Wednesday, March 31, 2010

Keep the used car or get a new one?

Two interesting questions from one person I got on my formspring:
My 2003 Lexus runs reasonably well, has 83k miles. I think it will need about $2k in repairs & it will be fine. I do mostly city driving. I owe about $8k on it. I could pay it off, sell it, get newer used car & still have nice bit of cash left. Thoughts?

If your car is still running well and you only owe $8k , I'm baffled at why you want to get another one. Unless the plan is to sell the car for enough to buy a newer car in cash, then this plan doesn't make sense.

But to do that, you'd have to sell your car for $8,000 plus the price of the newer car. I know
Lexuses have decent resale values, but I have a hard time imagining you selling a 7-year-old car with almost 100,000 miles on it and which needs $2,000 in repairs for enough to be able to pay off an $8,000 note AND still buy another car. Either you need to go into used car sales or that plan is seriously flawed.

Ok, you sold me. Keep car, pay it off, get it fixed. Done. So what do I do with the rest of the cash, around 40k? Can I have just 1 splurge? Please?

If you've got $40 grand in cash laying around, that's great and it's perfectly fine for you to buy yourself something. People get it twisted by thinking that folks who advocate frugality don't want you to spend ANYTHING. That's not the case; it's just that most people spend more than they take in, and don't save much at all.

Feel free to do something nice for yourself WITHIN REASON. Don't blow $25k of it in a weekend. Give yourself a (small) budget and have some fun.

After that, though, you need to consider what in the world you're doing with all that cash laying around? How much of an emergency fund do you have? If the answer's none, you need to stash enough of that money away in a savings or money market account to cover your expenses for several months in the event of a layoff or emergencies.

Already got an emergency fund? What about retirement? If you're not investing in a 401(k) and don't have an IRA, you need to start putting money away for your retirement.

If you've done both of those things, you're in good shape, but you can always afford to be in better shape by stashing most of that money away either for a rainy day or toward a home or some other goal you have.


L. Marie Joseph said...

If she have any additional outstanding debt, she should pay it off also. Then invest

laughing808 said...

Hey Keith, I actually found myself in a fairly similar situation. My 2000 Altma is paid off and only has 99K miles. Starting the middle of last year, I've had to pour some money into repairs: August - new radiator $350, October/November - knox sensor & misc $500.....and now seems my alternator is going bad on me to the tune of $850. So I had to make a hard decision whether or not to pour yet even more money into this car or get another car with a car note to boot.

After careful consideration I decided to fix the car I have. With less than 100K miles I figure I could get another year or two out of this car. This saves me about 300 a month or 3600 a year I would have paid as a car note.

Oh and it did help that I was able to find a place to get the repairs done for half the previous quote.