Never Have a Car Payment

If you have a car payment, you need to get rid of it. As a philosophy of mine I try to avoid anything that requires a recurring monthly payment. I understand some things are inevitable but I want to stress that a car payment is not one of them.

From talking to financial counselors many times when people are struggling and broken in their financial life, it is often because they find themselves in a lousy car situation or buying too much house. I will talk about buying too much house later this week, but for now let me stick to the car.

What I mean by a lousy car situation is they bought a new car and have been paying huge payments on it rather than paying cash, and now that they are in trouble financially because there was no buffer for life to happen they find that their car is worth LESS than what they still owe on it.

This happens far too often.

My advice and philosophy on this is pretty simple. I have 2 basic "car rules."

Car Rule #1: Don't buy new. My suggestion and personal philosophy is to get a 2 year old car. The reason for this is strictly numerical. As soon as you drive a new car off the lot it is taking a huge chunk of value off. In fact a large percentage of the value gets taken off in the first 2 years. By buying a car after 2 years you have avoided taking a huge depreciation hit.

Car Rule #2: Make payments to yourself.

Right now I am driving a 99 Honda Accord that does not have payments. Yet I am paying a $350 car payment to myself. There is a reason for this. It is smart. I can either make payments later and have a lot of that going to interest and be making someone else money, or I can make payments to myself now in my money market account that earns 5.05% and have interest coming in. Then when it is time to buy my 2 year old car I will have the money to pay cash for it. Side note: If you have cash you can get a major deal on a car, especially when looking to buy from individuals. When you show them you have cash and can give it to them as soon as they agree that is extremely enticing.

If you are thinking: "But I need to buy a car now but have no money saved up. What do I do?"

I will answer your question by giving you 2 scenarios and you can decide for yourself which is better.

Normally we buy:

$18,000 car; 7 years at 10%; payments of $300; value after 7 years, $800

Or we could buy instead:

$6,000 car; 7 years at 10%; payments of $100; value after 7 years, $400.
The other $200 per month is saved at 10% (mutual fund) for 7 years = $24,190

Now who may the right choice:

At Year Seven
The car is fully depreciated, in either plan, but in the 2nd plan:

Savings $24,190
One year old car for cash <$16,000>
Left in savings $ 8,190

No Car Payments!

Another Seven Years
Saving $300 per month from year 7 to year 14
plus interest on $8,190 (10% return) the car is fully depreciated again.

Savings $52,245
One year old car for cash <$25,000>
Left in savings $27,245

No Car Payments!

Which scenario do you choose?

After 14 years you are in a position where you are set up to never have to make another car payment just because of a decision you made 14 years ago.

It is a shift of thinking from, "I will always have a car payment" to "I never want a car payment."

Use the compound interest factor for your advantage and not against you. It is powerful either way.

Signs your financial System are Working

I wanted to offer up some encouragement to all who I have not had the pleasure of speaking with in person or through e-mail. I have heard really AWESOME things about people making commitments to handle their money wiser.

This allows them to be better stewards, better givers, better providers, and have actual freedom to do what God calls them to rather than be stuck in a position where they HAVE to earn a paycheck from a job they are not passionate about.

I wanted to list some signs that your financial system is working so that you may encouraged and continue what you are working towards:

1.) Paying car insurance quarterly or biannually without a hitch

2.) Giving e an offering to your local church not longer HURTS to write that check.

3.) Presents are a joy to buy for people.

4.) Getting to see monthly interest incurred from your 4.3%+ Interest Rate saving account. (If you do not have one of these, please sign up with ING Direct immediately.)

5.) No longer have stress when bills come in.

6.) You know that you have a plan financially if "life" happens.

7.) You are actually choosing to be at your job, rather than stuck at it.

And so many more! Having freedom with your finances is exactly what it sounds like. Freedom. It allows us to live life differently; I know too many people that are in bondage in their financial life which causes them to not be able to devote their lives to the calling they are called to because our money and hearts really are connected.

The Unexpected

In everything in life we must account for the unexpected. I would call it foolish to not do this. Most times when we have an emergency it is a major life changing event. However, when we have not set ourselves up for success financially to get through these types of events not only do we have a major LIFE crisis, but we also have a MONEY crisis.

This adds tons of unnecessary stress that could have been avoided. The reason why I seem to be harping on the need of an Emergency Fund a lot is for a couple reasons:

1.) It is the 1st step the I advise people to do. So if you wanted to ask me what your first step to financial freedom is I would advise to save up $1,000 (basic) emergency fund or $500 if your income is under $20,000.

2.) The other reason is because I see scripture advising us in this direction. Proverbs 21:20 "In the house of the wise are stores of choice food and oil, but a foolish man devours all he has."

It is literally foolish to devour all you have. So if you are living paycheck to paycheck and all your money comes in, then all your money goes out, scripture calls this foolish. This is why my first step is to break the chain and develop an emergency fund.

Technical Difficulties

I apologize for the inconvenience but www.chriskakaras.com will be down this week due to a domain transfer. I have been meaning to do this for some time and unfortunately this wait time was inevitable. www.chriskakaras.com will be up and running (hopefully) no later than Monday, October 1.

For the immediate time being you can check daily blog updates at storingtreasures.blogspot.com. Thanks!

Sincerely,

Chris Kakaras

Budget Time

It is getting to be that time of month. About a week before the month is over I put my financial outlook together and start budgeting for next month. A basic process of what is do is:

1.) Update all transactions in Microsoft Money to date and look at a snapshot in a summary of my accounts.

2.) I plan out a detailed projection of expenses (for the next 7 or so days) and put them in as transactions. The date I use is the last day of the month and as the actual expense comes, I delete that "projected" transaction. The reason I do this projection is because it is my goal to always keep $1,000 in my main checking account. I do not want to keep more and do not want to keep less in there. Anything left above $1,000 goes to a different account (savings, money market, investment, etc.) but I usually will end up right at $1,000 anyway because that is what I plan for.

3.) Now I am ready to put a plan for next month down on paper. The first thing I do is put the amount of income coming in. This goes at the top of the page and I want to "spend" all that money on paper. And when I mean spend I do not mean buy stuff, I mean give all your money a name. A certain amount goes to food, a certain amount goes to investments, giving, college fund, etc.

4.) After you put the income on the top of the page you start putting down necessary expenses. (i.e. Food, Shelter, Car, Utilities, Clothing in this order)

5.) I then think of upcoming expenses that could possibly be a budget buster in the coming months. I think of my car, Christmas, girlfriend's birthday, etc. And I choose a target amount for it then divide it by the number of months between now and then. This is now included in my budget and I make a separate account for it for money to be transferred to.

5.) Now lastly I roll over my previous months budget for all other accounts. I make my tweaks and then move on.

This whole process might be time consuming your first couple months but after a while you will be able to knock this out in less than 15 minutes. The important thing is to get the ball rolling. If you have yet to make a budget, I encourage you to start with next month (October).

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The Breakthrough Cont'd

If you did not read yesterdays post from Jim Collins' book "Good To Great" please check it out before you continue with this one.

In that illustration (known as the flywheel concept) you are using a ton of force and only moving it a little at a time however at some point the wheel begins to turn on its own and even goes faster with you doing little to no effort.

I think we all want to be there in our finances. I have stated as a goal of mine, I want my alternative income streams to be greater than my expenses. This to me is true financial freedom. How do I do this? First I MUST understand this concept because it changes strategy on what our plan is.

What would happen if you were pushing that flywheel and you got tired and took a break for just a second (or a month when it comes to personal finance). The momentum would be lost and we would be discouraged to have to start over. Not only that, we would not have as much energy as before. If that happens perpetually we would never get to be to the breakthrough point.

This "stopping factor" can come in many different shapes when it comes to personal finances. It could be that emergency that comes up that we didn't have an emergency fund in place to counteract so we could keep building momentum. It could be the realization that it is hard right now and we want it to be easier immediately, instead of looking to the breakthrough point. Or it might be that you are just focused on results right now and give up because you are not seeing any.

Just like with the flywheel when we start we will put in the most effort and get the least amount of results. But getting to the breakthrough point is worth it and in anything you do and this needs to kept in mind.

Practically for any goal you have with your finances this applies. If you are budgeting for the first time it will take the most effort and you will probably make the most mistakes or be the most frustrated than you ever will. It gets easier, I promise. After a little over a full year of actually living on a budget, I am able to accurately, efficiently, and effectively budget my money in a matter of minutes for the upcoming month.

All it takes is getting through the initial max effort min results stages and looking to the breakthrough point.