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Financial Planning - Financial planning in general. (Moderated)
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Posted by Daniel T. on July 6, 2008, 2:48 pm
> > > Let's not go to extremes. Unless you are on financial life
> > > support, buy a newer used car when the annual cost of repairs
> > > to the old car exceeds 50% or more of the car's resale value.
> > > And don't forget to drop collision insurance well before that
> > > time.
> >
> > Let me suggest that the resale value of the car is relevant only
> > if you are going to resell it. If you are going to keep driving
> > it, then the issue is the cost of repairs vs. the net cost of
> > buying another car.
>
> If your car is totaled, the insurance will only pay approximately
> the resale value. Collision insurance is reduced for older cars, so
> it makes sense to keep it.
And if your car is never totaled (which is *far* more likely,) then that
insurance has been an albatross on your finances for years.
The OP has made it clear that he would not be financially devastated if
this car disappeared tomorrow, so insurance (beyond what is legally
required,) is a waste of money for it.
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Posted by Douglas Johnson on July 6, 2008, 4:40 pm
>> >Let's not go to extremes. Unless you are on financial life support, buy
>> >a newer used car when the annual cost of repairs to the old car exceeds
>> >50% or more of the car's resale value. And don't forget to drop
>> >collision insurance well before that time.
>>
>> Let me suggest that the resale value of the car is relevant only if you are
>> going to resell it. If you are going to keep driving it, then the issue is
the
>> cost of repairs vs. the net cost of buying another car.
>
>If your car is totaled, the insurance will only pay approximately the
>resale value. Collision insurance is reduced for older cars, so it
>makes sense to keep it.
Sorry, I should have snipped a little more. I was suggesting the resale value
of the car is irrelevant as to whether you should repair it or not. That
decision should be based on the cost of repairing vs. the net cost of buying
another car. Yes, likelihood of further repairs, reliability, and safety play
into the decision as well. But those are often used as rationalizations for
wanting a new toy.
But since you bring it up, I tend to drop collision on a car when I can afford
to write it off. Don't forget. If the car is totaled, the insurance company
will only pay the blue book (retail, usually), less the deductible. For an
older car, that might be only a few hundred dollars.
-- Doug
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
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Posted by Mark Bole on July 6, 2008, 7:30 pm
Douglas Johnson wrote:
[...]
>> plus the image of reliability and sensibility you project to
>> your neighbors and co-workers (unless you are lucky enough not to have any!)
>
> Or lucky enough to have neighbors and co-workers that don't judge people by
> their cars. "Those that matter don't mind, those that mind don't matter."
True enough, at least for the high-cost status cars. I'm talking about
the other extreme, the automobile equivalent of dirty jeans with holes
and a threadbare t-shirt with something mildly obscene on it.
His 14-year old car has peeling paint, some major overdue engine
maintenance, we don't know about the interior condition or whether the
windshield is cracked but can guess.
Now, he said he only drives 4K miles/year and has another family car, so
maybe this is just the beater for weekend errands, in which case I would
recommend keeping it. Otherwise, I still recommend the "replace when
repairs are 50% of value" rule, it's easy to follow and pretty much
guarantees cash-flow payback in two years.
Speaking of clothes, I wonder how the financial advice would fall
regarding the economics of buying new clothes regularly vs. wearing used
ones well beyond when the edges start to get a tiny bit frayed. For
example, are there financial planning lessons to be learned from "What
Not To Wear" (cable TV show)? Do they clearly demonstrate a pay-off
from the $5K or so spent on clothes in each episode?
-Mark Bole
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
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Posted by Douglas Johnson on July 6, 2008, 8:15 pm
> Otherwise, I still recommend the "replace when
>repairs are 50% of value" rule, it's easy to follow and pretty much
>guarantees cash-flow payback in two years.
Could you show me the arithmetic on this? I still don't see how the resale
value of the car relates to the fix or replace decision.
I drive a 1995 Ford Explorer worth maybe $1500. It is very dependable and has
been averaging about $300 a year in repairs. A new replacement would be about
$26,000. Why should a $750 repair bill make me trade it?
-- Doug
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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Posted by Mark Bole on July 6, 2008, 9:04 pm
Douglas Johnson wrote:
>
>> Otherwise, I still recommend the "replace when
>> repairs are 50% of value" rule, it's easy to follow and pretty much
>> guarantees cash-flow payback in two years.
>
> Could you show me the arithmetic on this? I still don't see how the resale
> value of the car relates to the fix or replace decision.
>
> I drive a 1995 Ford Explorer worth maybe $1500. It is very dependable and has
> been averaging about $300 a year in repairs. A new replacement would be about
> $26,000. Why should a $750 repair bill make me trade it?
Who said anything about a "new" replacement? Not me.
How many miles do you put on it? Do you rely on it for your livelihood?
Can you afford to leave it in the shop at any old unexpected time, and
be without a vehicle for a day or two?
If I am spending $750/year cash for repairs to a $1,500 car, and I
replace it with a $5,000 car and reduce my repair bills by two-thirds
for the next seven years, then I am even or ahead.
(Incidentally, I don't think your example or my sample numbers above are
anywhere close to reality for the vast majority of drivers, but I don't
have any studies to back it up. There will always be the extreme
example of the miracle car that still runs like new twenty years later.)
Let's put it in analytic terms -- if repair cost and depreciation are
strictly straight-line functions of time, then it really doesn't make
any difference how long we keep the car. But everyone seems to agree
that the rate of depreciation is high up front and then slows, and I
would argue that repair cost is the converse -- more growth on the back
end than the front end. Therefore there must be a point of diminishing
returns where the ever-decreasing benefit of holding on to the car
longer finally becomes less than the ever-increasing cost.
If you agree, where do you think the point is? I think it's a lot
closer to ten years than fifteen.
-Mark Bole
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Misc.invest.financial-plan is a moderated newsgroup where Moderators strive
to keep the conversations on-topic for financial planning. Other posting
guidelines include a request for brevity and another for trimming posts to
which we respond. For all of the other tips and suggestions, see "FROM THE
MODERATORS: Posting to misc.invest.financial-plan", a weekly post now on the
Newsgroup.
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