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 A. Weeks III 952-432-2708 firstname.lastname@example.org
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.
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.
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.
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.
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" is the key here. How much money do you have available to
spend on this car?
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
(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!
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
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 A. Weeks III 952-432-2708 email@example.com
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...
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.
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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