Should My Winnings Go to a New a Car?
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Dear Chuck,
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I recently obtained a small court settlement and I am seeking the best way to handle my finances. I am particularly interested in what to do with my car. Should I pay it off and get a newer model or pay it off and keep it?!
Curious Car Buyer
Dear Curious,
Congratulations on winning your court case, but to answer your question, let me pose a few of my own because deciding whether to get a new car is a process that begins with evaluating your needs and budget. Many people don't consider that the cost of an auto includes maintenance, payments (if you borrow money), repairs, gas, oil, tags, taxes, and insurance — and that shouldn't exceed 15 percent of your net spendable income.
So consider this:
* Are your employed? Do you need your car for work or is public transportation or ride sharing a realistic option?
* What is the mileage and overall condition of you present car? Do you have reason to believe that a costly problem is on the horizon? Is it possible your present car can be repaired and continue for more years with only basic maintenance?
* Do you have an emergency savings account?
* Do you have any debt?
Especially when you receive a little extra money, you should evaluate some of your larger goals dealing with money. This can be the time to replace things like a bad refrigerator or for paying off expensive consumer debt.
But before you do any of that, Crown recommends that you first give to support your church and ministries you appreciate. Following that, fully fund an emergency savings account — because as your court case may show, the unexpected can happen. If you don't have an emergency fund, begin by saving $1,000. After that, depending on your salary, build towards a minimum of one full month's salary set aside for emergencies.
Proverbs 21: 20 says, "The wise man saves for the future, but the foolish man spends whatever he gets." (TLB)
Once you have accomplished these two important steps in the use of your court award, if you need your car to get to work and make a living, use the balance to purchase a quality used car that you can buy with cash. Your car is an important tool for your use that can't be cut out of a working budget. By the way, the best investment I ever made on a used car was one I purchased for $800. I drove it for two years with almost no maintenance costs and then sold it for $800.
Take the time to have a mechanic check over any used car that you like. At Crown we've found that "monthly repairs for the typical American car on the road (approximately seven years old) run about 5 percent of a family's budget. A new car takes about 15 percent of the family's budget. Compare 5 percent per month for maintenance on an older car to about 15 percent to buy a new car — no contest."
Even though you may think that better gas mileage justifies the cost of a new car, some new cars would have to be driven for more than 7 years to reap the savings from lower gas usage. As a practical matter, a car is an expense, but a necessary one for most of us . . . So with all of that in mind, I hope you can make a wise choice. Let me know if you need more input and thanks for asking!
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