Six Years of Car Payments Sounds Like A Student Loan

I just saw a TV commercial where they were offering 0% financing on a new car for 72 months; that's right - six years. The rule of thumb is to never finance a car for more than three years or 36 months and keep the car for at least six years. If you do that and then continue the amount of the car payment into your savings account for three or four more years, you will be able to pay cash for your next car.

We all know that money is not free, so if there is cash back offer or 0%, pay cash and take the discount.

I don't know about you, but ten years to pay off my student loans seemed to take forever. I personally couldn't stand for paying for a car over a six year period.

The problem with debt is that you are pledging future earning to the banker. In simple terms, you are enslaved to your lender. Vehicles depreciate over time –a vehicle is not an investment. At least with your student loans, it's an investment that pays off.

When you are debt free, all the money you make is for you (and the government in taxes). Being free of debt liberates you to pursue your passions and work for less doing something you love.   When you can turn your passions into profit, you never have to "work" a day in your life.

Be careful of low monthly payments. Dave Ramsey says "poor people ask how much down and how much a month. Rich people just ask how much."  Here it to you becoming rich and debt free.

College Debt or a New Car?

I was talking with a colleague the other day about student loan debt. She shared back "Perhaps we are thinking about student loan debt in the wrong way. We will go into debt $20,000 - $40,000 or more for a new car and not think twice. But we start to panic when a student graduates with $20,000 - $40,000 in debt. The car will last 6-10 years, but your education will last a lifetime."

Now I don’t want you to go into debt to finance your college education if you don’t have to, but I want you to think of your college debt as an investment that will last a lifetime. In Chris Farrell’s article “College Degree Still Worth the Cost Despite the Risk”, he quotes a study at the Booking's Institute that shows the return on investment for a college degree has been about 15% a year for the past 60 years. Not a bad return if I do say so myself, given the stock market has only shown a 6.8% return on investment over the same time period.

However with college, like any investment, there is risk involved. If you are looking at college as just a way to get a higher paycheck, there is a risk that a job may not be waiting for you when you graduate. In fact, your financial return may differ based on your major. So the question is “How much should I borrow to finance my education?”

Think about it this way…what kind of car do you want to drive, and be able to afford 10 year after you graduate? Look at others in your future profession to see what they drive. If they are driving Mercedes, BMW, Audi and Lexus, then they have a relatively high income and therefore they can go into greater student debt based on their future earnings potential. However, if you see professionals in your chosen field driving used cars that just get them from point A to point B, your profession may have a lower earnings potential and you may not be able to repay high students loans easily.

My suggestion is not to borrow any more money than 1-2 times the cost of the car driven by the professionals in your field 10 years after they graduated from college. Yes, I know, many who are 10 years out of college are driving a mini-van, SUV or crossover to haul the kids around, but is it a new loaded car or used-vehicle? This rule of thumb will help you keep your student loans to a reasonable amount based on your future earning potential.

There are many different calculators you can use to see what your earning potential will be, the likelihood of employment, what your take-home pay will be, cost of living, etc., but I like looking at cars. Let me know what you think this 'calculator' to estimate a reasonable amount of student loan debt.

So Many Priorities, Never Enough Money

80-10-10: That is the budget we strive to achieve in our household. Live on 80%, save 10%, give 10% of our time, talents and treasure. We are not there yet but every year we get closer. Coming to the end of this year and heading into the next, we find that we have had, and will continue to have, more priority family fun than we originally budgeted for. How do we balance our priorities and our income?

• Want to pay for it in cash and continue to keep our credit card balance at zero each month? -Yes
• Want to take out of our savings or reduce our savings rate? -No
• Consider backing down on our giving? -No.

Ideally, we should bring our life style within the limits of that 80%. Selling off an asset, such as an extra automobile, is one option we discussed. We have three vehicles (car, truck, van) between two drivers. For the most part, the truck and the van sit in the garage as we typically car pool. Why is it hard to part with assets we seldom use even though they cost us money? Even if a vehicle is paid for, it still costs you in maintenance, license, insurance and depreciation.

It’s hard. Yes, a van is handy at times and we love ‘Chitty’, with her ‘Truly Scrumptious’ navigation voice and leather, heated seats, back-up camera and warning sounds when her bumper gets close to another object – which makes parking in tight spots such a breeze. We named her ‘Chitty-Chitty-Bang-Bang’ because with her laser speed control, we felt she practically drove herself.

To balance our budget, do we:

Take from savings? Take from giving? Carry a credit card balance? Sell Chitty? Change spending habits elsewhere?

Whether you are striving to live on 90% of your income and save 10%, or aiming for the 80-10-10 split --how do you keep an every changing lifestyle balanced and in budget?  What recommendations do you have?  Thank you for sharing.

The Rising Cost of Auto Insurance

It seems like every time I turn on the television, I am bombarded with insurance commercials. I see Flow offering discounts for Progressive, a gecko advertising for Geico, Mayhem causing trouble -advertising for All State Insurance and countless others. Most of the insurance companies are advertising their low rates; others make their distinction on service.

Rates seem to continue to increase and it may not be my imagination. In the November 2011 issue if Smart Money, they state that auto insurance has increased 10% from 2008-2010, siting increases are due to the increased costs to repair a vehicle, soaring medical bills, increased probability of being in an accident, and increased number of uninsured motorist (now estimated at 16%).

So what is a person to do, to make sure they are covered with the correct amount of coverage and still keep their costs low? Here are some suggestions:

• Keep an eye on your credit score. Most insurance companies use your credit score to help estimate your risk and therefore your rate. By keeping your credit score high, you can keep your insurance rates low.

• Have the correct amount of coverage. Your state has a minimum coverage you must have. If you don't have enough insurance you could be putting other assets at risk if you get sued. By having too much insurance, you could be wasting your money.

• Shop around for different rates. It takes a little time, but may pay big dividends in savings to switch companies.

• Look at the deductible on your insurance. The higher your deductible, the more money you will have to pay out if you are in an accident, and the less the insurance company has to pay out.

• You could also give up some of your privacy and have your driving habits monitored. Progressive Insurance has "Snapshot" which monitors your driving habits. Your premium will be set on how you drive.

We all need to have insurance and the correct amount of insurance. Shop around on-line and/or talk to your insurance agent to make sure you are covered.

Saving $$$ on Gas

Summer is officially here and you feel the itch to hit the road and explore. What a relief to see gas prices take a dip at the height of summer vacation time! Other effective ways to save at the pump:

• Check online sites like gaspricewatch.com, gasprices.mapquest.com or gasbuddy.com for the most competitive prices.
• Watch your tire pressure. Underinflated tires of just 3 PSI (pounds per square inch) can degrade your miles per gallon by 1%.
• Keep your car engine will maintained. A properly maintained vehicle will run more efficiently and give you better mileage, which saves you money in gas.
• Get rid of unnecessary weight in your car. The heavier the vehicle, the more energy it takes to move it on the road.
• Park in the shade. Gasoline evaporates out of your tank and it does so faster when parked directly in the sun - winter or summer.
• Drive conservatively and at a steady speed. The greater your speed, the less miles per gallon you will average. Better yet, bike it. :)  

Save Energy -Save $$$

If you have a primary residence in Iowa and are served by MidAmerican Energy, then you are most likely eligible for a free energy inspection audit. We had our EnergyAdvantage® HomeCheck this past week. Not only was it FREE, but they made energy-saving improvements to our home during the audit. Outcome of the visit:

• A FREE report of the condition of our home's insulation, heating and cooling efficiency, water heating equipment and windows
• Replaced bulbs with FREE energy-efficient light bulbs
• Swapped out two FREE shower heads with energy-saving, massaging shower heads
• Installed a FREE energy-saving faucet aerator on the guest bathroom sink
• Provided us with a 70% rebate for additional insulation in the attic (value of $750!)

There were a number of other things that they would have done, had our home needed it (such as water pipe insulation, water heater insulation blankets and programmable thermostats).

Check with your energy provider to see if they are offering the same service. Not only were the upgrades free, but they will help us save money on our future energy bills, the updates conserve energy and reduce the demand on natural resources needed to produce energy, reducing our carbon footprint.

Home Maintenance

Last week, a broken kitchen faucet led to an accidental remodel of our first floor bathroom. We love home improvement and a trip to Lowell’s is like a visit to the candy shop. The bathroom remodel was part joy and part good ongoing upkeep.

Home repairs play an important part in protecting your investment. Doing it yourself can be a fun challenge and a source of pride. In taking on the task, it is important to do your homework. Taking advantage of the free classes at your local home improvement store is a great way to build skill and befriend an expert. We believe we cut our remodeling costs by more than half in doing it ourselves and are very happy with the outcome.

‘Labor of love’ or just plain ‘labor’, doing it yourself is a great way to keep your maintenance cost low and your home value up.