I'm a big fan of using simple rules to help people make easier and better financial decisions. Developing simple rules is a lot easier said than done, as there are a range of viewpoints to consider.
When building rules for car buying, I considered the following questions among others: How do I build rules that prevent people from overspending on a car, allow rich people to buy nice cars if they want, is reasonable for people buying their first car, and allows car enthusiasts to stretch a little on buying a car?
I narrowed car buying down into two phases. Phase 1 looks at rules for people who are broke, but need to buy a car. While someone's financial situation may be less than ideal, the realist in me knows a car may still be needed.
How do you know your broke? Being broke can mean different things to different people. I'll define being broke as negative net worth and not having anything saved for retirement.
One key thing I want to point out, being broke is not income dependent. I don't care how much money you make. If you have a lot of debt and aren't saving, you're broke. There are plenty of high-income earners out there who have nothing saved. Buying nice, expensive cars is often partly to blame.
Being broke is a common way to start out in the world, especially if you have student loans. A major positive to starting out broke is the frugal habits you can develop during this time. Don't let car buying destroy your financial future.
You can argue with the label of being broke, but do know that I'm trying to help you improve your financial situation. Cars depreciate! Cars will not help you build wealth! They will only put you further in the hole. If you want to take control of your financial situation, you need to start making better financial decisions.
Without further ado, here are NinjaPiggy's car buying rules for Phase 1.
Phase 1 Car Buying Rules: You’re Broke, But Need A Car
1. Explore Other Options
If you are broke and need a car, make sure you actually need a car. Have you considered other alternatives? Can you get by with public transportation? Will riding a bike or walking suffice? Can you carpool? Can your family manage with just one vehicle? How about cruising around on a moped? Better yet, how about your family cruising around on a moped?
Get creative! Try and talk yourself out of needing a car. If no other option exists, but to buy a car, then continue on, and follow the rules below.
2. Have a "Point A to Point B Safely" Mindset
Cars were invented to get people places, faster than a horse would allow. If you find yourself in phase 1 you need to make sure you have the right mindset around buying a car. In Phase 1, a car is simply a way to get from point A to point B safely. Stop and think for a minute how much society has strayed from the point A to point B mindset.
3. Don’t Buy for Features
A car may be a necessity, but many car features are not necessary. In Phase 1 you aren’t buying for features. You are in no position to get picky. You aren’t holding out for leather seats, a sunroof or a premium sound system. You're lucky to get a car with the paint color you like. Remember, the only feature you are worried about, is getting you to your destination safely.
When my wife was in college (before we were married), the A/C and heat on her car stopped working. She somehow survived driving in 100 degree weather, by rolling her windows down. When the cold, snowy winter came, she relied on a warm jacket and a portable heater she would plug into the cigarette lighter. Looking back on it now it's a sad, touching story and easy to justify why she should have bought herself a nicer vehicle. However, she was broke at the time, weighed down by massive student loans. A nicer car would have driven her further into debt. You can live without many features considered vital nowadays.
It's very easy to get carried away and spend more on safety features. After all, who doesn't want to keep their family safe? Safety can be a very touchy subject, and I don't want to sound cold but I do want to point a few things out. You can put your family in serious financial jeopardy by paying more for safety. Most financial decision come down to a difficult decision on trade-offs. When you give millions of humans the ability to travel along at high speeds, accidents and deaths are a sad reality. Sometimes safety features prevent serious injuries and death, sometimes they don't. Be careful with how much you are willing to spend on safety features.
4. Buy a Vehicle Between $2,000 - $7,500
If you’ve read the previous two points, it shouldn’t be a surprise I’m recommending buying a cheap vehicle. However, I want you to be careful about buying too cheap a vehicle. How cheap is too cheap? Under $2,000 is an extremely low price point. You don't want to buy a car you'll have to replace a few months down the road.
Am I saying you should never spend less than $2,000? I’ll give you two exceptions to allow you to spend less (feels backwards saying that). The first exception is if you or a family member is a car mechanic (free labor). If you know how to inspect and repair your own vehicle, then you know far more about vehicles than I do. If you know you are getting a good deal, buy as cheap of a car as you want, and you can take care of it without having to pay for labor on maintenance.
The second exception to spend less, is buying a vehicle from someone you trust. If a friend or family member wants to give you a great deal on a vehicle (within this price range), then take them up on their offer. Make sure you ask them if there are any maintenance issues to be aware of.
Use your network and let people know you are looking for a cheap, reliable vehicle. People like to help out other people. I've heard many great stories of people getting great deals on vehicles from a friend or family member. All because they knew there was a need. Create your own bargain car buying story.
Some of you may question if $7,500 is too high for the top end of the range. I initially hesitated and thought about lowering it. Why did I leave it where it is? The high end of the price range should only be used by those who have upward trajectory in their careers. Say, a recent college graduate who landed a good-paying job, and wants a vehicle that will last them at least 5 years while they pay off their student loans.
Whatever you do, stay within the range. You'll probably want to buy from a private seller. One major advantage of a private seller is avoiding the car dealership. It's easy to get suckered into an expensive vehicle after the salesman shows you how low they can make the monthly payments. Extend a loan term long enough and you can "afford" any vehicle. Don't fall for this trick.
5. Stick with Reliable Brands
A major risk of buying an older vehicle is the possibility of frequent trips to the car mechanic, which can take a toll on your, already strained, finances. Protect yourself, as best as possible, by buying reliable vehicles. Brands like Honda and Toyota are known for reliability and repair costs don't usually break the bank. Stay away from older model luxury vehicles. Now is not the time to buy a BMW, even if you can get it for $5,000. Repairs for luxury vehicles (even older ones) are more expensive than their more modest counterparts. Before you make your purchase final, do a little research on the reliability of the make and model you are buying.
6. Get an Inspection Before Buying
Don't ignore this step! Too many people get cheap, skipping the inspection, and it ends up costing them far more in the long run. No matter what price range you find yourself in, it's always a good idea to have a vehicle inspected before buying. Uncovering maintenance issues can save you thousands of dollars.
Even if you are buying a reliable vehicle from a family member, it is still a good idea to have the car inspected. Just because the car might not be showing obvious signs of problems, doesn't mean there isn't trouble lurking under the hood.
Hopefully, you already have an established relationship with a car mechanic you trust. Expect to pay around $100 for a pre-purchase inspection.
7. Pay as Much as You Can In Cash
Ideally, you’ll pay for your vehicle with 100% cash. However, if you’re broke, idealism doesn’t always apply. This is a case of practicality trumping idealism. If you do have to take out a loan to finance a vehicle, buying a cheaper vehicle should allow you to pay it off quickly. Pay off the loan as quickly as possible! Just because the bank is giving you a number of years to pay it off, doesn't mean you should take that long. You don't want car payments to become a normal way of life.
8. Remember, Phase 1 is Temporary
If these rules have you feeling down so far, cheer up. Remember Phase 1 is meant to be temporary. Your Phase 1 car isn’t your forever car. By following these rules and focusing on building your net worth, you will be able to (eventually) get into a nicer vehicle (if you so choose).
In a world of easy credit, we've lost our ability to remain patient. "Why wait, when you can buy it now for 0% interest?" We want what our friends and parents have, and we want it now. "I deserve it",, we tell ourselves. With all the marketing out there, it's hard to escape a short-term mindset.
Remember, wealth building takes time. Owning nice stuff should take time. Don't take shortcuts. Drive the car you deserve. If you're broke, it won't be the nicest car on the road, and that's okay.
Making smart choices today will set you up for success in the future. Work hard to get your debt paid off and build your retirement savings. Don't make excuses to justify why your broke but you need a nice car.
9. Take Pride in Your Vehicle
How do you take pride in an ugly car? It starts by taking pride in yourself. Be proud that you didn't overextend yourself to buy a more expensive vehicle you couldn't afford. Look at your little ole' clunker as your shortcut to financial success (this is a shortcut I can get behind). You didn't fall for all the marketing gimmicks out there. Once you convinced yourself how smart you are to be driving an affordable vehicle, you'll learn to love your vehicle more.
Instead of trying to look past all the minor scratches and dents, you learn to love them. They are signs of character. That embarrassing noise your car makes at the most inopportune times? It's just your car's way of letting the world know how smart you are. When someone accidentally opens their car door and scratches your car door, it doesn't ruin your day. You just tell them, "no worries" and go on your way. Just another beauty mark. Learn to appreciate the little imperfections.
Most people don't really care what kind of car you drive. If you tell your friends, you are trying to pay down your student loans before buying a nicer car, they'll understand. It's even better if you're able to convince them to do the same and go through the journey together.
For those of you out there who aren't broke, stay tuned for Phase 2 Car Buying Rules.
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I'm not just saying this because bloggers are ultimately judged by site traffic. Too many people out there make poor car buying decisions and it has a negative impact on the rest of their life. Most people who currently read NinjaPiggy have already made the decision to improve their finances, and are on the right path (which is great). I also want to help people who aren't actively seeking out advice, but could definitely use it. Together, we can help a lot of people make better financial decisions. A simple share on Facebook or Twitter can reach people who would never think to read a personal finance blog. Thanks in advance!