Some car-buying suggestions you don’t want to read. Here’s a frequently asked question: What’s the best way to buy a new car? My response: Pay cash. The inevitable follow up remark: I can’t afford to pay cash. It seems that driving a late model car is considered an entitlement, particularly among the younger set. But today, too many things in our financial lives can go wrong to risk being saddled with endless payments on an unaffordable new car. Here are some things for would-be car purchasers to consider:
- Don’t buy a new car unless you can either pay cash or finance it over a period of at most three years. If you can’t, you can’t afford a new car.
- Never lease a car. This is the worst way for most people to own a personal vehicle. It will just consign you to an endless cycle of lease payments when your goal should be to get out from under car payments so that you can eventually pay cash for your cars. Once you pay cash for a car, you’ll always pay cash for cars.
- If you buy new, plan to keep the car for at least 10 years. Years ago, I did a study of car ownership habits that didn’t ingratiate me with the auto manufacturers, but has had a lasting impact on many people. I compared someone who bought new and traded a car every three years with someone who bought new and traded every 10 years. Here’s the difference: Over the course of a 40-year work life, the one who trades every 10 years saves enough money to be able to retire at least five years earlier than the frequent trader. Also, the 10-year owner accumulates a lot more money along the way that could come in handy if financial adversity strikes, which happens a lot.
- Buying used is a very smart move. Here’s the best way to minimize car costs without driving clunkers, as I do. (I once had a handwritten sign put on my windshield that said: “Your car violates this neighborhood’s standards of good taste.”) Buy a four-year old car and keep it for four years. Most of the depreciation in a car’s value accrues in the first four years, but cars remain very reliable for many years thereafter. Compared with the person described above who buys new and keeps the car for a decade, trading a used car every four years results in even lower ownership costs.
Please forward this to any “deserving” family members. The blame resides with me.
Smart Money Tips
A couple of IRA tips:
- There’s still time to make a 2021 IRA contribution. You have until April 18 to make an IRA contribution for the 2021 tax year. Even if you can’t come up with the maximum ($6,000 for those under age 50; $7,000 for, in the words of my children, oldsters), any amount will help. If you qualify, make a Roth IRA contribution unless you need the tax deduction allowed by making a deductible traditional IRA contribution. Even if you, like Bill Gates, only qualify for a nondeductible IRA, do it anyway. You’ll thank me 40 years from now.
- Give a gift of an IRA. Parents and grandparents – if you can afford to give a younger generation family member a cash gift and if he or she has some income from a job, even a part-time job and even if under age 18, consider giving a gift of a Roth IRA. This will impart a valuable lesson in saving for the future. While retirement is still decades away and is probably the last thing on the child’s mind, your gift is sending an important message that you, as a parent or grandparent, believe that the sooner you start putting money aside for retirement, the better. Even young adults with full- or part-time jobs will benefit from this important lesson.
Food for Thought
A rich person is not one who has the most but the one who needs the least.
Money Can Be Funny
I advise you to go on living solely to enrage those who are paying your annuities. It is the only pleasure I have left.
– Voltaire
Word of the Week
ambisinistrous (am-bi-SIN-truhs) adjective – clumsy, klutzy, maladroit; literally, “both left”; the opposite of “ambidextrous.”
Origin: ambi– + sinister (“left”) + -ous
The ambisinistrous basketball players, a number three seed in the NCAAs, managed to lose to a number 15 seed.