Poor, Car

Purchasing a used car is like the Iliad of old. The young and inexperienced picking a fight with the strong and unyielding. You see, an average person will buy something like 20 cars (1.5 cars every 5 years from 20-75) in their lifetime. However, a car dealership will buy/sell something like 20+ cars a month. If your feeling a little bit like an underdog, your right.

So lets try and level the playing field and see if we can't keep your Achilles heel intact.
First, do not attempt to finance a car with bad credit. No credit history is better than bad. So if you have some dings to your credit, take the necessary time and drive "cash-only clunkers" until you get your credit score fixed (700 or higher).

Here is why this is so important:
I was talking to a sales rep at Ken Garff West Valley a while back. Ken Garff corp. is a great supporter of secondary education in Utah through their Keys to Success program. While speaking with the sales rep. he related a few stories from different customers who they were trying to help, despite their bad credit situations.

One type of situation sounded particularly desperate:
Customers come in looking for another car because their previous one has been repossessed (taken back by the bank/dealership because the owner wasn't making payments anymore). This is a major hit to your credit score; and typically, repossession is a symptom of other bad debt/bill payment issues. So, generally speaking, repossessions results in credit scores near the 300 minimum. In other words, you have a proven history of NOT PAYING FOR CARS.

As a result, the interest rate of your new auto loan will be around 24%. However, if you make on time payments for a year, then trade it in, you can finance into another car with a better credit score and a lower rate. This can be a great way to fix a bad credit situation. Except... you have a proven history of NOT PAYING FOR CARS!

According to this sales rep., most people who have these low-score high interest rate loans don't make the on time payment consistently for one year in order to qualify for the better rate. Why? Because they haven't fixed their bad debt/bill payment habits and therefore couldn't get our of their bad situation.

There was one more, very telling, outcome of this situation. As we walked around the car lot looking at the inventory, one thing was very noticeable, the cars at this particular lot were dirty, and many had dents, scratches, and other blemishes. It was obvious that this location catered to a low income, low credit score, low financially educated population. Cars that looked like they had been repossessed and the dealer expected that they would be repossessed again from their next owner.

I can't think of a better metaphor when buying a used car. The car you buy will reflect the condition of your financial education/credit score...
If you have "dirty" credit with some "dents" "dings" and "scratches" your car will too!

Adding Bubbles to your Bathtub

Last time I introduced the idea of stashing money in your bathtub. If that doesn't sound perfectly reasonable to you then I invite you to click the link and read the earlier article: Spend Yourself Wealthy

Now, its time to add "bubble bath" to your bathtub. As you recall you are saving AT LEAST 30% in your bathtub. But, there are a lot of demands on this saved money so we need a way to categorize what and how much of this savings you can use, and for what.

First, a quick refresher of the 60/20/10/10 rule. You are living off of 60% of your net income. 20% is being saved, 10% invested, and 10% for charitable contributions. The +30% that is going into your bathtub is the combination of savings (20%) and investing (10%) because the bathtub represents your cash net worth. Also, that 20% savings is a "fluid" amount (no pun intended). In the beginning you will be saving 30%, soon you will starting investing (10%) into retirement accounts, and eventually you will be investing into a variety of accounts at the rate of 20% and saving only 10% for major purchases.

Bubble bath.
The bubbles represent the different "budgets" or categories that you are putting your +30% into. For starters, you should establish an Emergency Fund account. At first, this "bubble" will consume all +30% of your Net Income (N.I.). Once your Emergency Fund bubble is fully funded ($1,000) then you can work on your next "bubble," 3-6 Months Expenses. This bubble will also consume all +30% of your N.I.
 

The next "bubble" to be created is your Retirement account. This "bubble" will account for +10% of your N.I. leaving 20% for other bubbles. This is where the "fun" begins. Unlike children who like to pop bubbles, we want our bubbles to get as big a possible; then, when you do finally pop them it will be awesome. So, here are some examples of other "bubbles" that you can grow with your +20%.

Emergency Fund ~ $1,000 + (as your standard of living rises so too should this amount)
3-6 Months Expenses ~ Less risky job = 3 months; more risky job = 6+ months

House Down-payment
Car (purchase/down-payment)
Home Furnishings
Moving out expenses (transportation, first/last months rent, security deposit, furnishings)
Wedding Ring/Honeymoon
Vacation
Religious Service/Mission
Birthday/Holiday Gift purchases
College Savings
New Technology (phone/computer replacements)
Etc.

You can have as few or as many bubble as you wish.  With fewer bubbles each bubble will grow faster. Have lots of bubbles (at the same time) and their growth may become agonizingly slow. Here again, delayed gratification will help you be successful as you will have fewer bubble and can watch them grow really fast.

Then, when the time comes and you have a nice big vacation bubble to "pop" that will be even more fun than popping bubbles as a kid.

As for the Investment percentage it too can be divided into various "bubbles" such as:
Retirement ~ (401k, Roth IRA, Mutual Funds)
Investments ~ (stocks, bonds, funds, trusts)
Real Estate/Land
Jewelry/Precious Metals

Just make sure that as your income increases and your 10-20% investing percentage grows, you need to have a fully funded 401k (if its matched by your employer) and a fully funded RothIRA before you use the extra dollar amounts on individual stocks and real estate purchases.

Spend Yourself Wealthy

Its your spending, not your earnings, that count most toward wealth. I think we all know someone who makes an incredible amount of money and still ends up poor. (cough: "Athletes") It really is "what you do with the money" that matters most.

All else being equal (steady and improving income, no major medical expenses, etc.) you can have at least a million dollars in wealth by the time you are 65. Its all about putting your money in your bathtub.

Your bathtub represents at least 30% of your net income (N.I.) each month or pay period. It is the amount that is captured and saved. Now, its very important that you look at your bathtub as capturing AT LEAST 30%.  There are a lot of demands on this saved money so the more you can capture the better.

Spend Yourself Wealthy. Its all about opportunity costs. If you choose a housing situation that costs you 25% of your N.I.instead of 30% then you can capture an additional 5%. If you choose transportation options that cost you only 12% instead of 15% then you can capture an addition 3%. Every little percentage counts and soon enough you are capturing enough water to overfill the bathtub. Its all about what better thing you can do with the money in the future.

Speaking of the future; the next step is to add bubble bath to your tub. No joke, bubbles!