Family Living
Focus
by
ROBIN L KULECK
McKean Co.
Extension Agent
Never finance a car again!
Pretty shocking concept, don’t
you think?
After housing, transportation
is the second largest expense a
family faces. For many families,
financing cars is an accepted
means of obtaining transporta
tion. Here’s a process that, if
carefully followed, can assure
you a new car every three years,
with no interest payments. In
fact, this technique depends on
you earning interest! No, there is
nothing illegal about this strate
gy, but it does require self-disci
pline.
A new $12,000 car financed at
To make ends meet and, better
still, to get ahead, you can reduce
household expenses and debt, in
crease income, or do all three.
Here are some ideas to consid
er:
Housing
• Consider refinancing an
existing mortgage if savings ex
ceed the cost.
• Ask your mortgage lender to
cancel private mortgage insur
ance (PMI) when home equity
reaches 20 percent of home value
(e.g., $20,000 of equity on a
$lOO,OOO home).
• Purchase appliances with a
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eight percent for three years has
monthly payments of $376 for a
total cost of $13,536, 13 percent
of which ($1,536) is interest.
Once paid for, most families find
somewhere else to spend the
money normally allocated to car
purchases. Instead, continue to
pay the $376 monthly payments,
not to the finance company, but
to yourself. Set up a money mar
ket fund where after three years
at five percent compounded an
nually you will have accumulat
ed $14,935, less taxes.
This amount, plus the trade-in
value of your now six-year-old
car should allow you to purchase
Painless Ways To Reduce Household Expenses
high Energy
(EER).
Food
• Combine coupons with store
sales and/or product rebates for
additional savings.
• Buy in bulk when items are
on sale or in season (e.g., pro
duce).
• Buy store or generic brands
if they have the cheapest price.
Transportation
• Keep a car as long as possi
ble to reduce depreciation and fi
nancing costs.
• Consider buying a late
model used car instead of a new
one.
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your next car without financing!
By continuing to make month
ly payments to your money mar
ket account, in another three
years you will have enough set
aside to trade your three- year
old car toward a new one and
continue trading every three
years throughout your life and
never finance a car again!
Because your monthly set
aside includes the initial interest
you were paying plus the interest
earning capacity, over time you
will be able to modify the type of
vehicle you are purchasing. As
time passes, if your family grows
or your tastes mature, you can
afford a larger, more accommo
dating car.
Even though inflation will
cause the cost of vehicles to rise,
the compounding of these two
interest factors is enough to
maintain and even exceed your
present buying power. Over time,
you could reduce the amount
you set aside each month be
cause your payment to yourself
doesn’t need to include the fi
nance charge. The interest
earned on the account should
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Clothing
Efficiency Ratio
• Shop department store clear
ance sales, consignment stores,
factory outlets, thrift shops, and/
or flea markets for clothing dis
counts.
• Buy washable clothing to
avoid dry cleaning charges.
• Build a wardrobe around
just a few dominant colors or
neutrals to enhance “mixing and
matching.”
• Use e-mail in lieu of phone
calls to redfice telephone charges.
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keep up with taxes and inflation
and still maintain your buying
power.
Maybe a $376 monthly pay
ment is too steep for you. Financ
ing the same $12,000 for 48
months at eight percent drops
your monthly payments to $292.
Using the same strategy, financ
ing the car for four years and
driving it for six, your two years
of monthly contributions to your
self will yield about $7,354 (less
taxes) which, if used with your
trade-in value, will greatly re
duce the amount you need to fi
nance on the second car. Assum
ing the amount you finance is
just $3,500, your ongoing $292
payments could pay that off in a
year. Continuing to save the
$292 for the next three years will
yield $11,598 (less taxes) plus
trade-in value of a now four
year-old car should enable you to
purchase your third car without
financing. From this point on
you should be able to trade-in
every three years and never fi
nance again.
If these numbers don’t seem
realistic to you, use computer
• Sign up for a long-distance
telephone savings plan.
• Close off unused rooms in
the winter to conserve heat.
• Insulate your hot water heat
er and reduce the temperature to
120 degrees.
Financial Management
• Switch to credit cards with a
low annual percentage rate
(APR) if you revolve a balance.
• Increase collision and com
prehensive deductibles and drop
coverage completely on older
cars.
• Inquire about insurance dis
counts (e.g., for buying all prop
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programs such as Quicken or Mi
crosoft Money or Internet-based
financial planning calculators to
come up with a plan to fit your
family transportation and budget
needs. The dollar figures used in
this example illustrate the con
cept of never paying finance
charges again.
Variables not taken into ac
count which impact the final ac
tual dollar values include cost of
vehicle plus taxes, title, current
interest and inflation rates, and
your tax bracket.
This technique does take com
mitment, a change in attitude
and behavior. Once you resolve
to never pay finance charges
again, and commit to making
monthly transportation pay
ments, the concept of never fi
nancing a car again doesn't
sound shocking at all.
Over your lifetime, the car
loan interest you’ve saved and
interest earned can add up to
tens of thousands of dollars.
Changing how you handle trans
portation costs gives you one
more way to increase your net
worth and assure your family a
sound financial future.
erty insurance from the same
company).
• Reorder checks and deposit
slips from a mail order firm in
stead of a bank.
• Eliminate “rarely-used” ex
penses such as health club dues,
call waiting, and premium cable
channels.
• Trim gambling expenses
(e.g., lottery tickets) and expen
sive habits (e.g., smoking).
• Always inquire about dis
counts, especially when traveling
and paying cash for items.
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