Why Do I Need a Vehicle?
To decide on what kind of a vehicle to buy, you must decide why you need a vehicle.
Why? Because I don’t like to walk to work!
Okay, that’s a start. Are there other reasons that you need a vehicle?
Let Me Help
To help speed this along, I will offer a few qualifying comments. Other possible uses may be:
- To replace one that is “falling apart”.
- Have more room for more passengers, such as more children, your Mother-In-Law, etc.
- There is a need to haul big things, like furniture, a grill, or lumber to build on the garage.
- Newer vehicles have more fun features than the older models.
- The old vehicle will not fit into the garage.
- Gas is too high. I can save a lot with a more fuel-efficient vehicle.
- I need a more dependable vehicle.
- I want to pull a fifth wheel RV.
That Is Reasonable
Now that you have defined your central reason for needing a vehicle, you have to select a model that will fit your needs and wants.
Some reasons make a lot of sense. Then, some ask about the cents. Dollars and cents.
Do We Have to Talk About Money?
I am afraid so. Unless you have the cash on-hand to buy the vehicle you want, you will have to sign up for a loan.
How much do you want to borrow? How much do you want your payments to be? You may have to blow the dust off your budget to see if it fits?
This Is Where the Tire Meets the Pavement
If you go for a loan, your FICO score becomes your friend or your enemy. It is the tool the lending company uses to see if you will be able or willing to make payments. Your FICO score will affect the interest rate you pay and the available percentage of the vehicle value to borrow.
The bank usually uses Kelly Blue Book, which tracks the resale value of vehicles. Most lending companies are comfortable loaning up to 80% of the value of the vehicle. They are taking a risk and will want to recover as much as possible if you default on the loan.
You cannot hide from the money history you have made. History is a record of things that happened in the past and any delayed or missed payments are reported to the credit bureaus, as well as payments on time and early payoffs.
The good news is that regardless of your past mistakes, you can build a better record for your future FICO calculations. So, work on your spending habits and your willingness to pay your bills.
To help that process, you can work on your skills and education to raise your chances for more income. And put money into a savings account to prevent your need to borrow money.
How Do I Work Around FICO?
The better question is “How do I make buying this a more enjoyable experience?”
Maybe you can do the math in your head, but most of us cannot. So, get some paper and let us figure this out.
There are two factors involved in this calculation: time and money.
I learned in school that money changes value over time. When you give borrowing the means to leverage a better, newer vehicle, you need to calculate the effect on your future income and available income for household needs.
Let’s look at two options. First, you can pay cash for the newer vehicle. Second, you have to borrow the whole amount over the trade-in value of your old vehicle.
Paying cash for the net purchase of $25,000 will have little effect on your budget other than the operating cost difference compared to your old vehicle.
Using the Bankrate.com loan calculator, borrowing $25,000 at 10% interest over five years (60 months) will cost you about $531 per month. How does that fit into your budget?
Which option do you think would look better to FICO? Remember, you have to pay on time over sixty months.
But It Looks So Good
Vanity can get in the way of reason.
A good used vehicle can still look good. So, shop around. Just be prepared to fix any hidden problems which might have led someone to trade this vehicle for another one. With the cost of repairs rising due to the technology on vehicles and the expensive equipment a mechanic needs to analyze the problem, you should consider an extended warranty policy purchase. Over three years, you can be well protected against the major repairs that catch most budgets off guard. The amount of the policy will vary with the cost of the vehicle. If a transmission goes out, you will be glad you have the warranty. It will still be cheaper than buying new and the new vehicle loses about fifteen percent of its value when you drive off the dealership lot.
I will offer you two books to consider. One is The Millionaire Next Door, by Thomas J. Stanley, Ph.D., and William D. Dankin, Ph.D. and the other is Rich Habits Poor Habits, by Tom Corley and Michael Yardney. Both were based on separate studies on the habits of people who had accumulated large amounts of money.
Both books concluded that most wealthy people drove a used, paid-for vehicle, especially before they were able to afford to pay cash for a new vehicle.
Vehicle Money Math
Let’s assume that you could afford the $531 monthly payment on a newer vehicle. With interest, the total amount you will pay for the vehicle over the sixty-month period would be $31, 860.
If we pretend you could pay the difference of $25,000 up front and you could afford to have the payment amount available to invest each month in a fund that would earn 5% per year, then, with the effect of compounding, the amount of your investment could accumulate to about $36,000 over that same sixty-month period.
So, my conclusion is this:
Borrowing would cost me interest and limit my spending over the five years.
Being able to pay cash for a vehicle and pretend I was making vehicle payments by putting the payments into a mutual fund that could net me 5% growth per year would give me about $36,400 at the end of five years.
Therefore, if you can pay cash for a vehicle and still invest a lot of your money that will accumulate to your benefit. That sounds like the difference between being rich and being poor!
What Is Your Conclusion?
Hopefully, your conclusion was like mine.
Yes, you need a better vehicle than you have. They are machines and wear out over time. Shopping with a well-defined vision of what you need, you can assess the cost to benefit based on the budget you defined that will allow you to keep investing for your future vehicle purchases.
“Act As If”
“Act as if…” is a mind trick promoted by several authors that can work to your benefit.
Suze Orman, the financial advisor seen on PBS, made reference to a client of hers who had managed to accumulate a lot for their retirement by “acting as if” they could not afford to buy things, that they made much less than they actually did by setting aside the maximum amount for retirement and direct depositing to a savings account and living off their “net pay”.
If I was to play tricks on myself, that is a good one!