Beating Broke

Personal Finance from the Broke Perspective

Cash Back Rebate or 0% Financing?

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Let me begin by saying that I don’t see any real value in buying a car new.  You’d be better off waiting a year or two and buying the same model after the initial devaluation happens.  If you insist, however, and you have to choose between a cash back rebate and 0% financing, here’s how it breaks down.

I’m taking liberties here and using a few assumptions.  The first, and most important, assumption is that you’ll use the cash back rebate as an addition to your down payment.  I’m also assuming a 5 year loan because that’s pretty standard for a new car loan.  I’m assuming that you’re going to use the cash back rebate as an addition to your down payment, because you’d be an idiot not to.  No really.  Why would you buy a $20,000-$50,000 car that will lose at least 10% of it’s value the second you sign the dotted line and then also take the $2500 (Or however much) in cash?  Also, if you do take it in cash, will you drop me a line?  I’ve got some ocean front property in Oklahoma to sell you.

Assumptions aside, the deciding factor here is the interest rate.  The lower the interest rate if you take the cash back, the better that side looks.  Somewhere around 5.8% they are about even over the life of the loan.  Of course, if you make extra payments that will change things as well.  If you can get a rate of 4% or so, the difference is pretty good and you should use the cash back and run with it.  At something like 8%, however, you’d be pretty silly to not take the 0% financing.

In the end, there are several variables that need to be taken into account such as trade in and sales tax.  And this is far from a scientific study I did here, nor is it meant to detail exactly how to buy a car.  What I would suggest is using a loan amortization calculator and punching in the numbers.  For this little experiment, I used a calculator built for just such a calculation at interest.com.

Avoiding Reactive Personal Finance

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Just what is reactive personal finance?  It’s the management of your personal finance in reaction to events or situations as opposed to the management of personal finance in anticipation of events or situations.

The best example of this is a budget.  A budget is built and held to in anticipation of events in your financial life.  You know that things like your electric bill and water bill are going to be coming and roughly how much they  will be.  That allows you to budget for them and set aside money to pay for them with.  A budget is a great tool in avoiding reactive personal finance.

Why do we need to avoid reactive personal finance?  Because reactive personal finance is disruptive.  You are managing and spending your money in reaction to the events that are happening.  Doing so can cause you to quickly lose control of your finances and find yourself in a downward spiral of poor management choices and, eventually, it can lead to you being broke.

Some examples of events that can cause you to become reactive.  Medical emergencies, blown tires, unexpected social events, and even bills that are larger than they normally are.  Any thing that is unexpected can cause you to spend in a reactive manner.  And when you have events like that, it can often lead to larger problems, like overspending on luxury items to make you feel better.

How do you avoid reactive personal finance?  No plan is foolproof, so it’s not really completely possible.  However, you can make the odds of it happening be cut drastically.  How?  An emergency fund and a bit of willpower.  The emergency fund will give you the available spending power to cover any emergencies that would normally make you spend in a reactive manner.  Instead of trying to react and borrow from somewhere else to pay for the emergency, you can just pay from the emergency fund and not need to react any further.  The willpower comes in where the spending opportunity isn’t an emergency.  You have to have the willpower to avoid last minute and spontaneous spending that could drain your funds and cause you to become reactive when you no longer have the money to pay bills or buy necessities.

The best laid plans often go askew.  But, building an emergency fund and strengthening your resolve can go miles towards avoiding reactive finance and potential disaster.

Adjustments to Make (Price Checking)

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I’m making this post in part to share with you, but also to make a reminder for myself of the things that I need to look into.  One of the mistakes that I and many other people make is not shopping around enough.  While you may have found the best deal when you bought something, if you are still paying for it, you might not be getting the best deal still.

The most obvious place where this could be true is with insurance.  I’ve been with my insurance company for about 10 years.  When I first purchased the insurance, I did a fair amount of shopping around and comparing and bought the insurance that was the best fit.  Since then, many things have changed.  I got married.  We’ve had two children.  We bought a house.  We both turned 25 several years ago.  All of these things could easily cause some drastic changes that really warrant a new comparison.  But, we never did that.  It’s time we did.  Over the next few weeks, I’ll be doing a bit of shopping around for better insurance rates and coverages.  In particular, our home owners insurance seems much higher than it should be, and consequently, I am now in the market to find cheap home insurance cover.

The other thing that I really need to look into (and should have a while ago) is the mortgage on our house.  We managed to buy our house when rates were good.  We’ve since added a second mortgage that is about 25% of the original mortage’s size.  The rate on that is not as favorable.  (9% ish)  So, I need to look into whether refinancing the whole thing and rolling the two together might help us out with a lower overall rate and maybe even a lower payment.

That’s just the two things that came up recently.  I’m sure there are plenty of other things that need to be checked regularly that I and others do not.  What are the things that you check regularly to save money?