Took this picture last week at a clients’ office. Pop quiz: If you’ve listened to me for any length of time it should be a no-brainer: Which one is my car: You’re looking at a one-year old Mercedes, a 2007 Ford Fusion and a brand new Mazda SUV…
Identity theft: In the past few months, the federal government has been running a nation-wide ad campaign on identity theft and on-line passwords. You’re way ahead of them in that we talked about it twice over the past year. Protecting yourself on line is huge, but if you missed it, go to yourmoneybook.com and you can search by topic to catch up on how to protect yourself.
Automatic renewals: Everybody from magazine subscriptions cell companies want access to your bank account. They market it as convenient when you can automatically renew or pay. But the downside is that few people remember the renewal and never look at the total charge or the breakdowns. Great for the company – really bad for you.
Tim Horton now has an ad campaign designed to get people to automatically re-load their gift cards through a bank account: ”Could I get one of these and one of those and get my friend here whatever he wants.” A pre-loaded gift card is like a credit card. Tim Horton, and everyone else in the small cash purchase industry, knows that you’re likely to spend way more money with a card, instead of cash!
With a pre-paid card, or credit card, McDonalds average purchase increases 47%, and vending machine purchase per person increases 178%. Small wonder these companies want you to use anything but cash!
Buying on payments alone: The majority of people purchase big ticket items such as vehicles or motorcycles purely on the payments. The is a new car dealer ad on the radio: If I can get you the same or lower payment than you have now, why wouldn’t you trade your vehicle for a new one? It’s very clever and appeals to most people. Sure, same payment but get a new vehicle? But the one you have may be a year from being paid in full, while the new one has you start over for six or seven years. Not a good idea. Never talk about payments alone. You have to start with the price or you can never comparison shop.
Last week, I bought a new car. No, it isn’t new, new. It is a 13-year old Buick, but with 160,000km, it’s a major upgrade from my Chrysler, which I retired after 308,000km.
Anyone who has ever read the vehicle chapter in the It’s Your Money book knows that I am not likely to buy a brand new model. No matter what the incentives, there is no chance I want to pay for the average 20 to 30% depreciation in the first year. And low-rate financing doesn’t interest me, because adding interest costs to a car makes things worse, and more costly. Even at zero percent financing, I would be giving up the alternative of a rebate, and would now have monthly payments. That isn’t going to happen, because a car payment is the biggest monthly cash flow robber, and I would always be financing something that is worth less and less each month.
For anyone who does want to consider a new vehicle, www.edmunds.com has a great calculator which estimates the true cost of ownership over the first five years. They include gas, depreciation, insurance, and a host of other factors. Before heading for the dealership, it’s well worth a trip to their site. While it is U.S. vehicle prices and costs, the comparison between vehicles alone is very insightful.
In my case, since new wasn’t really new, I was happy to just write a cheque for $2,400 for my Buick. I’ll let you know in a couple of years what it’s actually costing me.
What I did want to figure out, without attempting to be smarter than a fifth grader, or doing more than a few minutes of math, is the real cost to drive my old Chrysler. In my case, the car cost me $133 a month. That’s an amount I can live with, even though my brother is quite a bit better off than me, at $71 a month, with his old Olds Achieva!
If you believe that a vehicle is a status symbol, you are likely destined to be broke. If, however, you think of a vehicle as basic, reliable transportation, you will likely be way ahead of millions of people, financially.
First, however, you need to know what your current vehicle is costing you per month, or per km. You can easily calculate your cost below, and do send me a note if you can beat my figure, which is used as an example on the worksheet. And remember three other points which will help you to avoid making your vehicle into a money pit:
• Avoid having a finance payment on your vehicle at all costs.
• If you have one, keep the vehicle after it is paid off and re-direct the same payments to a savings account. You won’t miss the money – you’ve been paying it all these years. But now it’ll grow for you, instead of going away.
• If you are in a lease – get out. There is very little chance you will ever have any equity and all those payments are just treading water before you’ll likely be giving the vehicle back to the dealer.
Vehicle Cost to Drive:
Original cash price of the vehicle: $10,200 $__________
The total of all payments:
(add up all the monthly payments, because
this will include the interest you paid to
finance the vehicle) n/a $__________
On a lease, add the monthly payment with
taxes AND the end of lease buyout amount n/a $__________
Add the rough total of any repair bills: $ 3,600 $__________
Do not include insurance, gas, basic maintenance, such
as oil changes, tires, etc. Yes, they have to be paid, but
they won’t be too different between vehicles.
Subtract the current value of the
vehicle, or the actual sale price: $ 2,300 $__________
Equals the total cost to own: $11,500 $__________
Number of months you owned the vehicle: 86 months __________
Total km you have driven:
(That is the mileage right now, less the
mileage when you purchased the vehicle) 212,000 __________
Your cost per km: 18 cents/km __________
(Divided the total mileage you’ve
driven by the total cost to own)
Your cost per month: $133 __________
(Divide the total cost to own by the
number of months you’ve owned it)
In January we talked about GM and Chrysler, and the possibility of bankruptcy. Right now, it’s one down and one to go, as I believe a GM bankruptcy is probably just weeks away. GM is working on a June 1st deadline to eliminate $27 billion of bondholder debt and come up with a new labour agreement or they’ll be pushed into bankruptcy.
For six months now, there’s been a cry that we can’t let them go bankrupt, because it would lose a gazillion jobs and end car manufacturing. I said then, and it’s obviously true, that the fear tactics were and are nonsense. Major changes were going to happen – with our without a bankruptcy.
Even GM has started to terminate dealers, shutting down production for months at a time, and laying off people. That has nothing to do with the possibility of bankruptcy. It has everything to do with a business model that’s not working! When the foundation of your house is collapsing is not the time to put in new windows, or paint the deck.
GM wants to close one out of every six dealers in the U.S., and get from 6,000 down to 3,600 by the end of next year. In Canada, the plan is to go from 700 down to 300. They call it a dealer rationalization plan, and the termination letters are expected to go out the end of this month.
If you do have the cash to buy a new vehicle, it is critical that you hold off on your purchase for another month or so. If not, you may be losing out on a huge amount of money.
Right now, the U.S. House of Representatives has passed a junker rebate program, and it is now in the Senate for consideration. The program is designed to get old junkers off the road and supply a rebate of up to $4,500 towards a new vehicle purchase that is more fuel efficient.
If the trend of Canada matching U.S. programs holds true, buying right now would cost you a 20 to 30% first year depreciation, and you’d miss out on that huge rebate of up to $4,500.
The U.S. government claims this is to promote fuel efficiency. Don’t believe that – it’s purely to boost car sales. For anyone trading a pickup, they only need to buy something that gets two more miles to the gallon to qualify for the maximum $4,500 rebate. Even Hummers just need to be traded for something that gets five miles per gallon more. That’s not fuel efficiency – that’s a sales promotion.
If you’re in the market for a new vehicle:
• Hold off until this program is in place or there is a clear decision that Canada won’t match it.
• Pay cash for your new vehicle, or better yet, buy a one or two year old that has some warranty left to avoid the new car depreciation
• If you’re going to ignore the “pay cash” advice, never finance a vehicle for more than four years.
• Never ever make the buying and financing decision on the same day. You’ll need to know the rebate that’s available and compare it to the low-rate finance offer. More times than not, you’ll be better off, financially, taking the cash rebate off the price and financing it with the credit union.
Hold off, too, if you’re considering a one or two year old model right now. When the new program becomes available, it not only drops the price of new vehicles, it also drops the value of one and two year old models about the same amount!