Jack just bought a new car for $40,000 with a four-year loan. He expects to trade it in on another new car in four years with another four-year loan.
Jill just bought a used car for $20,000 with a two-year loan. She expects to hold onto it for eight years.
Question: How much more money will Jill have compared with Jack at the end of 8 years by buying a used car and holding onto it for 8 years?
Answer: Jill will have $56,000 in the till (even after factoring in repair costs)! She could use that money to help make a down payment on a home or, if she puts the money into retirement accounts for 20 years, she’ll have over $200,000 more than Jack at retirement time. On the other hand, Jack can strut around town in his expensive ride which may be his wont, but it’s a costly habit.
How much can someone prudently spend on a car? There are numerous rules of thumb purporting to show how much car you can afford. Most of them must be prepared by car manufacturers and dealers. In the old days, a two-year car loan was considered acceptable. Now the average new car loan is about seven years. Speaking of the old days, here’s a rule of thumb that has stood the test of time. The rule states that one should spend no more than 1/10th of gross annual income on the purchase price of a car, whether new or used. For example, someone with an annual gross income of $75,000 should limit the car purchase price to $7,500. If you want to drive a luxurious $40,000 car, the first thing to do is get a job that pays $400,000. Obviously, this rule is stringent, but driving an old heap could keep you out of a heap of trouble while providing the wherewithal to add to your retirement savings rather than face incessant and excessive car payments.
Smart Money Tips
• Set a good example for the youngsters in your life. It’s not easy raising children. Never has been. But it seems to be harder now than it was for earlier generations. While there are far more important child-rearing responsibilities, the one I’d like to proffer is to strive to set a good financial example for the children and other younger generation family members in your life. This includes being prudent in the way you spend, save, and invest your money. That’s the best thing you can do to increase the odds that your children will grow up to be financially responsible adults.
• If you’re having trouble paying your bills. A recent study indicates that a quarter of American families currently have trouble paying their bills on time, and that number is likely to rise because of inflation. Whatever the cause of a financial predicament for you or a family member, as hard as it may be, the best thing to do is to contact the lenders before they contact you. They may be able to devise a plan to help you better afford to pay your credit card and other bills. You might be encouraged to speak with a credit counselor but be sure to contact a legitimate credit counseling organization. Sadly, there are many who purport to be credit counselors including most who advertise on television, but who do nothing more than wreak further havoc on your predicament. To find a worthy credit counselor, contact the National Foundation for Credit Counseling (www.nfcc.org)
Food for Thought
Behold, my son, with what little wisdom the world is ruled.
-Count Axel Gustafsson Oxenstierna in a 1648 letter to his son at the conclusion of the Thirty Years War
Money Can Be Funny
It is pretty hard to tell what does bring happiness; poverty and wealth have both failed.
-Kin Hubbard
Word of the Week
exoteric adjective – Suitable for the public; hence, pretty obvious (roughly the opposite of esoteric).
Origin: From Latin exotericus; from Greek exōterikos, literally, external
Particularly useful if you want to insult someone without their realizing it, as in I am taken by your exoteric interpretation of current stock market conditions.