SubscribeCar Purchase: Confessions & Justification
Last week was a whirlwind of activity. It all started when our old car finally broke down. For a couple of days, I dropped the better half to work and he bummed a ride back home. But since our work places are in two different directions, this was not a very good arrangement. Since our city does not really support a public transportation infrastructure, we rented a car and kicked our car search to full gear. We did most of our search online and through local newspaper ads and test drove a few cars both from the dealer and private sellers. But none of them really clicked. We had a list of requirements that really mattered to us and did not want to compromise since we plan to drive this car for a long time, and also it is a fairly expensive purchase. So we looked and looked some more. Finally, we drove down to the neighboring town and after a hectic day of haggling and bargaining, we got the perfect car that met all our requirements (and then some). But the whole experience was quite an eye opener. Here is a long hard look at what we did wrong (confessions) and why I think it’s still OK (justification).
The Confessions
I have to admit that from a purely financial perspective our choice of the car was not a very good one for the following reasons –
- It is an expensive car. Buying this particular car was a want, not a need. Even though it is a used car, it cost us quite a bit. If we had bought only what we needed and invested the rest wisely, in the long run, we would have been much better off.
- It is certainly a very non-frugal purchase. In addition to what it cost us now, the maintenance in the long run is going to be quite steep as well. Currently, we have extended the maintenance plan and added additional warranties on top of the “almost-comprehensive” warranty that we received for buying it certified. This means, for the next 4 years all regular maintenance (oil change, brake jobs, 40K/60K/80K maintenance etc.) and road hazard (flat tire, wind shield chips etc.) are covered and we don’t have to pay a penny. But once the coverage ends each repair or regular maintenance visit is going to cost us an arm and a leg. Besides, with the EPA mileage rating of 20 (in city) and 29 (highway) and the requirement to use premium gas, we are going to be paying a lot more at the pump as well.
- It is a depreciating asset and we have financed it. Generally speaking, this is not a very good idea. In addition to that, all the extra warranties and maintenance plans that we purchased made the amount financed higher than the actual worth of the car, requiring us to get an expensive gap insurance. As I mentioned in the previous post we got steam rolled in the finance officers cabin, and made some really bad decisions :( For instance, the reason we decided to go for financing in the first place was that we qualified for a loan with APR close to the interest we earn at a high-yield savings account. But somehow (I still haven't figured out what happened in there!) we ended up being talked into accepting a longer term loan at about 2% higher APR!!! We plan to rectify the finance situation and get out of the expensive gap insurance by refinancing the vehicle as soon as we receive the loan number for that loan. I have spoken with my local bank and it is all in place – it just required a little more legwork and paperwork – something for which I don’t have enough bandwidth at this time :(
- And finally the worst of all, we exceeded our original budget by about 75%! Our original budget was based on what we actually needed – a pre-owned car that is about 2 years old with low mileage from a reliable manufacturer. But as we searched we found that by bumping our budget up by about 25%, we could ride in one of the high performance cars that was 4 to 5 years old and had slightly higher mileage. These were cars that we always dreamed of owning someday. The temptation was irresistible and we bumped up our budget. As we looked for cars in this category, we found a couple of 3 year olds that we could own if only we bumped our budget some more. And slowly we added a creep of another 25% in our budget as we started looking for 2 year olds with low mileage and some remaining manufacturer warranty in this high performance category. We were surprised at how undisciplined our approach was and how easily we were getting enticed by more and more expensive cars, but still, we could not let go of it and bring ourselves to go back to our original plans. When we walked into the dealership actually, it was to buy a car that would be a little over 125% of our original budget. The two backup cars we considered were priced higher, but we had agreed that we would buy them only if they fell within 150% the original budget. When we got to the dealer however, we found that the original car we looked for was merely bait and was totally misrepresented on their website. But we fell in love with one of the back-up options. We knew we were over extended by now, and when the dealer did not agree for the price we were willing to pay, we actually walked out. The salesperson followed us to our car and offered it to us at around 160% of our original budget. It had taken us about a week, and a lot of discussion and thought and hard look at our financial situation to determine that we could handle this extended budget without it pushing us downhill. And then in the next 30 minutes or so in the finance guy’s office we added an extra 15% worth of *additional* warranties and insurances (in addition to what was already included with the certified vehicle!) bringing our final price to around 175% of our original budget.
Now that’s a long list of reasons that indicate we should probably not have bought the car. But still, we are very happy with our purchase and don’t really have any buyer’s remorse. I’ll talk about our justification in the next post. It probably won't convince anyone but me, but writing things out on this blog helps me clear my thoughts and making it public keeps me accountable. Yes, we have thoroughly indulged ourselves and I understand that not many will approve. But hopefully by keeping it open I can ensure that we do not give in to any other indulgences in the near future - our quota of indulgence is done for a while.
3 Comments:
Hmmm... how come no one left a comment about this post? Your honesty is admirable, but your financial decisions are shameful! After this little car buying escapade, what is the point of only grocery shopping when you are in a hurry and not hungry? What is the point in not eating out, or only going to movies before 6 pm? You dummies, you could have easily done all of those things if you hadn't fallen for the second biggest financial mistake Americans make. What's next, a house you can't afford?
Mikealao: Even I have wondered how come no one left a comment about this post :) Anyway, did you get a chance to read our justifications? I don't know if it convinces anyone, but it did convince us :) Now about your question of why be frugal if we are going to throw away the money on an expensive car? Well, thats exactly the reason! We stay frugal, so we can afford to throw away some money on some indulgences every once in a while. It's a compromise.... in our particular case, we are OK with pinching pennies to pay for the difference between what an economy car would have cost us and what the car of our dreams costs. There was a time when we *had to* be frugal because we couldn't afford not to be (In my undergrad days, we struggled to afford to takeout one entree and split it between 3-4 people once every fortnight or so, because the inexpensive meals served at our dorm was entirely inedible and we weren't allowed to cook in our tiny dorm rooms shared with the said 3-4 people!). We have worked hard and got ourselves out of that situation and can afford a few indulgences now. But we *choose* to be frugal so we can best optimise the funds we have between our current day wants and future day needs. Our aim is, if we get hit by a bus tomorrow, we should die content and without regrets that we sacrificed our today for a tomorrow we never got to experience. On the other hand, if we don't get hit by a bus and live to be 100, we should be able to live a decent respectable self sufficient life on our own terms. Not an easy goal, but something definitely worth working hard for :)
Mikealao: I forgot to answer your other question about the house.... fortunately, we did not try to justify our way into an expensive purchase when we were house hunting :) Based on the "3 times annual household income" rule, we spent *well below* what we are supposed to be able to afford. We set our own budget and stuck with it. Now we pay extra each month and will hopefully be able to own the house outright in 10 - 12 years (from the date we bought it).
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