Advice - College Grad & Car



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-
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John A. Weeks III 952-432-2708 snipped-for-privacy@johnweeks.com
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wrote:

Where is $60 000 a year salary a low income? 10 year old two storey maintained houses in the town I grew up in are selling for 120 000 to 150 000 where the average full time hourly wage is $12.63.
That's the town I lived in before and will return to again shortly. $60 000 a year is almost unheard of there unless you have 20+ years expierence and managment and a degree or two.
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The Henchman wrote on [Tue, 29 May 2007 21:36:26 -0500]:

In many communities on the US coast, 60K is near poverty level.
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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.
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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?
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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.
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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
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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.
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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?
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wrote:>

I suggested a Mazda3 which would be a lower priced Volvo S40.
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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!
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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-
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John A. Weeks III 952-432-2708 snipped-for-privacy@johnweeks.com
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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...
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It appears you have ~2k per month of disposable income? Are you looking to finance the car or do away with a car payment?
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To the OP, are you sure the Volvo still has a 1 yr factory warranty? I ask because I have a 2004 s60, that has a 4yr, 50K mi. warranty. But there's a catch! My 2004 was purchased in June 2003 (they always release the cars the year before). My warranty is up in June 2007 (next month), not in 2008.
All financial matters aside, I love the s60 turbo! A word of warning though, Volvo built ALOT of leniency into its different models. I have noticed a larger than average difference in the upper-end T5 (turbo) models and the lower-end 1.9L. On the lower end you may be buying little more than the brand name.
Good luck to you.
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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.
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