Personal finances are important to everyone. They determine how much money you spend each month or year, how you pay for everyday expenses, whether you qualify for home loans, auto loans, or other types of financing, and which investments you choose. Personal finances also impact relationships, health, employment, and life experiences. Let’s see below what people need to know about personal finance. [Read more…]
Search Results for: budget
Should We Pay Cash for a New Car?
My husband and I have had our Toyota Sienna for 18.5 years, and it has 240,000 miles. We plan to buy a car in the next year or so, and, for the first time in our lives, we’ve saved money for the purchase. However, we can’t decide if we should pay cash for a new car or take out a loan instead with the plan to pay it off quickly.
Reasons to Pay Cash for a New Car
We have three reasons why we want to pay cash for a new car:
Stick to the Budget
Paying cash helps us stick to the budget in two ways.
Maintain Our Monthly Budget
We have a monthly budget that is working for us. If we pay cash for our vehicle, we don’t have to rearrange the budget to determine where the money will come from to pay a monthly car loan. Our finances stay as they are, and all is well.
Maintain Our Car Budget
In addition, if we pay cash for a vehicle, we have a finite amount of money available. That’s it. If we go over that amount, we either have to take some money out of our emergency fund or get a car loan.
If we consider taking out a car loan instead, overspending is easier. We’ve been to several dealerships to look at cars, and we find it easy to think, “We should upgrade our budget a bit because we can get better options and safety features if we do.” If we use a car loan, we won’t feel the pain of paying a higher price as much. Sure, we’ll feel the pain when we have to make the monthly car payment, but we won’t feel it when we sign on the dotted line because the money is not immediately coming out of our account.
No Interest
Without a loan, we won’t have to pay interest on the vehicle. The car will only cost us what it takes to drive it off the lot. Every other time we’ve bought a car, we’ve had to pay hundreds to thousands more in interest over the life of the loan.
Save for the Next Car
Currently, we are setting aside $400 a month in our budget for a new car. If we don’t have a loan, we can continue to set aside that money every month for a replacement vehicle for my husband. (His car is 10 years old and has 115,000 miles on it, so we’ll need to replace it in five to ten years.) Without a loan for my car, we can save for and hopefully pay cash for my husband’s replacement vehicle, too.
Reasons to Finance
Even though we love the thought of paying cash for our new car, there are advantages to taking out a car loan, especially if we plan to pay off the loan quickly.
Builds or Maintains Credit Score
Our credit score is excellent, and we are debt free except for our house. If we take out a car loan, we will maintain our high credit score.
While this is an important factor for some people, but less of an issue for us. Even though we’re debt free, we use credit cards regularly and pay them off before they’re due, so we maintain our credit score. So, I don’t think having a car loan or not will make much difference to our credit score.
Doesn’t Deplete Emergency Fund
We have both an emergency fund and a new car fund, so the money for the car would come from the car fund.
However, our emergency fund isn’t as large as I would like it to be. (It currently covers 1.5 months of living expenses.)
If we took out a car loan for at least part of the price of the vehicle, we could add the cash we would have used for the car to increase our emergency fund. That is a tempting idea, especially in this time of high inflation. However, if we don’t need that money as the months go on, we could use it to continue to pay extra on our car loan and pay it down more quickly.
In addition, we have one child who is attending a community college. He has one more year there before he transfers to a university, which will cost more. So, having more cash set aside to help him with his college expenses is tempting.
May Get Dealer Incentives
Long gone are the days when cash was king at car dealerships. Now, dealers make money on the financing, so they prefer customers who finance.
If we’re willing to finance, we may get dealer incentives to sweeten the deal. Without financing, those incentives are likely off the table.
Paying Cash May Increase Our Chance of Being Audited
If we pay the dealer more than $10,000 in cash, the dealer must file Form 8300. The IRS needs to know if we’re spending a large amount of cash and how frequently. Paying cash once for a new car likely won’t trigger an audit, but it does add an extra layer to our tax filing the following year.
Taking out a loan and paying more than the required monthly payment to pay the vehicle loan off quickly may be a better solution.
Our Loan Requirements
We would not consider taking out a car loan if we can’t get an interest rate below four percent. Our credit union said they could offer us a loan at 3.5 percent interest. We haven’t yet asked what the dealer can offer.
Additionally, we wouldn’t take out a car loan for a term longer than 36 months as we don’t want to extend this out for years. Even with a three-year loan, we may try to pay it off in two years.
Final Thoughts
Should we pay cash for a new car? For years that has been our dream, but now we’re wondering if some of the money wouldn’t be better served increasing our emergency fund, especially during this period of high inflation.
Read More
Our Two Large Financial Goals for 2023
Why Buying a Toyota Sienna Was One of Our Best Decisions
Avoiding Major Costs
Taking care of your finances is essential if you want to avoid major costs. Although it’s always a good idea to prepare for unexpected expenses, it’s also important to make sure that your spending habits are appropriate and within your budget. Even small costs can add up over time and can quickly become large ones. Here are some tips on how to avoid major costs.
Avoid DUI Incidents
In Alameda County, California alone, there were about 4,820 DUI arrests in 2017. Unfortunately, one DUI incident can cause extensive financial damage. A first-time offense will require you to pay a fine, which does not include the additional costs for attorney fees and court costs. Further offenses may require jail time which can have an even greater cost. To avoid major costs due to DUI incidents, always make sure you are aware of your alcohol limit and plan a safe ride home.
Be Aware of Your Credit Card Limit
Credit card companies offer convenience, but they can also be a major cost if you are not aware of your spending limit. Before making any purchase with your credit card, make sure that it does not exceed your approved credit limit. Going over the limit can lead to extra charges and an increase in interest rates. Additionally, it can hurt your credit score, which can make it difficult for you to secure loans or even rent an apartment.
Having a Savings Account
While you might not think you can afford it, having a savings account is essential to avoiding major costs. Even if you only deposit a small amount of money each month, it will add up over time. Having a savings account will help ensure that you have enough money to cover emergency expenses such as medical bills, car repair costs, and other unexpected costs. Additionally, having a savings account will give you peace of mind knowing that you have a financial cushion if something unexpected happens.
Check Insurance Coverage
Insurance can protect you from unexpected events. However, if you have inadequate coverage, it can lead to major costs for repair or replacement of items. Always review your insurance coverage and make sure that it meets your needs. It may be a good idea to add additional protection for items such as jewelry or electronics. Checking your insurance coverage is one of the easiest ways to prevent your finances from taking a major hit. For instance, if you have a car, having comprehensive auto insurance coverage can help to protect you should an accident occur.
Keep Up With Home Maintenance
Keeping up with home maintenance is one of the easiest, yet most ignored ways to avoid major costs. A small leak or broken window may seem minor and easy to ignore, but they can lead to much bigger problems if left unattended. To prevent any major costs due to home maintenance, make sure you inspect your home regularly and repair any potential damages right away. In addition, according to Reader’s Digest, flushable wipes commonly cause clogged toilets and pipes. Ensure you’re following all recommended flushing instructions and caring for your plumbing and maintenance.
Budget For Big Projects
If you’re planning on bigger renovations, it’s essential to budget ahead of time to keep your finances in order. For instance, around 35% of homeowners splurge on their kitchen countertops. However, unforeseen costs can easily add up and quickly exceed your budget. Before starting any project, make sure you plan out the entire process, including materials and labor costs, to avoid any major financial surprises. Doing so will help ensure that you have the funds available to complete the project.
By following these tips, you can ensure that your finances remain in good shape and help you avoid potential major costs. Begin budgeting today to ensure your savings have time to build before beginning the process. With a little bit of planning and preparation, you can protect your finances and keep them in check.