Pimp Your Bank Account, Not Your Ride
August 18, 2011There’s a show on MTV called Pimp My Ride, in which people would get extreme makeovers for their cars. But this post will be about a different kind of extreme makeover for what is probably your largest monthly expense, after your home. After all, getting from point A to point B can be expensive. It’s not just the sticker price on your car. It’s also the interest on the car loan, insurance, gas, maintenance, and repairs that go with it. An employee in one of my webcasts said she spends $400 a month on gas alone. To make it worse, unlike owning a home, a car is usually a depreciating asset.
Here are a few keys (no pun intended) to minimizing this cost:
Consider Going Carless
If you live in an area with good public transportation, you probably don’t really need a car. When I lived in NYC, I found it much cheaper, faster, and more convenient to use the subway system (one of the things I miss most about living in the Big Apple). I could even buy monthly passes, pre-tax through my company, and didn’t have to worry about traffic or parking that could make me late for work.
Even in a place like San Diego, that isn’t as public transportation-friendly, I know several people who get around quite well without a car. It helps that the climate is great for biking, but new smartphone apps make it really easy to use public transit systems in practically every major city. For those times when you really need a car, Zipcar lets you rent one for only about $8 an hour in San Diego. KISS legend Gene Simmons (who doesn’t believe in purchasing anything until you can do so with cash), said that before he became rich and famous, he used to get around on public transportation and rent expensive cars for a night to impress women on dates. While I’m not suggesting this as a dating strategy, the point is not to take it for granted that you need a car (or a second car if you’re married) before exploring all of your options.
Avoid That New Car Smell
If you have to buy a car, consider getting a used one, preferably one you can buy in cash. Given how quickly a car’s value depreciates just by driving it off the lot, buying a brand new one doesn’t make a lot of sense to me. Check out my fellow Financial Finesse planner Michael Smith’s post on exactly how much a new car can cost you. In case you’re still not convinced, it turns out that the new car smell might be as harmful to your health as it is to your wallet. Your money or your life? A new car can actually take some of both!
The biggest fear of buying used is ending up with a lemon. One way to avoid this is to buy a certified pre-owned car with similar warranties to a new one. You probably won’t even be able to tell the car is used. Otherwise, it’s always a good idea to get the car inspected by a mechanic first. Even if you’re buying from someone you know and trust, there could be problems the current owner isn’t even aware of.
When I first moved to San Diego, I really wanted a convertible to get the full SoCal experience. I also wanted something of quality that would last. At the same time, I was a law student and didn’t want a big car payment every month. I decided to cut out the middle man and found my current car, which is a 1995 BMW 325ic convertible, listed on Craig’s list for $10k. I was able to negotiate it down to $9k and spent the other $1k on the mechanic’s suggested repairs. All together, I ended up paying less in total than the Kelley Blue Book value. If I had bought a new, but lower cost model, it would now be a used and lower cost model, but my BMW is still a BMW.
Shop Around for a Car Loan, Auto Insurance, and Gas
If you buy from a dealer, don’t just accept their financing. Sometimes car dealers make more on your car loan than they do on the car, while other times they’ll give you a below market rate just to sell the car. Either way, it can’t hurt to shop around from a site like bankrate.com. Credit unions also tend to offer good rates since they’re non-profit.
In my case, I bought my car in cash to close the deal quickly, but that doesn’t mean I couldn’t take advantage of low auto loan rates from my credit union. I borrowed about $8k at 1.9% on my car and put the money in an account earning 4-6%. That earned me about $700 over 3 years. (See this earlier blog post for more on how to use this strategy with credit cards.)
Ditto on auto insurance. The policy you bought 5 years ago may not be the best deal for you today. Every time I get an offer for auto insurance in the mail, I give them a call and see if they can beat my current rate. If so, 15 minutes might really save me 15% or more on my car insurance (yes, that’s how I got my GEICO policy). If not, I get to feel better about how little I’m paying.
The same goes for gas. You can search for the cheapest gas stations at fueleconomy.gov, which also has tips on improving gas mileage. There’s also a free smartphone app called Gas Buddy for when you’re on the go.
An Ounce of Prevention…
One area you don’t always want to be frugal is in maintenance. Skipping those oil changes will likely cost you more in repairs in the long run. That doesn’t mean you necessarily have to change your oil every 3,000 miles though. Check your vehicle’s manual or indicator light for a more accurate estimate. Another Financial Finesse planner, Greg Ward, has a good post with other tips on how to maintain your vehicle.
If you have any other ideas on how to save money on car expenses, feel free to share them in the comment section below.