by Dave Ramsey
Smart Money magazine quotes the National Auto Dealers Association (NADA) as stating the average new car purchased for cash makes the dealer an $82 profit. When the dealer can get you to finance with them, they sell the financing contract and make an average of $775 per car! But if they can get you to fleece the car, the dealer can sell that fleece to the local bank or GMAC, Ford Motor Credit, Toyota Credit, etc., for an average of $1,300! The typical car dealer makes their money in the finance office and the shop, not in the sale of new cars.
Car fleecing is exploding because dealers know it is their largest profit center. We live in a culture that quit asking, “How much?” and instead asks, “How much down, and how much a month?” If you look at only the monthly outlay, then you will always fleece, because it almost always costs less down and less a month, but in the long run, it is much more expensive. Once again, the Red-Faced Kid bought something he couldn’t afford using an unwise method and then attempted to justify his stupidity. That redfaced stuff won’t work if you want a Total Money Makeover.
Craig called my radio show to argue about leasing because his CPA said he should lease a car. (Proof that some CPAs can’t add, or at least don’t take the time to!) Craig owned his own business and thought the tax write-off if his business owned the car made fleecing smart. Craig had the $20,000 cash to buy a one-year-old car just like the one he wanted, but instead he was going to fleece a new $30,000 one. He missed two important points. First, 98 percent of fleecing is done on a new car, which rapidly loses value, not a wise business decision. Second, creating an unneeded business expense for the sake of a tax write-off is bad math.
Let’s say that Craig fleeced a car for $416 per month, $5,000 per year, and used it 100 percent for business (which is highly unlikely and most times won’t survive an audit). If you have a tax write-off of $5,000, you don’t pay taxes on that money. If Craig didn’t have the $5,000 write-off, he would pay taxes on that $5,000, which would be about $1,500 in taxes. So Craig’s CPA’s suggestion that he send the car company $5,000 to keep from sending the government $1,500 sounds as though he can’t add. Plus, Craig is now responsible for a $30,000 car that is dropping in value instead of a $20,000 car that took the worst drop in value during its first year.
My company owns my cars. We are able to straight-line depreciate those cars or write off the mileage. If you drive inexpensive cars in your business and put high mileage on them, take the mileage deduction. If you, like me, drive expensive cars but do not put many miles on them, take the straight-line depreciation. Both tax deductions are available to you without having a stupid car payment. If you don’t own a business and didn’t understand everything I just said about tax write-offs, etc., don’t worry. Just know that, as a wise business owner, you don’t want to fleece a car.
MYTH: You can get a good deal on a new car at 0 percent interest.
TRUTH: A new car loses 60 percent of its value in the first four years; that isn’t 0 percent.
We have discussed the new-car purchase in its various forms for the last several pages. No, you can’t afford a new car unless you are a millionaire and can, therefore, afford to lose thousands of dollars, all in the name of the neat new-car smell. A good used car that is less than three years old is as reliable or more reliable than a new car. A new $28,000 car will lose about $17,000 of value in the first four years you own it. That is almost $100 per week in lost value. To understand what I’m talking about, open your window on your way to work once a week and throw out a $100 bill.
The average millionaire drives a two-year-old car with no payments. He or she simply bought it. The average millionaire is unwilling to take the loss that a new car dishes out; that is how they became millionaires. I am not saying you will never drive a brand-new car, but until you have so much money you can lose big bucks and not notice, you can’t afford the luxury. The car dealer will tell you that you are “buying someone else’s problems.” Then why do they sell used cars? Wouldn’t that be morally wrong? The truth is that most slightly used cars have gotten all the kinks worked out of them and were not traded because they were bad cars. In fact, there’s a good chance you are buying a car that came off a lease. My last two car purchases were one- and two-year lease turn-ins with low miles.
If you understand what I am saying about this huge loss in value, you now realize that 0 percent interest isn’t really “no cost.” While the money to borrow isn’t technically costing you, you are losing so much in value that you have still been taken. Zero percent, however, is used quite often by guys (seldom gals) to rationalize their “need” for some new wheels. So even though the interest rate is attractive, pass it up because the whole transaction still means throwing $100 bills out the window each week.
Some people want to buy a new car for the warranty. If you lose $17,000 of value over four years, on average you have paid too much for a warranty. You could have completely rebuilt the car twice for $17,000! Also, keep in mind that most manufacturers’ warranties will still cover you when buying a slightly used car. Of course, when you begin your Total Money Makeover, you may have an old beater, but the goal is to avoid the temptation of the 0 percent interest myth and get into quality used cars. (Still want to buy a new car? Sure they look great, smell great, and drive great—but the month-after-month and year-after-year payments definitely don’t feel great.)
MYTH: You should get a credit card to build your credit.
TRUTH: You won’t use credit with your Total Money Makeover, except maybe for a mortgage, and you don’t need a credit card for that.
The best myth is the “build your credit” myth. Bankers, car dealers, and unknowledgeable mortgage lenders have told America for years to “build your credit.” This myth means we have to get debt so we can get more debt because debt is how we get stuff. Those of us who have had a Total Money Makeover have found that cash buys stuff better than debt. But if I were selling debt, as the banker is, I also would tell you to get debt to get more debt. This is, however, a myth.
Yes, you will need to “build your credit” by borrowing and repaying debt in a timely fashion if you want to live a life of credit cards, student loans, and car payments. Not me. The one question we must answer is, “How do I get a home mortgage?” Later, I will introduce you to the 100-percent-down plan, or if you must, how to settle for a fifteen-year fixed-rate mortgage. But if you want that fifteen-year fixed rate with a payment that is no more than 25 percent of your take-home pay so I won’t yell about it, don’t you need credit? No.
You will need to find a mortgage company that does actual underwriting. Some mortgage companies call this a “No Credit Score” or “Non-Traditional Credit” process. That means they are professional enough to process the details of your life instead of using only a FICO score (lending for dummies). It’s getting harder to find a lender who will go to the trouble of actually getting to know you, but they’re out there. If one bank tells you they can’t do it, keep looking. You can get a mortgage if you have lived right. Let me define “lived right.”
You can qualify for a conventional fifteen-year fixed-rate loan if:
• You have paid your landlord early or on time for two years.
• You have a history of uninterrupted, on-time payments for things like utility bills, insurance premiums, school tuition, child care, or medical bills.
• You have been in the same career field for two years.
• You have a good down payment, which is more than “nothing down.”
• You have no other credit, good or bad.
• You are not trying to take too big a loan. A payment that totals 25 percent of take-home pay is conservative and will help you qualify.
The FICO score is an “I Love Debt” score. According the FICO website, your FICO score is determined by:
35% Debt Payment History
30% Debt Levels
15% Length of Debt
10% New Debt
10% Type of Debt
So if you quit borrowing mone
y you will lose your FICO score. It is not a score that says you are winning with money or that you have a million dollars; it mathematically says you LOVE DEBT. Please don’t brag about your FICO score; that makes you look like you love playing kissy face with some bank. Dumb, dumb, dumb.
So can you get a mortgage without a FICO score? Many mortgage companies have gotten so lazy that FICO is the only lending they do. Others simply don’t know how to write a loan without a score. But as of this writing, you can still get a mortgage with a zero score—it may just take a little longer to find a quality lender. You don’t want to have a low score; it is best to have a high one or none at all. My personal score, by the way, is zero—because I haven’t borrowed any money in decades.
MYTH: You need a credit card to rent a car, check into a hotel, or buy online.
TRUTH: A debit card will do all that.
The Visa debit card or other check cards that are connected to your checking account give you the ability to do virtually anything a credit card will do. I carry a debit card on my personal account and one on my business and do not have one credit card. Of course, you must have money before you can buy something with a debit card, but paying for things with money you have now is part of your Total Money Makeover. Some rental-car places don’t take debit cards, but most do. Even though most will take the debit card, you need to check with the specific rental location in advance. I buy things online and stay in hotels using my debit card all the time. In fact, I travel all over the nation several times a year speaking and doing appearances, and my debit card allows me access to the best things life has to offer with no debt.
Remember, there is one thing the debit card won’t do: get you into debt.
MYTH: The debit card has more risk than a credit card.
TRUTH: Nope.
Some of you were concerned when I mentioned buying things online and reserving hotels with a debit card. The perception is that it’s riskier to conduct that kind of business with a debit card. Supposed financial experts have spread this myth to the point that it is virtually urban legend. The fact is, Visa’s regulations require the card-issuing bank to afford the debit card the exact same protections in cases of theft or fraud. If you have any doubt, read the liability information on Visa’s own website. I contacted Visa directly and they sent this statement:
Visa’s Zero Liability policy covers all Visa credit—and debit-card transactions processed over the Visa network. Visa extends the same protections and benefits to its debit cards as it does to credit cards—including the ability for credit-card issuers to resolve merchant disputes on the cardholder’s behalf if goods were defective or weren’t received, you were overcharged, or for other reasons.
But remember, in order to get the full protection, be sure to run your card as a credit transaction—not using your PIN number. That’s what I do.
MYTH: If you pay off your credit card every month, you get the free use of someone else’s money.
TRUTH: CardTrak says that 60 percent of people don’t pay off their credit cards every month.
As I said, when you play with snakes, you get bitten. I have heard all the bait put out there to lure the unsuspecting into the pit. A free hat, airline miles, brownie points back, free use of someone else’s money, a discount at the register—the list goes on to get you to sign up for a credit card. Have you ever asked why they work so hard to get you involved? The answer is that you lose and they win.
You won’t wear the hat, and according to MSNBC.com, 90 percent of the airline miles are never redeemed. The next time you are in the store that gave you a discount for signing up for a card, you will have forgotten your cash, you’ll use the card, and the cycle begins. Maybe you think, I pay mine off, so I’m using their money. I’m winning. Wrong again. A study of credit card use at McDonald’s found that people spent 47 percent more when using credit instead of cash. It hurts when you spend cash; therefore you spend less.
The big question is, what do millionaires do? They don’t get rich with free hats, brownie points, air miles, and the use of someone else’s money. What do broke people do? They use credit cards. An American Bankruptcy Institute study of bankruptcy filers reveals that 69 percent of filers say credit-card debt caused the bankruptcy. Broke people use credit cards; rich people don’t. I rest my case.
Before getting onboard with Dave’s plan, I was so stressed with work and our financial situation that I ended up in the hospital with chest pains. My wife and I were making very good money in the San Francisco Bay area, having nothing to show for it but lives under constant pressure. For years we had desired to move closer to our children and grandchildren, parents, and siblings. But the debt we carried would not allow us to move to a possibly lower-paying situation.
By the time we found The Dave Ramsey Show on our daily long commutes to work, we were $95,000 in debt. It didn’t take long for us to realize that he spoke truths laced with a strong dose of common sense. We destroyed the credit cards and set up a plan of attack following the Baby Steps as outlined in The Total Money Makeover. We paid off all consumer debt and cars within eighteen months, saved our six-month emergency fund, and had a plan to pay off the house within seven years.
A funny thing happened once we got rid of all that consumer debt; the stressful jobs were no longer a financial necessity. We didn’t feel so much pressure on our lives either, and for the first time we could see a very bright light as we came out of the tunnel. Through Dave, God answered our prayers and allowed us to see clearly how we could move closer to our family!
We are now totally debt-free, including our home. We see family weekly and get to take part in all those wonderful events we had missed over the years. We are still saving 15 percent of our income and give with joy to church and charities in hopes that we can repay those blessings we have received and continue to receive.
We tell everyone who will listen to us about Dave and this great gift of financial peace. Getting rid of our credit cards and eliminating our outstanding debt on those cards freed us up to a point financially where we could take a pay cut and focus more on the things that really matter. My wife and I were happy before, but now we feel true joy in our lives.
Alan (age 48) and
Lonnie (age 47) Cluff
Both in Information Technology
Management
MYTH: Make sure your teenager gets a credit card so he or she will learn to be responsible with money.
TRUTH: Getting a credit card for your teenager is an excellent way to teach him or her to be financially irresponsible. That’s why teens are now the number one target of credit-card companies.
The past several pages have been devoted to the evils of credit cards, so I’m not going to repeat myself in the case of teenagers. I’ll only add that throwing your teen into a pool of sharks is a sure way to guarantee a lifetime of heartache for them and for you. I will also tell you that the vast majority of college seniors have credit-card debt before they even have a job! The credit-card marketers have done such a thorough job that a credit card is seen as a rite of passage into adulthood. American teens view themselves as adults if they have a credit card, a cell phone, and a driver’s license. Sadly, none of these “accomplishments” are in any way associated with real adulthood.
You are not teaching your sixteen-year-old child to spend responsibly when you give him a credit card any more than you are teaching gun responsibility by letting him sleep with a loaded automatic weapon with the safety off. In both cases, you as a parent are being stupid. People with common sense don’t give sixteen-year-olds beer to teach them how to hold their liquor. By giving a teenager a credit card, the parent, the one with supposed credibility, introduces a financially harmful substance and endorses its use, which is dumb but unfortunately very normal in today’s families. Parents must instead teach the teenager to just say no. Anyone visiting a college campus in recent years has been shocked at the aggressive and senseless marketing of credit cards to people who don’t have jobs. The res
ults can be devastating. Two college students in Oklahoma gave up on their credit-card debt and committed suicide with the bills lying on the bed beside them.
I got my first credit card when I was eighteen. Getting it felt like a rite of passage into adulthood, even though I didn’t really know how it worked. I’m not sure I even understood that the money had to be paid back!
I ended up losing my job. The bills started piling up, so I moved out of my apartment and into my truck to save some cash. Then my truck got repossessed! For far too long, I used my credit cards to buy anything and everything. I wasn’t budgeting at all, and I continued to treat credit-card cash as income.
I got married and debt continued to cause my wife and me a lot of stress and worry. We were living in Section 8 housing—and my wife was scared to be there alone! We hoped that disaster wouldn’t strike while we lived paycheck to paycheck. Without a buffer between us and life, we never knew when the next emergency would hit us.
I heard Dave on the radio, started his Baby Steps, and read The Total Money Makeover. We cut up our credit cards before we had an emergency fund in place, which made my wife nervous. We paid off $10,000 in debt on a $30,000 combined yearly income, and we are now debt-free!
We rarely disagree anymore when we create a budget. With each paycheck, we tithe, pay ourselves first (save!), pay bills, and use the envelope system for our other expenses. I ordered twenty copies of The Total Money Makeover and have enjoyed giving them away to my coworkers so they, too, can experience what it’s like to be debt-free and have cash in hand for purchases. I’ve gone from being completely ignorant about my money to becoming debt-free and trying to help others gain financial peace!
