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This and That:
Learning Financial Responsibility

What Do You REALLY Need?

Oh, come on, you were a kid once. You mean to tell me that you didn’t pester your parents with “but everyone at school has one” or “nobody likes me because I don’t have…”? This is what defines emotional buying. Honestly, when was the last time you seriously thought about a larger investment logically? For most people, the decision to buy a car starts with the question:” Which make and model is my next car going to be?” The reason for this is that they either don’t have a choice, because their lease ends or they simply emotionally determine that it is time to replace the vehicle they have. But what if you were to approach it from a strictly logical perspective? Would you be able to save money? – You bet! 

Let me give you an example: Let’s say you own a 3-year-old car and have paid off the loan. In the first place: this car represents an asset in your financial Net Worth calculation. We’ll get to what that means later, for now, just note it as something positive. Say you have driven about 60,000 miles and you fear that the car may become somewhat unreliable, so you decide you want to replace it. Well, here is an alternate perspective: You’ve been driving this vehicle for the last three years. You should have a record of its reliability. Any new vehicle will be an unknown. Cars, these days, are constructed to run reliably for at least 100,000 miles. And, if you drive 20,000 miles a year, you could drive this car for another 2 years before you seriously have to worry about potential repairs. Next, look at the loss of value. Most cars lose up to 30% of their initial purchase price in retail value in the first year, then another 20% from year to year until they hit about 20% of their initial retail value and then they stay fairly constant until they’re junk value. So what does that tell us? In numbers: if your car cost $20,000 it was worth about $14,000 after the first year, about $11,000 after the second year and it is worth about $9,000 today. So if you keep it for another 2 years it will be worth about $6,000, a $3,000 difference from today. If you buy another $20,000 car today, then in 2 years it will be worth $11,000. That means the new car will cost you $9,000 over the next 2 years. Now compare the two scenarios and you’ll see that keeping your current car will leave you a $6,000 safety cushion for potential repairs. That sounds like a good argument to keep the old car to me, what do you think?

If you take this Cost/Benefit approach as your primary decision criteria for any major purchase, be that household appliances, Consumer electronics, Vehicles or whatever depreciates in value over time, you’ll see that there is a certain threshold attached to the want versus need decision. 

In the case above, you don’t really need a new car until the risk of repairs outweighs the expected loss in value. This is what managing your finances is all about!

(read on ...) 

Copyright (c) 2008 by In Scope-Solutions, Inc. 

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