Wednesday, August 24, 2016

Your Vehicle Is Now Worthless - Part 2

In the first article I mentioned new vehicle purchases are now increasingly riskier with each year that passes. You won't become a millionaire if you keep doing foolish things with your money.

Remember when I showed you millionaires don't even buy new cars like the average person? Despite all their hard earned financial success millionaires only purchase 5.4% of all new vehicles despite representing 8.2% of all households.  You'd think they'd represent a similar ratio considering they have extra cash to spend. Nope. They know buying cars are poor uses of cash. They instead prefer to keep their money working for them through investments.

But by reading this article you're about to gift yourself a 2nd chance. It's akin to the heart being shocked back to life, and you can take that miraculous first breath again. A rare opportunity you can't afford to squander.

For the average person here's the gist of their financial plans. They'll either start saving for retirement tomorrow because you know why bother today. Or they hope a decision made 15 years to contribute 4% to their 401k  in high cost mutual funds is going to be enough to get them through retirement. Did I mention I do FREE reviews of your current investment portfolio? Meanwhile they go out and finance a new vehicle loaded up with about $28k in debt on a hunk of metal that depreciates faster than Usain Bolt. All the while parading it around town to show off to their friends and family. I know it sounds harsh, but it doesn't have to be that way.

Either way that's not enough. You have to play offense with your SAVINGS, INVESTING, and SPENDING!!!

Fortunately for you there is still time to get out from your vehicular financial mess. Because Americans as a whole are absolutely horrible when it comes to using debt to finance their rides. Considering over 90% of people borrow to buy a car that is killing them both physically and financially it's a huge issue. And did I mention the $1 trillion worth of vehicle debt outstanding? Priceless.

So how does the average person deal with a worthless vehicle?

There are a few ways ranging from what might seem extreme to I guess less extreme(all depends on your perception).  Also I should note living in a city gives you advantages your countryside residing brethren don't have.

If you purchased a new vehicle
Since the mistake is already made we might as well figure out a way to fix it. One way to deal with this is you sell your car if it's less than 1 year old. Yep you read that right. Sell that new car while you can before depreciation takes it's toll.

The first 3 years are when vehicles depreciate the fastest. So before father time takes more big wet bites dump that money loser while you still can.  Each year newer cars will depreciate faster as we get closer to autonomous cars replacing them. So get ahead of the game here. Just take a look at this example for standard depreciation.

Vehicle Purchase Price$30,000.00
Depreciation rateDeprecation AmtCar Value
Year 120.00%$6,000.00$24,000.00
Year 217.50%$4,200.00$19,800.00
Year 316.00%$3,168.00$16,632.00
Year 412.00%$1,995.84$14,636.16
Year 510.00%$1,463.62$13,172.54
Year 69.00%$1,185.53$11,987.02
Year 78.00%$958.96$11,028.05
Year 87.00%$771.96$10,256.09
Year 96.00%$615.37$9,640.72
Year 105.50%$530.24$9,110.48

Yep you read that right. The first 3 years will wipe out 44.5% of your cars value.

Of course if you recently bought a vehicle the less difficult path is to keep the car, but for at least 7-10 years. The reason you keep it that long is you have to do what I call "working off the depreciation". Plus you might as well get all the best years out of the car before any major repairs are need. And YOU MUST PAY IT OFF EARLY! Why pay more money in interest on something that loses it's value each day?   If you took out a loan for 5 years you pay that blood sucking debt off in 2.5 years or sooner. NO EXCEPTIONS. If you can't afford to pay it off early then this is when you deserve a boot kick to the rear since you really couldn't afford the vehicle in the first place.

If you have a used vehicle
If you already have purchased a used vehicles that's at least 3 years old there is not as much concern. If you purchased a vehicle at least 5-7 years old you have even less to worry about. You've lessened the devastating financial impact of car buying already. You hold onto that old clunker for as long as you can. If you need to update your ride buy another used vehicle. I'd recommend any purchases from here on out at minimum must be 5 years old, and MUST NOT BE FINANCED.  Of course the older the better since you'll have less money on the line.

You use a bicycle*
If you don't have a bicycle get one TODAY. Wait..What!?!? What does having a bicycle have to do with any of this?  A lot.  It will be your new primary form of transportation along with public transport if it's available to you.  If you have one sitting around then dust it off and start using it.  It will not only be cheaper to operate, but it will get you everywhere you need to. Outfit it with a couple of baskets/racks/trailer, and you can carry just about everything you'll need on a daily basis.

I've already explained the financial and health benefits in past articles. Bikes are way cheaper to operate than cars, plus they give your body the exercise it craves. With a bicycle as your new form of transport you won't have to worry about what kind of car you have. Head down to your local bike shop and check out your options. Explain your budget and needs and I guarantee you'll find a great new ride.

Let's just make one quick comparison for why it's better to use a bike over a car in financial terms using tire changes.  A bike used heavily everyday will need tire changes once a year for good measure.  The bicycle tire change will probably cost you $50, and that's for high quality tires.

For car tires it's about every 4 years. A very cheap car tire change will cost you $500 for rubber that's almost useless. You can change your bicycle tires 10 times in 4 years before it costs more than the car tires.   After four years you'll be way ahead on tire costs alone, and that doesn't even factor in how great of shape you'll be in from all that awesome exercise and fresh air.

People at all levels of financial means need to take these steps IMMEDIATELY. 

1. Start using your bike as much as you can.  It might take some easing into, but the faster you get out there the better.  Use it with your local public transportation options(for distances over 5 miles) and you'll find not one bit of inconvenience. You will eventually wonder how you used to deal with catching the same traffic light 3 times as you breeze by everyone else with fresh air on your skin. Plus you get awesome exercise.

2. Start using car purchases to your advantage. Buy used ones. The older the better if they are in good shape. Also make these purchases infrequent because each purchase entails transaction fees in the form of taxes and DMV registration which you need to minimize. Pay in cash, not with debt. Of course you can avoid this altogether by foregoing a vehicle.

3. If you haven't gotten the message sell your vehicle.  If you live in a city you probably don't need it. Between a good bicycle, public transport, ride-sharing, and vehicle sharing services you can get away completely with not having a car. I know people that never had a car, and live a perfectly normal life. Use the proceeds to pay off any debt you have including your home. No debt? Then immediately get those funds invested where they work for you, and not the other way around.

Follow any of these strategies to help minimize your losses for the impending worthlessness of your vehicle. Even without autonomous driving on the horizon these are bare minimum strategies you should be taking to reducing your vehicle costs.

In Part 3 of this series I'll take a look at some investing options in the self-driving vehicle space.

*I find the bicycle strategy the least extreme if you're wondering :).

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