When looking at your personal finances, you\’re always going to want to have a holistic point of view and consider all of the components of your financial picture to figure out what things need to be adjusted. One of these things is buying a vehicle with leeway and being able to build margin into your finances through transportation.
How I look at this is typically from one perspective or another in the sense of having two different options that usually are recommended when it comes to people building margin utilizing transportation methods.
1) Determine what has the highest balance and interest rate
When looking at how building margin into your transportation will affect your debt and your unsecured debt, you\’re going to first and foremost want to look at what you have the highest balance on and then the highest interest rate.
You may have a credit card with 17% interest, a line of credit with 11% interest, or a personal loan with a nine% interest rate. Regardless of what debt you have, you\’ll want to look at what those high balance, high percentage rate loans look like to figure out in what order to pay things off.
As we go through these themes related to building margin into your personal finances, I\’m going to be recommending that you strategically look at your finances from a holistic point of view and from the point of view that takes into consideration everything at play to make sure that you\’re building margin in and giving yourself breathing room. I always look at it from the standpoint of building in options.
When it comes to buying a vehicle, assuming that you are taking out a loan to buy that vehicle like 50% of Americans do, you are going to want to look at how you can build in margin into that purchase so that you can strategically look at retiring other debt that may not have an underlying asset attached to it and likely have a higher percentage rate.
I always try to be very careful when talking about debt consolidation because your bailout plan of combining that debt doesn\’t necessarily change the behavior that got you there in the first place.
You want to be careful about consolidating debt and pulling things into one singular loan because it makes you feel like you\’ve done something even though the debt\’s still there. I say this because so many people consolidate their loans and look at ways to reduce their monthly payments without necessarily making progress on paying off that debt.
When looking at building in margin into your personal finances related to transportation, you may want to consider buying a vehicle with a steady depreciation curve. For example, you may want to look into a vehicle such as a 2019 Honda Accord Sport. Let\’s say that vehicle has a trade-in value of $22,000 and a retail value of $26,000. Then assume that you can negotiate that vehicle, get it for trade-in value or below, and have four thousand dollars in equity on that vehicle without surpassing or exceeding the actual book or market value. From there, you\’ll want to look at the difference between the $22,000 and $26,000 and compare it to your debt. You may have a credit card at 17% interest, and you can take that and retire that debt by basically financing that vehicle for what it\’s worth.
You would then have that loan at a higher amount for your vehicle. Take that amount, and apply it to your credit card to pay it down or pay it off.
You want to be careful when you are trying to build your credit. You don\’t want to close that credit line in most situations, so you want to keep it open as long as you commit to not running that balance back up. Like I said before, you want to be careful about the behavior and make sure it is actually changing so that you\’re not just giving yourself a bailout plan, and then you charge up that credit card again. The goal here is to build margin into your monthly payments while being mindful of getting that debt retired.
I typically recommend this in certain people\’s financial plans because you have a definite period for that loan. For example, you may have a three-year, a 36-month, a six-year, or a 72-month loan. When you\’re looking at getting a loan on a vehicle, you have a finite period to pay that vehicle off, whereas, with a credit card, you can pay the minimum balance for years to come. For example, if you had that $22,000 Honda Accord financed at the typical loan term of 72-months at the normal rate of 5.5%, you would be paying about $359 per month on that vehicle.
Let\’s assume that you have a $4,000 balance on that credit card at 17% and that you are paying 1% of the balance per month plus your minimum payment. You will then have about $100 for that credit card you would be paying per month.
The caveat or the challenge is that a credit card is not based on a six-year or three-year loan. If you have that $4,000 balance, it will take you 21 years to actually pay that debt off by paying that hundred dollar payment. That\’s why I recommend that people look at consolidation carefully and not use a third party or someone else to consolidate their loans. I suggest that they strategically look at their finances to see if it makes sense to roll something like a credit card into a car loan, therefore, retiring the credit card and paying the entire amount off, in that term or less.
In addition to saving that money, you will also help to boost your credit as long as you don\’t cut off and close the card right away. You\’ll be boosting your credit because of your utilization if you end up using it in the future.
2.) Look at the depreciation curve
The second option comes down to looking at the depreciation curve for that vehicle and figuring out how you anticipate it depreciating over a year or maybe a year and a half. You can look at buying that vehicle at the trade-in value and selling it a year later at the retail value.
I say that because, at that point, you\’re going to have a certain amount that you pay down on the principal because you have a six-year loan and are paying a more significant portion of that loan payment to the principal than you would be for something like a credit card. Of course, you\’ll have to get another car loan or save up for a car over that year and a half that you can pay cash, but from that point, you have built-in margin from the get-go that can be utilized to pay down other debt.
Now again, these two options are simple and pretty painless. But they most likely won\’t change behavior, especially overnight, so you will want to be mindful of not living a lifestyle you really can\’t afford.
My encouragement and challenge to you is to make sure that what you are purchasing are things you can actually afford.
Let bygones be bygones. If you\’ve gotten into debt before, just figure out a plan to get out of that debt and strategically look at your finances to determine what components need to be involved in your debt payoff plan. From that point, look at how you need to live your lifestyle based on what you can afford.
Before pulling any equity out of any asset you have or getting a line of credit, be mindful of the plan to pay that back. Too many Americans today live in a fantasy world where they\’re taking out loans for everything under the sun without a plan to pay it back.
I would encourage you to make sure that you have a plan to pay off your debt that includes options so that if something happens like a recession or something similar, you are not stuck in a place where you don\’t have options to pay it off.
The goal with margin is to help you continue to build financial literacy and be educated to make decisions that put you in a better position so that we don\’t have a situation like 2008 happen again. You need to be proactive with your finances and figure out options ahead of time rather than waiting for an emergency.
Call To Action
My call to action today comes down to looking at your unsecured debt and looking at the vehicle–or vehicles–you have and whether you have equity in those vehicles.
Look at the market and the book values of that vehicle and determine if it makes sense to refinance or buy your next car with margin in mind to pay off those revolving lines that may be giving you an additional level or amount of exposure.
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