This is the 5th in a series of 6 articles on how to start a financial safety net
We all know him. He’s that guy that shows up at work one day with a new car. It’s beautiful—that new shade of ________ everybody L-O-V-E-S! Got a great sound system. Gorgeous upholstery. That new suspension system that’s the talk of the automotive industry. Pick-up like you wouldn’t believe. All the bells and whistles.
Yeah … Everyone’s checking it out. Everyone’s envious. And, everyone is thinking, “How can he afford to drive a car like that on his pay?”
He’s happy—for about six months—until the car breaks down—again. (You know? One of those new, improved systems? But… it’s still got a few kinks to be worked out?) And, since he didn’t qualify financially for the no-deductible warranty, he can’t afford to fix it—again? Now the car just sits in the driveway (and he’s hitching rides to work). Or, he’s “robbing Peter to pay Paul”—using money that should go for other things—to get it back on the road. The point is he can’t afford to repair the car, and he can’t afford to maintain his lifestyle.
Everyone knows they have to protect their vehicles. Two categories of harm are theft and accident. Comprehensive insurance can go a long way to compensate for either of these. Because a third party’s money is involved, if you’re making car payments, it’s likely that comprehensive insurance is required. Too many people assume that a bare bones liability policy covers a lot more than it really does.
Liability insurance is a must even in states where insurance is not required by law. Without it, it is highly possible you could lose you lifestyle if you are at fault in an accident. Liability helps you restore someone else’s lifestyle when you are at fault. Comprehensive insurance helps you keep yours. Of course, the car needs to be worth replacing to make a comprehensive policy worth buying. Talk to your insurance agent to get the particulars.
Really, insurance is only a beginning. You need another level of protection. A level that keeps your car running: Maintenance and Repair.
Yes, I know that if you have a new car, some (maybe, quite a few) maintenance and repair issues can be covered by a warranty. But … warranties run out, parts continue to wear out—all cars age. People overlook the importance of being prepared to keep their cars in good shape. They fail to have funds to cover maintenance and repair. When the car requires work, they’re left searching for a way to make a non-plan work one more time. (Personally, I got tired of hysterical praying and searching—hoping that I’d be able to pull it off—again). Being prepared to keep your vehicle running requires a commitment to have funds available for maintenance and repair.
All maintenance is preventative maintenance. It’s work or replacement done to a part or system that is not broken, but is nearing the end of its estimated performance span. Some is done repeatedly; other only once every several years. Almost all maintenance is based on mileage. Your owner’s manual has a section listing recommended procedures with corresponding mileage, and whenever you have your car in the shop, your mechanic should be inspecting for unusual wear.
When you own your own vehicle, there are some maintenance procedures you expect to do on a fairly regular schedule: Oil changes, fluid and light checks, a regular wash, winterizing (if you live in a cold environment)… The list goes on.
Living on a budget with a category for routine vehicle maintenance can insure that you have ready funds for these procedures.
Taking the long view
Engine oil needs to be changed a few times a year. A timing belt or chain may need to be replaced every 100,000 miles (or maybe, less). Generally, you can count on replacing things like the battery and tires every couple or years. Some exhaust systems tend to rust or crack every few years. Each part has an average life span that is influenced by weather, driving habits, etc. Eventually, every part of your car will wear out and need to be replaced.
Malfunctioning or broken parts can cause a cascade of problems throughout the vehicle; maintenance minimizes the long-term effects of wear and tear and, ultimately, saves on the cost of keeping your car running legally and smoothly. Sometimes, it even saves your vehicle.
Whether you work on your vehicle yourself or take it to a mechanic, it will take money to keep it running. A little research—in your owner’s manual, chatting with your mechanic, or online—can give you a ballpark figure on what you’ll spend to maintain/repair your car over the course of a few years.
You have a choice to make: You need to decide if you will be proactive in caring for your car, or just let things happen. (Because you won’t be prepared, the second option tends to be unpleasantly surprising—and expensive.) If you truly opt to be proactive, you’ll put together a plan (as part of your budget) to save money for anticipated work or a sooner-than-expected breakdown. Having funds in an emergency account for repair and unexpected trouble can protect your lifestyle; it’s part of a financial safety net.
For sure, there’s the possibility of a breakdown and the trauma of being without the funds to get your car back on the road. Your car is likely to be a huge asset for getting to work (or in finding work). It needs to be protected. But, there’s life outside “the car.”
Let’s get back to the guy with that gorgeous new car. He’s thrilled to have it. For about six months. Maybe, it has no problems. Maybe, it’s not just sitting in the driveway. He’s still driving it to work. And … That’s about it.
Maybe, he’s realized he’s traded his life for a monthly car payment. He can’t afford to pay for his car, maintain it, and still have a lifestyle. It’s not much fun to have a great ride when the only “ride” is to work and back. He can’t afford that car.
Monthly payments: A TRAP
If you’ve been around this blog very long, you know I’m adamantly against debt. My advice: Pay cash or don’t buy it. Debit free is the only way to live. My father didn’t believe in making payments on something that depreciates in value. “Something that depreciates in value” perfectly describes an automobile. (I’ll admit it took me a car or two and some really tight times before I believed him.) Almost any vehicle you purchase will lose value the as soon as you drive it off the lot with papers that say it’s yours. From that moment on, it will continue to depreciate until its value is whatever it can be scrapped or parted out for.
To protect your car and your lifestyle, you want a car you can afford—not payments you can afford.
If you do decide to buy your car on time (making monthly payments), you know it’s decreasing in value while your payments remain the same. You also know that required or not, it’s best to have comprehensive insurance on the car while you are paying for it—just incase it’s totaled in an accident. That way you (or the loan holder) will be reimbursed the pre-accident value of the car. The value of the car… and that’s it. If you owe more than the car is worth, you get its pre-accident worth—not what you owe. If the terms of your loan require all interest be paid, you get what the car was worth, and you still owe any outstanding interest.
So, if your car is paid for, should you have comprehensive insurance—or liability only? That’s a judgment call: Is the value of the car worth the extra cost for comprehensive? And, do you already have significant funds set aside for your next vehicle? As your car ages and you prepare to buy another, you can switch from the one to the other.
When you decide it’s time to buy a car, think it through. How much will my monthly insurance premiums be? What kind of mileage will it get? Can I afford the fuel? How often does the oil need to be changed? Where’s a reliable place that I can my car serviced—without it costing too much? (What can I do myself?) When do I expect to have to replace tires, battery, muffler, etc.? (Since I make a practice of buying used cars, that’s a question I always think about.) This list mentions just a few of the more common things to consider. Ultimately, I look for a car that will let me continue to enjoy my life(style). I want to own my car. I don’t want it to own me.
Protect your transportation with insurance and maintenance. Protect your lifestyle by buying a vehicle you really can afford. What good does it do to own transportation you cannot drive, because you can’t afford to repair it? Or it eats your lifestyle? Budgeting funds for maintaining and replacing your car is an essential element of your financial safety net.