Tuesday, 12 March 2013

Student Savings - Car Cash Conundrums

Start Your Engines:

Hey there fellow starving students! Have I got a post for you or what!

No seriously, that wasn't a question and this post is entirely about a situation that most of us will face at some point in our young lives... Buying our first car.

BMW M3 CSL... I can only dream...
Buying your first car can be an experience that brings up a number of emotions... Pride and shame are usually the first two that come into our heads. We're typically either ecstatic and disproportionately proud of our new vehicle (like the people who flip out over a rust-eaten, beat-up and SUPER high mileage jalopy) or somewhat ashamed (those of us driving our mom's old minivan because it seemed like great graduation gift at the time). Then there are the group of young drivers who venture to a used car lot intent on picking out a 'winner', finding a great deal only to realize that their dream car was nothing more than a cash cow in disguise... Andrew, I'm talking to you on that one bud ;)

Seriously though, the biggest issue is usually financing your wheels and that's understandable considering the price of gas, insurance, and the few pennies we manage to scrounge from out part-time, foot-in-the-door-level jobs after tuition takes its bite out of our savings. To this end I've come up with a suggestion that you can take to your parents in a time where everyone has changing needs, and one solution might just fit all of them adequately enough to get you behind the wheel, and give your family a new sense of pride in their fiscally responsible and reasonable youngster.

Weighing The Wallets and Wants:

As you're coming into your own as a young adult, your parents will likely be transitioning into a new lifestyle as well. With you looking to get out on your own, they'll be looking at a greater level of disposable income, odds are that they're looking into retirement, and as such their transportation needs will be changing as well.

Using my household as an example we've had a minivan since moving into this house almost a decade ago. This has always come off as odd to me seeing as I have had a sports practice in about the same amount of time, and I've not been to soccer practice since I was around 7 years old... Seriously, why my mother's got a 'soccer mom' vehicle at this point is beyond me but onto the real substance here. My mum wants to get herself behind the wheel of a Cadillac, but it's a big jump to go over the the luxury sedan side after driving a minivan for so long, not to mention a pretty hefty financial burden.

As for my needs? Well it's about high time that I started driving SOMETHING. I was never given the opportunity to practice with the Grey Goose (my affectionate nickname for the minivan) and my life never really saw me needing a vehicle as my school, work, and friends were all local to me and well within walking or biking distance. Now I see my life changing, longer commutes to see friends, family and a larger world of opportunity beyond my effective walking or biking range. This means, like many other people my age, that I'm in need of a motorized method of transportation. With that said, I don't have a lot of money to sink into that need, so my options remain limited.

This is where the needs of myself and my mother collide, and where you can likely find the common ground between you and YOUR household's needs as well. This works best if you're not in need of a vehicle on a daily basis, and especially well if you're just working on getting your full G License. My recommendation to you? Propose a "Scheduled Transfer of Ownership" to your parents and see what their feelings are on the matter. 

Scheduled Ownership Transfer:

Essentially you're looking at a 'rent to own' arrangement. You and your parents/guardian make an initial investment into a vehicle that adequately meets the needs of all the parties involved. In my case it's rather simple however you might need to do some bargaining as per your household's specific demands. After the initial investment (purchase) is made, under the agreement you, as the young driver of the house, would begin making scheduled payments over an established period of time until you take ownership of the vehicle.

My suggestion in arranging the payment plan is this... Your payments should include the cost incurred by your parents involved with insuring the vehicle so that you can drive it, as well as a percentage of the car's projected value at the point where you would be taking full ownership of it. This system works much better when dealing with buying a used, earlier model vehicle as the initial cost and insurance payments will be lower. Here's my situation...

My mother's target vehicle: Cadillac Sedan, New.
My proposed vehicle: Earlier-Model BMW 3-Series Sedan, Used.
Proposed Vehicle Cost: ~$5,400-$10,000 CDN.
Payment Term: 3-4 Years.

So, I've matched the needs of the parties involved, picked an older model car, a 4-door sedan as well (trust me, a young driver in a sports coupe? Insurance companies see nothing but dollar signs when you apply). the payment term reflects an average college or university education timeline and the cost (look it up people, you really can get BMWs in this price bracket) is very reasonable. Now comes the tricky part... Calculating the depreciation in value and establishing what value of use the other parties in the agreement will take from the vehicle.

For my example, here's a little spreadsheet I drew up for the calculations:

Simple enough.
I used a website to determine the projected decrease in my car model's value, applied that to any investment into a used vehicle and since the 'off the showroom floor' factor can be ignored when buying a used vehicle (the amount that a new vehicle depreciates simply by you taking it off the car lot), the calculation becomes a piece of cake. You need to use the formula for "exponential decay" to determine the value but honestly, with the online tools available to you, that's easy enough to do.

So, recapping everything:

Proposed Vehicle: BMW 3-Series, 320i 4-Door Sedan, Used.
Avg. Cost: $7,600.00CDN
Depreciated Value After:
-3 Years: $4595.37 CDN
-4 Years: $3824.84 CDN

Now, here's the more complicated part... Establishing what you're going to pay over time until the car is transferred over to you. I would argue that you could only owe, at most, the percentage of the final value, that your parents put into the initial investment minus an amount from them having benefited from the vehicle's use. As an example, if your parents were to pay for 75% of the car initially, then you would owe them 75% of the car's final value. Now there will be a lot of squabble about this, there always seems to be when I post my opinion but that's what I'm going with.

To sum things up, using my example of the BMW 3-Series 320i 4-Door Sedan purchased for $7,600.00 and a payment term of 4 years where the initial investment was split 60:40 between your parents/guardians and you respectively:

Initial Investments:
-You: $3040.00
-Parents/Guardians: $4560.00
Car's value after 4 years: $3824.84
Amount to be paid over payment term: ~$2294.90
Monthly Payments: $47.81 + Insurance Share

Driving Into the Sunset:

So, with the numbers broken down, there's really not that much to it. Everything in this system boils down to the five lines of data seen above. Just establish every value you can before making your proposal and you'll have given yourself the best chance of success.

Readers, from what I can gather, the majority of today's parents just want to see their children taking on more responsibility and proving that they can handle it. If you go to them whining "mommy, daddy I want a car!" odds are, unless you're some over-entitled brat, that you'll be getting nothing and you DEFINITELY won't earn any respect. However, go to them with a fully planned financial proposition and not only will you improve your chances of success, but at the very LEAST they ought to respect your level-headed approach.

That's really all I have to say about the issue... I hope that this solves some problems and puts you behind the wheel of a half-decent ride sometime soon!

Enjoy your swim!

Joshua J. Taylor

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