A New Car Is Little More Than A Drag On Your Net Worth

I got a call from our credit union the other day.  I used to do all my banking at this credit union until we got married, when we decided to combine our finances, and this led us to consolidate checking and saving services into a nearby bank, meaning that the credit union accounts largely became dormant.

Still, I kept the account active with a little bit of money because for several reasons:

  • Fees – I knew credit unions would be less likely to charge fees or would normally charge less fees than a traditional bank.  Although our bank has instituted service fees, we’ve avoided them largely by closing accounts or meeting minimum balance requirements.
  • Other services – I knew that credit unions offered a variety of services, typically at a good cost.  Sure enough, when it came time to open a Health Savings Account earlier this year, our credit union was the only instituion I could find that would service our account with no monthly fees.  Other accounts will waive fees but only with a high balance.  Since we’re just starting our HSA contributions, we expect a low balance for the first couple of years, and the credit union turned out to be our only option for a no-cost HSA.
  • Loan rates – If we ever did need a loan, our credit union typically offered the best rate.  I had financed a loan with them several years back, which was one of my last car loans.

Since we reactivated our services with them by way of the HSA account, I guess they took notice.  I got a call the other evening.  I didn’t pick up because it was a number I didn’t recognize, plus it was bath time for the kids, which is a pretty hectic time.  I picked up the voicemail and it was someone from the credit union calling.

I had just made a deposit into our account using the online bill pay service of our bank (who essentially would write a check to the credit union), and it was our first such deposit.  I thought that they were calling to tell me that I had made an error or something, so I called back immediately to find out what they wanted.

It turns out that the deposit was fine, but that they were calling to see if there were any services that they could offer.  They specifically asked if we had any auto loans outstanding or if we planned on taking out any auto loans in the next few months.

I proudly answered ‘No’ on both fronts.  Both of our cars (a 2007 Buick and a 2006 Pontiac) are fully paid for and have been for a number of years now.  We also drive very little, so both cars have under 60,000 miles and we’d like to keep them for a long time.

Still, I did tell her (with complete sincerity) that I was aware that they had great loan rates and that we would likely consider them first and foremost if we ever needed to get an auto loan.

What I Didn’t Tell Her

The part I left out is that, if it were up to me, I wouldn’t use them for any auto loan, because in my dream world I would never take an auto loan again.  The hope is that we can pay for our cars up front.

How We Would Do This

Our goal is to save up enough to fund replacement cars on a regular basis.  We put a portion of money that comes in from our tax refund every year, as well as extra money (like anything I might make from the blog, for example).  The ideal amount would be to capture the average depreciation of our current car as well as the increase in prices of replacement cars.  That would, in theory, allow us to buy a replacement car.  Obviously, anything bigger or better or with additional features would drive that price higher.

We haven’t been as successful in saving for this goal as I would honestly like.  It may sound like an excuse, but most of that has to do with the fact that I haven’t gotten a raise or bonus of any kind from my employer in several years.  Adding two kids and all of the costs associated takes away a good deal of the opportunity for savings compared to what you had in the past, especially when your take home pay is not increasing (and in fact decreases when you consider that health care premiums typically increase).  Still, we’re doing OK, to the point were if one car needed to be replaced, we could likely swing it, but if something happened where we needed to upgrade to newer cars for both, we’d be in a tight spot.

Replacement Is The Word

Notice that nowhere above did I say anything about a ‘new car’ and that’s because a new car isn’t something I have a big interest in at this point.  I’m not going to go as far as to say that I will never buy a brand new car again, but from an overall personal finance strategy, a new car simply doesn’t make sense.  I would look at buying a used car of some sort.  The issue I would have is making sure we bought one that was reliable and somehow free of problems.  Our last used car purchase was great in this regard since we bought it from my parents, so we knew the full history!  We won’t always be so lucky, though, but that’s a bridge we’ll cross when we get to it.

The Net Worth Effect(s)

See, the reason I no longer like the idea of buying a new car is twofold, and both tie to your net worth.

  • Paying Interest On A Depreciating Asset – For people who actually do consider the effect of a car payment, this one is the one that most will consider.  A car payment means cash flow going out the door, and some of that cash flow is interest.  You’re paying the loan provider money, all while the car is falling in value.  At least with a house, the value under normal circumstances is supposed to stay steady or go up, so while you pay money in interest, normal market conditions will protect the principle amount.  With a car payment, there’s no such expectation.  You’re not only ‘out’ the interest you pay, part of your principle is actually eaten away by the depreciation of the car.  So, if you have a $300 car payment, and $75 of that is interest, that leaves $225 in principle.  But, if the car falls in value by $150 that month, you’re essentially retaining $75 of that $300 payment in your net worth.  The biggest reason to avoid a new car is because you’ll see bigger depreciation up front.  With a used car, the value continues to fall but by lower amounts as the car ages.
  • Percentage – If you have a household net worth of $200,000, consider that a new $30,000 car represents 15% of your net worth.  If you are like most households and have two cars, that can double. You can easily have 30% of your household net worth associated with depreciating assets.  The goal is to grow your net worth, so if you have two assets that are dragging your net worth down each and every month, that’s a lot of ground you have to make up just to stay even, let alone actually increase your net worth.  Cheaper cars will represent a smaller percentage of your net worth, making the effects a bit easier to overcome in terms of how a car drags down your net worth.

New cars are great.  Don’t get me wrong.  I love the feeling of getting into a new car.  Everything is clean.  Everything is new.  It feels fantastic to drive.  It’s a definite rush.

But, just like that new car smell, all that fades.

Except the payment.

That one doesn’t go away.  Well, it might, but that ‘new car’ exhilaration has likely long been gone.

So, next time you’re considering a new car, consider the effect that it has on your net worth, and the amount it could be dragging you back.  Consider how a used car will have less depreciation pulling you back, and will also mean a smaller (or no) loan which means you have less interest to pay.

Readers, how many car loans do you have?  Do you look at the effect a car payment has on your net worth, especially when you consider how depreciation makes the effect of a car payment even worse? 

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Our 2013 Financial Goals

Having just closed the book on our 2012 financial goals, I thought I would share our 2013 financial goals.  These are goals that tie directly to our personal household finances.  I figure that posting them will leave the door open for suggestions as well as give me something to hold myself accountable to.  If you have any suggestions or ideas, I’d be more than happy to hear them.

  1. Health Savings Account – We switched to a High Deductible health insurance plan, and tied to that is a health savings account.  I am currently researching the best place to open this (since our company plan does not include the HSA aspect).  I’d like to have this open and funded in January, setup regular contributions of at least $200 per month, and end the year with at least a $2,000 balance to carry forward into next year.
  2. Home Value Increase of 4% – Our value increased by an estimated 6% last year.  This would be another nice increase.  It would still leave us far below what we paid, but would allow for a continued growth in equity.
  3. Auto / RV values decrease by 13% – We don’t plan any new purchases in terms of cars or our RV.  I’m estimating that depreciation will reduce the value by 13% from the beginning of the year.
  4. Cash savings reduced by 11% – Although I expect to save a little money toward our long term goals, we will be taking a hit this year that I’ve known is coming, as we will have to pay for a new roof.  A high yield savings account can help you earn a favorable interest rate on your cash holdings.
  5. Retirement assets increase by 15% – Regular contributions will hopefully push this number up, and I’m hoping for a modest gain in the markets.  I’m still not happy with our total number in terms of my age and what we have, but slow and steady wins the race.
  6. Investment account increase of 19% – Last year I set an ambitious goal of over 30% and saw this come well short.  This year, I’m still hoping for a gain that would outpace the market.  From what I’m seeing in terms of analyst and sector recommendations, I think this is achievable.
  7. Reduce debt by 6% – The only debt we have is our mortgage payment and a student loan payment.  Just the regular payments would allow us to reach these goals and would reduce our mortgage balance by 5.7% and our student loan balance by nearly 13%. I don’t plan on paying extra as any additional money that I’d normally put to paying off debt will instead go toward savings.
  8. Net gain increase of 17% – If we met every goal, our net worth would increase by 17%.  This is short of what we acehieved in 2012 (which was a 28% gain) but would still be pretty nice growth.  I’d like to see this even higher, but am trying to be a little conservative.  We still have a long ways to go toward making up the losses in our net worth that came about during the Great Recession, so even though our net worth is at ‘record’ levels, it is not where I had envisioned it being as I enter the last year and a half of my 30’s.

I’ll provide some regular updates throughout the year.  As I mentioned above, I’d love to hear about your goals or any suggestions you have that can help us beat our goals.

Thanks and here’s to a great 2013!

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Reviewing Our 2012 Financial Goals

I wanted to take a look back at the financial goals that we had set for 2012 and review how each of the areas that I had targeted actually performed.  The way I handle our financial spreadsheet, the net worth review that we do toward the beginning of the month is how the year is closed out, so even though there’s still some time left in the year, we can give an accurate look at our goals based on how things shaped up with the most recent review.

Here is a summary of each goal as well as how things actually turned out:

  1. Home value increases by 1% – The housing market had begun to show signs of stability at the beginning of the year, but it now looks like an actual recovery is taking place.  The formula which I use to calculate the value of our house takes into account a number of considerations, including Zillow’s reported value, comparable houses sold in our neighborhood and surrounding subdivisions, and a couple of other factors.  I’m happy to report that, based on these calculations, the value of our home went up by 5.7%.  There’s still quite a ways to go before we even reach the point of having it worth what we paid for it, but it’s still a great step in the right direction.  Achieved!
  2. Auto value decrease of 13% – Auto values had been holding relatively steady over the recent years, mostly as a result of an increased demand for cheaper, reliable used cars.  Now that the auto industry is steadily increasing sales and the age of the average car increases, the value of used cars has begun a more rapid decline.  Ours actually went down only by about 8% simply because the decline I forecasted didn’t really start until about mid-year (at least according to Kelley Blue Book, which is my estimating tool for our two cars).  Better than expected!
  3. A 25-30% growth in our investment account – I have a few stocks which I believed were ripe for big gains.  Unfortunately, they didn’t do as well as expected and we only realized about a 6% gain here.  It’s still better than nothing but not what I had hoped for.  Fail!
  4. A 15% increase in our cash holdings – We did OK here, seeing an increase of about 12%.  (Our cash holdings allowed us to pay for items and costs that came up, but if cash is not readily available there are options for quick loans that can get you through in a jam)  I had hoped our side income would be a little higher with various things that we do to earn money on the side, but while it was good, it was slightly less than expected.  Fail! 
  5. A fifteen to twenty percent increase in our retirement balance – This one was right on target and I’m happy to say it was toward the high end, as our retirement account balance increased by 19%.  Achieved!
  6. A five to six percent decrease in our mortgage balance – We did not apply any extra to our mortgage payments this year, but the 15-year 3.375% re-finance we got ourselves into last year helped us pay off 5.3% of the balance.  Achieved!
  7. An eleven to twelve percent decrease in our student loan balance – Again, we made minimum payments (thanks for nothing, employer who still hasn’t given out any raises) but this allowed us to pay off 11.3% of the outstanding balance we have for student loans.  Achieved!
  8. An overall net worth increase of 22% – If I were to have hit on all of the targets above, the end number would have resulted in a 22% net worth increase.  As it was, we hit on five and missed on two.  That’s the bad news.  The good news is that the ones we hit on had a bigger impact than the ones we missed on, namely hitting the high end of our retirement saving goal, and the value of our home going up by a few more percent than I had estimated.  With this we saw a net worth increase of 25%.  Achieved!

Am I happy or sad?

Little Boy Beagle is three and a half, so he’s learning right from wrong, and as such, he knows if we’re ‘happy’ or ‘sad’ and if he can’t read the look on our face, he’ll ask “Are you happy?” or “Are you sad?”.  My guess is that if he looked at my face, he probably wouldn’t be able to read whether I was happy or sad with the numbers.

The bottom line number, overall net worth, is great.  Given that we set a pretty high benchmark and we actually exceeded it, I’m very happy about that.  In fact, since I started tracking net worth, it’s the highest year over year increase since 2003, when I had a 27% increase.

That was the happy part.  But, as to the things that made me sad, well first is the obvious fact that we missed on two of the targets.  Even though we had a big upward surprise on the value of our house, it still doesn’t make up for the fact that we grossly missed on our investment accounts.   Now, granted, some of the people that commented on the original goals post indicated that my expectation was pretty lofty, so maybe I shot a little too high.

Or maybe I don’t have a great handle on the actual investments.

The good news on that front is that the investment accounts make up a small portion of our net worth total, so a miss there isn’t going to have an impact as if we, say, missed on the value of the home.  In other words, if we had to miss, I would rather miss on the investment account than the home.

But, in reality, there’s a part of me that wishes that wasn’t true.  See, the investment account won’t grow to a comparable level of importance as our home if we don’t actually grow the investment account.  If it were to grow at 6-7% a year, many would say that isn’t bad, but I am hoping for better than that.  I want it to grow faster and at some point provide a measurable part of our net worth.

Getting there is the challenge.

Right now, adding a lot to investments isn’t really in our cards.  Most ‘net new’ investment into stocks or mutual funds goes via our retirement accounts.  Outside of that, we’ve been squeezed on several fronts.  I will say up front that these are things we have made conscious choices upon.

  • We are a single income household – We made the decision even before we got married and were years away from starting a family that we wanted to have Mrs. Beagle stay at home.  Her income was in that area where her working wouldn’t have resulted in a big net pay increase after you factor in child care, and when you add the fact that our kids are getting great care, I know this is the right choice.
  • I haven’t gotten a raise in a number of years – Our company was bought out by a venture capital firm several years back.  I knew what that meant and expected that raises and such would be impacted, and they were.  While the company now makes money (they hadn’t before the buyout), apparently it’s not enough to allow for raises to be given out.  This diminishes our spending power as inflation erodes the paycheck.  This is a choice we make for me to stay at the job.  The reason I do?  Mostly the non-paycheck benefits.  I get over five weeks of paid time off.  I work five minutes from home.  I have managers and team members who support each other. I like the job that I do.  At a certain point, these things may not be enough, but at this point, my satisfaction with the job and the complete package is enough (though I do have my moments).
  • We re-financed last year – From a net worth perspective, last year’s re-finance from a 30-year 5.875% mortgage to a 15-year 3.375% mortgage was awesome. Our payment went up $150 per month, but our contribution toward principle went up $500 per month.  That’s a pretty good return on investment.  Still, from a simple cash flow perspective combined with the fact that I refuse to cut our retirement contribution and my employer refuses to give me any more money, it takes money off the table at the end of the month (though to be fair, there’s no way I could get that return in the market).

So, while all of these choices are ones that I have made actively or passively, there’s a part of me that is still frustrated by the slow growth in the area of our investments.  In the long run, I will have to adjust my expectations and continue to focus on the bigger picture.  I know that I am reasonable enough to know that if I were to get a few more years in a row of 25% returns that I would be more than happy.

One can only hope, right?

Readers, how did you do on your 2012 financial goals?

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Oops! I’ve Been Overestimating Our Net Worth

I use a spreadsheet to track all of our financial information, including sheets that I’ve created for tracking income and spending from our checking account, savings accounts, as well as our credit cards, investments, and pretty much everything else financial related.  The spreadsheet serves me well and has evolved over time.

I know there are online options out there but I’ve been using this for so long that I am just so familiar and comfortable with using it, and have no desire to switch over to Mint or anything else.

Maybe some day.

But I did recently happen to see that I’ve been overestimating our net worth, probably for quite some time.

One of the things I track is all of our bank account balances.  In the same section, I also track our outstanding credit card balance.

So for example, I might have:

Bank 1 Checking: $2,000
Bank 1 Saving: $1,000
Money Market 1: $5,000
Online Saving: $5,000
Credit Card Balances: -$1,000

These are all calculated on the day of the month that I do our net worth tracking.  In this case, adding all of the numbers together would yield a ‘balance’ in this area of $12,000.

The problem was, in the ‘total’ section, I was subtracting the credit card balances.  As we’ve all learned from our basic math classes, subtracting a negative number has the net result of adding it in there.  So, in essence for this example I would have been adding $1,000 to the balance, and would have been getting a total of $14,000.

This basically means that for as long as I’ve had the error, I was overstating our net worth by two times the amount of whatever our credit card balance was.

I don’t keep that level of detail on a month to month basis, so I’m not going to go back and correct anything.  In most months, this is a pretty low number, usually between $400 and $700.  It’s not going to throw our numbers off that much.

And, it actually happened to fall on a good month, as our net worth went up by a good chunk from some good action in the stock market.  So, even after correcting the error, our net worth still showed a nice bump over last month, when it was wrong (and probably for at least a couple of years before that).

I should probably go through and look at the rest of my formulas to make sure that everything jives.  I do have quite a few checks and balances that I’ve built in so I’m fairly confident that our numbers are correct, but you never know.

Have you ever caught an error of your own doing?  How much did it throw you off or cost you?

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