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How To Save Money When Buying A Car

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We're in the middle of a search for a bigger vehicle for our family. We recently had our first child, and my wife's little Honda just isn't cutting it anymore when it comes to carting around the baby and all his stuff. It's just getting too cramped. At this point we're looking into what type of vehicle to buy – anything from a mini-van to a smaller SUV. While we haven't settled on anything, my wife can't stand mini-vans, so we're leaning towards buying a SUV.

When buying a new car, there are a lot of things that you can do in order to save money on your purchase.  Some will save you a little money – and others will save you hundreds or thousands of dollars.  So let's get started!

Things You Can Do To Save Money On Your Automobile Purchase

Saving money on your auto purchase can be done in a variety of ways – from doing your due diligence and research  before you shop – all the way to figuring out what make and model to buy.  Here are the tips we're using to save money on our next purchase.

  • Research potential cars, and how to sell your own:   If you're looking for a new car, make sure that you give yourself time to look into exactly what type of car you want to buy, how much it should reasonably cost, fuel efficiency, reliability and other factors that can affect your decision.  Also look into selling your current car, and figure out how much you can get for it either by selling it as a private party sale – or by trading it in.    Use sites like CarSoup.com, Autotrader.com, Edmunds.com and ConsumerReports.org to give you a ballpark value of what your car is worth so that you can get top dollar for your car.
  • Used vehicles save you thousands: When buying a car we often dream of buying that high end luxury ride, instead of buying something that just fits our needs. We want a brand new car that still has the showroom smell.   If we are honest about it, however, we can see that buying a pre-owned car, one that's 2-3 years old with low miles – will end up saving us thousands of dollars.  The reason?  New cars lose up to 60% of their value within the first 4 years.  That's a lot of value just disappearing into the ether!  Instead of buying a brand new car, do as we did with out last car.  We bought a 3 year old sedan that was close to $20,000 new.  By buying the same car as a used car, we got it for around $11,000, and it only had 29,000 miles on it!  (plus it still felt like it was brand new anyway!)
  • Buy from a private owner:  When you buy a car from a dealership, there is going to be markup over what you might pay to buy the car from a private party.   That's why when you go to Kelly Blue Book's website, there is a price for retail and one for private party that is lower.  One caveat – just make sure that you get a vehicle history report and having the car inspected by a trusted mechanic to ensure you're actually getting a good deal.
  • Paying cash saves interest:   My wife and I have been paying ourselves a car payment for the last few years.  The result is that after a couple of years you end up having a nice stash of cash to pay for your next car in cash – instead of getting a loan.  While rates may be low right now, you'll still save by paying cash instead of getting a loan (of course unless you get one of those 0% financing offers – in which case you're probably not saving by getting a used car).  Set up a high yield savings account, and start saving your payments!
  • Rental cars can save you money too:  Our last two cars that we purchased were both rental cars.  While you might think that buying a rental car isn't a good idea (there is a common thought that rental cars are driven harder than other cars), we've found that for our family it ended up being a great deal.  The rental cars that we bought were lower in price, but were both in great shape – and had been maintained meticulously by the rental agency.  My last one drove wonderfully until i got rid of it at 130,000 miles.
  • Extra options mean big  money:  If you leave off extra options like sunroof, leather and premium sound packages, a $20,000 car can quickly become a $16,500 car.  Carefully consider which options you actually need.
  • Negotiation on price may be necessary:  Sometimes whether you're comfortable with it or not, you may need to be willing to negotiate with a car dealer to get the best price.   If you don't like negotiating, consider getting a family member who doesn't mind doing it – to do it for you.  Make a game out of it offer to give your friend or family member a percentage of whatever they save you in negotiation.
  • Make sure to get an inspection and a vehicle history report:  Pre-owned cars will have different histories, and you need to be careful that you don't buy one that has negative events in it's past.  Get a vehicle inspection from a mechanic you trust, and also get a vehicle history report to confirm it hasn't had flood damage, accidents or other negative events.  Skipping this step could cost you thousands down the road.
  • Don't buy an extended warranty:  Extended warranties are one of the places that car dealerships make some of their biggest profits.  The reason? Most people that buy them never use them.  If you want to get a warranty anyway, consider buying from an outside company for less than you can get a policy at the dealership.  Or even better, self insure yourself against the risk of mechanical failure by saving up a “car repair emergency fund“!

There are lots of ways that you can save when buying a car.  Some of the tips will save you more than others – but really it all comes down to doing your research, preparing yourself, and going out to do battle – to save money!

Have your own tips for saving money when buying a car?  Tell us your car buying strategies in the comments!

Hindenburg Omen Tripped Again. Does It Foreshadow A Market Crash?

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In the past few days we've had some interesting (and scary!) news, which has sent a lot of investors scrambling and heading for the hills.  The Hindenburg Omen has been tripped!

The Omen, a technical indicator which uses a plethora of data to foreshadow a stock-market crash, was tripped again on Friday, marking the second time since Aug. 12 it has occurred. (It also came close on Thursday, but one of its criteria fell short.)

The latest trigger has prompted the Omen’s creator, Jim Miekka, to exit the market. “I’m taking it seriously and I’m fully out of the market now,” Miekka, a blind mathematician, said in a telephone interview from his home in Surry, Maine. “I would’ve probably stayed in until the beginning of September,” depending on how the indicators varied. “That was my basic plan, until the Hindenburg came along.”

The Omen has been behind every market crash since 1987, but significant stock-market declines have followed only 25% of the time. So there’s a high likelihood that the Omen could be nothing more than a false signal.

So a lot of people are getting wary, and getting out of the market because they believe that the omen is correct and the possibility of another market crash is pretty high.  In fact some are saying that the market could continue on a downward spiral til it reaches 5000!  Sorry to be the bearer of bad news!

What are your thoughts?

Nearly Half Of Homeowners Leave The Making Home Affordable Loan Modification Program

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I recently wrote about the Making Home Affordable Loan Modification program that the Obama administration passed.  The program was put in place to help homeowners to get some help in tough situations  where they were having a hard time making their regular mortgage payments.  If they were able to prove that they needed help and their mortgage was more than 31 percent of their income, the interest rates on their loans could be substantially be reduced, and in some cases principal reduced.

Government Modification Program Effectiveness Questioned

Since the program started over 1.3 million homeowners have enrolled in the program in order to get some help and get their mortgage payments reduced.  The problem is, the program just hasn't been as effective as hoped, and the tide of foreclosures has continued.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration's flagship mortgage-relief program have fallen out.

The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday's report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say.

More than 2.3 million homes have fallen into foreclosure since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year.”The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody's Analytics.

So of the 1.3 million who enrolled in the mortgage modification program, almost 50 percent of the people have fallen out of the program either because they couldn't keep up with their reduced payments, didn't file their paperwork correctly, or some other reason. Many have complained that the program is a complete mess with neither the government or the banks knowing which end is up.

Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork.

The banking industry said borrowers weren't sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out.

So everyone is blaming everyone else for the problems the program has had. Borrowers blame the banks and the government.  The banks blame the consumers and the government. The government blames them both.  My guess is that the program was ill conceived from the get-go, and it was destined for failure.  At this point only $490 million has been spent out of a potential $75 billion the government has made available to help stem the wave of foreclosures.

Approximately 630,000 people who had tried to get their monthly mortgage payments lowered through the government program have been cut loose through July, according to the Treasury report. That's about 48 percent of the those who had enrolled since March 2009. And it is up from more than 40 percent through June.

Another 421,804, or roughly 32 percent of those who started the program, have received permanent loan modifications and are making their payments on time.

RealtyTrac reported that the number of U.S. homes lost to foreclosure surged in July to 92,858 properties, up 9 percent from June. The pace of repossessions has been increasing and the nation is now on track to having more than 1 million homes lost to foreclosure by the end of the year. That would eclipse the more than 900,000 homes repossessed in 2009, the firm says.

To me it makes sense that only 32 percent of homeowners who entered the program have been able to get permanent modifications.  After all, many of them only entered the program because they didn't have enough income to make payments.  Where is the money going to come from even if the payments are reduced?

What do you think about the Making Home Affordable Loan Modification program? Do you think it was destined to fail?  Have you tried to take part in the program only to get the run around?  Tell us your thoughts on the MHA Modification program in the comments.

Should I Get A 401k Loan Or Do An Early Withdrawal To Help Us Through Tough Times?

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Times are tough in the U.S. and more people than ever are finding themselves in tough situations where they've lost a job and haven't been able to find something new.  Unemployment is hovering around 10%, although true unemployment is probably much higher as some people have just stopped looking.

As people go further without finding something new, many of them are having to find new ways to get money to keep the lights on.  One of those places people are looking is their retirement accounts.  CNN reports that 401k hardship withdrawals and 401k loans are at the highest level in 10 years:

Hardship withdrawals from 401(k) retirement saving plans rose to the highest level in 10 years during the second quarter, Fidelity Investments said on Friday, in the latest sign of a dismal economy.

Fidelity reported that, as of the second quarter, 2.2% of all 401(k) participants had made a hardship withdrawal at some point over the preceding 12 months. That's up from 2% in the prior year, and was the highest level in 10 years.

At the same time, the percentage of 401(k) participants that had an outstanding loan from their account rose to a record high of 22% in the second quarter. The average loan amount was $8,650 at the end of the quarter.

So more and more people are using their 401k accounts as a backup plan to be used when times are tough. But should they?

Early Withdrawals – Things To Consider

So what are some of the things that need to be considered when taking an early withdrawal from your 401k?

  • 10% Early Withdrawal Penalty: When you take money out of your 401k before you turn 59 1/2, your withdrawals will be subject to a 10% penalty unless you meet certain withdrawal criteria. That's a pretty big chunk off the top!
  • State and Federal Taxes: Your early withdrawal will be subject to state and federal taxes which means that after the 10% penalty and taxes your withdrawal could be left with only about 60% of the total before you're done.
  • Short Circuiting Retirement Gains: When you withdraw from your retirement accounts, you'll be foregoing the gains you might have made on that money.

So when it comes down to it, if you take an early withdrawal you'll be losing up to 40% of the money right off the top due to taxes and penalties.  That's a lot of money to give up!

401k Loans – Things To Consider

401k loans are being used now more than ever to pay off debt, pay bills and pay for other wants and needs.

Usually you can borrow up to 50% of your vested account balance or $50,000, whichever is less. You usually have a maximum of five years to repay the loan, unless you are borrowing for a first home, which allows a longer payback.

But there are things you need to consider.

  • 401k Loans May Require Repayment Immediately If You Move Jobs Or Are Fired: These are uncertain times, and we never know what might happen tomorrow.  What if you leave or lose your job before the loan is paid back?  You will be obligated to pay it back immediately (although many plans offer a 60-90 day grace period) or suffer the fees and penalties associated with a 401k withdrawal.  As mentioned above there is a 10% penalty, and federal and state taxes are taken out as well.  In this situation you may be better off taking out a loan at a bank to repay the loan – and avoid those penalties.
  • If Your Stocks Are Down, You Can't Regain Losses:  If you withdrew your money when the market was down, you won't be able to regain those losses when the market goes back up.
  • You Pay Interest To Yourself: One positive point about 401k loans is that you're paying interest to yourself, and not a big bank somewhere.

Conclusion

Personally I think that doing a 401k loan, or doing an early withdrawal from your account is hardly ever a good idea.  I think it should only be used as a complete last resort. The downsides – including penalties, short circuiting gains and having to repay the loan immediately if you leave the job (when you can probably least afford it) are just too big.

What do you think about 401k loans? Are they ever a good idea, and would you take one out  – or have you?  Tell us your thoughts in the comments!

Tax Implications Of Strategically Defaulting On Your Underwater Mortgage

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A while back I wrote about how millions of homeowners are finding themselves underwater in their mortgage.  In other words,  they are finding that they owe more on their home than it is currently worth.  It's frustrating to have to pay more on your home than you could get for it if you sold, and many are deciding that their best option might just be to strategically default on their mortgage.  Why keep paying if your home isn't worth what you thought it was?  Why throw good money after bad?

There is a heated debate as to whether strategically defaulting is OK to do morally, but plenty of people are accepting  it as a viable alternative.  For those that decide to go down that road, are they considering all the implications?

Tax Implications Of A Strategic Default

One thing a lot of people don't realize is that if you strategically default on your home mortgage, and the bank forecloses, you may be liable for the taxes on your forgiven debt.

In many states, any part of a mortgage that the bank forgives is reported as taxable income.

In some states, you’re off the tax hook if the bank forecloses on your original mortgage. But you could still be taxed on a home equity loan or a loan you refinanced.You’ve probably heard that the government has temporarily stopped taxing people who lose or give up their homes. That’s the Mortgage Forgiveness Debt Relief Act (otherwise known as “The Don’t Kick ‘Em When They’re Down Act”). But it doesn’t apply to every mortgage. You can be foreclosed and get a tax bill, too.

The majority of people going through foreclosure have no choice. They can’t afford the payments any more.  But a growing number of homeowners are choosing “strategic default.” They’re not broke. They owe more than the house is worth and decide to stop throwing good money after bad.  Many considerations come into the default decision — moral, reputational, financial, credit-score, and what the kids will think. Taxes matter, too

So if you default on your mortgage loan, even though you're able to pay the bank – and the bank forgives part of your loan, you could be getting a big tax bill.

You’re generally taxed on debt that a lender forgives. For example, say that you default on a $350,000 first-mortgage loan. The bank sells the property for $250,000. If the bank has the right to pursue you for the remaining $100,000 but doesn’t, that “forgiven” amount is taxed to you. States with these rules are called “recourse” states.

The Debt Relief law wipes out the taxes due, but only for certain types of loans.

In some states — called “non-recourse” states — a bank that forecloses generally does not have the right to chase you for additional money. As a result, the unpaid debt ($100,000, in this example) is not taxed as income. You get away scot free.

So which states are non-recourse states where you'll be off the hook for taxes?

Non-Recourse States: Alaska, Arizona, California, Connecticut, Florida, Idaho, Minnesota, North Carolina, North Dakota, Texas, Utah, Washington.

In other states you may be liable for taxes due if the bank forgives part of your principle balance after selling your property.

Other situations in which you won't be liable for taxes due include when you are bankrupt or insolvent.

Tax Forgiveness On Forgiven Debt Doesn't Cover All Loans

There is an asterisk on the tax free status for the non-recourse states.  The tax free laws only cover three types of loans:

  • The original mortgage from when you bought or built the home
  • The balance of the original mortgage at the time you refinanced.
  • A cash-out refinancing or home equity loan when the proceeds were used to improve the home.

If you borrowed against your home in order to pay off a credit card, or to buy a car for example, you will be liable for taxes on those amounts.

If you do have part of your mortgage balance forgiven, the bank will issue you a 1099 for taxable income, which you can use when filing your taxes.

What do you think about the tax implications of strategically defaulting on your mortgage?  Do you think most people consider that they may have to pay taxes on the forgiven amount of debt?  Tell us your thoughts in the comments!

PerkStreet Financial Free Rewards Checking – Review: A Cash Back Checking Account? That’s Right!

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Over the past couple of years we've seen the rates on online savings accounts drop like a rock.  Most online savings accounts are currently hovering around 1-1.3% in interest earned on your money.  In other words it isn't exactly an amazing return on your money.

In addition to the online savings accounts souring,  rewards credit cards have been seeing their accounts drop benefits, add annual fees and in general become less of a good deal.   I know my rewards credit card terms have changed for the worse.

It isn't a great environment if you're actually trying to get something extra for your money.   Until now.

Perkstreet Financial has burst onto the scene with a new concept that has a lot of folks pretty excited.  It's a rewards checking account!  You get to earn money on the money that you spend from your account – up to 2%!

Perkstreet Financial Free Rewards Checking

For the most part online and bricks and mortar checking accounts haven't been anything to get excited about. You get an account, and you use it to pay your bills. While you may not be paying any account fees, you're also not getting much out of the account other than a place to put your money before you send it out to all your regular monthly bills and savings goals.  Now Perkstreet is turning things around by offering people cash back just for spending their own money.   How much money you get back really depends on a couple of factors.

  • How much you spend: The more you spend, the more you get back!
  • How much you keep in your account:  If you keep $5000 or more in your account at all times, you'll be able to earn 2% cash back on all your purchases.  While that might not sound like that much at first glance, if you consider it, it really does end up being quite a bit of money. For example, if you spend $2500 in a normal month on all your bills, you could start paying them via your Perkstreet Visa, and get back $50 in cash if you have a $5000 balance.  Even without a high balance you'd make $25 back!  That's $300-600 back in a year!

With cash back rewards that good on a checking account, what it really means is that my credit card account is becoming obsolete.  I pay cash for everything anyway, so why would I keep the credit card account, and it's associated risks when I can get the same benefits from my checking account?

Benefits Of The Perkstreet Checking Account

The account at Perkstreet really is chocked full of benefits. Some of them include:

  • No Cap On the Amount of Perks You Can Earn
  • Nation’s Largest Surcharge-Free ATM Network
  • No Minimum Balance Requirement
  • No Monthly Fees When You Use Your Account
  • Sign-Up In Just 5 Minutes
  • Free Online Banking and Bill Pay
  • No Need to Worry, Deposits are FDIC Insured Up to $250,000 and Protected from Fraud by the Visa Zero Liability Policy
  • PerkStreet Financial? Visa® Debit Card gives you 2% cash back
  • You can get 5% cash back on certain categories and certain merchants!
  • Super fast live phone service, 24/7

SignUp For Perkstreet In 5 Minutes

Getting a new account at Perkstreet is quick process that should only take you 5 minutes of your time, according to their site.  You select what type of rewards you want, give identification, review your information, and fund the account via credit or debit card.

What information will you need when you open your account?:

  • Social Security Number
  • Personal information
  • Driver’s license
  • Debit or credit card to make the initial $25 deposit.

Some have stated that when they opened their account they didn't get a hard credit pull on their credit report.  Others have stated that when they opened a “plus” account – with overdraft protection, they DID see a hard credit pull.  I’m not sure if either of these is true, so be forewarned.

Conclusion

When I heard about the Perkstreet Rewards Checking account, I was intrigued. It was a pretty new type of account offering, not one you're seeing yet at many other banks.  Time will tell if it is successful, but if it is, you can be assured that you'll see these account types popping up all over.

Some of the things I like the most about the rewards checking at Perkstreet include the large number of free ATMs you can use when you have the account (over 37,000 of them in the STARsf® surcharge-free network), no monthly fees as long as you use the account, free bill pay, and the protection of FDIC insurance of up to $250,000 on your account. So you don’t have to worry about your money being safe.

Best of all, the account will pay you to spend your own money, without having to use a credit card!

One of the few downsides I can see is that you have to keep a relatively high $5000 balance to earn the highest cash back rate (2%), but even at the lower rate, it's still a pretty good deal.

If you want a rewards account, but don't like dancing with the credit card devils, Perkstreet is a great option to consider.  Not only will you be paying cash for the things you buy, but you'll be earning money back on all your purchases!

Want to sign up now?  Check it out at the link below:

Sign Up For Perkstreet Financial Rewards Checking