Car Purchase: Confessions & Justification (Cont.)

I had a long list of confessions in my last post about the car we recently purchased. And at the end of the post I had mentioned that in spite of the long list of reasons that indicate we should not have bought the car, we still did. And we are happy with the purchase. And we have no buyer’s remorse. Here’s why.

The Justification

• All the reasons that were listed in the confessions post were purely financial reasons. There is more to life than money. Once in a while you just need to think beyond money and do what makes you happy. They say happiness cannot be purchased. While that is true in most cases, there are a few exceptions. In our case, this was one. We are both from middle class families – and this car is a symbol of how far we have come and a motivation to keep pushing ourselves further. It is a reminder that hard work and sacrifices do bear fruit. It is an indulgence that we have earned by making sensible choices in other areas of our lives so far and by promising to continue to make more sensible decisions in the future. Every time we drive in that car, I know we will experience the thrill and the joy of earning the privilege to own it. If we can't spend once in a while on something that means so much to us, then what are we saving for? What is the point? Where is the motivation to keep going?


• From a financial perspective, even though it is an expensive non-frugal purchase, it is a well thought out one. Long back, I had listed our financial goals in this post. Summarizing them, based on our long-term and intermediate dreams, we need to max out the 401K, make extra payments to mortgage, and save towards a combined car/emergency/investment fund. So far we have done all this and in addition, contributed a part of our paycheck to participate in the employee stock purchase plan. With the purchase of the car now, we can continue to fund our 401K, make extra mortgage payments and participate in the employee stock purchase plan at the same rate as before. However, the extra money that we were saving up for the car/emergency/investment fund will now be diverted to the auto loan. It looks like this amount will be about 1.5 times the monthly payments once we refinance the loan and should help us get rid of the loan in a shorter term. Any bonuses or found money that we receive will go towards the investment fund. The emergency fund currently has a small amount of money, but we are not believers of large emergency fund (I should write about that sometime) so we feel comfortable with what we have. So the one goal that takes a hit is the additional investments. While our long term goal (25 year horizon) is not really affected much, the down side of this decision is, our intermediate goal (~10 year horizon) of switching to low-stress, low-paying job *may* be jeopardized. And I say *may* because we plan to tighten our belts and try and continue to invest some money in spite of the car loan. We have carefully planned our personal finances and unless there is a huge unexpected expenditure, we should stay on track in spite of this purchase.


• About the financing: In our “custom” (read “weird”?) financial plan, we had one common fund for car/emergencies/investments-beyond-retirement. We do not believe in keeping a large emergency fund (I will write about it sometime). And we planned to use our old car for as long as possible. So, every time we had a reasonable amount in that fund, we have invested it. When the car broke down finally, this fund has some cash in it, but not enough to make the full payment. So our options were - break some of our investments, or get creative (e.g., pay as much down payment as possible and roll the rest of the balance between 0% APR credit card offers until fully paid off), or finance the vehicle. We are not too keen on breaking the investments. If we pay down as much as we can we will run the risk of close-to-zero emergency fund. In addition, being creative about the balance has its own risks. We already have around 30K in 0%APR balance transfers in the bank earning a healthy 5.X% interest for us. So, when we can get a loan of 5.X% with zero down payment to finance the vehicle, why go for the higher risk option of putting as much down as possible and getting creative with the balance? In addition, with the financing, we can opt for gap insurance. If we are unfortunate enough to have a car wreck resulting in the vehicle being totaled (and live to face the consequences), the gap insurance covers the difference between the value of the loan and the true value of the car (ie, cost excluding the warranties and other add-ons). So it seems like financing does not have severe negatives, while having some distinct positives. And so we chose to go with financing.


• We understand that getting this car does NOT mean we are “rich” and can afford an expensive lifestyle. No don’t laugh – it does happen. I was talking to one of my friends who is used to seeing me in a very old car. When I told him about the car I recently purchased, he immediately said, “OK now you can take us all out in your new car and treat us to lunch” and when I asked why, he replied only half-jokingly, “If you can afford that car, you can afford to buy us lunch”. I've had some similar comments later as well, in the context of, "Now that you have bought the car, you can also buy [...]". It seems to be the general attitude that if you can buy an expensive car, you should be able to buy other expensive stuff too. That’s very ironic since if you have an expensive car, it means, you can no longer afford even some of the bare necessities, as you now have a huge car payment to make! We recognize this irony and will continue to make an effort to remember it now and in the future. And since my financial life is laid bare here, if I slip, I hope some of you will remind me :)


• Finally, for the category we considered, the car we bought is still a bargain. It is a certified pre-owned vehicle. Based on the carfax report and what the sales person said, it is a one-owner lease vehicle. Due to the stringent mileage caps in the lease contract and the wear-and-tear charges that a person has to pay if the vehicle needs repairs when the lease expires, a leased vehicle often has low mileage and is well-maintained and makes a great option as a used car. Our car seems to fit the bill. It has relatively low mileage and from the way it drives and handles it is easy to see that the previous owner has taken good care of it. And of course we have the maintenance records to prove it and the additional certification inspection according to factory mandated standards that provide further peace of mind. It is a car known to last for years, and we hope to drive it until we can pawn it off to our (yet unborn) teenage kids :)

So there, I don’t know if I have convinced anyone, but to us these reasons justify the purchase. Please note that my intention here is not to convince anyone to go buy an expensive car – these reasons are very specific to our situation. And all said and done, they are still justifications for slipping up and indulging. Please do not take this to mean that I advocate anyone to buy an expensive car. Make your analysis with your own situation and see if it is still worth it for you. Also, I don't know if I am making a mountain out of a molehill - there are many more cars out there that are much more expensive than ours. It is just that this car is a lot more expensive than any car we thought we would ever buy!

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