Hardly stern advice

Reuters blogger Linda Stern recently wrote an article regarding financial decisions that can wait. Many of the items listed in the article are things beyond any person’s normal expertise, such as annuities and IRAs — i.e. things that would require a consultation with a financial planner to fully understand. But two items on the list are a little off, in my opinion: paying off your mortgage early and buying a car. Let’s go into both.

Should you hurry to kill your loan by paying extra principal every month? Not usually. Homeowners who have been able to refinance now are sitting on long-term loans at rates around 4 percent, 3 percent or even less. Hold that loan as long as possible, make the regular monthly payment and use extra cash to build a rainy-day fund or invest. At the end of the day you are likely to end up with more money than if you just paid it off early. And you’ll be able to use those emergency funds without paying higher interest to borrow new money next time you need to fix the roof.

This is a bit off the mark.

Now I’ve advocated on this blog and elsewhere that you should pay down your debts as quickly as you feel is feasible. After all, getting out from under your debt is always going to be better for you in the long run and save you money in the long run.

Should you pay extra principal every month? If you can afford to do so, then certainly. The term of a mortgage is typically measured in decades, so any extra cash you can put toward your mortgage payments will pay off in the long run. It need not be much. Round your payment up to the next fifty or hundred dollars, for example, and it’ll pay off by potentially taking a couple years off your mortgage term. Now if you’re in the final “trimester” of your mortgage (last 10 years on a 30-year mortgage, for example), then the gains may not be nearly as significant, but you’ll still come out ahead in the end.

But here’s the caveat: “if you can afford to do so”. This certainly does not mean you should sink all extra cash into your mortgage payment, and you should be putting cash aside for unexpected situations. But if you are already saving up money, or already have a good cash savings built up, then you certainly should be putting extra money toward your mortgage. You will, in the end, save thousands of dollars across the term of the mortgage by putting extra money toward it.

The beauty of this, as well, is that you will still be gaining in the long term even if you have to back off to your typical monthly payment for a short period.

Unless your car is actually rusting out from under you and costing you thousands of dollars a year in maintenance, there’s little harm in replacing it later. Otter tells readers to defer the car purchase and use the extra cash to take a vacation. While that may sound like a questionable financial decision, it isn’t. There’s solid research behind the idea that people are happiest when they spend their money on experiences, instead of things, so don’t put off that family trip. It’s a limited time offer.

Back in 2005, I purchased my first car. It was a brand new 2005 Kia Optima. Silver.

Before I purchased that car, however, I created a spreadsheet and ran some numbers across all of the various models that were available. I looked at estimated fuel economy, and I got insurance quotes for the various vehicles and ran some comparisons, along with looking at the cost of the car per month on a loan.

This is called “total cost of ownership” or TCO.

Before deciding to purchase a new or newer car, you need to take a look at the current total cost of ownership for your vehicle. Maintenance need not come into this, as the cost of routine maintenance on a vehicle won’t change much between vehicles. Your annual taxes, however, should be included.

So do the math on the total cost of ownership for your vehicle. A new car will cost you more in some areas. Property taxes will be higher. You may be taking on a monthly payment again. But the fuel economy will likely be significantly improved if you go with a similar class to what you’re driving now, and you’ll probably have a better insurance rate. Speaking of, if you’re considering purchasing a new vehicle, consider also shopping around for a new insurance policy as well, as you may find some savings there.

But there are other “costs” to consider. For example if your car regularly leaves you with a sore back just driving back and forth to work, a more comfortable vehicle can pay dividends in ways that don’t register in your bank account. If you moved out to a more rural area but still drive a sedan, moving up to a vehicle better equipped to handle the road to and from your residence can give you peace of mind.

There is a lot that goes into the decision to buy a new car. Putting it off may or may not cost you. It all depends on how the math works out, and what other intrinsic benefits you might obtain by buying a newer vehicle as opposed to sticking with your current one.