Advice - College Grad & Car

Hi everyone - I'm 22, graduated from school 6 months ago, and have done a decent job handling my finances so far. Recent car problems, however, have thrown a fork in things and I would appreciate any advice. Here's my situation:

Salary: 60k/yr with stable company Rent: 300/mo (could change to 400-500 in fall) Investments: Invest up to 4% company match Employee stock program: Invest 1% Roth IRA: Was able to save 4k for past tax year and already have 2k in for current tax year Student Loan 1: 6500 @ 7.65% Student Loan 2: 18000 @ 4.75% (will drop to 3.25% in a few months)

Problem: Current car just died and is beyond repair - I will not get anything for a trade in.

Options: (1) Purchase high mile (100k+ miles) Honda Accord for around $6-10k from dealer or private (2) Purchase 2004 Volvo S40 w/ 30k miles and still 1 year of factory warranty from a colleague for $17,000. My thought here is that I know the owner - it has recently had exhaustive 30,000 mile checkup and had no problems, car will probably last me a long time and have a higher resale value

My worry with option (1) is that I could get stuck in a similar situation where engine goes or something and I will be pumping enough money in the car that it really wouldn't be much of a difference from option (2). And the car in option (2) is REALLY nice.

Thank you for suggestions!

Reply to
teaks
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I'd need to see a monthly budget before I can give an answer. My initial reaction is that #2 is far more than you can spend on a $60K income. If you were making $100K and had no student loans, then #2 is high but doable. At $60K, you have no business with an ultra-luxury vehicle, not unless you were late in life and had a paid for house and no other debt. The way it looks to me, the #1 is even a bit high priced, and #2 is far more debt than you should take on. But if you can do a budget and show me the money, then we can talk more.

-john-

Reply to
John A. Weeks III

I will agree with you that you have done a decent job handling your finances. Most people your age don't even know what an IRA is...

If you can afford it, I'd say you should go for (2) for the reasons you cite. In addition to those reasons, you will almost surely spend much less on repairs for the newer car, and that cost difference will persist for the five or so years that the older car will last. So the newer car might not cost that much more to own.

The real question is whether you can come up with the $17K--which in turn depends on your cash flow. You haven't told us what that is.

I am guessing that you will want to finance the car, and that you will be able to get a loan for less than the 7.65% rate you're paying on your $6500 student loan--let's say 7% for argument. In that case, your monthly interest charges will be (6500 * 7.65% + 17000 * 7% + 1800 * 3.25%)/12, which is in the neighborhood of $150. Of course you need to retire those loans eventually, and there's a minimum payment for each.

Some people will suggest trying to pay back the loans more quickly than you have to. I think that might be wise for the 7.65% loan, but not the 3.25% one. More generally, there are two questions:

1) Do you need the cash now, or can you forego it until later? 2) Is the interest rate on the loan greater than you can make by investing the money?

If the answer to (1) is that you need the cash now, then you shouldn't prepay the loan :-)

If you can make more by investing the money than by prepaying, then you should invest. Of course, I can't think of any investment that will be guaranteed to make more than 7.65%, but it has been easy to beat that benchmark *over the long term* in the past and there is no obvious reason to believe that it will not be possible in the future. And you're 22--you have the time to let the bumps even out.

So if I knew at your age what I know now, what I'd do is buy the Volvo, financing it if necessary, and hunting for a good finance rate. I'd start with my neighborhood credit union. Then I would pay off those loans as slowly as possible, socking away any extra money first in an emergency fund, and later in a broadly diversified, all-equity mutual fund or funds (alternatives that I personally find attractive include VHGEX or a combination of, say, VFWIX and VTSMX).

Please note that this suggestion reflects my personal preferences. As my preferences about just about everything are in the minority, you should take it with a very large grain of salt. In particular, please do not treat it as advice. I am not saying what I think you should do, beyond treating it as a statement that one person whom you've never met, and whose qualifications you have no reason to believe, suggested a particular avenue of exploration. So if that avenue looks promising, you are welcome to check out the facts for yourself, form your own opinion, and act on it.

Reply to
Andrew Koenig

A Volvo S40 is hardly an ultra-luxury vehicle.

Reply to
Andrew Koenig

teaks wrote on [Mon, 28 May 2007 12:04:50 -0500]:

How about option 3? Buy a lower mileage car or a new car for less than

17K?
Reply to
Justin

OK so you make $5000 per month and spend: $300 on rent. $200 on investements $ 50 on stock program $330 on IRA $250? on loan payments (I'm guessing here) $600? on taxes.

This still leaves over $3000 a month. What do you do with the rest of your money? (I expect food and clothing cost under a grand, so that still leaves $2K per month.)

That sounds quite pricey. (Note a 1997 Accord with 100K miles should be well under $5K, maybe as little as $3K for a 4-door.)

$17K is way too much for the car. A better price would be around $14.5.

If you can pay cash for the Volvo and can talk your colleague down $2-3K, then go for it. Otherwise, I suggest you keep looking. Find yourself a 5 year old car with around 60-70K miles for under $5K, and pay cash.

"Pay cash" is the key here. How much money do you have available to spend on this car?

Reply to
Daniel T.

A Volvo S40 is nowhere near an ultra luxury vechile and in fact it might fit the bill. I plan on owning a Saab or Volvo by the time I'm 35 (I'm 31 now) and I make half of what the original poster makes. That means my next car purchase will be a Saab 9-3 or Volvo S40 or an Acura EL. If you drive far for work, are in sales, travel alot, the Volvo will make your life easier IMHO.

The Volvo S40 and V50 are entry level Volvo's and they compete quite nicely with American Small and Mid sized cars.

Volvo maintenance is higher than American or Japanese but they last longer on average and major repairs are less frequent. You can expect over 200 000 miles as opposed to 150 000 miles on American vechiles before big time repair costs. Let's say you need that car for 6 years, then does $3000 per year for buying a car (before interest and taxes) make sense to you? It may for some people. One note of caution. That S40 might be a 5 cylinder so make sure you research any issues with Volvo 5 in-line cylinders. Volvo insurance might not be higher than Honda insurance as Hondas are stolen frequently for parts.

$60 000 may be a high salary or a low salary depending on where you live. If I were in your shoes, and I have no debt and a savings rate of 25% of take home income, renter, I would be on heat Volvo and know that the next 8 years of my transportation needs were going to be reliable and comfortable. I would plan for 275000 Km's on that car and I'm in Canada so we get lotsa snow and salt and ice on the road. I would pay half in cash and finance the other half.

Check your local Ford dealer to see if they have qualified Volvo mechanics. You may save $25 an hour shop rate.

And on the Topic of Ford Imports A cheaper version of your Volvo might be the Mazda3. They'll have similar components and engineering.

Again we don't know your budget so my opinion might not mean much here.

Reply to
The Henchman

What if the less than $17000 new car costs more in insurance, has worse reliability track record and poorer fuel consumption? Since he is looking at mid-sized cars would a New Fusion, malibu or Sebring be as good value in longevity and reliability and driving comfort as the S40? And you keep this less than $17000 car for say 4 years 6 years 8 years?

We don't know his driving habits yet or his monthly budget.

Reply to
The Henchman

I suggested a Mazda3 which would be a lower priced Volvo S40.

Reply to
The Henchman

Open up and look for options 3, 4 and 5. For 17k you could probably buy a new Honda which would last 10-15-20 years. For half that, you should be able to find a Honda with less than 100k miles.

look for option 5: a car which costs 2k which you do not have finance... pull the 2k IRA payments out if you have to for 2007. Don't go into debt beyond your means for a short term problem.

If you finance the car, my suggestion is take the highest payment possible (like 2 years instead of 3 or 4 yr financing).

If you post a budget of where you spend 4k per month take home, then the advice received might change.

Reply to
jIM

Thanks for the advice so far, a little more info...

I'm currently taking home around 3k/month after all deductions (401k, stock plan, tax, health, etc.) Rent + utilities is currently $300/mo but will likely increase to $400-500/mo in 6 months. I don't spend very much on food or clothes, definitely less than $500/mo. I am single and don't have a mortgage.

My thoughts on the car situation: (1) If I purchase lets say a Honda Accord w/ 100k+ miles at around $6k, how much longer until I start getting hit with repair costs? How long could I expect to drive the vehicle before it is basically worth nothing and I am in the same boat I'm currently in. (2) With Volvo I still have a full year of bumper to bumper warranty. Even after that, the car has relatively low miles. If I decide to go back to school in 3 or 4 years (which I'm considering) I can sell the car (assuming resell value is not horrible) and probably come out okay. (3) I realize the Volvo route may be a little more money over the course of 4 or 6 years (but it is a lot more bang for the buck). I know part of this is a personal decision, I just want to make sure I understand the economics before I make my decision.

Thanks for any more opinions!

Reply to
teaks

The Henchman wrote on [Mon, 28 May 2007 16:52:03 -0500]:

As far as I can tell the S40 is a compact sedan. Not midsize.

A brand new corolla starts at under 13K

Reply to
Justin

I'm in Canada so I'm having a bit of trouble converting dollars. Yes the S40 is a compact not a mid sized. My mistake.

To me Corollas are tough to buy because Toyota dealerships here will not negotiate on a car and they come with option packages I don't care for and their dealer garages charge a higher labour rate, although I doubt you'll be repairing as much so it may not be a factor.

But they have long reliability. Also it won't give you the same features or driving comfort or safety features as the Volvo but they hold their resale and you can treat it like an asset almost. Also Corollas are tough to find used with low miles so it's actually good value at times to buy them new.

Also in Canada if anyone else is following from here the Corolla is built here and it qualifies I believe for the Federal gas miser rebate.

Reply to
The Henchman

Anything that cost $17K used is an ultra-luxury for someone who simply cannot afford it. You should never spend more than

1/5 of your annual take-home pay on a vehicle. Anything else is a luxury, and unless you have the cash, you will simply end up broke and in debt like most of the rest of the people in the USA. If that is your goal, buying fabulously expensive cars will do that very quick.

Never make the mistake of thinking that something is OK just because a lot of other people do it.

-john-

Reply to
John A. Weeks III

If you can pay cash for it, and have no debt, then I have no problem with you buying whatever you want. But in this case, we have someone who is a relatively low income earner that is waist deep in debt. Such a person should spend no more than 1/5 of their annual take home pay on a car. That means an upper limit of about $9800 for a car for this poster. Anything more than that IS a luxury for this guy, one that will lead to many years of being broke and in debt. That may be the plan for most Americans, but I wouldn't suggest it myself.

-john-

Reply to
John A. Weeks III

I have to disagree with you on this one. The cost of a car is amortized over its lifetime, which means that if you spend 1/5, 1/4, or even 1/3 of your annual take-home pay on a car, it won't make that much of a difference in the long run. For that matter, fuel, insurance, and maintenance will wind up costing substantially more than the car itself, which makes the car's actual cost that much less of an issue.

We can look at the financial cost this way: Assume an 8%/year opportunity cost for the money (that is, you're spending money, regardless of whether you borrow it, that you might have earned an average of 8% by investing instead), which works out to $1,360/year. On top of that, assume that the car depreciates to zero over 10 years, which works out to another $1,700/year. That's $3,060/year.

Next, you need insurance. Our original poster is 25 years old, so insurance is going to be expensive--let's figure $1,500/year. Assume 15,000 miles/year, and that the car gets 25 miles/gallon (about right for a Volvo S40). At $3/gallon, that's another $1,800. Finally, let's figure $1,000/year for maintenance. It will be less in the early years, but eventually the car will start needing tires and other things will break from time to time.

So here's how it adds up:

1,360 Opportunity cost 1,700 Depreciation 1,500 Insurance 1,800 Fuel 1,000 Mainenance

That's a total of $7,360/year, or a little over $600/month.

Now, suppose that instead of spending $17,000 on a car, we were able to spend $7,000 on a older used car. The opportunity cost would then go down to $560. The car, being older, would not last as long, so let's amortize it over 5 years instead of 10, for a total depreciation of $1,400/year. Fuel would presumably cost the same. Insurance would cost less, and maintenance would cost more, so let's assume they cancel. The cost would therefore be

560 Opportunity cost 1,400 Depreciation 4,300 Insurance, fuel, maintenance (same as before)

The total is now $6260/year, or about $520/month.

So a 58% decrease in the purchase price of the car results in a 15% decrease in total cost. It's just not that big a deal in the long run.

Reply to
Andrew Koenig

One should be doing routine maintenance on a car all through its life. A properly maintained car with 100,000 miles should be just about like a new car, other than the smell, if it is taken care of.

I have a friend that bought a Camry with 124,000 on it. The car currently has 262,000 on it. I wouldn't hesitate to take that vehicle on a cross country trip. In fact, a few months ago, we ran from Minneapolis to North Carolina for the weekend.

I have a Ford Ranger that just turned over 194,000. Up until now, I had been trading off at 60,000. Given that this rig cost a very expensive $16,000, trading 3 times meant that I would have already gone through $48,000 worth of new vehicle, and be well into my 4th new Ranger. As it is, I have spent about $4,000 in maintenance, so I have $48,000 worth of usage for only $20,000 in cash. At 130,000, I had all the rubber bushings and suspension control arms replaced. As a result, it still has a very tight front end and it drives like a new vehicle.

I would put forth that you will never spend more fixing a well maintained used car than what you will pay in payments on a new car.

As far as your 2nd question, once a car gets above 65,000 miles, it essentially has no value. You will get screwed on any trade in. You can do OK in private sales, but people will always think that something major is just about to go wrong. As a result, you are far better economically to run the wheels off of the thing.

-john-

Reply to
John A. Weeks III

So you still haven't explained where that left over $2K per month goes. How much non-investment cash do you have available to you?

I say one more time, both cars are overpriced by a good $2-3K.

For the price of the Volvo, you can buy a $5K car (and throw it away!) every 2 years. A $5K car will likely last more than 2 years though.

However, if you can afford the cost and really want the car then I say go for it. You still haven't said if you can afford the cost. Do you have $17K cash available to buy the Volvo with? Do you at least have the $14-15K the car is really worth?

If you can't buy it cash, don't buy it. If you can, and you want the status it brings (over a $5K car) then bite the bullet and buy it.

Just my opinion of course...

Reply to
Daniel T.

You have said this a couple of times now. The median *family* income in the US is just over $40K, and the OP *individually* makes $60K yet you call him a "low earner". I don't understand that, could you explain?

Also, why 1/5 of income? Where did that number come from? What about families who's income is $40K and needs two cars?

Reply to
Daniel T.

It appears you have ~2k per month of disposable income? Are you looking to finance the car or do away with a car payment?

Reply to
jIM

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