It’s Called “Personal” Finance for a Reason

Personal Finance is one of those things that’s different for just about everyone.  Sure, some parts can be strikingly similar like saving money and spending less than you earn, but for the most part, it’s a different beast for every person or family.  One family may not value things that their friends do, and it will reflect in their spending habits and money management.  I’ve been thinking a lot lately about one thing that I did that flew in the face of all the personal finance advice that I have read and seen, and I’d like to go into depth more about why it has worked out well for me.

The decision to buy a car will confront all of us at some point, and if you’re in your 20s like me, it’s probably the most expensive thing that you will buy until you buy a house (excluding that education that we took out loans for).  Due to this, there is TONS of advice out there for people who are looking to buy a car, related to how much they should spend, what capabilities they need and whatnot.  Most of it is great advice for 95% of the population, and if you follow it, you’ll end up just fine.  The biggest spokesperson for some of this advice is a  titan of personal finance, a person who (some believe) stands below, but quite close to the big man (or woman) upstairs: Dave Ramsey.

Dave has a lot to say about cars, and for good reason.  During the time when Dave was losing all his money, there was 1 thing he felt like he absolutely had to keep, and it wasnt his home.  It was his Jaguar.  To keep up appearances that people had expected of him, he felt he NEEDED to have the jag, even though it was a huge money pit for him.  Dave learned a valuable lesson as the car was (I think) repossessed some time later.  Dave is now completely against the buying of a new car for anyone at any time (unless they can pay cash, I’d assume).  This is because most vehicles typically lose a large percent of their value after you take it home from the dealer (its around 30% I believe).  This, coupled with the american habit of wanting a new car every few years means that you’re borrowing to pay for something that will lose much of it’s value right away and will stay at that lower value until the typical consumer trades it in for a new one, and the process starts over.  Dave calls this a “Stupid Tax” , meaning that you only pay the tax if  you’re stupid.  For 95% of the population, I think Dave is completely right.  If they took this advice, they would probably be much better off buying a car that is a year or 2 old.

My issue with this is that it’s a blanket statement, and many of you who make blanket statements know that they are most likely going to be eaten at some point.  If you say X always leads to Y, you are begging for someone to prove you wrong.  In my case, Dave’s advice wasn’t the most applicable in my situation, and I feel like he left out a few of those things that were present in my situation that are not present in everyone’s situation, and I’ll list them below with a bit of explanation.

  1. Dave Says that you should buy a used car because you’re going to trade it in a few years down the road.  What I’m assuming he means by this is that you’re not going to ” drive it until the wheels fall off ” and the car absolutely wont go another mile.  Who could blame you, anyway?  You could end up driving around a 25 year old car.  I was taught that you bought a new car if you could afford one, and you drove it for 15 years or more. My parents have done this for as long as I can remember, and I picked it up from them.  If you buy and hold a new car, a new car isnt a bad purchase, it’s just a purchase like any other.  You’ll lose a lot of value in the beginning (but it’s only paper value), but if you plan on rolling in the car until you’ve got to take it to the scrap pile yourself, who cares if it loses some value 30 minutes after you bought it?
  2. It’s also common knowledge that your car will depreciate after you drive it off the lot, and you’ll be upside down (owe more than  you can sell the car for) for the next year or so.  This is true for most cars but not for trucks.  Trucks are (no-no-)notorious for holding their value years down the road.  When I was test driving vehicles, I test drove a truck that was 3 model years old (it was a 2007) that was fairly nice with some extras, but nothing terribly fancy.  They were trying to sell it for about 3500 less than what they wanted for that same truck that was brand new.  Curious to see how my truck was holding it’s value, I checked it on recently.  I don’t recall my exact sales price (but it was less than $25,000) but the value of my truck currently is $22,000 and the total cost of my loan was somewhere in the mid to high 23’s.  As it sits right now, If I sold the truck, I could make approximately 3500 on it, because I’ve been paying a small bit extra each month, and because the value didn’t tank when I drove it home.
  3. My future.  I went to the readers of Debt Free Adventure and got advice similar to what I’ve listed above.  It was all great advice, it just did not take into account one of the most important things about money: My (or your) personal future goals.  In the future, I would like to do a few things, most of which involve needing a truck or at the very least, something with high ground clearance and 4 wheel drive.  Where I live, 4 wheel drive is also almost a requirement due to adverse weather.  Along with possibly using this truck for a business that I’d like to create, I’d also like to purchase some land and work it.  I’m thinking of raising some sort of animals or growing alfalfa, but I have not really decided.  This is something I really want with my life and I know it’s in the future, so I figured why not get a truck, drive it around nice and new for a while, then when I purchased land and started a business, turn it into a work truck.  Whenever I see one of those really old beat up trucks on the road, I tell myself that soon my truck will be beat up and super awesome like the one I’m looking at.

The way that I see it, I made a pretty good decision and was able to balance my needs and wants and fly in the face of some sound financial principles.  Even though this is still debt and I still don’t like it, It sure beats waking up in the middle of the night wondering if my car will start so that I can get to work later that morning.

So readers, do you think I’m in an alright spot considering I broke a cardnial rule of Personal Finance?

If you were in a similar situation where you were going against most of the PF literature that you have read, would you be able to go through with it?  Admittedly, mine was easier because ‘normal’ people buy new cars, and typically people who buy used ones get looked at like they’ve got 3 heads.  But the question remains, Could you still go it alone?

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30 thoughts on “It’s Called “Personal” Finance for a Reason”

  1. I went crazy in my 20’s buying cars. In hindsight, it fed a need and desire, but cost me probably $30-40,000 in lost savings.

    I go by my 1/10th rule of car buying now i.e. spend no more than 1/10th your gross income on the purchase price of a car.

    Best, Sam

  2. Thanks for stopping by Sam. I think it’s definitely easy to go crazy and upgrade your cars every two or three years in your twenties. 1/2 of my twenties were spent in school, so I didnt need to keep up appearances like some people feel that they do.

    I’ve heard that 1/10th rule before, and it’s a pretty good one.

  3. I think it’s totally find to bend “the rules” if it makes sense for your situation. People who embrace Dave Ramsey as one-size-fits-all… Well, I just don’t think it’s right.

    Personally, I decided to pay off my debts from highest balance/highest interest instead of lowest balance, like Dave Ramsey says. It makes more sense financially, though I understand the psychological effects of paying off loans more quickly.

    In a broader sense, I’m paying off my student loans in a hurry. Most blogs I’ve read advise you to keep around “good debt” and instead invest the money, but I’m not interested in having those payments around for a decade. I just can’t imagine that.

  4. “Typically people who buy used [cars] get looked at like they’ve got 3 heads” Where is this? I do not want to live there!

    I have completely broke the cardinal rule by taking out a loan on something that all PF-ers would say to never ever ever ever ever do. But I did and I absolutely do not regret it. So I definitely feel that you know your life better than anyone else!

  5. @Red. I agree, and all PF people who are worth their salt realize it’s called “personal” finance for a reason. It reflects many things about a person and the situation that they are in such as how much money they have, the activities they like to participate in, what line of work they are in and so on. For example, if someone didn’t own a car but paid 400k for a home because they wanted to walk to work, that would be different than someone paying 200k for a home but needing to drive 30 minutes to work.

    @Leslie. I dont want to live in a place that looks at you funny if you shop for/buy things used. I do it with a lot of stuff, and I dont have a problem with it at all. It’s good that you dont regret your decision. You are the only one who knows the best way for you to spend your own money. I took out a loan and bought a new car because I was seeking stability in my automobile situation. I’m not saying that I wouldnt have had stability with a used car, but I KNEW I would if I had a warranty and a new vehicle. It’s been worth it many times over.

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  7. I completely dismis all of the emergency fund dogma. I think it’s bulls&*t. If you’re getting 2% on your Emergency fund and paying 12% on your credit card your 10% worse off every year because of your emergency fund

    • I partially agree with this ben. However, I do think it’s important when paying back debt to have a little cash. It helps you break the mindset that credit cards are for emergencies. Also, I think one should be in place after you’re debt free. Even if you’re making 2% on your e-fund after you’re debt free, you’re still doing just fine.

  8. I take a different perspective on that. If you’re commited to being debt free you will do everything possible NOT to use the credit card again. You go without, you disconnect the cable, you cut a deal with the “insert creditor here” to make a payment arrangement. In short you will move heaven and hell so you don’t have to hit up that credit crack pipe again.

    It’s the same with bonds vs savings. Because it’s harder to get access to bond money you’re less likely to access it when times get tough vs savings which you can access instantly

  9. I have to agree that Dave Ramsey’s advice (or Suze Orman’s, or anybody else’s) is not the best advice for everybody.

    I don’t trust used cars. My husband bought a Certified Pre-Owned Prius in 2008 that we just paid off last week that is running fine, but in general, I don’t trust used cars.

    Since our cars are paid off now, we’re building up a fund for maintenance and future car purchases. If we have enough in that account to buy the car I want when my crappy Aveo finally dies, yay. If not, it will make a nice downpayment for my next new or Certified Pre-Owned car, lol.

    I don’t splurge and am not buying a Jaguar…but my next Yaris or Prius or Accent will need to be a car I can trust since I do plan on driving any car I own for a minimum of 7-8 years…hopefully 10 or more…

  10. One size fits all personal finance is like the one size fits all t-shirt. It probably won’t fit you. But these gurus who have to make blanket statements that work for non-number crunchers are giving the best advice they can with limited knowledge.

    Personally, I love to crunch the numbers and see what is right for me. So far, that has been purchasing new vehicles since I know I will keep them for 10+ years and am great with maintenance. When the time comes for the next car, I’ll see how much money is in the account set aside for just this purpose, and again make the best deal I can for my usage.

    I’m not adverse to a gently used vehicle, but if a deal comes around where I can buy a new one with 0% financing, I’ll know that’s my best financial choice yet. Used cars never get the 0% financing deal. How nice it would be to have a new car AND retain my car nest egg to earn interest.

  11. BITFS – Getting out of the car trouble has been the best thing that’s happened to me, as I mentioned in the post. It felt like I could never gain any traction with my old one. Also, congrats on paying off both of your cars. I’ll sure be happy when I get to that point!

    Leigh – Thanks for stopping by, I agree with the 1 size fits all stuff. I think what a lot of the people are trying to get people to realize is that it’s not difficult, and there are a few things that are 1 size fits all (like spending less than you earn).

    I was not adverse to a gently used vehicle either, but they wanted more for an old truck than a new one. I got .9% financing, and even at that deal it was better than paying more for a used one

  12. “I was taught that you bought a new car if you could afford one, and you drove it for 15 years or more.”

    I was taught something similar, but a few years ago realized something that would work better for us…why not buy a 2-year-old car and drive it for 13 years?

    Food for thought…

    By the way, I completely agree that finance is 75% personal, but as you mention there’s the 25% baseline that contains those core principles that can’t be messed around with too much. I believe that most of the problems with people’s finances are attributed to violating that 25%.

    P.S. Great blog! Very happy I stumbled on it.

  13. Wojo – I completely agree with your reading of peoples core financial problems. Sure, someone may pick the wrong stocks or not invest aggressively enough for retirement, but if they are spending more than they earn, they are going to be in trouble no matter what.

  14. I prefer to purchase a used car myself (usually only 2-3 years old) because the biggest problem with new cars is that most people just buy them in order to show off to other people and then watch the car depreciate immediately and potentially end up owing more than the car is worth.

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