Money – Page 3

car first or house first You graduated from college, landed a good job, and have been diligently saving money for awhile now. Your car is getting old and pretty soon you are going to need a new one, but you also have the desire to be a homeowner. Should you buy a new house or a new car first? This question is actually extremely difficult to answer. It truly depends on the immediate financial circumstances of the individual involved.

Before thinking about it, most people would probably advise buying a house before buying a car. After all, a house is an appreciating asset and a car is a depreciating liability, right? That statement might be true in the long term, but in reality, most working professionals will eventually buy both a house and a car. In the end you will have the money for both. So it’s not really an issue of which is the better long term investment, it’s a question of which one should be purchased first.

I’m going to assume the following:

You have about $40K saved in cash.
Your current car is old and only worth about $1,500.
You want to avoid financing a car.
You live in a rental property.
You are looking to purchase a new car under $25K
You will be a first time home buyer
You are looking to purchase a house for about $275K with at least a 10% down payment and 5K in closing costs.

Answering the following questions will assist you in making the right decision based on your own individual situation.

How long will your current car last?
Have a decent mechanic estimate your car’s life expectancy. Are there any cheap repairs that could increase the life expectancy? Are the repairs worth the money based on the car’s overall worth?

Will your overall living expenses be cheaper before or after you purchase a house?
Is the total cost of your current rent and utilities significantly cheaper than the cost of a mortgage, utilities, homeowner’s taxes, and insurance? In other words, which living arrangement allows you to save cash the quickest?

If you buy a house first, how long will it take you to save enough cash in order to purchase a car outright? How much money can you comfortably afford to save each month?

Likewise, if you buy a car first, how long will it take you to replace the cash necessary for a down payment on a house? How much money can you comfortably afford to save each month?

Do you expect decent short-term real estate appreciation in the housing market you intend to buy into? Ask a real estate agent for numbers on local market trends. Have home prices been rising or sinking? What do the overall unsold inventory numbers look like? In other words, is there any foreseen disadvantage to holding off on a house purchase for a year?

Consider the following scenario:

You really want a new house, so you decide to deal with your old car’s problems and instead purchase a new house first. Now you have zero cash, but you do have a slowly appreciating asset, a beautiful new home. 6 months later your old car completely breaks down and the repair costs are close to the total value of the car. If the car isn’t worth the money, you will have no choice but to finance a new car. You will now be paying interest on an auto loan in addition to paying your monthly mortgage payments. The annual appreciation of your house is counterbalanced by the finance charges you are paying on your car loan… at least for the first couple of years. In the end was it really smarter to purchase the house first?

The bottom line: As I stated earlier, most people assume that buying a house first is the smarter choice. While it very well could be, it isn’t necessarily the best order of operations for everyone. It completely depends on individual circumstance.

the new car we bought on a credit card We just purchased a brand new car (Honda Accord Coupe EX-L) on a credit card. You think we’re crazy? Think again. We instantly saved ourselves about $500 by paying with plastic. Sure, there are a million reasons why this might sound like a bad idea in regards to long term debt. However, if you have the cash to back it up, a credit card is the smart way to pay for a new car.

Consider the following 2 points:

Rewards / Miles Credit Cards – Typical rewards cards generally earn the consumer somewhere in the ballpark of 2% cash back. If you buy a new car for $25,000 with your rewards credit card, you just saved yourself $500. If you have an airline miles rewards card, as I do (Southwest Visa), you can earn yourself a free round trip flight for about $20,000 in purchases. With airline fares continuously skyrocketing, this round trip airfare ticket is easily worth about $500.
0% Interest Rate – Many credit card issuers entice potential consumers with various introductory 0% interest rate deals for a certain period of time. This introductory rate period usually spans somewhere between 6 months and 1 year. Let’s say you buy a $25,000 car on your 0% interest for 1 year credit card. You then invest the $25,000 in a 1 year CD (a non-liquid investment that prevents you from spending the cash) earning a modest 5%. At the end of 1 year you have $26,250. You immediately pay off the $25,000 car, leaving $1,250 to be returned to hip national bank.

Do you think those savings are meager, or not worth the effort? Well then head over to your bank right now and donate that amount of money into a complete stranger’s bank account. No? I didn’t think so. The bottom line is this: If you have the cash and discipline necessary to back up your car purchase, there is no reason why you shouldn’t reap the benefits of buying your next car with a credit card. You do the math. It just makes cents.

PS: Contrary to popular belief, most new car dealers will let you put a hefty dollar sum of your car purchase on a credit card, so long as your are paying cash on the remaining balance.

A House or A Car… Which Should I Buy First?

When Buying a Car with a Credit Card Makes Cents