you don't like or don't care about. And finally there is a decent chance things will turn around income wise for me this year. If I'm driving something that I really don't like I'll be very inclined to switch to something else as soon as my financial situation is better. We have 9.9% sales tax in this state. Switching cars is not cheap. It is better to buy something you can see yourself driving for longer in my opinion.

Probably the best solution is go for a $20K pre-owned car to keep the payments down yet still have some decent enough for my consulting business image.

This is what I gather from the OP.

You have an expensive, Paid For, low mileage, luxury car. You dislike the idea of paying for the Optional expensive recommended services and want to sell it. You expect to receive $20k from the sell of the car.

Personally I would sell the car. Many would argue against buying a new car or a used one. I will only argue against spending $30k on the next car. I would not purchase anything that cost more than what I am trading in. Additionally you are still going to have to maintain the new car, regardless of if it is $5k or $30k.

The reason I would sell and buy another car is because you seem to stress the expense of repairs for the European luxury car.

I am going to assume you purchased your current car new. I don't see a price listed, but can I ASSUME you paided $40k for it and probably $550/month payments?? (No calculator on me, fuzzy math). Also let me assume you just paid it off.

That all folds back into what aevans1206 said also, maintenace is far cheaper than a car payment, especially if that car is not an European luxury car.

I have never bought the "debt is a wealth building tool" argument. I don't believe that having debt to purchase stuff in general = $0 net.

I would use what extra money I received from the car sell to pay down the credit accounts.

Also I would consider making the car payments you were making on the European luxury car on the credit accounts. You would be able to pay them off quickly by that measure.

As the others have said, work on your budget. With what you were paying on your luxury car every month, in a years time, hopefully you can say "I am in improving financial health. And in two or three years at the most you can say "I am in great financial health!"

[ActYourWage]

consultant:

Are you looking for help? or Are you looking for someone to agree with YOUR thought process so you can justify your actions.

You sound like a broke finance professor with all the logical theories to earn money or pay down debt but in the end you are still broke. The key is to take action, but be smart about it.

The financial progress is slow and steady. The turtle wins the race in the end.

[consultant]

Numbers don't lie. I've had similar discussion in previous years. I've always been surprised how much of a knee jerk reaction you get from people versus those that take the time to do the numbers.

I understand your point though. If the numbers make sense, why am I here?

Well, I'm just as skeptical as the next guy that taking on more debt makes sense. But again that's the initial knee jerk reaction to the situations. There are so many factors to considered that all effect the numbers. It can't be dummied down for sake of simplicity lending to a response like you can't get out of debt with more debt. That's true in a lot of cases but definitely not all, especially in the business world.

I'm sort of surprised one of the simplied responses was, if you're confident in your numbers and the risk of it being a bad decision is very low or nil then you have your answer already.

I'm just looking for a sanity check on my calculations and methodology. I just want to make sure I'm not overlooking something fairly significant that really changes the numbers on this. That's the "help" I'm looking for. As I said, I'm on the fence. The numbers make sense but on the surface it seems to defy logic.

[consultant]

P.S. The broke Finance Professor comment gave me a good chuckle. That IS what I sound like. Thanks for a good laugh!

[LivingAlmostLarge]

How do you guarantee a 20% return on the $20k?

[maat55]

You sound like a young Dave Ramsey. He built wealth on debt then went BK. Today, he is wealthy on real wealth.

If you want a really good laugh, you should read Financial Peace or The Total Money Makeover.