Trade down my car to reduce debt?

[Noncents]

Hi, I'm new and I would appreciate some advice if you'd care to give it...

Two years ago I purchased a new 2010 VW Jetta TDI Sportwagon (on credit) when my previous car died suddenly. I was not very Mustachian at the time and bought the car with only a small down payment.  I needed a reliable vehicle for my job at the time which required occasional travel, and commuting of at least 40 miles per day to our office or to client sites.  I also needed something I could use to take a client to lunch in and not feel cheesy. 

Fast forward 2 years - I moved across the country, got a standard 9-5 office job and cut my commute by 8 miles per day.  I've also discovered Mr. Money Mustache who has inspired me to either a) retire in 10 years (wussypants, I know), or b) at least have enough F-you money to retire if i feel like it after that 10 year period.

Since my MMM-inspiration, I'm on track to save 38% of my take home pay annually and I'm looking to cut costs more.  The last realistic place I can do this is with the car.  I owe $22,000 at 5.996% (Yeah, I said I wasn't very mustachian at the time... ) which translates out to a minimum of $525/month or $24,730 over the next 4 years.  I have been paying about $650 per month since I purchased it.   Prior to the move I drove 20,000 miles per year.  Now I've cut it down to about 11,000 (or less!).

Should I sell the car?  I took it to Carmax and they offered me $19,000 - which is pretty ridiculously low - putting me right at $3k underwater.  However, even if I accepted this offer and purchased an overpriced car from them at $11,000 (plus TTTL, plus $3,000 negative equity) say $15,000 total, I'm still cutting my principal owed by over 1/3... I have much better credit now than I did two years ago, so I should be able to get a rate of 4% or less from my credit union.  Also, I think I can probably get a better offer for the car, I'm just sticking with Carmax as an example.

I know it's a terrible idea to finance a car, but I do not yet have the savings to purchase a used car in cash; and I'm already financing!

I am leaning toward selling it as I'd be able to save approximately $170 per month for the next 4 years (total savings in the example above is about $8,200 over 4 years).  Additionally, total interest on the new loan would be $1,250 over the 48 months.  I can probably get that down to $850 if I pay it off in 36 months.  Alternately, I could put that $170 per month into my (mini)stache and pray that my index funds return more than 4% over the next couple of years.

Please let me know what you think, and thanks!

[Devils Advocate]

Is that quote ridiculously low? Not looking up the KBB value it sounds like it may be a reasonable offer.  Your car depreciates like a sonofabitch the first couple of years.

MMM would say (I think) to sell the car pay off the remaining balance (Dave Ramsey would say this is your stupid tax) and get a different mode of transportation. 

Does your city have decent public transportation? Can you bike to work?  Do you NEED a car?  If you need one, buy a cheaper used car and save up a car replacement fund in the meantime.

DA

[James]

Absolutely sell the car.  I suggest craig's list and private party in order to get more for your vehicle.  Hopefully that can get you above $20,000, but a search of listings in your area can give you a closer idea of what to expect.
 
As far as what to purchase, MMM has a good post on ideas.  $11,000 seems a bit high for what you need, especially financed.  I'd drop that down as low as you can go, pay it off asap, and then start saving for an upgrade.

http://www.mrmoneymustache.com/2012/03/19/top-10-cars-for-smart-people/

[Bakari]

I do not yet have the savings to purchase a used car in cash

If you sell the car for close to what you owe, and manage to get by for just a couple months with public transit and/or bike, 3-4 months worth of your previous $650 payments would be enough for a reasonably reliable 10-15 year old car.

[gooki]

My plan.

Start hunting for a quality, low cost replacement now. Once you find one you want, get the buyer to hold it for 48 hours while you dispose of your vehicle via Carmax ($19,000 sounds very reasonable for a car that was $26,000 new). I'd be looking to come out of the deal at least $10,000 better off.

[menorman]

Well quite honestly, despite your method of acquiring it, you do have what I would consider to be one of the better values on the road today, especially with the rising fuel costs. If your specimen is in good condition and all, you could probably get close to or even more than what you owe on it. Alternatively, you can see if you could possibly get a refinancing deal with lower interest if you want to keep it a bit longer. With that being said, you could probably find an older version of the exact same car in the $11k range, but they will likely have substantial miles. But aside from hybrids, I don't know of many cars that are have EPA stickers for as high as the TDIs do unless they're hybrids, so you may end up paying what you save in insurance and payment in gas instead.

[Mr Mark]

I do not yet have the savings to purchase a used car in cash

If you sell the car for close to what you owe, and manage to get by for just a couple months with public transit and/or bike, 3-4 months worth of your previous $650 payments would be enough for a reasonably reliable 10-15 year old car.

Yep.

At that interest rate, pay it off asap.

If you can get so you only need a car occasionally, what about just an occasional rental when you need one, formal or informal, instead of owning a car at all?

[2handband]

I'm starting to realize there's a bit of a disconnect between myself and the mustachian community. Folks here seem to be mostly interested in retirement through savings, whereas my method is just to not spend money ever. Coming from that perspective, my advice is:

Get rid of the thing. Now. Never, ever buy a car that you can't pay for with cash. Who cares what it looks like? Despite what you might have heard, you are not your car. If possible, don't own a car. If you must have one buy something cheap and shitty and drive it as little as possible.

[Mr Mark]

I'm starting to realize there's a bit of a disconnect between myself and the mustachian community. Folks here seem to be mostly interested in retirement through savings, whereas my method is just to not spend money ever.

I think if you read the blog posts from MMM you'll see one of the the big secrets of Mustashian retirement is that it's all about the low spending with standard/above-standard middle class life-style. But it's not extreme.

It's always been the case that "At both ends of the social spectrum, there lives a leisure class".

[2handband]

I'm starting to realize there's a bit of a disconnect between myself and the mustachian community. Folks here seem to be mostly interested in retirement through savings, whereas my method is just to not spend money ever.

I think if you read the blog posts from MMM you'll see one of the the big secrets of Mustashian retirement is that it's all about the low spending with standard/above-standard middle class life-style. But it's not extreme.

It's always been the case that "At both ends of the social spectrum, there lives a leisure class".

I'm slowly working my way through the blog as I have time. I think the big difference is I don't give a damn about maintaining a middle-class standard of living. For me simpler is always better, and I make all major life decisions with the primary goal of reducing stress.

[arebelspy]

Yes 2hand, you're closer to ERE than MMM.

There is some overlap, but you're closer to the ERE end of the spectrum. I think ETE budgets are 5-10k, Mustachian budgets are 15-30k, etc.

Gross oversimplification, but probably not inaccurate.

[velocistar237]

2handband, if you haven't already, head over to http://forum.earlyretirementextreme.com

[Mr Mark]

Yes 2hand, you're closer to ERE than MMM.

There is some overlap, but you're closer to the ERE end of the spectrum. I think ETE budgets are 5-10k, Mustachian budgets are 15-30k, etc.

Gross oversimplification, but probably not inaccurate.

Maybe I'm an unorthodox Mustashian, as I'm targeting ~$50k / yr with owning my own house debt free.

[2handband]

$50,000 a year sounds like a king's ransom to me... I honestly can't imagine what I'd do with that kind of money. I must ask (and this is genuine curiosity, not a snipe of any kind): if you own your home free and clear, what could you possibly be spending 50 large a year on?

[gecko10x]

Yes 2hand, you're closer to ERE than MMM.

There is some overlap, but you're closer to the ERE end of the spectrum. I think ETE budgets are 5-10k, Mustachian budgets are 15-30k, etc.

Gross oversimplification, but probably not inaccurate.

Maybe I'm an unorthodox Mustashian, as I'm targeting ~$50k / yr with owning my own house debt free.

Interesting that there seems to be such a wide spending spread among members that feel like they fit into the community.

[skyrefuge]

2handband, if you haven't already, head over to http://forum.earlyretirementextreme.com

Yeah, good suggestion.  I was thinking the same, that this might not be the most optimal community for 2handband, but I didn't know how to say that without being a rich snobbish exclusionary ass (like the people he deals with in real life).  Especially since his extreme level of low expenses could be a kick-in-the-ass inspiration to those here who *think* they've got their expenses trimmed pretty well, but still want to save more.  But in terms of help for *him*, he can probably get better advice at the ERE forums, since he's already way more advanced at cost-cutting than almost everyone here in MMM-land. 

For the record (and to continue the shameful derailment of this thread, any way these posts can be moved to 2handband's thread?), I'm targeting $20k/year expenses (single, no kids), so I wholly agree with arebelspy's "gross oversimplification".  My property taxes alone are $375/mo.  I have friends whose property taxes are $1100/mo.

[arebelspy]

Yes 2hand, you're closer to ERE than MMM.

There is some overlap, but you're closer to the ERE end of the spectrum. I think ETE budgets are 5-10k, Mustachian budgets are 15-30k, etc.

Gross oversimplification, but probably not inaccurate.

Maybe I'm an unorthodox Mustashian, as I'm targeting ~$50k / yr with owning my own house debt free.

I'll be right there with you.  The wife and I are at about 25k right now, but we're anticipating about double that when we have two kids.

I was generalizing based on what I feel most Mustachians have mentioned as a current budget.  But you're right, target budget might be different (as mine is).  Sounds like it's time for a poll!

EDIT: POLL! https://forum.mrmoneymustache.com/ask-a-mustachian/what's-your-target-annual-income-in-retirement/

[Mr Mark]

$50,000 a year sounds like a king's ransom to me... I honestly can't imagine what I'd do with that kind of money. I must ask (and this is genuine curiosity, not a snipe of any kind): if you own your home free and clear, what could you possibly be spending 50 large a year on?

Good question.  I'll try to break it down.

Needs
House will be valued at ~250k. Yearly taxes, maintenance, and some mortgage payments [30 year, fixed, assume ~50% of equity*]. Where we'll be living, thats ~4k taxes + 1k house fund + 8k mortgage: total 13k
Food and clothes & household stuff: $5k /yr, Total 18k
Health care: Catastrophic insurance (5k max OOP per year) $4k /yr premiums + assume $2k average OOP, Total 24k
Utilities: $4K, Total 28k

Wants
Private school for child, $7k/yr, Total $35k
Going out, entertaining, wine & beer, $3k, Total $38k
Car for Costco & trips + gas: $2k, Total $40k
Support for family + charity: $5k, Total $45
Travel, stuff I haven't thought of, say 10%, $5k, Total $50k

I know I could buy a few FEMA trailors and a patch of land, go off the grid, home school my child and shoot or grow my own dinner, but I choose not to.  Also, the location we love to live in means private school is pretty much required, and we don't want to move.



* Mortgage is good to have - by investing 150k on average I'll net ~6k/yr vs owning the house 100%

[arebelspy]

Health care: Catastrophic insurance (5k max OOP per year) $4k /yr premiums + assume $2k average OOP, Total 24k

Out of curiosity, are those projections based on actual quotes, or guesses, or...

That is, how did you come to these numbers?

[Mr Mark]

Health care: Catastrophic insurance (5k max OOP per year) $4k /yr premiums + assume $2k average OOP, Total 24k

Out of curiosity, are those projections based on actual quotes, or guesses, or...

That is, how did you come to these numbers?

I got quotes and the two I liked were:
- You pay everything up to $5k/yr, and they pay everything above that. If you don't hit the limit in the 1st year it lowers 20%, same next year, then 10% on yr 3, so your max OOP goes down to 2.5k. That was $400/mth
- You pay everything up to $10k/yr, and they pay everything above that. If you don't hit the limit in the 1st year it lowers 20%, same next year, then 10% on yr 3, so your max OOP goes down to 5k. That was $300/mth

I think both were United Health Care. We're a healthy family, but regular medication will run $1200/yr anyhow.

Note: for Family of 4 - I added a kid JIC ;-)  I don't think it changes the premium much.
-

[arebelspy]

Thanks Mr Mark.

[gecko10x]

I got quotes and the two I liked were:
- You pay everything up to $5k/yr, and they pay everything above that. If you don't hit the limit in the 1st year it lowers 20%, same next year, then 10% on yr 3, so your max OOP goes down to 2.5k. That was $400/mth
- You pay everything up to $10k/yr, and they pay everything above that. If you don't hit the limit in the 1st year it lowers 20%, same next year, then 10% on yr 3, so your max OOP goes down to 5k. That was $300/mth

I think both were United Health Care. We're a healthy family, but regular medication will run $1200/yr anyhow.

Note: for Family of 4 - I added a kid JIC ;-)  I don't think it changes the premium much.
-

Thanks for the info.

As an aside, those numbers are insane. I can't believe how expensive insurance is, and am constantly amazed at how lucky we are with ours.

[Bakari]

I second the suggestion that this be made a separate thread, but until then I'll join in on the hijacking

$50,000 a year sounds like a king's ransom to me... I honestly can't imagine what I'd do with that kind of money. I must ask (and this is genuine curiosity, not a snipe of any kind): if you own your home free and clear, what could you possibly be spending 50 large a year on?

The average / median income is on the high side here, but you're not the only one.
Most years of my life I've had a 4 digit income, and I feel pretty well off with my current  25k
And as you know, I'm paying twice as much as you for rent ;)

I'm starting to realize there's a bit of a disconnect between myself and the mustachian community. Folks here seem to be mostly interested in retirement through savings, whereas my method is just to not spend money ever.

That was my method for most of my life.  Spend as little as possible so that I could get away with working as little as possible.
What Jacob of ERE made me realize was that by temporarily making more than you spend, that savings can buy you even more freedom.

You can either work 10 hours a week, earn $10k a year, spend 10k a year, and live comfortably on that low income and enjoy all your free time - and keep that cycle going for your entire life

or

you can work 40 hours a week, earn $40k a year, spend 5k a year, and 7 years later have a quarter million in investments that passively generates  the entire 10k you need to live comfortably. 

In scenario one you work a total of 30,000 hours.
In scenario two you work a total of 14,000 hours.

So in the long run, the retirement through savings plan actually has you working less than using frugality to not have to earn as much in the first place.
You don't have to want a middle-class standard of living for this to work.  In fact, it works even better if you don't, because you need so much less savings for it to work.
For me at least, its not about being able to buy stuff.  Its about freedom.

[arebelspy]

So in the long run, the retirement through savings plan actually has you working less than using frugality to not have to earn as much in the first place.
You don't have to want a middle-class standard of living for this to work.  In fact, it works even better if you don't, because you need so much less savings for it to work.
For me at least, its not about being able to buy stuff.  Its about freedom.

Good way to put it.  I work at a job now (which, admittedly, I enjoy), so I will have the freedom to do whatever I want soon.  I could go part time now and work forever. Say, a few hours a week for the next 50 years.  But I'd rather go full time for the next 5 and be fully FI.  (Also means you aren't dependent on that job.)

[gooki]

Also means you aren't dependent on that job.

That's the kicker for me. Not being dependant on employment.

[Noncents]

Well quite honestly, despite your method of acquiring it, you do have what I would consider to be one of the better values on the road today, especially with the rising fuel costs. If your specimen is in good condition and all, you could probably get close to or even more than what you owe on it. Alternatively, you can see if you could possibly get a refinancing deal with lower interest if you want to keep it a bit longer. With that being said, you could probably find an older version of the exact same car in the $11k range, but they will likely have substantial miles. But aside from hybrids, I don't know of many cars that are have EPA stickers for as high as the TDIs do unless they're hybrids, so you may end up paying what you save in insurance and payment in gas instead.

First, thanks to all for your consideration.  I knew the answer before I asked, but I think I needed a kick in the pants.  Also,  thanks for the interesting tangents!

The TDI gets amazing mileage, and I'm pretty happy with the car thus far.  However, the cost of maintenance that has been built into the car will nearly exceed the fuel savings that the TDI achieves (when compared to a more conventional vehicle).  Largely this is due to the automatic DSG transmission - it requires special tools to service and has a higher than average expected failure rate. Additional costs may be attributed to the diesel, but it's arguably close in reliability, and will likely have more longevity.  All things being equal, the overall cost of ownership of a honda fit is much less expensive, despite the 8-10 fewer average miles per gallon it's expected to receive over its life.

For the record, offering an individual the (discounted) wholesale price of $19k for a vehicle that you intend to sell at $25k (used) is, to me, unreasonable and is bordering on the unethical.

With that being said, I would spend less money going out today and purchasing a brand spanking new honda fit at 2 to 2.5% interest than what I'm paying for the remaining balance owed on the TDI (approximately $3,500 savings over 3 years for a new, base Fit with a 5 speed manual).  (This would be different if I had purchased a manual TDI Golf)  I whole heartedly admit to antimustachianism in my purchase - but it was my first "new" car and I had anticipated needing it for a much higher rate of use than I'm currently getting out of it.

Full disclosure:  The owners of my company also own a Cadillac dealership.  I'm collaborating with the sales manager to find  a decent mid-to-late model used Fit/Civic/Scion for only a few hundred over the wholesale price.  I'm also the head of the corporate accounting department, so they know that I'll know the exact profit they'll be making off of me (I'm willing to pay a modest fee for the service).  I will be spending $10,000 to 12,00 on the car, but it will be paid off in 2.5 years and I will pay approximately $1,000 in interest over that time - Total savings of about $8,000 over the TDI and it's 3.5 year repayment plan.  I could probably do it cheaper as some have suggested, but I'm willing pay that interest in exchange for a reliable vehicle that I'm not itching to replace on a daily basis. 

I think that's my breaking point actually.  If I were to go the extreme route as 2hand suggests, it would last me either a year, or 3-4 mechanical issues before I would be in the market to buy another car.  I know a car doesn't define me.  But I know that I will be irrational when faced with an unreliable vehicle - that's how I landed in this situation in the first place!  At the same time, I know from experience that the other extreme doesn't work so well for me either.

That's about where I'm standing right now.  Further mustachian punches to the face / priority re-alignments are welcome and encouraged.

[grantmeaname]

With that being said, I would spend less money going out today and purchasing a brand spanking new honda fit at 2 to 2.5% interest than what I'm paying for the remaining balance owed on the TDI (approximately $3,500 savings over 3 years for a new, base Fit with a 5 speed manual).  (This would be different if I had purchased a manual TDI Golf)  I whole heartedly admit to antimustachianism in my purchase - but it was my first "new" car and I had anticipated needing it for a much higher rate of use than I'm currently getting out of it.

Does this account for the -$3000 in equity you have in the TDI? (Is it based on what you would actually receive for a trade in?)

[Noncents]

Does this account for the -$3000 in equity you have in the TDI? (Is it based on what you would actually receive for a trade in?)

Yes, the savings accounts for the negative equity in the TDI (which is now about $2,200 negative after today... so the savings also is cut back by this past payment...).

Essentially at 6% I have 45 months remaining so I'll pay $23,730.46 on 21,200 ($2,530.46 in interest) assuming minimum payments.

On a new 2012 Fit $15,750 (base, manual transmission) with $1850 in TTL (including doc fees) and $2,200 negative equity puts the purchase at $19,800 at a rate of 3.5% (conservative...it would probably be 2 to 2.5%) then making minimum payments over 48 months would put me at $21,247.20 or a savings of $2,483.26.  At a 2.5% rate the savings would be $2,903.46.

Buying a used vehicle at 12,000 (+2,200 neg.eq. +1350 TTL) at 4% is  $16,852.50 ($15,550 principal and $1302.80 int) for a total savings of  $6,877.96 over the 48 months.

This all assumes minimum monthly payments, of course.  I would actually be paying the new car off much faster by applying the same $650 per month to a much lower monthly payment... I would estimate another $300-$500 savings in each scenario for the reduced time frame.  I also think that that would be offset by the slightly higher fuel consumption of the new vehicle.

*Edit* (...and yes, buying a $3,000 car for cash would save me another $10,300 over the same time period.. damn)

[Mr Mark]

 It seems a lot of us Urban biker types would benefit from some kind of car share scheme, or partial ownership, like netjets for cars. It's still shocking how much money is spent in this country having machines that sit in your driveway 22+ hrs a day doing nothing but depreciate.

[grantmeaname]

They have systems like that. Two popular ones are Hertz Connect and Zipcar.

[Mr Mark]

 Awesome! That zipcar thing looks great, if it's really that easy to book a car.

Perfect for an urban biker who needs a car for costco and a few trips a month.

[poko]

Also Car2Go -- smartcars that you can rent and don't have to return, just drop them off wherever (obviously there are some kind of limits, but I don't know the details). They are in Austin, not sure if they've made it other cities yet.

[Bakari]

City Car Share in my area.

If you had a few like-minded friends that you really trusted, you could set up something with them.

All else fails, you don't have like-minded friends and your town doesn't have Zip car, if you rarely need a car, it can be cost effective to just rent one from a traditional car rental place rather than owning one outright.