When A New Car Can Save Money??

**jIM_Ohio** · 01-04-2010, 01:14 PM

You cannot borrow your way out of debt.

you have a 20k asset which you need
and 20k worth of debt

the debt you have is even worse than the car- the car is a secure (depreciating) asset, the debt, I am assuming on a credit card- is unsecured, and also a depreciating asset.

Instead of moving money from the left pocket to the right pocket, focus on your budget, balance and behaviors.

budget- can you squeeze more out of your budget and pay the 20k debt faster? Try finding $1000/mo you can direct towards the debt, and in 2 years it will be gone and your car will still be paid off.

balance- what are your bank account balances? any emergency fund?

behavior- what caused the debt? Have you corrected the behavior.

You cannot borrow your way out of debt.

**consultant** · 01-04-2010, 01:25 PM

I agree with most all of your premise, but your view is a narrow one. There are other factors to come into play.

Any knowledgeable financial advisor will agree that debt is a useful tool but it also carries with it some risks and trade offs.

Two things I think you overlooked here, at least in my situation, and it could be simply I didn't provide enough detail is the risk the car could become an unexpected significant expense to maintain. Based on my experience with the car the first 4 years, I would say my maintenance costs for the next 2-years are a very low-ball estimate. With luxury European brands you could easily have something go wrong out of warranty that costs you $2K or more.

The other thing I think you are not giving any importance to is cost of lost opportunity with money. Opportunity is very general I agree, but it is real - what opportunity - what is the risk/reward ratio with that opportunity. Well, I'm not thinking opportunity like Black Jack table or race track - I'm thinking more sensible business opportunity or investment opportunity. Everything carries varying degrees of risk/reward. If all I did with the money is pay off my highest interest debt, and the warranty saved me one or two large repair expenses, then I'm better off switching cars and getting my equity out of my current one. End of story. If I didn't have to drive clients around, I'd maybe sell my car and buy a $5k used Japanese econo box and avoid the additional debt, but that's not my situation.

You mention that credit card debt is a depreciating asset which it is since interest on debt is the same thing as depreciation on an asset. But in my case they can't be compared as currently I can't go sell my credit card balance to someone to get the money out to be used elsewhere such as paying off an higher interest credit card or make an investment to increase my income, I CAN do that with my car.

I'm not surprised at your response. It makes sense but it is typical of the mentality that a lot of people have that in general debt is bad - with the exception of a mortage (our banking industry has done a good job brainwashing the US population that a huge mortgage is OKAY.) How many corporations that were in dire straights over the course of history do you think saved themselves my taking out more debt and using it in a new business strategy to save the business? A bet you more saved themselves using debt as a tool that ended up failing anyway. But I do admit some just dug themselves a deeper hole. It really depends on the risk/reward ratio of what you are going to do with the money.

**am_vanquish** · 01-04-2010, 01:42 PM

Originally posted by consultant View Post

I agree with most all of your premise, but your view is a narrow one. There are other factors to come into play.

The irony in that statement is amazing. jIM is trying to convince you to take a look at the bigger picture - your overall spending & saving patterns - and you grill him for having a narrow view?

You mis-interpreted jIM's post. He'll agree that debt can be used as a useful tool in financial planning (while consistently emphasizing the multiple objectives that personal finance can have for certain individuals; e.g., reduce debt, maximize net worth, retire early, etc.) Instead, he's simply trying to tell you that with all the energy you're spending trying to wiggle your way out of the car loan, you could make much more progress by focusing on other parts of your financial picture.

Since you like "financial speak" - how about the opportunity cost of wasting your time trying to break even on car loans when you could be streamlining your budget & spending your money more efficiently in several other areas?

**glock35ipsc** · 01-04-2010, 01:47 PM

I guess I'm not seeing the point of your post, is there a question involved somewhere?

You acknowledge that you are not in good financial health, yet you seem insistent on driving a luxury car. Personally, I would tell you to sell the car, pay off the debt (there is a 14% return), and drive a cheap beater until you save enough to buy a nice slightly used car. But I gather that's not what you want to hear.

It makes sense but it is typical of the mentality that a lot of people have that in general debt is bad.

In your case, it seems true......

Jim said it best, "You cannot borrow your way out of debt."

**consultant** · 01-04-2010, 01:56 PM

Is there somewhere I said I had yet to streamline my budget and address the cause of how I got where I am. Never said that because that was done a while ago. I'm not your typical lived beyond my means, not financially knowledgeable out of control spending U.S. consumer you seem to be treating me like - but I imagine with this recession, there are TONS of them out there.

My predicament resulted in a huge unexpected downturn in my business to which I could not have predicted. The behavior cause for me personally was that I didn't keep a rainy-day fund and instead was pumping every thing I could into my business. I've already re-budgeted. I've already re-financed. I'm already reducing my debt. One of the few books on my shelf is The Wealthy Barber.

So then the question, why did I post here in the first place. Well to be honest it was 1) out of curiosity to see if anyone actually looks at debt as a tool or if it is the same blanket mentality that beyond a mortgage, avoid debt at all costs and 2) the decisions is actually borderline makes sense - it really depends on the risk and amount of potential cost on the car without the warranty and the potential benefit of the return on using the $20K both of which cannot be predicted with great certainty. Accountants have a real tough time with things like that. Entrepreneurs don't. Everyone's circumstances are very individualized. That's why it is important to pay attention to the specifics of an individual's situation.

I'm really on the fence about this decision to be honest as I like my current car. But I've made the mistake too many times before whether a car or house or other asset that I felt had a high risk of unexpected maintenance costs but I held onto them because I "liked" them so much.

**consultant** · 01-04-2010, 02:00 PM

Originally posted by glock35ipsc View Post

I guess I'm not seeing the point of your post, is there a question involved somewhere?

You acknowledge that you are not in good financial health, yet you seem insistent on driving a luxury car. Personally, I would tell you to sell the car, pay off the debt (there is a 14% return), and drive a cheap beater until you save enough to buy a nice slightly used car. But I gather that's not what you want to hear.

In your case, it seems true......

Jim said it best, "You cannot borrow your way out of debt."

When you have to entertain clients that you are meeting for the first time you don't want to be driving a Mercedes (they may think you charge too much) or a 20-yr old Civic. I drive a Volvo S80 because it is a good middle ground and suits my business needs the best.

**happygirl** · 01-04-2010, 02:06 PM

For what it's worth, I think mortgage debt is bad debt as well.

**jIM_Ohio** · 01-04-2010, 02:13 PM

you should streamline the budget before making a decision on a car

you cannot finance your way out of debt
you can finance your way to a higher net worth

you did not mention anything about net worth
you did mention about borrowing to get out of a car loan

you are so focused on one tree in your financial forest, you do not see the forest.

Focus on budget first (spend less than you earn)
then focus on line items in expenses column

you have done nothing to address the habits which created the debt to begin with.

**glock35ipsc** · 01-04-2010, 02:18 PM

Originally posted by consultant View Post

I'm not in good financial health with lots of debt and already max mortgage on home...... I have a credit card balance of about $20K also at 14% interest.

Originally posted by consultant

I'm not your typical lived beyond my means, not financially knowledgeable out of control spending U.S. consumer you seem to be treating me like.

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

Originally posted by consultant

out of curiosity to see if anyone actually looks at debt as a tool or if it is the same blanket mentality that beyond a mortgage, avoid debt at all costs

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

**disneysteve** · 01-04-2010, 02:22 PM

This will be an odd suggestion coming from me, but if you are so concerned about the image of your car and the message it sends to potential clients and you are concerned about the possible maintenance costs beyond the warranty period, might you be better off leasing your cars? This could be one of those situations where leasing actually makes sense. I know there are advantages to leasing when used for business purposes which would apply here.

Maybe the best route would be to sell your car for 20K and lease the cheapest vehicle that would meet your criteria for work (which I'm sure is less than 30K).

**disneysteve** · 01-04-2010, 02:40 PM

Originally posted by consultant View Post

Now lets say I buy a slightly used comparable car for $30K and pocket the $20K for my car. I can take that $20K and pay the credit card off and that right there saves me $230/month.

Assuming insurance costs are comparable

A couple of problems here.

1. You won't be saving $230/month because you will now have a car payment on a 30K car.

2. Insurance costs won't be comparable. It will cost more to insure a car worth 30K than to insure one worth 20K. It will also cost more to insure a new or slightly used car than to insure a 5-year-old car.

So your reasoning here doesn't work.

**jIM_Ohio** · 01-04-2010, 03:03 PM

Originally posted by disneysteve View Post

A couple of problems here.

1. You won't be saving $230/month because you will now have a car payment on a 30K car.

2. Insurance costs won't be comparable. It will cost more to insure a car worth 30K than to insure one worth 20K. It will also cost more to insure a new or slightly used car than to insure a 5-year-old car.

So your reasoning here doesn't work.

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

**disneysteve** · 01-04-2010, 03:05 PM

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** · 01-04-2010, 03:21 PM

Is this some boiler plate copy and paste sentences you use?

JIM:you should streamline the budget before making a decision on a car
ME: Already done, many months ago

JIM: you cannot finance your way out of debt
ME: For the average person, I agree, but if the additional debt can produce income in excess of the debt payment, yes, you can finance your way out of debt FASTER than without

JIM: you can finance your way to a higher net worth
ME: Debt is figured into the net worth equation. If you take out a $30K loan you have $30K more cash assets but you also have $30K more liabilities, net change = $0 as far as net worth (worth = assets - liabilities). So I'm curious to hear more on how you figure debt can increase net worth?

JIM: you did not mention anything about net worth
ME: Net worth is about $450K. 90% equity in my home which is not very liquid since my income/debt ratio is too high to draw from more of my equity

JIM: you did mention about borrowing to get out of a car loan
ME: No I didn't. I have ZERO auto loans currently so where did I say was trying to get out of a car loan? Maybe you just meant car, not car loan? I'm trying to get out of a car which I believe to have a high risk of much higher maintenance costs than a newer car with warranty. I'm trying to avoid a brand new car as the depreciation hit the first year is too big.

JIM: you are so focused on one tree in your financial forest, you do not see the forest.
ME: I see all the trees in my forest. My debt, my income, my expenses/budget, and potential income sources which require capital

JIM: Focus on budget first (spend less than you earn)
then focus on line items in expenses column
ME: I agree, but when income is suddenly and drastically reduced that is not always feasible, at least in the short-term. My home is directly or indirectly associated with the majority of my expenses. So the only way to further reduce expenses is to downsize the home other than that, there's nothing else for me to do.

JIM: you have done nothing to address the habits which created the debt to begin with.
ME: I'm not sure where you are getting that from as that sound like a statement a personal financial planner that has spent several hours talking to me would say and that obviously isn't the case.

The situation has to do with self-owned business taking a huge hit. It doesn't have to do with personal spending habits. It does have to do with personal savings habits since I put all my savings into my business but I was well aware of the risks involved and have no problem dealing with the consequences because of the timing with the recession and all.

Bottom line for me I think is the car thing will make little difference in the overall picture. If my current car is trouble-free for the next couple years AND I was not able to generate any income or reduction in interest expense to offset an auto loan, then yes, an Auto Loan would end up costing me a few hundred a month - in the big picture of things that is not very significant when your expenses WITHOUT luxuries (debt payments, utilities, insurance, taxes, food etc. etc.) are about $8K per month.

The conservative estimate is that the new car saves me $230/month in lower fuel and maintenance costs than if I don't switch cars. If the new auto loan payment is $530, then that's $300/month in additional cost over savings. 300*12 = $3,600 which means I would need to generate 18% annual return off the $20K or pay off a credit cart that has interest of 18% to break even. From a conservative investment vehicle point of view that's not super easy. Although I got about 120% return off my futures trading last year - I realize that was an exceptional year. But all those proceeds went to paying taxes and paying down debt. Anyone worth their salt knows as far as investments past performance is not an indication of future performance. Still, 18% annual return is an incredible mark to shoot for. I think my consumer card is at 14% so I could just pay that off and I'm 90% there so net cost on the car loan is negligible in the bigger scheme of things. But I'm an analyst at heart so I like to really analyze my decisions with hard figures when possible.

When A New Car Can Save Money??