New Cars, Used Cars, and People's Word in the Online World

New cars are a tremendous waste of money for anyone making less than $80,000 a year.  I've come to this belief academically through Dave Ramsey, but also by experience.  My only new car was a 2010 Hyundai Elantra.  I spent about $14,000 on it.  It was shiny, black, and came with a $280 car payment.

It also came with unexpected consequences:

First, my insurance tripled to $100 a month.  I didn't think about it at the time, but it obviously cost more to insure a brand new car than my old high school clunker.

Second, I hated driving it to the places I love to go (up mountain roads) because I was afraid of scratching it.

Third, it lost value the second I drove it off the lot.  Edmunds says cars lose 9% the minute you drive it.  Stupid investment.

So I sold it on Autotrader.com and have bought used cars for cash ever since.  No car payments.  My marketplace of choice for buying and selling is Craigslist.  Used car dealers mark cars up extremely high.  Buying from a private party can be up to twice as cheap.  Again, a good tool to see the difference between the retail (dealership) price of a car and the private party price is Kelly Blue Book.  I just sold my 2004 Toyota Corolla LE at the private party blue book price for $4,650.  Dealership price?  $6,200.

Now of course you've got to be careful.  There are shady characters out there.  I always run the cars by a mechanic before I buy, but I've had a lot of success on Craigslist.  Of the five different cars I've bought and sold, I've made a little bit of money on three, and lost a little bit of money on two.  Not bad compared to the value I lost driving my new car off the lot.

Dealing with people there and on other sites has got me thinking about online ethics.  Just this week I had met a woman selling her Subaru Outback.  We went a test drive.  I liked it.  She was asking $2,800 and we negotiated down to $2,500.   We shook hands, and agreed I would buy it when she returned from a business trip.  Two days later she informs me by email she sold it to someone else.

I felt this was wrong.  We didn't sign a contract, but we had a verbal agreement, sealed with a handshake.  Perhaps people are more inclined to renege on their word online because of its depersonalized nature and anonimity it offers.  This woman assumes she'll never see me, or interact with me again.  She feared no social consequences or stigma by breaking her word.

Still, I do believe in the saying "you are only as good as your word."  And I certainly believe our actions towards those who have no power to help us or harm us reveal our character.  Ironically, this woman works for the Oregon Department of Justice.

Back to the car I sold on Craigslist.

My prospective buyer test drove it, liked it and wanted to buy it for his daughter in college.  He negotiated me down from $4,800 to $4,650.  We shook hands, and he said he'd pick it up the next day after arranging financing.  But he didn't show.  He called and said it would be the next day.  Again, no show.  He calls and says he's had trouble with the bank but he'd get it the next day for sure.  That same night I got a better offer for my car, which I declined.

The next afternoon he arrived right when he said he would, cash in hand.  He drove away happy.  His daughter was happy.  And I was glad I kept my word.

Every Dollar Is An Investment

Before I start, credit where credit is due. Treating every dollar as an investment is the third step in the Motley Fool's 13 Steps to Investing Foolishly.

I read that article awhile ago, leaving the idea percolating in my head.  

In your life, you will only get so much money. That amount can be higher or lower based on a number of things in and out of your control.  But the amount is limited.  As your momma said, "Money doesn't go on trees."

While you might not think twice about buying $3.40 latte (for example), the implications of doing so loom large.  Especially when multiplied hundreds or thousands of time. That $3.40 can never again be spent on anything else.  Is it really worth it?

Another way of looking at it:  Each time you spend a dollar, you value the object purchased more than the dollar.  You also value the object purchased more than anything else you could potentially buy with that dollar.  And some things I'd rather spend money on other than lattes.  For example:

• Travelling around the world.
• Supporting an awesome cause.
• Growing my little garden.
• Doing anything with my friends.

A whole other category of ways to spend that $3.40 exists.  Ways that make my money make more money (reread that part carefully), also known as investing.  For example:

• Saving towards the down payment for a housem where I can build equity.  
• Paying off credit card debt, instead of owing the bank 14% or more.
• Funding my retirement account or otherwise investing in the stock market.

The first options are good and the second superior.  Investing wisely now means more money later to do the things I want. 

Back to the coffee.  Never buy a latte?  Not at all.  At times a latte has been the best money I've ever spent.  Do treat each dollar as an investment.  Consider and value each purchase.  In doing so, you will stretch your money much farther.  Some tips:

1. Make a Budget and Track Your Expenses:
   Know where your money goes. I estimated $250 a month for food on my first budget.  The reality? $400-$500!  Those Subway stops, Starbucks run, and nights out added up, without me knowing.
   
2. Find the Low Hanging Fruit: Once you know where your money goes, you can find ways to save.  Some are easy.  Pack a lunch to work instead of eating out.  Brew your own coffee instead of a daily latte.  The savings add up quick.  Consider the math:
   
   Home brewed coffee = $.25.  Latte = $3.40.  Weekly Savings = $16.75.
   
   Ask yourself what's really important to you and what's not.  Are you investing too much money in your car every month?  Sell it and buy a cheaper one.  Can you get by with just using Hulu?  Then cancel TV.
   
3. With Your Extra Money Pay Off Debt, Save, and Invest!
1. First of all, Debt is Dumb. If you have any that's not your home mortgage, pay it off! I've been debt free for about a year now, and the freedom feels great.    
   
2. Once that's done, sock money away.  Choose an amount and save it every month.  Once you see your accounts grow, you'll get addicted.  Seriously, it's fun!
   
3. Invest.  Make your money work for you.  Fully fund your retirement.  Open an IRA.  Check out a site like Prosper.  Build wealth!
   
   Read Dave Ramsey for the full scoop.  His baby step plan is great, and I did not do it justice here.
   
4. Spend Your Money on What Really Matters To You (In Cash):  
   Use some of your savings to do what you love.  I love travel, but not on Visa's dime.  Gardening and bike riding are also hobbies of mine.  I pay for them in cash.
   
   Get those season tickets you want.  Go to the ballet.  Buy that motorcycle.  Spend your money on the things that matter to you.  Find a cause you're passionate about and give.  

You work hard for your money.  Use it to live the kind of life you want, without going into debt, while building wealth.  It might sound impossible, but when you think about where your money goes, you'll be amazed at how far your money goes.  

  

Debt Sucks!!!

It's not sexy, adventerous, or particularly world-changing, but living well means knowing how to manage your money.

The enemy of your money is debt. It's everywhere on the news these days: foreclosures, bankruptcy, crushing credit card debt. Anyway you cut it debt is no good, but credit cards are particularly insidious with their late fees, endless minimum payments, and rocketing rates if you miss one payment even by one day.

You might have heard these numbers before but they are worth repeating:

• A typical credit card has an interest rate of about 13%. Try getting that in the stock market.
• At 13% it would take you about 11 years to pay off a $5,000 balance making on the minimum payments. You would pay nearly $2,000 in interest.
• The average American credit card debt is $9,200.

Including mortages, cars and student loans it all adds up. I have plenty of it myself with credit card debt and student loans. Last year I nearly became one of those credit card horror stories you hear about. I had about $10,000 on the card, but at a reasonable 5.99% percent. I was one day late on the payment and I called the company and begged the representative to accept my payment via phone. She assured me that my rate would not increase, a point I pressed her on repeatedly.

Much to my surprise then, when I recieved my next statement my rate had rocketed to 24.99%! There were nearly $200 in finance charges alone. Just in interest! I called the company right away and told them I was assured my rate would not change. To their credit (ha) they reviewed the phone call (yes, they really do record those) and changed my rate back, but had it stayed I would have been in trouble.

So if your crushed with debt what can you do? Aside from going on Deal or No Deal or calling one of those shady debt relief hotlines, it may seem dire. But there is hope! And its name is Dave Ramsey. Check him out right now. I love this guy, just love him. He has a radio show dealing with debt reduction and money management that airs here in Portland and around the nation, and he knows his stuff plain and simple.

To get out of debt he advocates the debt snowball. It works like this, list your debts from smallest to biggest and interest rates be darned. Cut back on ALL needless expenses; the gym, netflicks, Starbucks, and pay down the SMALLEST debt first. Free from that payment, you attack the next smallest amount until one by one your debts are gone. Using the debt snowball I've paid off $6,000 since January!

I love one of his sayings, "Live like no one else so you can live like no one else." That means eating rice and beans to get out of debt, so when you're debt free you can use all that extra income to really live. I keep thinking about the day I'm debt free and instead of giving my money to a big bank I can spend it as I see fit. Someday I'd like a house, a new car, to see the spots on the globe I've missed. I'd also like to support foundations like Global Giving more. Giving is something Ramsey is big on, he's not about accumulating money for money's sake.

So check out his website, stop living past your limits, and pay for things in cash! Leave me comments and let me know what you think.