Monthly Archives: December 2016

Info Buying a Car? Read This Financial Advice First

A few years ago when my son was in college, I gave him my old car to drive. Now, four years later, my son has a job and an apartment and uses this same old car to commute. The car is still reliable, but does need a little maintenance, and my son is thinking about buying a new car. He’s asking my advice, so I thought I’d share my advice with everyone. Buying a car is one of the priciest purchases you can make, so it’s definitely a subject that requires some financial advice.

Choosing the right car is very subjective. There are practical, emotional and aesthetical needs. Some people only care about a car as transportation. For some, a car needs to be comfortable. For others a car needs to project the buyer’s personality or be beautiful to look at. For still others, a car is the manifestation of sophisticated technology and needs to look and go fast. I think of a car as transportation, but I also want to be comfortable while I’m being transported. My son wants the car to fit his transportation needs and be fun to drive. When my wife bought her last car, her only need was a place to put her purse that wasn’t on the passenger seat or too far away. So how do you choose? (For related reading, see: The Complete Guide to Buying a New Car: What to Look for in a New Car.)

Make a List

You won’t be happy if you get a car that looks great and goes fast, but can’t fit your family or transport your dog or bottoms out on your driveway. So make a list of the most important transportation criteria and use this as a guide during your search.

Research

I happen to think Consumer Reports is one of the best sources out there for car information. They have a lot of technical information on the cars, and they test drive every one. They collect information from their readers on reliability issues and even have a buying service to help you get a good price. Since they accept no advertising, their advice is unbiased, but remember, their criteria are not necessarily your criteria.

Here’s a list of good places for car research:

  • Consumer Reports
  • Edmunds – Good reviews and information on new and used cars
  • Kelly Blue Book – Pricing estimator for used cars
  • Carsdirect.com – Great pricing and configuration tool for new cars; also good car comparison tools
  • Truecar.com – Best pricing tool and best place to get quotes from local dealers

What Can I Afford?

Financially, the best way to buy a car is to buy it new with cash and keep it for a long time, preferably 10 years or more. You can get the best price, you don’t pay any interest and you can sell it at any time. A car is a depreciating asset that doesn’t depreciate in a straight line. New cars depreciate the most when you drive them off the lot. They depreciate rapidly in the first couple of years and then depreciation slows. Keeping your car a long time means the rapid depreciation when the car is newer won’t matter to you. (For related reading, see: Cars That Depreciate the Least.)

How much car you can afford is obvious if you’re paying cash, but not if you take out a loan or lease your car. Then you have a monthly payment. Don’t get into any deal that lasts over five years (or 60 months). If you do, you are likely to be under water (where you actually owe more than the car is worth) for at least part of the deal. Sure your payments will be lower, but you are locked in for way too long. Make a realistic budget and include the car payments, insurance and maintenance. Try to keep your debt-to-income ratio less than 15%. You should also be continuing to save 10% or more of your income. If your car payments cause your savings to go away, you’re buying too much car.

If you find that you can’t buy the new car you want, look into a used car. For as little as $2,000 you can get a used car that will take you from point A to point B, and if you spend more you can actually get a nice car. Just remember that any used car will need some maintenance, so put that in the budget. If you buy a used car from a dealer, you might be able to get up to a six-month warranty, but you will definitely pay more than buying from a private party. Always get a Carfax report on any used car you buy. Most dealers will provide it for free, just ask. For a private party purchase you will probably need to buy it. The Carfax report will give you the car’s collision, repair and purchase history. (For related reading, see: Retirees and Cars: New or Used.)

Lease vs. Loan

When you buy a car with a loan, you are actually buying a car you will own when you make the last payment. When you lease a car, you are renting it. At the end of the lease, you can buy the car at a preset price. Which is better depends on how long you plan to keep the car. If you like a new car every two years and don’t mind not owning your car, then leasing can be a great way to go. You will always have the latest and greatest, but you will never be done with that payment.

On the other hand, if you keep your car for 10 years and take out a 48-month loan, you have four years of payments followed by six years with no payments. With both the lease and a loan, you are responsible for any repairs or maintenance not covered by warranty. With a lease, you’re allotted a preset number of miles (often 12,000/yr) and if you drive more than that, you will be charged for them. (For related reading, see: New Wheels: Lease or Buy?)

Getting the Best Deal

You’ve decided on a car and how you’re going to pay for it. Now how do you get the best deal?

Separate price from all other factors – This tip works best when you are paying cash or are taking a loan. The car dealer will want to give you a price, based on how you’re paying and other factors like your trade-in. Ask for a cash price without a trade. You can always say you’ve changed your mind and now want a loan or have a trade-in later. This gets you a price for the car that you can compare with other places using TrueCar or some other service.

Arrange financing before going into the dealership – The dealer might have great financing deals, but sometimes those great deals mean you actually pay more for the car. Shop around for a loan before going and see if the dealer can beat it after you’ve negotiated the price of your car. Check your local banks and online to find the best rates. (For related reading, see: How to Get the Best Price on a New Car.)

Shop on the last day of the month – Dealers need to move a certain number of cars monthly to get incentives from manufacturers. Salespeople are measured monthly. So if you buy your car on the last weekend or better yet the last day of the month, you’re more likely to get a good deal. Better yet, try the last day of the quarter.

Make sure the dealer can get your car – If you find what you want on the lot, that’s the best way to make a good deal, but the chances of them having it in your color with the right features is pretty low. So dealers trade cars to get the car you want, but often ask for a deposit first. Always know where the car is and when it’s arriving before putting down a deposit; if the salesman doesn’t have a good answer, walk away.

Put your deposit on a credit card – Deposits on new cars are refundable if the dealer can’t get the car you want, but it’s a pain to get your money back. Being able to threaten the dealership with a chargeback on your credit card is a good way to make them refund your deposit if they can’t get the car you want.

Extras – The dealer will try to sell you all kinds of extras. Unless your particular model is very prone to mechanical problems, I would avoid the extended warranty. Many extended warranties are actually very poor and don’t cover things that you think they should. Dealers like to sell them because they make lots of money on them. Other bad deals are undercarriage coatings or rustproofing, fabric protection and paint protection. VIN etching is generally a good thing, but keep in mind the dealer is going to charge a lot for this: $200-$300. You can buy a do-it-yourself kit for $30. On the other hand, it’s pretty convenient to have the dealer do it for you.

The Common Budgeting Challenges to Overcome

The word “budget” has been known to make people cringe, cry and bury their heads in the sand, but budgeting challenges don’t have to keep you from getting the job done. Budgets are just a set of guidelines to help you manage your money. (Budgeting Basics will help you get started.) Once you set up your system, budgeting isn’t even that much work. If yours isn’t working for you, then scrap it and start again. But don’t be stopped before you start by challenges that you can easily overcome.

Budgeting Challenges

1. The All-or-Nothing Mentality

Many people are turned off by budgeting because most advice about creating one requires tracking every penny spent for three months. That is a lot of saving receipts and tracking, especially if you aren’t using an automatic system. The point of a budget is to get a picture of your expenses and plan for your financial goals – in other words, it is a tool for you and you alone – and if tracking every penny is a roadblock to get you started, cut yourself some slack. Perfect is definitely the enemy of good.

Having a general idea of your income and major expenses is a good first step toward creating a budget. Common spending categories include:

  • Rent
  • Utilities
  • Phone/Internet
  • Transportation
  • Insurance
  • Groceries
  • Car Payments
  • Childcare
  • Loans or Debts
  • Clothing
  • Entertainment
  • Dining Out
  • Travel
  • Charity
  • Savings

If you tally up roughly what you spend for each of these categories (or what you would like to spend) – and it is less than your income – then it is fine to track your large expense categories and leave out the occasional lunch or impulse purchase. If you find that you’re overspending, you need to reassess and set a stricter budget.

2. Labor-Intensive Tracking

As mentioned above, common budgeting advice requires you to track all of your receipts and spending for multiple months. You can do this on paper or on a spreadsheet, but there are easier ways. A variety of apps and computer programs exist that will track your spending, categorize it, help you create a budget and note progress toward your financial goals

Click on the 5 Best Personal Finance Apps for a list of first-rate free tools to try out. In different ways, these apps monitor your bank accounts, credit card transactions and even investments and retirement planning. Some also allow you to set spending goals.

3. Paying in Cash

It has been proved that people who use cash rather than credit spend less overall. The big hurdle is that spending cash makes sticking to a tight budget very challenging, because to track your spending you have to manually tally up receipts. There are a few ways to stick to a budget while avoiding credit cards.

One method is known as the “envelope” method. You take your spending money out of the bank at the start of the month and divide it into envelopes. When the grocery envelope is empty, that’s it for the month (although you can always borrow from the other envelopes in an emergency). A more wallet-friendly alternative to carrying around multiple envelopes is to paper clip bills together and attach a sticky note that designates what the money is for. Obviously, some monthly bills will be paid directly from your bank account – or by check, if you still do that – for example, rent, car payments, credit cards and utilities.

A less complicated version of this method requires designating a specific cash amount for variable expenses and miscellaneous purchases and putting that in a single place. Instead of tracking every cup of coffee or dinner out, use your cash on hand to guide your general spending. The fund can be designed for whatever time period works best for you: weekly, biweekly or monthly. Just coordinate it with the big monthly bills. This second approach could also work with a debit card, if you carefully track what you spend.

The Bottom Line

Budgeting can seem scary, labor intensive and challenging, especially for those who use cash. The most important thing to remember is that it is a tool for you, and if you go awry one month, you can just try again the next. And don’t be afraid to change your budget if it isn’t working. Use the above tips and you should be well on your way to finding a financial plan that fits your lifestyle.

Ways to Create a Successful Budget

Financial planning revolves around what is in our control. For example, we can’t control stock market returns, tax rates, or unexpected events, but we can plan to mitigate these risks through diversification, tax planning, and insurance. Of all the areas in financial planning, we probably have the highest degree of control over our income, expenses, and savings, making it extremely important to create a workable budget.

Here are some of the best ways you can create a budget you can actually stick to.

First, Know Your Resources

No matter how you are paid (hourly, salary, commission), it is important to make a projection of your take-home income each month to compare to your budgeted expenses. Your budgeted expenses should never exceed your income. If you are paid less than monthly, it’s important to know how long that income is expected to last, and to have a plan to spread out your resources accordingly.

No two budgets look the same. You can look online for budget templates, but none will contain the categories and level of detail that fit your needs. However, creating these three basic categories will get your budget off to a great start.

1. Monthly Needs vs. Wants

These are expenses that you need to survive every month, and should include your cost of housing, minimum loan payments, utilities, groceries, and other basic needs. Everyone’s definition of needs is different (e.g. I wouldn’t consider my gym membership a need, but some would). It’s ideal to keep these expenses to less than 50% of your take home pay.

As for the wants, these comprise the part of the budget reserved for the finer things in life—things that you could live without such as dining out, new furniture, entertainment, sports, etc. It’s ideal to keep these expenses under 30% of your take home pay.

2. Savings Goals

This is the part of the budget reserved for long-term goals such as setting up an emergency fund, vacations, buying a new car or house. For each goal you have, pick a date you would like to accomplish that goal, and divide that dollar amount by the number of months until that date to determine a monthly amount.  For example, if I wanted to buy a car for $18,000 in three years, I would need to budget $500/month ($18,000/36 months) to achieve my goal.

Because repaying credit card and student loan debt does not happen overnight, making additional principal payments towards any debt can also be lumped into the long-term savings goals category. By paying down loans, you are not technically savings funds, but you are reducing the amount of interest paid over the term of the loan. For debt repayment goals, it helps to set a desired payoff date, and use an amortization calculator to determine how much to budget for your goal.

You should also be setting aside a portion of your budget for retirement savings. This is especially important if you aren’t making contributions to an employer-sponsored retirement plan through payroll deductions. Using a retirement savings tool or seeing a certified financial planner can help you determine how much you need to save to achieve your retirement goals. (For related reading, see: 6 Steps to Prepare Financially for a Newborn.)

3. Track Your Expenses

I find that many people actually do have a budget, but not so many are budgeting. What’s the difference? Having a budget is a great start and provides spending goals to measure your expenses against. Budgeting includes regularly tracking your expenses and updating your budget as your income and expenses change. If you aren’t tracking your expenses, how will you know if you’re achieving your spending goals? Doing this with a pen and paper, or even an Excel spreadsheet, can be extremely cumbersome.

Fortunately, there are hundreds of software tools available to help track your budget and expenses. Mint, Quicken, and YNAB are a few examples of tools that can assist you in expense tracking. Although tracking expenses can be cumbersome, it is an imperative component of budgeting that cannot be overlooked.

Don’t Forget to Make Your Budget Flexible

You’ve projected your income, broken your expenses into categories, and are tracking expenses. What happens when you’ve gone over budget? One very important part of budgeting is making sure your budget is flexible enough to absorb the impact of overspending in a category (which will happen more than you think). Let’s say you had budgeted $500 for groceries, and you check your grocery expenses after your final grocery trip of the month, and total expenses are $600.

It’s important to adjust your budget by taking the $100 you had gone over budget and reducing another spending category, or goal (i.e. reduce the amount you will spend on clothing or save for your vacation). Making your budget flexible will also help you understand the consequence of each spending decision. Do you really need those $200 shoes? If you only have $150 left in your clothing budget, you will need to make sacrifices elsewhere.

And Dedicate Time to Track Your Progress

Creating a workable budget includes time budgeting. You should dedicate at least 20 minutes a week to working on your budget. That’s roughly three minutes a day. I take a half hour out of every Sunday night to update our budget. Carving out the time to track and update your expenses and income will make sure you keep budgeting, rather than just have a budget you set and forget.

 

This Key Tips for Budgeting Your Money

It’s almost a truism that budgeting is a critical step for anyone looking to get serious about money management. After all, you have to know where your money is going in order to make plans for the future. But if you haven’t ever tracked your spending, how do you get started?

Here are three tips that will help you set up a budget and start managing your money.

1. Determine Wants Versus Needs

The first step towards creating a budget is determining which expenses are wants and which are needs. Housing, utilities, groceries, transportation, clothing and childcare are generally considered necessities; entertainment, travel and dining out are thought of as “wants,” or what are known as discretionary expenses. That being said, there often is some gray area between a want and a need: You may need a car to get to work if carpooling or public transit is not an option, for example, but a flashy sports car may be a want. Everyone must buy clothes, but designer clothes are not requirements. If you can afford or have already purchased a luxury version of your necessary expenses, remember that downgrading is always an option if you decide that type of expense no longer fits with your lifestyle.

2. Figure Out Fixed and Variable Expenses

Fixed expenses – which, as their name implies, remain the same every month – are the backbone of every budget and should be the easiest to plan for. Examples of these might be your rent, car payment and student loans, which are likely to be the same, month in and month out. Variable expenses, no surprise, are the ones that change every month. Your grocery bills, consumption-based utilities (like oil/gas, electricity, phone service), clothing expenses, travel and car maintenance expenses are all variable expenses.

Budgeting for variable expenses, of course, is one of the harder parts of creating a spending plan. Here are a couple of tips to help make it easier:

  • Track your spending for three to six months, figure out the average over that period and, in the future, aim for the average every month.
  • Instead of tracking variable expenses monthly, try setting a six-month or annual budget goal. This is especially useful for expenses like car maintenance or travel, which might not crop up every month but still need to be considered in a budget as they can be big-ticket items.

3. Decide What Type of Money Manager You Want to Be

It’s important to determine whether you are a big-picture or a detail-oriented money manager. Some people like to know generally where their money is going but don’t want to have to track every coffee they buy; others like to know exactly how much they spend on their latte habit. Determining if you prefer a detailed or broad view of your money will help you decide what type of budget system will work for you. The one caveat: If money is tight, you may have to use a system that tracks every penny. Once your finances are more flush, you may be able to switch to a less detailed tracking system. Here is a closer look at each type of budgeting.

• Detail-oriented budgeting. This system helps you control the outflow of your funds and sometimes alerts you to wasteful spending that you weren’t aware of. You know the popular “you spend enough on coffee each year to buy a used car” scolding? This system will help you figure out exactly how much you spend on things like your java habit, and where you actually want your money to go – including into savings and retirement accounts.

While you can create a detail-oriented budget manually with receipts and spreadsheets, many people choose to use automated tracking tools such as those found at Mint or Personal Capital. These programs will track and categorize all of your spending, which makes it easy to see if you are overspending in different categories. An additional benefit: If you have expenses for your work that should be reimbursable (travel expenses, office supplies), an automatic tracker can help you keep them organized and make sure you get the full reimbursements you are due. 6 Best Personal Finance Apps will update you on good tools to try.

• Big-picture budgeting. If you have more financial wiggle room and less tolerance for tracking details, you may want to develop a big-picture budget. Create a list of all of the regular expenses that you consider “needs,” and include categories for savings, retirement, emergency funds, charitable giving and travel (if you travel often). If you choose to use a big-picture budgeting system, be sure to give yourself a sizable cushion for savings and an emergency fund. (For more on this, see Building an Emergency Fund and Why You Absolutely Need an Emergency Fund.)

Once you have determined your monthly necessary expenses, plus the additional categories included above, you can then spend the remainder of your monthly income however you choose. The only thing to track is the total spent from this “miscellaneous” fund, but you don’t have to track how much you spend on clothes or coffee. To make tracking easier, it can be helpful to have one bank account or one credit card that you use for your “miscellaneous” expense fund so that you can easily keep an eye on your total expenditures.

The Bottom Line

Budgets are a critical tool to help with money management, but ultimately they are just a general set of guidelines. If your current budget isn’t working for you, try another approach. The most important thing to do is to make a plan that works for you, and once it’s in place, to stick with it.
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