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?