PocketCoinage

Back in March of 2008, I made the decision to buy a brand new car.  There was nothing wrong with my old car at the time, but I somehow talked myself into wanting this new item.  I made the justification that I wanted to buy a house eventually (I needed the credit history) and that my sister would start driving in September.  Clearly, I needed to get this new car (not really). My 2000 Saturn SL2 had 105,000 miles on it and ran great.

My mind was already made up on what I wanted.  During my trip out to Nashville earlier that year, I rented a 2008 Mitsubishi Galant.  I immediately fell in love with it and had to own one.  It was roomy, economical, and had enough power to get onto the highway without difficulty.  So I went over two auto dealers to see what kind of selection they had.

I had a few ideas in mind when going to the auto dealer:

• Look for last year’s model
  • They usually have specials on left over inventory for the previous year
  • In my case 2009 models were already out, so I was looking for a 2008
• Haggle for the best price
  • Usually with last year’s model, they are willing to sell it for equal to or less than invoice (what they paid for it)
  • Shop around multiple dealers for the same model and year with similar features
• Don’t let them play on my emotions
  • A good sales person knows how to work with people’s emotions
  • If you get fixed on a particular quality, they will try reel you in using that!
• Be willing to sacrifice some features
  • I would have liked a sunroof, but it didn’t make or break the deal
• Shop educated
  • I went online and did my homework about the vehicle
  • This showed them that I had an understanding of the car to limit them pulling any tricks

I went to the first dealer and found a car that I liked.  It had all the features I wanted and they were willing to sell it $1,000 under invoice.  Fair enough, I told the salesman that I would go home and sleep on it.  It was very difficult to walk away from that dealer; they followed me out to the car!  The next day, I went over to another dealer and found a car with very similar features as the other one.  It was missing a few things such as fog lights and traction control, but this wasn’t a deal breaker to me.

Talking with the salesman at the second dealer, they did not offer the same pricing initially.  So I mentioned that the dealer up the road offered me $1,000 under invoice for a similar model.  The salesman talked with his manager and came back with $1,150 under invoice.  Between this offer and the color of the car, I was sold.

Now came the big moment of running credit and financing.  Since this was my first “big” loan, Mitsubishi Motors did not want to offer me a credit line for their current offer of 0% financing.  The dealer was able to find another bank and they offered me 6.69% APR for 5 years; so I went for it.

While paying back this loan, I ran into some interesting situations. The first one was making a principal payment. There were two ways for me to make it:

1. Send it to a different address at the bank.
2. Include it with my normal monthly check and explicitly specify “use remainder as principal payment”.

There were times where “use remainder as principal payment” was checked on the payment stub and they proceeded to apply the remainder of the balance towards next month’s payment (and the month after that)!  I immediately called them to correct the problem.

I also considered paying the auto loan online.  However, there was also no way for me to make a principal payment through their website.  Plus they charged you a “courtsey” fee of $10 to make the payment if you did not have a checking account with them!  Absolute highway robbery.

In the end I wasted $894.83 in interest, but I sacrificed and managed to pay off the loan in less than two years!

What experiences have you had with car dealers and auto loans?

If you have read my previous post, Life After an Auto Loan, you’ll notice that I was undecided on what I wanted to do after my auto loan was paid off.  Over the past month I made a decision to split it up.  I am allocating 75% of the $400 to my student loans and the remainder to my Roth IRA.

By making this move, my student loans repayment schedule fell to 4 years from their original 10 years!  This is a huge drop in time and interest.  Based on my calculations, I should be keeping about $3,000 in my pocket that would otherwise go to the loan company.  If I allocated 100% to the loan, that would cut the time down to about 3.5 years.

Depending on your income level, you may be able to claim student loan interest paid on your taxes.  Unfortunately for me, I am unable to claim this.  So, for me, it makes no financial sense to carry this “good” debt.  Depending on how you look at things, some say that no debt is “good” debt.

What exactly is “good” debt?  “Good” debt is any debt that’s taken out for the prospect of growth, such as a student or home loan; it may also be tax-deductible.  When you take out a student loan, you are investing in education that will, hopefully, increase the earning potential over your lifetime.

As much as I want to pay down my student loan quickly, I still need to save for retirement.  I currently match my employer’s 403b at 1% and contribute to my Roth IRA.  Before I bought the house, my Roth IRA was maxed out every year at $5,000.  This past year, I only contributed a $1,000 to it – after my tax return!  This year I am trying to set aside for my Roth IRA every month, while still saving a portion from my tax return.  If my calculations are correct, this will place me at roughly $2,000 saved for the 2010 year.

Once you finished with a debt, what did you do with the extra money?

So, you made your final auto payment.  3 – 5 years (or less) of blood, sweat, and interest have paid off.  Now the big question is, “What do I do with this extra cash flow?”  Sure, you can disperse this back into your checking account, but what happens in another couple of years once another vehicle is needed?  Will you have enough for a decent down payment (20%)?  Maybe you want to buy your next car in cash?

I recently paid my 5 year auto loan in less than two years and now I’m starting to ask myself these questions.  I am finding many things to do with this extra cash flow, including spend it!  I need to come up with a plan so that I can stick to my goals.

Using the Auto Payment to Pad the Emergency Fund
Using this extra cash flow to pad my emergency fund might be the best idea to reach my goal of $20,000 sooner.  I might direct most of the auto payment here for a few months just to give it a boost.  If I redirect the whole amount to my emergency fund, I will easily reach my goal by the end of the year.

If you do not have an emergency fund, it’s important that you start as soon as possible – even if the amounts are small.  You will be better off just by getting into the habit of saving.  Remember, it starts with the small things!

Using the Auto Payment to Pay Down Debt
I’m also considering using this to pay down my student loans.  Since I make too much money to write off the interest on my taxes, I want to rid of this debt as quickly as possible.

According to the IRS for 2009, if you are single and your modified adjusted gross income is above $75,000, you are not allowed to deduct the interested.  The deduction is phased out between $60,000 and $75,000.  If you are married and make more than $150,000, you cannot deduct student loan interest.  This too gets phased out between $120,000 and $150,000.

The bottom line is you are allowed to deduct the most student loan interest IF:

• You file as single and make less than $60,000.
• You file as married and make less than $120,000 combined.

Check with your tax advisor to see if you qualify to write off student loan interest.

Using the Auto Payment to Save for Another Vehicle
Why not continue to make auto payments to myself?  By doing this, I’ll be ahead of the game for when it’s time to get another vehicle.  I may even be able to buy the next one in cash!

Divvy up the Money
There are many things I would like to do with this extra cash flow.  In the end, I might divide it up in equal parts to various saving accounts.

I will keep you posted on which route I take.  What have you done with the extra cash flow after a debt was paid off?