depreciation

4 Hidden Costs of a Luxury Car

Toni Husbands — Tue, 23 Jan 2018 10:00:06 +0000

You've seen the commercials: an oversized, red bow atop a shiny new luxury car in the driveway. You can all but imagine the new car aroma wafting while an exuberant recipient jumps for joy in his or her jammies.

Luxury cars make a statement. They say something about the owner's arrival into a land of accomplishment. They stand out in a sea of moderately priced alternatives. Heck, they just look better. But, they can also have you scrambling to stay on top of your finances.

Even if you've absorbed the sticker shock and accepted that a new luxury car will cost you more than the comparable non-luxury model, there are other hidden costs that can transform that new car smell into a rotten stench of budget overrun. (See also: 10 New Car Costs the Dealer Is Hiding From You)

Everything costs more with a luxury car. Do your homework before signing on the dotted line.

Insurance

Insurance is one of the not-so-sexy must-haves that every buyer must reckon with after leaving the car lot. As you would expect, a fender bender with your shiny new luxury mobile will cost more to repair. The insurance company will pass the cost along in the form of higher premiums.

Just how much your insurance costs rise depends on your new car. Let's compare a top-of-the-line Toyota Camry to an entry-level luxury model, the Mercedes C300. A fully loaded Camry in Chicago tops out at $33,000 according to TrueCar.com. Slide into an entry-level C-class Mercedes, standard frills only, starting with a $40,000 price tag.

A quick search on InsuranceQuotes.com shows that as a married woman in her 40s, I would pay $1,500 annually for the typical Toyota Sedan insurance premium. By comparison, I would fork out a whopping $2,689 a year to ensure my new hot Mercedes. That's an additional $1,189 a year, an 80 percent increase, to ride in style.

Gasoline

Fuel costs are another ongoing expense to calculate when considering a luxury car. Luxury cars, with their massive engines, are built for performance, not fuel economy. That's why premium fuel is required to keep these marvels humming. The national average for regular gas prices is $2.48 per gallon, according to AAA. That average jumps to $3.01 for premium prices.

In Illinois, we have the honor of paying even more for gas. Premium prices are currently an average $3.37 per gallon, while regular fuel costs around $2.62 per gallon. So my fuel costs on average per year will cost $1,800 annually for the Mercedes vs. $1,500 a year to drive a Camry, according to a calculator on FuelEcomony.gov.

Maybe you're not bothered by an additional $300 in fuel costs. We're not done yet.

Maintenance and repairs

Repairs will also cost you more for luxury models. The parts are more expensive. Technicians have to be specially-trained to work with the complicated gadgets. Even if you opt for non-dealer mechanics, repairs will undoubtedly add to your cost of ownership as the car ages. Non-luxury cars need maintenance, too, but repairs and upkeep are cheaper.

Toyotas are famous for their new car care programs. Toyota purchases include ToyotaCare, which covers factory-scheduled maintenance costs for the first two years or 25,000 miles. Your oil changes, tire rotations, and brake inspections are covered.

Mercedes, on the other hand, offers a prepaid maintenance package starting at $769. According to MBUSA.com, the Mercedes-Benz website, the package will save you 30 percent on routine maintenance costs over three years compared to paying as you go. This one-time fee covers the car for three years or 30,000 miles.

Once these new car protections expire, the difference between maintenance cost grows. YourMechanic.com ranks the cost to maintain all of the major car brands. Mercedes, not surprisingly, is one of the most expensive cars to maintain — right after BMWs — at nearly $13,000 over 10 years. A Toyota should cost only $5,500 to maintain over 10 years. In annual terms, the Mercedes costs $750 more than the Toyota to maintain. (See also: 6 Cars You Can Drive (Almost) Forever)

Depreciation and taxes

No one walks into a dealership and wonders how much depreciation will impact their cost of ownership. Maybe we should. This hidden cost impacts your car's resale value. Luxury car values continue to drop after standard car depreciation rates tend to level off. (See also: 3 Reasons Why You Should Never Buy a New Car)

The higher cost of maintenance and repairs has a lot to do with that. Think about it. Someone buying your used luxury car is taking on an expensive bill with their new-to-them car purchase. It will cost you more, in terms of lower resale value, to sell your car when you're ready to upgrade.

Kelly Blue Book has a handy tool that will allow you to compare a car's depreciation as a portion of the total five-year cost of ownership. Our Mercedes in this example would lose $27,000 by year five, versus a $16,700 loss for the Camry.

In the end, you may still decide you want the cush Mercedes over the practical Toyota. Either way, go into your decision with your eyes wide open about ongoing costs and total cost of ownership. (See also: Could You Put Away a Million Dollars by Driving a Used Car?)

Sales taxes are another consideration. State taxes vary based on your location, but given the higher purchase price of the Mercedes, you'll pay more taxes on it, too.

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This article is from Toni Husbands of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

Could You Put Away a Million Dollars by Driving a Used Car?

Dr Penny Pincher — Thu, 13 Apr 2017 09:00:09 +0000

When you buy a new car, there are several financial factors working against you. First, the asset you are buying — the car — depreciates rapidly. As soon as you drive it off the lot, it is worth thousands less than what you paid. In about four years, a new car will typically be worth half its original value.

Secondly, when you make car payments, you are paying interest. So not only are you putting money into an asset that is certain to depreciate, you are borrowing money and paying compound interest as well.

Finally, there is the opportunity cost of buying a new car. This is a factor many people forget about. Put simply, opportunity cost is what you give up by choosing one investment or purchase over another. Instead of spending money on a depreciating asset, you could invest the money instead where it would likely grow. Over a lifetime, this could add up to a significant amount of money. Opportunity cost is a key tool in business, and has many uses in daily life, too. Fortunately, the math is simple: Opportunity cost = return of most lucrative option - return of chosen option.

As you can see, buying a new car doesn't make much sense when you look at it from a financial perspective. But could you come out $1 million dollars ahead driving used instead of buying new?

New car versus used car scenarios

In many parts of the United States, it's impossible to get to your job or other places you need to go without a car. I'm not suggesting you have to completely give up automobiles. But there is a big difference between always buying a brand-new car, and buying used. And when you consider that you could be investing that price differential in a growing stock market, the argument for used cars becomes hard to ignore.

I'll run through some scenarios to analyze the opportunity cost of making new car payments, considering how much you could end up with if you choose to invest the money instead where it could grow rather than depreciate.

For the opportunity cost, the analysis assumes that over the long term you could realize an 8 percent rate of return from stock market investments. Of course, no one knows how the stock market will perform in the future, but an 8 percent rate of growth is often used as a long-term average that includes both boom and bust cycles. The goal of this analysis is to provide a general idea of the potential magnitude of making car payments instead of investing the money.

The scenarios for buying new cars versus driving used cars will run for 40 years to represent a lifetime of car buying behavior. Note that the effect of inflation on the price of the car or on potential investment value is not included in the analysis. Now, let's find out how much you could save by driving a used car.

Scenario 1: That new car smell!

First, let's look at a scenario where you always drive a new car. We'll assume you buy a brand-new car for $35,000 every four years with a 48-month financing plan that charges 0.9 percent interest. You make payments for four years, and then trade it in for its depreciated value (we'll use $17,000), and the trade-in value is applied toward the purchase of your next new $35,000 car. In this scenario, you are always making payments on a new car.

Using the Calc XML car loan calculator, we find that the monthly car payment for the first four years is $743, then it's $382/month for the following 36 years when we're able to take advantage of the $17,000 trade in every four years. Adding up those payments we get (743 x 48) + (382 x 432) = $35,664 + $165,024 = $200,668.

Now, let's calculate the opportunity cost of making those new car payments for 40 years. We'll use an investment calculator from CalcXML. Assuming annual compounding, with a start amount of $0, an annual interest rate of 8 percent, and an annual deposit of $8,916 (those monthly $743 car payments x 12), we get a future value of $43,391. That's the amount we could have made if we'd foregone our first four years of new car payments and instead invested that money in the stock market.

After those first four years, the amount of our car payments, and thus the opportunity cost of investing them, will be lower ($382 per month, or $4,584 per year) because we'll be getting a $17,000 trade-in for our old car. We'll start with investing the $43,391 we earned in the first four years, and after 36 years of such contributions, we end up with a balance of $1,619,165. This amount represents the opportunity cost of making new car payments for 40 years. That's how much we're losing out on stock market gains by burning our money up on new car payments!

Results over 40 years:

Total cost of car payments: $200,668
Total return: $0
Total invested (if we skipped the car altogether): $200,668
Total returned: $1,619,165
Opportunity cost: $1,619,165 - $0 = $1,619,165.

If you invested instead of making car payments, the opportunity cost of always driving a new car is: $1,619,165.

Scenario 2: Drive it till it drops!

Next, let's consider the other extreme. In this scenario, you never make car loan payments. Let's assume you take a frugal approach to buying older used cars, and budget only $600 per year for purchasing the next car. With this budget, you could afford to buy a $6,000 used car every 10 years to meet your transportation needs — with no finance charges involved. Also, a budget of $100 per month for maintenance and repairs is included in the analysis, since you will always be driving an older car in this scenario. As I mentioned, this is a frugal scenario. You'll need to save up your $150 per month total car budget until you have enough to pay cash for a used car.

Again, to calculate the opportunity cost, we'll consider investing $1,800 a year ($600/year + $100 maintenance fees x 12 months) for 40 years with interest compounded annually.

Results over 40 years:

Total cost of car expenses: $72,000
If you invested your car expenses instead, the opportunity cost of driving a cheap used car is: $503,607
Opportunity cost benefit over always driving a new car: $1,115,558 ($1,619,165 - $503,607)

Since the opportunity cost of driving a new car all the time is around $1.6 million, by buying a cheap used car and maintaining it for 40 years you come out ahead by more than $1.1 million (i.e., the opportunity cost of the used car is only about $500,000, which is $1.1 million less than the opportunity cost of always driving a new car). In other words, if you only bought cheap used cars and invested the money you would have otherwise spent on new cars, you could make more than a million dollars in the stock market over 40 years.

Scenario 3: Buy a four-year-old car, drive it for 10 years

Now, what if you buy a four-year-old used car for $17,000, pay it off in four years at 4.9 percent interest, and then drive it for six more years with no payments? Since your car is more than four years old at all times, the analysis includes $100 per month for repairs and maintenance throughout the scenario.

If you buy a four-year-old car and drive it for 10 years, this means that you will be driving a 14-year-old car at times. If you have not driven a car this old before, you may be concerned about reliability, but I can say from experience that well-maintained cars will easily run this long.

Results over 40 years:

Total cost of car expenses: $103,872
If you invested instead, the opportunity cost of driving a nice used car is: $817,985
Opportunity cost benefit of driving a nice used car instead of always driving a new car: $801,180 ($1,619,165 - $817,985)

In other words, even if you bought a relatively nice used car every 10 years and invested the money you would have otherwise spent on new cars, you could still make more than $800,000 in the stock market over 40 years.

How much can you save driving used cars?

The results of these car buying scenarios over a 40-year period show that if you are willing to minimize your car payments by driving inexpensive used vehicles instead of new ones, you can come out ahead not only by saving on car expenses themselves, but by reducing the opportunity cost of your car payments by $1,115,558 — over a million dollars! If you buy four-year-old cars instead of brand-new and drive them for 10 years, you can come out ahead by around $800,000 in opportunity cost compared with driving brand-new cars.

When you look at making a car payment of a few hundred dollars per month, it may not seem like a lot of money. But as you can see, financing new vehicles can add up to a lot of missed investment opportunity over time. This makes driving a used car instead of a new car seem like a relatively painless way to boost your retirement fund.

This article is from Dr Penny Pincher of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

The Airline Lost Your Luggage. Now What?

Nick Wharton — Wed, 04 May 2016 09:30:21 +0000

The absolute worst thing that can happen to you when you arrive at the airport after a long trip is waiting at the luggage carousel and watching it stop as you stand there empty-handed. The airline has lost your bags and you're stranded in a foreign country with no toothbrush, no shampoo, and no clothing. I had the misfortune of living through this catastrophe on a recent trip, and it's not fun.

Here's what you can do if it happens to you.

Report Your Loss Right Away

In every airport, there will be a luggage lost and found counter. They are usually located right next the baggage carousels and are typically well-marked. As soon as you realize that you made it to your destination but your luggage did not, head to the lost and found area to make a claim.

Make sure you bring your baggage ticket as they will need to enter it in the system. They will usually go on the radio and contact the luggage handling staff at the airport to see if your bags were accidentally left somewhere.

If you're lucky, your bag is sitting on the tarmac or in the transit area and you'll get it back within an hour or so. If not, you'll have to file a lost luggage claim. The staff will give you a form to fill out with your name, home address, hotel address, passport number, phone number, luggage description, and baggage tag number as well as a brief description of what was in your bag.

They will then photocopy your luggage tag, your passport, and the information you gave them and hand you a piece of paper with a reference number.

At this time you can leave the airport and head to your hotel. The airline will search for your bag and call or text you when it is found. When they find your bag, they should send it to your hotel or wherever you are staying at the time. (See also: What to Do If You Don't Have Your ID at the Airport)

Check the Status

If, after 24 hours or more, you still haven't heard from the airline, go online to the airline's website and click on the "Lost Luggage" section. Enter your reference number and last name and check the status of your claim.

Follow Up

Most airlines will update your status as soon as they find your luggage, but sometimes they can be slow and unreliable. Some people have had to go without their bags for months, while others never saw their precious luggage again.

Go on the airline's website and look for a customer service number. Call them and navigate the automated telephone menu until you get to a luggage lost and found representative. Give them your reference number and tell them your situation. Ask them to do everything they can to find your bag and also tell them how long you'll be at the hotel. Make your situation sound as dire as possible to try to encourage them to actively search for your bag.

Keep the Claim Updated

Make sure that all of the information that you gave is correct and remains valid. If you check out of your hotel and move to a new one, call or go online and change the information on the claim so that the airline can properly contact you when your bag is found. Even if you move to another city or country, they should courier your bag to you as soon as possible.

Go Shopping

The US Department of Transportation has laws in place that help to hold the airline responsible for your lost luggage and the contents of your bag. While the airline is technically required to reimburse you for any losses, the individual airline regulations vary greatly.

You can, however, be certain that you will be covered for your essentials. Contact the airline and ask them how much essential spending you will be covered for. Then go out and buy yourself some new underwear, shampoo, deodorant, and clothing. Keep all the receipts for these purchases because you will be asked to submit them later.

Sometimes the "Maximum Claim Amount" can be found on the back of your luggage ticket. This is the amount that you can spend on essentials and emergencies. For permanently lost luggage, there are different amounts you can be reimbursed.

Negotiate

No airline is going to willingly offer you the full reimbursement for your troubles or for the value of your lost items. You will have to negotiate, complain, and protest. Make sure you talk to a supervisor when making your claims and if you had anything of sentimental value in the bag, make sure you tell them. Also request that they refund you your checked baggage fee. The airline shouldn't be paid $25 for losing your luggage!

You can also ask to be reimbursed in other ways. You may be able to complain your way into a free flight or at least an upgrade into first class on your next scheduled flight with the airline.

Use Social Media

Some airlines don't make the claim process very easy. In this situation, you can take to social media and try a good old fashioned smear campaign. Mention the airline and explain your situation on any social media accounts you have and be sure to @ them so that they will see the posts.

No company wants to have the story of your lost luggage go viral on social media. You may be able to speed up the claim process or land yourself some free flights by posting about your situation on Facebook, Twitter, and Instagram.

When to Give Up

According to the DOT's latest Air Travel Consumer Report, 2.9 in 10,000 passengers experience delayed, damaged, or lost baggage. They estimate less than 2% of those passengers actually end up with their luggage permanently lost. If you are one of those unlucky people, it's time to make a lost luggage claim.

Claims for reimbursement will have to be backed up by receipts and proof of payment. When you go out shopping for emergency clothing and essentials, make sure to keep all of your receipts and when you claim the items that were permanently lost in your bag, try to find as many receipts as you can to back up your claims of what was in the luggage.

Before 2009 when DOT tightened restrictions on lost luggage claims, you would have had to kiss your luggage goodbye and never be reimbursed more than the cost of your essential emergency spending. Nowadays, the airlines are held responsible for "all reasonable, actual, and verifiable expenses related to baggage loss, damage, or delay."

Technically, the per passenger maximum for domestic flights in the U.S. is around $3,400, but getting that amount would be like winning the lost luggage lottery. You're more likely to be refunded a small portion of what you lost. For international flights, you may only be reimbursed around $1,600. It is unlikely that you'll ever receive these full amounts unless you can prove that your bag was indeed carrying more than that value.

Even if you can prove that you were carrying $3,400 worth of stuff in your lost baggage, the airline will only pay you a fraction of that amount. They are only required to pay the "depreciated value" of your items, so expect to take a major loss.

Contact Your Insurance and Credit Card Provider

Some travel insurance policies will cover you for lost baggage. This can help to top up the amount the airline agrees to pay. Contact your travel insurance provider and ask about their lost luggage policy. If you paid for the flight with your credit card, contact the card issuer and ask about baggage insurance. Many credit cards will help to cover you for your losses.

Get Your Bag Back

Hopefully you didn't have to go through every step in this article and somewhere in this process you were contacted by the airline and informed that they found your bag. If this is the case, you can either return to the airport to pick up the luggage yourself, or have it delivered to the address that you entered on your claim. Some airlines will try to make your pay for the delivery (believe it or not). If this is the case, negotiate and try your best to have them cover the cost. When your bags are safe and sound back home, it might be wise to invest in a GPS luggage tracker in the event this should ever happen again.

Has the airline ever lost your luggage? Did you get it back?

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This article is from Nick Wharton of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

4 Purchases With Financing Options That Depreciate Fast

Qiana Chavaia — Wed, 02 Mar 2016 11:30:07 +0000

It's refund season. Unfortunately, the first thing most people do when they receive their tax refund is purchase big ticket items that often depreciate in value. Far worse, sometimes the refund is used as a down payment, and the purchase still requires financing. Or, it's bought before the money actually arrives and carried as a credit card balance — believing you'll use your refund to pay it off. (See also: 8 Smart Things to Do With Your Tax Refund)

Investing your tax refund in smart, long-lasting purchases you really need is one thing. But using the money on big-ticket items that are certain to depreciate is a losing financial proposition. Consider avoiding these depreciating purchases:

1. Jewelry

Suze Orman likes to point out that she always wears the same jewelry. I'm the same way. Unless it's for a truly special occasion — such as an engagement ring, wedding band, or anniversary gift — jewelry isn't something you should buy often. Precious stones, in particular, tend to depreciate hard and fast. Ira Weissman, a 10-year veteran in the diamond business, says diamonds are a terrible waste of your money because their value often drops to less than half after your purchase.

2. Automobiles

You've heard that cars lose their value the moment you drive off the lot. So, why pump so much money into something that will never appreciate in value, will only cost more money over time, and ultimately need to be replaced? And worse, why would you finance a new vehicle — taking on additional debt on top of a depreciating asset — if you don't really need a new car?

The good news is, consumers have wised up to the truth about auto financing. And the automobile industry has caught on to the fact they can no longer convince people to run out and buy new cars every two to three years. But they still want your money. So, they've created an alternative scheme to traditional three to five year financing. It's an auto lease, where if you use the car for work (individual or business), you can deduct up to as much as 100% of monthly payments and other expenses. While it's not right for everyone, in some situations, it's a good alternative to taking on new car debt. Of course, the best option is still to pay for cars in cash, buying a vehicle only when you really need it.

3. Electronics

In our nation's consumer-driven economy, the sale of goods is the backbone of business. So, some businesses no longer have an incentive to make quality products that last, because consumers want the latest release with updated features. Since electronics are a necessary — and rapidly depreciating — evil, your best bet is to buy only what you need, get an extended warranty on it (if possible), insure it, and hang onto it for years to come. Help drive down the excessive costs of these expensive gadgets by simply refusing to trade them in every year.

4. Furniture

Used furniture is only as valuable as what someone is willing pay, and that's often far less than what you paid originally. Even designer furniture in good condition only fetches a small fraction of its original price. If you're in the market for furniture, buy high-quality, durable pieces if you can. Budget and plan for their purchase and acquire them over time. If you can't quite afford those high-quality items yet, consider buying them used and let someone else take the depreciation hit, instead.

Are there other quickly depreciating buys we've missed? Please share in comments!

This article is from Qiana Chavaia of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

3 Reasons Why You Should Never Buy a New Car

Mikey Rox — Mon, 01 Feb 2016 16:00:04 +0000

I don't know what it is, but there's something really exciting about being the first person to own a car. Maybe it's because brand new cars come with the latest technologies, extremely low mileage, and that new car smell you just can't duplicate. Plus, there are no animal crackers stuck between the seats from the previous owner's three-year-old.

But these aren't the only perks of buying new.

Unless you have the misfortune of getting stuck with a lemon, new cars typically have fewer maintenance problems, too. In most cases, you don't have to think about replacing the brakes, tires, or other minor repairs for at least a few years. If you run into some defect, most car manufacturers offer a three-year limited warranty, which provides added peace of mind. Additionally, if you're financing, banks usually offer lower interest rates on newer cars. For example, Toyota sometimes runs a 0% financing promotion (or financing as low as 1.9%) on new models for well-qualified buyers.

But while there are benefits to buying a brand new car, it might not be the smartest financial choice. At the end of the day, you have to decide whether to buy brand new or used. However, before you think a car with only 10 miles is the better deal, here are three arguments for never buying a brand new car. (See also: 10 New Car Costs the Dealer Is Hiding From You)

1. The Obvious Reason — You'll Pay More

If money is the least of your worries, it probably doesn't matter whether you buy new or used. But if you identify with the rest of us and you're pinching your pennies, you need a monthly payment that doesn't stretch your budget or cause unnecessary financial strain.

The good news is that buying a car doesn't have to complicate your financial life. If you have good credit and you're able to qualify for a new car loan with no hassles, banks may compete for your business and offer the best rate possible.

But even with low-rate auto financing on a new purchase, a new car will be more expensive than an older version of the same car. Not only because of the higher sale price — you'll also pay more in other areas. Brand new cars can have higher insurance premiums than used cars. And if you live in a state with personal property taxes, the newer your car, the more you'll pay in taxes each year.

2. Faster Depreciation and Negative Equity

It's not fair or right, but new cars depreciate faster than used vehicles. The sad reality is that the average new car can depreciate as much as 19% in its first year — and that's just an average. What does this mean for you? To put it simply, if you buy a brand new car without a down payment, or if your monthly loan payment isn't high enough to compensate for depreciation, you could end up owing more than the vehicle is worth.

Let's say you pay $20,000 for a brand new car and $3,000 in finance charges over the length of a five-year term. This brings the total cost of your car to $23,000. We'll factor in a 19% rate of depreciation for the first year, which brings the value of the car down to $16,200. Your payments are $350 a month, or $4,200 a year, so by the end of year one, you'll owe the bank $18,800. Sure, you're making progress on the loan. But since the value of your car dropped nearly $4,000, you now have negative equity and you owe $2,600 more than the car is worth.

Negative equity isn't the worst thing to happen if you plan on keeping the car until it's paid off. But if you're the type of person who trades in vehicles every two or three years, negative equity can increase the cost of your next vehicle. If the dealership gives you $19,000 for your trade-in, yet you owe $22,000, the $3,000 difference doesn't disappear. Instead, the dealer tacks the negative equity onto your next car loan. So instead of a sale price of $27,000 for your next vehicle, you end up financing $30,000.

On the other hand, if you skip the brand new car and buy a vehicle that's one or two years old, you'll be able to get the car at a price that's more comparable to its actual value, and possibly avoid an upside-down loan.

3. You Get More for the Money Buying Used

Since cars depreciate rapidly within the first year, buying used is an opportunity to get more for less. I have a friend who purchased a one-year old Toyota Camry XLE back in 2010. It was a top-of-the-line Camry with wood grain, leather seats, sunroof, rims, heated seats, JBL sound system, dual temperature control, fully loaded. Just one year prior, the car sold for about $28,000 brand new. However, she was able to purchase the vehicle for a little more than $20,000. The car only had 13,000 miles and not a single scratch or stain. It was like buying a brand new car, without the brand new price tag.

What do you think? Are you a new car loyalist, or have you found value in buying not-so-new? I'd love to hear you take on this discussion in the comments below.

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This article is from Mikey Rox of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

7 Reasons to Love That Used Car Smell

Craig Ford — Tue, 23 Apr 2013 09:37:28 +0000

If you love that new car smell and aren't willing to settle for a "new car smell" scented air freshener, you'll need to be prepared to pay a hefty premium for your new car. If, however, you're willing to allow another owner to drive the first 15,000 miles or more, then you'll be able to save thousands of dollars. (See also: Save on Car Maintenance With These 5 DIY Tips)

As an extra benefit, you'll probably also find that there are a couple of non-financial benefits to buying a used car, too.

1. Less Depreciation

Until they are considered an antique, every vehicle depreciates as time passes. However, the depreciation is more intense the newer the car. Edmunds.com reports that a new car will typically depreciate 11% the minute you take it off the lot. Furthermore, after the first year your "new" car is typically worth 19% less than you paid for it.

That's a lot to pay to be the first person to have the honor of spilling coffee all over the center console.

2. Lower Purchase Price

Do you like driving newer cars with fewer miles? Why not focus on buying cars that are about a year old and have 15,000 miles? There's still a lot of good car left, and you can save yourself 20% compared to buying the car new.

Typically, if you're looking for newer used cars, you can find great deals because people who are selling cars after a year are usually just coming to the realization that they cannot afford the vehicle any longer. Their motivation to sell and your desire to get a great deal on a used car is a perfect combination.

3. Lower Insurance Costs

There is a direct correlation between the value of your vehicle and the amount of insurance you'll pay. Thus, if you buy a car that is at least a year or two old, you'll pay lower insurance premiums.

4. Reduced Taxes and Registration Fees

Depending on your state, you may not be required to pay sales tax on a used vehicle. New Hampshire, Delaware, Oregon, and Montana don't charge sales tax for a new car. In Georgia, you'll pay sales tax if you buy a car from a dealership, but not if it is a private sale.

Every state has different registration fees, and those fees can vary based on the age of a vehicle. For example, in Montana if a car is 0-4 years old, you'll pay $217 to register the car. However, if the car is older than 11 years old, you'll pay $28.

5. More Money for Real Investments

Opportunity cost dictates that the more you spend on a vehicle, the less you'll have for something else. If you have $4,000 tied up in a vehicle, then you don't have $4,000 to use towards retirement, college savings, or any other worthy savings goal that has the potential to increase in value.

6. Door Dings Are Not Your Problem

Some people who have new cars insist on parking a long way from the entrance to the store. Why? They are afraid that their new, shiny, glossy car might get a nick or a ding. But you're not worried. Not in the least.

7. And Neither Is Spilled Juice

A colleague may spill coffee on the upholstery. A kid might write on the door panel. A stone may ding your windshield. Your dog will leave dog hair all over the back seat.

When you buy a car that already has a little personality, your spills, marks, and stains will just become another chapter in the story of that vehicle. Sure, it will be frustrating when something happens, but being the first to witness the desecration of a perfect car is even more frustrating.

Do you usually purchase new or used vehicles? Can you think of any additional benefits of buying a reliable used car?

This article is from Craig Ford of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread:

State and Local Tax Surprises for Your Small Business

Barbara Weltman — Wed, 20 Apr 2011 22:14:15 +0000

Link:

http://www.openforum.com/idea-hub/topics/money/article/state-and-local-tax-surpr...

Griping by business owners about federal income taxes on their hard-earned profits is common, and often appropriate. However, there may be even greater reasons for complaining about state and/or local taxes. Where your business is located can make a big difference in the amount of state and local taxes you pay.

Depreciation Rules

Usually, the cost of business equipment and machinery is depreciated over a number of years. However, for federal income taxes, there are two important tax breaks that apply for 2011 to accelerate write offs for the year in which the equipment is bought:

A “Section 179 deduction” of up to $500,000: This deduction, also called “first-year expensing,” applies to both new and pre-owned items, such as computers, office furniture, and other equipment. It can only benefit profitable businesses.
100% bonus depreciation: The full cost of new items can be deducted in the year of purchase instead of spreading depreciation write-offs over a number of years. There is no dollar limit to this deduction. The deduction can be used to create or increase a net operating loss for businesses that are marginal or in the red.

These tax breaks do not necessarily apply on the state level. In seven states — Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming — there is no reason for concern because they have no income tax. New Hampshire and Tennessee tax only interest and dividends. Of the other states, some follow federal rules while others have “decoupled” their tax rules from federal law and apply their own rules when it comes to depreciation.

Not every state follows the federal rule allowing first-year expensing. Hawaii, Pennsylvania, and Wisconsin, for example, do not. California limits expensing to $25,000 (compared with the $500,000 federal limit).

New York does not allow bonus depreciation except for resurgence zone property and New York liberty zone property, which are specially-designated areas within the state. New York is not alone. Many other states (called “nonconforming states”), including California, Massachusetts, and New Jersey, do not allow bonus depreciation.

Other states have certain refinements for bonus depreciation. For example, in Connecticut, sole proprietors can use bonus depreciation but corporations cannot.

Capital Gains

For federal income taxes, capital gains are usually taxed at 15% (those in the 10% or 15% tax bracket pay no federal income tax on their gains). This rule is set to apply through 2012.

What’s more, those who acquire “qualified small business stock” after September 27, 2010, and before January 1, 2011, and hold it more than five years, will pay no federal income tax on their gain, regardless of their tax bracket at the time of sale. Qualified small business stock is stock in a C corporation engaged in technology, manufacturing, or certain other endeavors.

On the state level, however, these favorable capital gains rules do not necessarily apply. In California, for example, capital gains are taxed as if they were ordinary income. There is no preferential treatment given to capital gains; 22 other states apply the same treatment. However, there are some variations. In Minnesota, capital gains from most investments are taxed as ordinary income, but the state uses the favorable federal rule for gain on qualified small business stock.

Special Taxes

Some jurisdictions have special or unique taxes that do not apply at the federal level. For example, in the New York City metropolitan area, there is a Metropolitan Commuter Transportation Mobility Tax, referred to as the MTA tax, imposed on self-employed individuals and company payrolls. The tax rate is 0.34% of an individual’s net earnings from self-employment allocated to the Metropolitan Commuter Transportation District (the five counties in New York City and seven surrounding counties).

Bottom Line

While there is a level playing field under federal tax rules for businesses across the country, state and local tax rules can significantly alter your after-tax profits depending on where you are located. Learn more about your state taxes and how they stack up against other states from the Tax Foundation.

As always, the best course is to work closely with a tax professional who is knowledgeable about tax rules in your location. This will enable you to comply with tax filing and payment rules and avoid penalties and interest.

This article is from Barbara Weltman of Wise Bread, an award-winning personal finance and credit card comparison website. Read more great articles from Wise Bread: