Let the Government go bail out somebody else.  It’s too expensive for you.

I’ll admit that I haven’t followed all the ins and outs of this program but I have two good reasons for not doing so:

1. I have a 1995 Camry that I love.  My two eldest daughters used it to get to and from high-school. I still have a ten-year old at home and my ultimate goal is for her to use it to get to high-school 6 years from now.
2. As long as I have a pulse, I will do everything I can to stop anyone I know from buying a new car.  It’s a complete waste of money in most cases.

So why am I bothering to write about this? Well, the subject came up over the weekend.  My daughter is thinking about getting a new car and “taking advantage” of the “Cash for Clunkers” program (with my beloved Camry no less!).  I’m dead set against it.

This program stinks worse than the junk you find when you clean out your trunk for one major reason:

It forces you to get rid of a very inexpensive mode of transportation and burdens you with a very expensive form of transportation.

An automobile is a device we use to move around.  That’s it.  It’s not a social statement or a tool to increase your self-esteem.  It’s a hunk of metal that moves you.

That being said, the question is, how do you get from point A to point B in the safest manner with the least cost. Right?  Am I missing something?

Let’s look at my Camry to illustrate the “virtues” of this program.  You tell me where I’m wrong.

Let’s take the first scenario where you trade in your clunker, receive $4500 and buy a new car.  What does it cost you to own that new car over the next 7 years?

A 2009 Camry (SE) costs a hair over $23,000 if you buy a new one.  Assume you buy it after turning in an old clunker, drive it for 7 years and sell it.  In this case, here’s how your numbers add up:

So, if you buy the new car, it will cost you about $1700 per year to own.  This is without the high cost of insurance you must buy when you own a new car.  It also excludes the jacked up price you paid for the new car because everyone wants one right now and it excludes the maintenance cost.  (I could not find good data on what it costs to maintain a used car.)

Now, lets assume you pass on the cash and drive your clunker.  Here’s what it costs you to own it per year:

This means you could spend up to $1400 per year on repairs and still save money vs owning a new car.  This assumes the car is safe and reliable for your particular needs.  In my case, my 1995 gem is perfect.

By the way, this analysis ignores the low cost for insurance for the used car.  No question about it, the clunker is better than the cash.

Will the clunker last another 7 years? Maybe not.  So let’s consider another alternative.

If and when my good old 1995 Camry dies, I’ll replace it with a 2 or 3 year old car.  It’s still going to be much cheaper than using this program.  Take a look:

I used the Toyota site to determine the new car prices.  I used the Kelly Blue Book site to get residual values. Again, this excludes the higher cost for insuring the new car but the lower maintenance expense. Buying used saves you $600 every year.

The bottom line is even with the clunker cash, it doesn’t make sense to buy a new car.  So just remember this, friends don’t let friends buy new cars.

Additional Reading:

• Cash for Clunkers Taxable?
• Cash for Clunkers Tax Rules

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Now that we have paid off our car, we recognize that it won’t last forever, so we might as well continue making “payments” to ourselves so we can pay cash for the next one. Since we have been in car debt our entire marriage up to this point, we are used to living without that $300-$400 we were sending to banks and finance companies over the last decade. Continuing to make a “car payment” to savings shouldn’t be that painful.

The Car Replacement Fund

As usual, I turned to ING Direct (read my ING Direct review) to handle my car replacement fund. I could get a slightly better rate with other banks, but the convenience of creating additional “sub-accounts” at ING, and seeing all my targeted savings accounts in one view, is key to my motivation.

We labeled the new account “Car Replacement” and scheduled a monthly transfer from checking for the exact amount of our most recent car payment (roughly $300). In just one year we should have around $3,600, plus a little interest. In two years we should be up around $7,500 – well within the range of replacing our car.

When the time comes we will sell the car via private sale, and put the proceeds with the cash in the car replacement fund. Based on an a depreciation estimate for our current vehicle, and the projected savings balance in two years, that should give us a solid $15,000 to look for a newer, used vehicle.

Over time we will continue this trend of upgrading every few years, but always doing it with cash. The schedule isn’t that much different than someone financing a new car, paying it off over 60 months and then financing a new one. Well, except we won’t be financing it from a bank – we’ll be using our savings.

I’m lucky; I’m not a “car guy.” I don’t drool over showroom models, and with only one exception, I’ve never really cared what I drove (there was that whole Isuzu Rodeo leasing saga). To me a car represents four tires and sheet metal with an engine to get you from point A to point B. It says nothing about who I am, my status, or my personality. Fortunately, my wife feels the same way.

Thanks to this utilitarian approach to car ownership, we simply look for the best value, not the sexiest design. Give me a beat up exterior with a solid engine and low miles any day. And driving that car without dragging a payment makes it just that much sweeter.

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Five Maintenance Tips For Getting To 300,000 Miles

1. Keep your battery charged. This is especially important if you don’t drive your car that often. If you plan to let a vehicle sit for more than a couple weeks, you should invest in a “trickle charger,” or battery tender, which plugs into a regular household outlet and keeps your battery fully charged, automatically. I have a battery tender for my lawn tractor battery for winter months, and it guarantees a strong start in the spring.

2. Keep at least half a tank of gas in the car. Plenty of reasons not to let your car run on fumes, but one I had never considered before reading this article is that an empty gas tank is more prone to rust.  The rust can leach into your fuel and clog filters and fuel lines downstream. Rust could also eventually eat through your gas tank leaving a hole.  At today’s gas prices, who can afford for that to happen!

3. Don’t forget the tires. When you fill up your gas tank, or every couple weeks, whichever happens more frequently, be sure to check your tire pressure. If you drive an older vehicle like me you’ll need to pick up a tire gauge. Look at the label inside the door, or in your owner’s manual, to find the correct tire pressure for your specific model. Low tire pressure causes things like uneven wear on your tires and decreased gas mileage.

4. Change the oil. There is some debate in the frugal car owner world on whether or not you should change your oil as often as prescribed by car manufacturers (and those express oil-changing facilities). I’m no expert, but I think you should stay pretty close to the suggested schedule, only deviating a month or two, or a couple hundred miles. Peters agrees with me. Besides, a $30 oil change is much cheaper than a new engine, and if you are ultra frugal, you can even change your own oil!

5. Be kind to your clutch, and your brakes. If you drive a car with a manual transmission you know at some point you will likely have to replace the clutch. But you can extend the life of your clutch, and your brakes, by not riding either one for long periods of time, and by using your accelerator (or not using your accelerator) to coast a bit as traffic ebbs and flows.

Automobiles are becoming more and more expensive these days. In fact, next to buying a home, it is probably the largest single purchase most people will make in a lifetime. Use the steps above to increase the chances your vehicle will last well beyond your car loan, guaranteeing you many years of debt-free driving.

Post by Frugal Dad

Photo courtesy of dave 7

First of all, I think it is a mistake to create artificial demand for new cars by borrowing from taxpayers. I would much rather see the four billion dollars this program will likely cost be used to pay down some of our national debt, and let the creation of buyer’s incentives be left up to car manufacturers.

With unemployment still hovering around double digits (real unemployment is actually much higher), I doubt many people are going to rush out to buy a new car simply because the government is offering cash for clunkers. Environmental concerns aside, we’d be better off financially, continuing to drive our clunkers.

What if your so-called “clunker” is worth more than the value of the voucher? You might be able to get more from a straight-up trade in, or selling your vehicle private sale, than taking advantage of the cash for clunker offer. Of course, that option does not get the cars off the road, which is a close second objective of this bill–the first is to stimulate new car sales.

If you are on the fence about the cash for clunker program, perhaps the ever-increasing gas prices this summer will help change your mind. Do you think it is a coincidence prices are quickly approaching $3.00 per gallon?

This all reminds me of the $600 tax rebate checks, which had little effect (temporary, at best) on stimulating spending. When people are worried about losing their jobs, and already deep in debt, they are usually not in a spending mood. Any additional cash will be saved or used to pay down debt. I plan on keeping my clunkers, thank you very much.

Read more about the Cash for Clunkers program:

• Clunkers for Cash: Is It Even Worth It?
• 2009 Cash for Clunkers Program: Trade In Your Old Junker for Money
• Cash for Clunkers Taxable?
  

Post by Frugal Dad

Does Cruise Control Save Gas?

Because I am not the most mechanically inclined person alive, I turned to a popular, well-regarded source for automobile information.  The Internet.  Seriously, what can’t you learn about on the Web these days!  A quick search of Google yielded a few promising results, but one in particular stuck out.  Edmunds.com, the popular website for automotive consumers, had this to say in an article on tips for improving fuel efficiency:

“Using cruise control can improve your gas mileage by helping you maintain a steady speed, but only if you are driving on mostly flat roads. If you are driving in hilly terrain, using cruise control typically causes your vehicle to speed up faster (to maintain the preset speed) than it would if you were operating the accelerator yourself. Before you push that cruise control button, think about the terrain ahead.”

Makes sense to me.  In fact, one of the things I noticed when pulling the few hills I encountered along the way was the car held back a little on the downhill and lost momentum,  requiring more gas to pull up the hill that followed.  Had I disabled the cruise control I could have simply allowed the car to gain some speed and then coasted up the first half of the next hill.  Careful, a speeding ticket here will wipe out any potential savings!

Putting the Theory to the Test

Using a highly unscientific test, I filled up the gas tank and traveled my normal route maintaining about the same speed (65mph) all the way, but leaving the cruise control off.  When I arrived home I made a mental note of how much gas I had consumed–about 1/3 of a tank.  A week later I filled up again before setting off on another trip and set the cruise control to the same speed I had maintained manually.  When I returned home I had used just over 1/4 of a tank.

What does this prove? Well, without running more tests, I doubt very much, but it is interesting that I appeared to use up less gas when running with the cruise control on.  Of course there are several variables to consider such as traffic, weather (was I running the AC, or driving with windows down), wind conditions (a strong headwind could cause additional drag), speed (65mph was probably a little high for optimal fuel efficiency), tire condition, etc.  In the future I will probably take Edmund’s advice and use the cruise control feature during long, flat stretches of road.

I’d love to hear from someone who knows more about cars than I do.  Does using cruise control really reduce gas consumption?

Post by Frugal Dad

The Vehicle Buyback Pitch

The letters all have the same tone–because of my superior finance history, and the wise choice I made when selecting a vehicle that has held its value over time, I can bring it back to the dealer where I purchased the vehicle and drive off the lot with a new truck, no down payment required.  Sounds like a pretty sweet deal, doesn’t it?

What they don’t tell you in the body of the letter, but reserve for the tiny print in the footer of the letter, is that you also drive away with a brand new, 60-month loan.  How nice.  Assuming I had kept that truck, I would nearly have it paid off by now, so why would I want to obligate myself to another five years of car payments?

What’s In It for the Dealer?

Dealers are trying all they can to move new car inventory.  With the economic downturn, few people can afford the exorbitant costs of a new car, and more and more consumers are looking for used models.  The vehicle buyback program is the auto industry’s attempt to replace their new car inventory with more popular used models.  But there is a catch.  The offer sounds sweet because no down payment is required.  You simply hand over the keys, they pay off any remaining balance on your old car, and you drive off in a new car with the same monthly payment thanks to a longer financing term.

The problem is that your current car is probably worth significantly more than the value they quote for offsetting your down payment for the new model.  In other words, if you owe $3000 on your current car, but it is worth $12,000 in a private sale, you have $9,000 worth of “equity” in your vehicle.  The dealer might require a $2,000 down payment for new cars, but offer to waive that for you in lieu of your trade-in, and pay off your remaining $3,000 loan.  To the naked eye it sounds like a great deal, but if you simply sold your existing car for $12,000, paid off the loan yourself with the proceeds, you’d have $9,000 to play with, not the $5,000 (loan payoff plus down payment waiver) they are offering.

Of course, the dealer’s hope is that you take them up on the offer because they can turn around and sell your used car for $12,000 (or more) and pocket the profit themselves.  Bottom line?  If you like your car, and it is a reliable form of transportation, don’t let some gimmicky sales letter talk you into “trading up.” That is just dealer-speak for going deeper into debt for a longer period of time.

Post by Frugal Dad

Create a matching savings plan. To help Jr. raise money for a new car set up a plan to match any savings amount they contribute, dollar for dollar. If your kids are as enterprising as mine you may want to put a limit on this, else they could save $20,000 of their own money and expect a new Hummer when they turn 16! Agree to match the first $5,000 they earn and contribute to a dedicated “car fund” subaccount at ING Direct. Since they are not old enough to legally work until they reach 16, this will encourage them to get creative and find unique ways to earn money. Foster that entrepreneurial spirit by pointing out yards that need to be mowed, babies in need of sitting, and when Mom’s car needs a good washing.

Pretty soon your fifteen year-old could have one or two thousand dollars saved up towards a used car purchase.

Set spending limits. Fortunately, I’ve got a few years to plan for car purchases for teenagers. However, if I was in the market today I would probably use Edmunds.com to find a $5,000-$7,000 used Honda with a good maintenance record. I would not be overly concerned with how the exterior looked, unless there was significant body damage. I personally believe small dings and scratches give a car (and their driver) character.

Drive safely. Check Consumer Reports for safety ratings on used cars, and be sure to run a CarFax vehicle report to rule out any past accidents or significant claims related to body damage. It is also a good idea to have a mechanic look over a potential buy to advise if any repairs are needed and provide a rough estimate of the cost. This will give you some leverage in the price negotiation with the seller. Avoid small SUVs because of their propensity to rollover. Inexperienced drivers are more likely to over-correct steering and cause small, top-heavy SUVs to flip. Used, mid-size cars such as the Honda Civic and many older Saturn models make great buys for teenagers. They are generally safer, and more reliable than their sporty equivalents.

Sharing the operating expenses. Cars come with a lot of expenses. Gas, car insurance, maintenance, repairs, new tires, etc. can really add up. Come up with a realistic way for your kids to share in the expenses and encourage them to drive frugally. If parents agree to help with insurance costs, and any repairs, kids should pay for gasoline and oil changes. If your teenager doesn’t work, you will wind up paying for these anyway, but do so in a way that sets a budgeted amount for each category. If you give a teenager $50 a month for gas they better not “cruise” around after school burning up fuel or they will be catching the bus the last week of the month. This will subtly begin to instill in them the value of budgeting.

If you want to buy a used car for your kids then a no obligation car loan quote from one38.org could be the answer.

Photo by tomsaint11

Post by Frugal Dad

The Real Costs of Car Ownership

With gas prices climbing we are consumed by how much it costs to fill the tank, but owning a car includes additional expenses often not considered when accounting for the “auto” budget category:

• Car Insurance
• Depreciation
• Maintenance
• Repairs
• Loan Interest (if financed)

Excluding depreciation (since it doesn’t directly affect cash flow), let’s compare the costs of continuing to operate our current gas guzzler with the expense of financing a new car. Now, I realize that gas prices fluctuate, MPG ratings change for highway driving vs. city driving, etc, but for this example we will assume everything remains the same – gas prices, costs to operate, etc. for at least one year. Both calculations assume $150 in monthly maintenance/insurance costs, and the new car includes a $300 car loan payment.

As you can see, from a purely economic standpoint it does not make sense to finance a newer, more efficient car in the short term. Over time, as the cost of gas continues to increase, and the costs of ownership of the newer car come down (and the loan is paid off), the savings realized could be significant. However, it would take a lot of fill-ups at the pump to justify adding a car payment to your monthly budget.

The Costs of Being Green

One aspect I have failed to mention in my analysis is the environmental costs of continuing to operate a car with a lower MPG rating. As you can see from the example above, the “current car” requires about 320 gallons more fuel over the course of a year than the newer, more efficient model. Multiply that amount by several million drivers and you can easily see why demand for gas is so high, and why supply is spread so thin. For purposes of this example I have only used “real” numbers, but environmental costs are certainly something you should consider when making your own car-buying decision. It may cost you more in the short term, but in the long term you are saving money and helping the environment. As Kermit said, “It’s not easy being green,” or was that Al Gore?

Post by Frugal Dad

To impress people at a stop light. Seriously, think about the motivation for your last car purchase. Was safety your top priority? If you have kids it might have been. Chances are you were more impressed with the options package than the safety ratings. Were you concerned with the interest rate on the loan, or the early prepayment penalties? Probably not. Americans have had a love affair with their cars for many years. It is a concept that is perpetuated by auto manufacturers and dealers alike. Our vehicles have become an extension of ourselves, a reflection of our self-worth and an indication of our success. Some of us actually believe our cars make us better looking. I personally gave up on that idea a long time ago – I look just as ugly in a beautiful car as I do a beater!

I need a nice car for my job. Oh really? Says who? Real estate agents, contractors and other service professionals have fallen for this one. Let’s pretend I call two plumbers to come out to my home for a repair. One drives up in a brand new Hummer, the other a used pickup truck. Guess who is getting my business? You got it – give me the old pickup truck any day. Driving around in a flashy car might give your customers the idea you are successful, but it probably leaves them feeling like they are the ones paying for that ride by overpaying for your service.

I need a new car to save on gasoline. This is one of my personal favorites. I hear people all the time say, “I bought a new car because it had better gas mileage than my old gas guzzler.” Now, I can appreciate their concern for the environment. However, “green” concerns aside, there is no way you can justify financing a new automobile because of higher gas prices. How many thousands of miles a month would you have to drive to make up a $400 car payment in gasoline savings?

Bottom line, cars are simply a method of basic transportation…that’s all they are. They are assembled hunks of metal sitting on four tires designed for the purpose of transporting us safely from point A to point B. I doubt Henry Ford ever envisioned the kind of luxuries we see in today’s automobile – voice activated radio controls, heated leather seats, heads up displays, and backup cameras installed in bumpers. If families invested the $400 a month wasted on new cars into a good, growth stock mutual fund for 30 years they could easily retire millionaires. Hope you like the car!

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Cars go down in value like a rock (where do you think Chevy got the tagline?). New cars can lose as much as 30-40% of their original value in the first two years, leaving many people owing more than their car is worth (a position often referred to as being in an upside down car loan). If you find yourself in this upside down status chances are your situation could be greatly improved if you sell that “new” car and buy a $2,000-$3,000 used car to get back and forth to work.

The first step in selling an upside down car is to get a good valuation figure to work with. Kelley Blue Book (kbb.com) offers a great online service for looking up your used car’s value, taking into account mileage, options specific to your model, and the overall condition of your vehicle. Be honest with yourself when assessing the condition of your car. If your kid spilled grape juice all over the backseat upholstery don’t list the condition as excellent. You get the idea.

Always look for the “private sale” estimate. You can almost always get more out of your used car selling it to an individual than trading it in at a dealership, or selling it to an auto wholesaler/reseller such as CarMax. Advertise in your local credit union bulletin or newspaper, and stick a For Sale sign in your window when the vehicle is parked.

If you find yourself in the unfortunate position of being in an upside down car loan, consider financing the difference. This is one of the only times you will here me advocate taking on new debt when trying to become debt free. If your car is worth $15,000 and you owe $18,000, it’s much better to sell it and owe $3,000.

Yes, you still have a debt associated with a car without having the car, but better to owe $3,000 than $18,000. With decent credit you should be able to finance this difference at places like Lending Club, and if you don’t have any cash sitting around for another car, you may want to add $1,500-$2,000 to this figure to include your new (used) car.

Bottom line, quit sacrificing your financial future for the opportunity to impress people at a stop light. Seriously folks, a car is four tires and a hunk of metal. They were designed to transport us from one location to another. Despite popular opinion, they don’t make us look any better or make our lives any richer. Remember, Sam Walton, one of the richest men in America at the time of his death, still drove his 1979 pickup truck.

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