Paying Cash for Your New Vehicle

When I told some friends of ours that we paid off our car, and don’t plan on ever having another car payment again, they just looked at me like a deer in headlights.  Their look was saying “that’s not really possible, is it?”  I was so stunned I thought that needed it’s own post.

It is possible, and more realistic than you might think.  Now that our last car payment was made this month, we will save for a new vehicle purchase starting next month.  We have no plans of purchasing a new vehicle any time soon, but I don’t ever want to take out another loan for purchasing a car again.  Since we live on a written budget, this is easy.  I just renamed our existing Car Loan category in our budget to Car Savings, and will continue to contribute to that category.  Our plan is to save $200/mo in that category, which will eventually be used to replace one of our vehicles.  Since we won’t be purchasing a vehicle any time soon, $200/mo should be plenty enough to cover whatever we choose to buy 5-10 years down the road.

By saving now instead of taking out a loan, we will save money on the purchase.  We will earn interest on the money now, and not have to pay interest after the car is purchased way down the road.  It also frees up our income to not be 100% tied to a car payment, in case other things come up.  If we need the $200 (or part of it) to help cover expenses for a month, we can just not “pay” the $200 to ourselves for that month.  You can’t do that with a car loan.  It just means we’d have to put off buying a new car for a month, or we could put more toward it when we have some extra income.

So if you don’t have a car payment, start saving today for a new car.  If you are close to paying your existing loan off, start saving for a new car as soon as you get your existing loan paid off.  You’ll be thankful you did down the road.  It’s just one more step to financial independence.

New Year’s Goals – Progress Update – Nine Months

As I mentioned earlier, we paid off our car.  That gets us a little ahead of where we planned with our debt reduction.  Here’s an update on my New Year’s Goals for this year:

  1. Reduce house debt by 44.11% (Revised target: 56.92%).
    Revised target: 49.61%, Actual: 51.48%.  We’re still pretty much on track, but we did get a little more than the plan for this month.  Here’s a graph of our progress so far:
  2. Run a 5k.
    Unfortunately, I had to spend the day of the 5k working on fixing something with my car.  So I didn’t make that 5k, and I doubt I will be able to hit this goal now that our baby is due in a couple weeks.
  3. Work out at least 2 times per week.
    I worked out 3 times this month.
  4. Add at least 2 products to archwayhometheateraccessories.com
    I haven’t added any new products this month either.
  5. Make our home  more energy efficient.
    I replaced our 20 year old deep freezer with a brand new one, which will save us $18/mo.  That ended up being more of a savings than I planned, but I’m glad we bought a new one compared to another older one.  The difference in savings will catch up to the price in 2-3 years, and we will save money from there on out (not to mention that it will last longer than a used one).  Other than that, I’ve made some real progress in this area this year.  Just about the only thing left on my list is stuff in the basement, which isn’t as high of a priority.  I knocked this one out early.
  6. Participate in at least one bike race.
    I’m not sure if this one will happen this year.  I haven’t even been on the bike in a while.

Things are about to get real crazy around here, since we will have a baby by the time I do another one of these posts.  I can pretty much bank on not hitting my workout goals for the rest of the year.  At least we can still hit the debt reduction goal, which was my main goal for the year.

Debt Snowball Progress – Car Paid Off

Earlier this week, I briefly mentioned that we paid off our car.  We bought my wife a new car after she graduated college, then we got really intense at getting rid of our debt.  We added the car payment to the debt snowball, but we had a few student loans that were smaller with higher interest rates, so we knocked those out first.  Then we decided it was time to start attacking the car loan.

But let’s back up for a minute.  How’d we get in the position to have a massive car loan in the first place?  Well, years ago, when my wife was still in school, she had a car that had some major issues.  She was driving back and forth every day to school, so I convinced her that she needed something more reliable.

I didn’t work with her as much as I should have when we made that vehicle purchase.  I wanted her to have a reliable vehicle that would last a while, and convinced her to get a Honda Civic.  She never liked it, and didn’t speak up when we made the purchase together. The car wasn’t sporty enough for her, and it didn’t fit her personality.

So she graduated college, and wanted a new car.  Makes sense, right?  Everybody gets a new car once they graduate and go out in the new world, right?  My original plan was to save up for half the purchase, and take out a loan for the second half.  But she didn’t want to wait, and I got to hear about how much she didn’t like the car she had all the time.  With her added income, we could afford a new car payment.

So we went car shopping.  I know, I know.  We should have waited until we had enough to purchase it, but I was stupid about it.  I figured we would be buying one in another year or so with half the amount saved up, so what’s the difference if we just went ahead and did it.  Of course it was a stupid decision looking back on it.

So we went car shopping.  I didn’t want to make the same mistakes as last time, so I told her my only requirement is that she keep the car for 10 years.  After doing a whole bunch of research, she decided on a Ford Escape.  Not what I would have picked out, but hey, it’s not my car.  She likes it because it’s sporty, sits up high, and has room for kids (since she has to keep it for 10 years).

After following the steps I wrote about about how to buy a new car (great advice), we did some stupid things.  We put no money down (stupid mistake), and took out a loan for the whole purchase of a new vehicle (another stupid mistake).  We talked about selling it earlier in our debt reduction plan, but decided we would just stick to it and pay it off as quickly as possible.

Well here it is, two years and a couple months later, and her car is paid off.  We now just have two larger student loans we are going to start attacking, then the house will be all that’s left.  My plan is to make that the last car payment we ever have.  I already started saving up for a car replacement, and we shouldn’t need a new car anytime soon.

The moral of the story: pay cash for your vehicles.  Learn your lesson from us on this one.  Don’t take out a loan, because a loan means you really can’t afford it.  We got lucky and paid it off, but it hasn’t been an easy two years.  It’s still tough financially in our house, and that’s because we’re still working on paying off student loans.  We could have been debt free by now if it wasn’t for the car payment, but we still have a year or two left before we can say we’re debt free.  So stay with your older car as long as you can, and start saving for a new car before you are even close to needing a replacement.  You’ll be in a lot better shape.

Why Having an Emergency Fund Is Important

Trying to work your way out of debt, and wondering if you should save some money for an emergency fund before you pay down your debt?  Wondering how much money you should let just sit in your savings account, doing nothing, while you try to get rid of your debt?

Dave Ramsey recommends $1000 for your emergency fund.  I think that’s fine if you have credit card debt, but I think it’s low once you move onto lower interest debt reduction, such as car payments and student loans.  I have kept $5000 in my emergency fund for years now, and we recently had the perfect storm to wipe it all out.  Luckily, we should have it filled back up just within a couple months, but here’s what happened to us (something similar could happen to you, so read on).

A little over a month ago, I took a position at a new company.  I wasn’t looking to leave, but this new job seemed like a perfect fit for me (it’s been awesome so far, so well worth it).  At the time, my wife was 7 months pregnant, so switching insurance could be a pain.  Also, the cost of having a baby with the new insurance is $4000-$6000 more than my old insurance, plus they have a waiting period before your even eligible.

It turns out I wasn’t eligible for the new insurance until after the baby is born, which means I have to pay the COBRA fee to keep my old insurance for two months (at roughly $1500/mo!).  I took that into consideration before I accepted the position, and figured I could just take the $3000 or so out of our emergency fund to cover the difference.  Right there is benefit #1 of having a larger emergency fund.  I wouldn’t have been able to accept this new position if I didn’t have an emergency fund in place.

We moved into a new house 2 and a half years ago, and we just got hit with the tax increase.  I’ve been saving up for it for a few months now, and had most of it saved.  But I was still just over $1000 short.  Of course, they sent me the bill at the same time as me accepting the new position.  I could either pay the tax that’s due right now, or let it average out over the next year in my escrow account.  Of course, if I average it out, they’ll charge me a $60/mo convenience fee. Of course I paid the full amount.  $4000+ of the emergency fund wiped out.

The dishwasher in our rental property went out right before all this happened as well.  That dishwasher was a Maytag, and was only 2.5 years old.  It would have costed me around $200 to get it fixed (the front panel went out), and it only costed $350 new.  The dishwasher that came with our house was construction grade, so it would be better served in a rental property than our home, so we decided to get a new one for our house and move ours to the rental.  I’ve got a separate account set up for the rental property, but I transfered $300 over from our personal account to split the cost between the two accounts.

And of course, our deep freezer quit working this past weekend.  I got it off Craigslist about 4 years ago for $150.  It’s probably 20 years old, but it kept the food cold.  I monitored the cost of electricity to run it, and it averages around $20/mo to keep food cold.  I thought that was high, but we used it all the time so it was worth it.  When it went out, I figured it would cost us $75-$100 for someone just to look at it.  I figured it would probably be better to just replace it.  I looked on Craigslist again, and found some for $150-$200 that would fit our needs.  But I went to look at new ones, and found one for $440.  The new one costs $35 per year (not month) to run!  So we decided to get a new one, and figure the savings in electricity would outweigh the cost of the unit in just 2-3 years.  Emergency fund completely wiped out!

If I didn’t have a larger emergency fund saved up, we wouldn’t have been able to handle the perfect storm that happened over the past month and a half.  We would have gotten a cheap deep freezer as a replacement that would cost us more to run over the long haul than a new one, and we would probably be fighting a whole lot during this process.  Instead, we just wiped out our emergency fund, and should have it replaced in just a couple of months due to some extra income we have coming in (claiming our flex pay spending for daycare for one), so it wasn’t stressful at all.  In fact, we made the last payment on my wife’s car during this process, which was double the normal monthly payment.  So we wiped out a debt in the middle of this perfect storm that could have easily done us in financially.  I got a better job, our property taxes are up to date, and we replaced two failed appliances at the same time, all because we had the emergency fund in place to handle the situation.

My recommendation to you is to save $1000 in your emergency fund if you still have credit card debt, but increase it to $5000 once you get your credit cards paid off.  It’ll most likely come in handy at some point in the future.