This is another installment from my 10-part series hosted by KLRN on being money savvy, called It Just Makes Cents. This one encourages you to be smart and frugal about the car-buying process.
If you prefer knowledge like this to enter straight into your ear-hole, then you would want to go to the SoundCloud links provided by KLRN.
Finally, text is the way I generally learn, so let’s do that too!
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One of the hardest things to get our heads around about cars: A car is a large consumer device that loses value over time. It’s not an investment. It’s not our personality. Also – beware the manipulative question “How much can you afford to pay per month?”
Car Marketing – Beware
Our brains have been soaked and marinated in car advertisements practically since birth. I think this is why it’s difficult to imagine that the “meaning” of a car isn’t bigger than the “meaning” of a washing machine, dishwasher, or any other useful but ultimately disposable thing that just loses value every year and costs money to maintain. With cars, we tend to crave more from the brand than from our dishwasher brand. That craving costs us money.
A car doesn’t define your sex-appeal. It doesn’t make you stronger. An expensive car does not make you rich. In fact, just the opposite. To the extent a car is an expensive consumer device you bought on credit, it makes you poorer. This is sometimes difficult to remember, because of the car advertisements in every media we’ve all seen every single day of our lives.
Less Car, Less Often
Here are the two big lifetime ideas about how to be financially clever about car buying: Buy less car. And buy cars less often.
“Less car” doesn’t mean just 2 of the 4 wheels and engine, while forgetting the brakes and roof. It means: look to buy a car that literally costs less.
A car good enough to take you from home to work, and back again, could cost you one-tenth of your annual salary. Or it could cost you half of your annual salary. Which one do you want? Try to go with the one-tenth end of the spectrum. If you don’t make a huge salary, you’re looking at an older vehicle with some significant mileage on it.
And “less often” means try to extend the life of your existing ride. Make it last 15 years, not 5 years. Don’t trade it in after 5 just because the dealer reached out to you. What the sexy car advertisements don’t tell you is that every time you buy or sell your car, you lose money. Fewer lifetime transactions means less of your money lost.
Get Pre-Approved Before Walking on the Lot
Finally – Let’s talk about car credit. In an ideal world (I know, I know, most of us are not there yet) you buy a car with cash. Paying cash would tend to force you to shop for “less car,” which is a win.
But I know we’ll often have to buy on credit, getting an auto loan.
The best way to do that is to separate the loan process from the auto shopping. What do I mean by that? I mean, line up an auto loan in advance – before walking onto the car lot. Your bank or credit union is in the business of lending for cars. You get pre-approved for a certain amount of a car loan – given your current credit and income – and you’ll then know what you can afford. Shopping for a car, with pre-approval from your bank or credit union only up to a certain amount, limits the temptation to buy more car than you need.
Beware the “Monthly Payment” conversation
It will also keep the car-buying negotiation fixed on the price of the car, where your focus should stay. Car dealerships notoriously focus your attention on the “monthly payment.” That’s a trick. The cost of the car is in the price, and the interest rate you pay on the loan. The “monthly payment” conversation essentially distracts us from getting the best interest rate and the lowest price overall.
The best you can do
Most of us are not yet living in a ‘post-car’ world. If you can get by on biking and the occasional Lyft/Uber, that could be worth tens of thousands, maybe hundreds of thousands, over your lifetime. But we’re not there yet – and until that day, cars are still useful.
The best you can do, financially, is minimize cars’ hurt to your bottom line. Buy less car. Less often. Use cash if you can, and shop for the lowest auto-loan interest rate before buying, if you must borrow.
I conducted an experiment a few months back to test a long-held theory. The ubiquitous funny advertisements with the green lizard have led me to believe I could save money by calling up my automobile insurance provider and asking them to reduce my costs. (FWIW I don’t use that company. I have a different one, and I’m loyal to mine.)
Long story short, it worked. At the end of my phone conversation with my provider I’ll pay $20.07 less per month. To state some obvious math, that’s $240.84 per year.
I think my choices are prudent for me, but they are not free-lunch choices. I made a series of calculated gambles based on what I know about insurance in general, my particular car, and my personal financial situation.
This all started from a conversation over coffee with a reader two weeks ago. He mentioned that since the 1980s he’d declined to pay for collision insurance on his car, and that he calculates having saved at least $30,000 since then as a result. That got my attention. I realized I haven’t deeply studied the different components of auto insurance. Maybe you haven’t either. Now’s your chance to get a little nerdy with me.
For starters, auto insurance is required by law in every state. The required part of auto insurance is liability insurance. That’s for when you damage someone else’s body, car, or property. In Texas you’re allowed to buy a minimum of $25,000 in coverage per person or car, and $60,000 per incident. I pay to insure well over the minimum amounts and I didn’t mess with this liability part of my auto insurance policy.
The second part of auto insurance – which turns out to be optional in some cases – is collision insurance. That’s the amount you’ll receive if your car gets damaged.
Here’s where insurance theory and two other personal finance theories came into play. I’ll hit you with all three theories. First, insurance is expensive, so buy the least you can while still avoiding catastrophic financial risk. Second, don’t buy too much car. Third, try to buy so little car that you can avoid having a car loan. This third part is admittedly rarely achieved, but something to strive for. Because if you can eliminate your car loan, you have more options with collision insurance.
If you have a car loan, your lender makes you buy collision insurance, naturally, because the car acts as collateral for your loan. A smashed up car makes for poor collateral. If you don’t have a car loan, however, you can decline collision insurance.
I don’t have a car loan. I also don’t have a valuable car. In combination, that means I’m not terribly worried about losing many thousands of dollars in value if I wreck it. During this process I looked up trade-in value for my 11 year-old Hyundai Elantra with 95,000 miles and learned it’s worth $1,800 to $2,500. I don’t expect my insurance company to shower me with much more than that amount, in the event of a total wreck. And I’m not dropping $7,000 in repairs into this automotive beauty in that event either. Both of these factors mean I should keep my collision insurance to a minimum. I declined to pay for any collision insurance this week, because that suits my particular circumstance.
A fourth rule of personal finance came into play on the issue of comprehensive coverage. The rule is that it helps to have money in order to save money.
I saved a small amount when I upped my comprehensive coverage deductible from $500 to $1000. A few definitions might be helpful to explain what this means. Comprehensive coverage protects me if something other than another motorist hits me, such as hail damage, a tree falling, or flooding. The deductible is the amount I’m on the hook for, in the event of needed repairs. My upping the deductible is really a result of being able to handle the financial hit if a bad thing happens. If I didn’t have either savings or decent lines of credit, I wouldn’t be able to responsibly increase my deductible. But I do, so it’s cool. That’s the “it takes money to save money” thing.
A few other fine-print things I considered during my auto insurance conversation.
I continue to pay for vehicle damage if I’m hit by an uninsured motorist, although I lowered my coverage to the Texas state minimum of $25,000. As I mentioned, my car ain’t worth $25,000, so I’m probably over-covered there.
I continue to pay $1.65 per month for towing and labor. Between a history of dead batteries and flat tires, it feels like I need a tow or jump start more than once a year. So I’m getting my full money’s worth there, if history is any guide.
I also learned that our household auto insurance premiums won’t jump in six months when my eldest gets her learner’s permit. But they will jump in 1.5 years – quite a bit – when she gets her full license. I could hear the empathetic pain over the phone in the auto insurer representative’s voice when I told her my daughter’s age.
So that will be a future auto insurance cost increase. In the meantime, I was happy to squeeze out a bit in savings while I could.
I conducted an experiment last week to test a long-held theory. The ubiquitous funny advertisements with the green lizard have led me to believe I could save money by calling up my automobile insurance provider and asking them to reduce my costs. (FWIW I don’t use that company. I have a different one, and I’m loyal to mine.)
Long story short, it worked. At the end of my phone conversation with my provider I’ll pay $20.07 less per month. To state some obvious math, that’s $240.84 per year.
I think my choices are prudent for me, but they are not free-lunch choices. I made a series of calculated gambles based on what I know about insurance in general, my particular car, and my personal financial situation.
This all started from a conversation over coffee with a reader two weeks ago. He mentioned that since the 1980s he’d declined to pay for collision insurance on his car, and that he calculates having saved at least $30,000 since then as a result. That got my attention. I realized I haven’t deeply studied the different components of auto insurance. Maybe you haven’t either. Now’s your chance to get a little nerdy with me.
For starters, auto insurance is required by law in every state. The required part of auto insurance is liability insurance. That’s for when you damage someone else’s body, car, or property. In Texas you’re allowed to buy a minimum of $25,000 in coverage per person or car, and $60,000 per incident. I pay to insure well over the minimum amounts and I didn’t mess with this liability part of my auto insurance policy.
The second part of auto insurance – which turns out to be optional in some cases – is collision insurance. That’s the amount you’ll receive if your car gets damaged.
Here’s where insurance theory and two other personal finance theories came into play. I’ll hit you with all three theories. First, insurance is expensive, so buy the least you can while still avoiding catastrophic financial risk. Second, don’t buy too much car. Third, try to buy so little car that you can avoid having a car loan. This third part is admittedly rarely achieved, but something to strive for. Because if you can eliminate your car loan, you have more options with collision insurance.
(Not meant as an advertisement. Just the pictures was BIG!)
If you have a car loan, your lender makes you buy collision insurance, naturally, because the car acts as collateral for your loan. A smashed up car makes for poor collateral. If you don’t have a car loan, however, you can decline collision insurance.
I don’t have a car loan. I also don’t have a valuable car. In combination, that means I’m not terribly worried about losing many thousands of dollars in value if I wreck it. During this process I looked up trade-in value [LINK to Kelly Blue Book https://www.kbb.com] for my 11 year-old Hyundai Elantra with 95,000 miles and learned it’s worth $1,800 to $2,5000. I don’t expect my insurance company to shower me with much more than that amount, in the event of a total wreck. And I’m not dropping $7,000 in repairs into this automotive beauty in that event either. Both of these factors mean I should keep my collision insurance to a minimum. I declined to pay for any collision insurance this week, because that suits my particular circumstance.
A fourth rule of personal finance came into play on the issue of comprehensive coverage. The rule is that it helps to have money in order to save money.
I saved a small amount when I upped my comprehensive coverage deductible from $500 to $1000. A few definitions might be helpful to explain what this means. Comprehensive coverage protects me if something other than another motorist hits me, such as hail damage, a tree falling, or flooding. The deductible is the amount I’m on the hook for, in the event of needed repairs. My upping the deductible is really a result of being able to handle the financial hit if a bad thing happens. If I didn’t have either savings or decent lines of credit, I wouldn’t be able to responsibly increase my deductible. But I do, so it’s cool. That’s the “it takes money to save money” thing.
A few other fine-print things I considered during my auto insurance conversation.
I continue to pay for vehicle damage if I’m hit by an uninsured motorist, although I lowered my coverage to the Texas state minimum of $25,000. As I mentioned, my car ain’t worth $25,000, so I’m probably over-covered there.
I continue to pay $1.65 per month for towing and labor. Between a history of dead batteries and flat tires, it feels like I need a tow or jump start more than once a year. So I’m getting my full money’s worth there, if history is any guide.
I also learned that our household auto insurance premiums won’t jump in six months when my eldest gets her learner’s permit. But they will jump in 1.5 years – quite a bit – when she gets her full license. I could hear the empathetic pain over the phone in the auto insurer representative’s voice when I told her my daughter’s age.
So that will be a future auto insurance cost increase. In the meantime, I was happy to squeeze out a bit in savings while I could.
If you frequently read articles, books and blog posts about personal finance – as is my unfortunate wont – you quickly stumble upon one of the sacred cows of the genre: “The Emergency Fund.”
“The Emergency Fund,” the grown-ups tell us (as in this post that showed up in my inbox yesterday,) consists of 3 to 6 months of wages, socked away in a safe CD or savings account at the bank, untouched by regular expenses. Only when you stumble to the emergency room for your uninsured, unplanned, uninvited $5,000 appendectomy, or only when you lose your job and take 6 months to land a new one, are you allowed to dip into this account.
This sacred cow of personal finance, however, deserves to be cow-tipped at midnight. Because, mostly, its a complete load of bullcrap.
I’m not saying it’s a bad idea to have some ready money in the bank. Of course it is a good idea. Money in the bank is lovely. The idea is fine. But it stinks as a piece of personal finance advice.
In reality, there are three types of people, and none of these three types need the ‘Emergency Fund’ sacred cow advice.
Group One – You have money in the bank, (or stocks in the market, or a trust fund annuity, or whatever) without having been told. Maybe you were a fortunate beneficiary of the genetic lottery and tax code (The first $5.5 million inherited is tax free!), or maybe you just have a squirrel-like capacity for storing nuts. Good for you, but you really don’t need to be told about the Emergency Fund rule. The advice is irrelevant. You’re past that, you got that covered.
Group Two – On the edge of solvency, trying to make it through every month with all bills paid, but occasionally slipping into deficit. This includes about 50% of all Americans and 90% of Americans under the age of 30. This is the group to whom the “Emergency Fund advice” gets directed by the concerned grown-ups with a furrowed brow.
Now, this Group Two might, theoretically, be interested in the advice, but it really doesn’t even make financially savvy sense to follow it.
Here’s the mathematics of why. If you’re at break-even financially, with occasional monthly deficits, then you’ve got some credit card debt. You’re like 55% of Americans who carry a balance from month to month. You might pay the national average of 12% on that credit card principal balance. If you’ve got a checkered pay history you’re looking at 18% to 29% interest on the balance.
To make the math easy, let’s assume you have $5,000 in credit card debt, on which you pay 15% per year in interest, which totals $750 per year in interest.
Ok, now let’s say you somehow, despite paying significant interest on your debt burden, manage to accumulate a $5,000 Emergency Fund, just like they told you to. Congratulations. Now the adults convince you to ‘do the right thing’ and put it in an untouchable savings account.
Here’s some more easy math: You can safely earn up to1% annually on that Emergency Savings, or $50 per year.
So, in sum, the sacred cow advice is to pay $750 per year in interest while earning $50 in interest? Let’s just lock in a $700 loss per year! So even for this group, to whom the advice always gets passed, it doesn’t make sense.
What makes financial sense for Group Two, instead, is to have close to zero savings, but also to have close to zero credit card debt, with open lines of credit to be drawn on in an emergency. In that scenario, you neither earn interest nor pay interest, and you’re certainly not safe and comfortable, but at least you don’t lock in an annual $700 loss on your money, due to bad advice.
Because let’s face it: If you’re in Group Two, the choice isn’t between having an Emergency Fund or not. The choice is between having high-interest debt on the one hand and low-interest savings account on the other while paying the difference to your bank(s), or having neither and keeping the money yourself.
In a related story, nobody in Group Two actually has an Emergency Fund.
Group Three – Totally indebted, with no prospect of savings. This includes the chronic under- or unemployed, anyone whose house is in foreclosure, or is bankrupt, or not paying their credit card bills. At any point in time this is going to include about 25% of all Americans.
Yes, an Emergency Fund would be fabulous, but it’s totally irrelevant for this group.
I know I’m being flip and overly simplistic about this, and for the five readers who are about to write in to tell me about their emergency fund and what a great thing it has been for them, I apologize in advance.
You know who really likes the ‘Emergency Fund’ advice? Those five people. The ones who already have one.
You know who else really likes the ‘Emergency Fund’ advice? Banks, because they can earn the interest rate spread between your debt and your savings.
But for the 299,999,995 other people who have done the math on the classic Emergency Fund advice and agree with me: Respect.
A friend recently asked me to speak to her company at an informal ‘Lunch and Learn,’ about a common financial problem many of us face, namely “How Can I Save Money?”
My initial thought – and some version of this is same thought occurs many times somebody asks me to help with anything[1] – is that I’m not the right person to lead that discussion.But I’ll get to that point later.As Suze Orman was apparently unavailable that day, I put together my thoughts, and this is what I came up with.
Beyond Rational Thought
Saving money, losing weight, or kicking addiction all exist in that realm of adult behavior change which are immune to rational solutions.
I can enumerate four good factual, rational, reasons to not eat cupcakes, but that rarely stops you from ordering the red velvet with icing and a cherry on top.
I can list 10 techniques for cutting out non-essentials from your daily expenses but you’re still probably going to blow $30/week on the Venti Iced Pumpkin Spice Caramel Double Shot Frappuccino, aren’t you?
(Incidentally, I don’t think it will work, but if you do want a list of at least 51 great ways to save money,the best chapter I’ve ever read on the topic is Chapter Two of Andrew Tobias’ excellent The Only Investment Guide You’ll Ever Need, which is entitled “A Penny Saved Is Two Pennies Earned.” I reviewed Tobias’ book here.)
Purchasing non-essentials doesn’t make any financial sense, and it certainly doesn’t help your diet when it involves things like cronuts, but we’re in the realm of deep subconscious decision-making here.You can’t rationalize your way into good decisions in this realm.
Can this Jedi help you save money?
Trick the Mind
In short, you need a Jedi.
My advice for someone struggling with saving money on a monthly basis is to realize that rational thought is helpless in the face of subconscious desires, and that only by tricking our rational mind do we have a chance.
Consequently, I’ve got three Jedi mind tricks to offer:
1. Hawthorne effect (aka, “Observer effect”)
Scientists – ranging from quantum physicists to weight-loss investigators – struggle with the “Hawthorne Effect” the idea that in the act of observing something we inevitably alter the thing we study.How does this relate to saving money?You can be your own frustrated scientist by studying your household budget, as I wrote in an earlier post.
You could decide to buy budgeting software like Quicken, or use an online service like Mint.com, or YNAB.com or just save your money and create your own Excel Spreadsheet.You’d need to record every single monthly expense, then categorize it into essential, useful, and non-essential.
As you dig into where your money goes and start observing closely, you will gather data. And that data can be helpful in its own right, but does not actually constitute the Jedi mind trick I’m talking about.
What I am talking about is that you will probably begin to skew the data in a positive direction by the mind trick of the Hawthorne effect.The longer and more closely you begin to observe your spending patterns, the more likely you are to shift your spending patterns toward a more positive direction.That skew that frustrates scientists will nudge you to better choices.
2. Radical Transparency and Positive Peer Pressure
As sober alcoholics know, most of us need a group.We need to be able to tell our story.
Having trouble saving money is hard enough, but it’s especially hard because it typically happens in secret.Our shame and personal struggle to save money is in our heads, and we console ourselves with the fact that at least other people don’t realize we have growing credit card debt.
And when we go out with our friends, we’ll happily pick up the tab because, shit, I don’t want anybody to suspect I’m broke.
Obviously, this is part of the problem.
As a result we’ve got to trick our minds.
Something that seems to work for saving money is radical transparency – oversharing with others who will cheer you on, pick you up when you fall, and ideally join you in the journey.
The first step on the journey would be to pick the peer group, and often including a partner or spouse would be an important first step.
Maybe they’ll come from your regular Wednesday 6am Yoga class.Maybe they can come from a subset of regulars at your favorite Magic: The Gathering game store.More likely, these days, you will draw your social network of radically transparent money savers from Reddit, or Facebook, or Twitter.
It doesn’t matter so much how you form the group. What matters is that you feel responsible to others and you don’t try to save money alone.
Each person in your group who commits to saving money further commits to transparently share their struggle, methods, successes, and failure in saving money each month.When you get tired of posting that you’re broke, or watching your friends do the same, you move that tendency to radical transparency in a positive direction and get people to help you form an action plan.
The reader profiles on a site like Free Money Finance are an attempt at this kind of radical transparency.
Forcibly trick your mind away from keeping your spending patterns secret, and instead tap into the pride and peer accolades you will get at making the difficult money-saving choice.
3. Out of sight, out of mind
I typically don’t use either of the two savings plans above, but I absolutely use this one.Money you don’t see is the best way to save.
If we don’t have money in our hand, or if in fact we never even see it in our bank, it’s much easier to forget that we ever had it in the first place.Which, naturally, means we’re more likely to save rather than spend.
Automatic payroll deduction is by far the most important Jedi money-saving trick available.
This one works, and it’s particularly awesome when saving for long-term problems like retirement or college tuition. If you’ve got an employee-sponsored 401K plan or 403b plan, there is simply no better way to create saving than to have your paycheck automatically deducted.
Automatic bank transfers, if you don’t have access to a 401K/403b plan, work next best.Most banks and most investment programs will happily set up automatic transfers between your accounts.Slipping a few hundred dollars per month out of your checking account into a savings account, or College saving 529 account, or a mutual fund account may be the only way for most of us to actually accumulate savings over time.
Most of us badly need this Jedi mind trick.
The least financially efficient – but still frequently used – version of this is the IRS tax withholding/refund trick which many of us use.We love it when the IRS sends us a few hundred or a few thousand dollars refund after we file our taxes.
Unlike automatic payroll deductions or automatic bank transfers, the tax refund trick is inefficient, as you end up giving the federal government a 0% loan until you get your refund.But it also constitutes a major part of many people’s savings plan.
But because ‘out of sight, out of mind’ works so well, we end up using tax refunds as a kind of savings plan as well.
When you feel artificially poorer you adjust your lifestyle and spending accordingly.
Concluding thought
Messing with yourself with Jedi mind tricks like ascience project, radically exposing your finances to others, and tricking yourself into feeling more poor than you really are – each of these techniques are irrational.Each of these operates on the subconscious in a way that doesn’t make perfect sense.
But because that’s often where the problem lies in savings money, that’s where the solution will come from as well.
Post-script: Incidentally, who is best qualified in your life to help you learn to save money?
It’s not me.
My guess is that the best person to help you figure out how to save money is somebody who has suffered from living beyond their means in the past, and who has developed effective strategies for overcoming this problem.
I’d rather ask a formerly-chubby-now-turned-Cross-Fit-stud for weight loss advice than I would the naturally skinny person who has never struggled with extra pounds.
Just like a recovering banker turned blogger has something to offer a society trying to recover from the particular affliction of banking, you need hard-won experience to understand and change certain behaviors.
Having told you why you shouldn’t take my advice, I went ahead and offered it to you anyway.Which is kind of irrational.I hope it works.
[1]I don’t think my instinctual “I’m not the right person” comes from pure laziness or avoidance of helping others.
However, I am reminded of this great piece of advice from Jack Handey:
“To me, it’s always a good idea to always carry two sacks of something when you walk around.
That way, if anybody says, ‘Hey, can you give me a hand?’ you can say, ‘Sorry, got these sacks.’”
