Spending money to save money.
It doesn't work, I added it up my self.

For example, friend #1.
He had a 2005 F-150 XLT 4X4 with 55K miles on it, he owed $4,500.
He traded it "because it was too costly to drive it 20 miles a day" to a 2012 Honda civic SI V-tech manual.
He now owes $18,000 instead of $4,500 at a better interest rate though.
He went from paying $300 a month and 15 months left to $300 a month for 60 months.
Insurance dropped $10 a month.

He still only drives 20 miles a day.
How could he have saved money? He owes more. What he might slightly save on gas is out weighed by the increased debt.

How do people figure they are saving money this way?

 

Sometimes we men use useless excuses to have a new toy...........

 

A number of my co-workers change vehicles as if they were dirty undershirts, and from what I've been able to gather from talking to these folks, they simply fixate on their monthly payment and the cost of gas. They think that if they trade up to a newer vehicle that gets slightly better mileage at a similar monthly payment as their old car they have "saved money".....

What usually happens is that they start with a vehicle in an "ok" financial position. Since they only fixate on the monthly payment, they soon become "easy pickings" for any dealer who is willing to simply extend the payment terms of a loan. After playing this charade on a couple of vehicles, they usually find themselves trapped into downgrading on the type of car because of all the negative equity they've accumulated on their past trades, and they end up driving a Toyota Corolla with an 84-month loan period. After that (usually once they have to stick some big money into a repair or two -- which of course they almost invariably put on a credit card) an inordinate number of them realize that they have completely hosed themselves and end up letting the cars go back to the bank.....

Now, you would think that this sort of merry-go-round would teach them (and the dealers) a lesson, but it never does. After a year or two of driving a clunker, they usually find some dealer who is willing to extend them another loan and the cycle starts all over again.....

The sad thing about most of these people (or maybe for us?) is that they will get to retirement age without so much as a dime in savings and then demand that the rest of society support them in their "golden years".....

 

Most people aren't money smart. That's why 1% of the population is filthy rich.

 

That sounds like a decent trade if he no longer NEEDS a truck. He had plenty of equity in the truck and a 18k note on a Civic SI isn't upside down. 60 months is fine on a new vehicle.

 

I am not say its not a nice car (I hate it) or that he got a bad deal.
What I am getting at is, in his mind he is somehow saving money by owing $13,500 more than he did.

He got a good deal and was happy (good for him I guess) but kept going on and on about how much money he saves every month, yet owing more.
Then he tried to talk me into buying the matching blue one because I would "save so much money" if I did.

After I showed him the math he got mad and left.

I looked at it this way, when he asked me "how do you figure you won't save money".

I owe $7,300.
It costs me $300 a month in gas.
Its $300 a month payment.

Or
I could owe on a new civic SI (Local lot has them priced for $24,500 fully loaded manual 6 speed).
If I got lucky and got $12,500 trade in I would still owe $19,XXX at 0.9APR.
Thats about $320 a month for 60 months opposed to the 24 I have left.

SO the car would be $320 a month (at best) for 60 months.
I would save maybe half as much on gas, so $150 a month.
Lets call insurance the same price ($150 for me and my wife's F-150/trailblazer full coverage)
So I save $130 a month in gas, but I owe for 36 months longer and a higher amount.
Even if I added that $130 a month I saved on gas into the payment I still won;t have it paid off as fast.
Where as I could just be out of a payment in 24 months or less.

Personally, I think the car he got sucks, more so when you consider what he had.

How could in anyway, I come out ahead, or him?

 

If he isn't upside down and his payments are the same, that's not losing money. You are just letting your bias toward big trucks and against little Hondas cloud your judgment. He extended his payments another 45 months (less than 4 years) and got a BRAND NEW vehicle that's 7 years newer than what he had. He is cutting his gas bill in half.

If I didn't really LIKE my paid-for truck and didn't have a reasonable use for it, I'd be over at Ford buying a new Fusion in a heartbeat. In fact, once I've had my Ford stock for 6 months, I just might do it - and I'd give my truck to my son-in-law and borrow it back when I needed it.

 

He can't cut his gas bill in half, he drives 20 miles a day, max.
The $300 was my cost.

I don't see how he saved any money by owing more.
He is out more money in the long run, to save a meager amount now.

Like I said in the op, he drives 20 miles a day (if that) max.
He drove 2 weeks on $60-$70.
Now even if I traded my truck in and went from $300 in gas a month to $150 I still didn't save anything cause I owe more.

I don't understand how owing more = saving money.

If he had paid the truck off, he could have saved that payment every month, thats $300 he could save every month.
Now he is stuck with a payment.
In 15 months he could have been out of a payment, or sooner.

I just don't understand that, he owes more yet "saved" money thing.

 

the difference is you are talking about saving money in the long run, he is looking at his current state (pay check to paycheck/monthly) he spends less at the end of the month therefore to him he has saved money and it is better for him. Yes he will be making a payment longer but he is not thinking that far ahead from the sounds of it. And if he drives 20 miles a day I bet he fills up every 3 weeks or so with that car

 

Paint fumes, Glue, -hell maybe even freon.

 

Doesn't matter how little you drive per day, if the vehicle is more effiecient you spend less on gas

 

Titan - Next time this friend makes a major purchase, I expect you will hear about it through the grapevine before he tells you, lol.

 

It's mindset. People want to look like they have wealth, or that they are doing well so they can impress other people. They are really hurting their self in the long run by wasting their money on material possessions that don't earn them more money than they paid. They should be using that money to start a business or investing it in something that will earn them more money off that money. But that's a whole another story. I don't want 500 people quoting me and trying to prove me wrong. lol

 

IMO you are missing at least one large piece of the financial analysis.

The big piece you are missing is: What are the vehicles going to be worth in the future, when you would be ready to sell/trade them to buy your next vehicle?

Pick a future date. Let's say 60 months from now, when the new Honda would be paid off. Shoot, you could use the date your F150 is paid off for the analysis, and assume the Honda still has 3 years of payments left.

If the 2012 Honda with 6 years of less mileage is going to be worth much more more than your 2006 F150, than it may be worth selling your truck, keeping your payments virtually the same and saving money on gas the whole time.

I don't have the time, but you could go to nada.com or kbb.com. Find a comparable Honda that is 2 years and 5 years old, and estimtae an appropriate mileage. Then compare to F150's that are 8 and 11 years old, with 6 years more mileage than you used for the Honda.

Maybe your friend is not as stupid as you thought, lol.

 

Most people these days don't care about the long term, its all about the month to month/paycheck to paycheck/live in the now. Its the new American way. If more people thought long term the "1%" would be alot more crowded.