Take a Break from Car Ownership: Know Your Basic Transportation Options

Money Smart Life knows a guy who lost his car and is staring at 20% interest to finance an emergency replacement.

The burdens of automobile ownership are common enough that this guy's situation is a good invitation for all of us to reject the trapped mindset and remind ourselves of all the options we have. Problems like his are good opportunities to reevaluate monthly expenses and often provide a healthy jolt to put yourself on a better path.

Here was my initial reply:

One option is to take a break from car ownership (including insurance, unless he’d have a renewal problem later), get rides to work, and pay cash for a cheap car in a few months. Whether you can tell him is another matter.

"No car" often means that you spend less on other things by making fewer shopping trips and therefore fewer unnecessary purchases at stores or eating out. Whether you go car-less for a few weeks or for longer depends upon your situation. You might even grow to like it when you see your bank account.

Here are more-detailed options:

• Get rides from co-workers or friends or family (offer gas money; you still are saving a bundle).
• Take the bus (an extra hour to conform to the bus schedule might “pay better” than driving to a second job to pay 20% interest so you can drive to the second job).
• Bicycle to work while the weather’s nice (and no need for gym fees to stay healthy).
• Stay worknights at a friend’s or relative’s home if they are within walking distance of your work (offer grocery money).
• Now might be a good excuse to save housing money by downsizing to a cheaper home that is within walking distance of work (or within bicycle or bus distance of work).

As usual, you have many ways to save money if you stop to think.

Confusing Investment with Consumption: Emotional Attachment & Resale Value Transform Gold into Lead

"Practical Wealth V. Phantom Wealth" covered how to measure your financial wealth accurately by accounting for liquidity and stickiness (resistance to change). This article now covers how people reduce their liquidity without realizing it.

Consumerism Alchemy: Turning Assets into Consumption

Most people realize that some assets such as cars depreciate and the depreciation supposedly represents the consumption or usage of the asset in wear-and-tear. However, many people then assume that any retained or core value at any point in time is a positive asset (often for their supposed "net worth")--but people often behave in ways that turns an asset into additional ongoing consumption.

2 ways in which "retained" asset-value becomes consumption:

• The Resale Value Trap: Resale value is an "entry fee" surcharge and should be kept as low as possible. Resale value is a marketing trick to encourage overbuying. Never trading down (liquidating an expensive asset and buying a cheaper one) means that any core value is consumption, an expenditure never to be recouped. Some people fool themselves into thinking that they pay for car depreciation but “keep” the resale value, which is untrue, practically speaking. If you continually trade-in cars when they reach $10k value, that $10k (plus any interest) is forever lost as permanent consumption, an "entry fee" for "getting in the game."
• The Emotional Attachment Trap: Emotional attachment is a form of illiquid stickiness that turns an asset into ongoing consumption. Count your car only if you are willing to trade it for a junker. Otherwise, it is phantom wealth because you would never tap it. Instead of disaggregating the value of basic transportation from surplus conveniences (CD player, etc.), you are treating the whole, indivisible car as psychic consumption. Do not count your grandmother's wedding ring if you would never sell it despite defaulting on your mortgage.

Next: Best-Worst Financial Measures: How To Track Your Financial Independence and Security

Savers Are from Mars. Debtors Are from Venus. Episode 1

Mind-Boggling True Story

Debtor: “I’m going to buy a new car.”

Saver: “Why? Your Honda Civic might go another 100,000 miles. What’s wrong with it?"

Debtor: “It’s going to be paid off soon.”

Take the quiz: Would you buy a new car or not? Answer in comments.

Home Equity Loan Buys Sports Car

People continue to borrow home equity loans to buy toys.

Today's Car Talk radio show caller bought a $14,000 used luxury sports car with home equity. The car had a bad transmission, but he was more interested in the Candy Apple Red color.

The big problem with the housing bubble is that not only did new buyers overpay for homes but also that existing home dwellers who had manageable mortgages embarked on spending sprees based on the imagined paper "wealth effect" of higher appreciation. They treated their houses as ATMs by taking out home equity loans or the similar Home Equity Line of Credit called HELOC. So, even people who had bought before the bubble and had good finances have endangered themselves by bubble behavior.

Appreciation can be temporary. Debt is certain.

The big mistake people make with debt is that they assume that present conditions or trends will remain the same ("I make enough for that payment."). Every scientist should know the danger of extrapolating current trends into the future and the uncertainty is why stock disclosures warn that past performance does not guarantee similar performance tomorrow.

Make your life easy by not volunteering to lock yourself into future burdens, especially unnecessary ones.

Yes, a broken $14,000 sports car counts as an unnecessary one.