Dear Ms. MoneyPeace:
I just got a new job and they are giving me a car allowance, so I am in the market for a new car. I used to commute by public transportation, so an 11-year-old car is what I used for weekends.
Since I have a monthly car allowance of $450 I want to step up my game and maybe even get a luxury car. My wife is hesitant to spend $500 a month on a lease. I do not see why that makes much of a difference as we have added income. Plus most leases include oil changes, so we will be saving on maintenance. Besides, she has a car, so this is what I will need to drive day in and day out for work.
She also is “old school” and thinks we would be better off buying – especially buying a car that is a few years old. The car I want to lease would be an almost $600-a-month car payment. I do not know how we could afford to buy that new! I have been driving a used practical car, so this is my time.
We are in our late 40s and have no kids and some savings for retirement. With my raise, we can save more.
Congratulations on your new job. During this exciting time, I can understand your desire to step into the car of your dreams. American’s love affair with cars often has financial ramifications that get lost in the emotions. Asking for help is a good first step. This question goes beyond a simple calculator choice that some car aficionados believe.
First, put off deciding and explore all your options. Understand how and when you will use the car; that will help you determine what size and model you will need. During your training period, find out if a new car is required for your job, as some companies give the car allowance as a perk but your car is never seen by clients. Your old car or an older model may serve your needs.
Second, think beyond the payment. Today you are seeing that $450 as added income you can spend, but it needs to cover insurance, gas, and wear and tear on your vehicle. Those are expenses you are committed to beyond the monthly loan or lease payment.
Third, adjust your expectations. After driving your current car, a new-to-you vehicle will feel like a major step up as today’s safety features and conveniences have come a long way. Your dream car may come in many forms.
Finally, understand the tax implications and recordkeeping you will need to do in regards to this car allowance. You may even have to pay taxes on some of this income, so get clarification from your employer on if this is W-2 or other income. Tracking your mileage at $ 0.575 per mile and other business expenses will be important. Talk to your accountant and read this IRS publication for more details.
Leasing leaves you without a car or trade-in at the end of the typically three-year lease. Unless you can also save money to buy the car at the end of the term, the lease could work against your transportation needs. On the off chance you lose your job, you still have the car and the payment. At the end of the lease, you will have to start over again without a trade or the cash to put down if all your money is going into the lease.
If you can lease and save to buy the car, then you would be compromising wisely by buying used at the end of the lease agreement.
Buying a car gives you ownership in the vehicle. You do not say if you have cash to put down, which would be great, but either way your old car will be worth something in the trade. Because it is yours, you pay for the maintenance and have a car payment, but you also have equity in the car and flexibility if your life changes and you need to sell it.
A new car depreciates as soon as you drive it off the lot, which is one reason why your wife wants to buy used. You could buy a year-old car, which would still be a major step up. Or buy a new model but use less than the $450 payment and see if the dealer offers a 0% interest loan.
If you chose to buy new, understand the immediate loss of value and only sign for a loan for the shortest length of time possible. Otherwise, you are paying interest for five, six, seven years on a depreciating asset, which is a careless waste of money.
Whether buying or leasing, here are some shop smart tips:
- When you narrow down your cars, talk to your insurance agent and price out car insurance. Different models and types mean different annual insurance costs.
- Check out Kelley Blue Book and Edmunds for the right car for your family. They will also help you price your used car for sale.
- Be willing to compromise: Car inventories are tight right now. Holding out for the exact model may cost you more.
- Consider how far you will be driving with this new job. Most leases only cover 12,000 miles, and the more miles you add, the more it costs you monthly or at the end of the term.
- Know what you want. With all the bells and whistles out there on cars, it is easy to be upsold or oversold.
Read the fine print whether you lease or get a loan. Be sure to know the answers to the following questions before you sign: Who can take over the lease if something happens to you? Does the lease have to be paid in full if you were to die? Do the loan documents include insurances for unemployment or added-on maintenance plans?
Understand what you are committing to with the dealer or loan provider.
Remember what a car is: a depreciating vehicle to get you from point A to point B. Yes, you want to enjoy driving it but not at the price of trading savings, other spending pleasures and peace at home. Think twice, and have fun.
CD Moriarty is a Certified Financial Planner, a columnist for MarketWatch and a personal-finance speaker. She blogs at MoneyPeace.