New and Drowning

[shelsl93]

There is so much information on here and I'm trying to keep my head from spinning. I'm young and have never had any financial guidance outside of being told to pay off debt, which leaves me in my current predicament.

After some recent car trouble, I allowed myself to be swayed into selling my car and purchasing a new 2018 vehicle with a $26,000 price tag. I took advantage of the longer financing option (6 years) to keep a more manageable payment for myself, but now I'm riddled with uncertainty. While I can make my payments, it keeps me from achieving 0 debt and financial freedom sooner.

What is the smarter choice financially? 

Do I continue to pay off the car and dump as much extra money as possible on that loan so that hopefully, in 4 years instead of 6, I'll have paid off the car and will know not to make the mistake of purchasing a new car in the future?

Or do I cut my losses early, taking maybe a $5,000 loss on the new car by selling it and purchasing an older model car costing me a lump some of maybe $6,000 - $8,000. Foregoing the roughly $2,500 I would have been paying for interest over the 6 years of the loan and differing financial freedom for the reliability of a new car?

Of course I'm frustrated that I made this decision in the first place, but now I'm just looking for the smartest way to proceed.

[bacchi]

The most optimal solution is to sell the new car, take the hit, and get a used car. You could even buy a 2015 used car for $14k and still be better financially.

It depends on how much you want FI. Keeping the current car is not the worst choice to make if the rate is low and it's a sensible car that will last at least 15 years but it is definitely sub-optimal.

[red_pill]

If you are totally new to monitoring your finances, then maybe just leave this tough problem for now (as long as you aren’t hair on fire in debt) and work out some easier stuff first? Pick the low hanging fruit, get the hang of it, build your frugality muscles and then revisit this hard problem in a few months. You may be better equipped to align your spending with your priorities at that point.

Does that make sense? It’s like if you want to declutter your house you don’t start with the sentimental items, you do the junk drawer first. If the car issue is looming as this big problem that you don’t know what to do with, then maybe you need to build some tools that you can use to deal with it. And maybe you can realize similar or greater savings by focusing your attention on the little things that are adding up without you realizing it.

[leavesofgrass]

You need to provide more information in order to better evaluate the purchase:

What's your income? Buying a $26K car on a $75K salary is very different than buying that same car on a $200K salary.

Are you maxing out your retirement savings and hitting all other financial goals?

Did you buy a Honda/Toyota or other similar brand that's super reliable and depreciates more slowly than other manufacturers?

Do you intend to drive this car until it dies?

[shelsl93]

The car is a Nissan and I purchased it for just under 26K with a 3.95% AIR presently over 6 years (started in October of 2018) and I do plan to run it til it dies. My plan isn't to think about this vehicle as a trade-in.

 My income is 40K and I bring in around another 30 in commissions on a yearly basis.

Maxing out employer matched small IRA, and I have my own ROTH that I put into.

[leavesofgrass]

Assuming you get your base + full commission, that car is about 37% of your gross income, which is very high.

Personally, I would not want a $26K car on that income, especially since almost half of it is commission-based. However, if you see your income going up substantially over the next few years, consider keeping the car while paying it off ASAP.

I would look into private party sales and see how much you can get for your Nissan. Then look at the cost of a used car -- ideally one that's still under warranty and around 2-5 years old. Consider the most economical, reliable car that has what you need and assume it will last 10+ years. Then you'll really know how much you'd be out.

At least you're not locked in a lease!

[Ecky]

I don't think highly of Nissan automatics, but even if a Honda or Toyota would last x years longer, major failures would still be years down the road and not something you'll need to think about until you're in your 30's.

[35andFI]

I was in a similar (worse?) situation myself. I was making less than you (including your commission) and purchased a brand new car for around $46k out the door (financed ~30k).

I owned the car for about 10 months before starting to track my net worth. I was easily able to afford the payments and had 0 debt elsewhere due to my otherwise frugal lifestyle.

After seeing the bleeding wound on my net worth spreadsheet for roughly 3 months, I sold the car resulting in a loss in excess of $10-12k (still haven’t calculated the exact number).

Ended up buying a small, FWD, economical, 4cyl hatchback with <30k miles for ~11k out the door. that I paid in cash.

I haven’t regretted the decision for a moment.

[jo552006]

The smarter move financially is almost always to sell and have a lower payment.

My opinion:
Sell new car > Take the hit > Don't buy new again until you can afford to buy the new car without a loan.

It's literally that simple.  It's not the only way to do it, but you specifically asked "What is the smarter choice financially?"

[cchrissyy]

I agree that if you are "new and drowning" you can probably take a step away from the car issue and let it wait while you handle many easier things with quicker payoffs so you feel some breathing room and don't rush this big decision.

[CindyBS]

I agree that is you are "new and drowning" you can probably take a step away from the car issue and let it wait while you handle many easier things with quicker payoffs so you feel some breathing room and don't rush this big decision.

I third this idea.  Maybe a good starting point if you are really new and overwhelmed is to just record your spending for a few weeks.  Then you can get a handle on the big picture and make a more informed choice.  Most likely the answer is to sell the car, but then buy what?   Baby steps are more likely to lead to success than trying to take on a huge life change.

[frugaldrummer]

I agree with others who say wait to decide about the car.

Work on the rest of your budget first.

I've had old cars and new cars. I've gotten the best bang for my buck by buying new, reliable, basic model cars with no extras, and then maintaining them well and driving them for 200k plus miles.

Plus you should have several years of trouble free driving in the early years of this car's life. There's some value to that.

Focus on saving an emergency fund and funding retirement accounts first.

[Fomerly known as something]

I agree the car in of itself is not the problem.  The problem is the I stretched out the payment because I needed it lower attitude you had when buying the car.  I'll +1 to say you need to look at your spending and create a budget first than make a decision on the car based on what you find there.