Advanced Personal Finance

The following was a guest post I did that was featured on Money Smart Life.

When it comes to their money, some people do inexplicable things. I came across an appalling figure the other day. The average length of a car loan today is 70 months - nearly six years! Now couple that stat with the fact that, on average, people only keep their cars three to five years. If you do that, it doesn’t take a calculator to figure out you’re digging yourself into a hole.

Upside Down

Being ‘upside down’ is the term used to describe when you owe more on something than it’s actually worth. When you’re talking about cars, it can happen surprising easily.

As a rule, new cars immediately lose value as soon as they’re driven off the lot. It takes several months or even a year of payments to owe less than the resale value of the car. For that period of time, you’re upside down. The longer your loan term, the longer it takes to get to the break-even point.

So it seems that what more and more new car buyers are doing is not entirely paying for a car before they turn around and sell it. Then they buy another car and roll the old loan balance into the new loan. After a few cycles of this, you’re driving a Chevy with a Mercedes-size loan.

The Numbers

To put numbers to the point, let’s say you want to buy this nice new Toyota Camry with a loan of $20,000. If you finance for five years at 6.24% (what my bank offers), you’ll be paying $3,333 in interest over the life of the loan. If your loan term is three years, total interest is $1,770. Financing for the longer term nearly doubles the interest you pay.

If you decide to trade in that car after four years, you still owe over $4,000 on the loan. No problem - just roll that into the loan for your new car.

Do this a couple of times and you’ll quickly be driving a car worth half what you owe on it.

Lease Instead

Since evidently a great many people are doing just that, it seems they should be leasing instead of buying. At least at the end of a lease you don’t owe any money (assuming you fulfill the terms of the lease). Not only that but you’ll be able to afford more car than you would by buying outright.

Like I said, people do unbelievable things when it comes to money.

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You’ve heard the phrase about a million times right before you swipe your card through those Point of Sale (POS) terminal at the grocery or department store. (By the way, why the crap can’t those things all work the same way? I have to guess the order of operation at each retailer. Do I swipe then press credit? Do I tell the clerk what I’m using first? Do I press cancel to use credit? You have two choices in this situation. (1) Ask the clerk, “what do I do?” and look like an idiot. (2) Take a guess, screw up the transaction, and get the eye-roll and sigh from the clerk and look like an idiot. Isn’t there some sort of POS terminal governing body?)

But that’s not the point of this post. What I’m really asking is, do you use a debit card for most or all of your everyday purchases or do you charge everything on a rewards credit card? Me, I’m a debit card man. I’ve heard from readers and other PF bloggers that the credit card is definitely the way to go. I see a couple of reasons to go with both.

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Moving around PF blogs, you see a lot of advice and tips for smart money moves to make. There are some, though, that I just haven’t been willing and/or able to implement.

1. After you’ve paid off your car, keep making those payments to yourself then buy your next car in cash. It’s been ages since we had a car payment (except the four months or so after we learned how not to buy a car). So while I know this is good advice, I’m too late to implement it easily in our family. Our budget is just allocated differently now and I don’t have that kind of money just sloshing around in it. I feel okay about that, though, because barring the total destruction of my car, I don’t figure we’ll be needing to replace either for many years to come.
2. Fund your 401(k) up to the employer match, then fund a Roth to the max, then switch back to the 401(k). I know lots of people advocate this three-step approach. I’ve found it’s too much trouble for me. I just fund my 401(k) up to the maximum for the year and put a couple thousand into each of our Roths.
3. Keep your emergency savings in a high-yield savings account like Emigrant or HSBC. I use a money market fund offered by USAA instead. I’ve compared rates after seeing all the buzz on PF blogs about who’s getting what rate and my money market is competitive. It costs me a little bit in fees, so net-net I’m losing a tiny bit of money using it instead. I do it for a couple of reasons. One, I do everything else with USAA so this keeps it all together. Two, I can get the money immediately if necessary, unlike an online bank. Typically they need 2-3 days to get you the money. Finally, it’s not costing me enough money to switch.

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There probably isn’t a day that goes by that I don’t encounter mention of this or that online high yield savings account. Then I read this post by Jonathan at My Money Blog and it got me thinking about how my own finances are set up. It appears Jonathan used to use a couple of different banks for different reasons, but has moved to consolidate at WaMu.

I started to wonder what the advantages and disadvantages are of consolidating your financial dealings with one or just a few providers. Our finances are exclusively through USAA. If you’ve never heard of USAA, they’re a ‘military-affiliated’ financial services company. I’m not a representative of the company, so I’m not positive what all the membership requirements are, but generally you can use them if you or your parents are/were in the military. What I do know is that USAA kicks ass. They provide banking, insurance, and mutual funds and brokerage. I could do a whole post on them, but that’s not the point.
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