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Money February 2013

Financial Fortitude

Buying a Car, Paying for Education – The Money Adds Up

By Karen Telleen-Lawton

As a final warning, beware the siren call of life insurance as a "solution" to college financing. The pitch is that you can sequester your assets in life insurance to qualify for more college aid. These schemes rarely work out in the long run – except for the agents who sell them.

Dear Karen: What's the best way to replace my car? I typically buy a new car every eight years or so - not a fancy one. I have a long commute, so gas consumption is important. Should I buy or lease?

A: Leasing makes sense when you don't drive a lot but want to cruise in the latest model. Leases usually last three years, corresponding with the common 3-year warranty. If you lease for longer, you'll be stuck with your own maintenance and repair bills.

The cost of a lease depends in part on your chosen vehicle's resale value. So when you buy a car that retains value, your lease will be less expensive. Other factors in the cost: the car's sticker price, interest rates, and your mileage. If you drive over 10 or 12 thousand miles per year, you'll likely pay extra charges: up to 20 cents per mile. (The average car is driven 15,000 miles per year.)

Just as in buying a car, "everything" is negotiable in leasing. The sticker price and the interest rate are your main points of leverage. Some folks believe leasing is a good option right now. "Manufacturers believe the supply of used cars is on the low side, so they've priced residual values higher," according to TrueCar.com's Jesse Toprak. But it's not likely a good deal for you.

To get the best financing deal on a car purchase, first line up a loan from your credit union or your home equity. Rates are projected to stay low for the next couple of years, so try to lock in a fixed rate. Then go to the dealership, find your car, and negotiate for your best financing deal, using the loan in your pocket as a bargaining tool.

Work your monthly budget to pay off the loan in no more than half the time you plan to own the car: four years, in your case. When you've paid it off, set aside that same amount (or more) every month to finance your next car purchase. Then you'll have the option of buying it in cash next time. Finally, if your taste in cars starts getting fancier, consider a "gently used" car in the make of your choice. Most cars' values depreciate steeply the first year or so before plateauing.

 

Dear Karen: I'm starting to panic about the confluence of paying for our kids' colleges and financing our upcoming retirements. The kids are pretty good students and athletes, but probably not good enough for scholarships. Any tips?

A: It can be overwhelming to face these big-ticket items at the same time. The key is to break it down into manageable pieces. What might retirement cost? What might education cost? What is the gap between my needs and my funds, and how do I make up the difference?

Just like donning oxygen masks on airplanes, it's important to make sure you're on track for retirement before you fund your children's post-secondary educations. There are many ways to estimate your retirement needs online. Once you have a figure for your possible annual need in retirement, you can subtract out any pensions you have, plus your social security benefit. Hopefully you're still in positive territory.

As I'm sure you're aware, college costs can vary widely depending on your (and their) decisions. Community colleges and state schools in your own area offer significant discounts. State scholarships are available if they can keep certain grade-point averages, and military schools are taxpayer-funded. The kids can and should contribute from job money and gifts.

Decide on your level of financial commitment considering these options. Now you've whittled it down to one issue: a possible funding gap. Your choices are one or a combination of four options:

  • Save more aggressively: reduce your household budget and shovel the difference into 529 plans, Education Savings Accounts, Series EE or I bonds, IRAs, or directs gifts under the UGMA.
  • Invest more aggressively: increase the return – and risk – on your investments.
  • Education funding: American Opportunity Tax Credit, Lifetime Learning Credit, Pell grants, PLUS loans, Stafford loans, etc.
  • Home equity: set up or use an existing Home Equity Line of Credit (HELOC) or refinance your home.

Each of these has major caveats. As a final warning, beware the siren call of life insurance as a "solution" to college financing. The pitch is that you can sequester your assets in life insurance to qualify for more college aid. These schemes rarely work out in the long run – except for the agents who sell them.

 

Karen Telleen-Lawton, CFP®, serves seniors and pre-seniors as the Principal of Decisive Path Fee-Only Financial Advisory in Santa Barbara, California (http://www.DecisivePath.com). You can reach her with your financial planning questions at This email address is being protected from spambots. You need JavaScript enabled to view it. .


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