Could it be a payment problem?

You’ve hunkered down. You’re eating .33 a box mac and cheese and you’re working two jobs but you still can’t make ends meet. You may have a payment problem.

This is the point where you need to look at your payments. Do you have a car payment? How much of your take home pay is that car payment? What could you do if you didn’t have that car payment? Even if you are upside down in your car, you may want to sell your car and get a loan from a credit union to cover the difference. If you owe $10,000 on your car, you could probably sell it for $7,000 and borrow $4,000 from the credit union. This will give you $1,000 to purchase a crappy car. Having the crappy car and paying off $4,000 over 2 years will cost you much less than trying to carry the $10,000 loan.

If it’s your mortgage that’s the problem, you need to seriously consider getting rid of the house. I know that’s not something you want to consider but if you have a $2,000 a month mortgage payment when you could rent for $1,000 a month, think how much better your budget would be if you had that extra $1,000 a month in your pocket. Think how fast you could get rid of the rest of your debt.

If you really want to get ahead, you’ll need to make some significant changes in your life. You cannot keep this debt cycle going. Remember that this is temporary. If you are struggling to make your payments and dig yourself out of debt, this may be an option for you.

Is the increase in personal savings temporary?

J.D. Roth over at Get Rich Slowly wrote an excellent post today about the fall and rise of personal savings. He cites a number of experts who believe that the increase in personal savings is just temporary. I am not an expert, but I did write my Master’s thesis on this topic. I respectfully disagree with those experts.

Where did we go wrong?

Back in the 1980’s all interest payments were deductible. Car loans, credit cards, student loans… you name it, you got to write it off. Our savings rate was pretty low and Congress, in its infinite wisdom decided that this could not go on forever. The Country was falling farther into debt. The 1986 Tax Act limited and eventually disallowed the deduction for most types of consumer debt, except mortgages. There were very generous limitations put in place on mortgage deductions. A homeowner could borrow up to $100,ooo on top of the original mortgage for things completely unrelated to the purchase or upkeep of the home and write off the interest.Members of Congress felt that these changes would discourage consumers from borrowing and increase savings rates.

As the value of homes rose in the 1990’s and the beginning of the new millennium, home equity loans and home equity lines of credit became all the rage. Consumers would rack up credit card and car loan debt then roll it into  their mortgage to get the tax deduction. Plus, home loans have been really inexpensive. Interest rates are still historically low. Consumers continued to spend as credit flowed freely. Did they cut up all those credit cards after paying off the balances? Of course not. Now, they had a shiny credit card with no balance.  Well, until the next statement came. Never fear, home equity is here! When the cards were maxed again, many consumers just refinanced again. It was a personal ATM machine.  Who needs savings when there are credit lines available to save the day?

Fast forward to 2008. Home prices start to decline. No more personal ATM machine. Lines of credit, including credit cards, start to dry up. Subconsciously, consumers started to become savers. Without the safety net provided by lines of credit and home equity, people turned back to personal savings. Most consumers realized that they could not keep spending more than they make.  They needed a real cushion. Cash in the bank.

I believe that as long as credit is more difficult to get, consumers will continue saving. They will think twice before getting a new car loan or another credit card. They will think twice before getting that big screen TV. Hopefully, we will return to the days of paying cash for things. Remember lay-a-way? It’s making a come back.

Are you saving more? Have you put off big purchases in order to save for them? Are you a little more leery about putting things on a credit card?

Self finance your next car purchase

I hate car loans. I’ve only had one in my life. My first two cars were purchased with cash. They were crappy, cheap cars, both of which I loved. My third car was a new 2002 Kia Spectra. I still own this car and I plan to drive it until it dies. I don’t think I’ll ever buy another new car because I hate having a car loan. I’m currently saving for my next “new-to-me” car.

Most people think I’m crazy when I talk about saving for a car. Car loans and leases are part of everyday life. Well, they don’t have to be. Being an accountant, I decided to run the numbers. It’s pretty amazing.

When you get a car loan, two things happen: you are paying interest to the loan holder and you are losing the interest income you could have gotten by putting the money into your bank account each month instead of forking it over to your loan company. These two forces are costing you a lot of money if you have a car loan.

I went to BankRate yesterday to check out loan rates. The average rate for a 5-year new car loan is 7.49%. Therefore, if you take out a $10,000 car loan, the monthly payment would be $200.33 a month and you would pay $2,019.92 in interest. Now, let’s take this one step further. What if you took the $200.33 a month a put it into a savings account at 1.5% (which is what my ING account is paying right now) for five years to save up the $10,000? Well, it wouldn’t take you five years. It would take you a little over four years to save up the money. If you put the money in for a full five years, you’d have $2,473.24 left over in your savings account. Not bad, right? Wait, it gets better.

What would happen if you kept putting $200.33 in savings each month, say for the next 40 years? Well, if you withdraw $10,000 every 5 years to purchase another car (hopefully you last a bit longer than that), in 40 years you would have purchased 8 cars for the same monthly payment you would have sent to the loan company. How much do you think would be left in the savings account at 1.5% interest?

$26,109.26. That’s right. Over $25,000. Remember, also, that we have the lowest savings interest rates this country has ever seen. What happens when interest rates go back to 4%? In 40 years, after purchasing 8 cars, you would still have $58,504.86!

Are you convinced that car loans just make you poor and self financing your car purchases can make you rich? Let’s look at one more scenario. What if you usually purchase $20,000 cars? Your monthly payment would be approximately $400.66, costing you $4,039.84 in interest. If you saved the money instead and purchased the car after you had saved for it, you would have $52,218.53 at the end of 40 years, even after you purchased 8 cars (one every 5 years), assuming 1.5% interest rate on the savings account. Raise that interest rate to 4%, and you’ll have saved $117,009.71. That’s a nice chunk of retirement savings right? I’d rather have the $117 grand than have a car loan. I can be patient. I can wait a bit longer to get another car. What do you think?

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