The Budget Geek

Fanaticism Without Regret

The Budget Geek - Fanaticism Without Regret

Do You Repair That Old Car Or Replace It?

Last week, my wife called me at work to inform me that her car had suddenly become difficult to steer and began to emit a strange odor. I was not at all surprised by this phone call. Her car is a 2002 Subaru Outback with nearly 250,000 miles. Her business requires a lot of driving and, occasionally, a 4-wheel-drive vehicle in order to traverse the back roads, hills, and construction sites in our surrounding counties.

We purchased her car in early 2009 for less than $5,000. We have made a few repairs to it since taking ownership, but none were too outrageous. Given the car’s age and mileage, we have already saved up enough money to purchase its replacement. So the question we started asking ourselves was how much are we willing to spend on repairs before it made more sense to purchase another vehicle.

We used the following steps to analyze whether to repair the Subaru or purchase a replacement vehicle:

  1. Determine value of the car if it is in good running shape. We looked up the car’s value on Kelley Blue Book. We chose Private Party Value. Our Subaru would rate between fair and good condition, so the repaired value would range between $2,600 and $3,300.
  2. Determine value of the car without repairs. Typically, a reputable junk vendor will offer between 20%-50% of the retail value of the vehicle. That means that if we do not decide to repair the car and choose instead to sell it to a junk vendor, we would likely get somewhere between $1,000 and $1,500 for the car.
  3. Use the formula to determine the maximum amount you should spend to repair the car:

Value of Car In Good Running ShapeValue of Car Without Repairs = Maximum You Should Spend To Repair Car

So, to use our Subaru as an example, assuming the low end of the range for both the value of the car repaired and the value of the car not repaired, we determined that we should spend no more than $1,600 on repairs ($2,600 – $1,000 = $1,600)

If the cost to repair the car is more than the value calculated above, then you should sell the vehicle for salvage value. Then, take that money, plus any money that you have saved up for vehicle replacement, and pay cash for another vehicle. No car payments!

Even if the replacement vehicle that you purchase is not the vehicle you want to drive long-term, you can drive it for a short period of time while you pile up cash to move up in vehicle.

Given the age and mileage of the Subaru and the fact that we already have cash saved for another vehicle, we decided to repair the Subaru if the repairs were going to cost less than $1,000. We figured that $1,000 or less would buy us time to find the “right” vehicle for our next one.

Fortunately, we did not have to make a decision at all. Our mechanic determined that the Subaru was not yet on her last legs. Instead of a costly repair, he believes that a rock got caught in the insert name of auto part here (aren’t you impressed with my knowledge of auto parts?) and that caused the steering difficulty and odor. So we will continue to drive the Subaru, add to our auto replacement fund, and keep a lookout for our next vehicle.


Keeping A Mortgage For The Tax Deduction Is A Bad Idea

Some Financial Advisers recommend that their clients not pay off their mortgage early because the mortgage interest creates a tax deduction.  This is bad advice and the example below that Dave Ramsey uses illustrates why:

Let’s suppose that you have a $200,000 mortgage with a 5% interest rate.
This means that you would pay roughly $10,000 in interest this year ($200,000 x .05).

Now, lets suppose that your income is $50,000 per year and that puts you in a 25% tax bracket.

With the mortgage above, you would be able to take a tax deduction of $10,000, so instead of paying taxes on $50,000, you would pay taxes on $40,000.

In a 25% tax bracket, taxes on $10,000 would be $2,500 ($10,000 x .25).  So, having a mortgage saved you $2,500 on taxes.  That’s good news, right?  Not really.  In order to save that $2,500 in taxes, you paid $10,000 in interest to the bank that holds your mortgage.

You swapped $10,000 for $2,500.  That is a bad idea!

If you really want the $2,500 tax deduction, then give $10,000 to your church or a qualified charity.  The tax deduction is exactly the same as if you had a mortgage, but you did not have to stay in debt and risk your home in order to get it!

Personally, I would stay away from any Financial Adviser who recommends that I keep a mortgage for the tax deduction..

3 Steps For Keeping Your Spouse Engaged In The Budget Committee Meeting™

My wife and I have been budgeting for 9 years now. That means 9 years of monthly Budget Committee Meetings™. When you do anything monthly for 9 years, it is easy to fall into a rut. That’s exactly what happened with us.

Last week, we were trying to determine the spending priority for the commissions that she had coming in. I was attempting to describe to her my system for looking at not only this month, but next month when budgeting our income. She understood what I was saying, but she was having difficulty understanding my logic. So, I proposed that she sit down and allow me to illustrate my point in the budget spreadsheet.

That’s when she hit me with, “Let’s sit in bed and look at it on the iPad instead of having me stand and look over your shoulder at the PC in the computer room.” I had never thought about the fact that she was not comfortable during our meetings. The meetings had been growing shorter over time, but I had attributed that to the fact that we are seasoned veterans of budgeting. Turns out, that was only partially true.

Photo courtesy of

Photo Courtesy of

Here are three steps for keeping your spouse engaged in the Budget Committee Meeting™:

  1. Accept your spouse’s input.  You, the nerd, have had your say in the budget. Your opinion is right there on paper or in the spreadsheet. Now, slide the budget across to your spouse and shut up. Let your spouse change things in the budget. Discuss the changes and come to an agreement.
  2. Hold the budget committee meeting in a different location or via a different medium.  Pack up the budget forms and head to a local coffee shop to discuss your finances over your favorite beverage. Or grab the iPad and head to the den. Move away from the stale confines of your office or dining room table and make an adventure of it.
  3. Bribe your spouse by budgeting in extra blow money for them.  OK, maybe not extra blow money, but you can offer other non-monetary consideration in exchange for working with you on the budget. Offer to do the laundry this week. Or mow the lawn. Or watch the children and allow your spouse some well-deserved quiet time. Or prepare your spouse’s favorite meal.

The thing to remember is that couples who work together to come into agreement about where their money is being spent are the ones who ultimately get to win with money..