image by RBerteig

This is a continuation of my previous post, When to Buy a New Car.

The television, radio and newspapers are full of dealership ads screaming about how much everybody needs a new car and how affordable they are, even if you have “bad credit, slow credit or no credit.” For used cars, there are “buy here, pay here” lots everywhere. Needless to say, for virtually every American out there who needs a set of wheels, you can get one. But how can you actually get a good deal on that next vehicle? How can you buy what you need without paying too much? Here are my top three tips:

1. Do your homework. In “the olden days” (in other words, before the internet, HA!) this was pretty tough. Nowadays, finding out what a car’s estimated value is and where to find what you’re looking for is as simple as a few minutes on websites such as Kelley Blue Book, Edmunds, eBay motors, and even Craig’s List. Don’t just go roaming around some weekend looking at car lots. You’ll pay too much and are very likely to make a bad decision. Decide what you want in your next vehicle, starting with the budget you can afford to pay. Then work your way down the features: auto/manual, power/manual door locks/windows, fuel economy, two-/four-wheel drive, front-/rear-wheel drive, etc., etc. Once you’ve done some research on these options, the shopping won’t be so overwhelming and you can make a better choice.
2. Don’t rely on a dealer. Is a car easier to find at a dealership? Yes. Will you pay more for it? Yes. When possible, I recommend buying your car from an individual rather than a dealer. It will save you some money, the current owner will know more about the car, and he/she is usually more willing to negotiate on just about anything because they want rid of that ride. A dealership has to make money. That’s not evil; that’s just a fact. The dealer also won’t know much about the car’s history and usually won’t be willing to give you the contact information for the previous owner so you can call and get those details. While it may be harder to find the perfect car if you’re not looking at dealerships, check out local classifieds, eBay motors, Craig’s List and other local outlets where you can see what is out there before you give up and go to a car lot.
3. Be ready to negotiate. When I bought my last vehicle, after discussing the money for a while and getting close the final number, I literally walked out to my car, then back in with a stack of $100 bills. Laying them on the man’s desk, I told him here was my offer. That’s SERIOUS. He had no question I meant business when he saw that stack of cash. Was it maybe a little over the top – sure…but it was fun! But notice I discussed the money with the man for a while first. I negotiated. You should be ready to talk numbers honestly, intelligently and ready to act if you can come to an agreement (or close). You should also be ready to walk away if the seller won’t come within your budget. That being said, if you don’t do your homework (item 1), you can’t do any part of this step very well.

Well, that’s about it. Considering it is one of the biggest purchases you’ll make in your life next to a house, and a purchase you’ll make more than once, don’t you think you should spend some time to get it right? I know the answer is yes. What about you? What are some tips you’d offer for getting the best deal on your next ride?

As my wife’s car sat in a repair shop and I awaited the bill to be tallied, I had a thought – people ask me all the time when they should buy a new car; why haven’t I written about this?! So with that in mind, I bet you can guess what today’s post is all about – deciding when it is the right time to buy another car. The title of my post is a little misleading, because I don’t believe you should ever buy a new car. Unless you’re so rich you don’t know what to do with all your money, let someone else be the chump and eat the depreciation (decline in value) on a new car. You should be shopping based on your budget, which for 95% of Americans means shopping used. We’re also not talking about a lease here, because a lease is just a bad mathematical deal. You will not come out ahead on a lease, even if you plan to buy the car at the end of the lease period or trade out and get something else every few years. Leases don’t make mathematical sense. Also, if at all possible, set emotion aside when considering your shopping decision. If you WANT another ride but are driving around in something that meets your current needs, I won’t fuss too much if you go shopping, but recognize you’re spending money unnecessarily if you do that. It is best to wait until there is a need to replace your ride.

With those disclaimers out of the way, when should you go car shopping? The simplest answer is to start by looking at the math. Let’s say your car just broke down. It will cost $1,000 to fix it – should you spend that $1,000 or go shopping for something else? Compare what the car is worth as it sits to how much it would be worth fixed. Let’s say it is worth $4,500 as it sits and worth $5,000 when repaired. You’re technically losing $500 to fix it. In other words, instead of fixing the car, you could sell it for $4,500 and take the $1,000 you’d have to spend to fix it and go buy a $5,500 car. See the difference? Unless you have a strong emotional attachment to your car (and an extra $500 to blow), it may be time to buy something else.

On the flipside of that equation, maybe the car is worth $3,500 as it sits and $5,000 when repaired. In that case, it makes perfect sense to sink $1,000 into the car because you’re spending $1,000 to get $1,500 increase in the car’s value. That math makes sense.

The next things you need to consider (especially if the math of the value of the car is close) are the tax and insurance issues. Depending on where you live, taxes and insurance vary dramatically on personal vehicles. If you sell one car for another, you may end up paying a lot in taxes and a higher insurance premium. So before you leap, find out the taxes on a car within your budget (in my area, that’s as simple as making a phone call to the local government office responsible for tags and title). Then call your insurance company and see if the vehicle you’d be considering for purchase is in a different risk class than what you have now. Two phone calls can answer those questions and give you some peace of mind about your decision to keep or sell.

The last thing you need to consider is hassle. Inevitably when you go buy another car, you’ll need accessories to make it yours. Maybe the cup holder was engineered by satan and requires an aftermarket replacement. Maybe the CD player is actually a tape deck or 8-track player. You gotta replace that! You get my point. You’ll usually buy the car, then find you want a few extra things after it is yours. It really is a hassle to buy a car and get it set up like you want. Don’t leave that out of your consideration. If you truly love the car you’re in and don’t want to get rid of it, it may be worth $500 extra just to keep it. I won’t fault you for that as long as you can pay for it.

My final point is this: there are thousands of cars bought and sold each day in America, and I’d bet 90% or more of those transactions are based on a whim. Someone buys or sells simply because they’re bored, or heard some marketing pitch on TV or the radio that convinced them to buy a different car. There really is a right and wrong time to sell and buy a different car. I hope these simple guidelines help you determine that timing for yourself.

Like this? Check out my post on How to Get the Best Deal on Your Next Ride.

I’m on a mission. I am committed to helping as many people as will listen to become free from the restraint, risk and ridiculousness of the burden of debt. In that mission, I sometimes get carried away and have to remind myself of the real priorities in life. I sometimes struggle to be generous. I often struggle with being cheap. I sometimes struggle to pay someone else to do something I could maybe do myself, even if it would take me 30 times longer and in our current schedule there isn’t a spare second. I sometimes secretly think, “Does Stacy really need to go grocery shopping or could we save that money toward retirement, allowing me to retire a couple weeks earlier?” Okay, maybe I’m not that bad, but you see my point – when we are on a mission to get out of debt or save like crazy toward a goal, we sometimes get TOO FOCUSED. This often leads to bad decisions or imbalanced priorities. That’s what I want to talk about today – balance and priorities. Since that could be a book, I’m going to narrow my focus for today a bit to talk about the balance between long-term savings (especially for retirement) vs. focused debt reduction.
Once I’ve gained a new convert to the “debt is bad, I want out” philosophy, the obvious question is, “how can I get out the fastest and what’s the best approach?” Included in that stream of thought is the idea of selling off some things and/or dramatically changing priorities to maximize the ability to pay down debt. One common set of questions is, “Should I stop paying into retirement while I’m paying off debt?” and, “Should I cash out any of my 401k to pay off debt?” Let’s address both of those questions.

Should I stop paying into retirement while I’m paying off debt?

The answer: MAYBE. Dave Ramsey’s advice is to stop paying into retirement while paying off your debt (except the mortgage). From his newsletter in February of 2011, he specifically answered this question as follows:

You want to commit all your energy and resources to getting out of debt…and diverting money toward retirement savings means you’ll stay in debt longer. Don’t dilute your efforts; concentrate on one thing at a time. Even if you get a company match, don’t take it while you’re eliminating your debts. With a cut lifestyle, extra income from a second job (if you take one) and super focus, you’ll get out of debt quickly and establish your full emergency fund. Then you can go right back to investing. Being debt-free will more than make up for taking a year or two off of investing.

I agree with his point with a couple of exceptions*. First, if the math of your situation already works (income – expenses = something left over to pay toward debt) and you have room to cut expenses or do other things to give you the needed leverage to pay off debt quickly, I say you should do everything on that side before you consider unplugging your retirement savings. Why? Most companies match dollar for dollar, meaning you get 100% return on your investment in the first year. That is FREE MONEY. Even if you have credit cards at 29% interest, you still come out 71% ahead (okay nerds, I know I simplified the compounding math – cut me some slack).

Second, if you unplug your retirement before you’ve done everything to straighten up your financial behavior; you are simply giving yourself more income to use to misbehave! Think about it – if you stop saving for retirement and thus bring that extra income home but haven’t decided to behave with it, you may just go on a shopping spree instead of paying off debt. If you can learn to look at your debt as an enemy standing between you and freedom, you can change your attitude and behavior. That’s the top priority.

Should I cash out any of my 401k to pay off debt?

The answer: ALMOST NEVER! If you decide you want all your debt gone and have the determination to make it happen, you’ll be looking to squeeze every last penny out of your budget to kill debt. If you’ve built up some retirement savings, you’re treading on dangerous ground to touch it for any reason. Why? Let’s look at the math. If you cash out a 401k or similar retirement plan, you’ll have to pay taxes on that because the government is going to treat it as income (this means you’ll pay 15-28% to the IRS), plus any state income taxes you may have to pay, plus a 10% early withdrawal penalty. In other words, you might have to give up 40% or more of what you withdraw just to cover taxes and penalties. Even worse, that math doesn’t consider the damage to your retirement accounts and trust me; you want those to be big numbers when you reach retirement age. That is…unless you always want to work.

*On all these points I assume you’re already contributing to your 401k, 403b, 457, etc. up to the amount matched. If you’re contributing more, bring it down to ONLY the amount of the match. If you’re not contributing, don’t start until after you’ve killed your debt.