My Personal Finance Journey

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A New (Used) Car For Father's Day

Contributed by mm | June 21, 2004 10:10 PM PST

My wife will start to work again pretty soon. The new job brings new challenges and commitments. First, we we agree that to continue to rely on one set of wheels will stretch our time because we work in different locations (10 miles apart), so we need to get another car. Second, we need to send our kid to daycare. Admittedly stressful in the short-run for new job, new car and new daycare, I see it as a positive development for the family in the long run.

Why A Used Car, Again?

You all know I am current driving a 2000 Toyota Camry LE, which I acquired back in 2002 for $12,700 plus tax. It is a great deal: the car, equipped with lots of amenties like power moonroof, power driver seat, ABS, premium sound system and keyless entry, is valued at $10,990 (trade-in), $12,578 (private party) and $14,315 (dealer retail) at Edmunds.com. The car never has a problem and during my ownership I just changed oil regularly, replaced a set of wheels and did a front-brake relining.

As my first car turning out to be a great deal for me, I consider nothing but another used car this time. Also, I like the small dealership which I got my last car so much that I only looked at its inventory when I think of my second car.

Research Resources

Some of the best online resources I found in my research include:

- Edmunds.com: the greatest resource of all includes all the details of the car, editor reviews and customer reviews, plus the fair pricing guide and True Cost to Own report.

- Consumer Guide also includes details of various aspects plus independent reviews.

- MSN Autos is informative too, and it provides some exclusive reviews and lots of customer reviews.

Of course, for used car purchase, one needs a car history check service. The last time I got my Camry, I used CarFax, which was around $20. This time, the unlimited CarFax account costs $24.99. I finally signed up for Consumer Guide Vehicle History Report, which costs $23.95 for 60-day unlimited service. I'm very satisfied about the results -- it produces the same details as CarFax in a neat format. (AutoCheck also offers a similar service at $24.99.)

The Deal

When I started to browse the inventory of my favorate dealer, I was chooseing from Toyota Camry, Nissan Altima, Mazda 626 and Ford Taurus. I finally picked up a 2002 Kia Optima LX V6 2002 with 28,000 miles mainly mainly because I see Kia provided equal or better feature sets at a much lower cost. I especially like the V6 engine and its power, and its generous 5-year/60,000 miles warranty, which I can leverage for three full years. 90% of the all the customer reviews I read rated this car as great value and highly reliable, which eased some of my concerns on the Korean cars.

On the minus side, the Kia does not have keyless entry and power seat, not to mention moonroof (maybe I am spoiled in my Camry :-)). I don't particularly see resale value is a problem: the car was sold at $17,000 or above two years ago when new, so I have minimal downside even it used to be a rental.

The Kia is at 28,000 miles now and it used to be a rental car from Hertz. Edmunds priced this car at $6,799 (trade-in), $7,760 (private party) and $9,428 (dealer retail), and I got the car at $8,150. Adding 9.1% sales tax, $136 documentation and one-year excise tax and substracting $28 discount to round up the numbers, I finally got the car at $9,000.

The Small Liquidity Issue

The deal posed a small liquidity problem for me: as I reported in my last month update, I have close to $11,600 in cash and saving accounts. Currently, I'm in the process of gaining $700 from E*Trade's checking account offering ($350 each for two accounts - my wife's and mine), so I'm moving some cash around to meet the promotion needs. Also, I paid off a lot of credit card bills, and especially, to take advantage, instead of being taken advantage of Citibank's Credit Protector offering, I already paid back my entire balance at Citi Dividend Platinum Select Card. To pay cash to wrap up this deal, I had to withdraw some money from the marginable accounts in Datek/AmeriTrade.

Fortunately, I should be able to get $8,000 cash from my employer's Employee Stock Purchase Program in July. With the annual bonus expected in September, I will be able to restore my cash pile. (On the other hand, I am also considering to open an HELOC as my emergency cash pool.)

The Financials

Edmunds.com's True Cost to Own Report indicates that a typical owner will incur an annual expense of around $5,000 to maintain this car plus a first-year one-time sales tax charge of around $700. (I discussed the TCO report in my blog previously.) In the spirit of this report, I'm calculating my own TCO:

- Depreciation: I have no reason not to take Edmunds' number. Actually just for the purpose of conservative accounting, I will book an $300 depreciation upfront, and $125/month depreciation in the near future. This amounts to $1,675 in the first 12 months, compared to $1,331 in Edmunds' report.

- Financing: I paid $9,000 cash for the car and necessary tax and licensing fees. While I will not incur a direct financing charge like interest in the car loan, my financing cost is the opportunity cost of the $9,000 cash. At 5% return rate, it is a cost of $450 for the first year (compared to $406 in Edmunds' report).

- Insurance: My insurance agent just added the Kia to my policy ($500k liability, $500 comprehensive deductible and $1,000 collision deductible, plus uninsured motorist bodily and physical damage). The six-month auto insurance premium will increase from $316 to $575, and my umbrella insurance (for $1M additional coverage) annual premium will increase from $99 to $132. The net increase is: ($575 - $316) * 2 + ($132 - $99) = $551, compared to $904 reported by Edmunds.

- Taxes and Fees: I incured $742 one-time sales tax, $60 one-time documentation fee, and the recurring annual excise tax will be $78.75.

- Fuel: As this is the second car, and we leverage our current Camry very much (1,400 miles/month), I think our incremental mileage per month will be close to 600. As 21 MPG (thanks to the V6 engine) and $2.15/gallon gas price, this should amounts to $61 every month, or $737/year, compared to Edmunds' number of $1,492.75.

- Maintenance: I see the 30k service and regular 7,500 mile service in the near future, as my Kia is still in the 5 year/60,000 miles bumper-t-bumper warranty. I will book $200 upfront, and $50 every month for the foreseeable future. This adds up to $750 in the first 12 months, compared to Edmunds' reported $350. (For year 2 to year 5, Edmunds reported maintenance cost of $1,000/year.)

- Repairs: As the car will still be in the warranty for the next three years (the first-use date of this car is June 2002), there should be zero repair cost for now.

Total: My accounting will report $4,241 annual maintenance cost, plus one-time charge-off of around $800 sales tax and documentation fee. I should admit the total number is close to Edmunds' estimate, although the difference in some lines are significant.

Accounting Treatments

The purchase involves the following accounting entries into my Microsoft Money:

- $8,122 car purchase as a transfer from my checking account to a new asset account for Kia
- $741,65 state tax expensed from checking account immediately
- $136.35 documentation fee expensed from checking account immediately

To accurately reflect the cost of ownership, I set up the following monthly charges:

- Depredication: $300 depreciation in the month of June, and $125 every month starting in July. ($125 is based on Edmunds.com's depreciation forecast in the TCO report)

- Maintenance Fund: I set up a new maintenance fund account for Kia, accrued $200 in June and will add $50 every month starting in July. I need to accrue a large amount for now, because the 30,000 mile service will come pretty soon in 2-3 months.

I will need to adjust my insurance bookkeeping as well when I receive the detailed pro-rated premium in the next couple of weeks.

Final Words

I am quite sure this will turn out to be another good deal. Again, I am living below my means. Maybe the next time I shop around, I will treat myself better :-)

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