Since I gladly accepted the Dividend Diplomats 60% Savings Challenge, I have been brainstorming ways to increase my savings rate by both increasing income and reducing expenses. Let me tell you, it is fun brainstorming all the different ways you can accomplish this. A simple internet search will provide you with many creative, simple ways that you have probably never considered. After reviewing my expenses the last couple of months, there is one elephant in the room for my expenses: my car. Over the last month I have been working on reducing this expense. This article will walk you through my current situation and what I have learned over the last month.
Situation
I used to drive an older Honda Civic that was a family car used to get me and my siblings through college. My plan was to drive this car for as long as possible since it was paid off. Yes it was older, was manual transmission, and didn’t have any bells and whistles, but it was paid off completely and was very fuel efficient. My only recurring monthly expense was the insurance premiums, which was very low due to the lower value of the car. One day, my sister needed a car as she was returning to the United Sates to pursue her MBA (Note: I am very proud of her and she will be a star one day!). If you can see where this is going, she needed the family car and of course I gladly handed over the keys to her.
As I began my car search a few years ago, I determined that I wanted to own a car that I can drive to 200k. Longevity and reliability were at the top of my list. I envisioned several years where I can drive a reliable car without a car payment. Man, imagine what my savings rate will be once I make my final payment? My dividend income would definitely increase through way of additional purchases, as my capital will be of abundance! Of course, I had several features that were must “haves”. I wanted Bluetooth capabilities and an easy to use interface to control the radio. Why did I insist on the features? Because I was planning on buying a car that will last till 200k miles. My assumption was that the features I desired were going to be base model features in the future, so if I was going to own the same car for the next 7+ years, I wanted the minimum features so I wasn’t driving too out dated of a car. I know myself well enough to know that if I were driving a car without these features, I would eventually resent my vehicle and begin the purchasing process all over again. It may not be the most frugal thought process, I know, but having these simple features will allow me to be happy with the vehicle until the car could no longer run. A very fair compromise in my opinion.
My search led me to a new 2013 Toyota Camry. I financed the car with a 0% interest rate through the dealer since I was a recent college graduate. In total, my monthly can payment is $360/month. I ultimately chose a Toyota because it had the minimum features I desired and Toyota’s are known for their long lives (Ask Lanny, he had a Toyota Celica with 200k+ miles). I don’t think the car and insurance payments are out of hand. In fact, I know many co-workers and friends that are saddled with higher payments. However, I know I could do better. I could find a cheaper car with the same features and better gas mileage for a cheaper monthly payment.
The Search
As I began this search, I thought it was important to figure out exactly what I wanted from this process. How could I make a quick decision on a car purchase if I don’t know what I need to make a switch? My main goal in this search is to increase my current cash flow because it would increase my savings rate and ultimately my portfolio. If I found a car that had all the same features, has the reliability/reputation of my current care, better city gas mileage, and would have a car payment of $330/month or lower (~10% decrease), I would pull the trigger on the transaction. One other thing worth noting as I write this series is that I am a little nervous buying a non-certified used car since I am not a handy car owner. If I have to make all repairs through a dealership, it will become very expensive (We have written before about how expensive a car can become). I would prefer a new car or a certified used car for this reason. My search will mainly focus on those two classes of cars.
Last week I took my car in for its last free service. My new car reached 25,000 miles and the free Toyota care package officially expired. From this point forward, all repairs and routine maintenance are financed by my savings account. While I was waiting, I spoke with the sales rep who sold me my car about my current situation and he ran two ideas by me. First, consider the new Corolla. The car has better bells and whistles in its base package, better city gas mileage, and had a cheaper base price than my current car so the insurance cost would decrease. I loved the car and unfortunately, he crunched he numbers. Due to the negative equity in my current car, the monthly car payments would actually increase $20/month. So cross that idea off the board since the benefits of the gas mileage and decrease in insurance would not have been enough to negate the increased monthly payments. I mentioned there was a second option, right? He also showed me their one certified used Prius. He flashed one number in my face, 51 mpg in the city. Now that would reduce my monthly gas expense! I never considered a hybrid and I was skeptical of how the car would drive. After my test drive, I was pleasantly surprised and was open to the idea of owning the hybrid.. However, this car was older and lacked many of the basic features I current have and want going forward. Plus, I really was not a fan of the color schemes (It sounds ridiculous, but I do not want to own a car that I won’t enjoy owning and looking at every day for the next 7+ years). Because of this, I ultimately passed on the vehicle. So I left the dealer driving the same car that I entered with.
Summary
So what have I learned over the last month? Be careful when you take out a loan for a car. I underestimated how much faster the value of a car decreases compared to the value of your loan. Trust me, I will always remember this going forward and make sure to consider this for every car I buy in the future. Second, this is going to be a very long, difficult process. My end goal is to have a car that is going to be reliable and will allow me to save over a long period of time. Essentially, I am craving my current car with a lower car payment. I could always refinance, but I don’t want to stretch my loan out any further and incur interest since my current loan is interest free. For now, I will continue to make payments on my loan and ferociously search the ads to find a deal. I am not making a change just to make a change. In 3+ years, when my car payments are gone, I will be a very happy camper. The question is, can I make it to that point or will I be driving a new vehicle before I make my final car payment?
Does anybody have any advice? Have you gone through a similar situation? What else should I be considering as I look to reduce my car payment? Please share your ideas. I would love to know if there is something else I should be considering.
-Bert