Several analysts have reported that car sales are expected to rise this year, in part because there’s a sizeable group of people who need to replace their older vehicles. But how much is the “right” amount to spend?
If you’re looking to finance, you might consider the 20-4-10 rule: 20 percent down; financing that lasts no longer than four years; and principal, interest and insurance that doesn’t exceed 10 percent of your gross household income.
It’s a formula that can help change the way we think about how we define the affordability of a car, and potentially start to free up some extra cash for other, more important financial needs such as retirement or even the more basic emergency savings fund.
“How that change in thinking lowers your stress level is just amazing,” says Mike Sante, a managing editor at Interest.com, which recently completed a study that looked at car affordability. “It can make a tremendous change in your quality of life. This is where the money is for your savings.”
Americans are largely spending too much on cars, an asset that is often our second-largest household expense after rent or a mortgage and offers no potential for increasing net worth. For example, taking into account car insurance costs and the Boston area’s median income of almost $70,000 a year, Interest.com calculated that a typical Boston household can afford to spend up to $26,025 on a car. It would take a pretty good amount of self-control to avoid spending more than that, since the average new car with bells and whistles costs $30,550.
Gas prices eating at your wallet? Try visiting the pump on a Wednesday, before 10 a.m., as well as these other tips
Feeling a pinch from the gas pump? No wonder. According to the American Automobile Association, gas prices rose every day from Jan. 17 to Feb. 20 – a 15 percent jump to $3.778 per gallon, the fastest run-up since 2005.
Not surprisingly, I’ve been hearing from a lot of folks who have “tips” for how to track, and maybe even help manage, the sticker shock. For example, there is an app called Gasbuddy.com that can provide you with a list of gas stations in the area and their latest prices so that you can compare prices before you fill up the tank. In some cases, you can save 20 cents or more per gallon, which can quickly lead to big savings.
I also liked looking at the gas “heat map” on their website, which shows where the highest prices are in the country in case you’re planning a road trip. Massachusetts was definitely on the warmer end, though nothing like California.
Mapquest has a similar function. At the top left corner of the map that shows up on Mapquest.com, you’ll see a series of icons. Click on the one for “travel services” and it will give you a menu that includes “Gas stations.” Click on that, and it pulls up a list of stations with prices.
Local retailer Cumberland Farms also recently introduced a new payment program called SmartPay Check-Link that the company says saves drivers 10 cents on every gallon of gas, every day. You have a choice of downloading the SmartPay app or picking up a plastic SmartPay card at a Cumberland Farms/Gulf location after registering for the program on the company’s website and syncing it up with your checking account. Each time you fill up your tank, the payment is automatically withdrawn from your bank account.
Ally Financial’s Kucharski Sees Auto Lenders Ready to Handle Increase in Consumer Demand With More Financing, Lease Offers
I recently spoke with Jim Kucharski, who works with auto manufacturers such as General Motors Corp. and Chrysler Corp. as vice president of Alliance Sales at Ally Financial. According to Kucharski, 2013 should be a good year for the auto industry because of significant, pent-up demand from buyers (both consumers and businesses) who deferred sales during the recession. In addition, the average vehicle on the road in the US is more than 10 years old, encouraging consumers to trade in this older fleet for newer models.
Ally forecasts that the auto industry may sell at least 15 million units this year, an increase of about 3-4 percent. The last time the U.S. auto industry sold 16 million vehicles was in 2007.
In addition to the demand generated from the replacement of old vehicles, the industry expects to benefit from almost 500,000 more lease returns this year compared to last year, which should result in either new leases or purchases, Ally said. A recent Wall Street Journal report said that design “refreshes” in the midsize-car market should help that segment to continue to lead the industry. Overall, more than 40 new vehicle introductions are expected in the U.S. this year, more than twice the number in 2012.
“From our perspective, we see tremendous demand by consumers and supply by lenders to handle consumers with a variety and breadth of credit capacity and scores,” Kucharski said. “Not only is the auto market growing, but the auto finance market is growing.”
The rally in the markets this week probably has a lot of people checking their 401(k) balances to see what kind of bump they may have gotten in their portfolios. Mary Mullin, a financial advisor with Merrill Lynch Wealth Management here in Boston, says that there are some pretty solid reasons to be optimistic about a rebound in growth, not just in the U.S., but worldwide this year.
“The macroeconomic challenges still exist, but we’re talking to individuals about re-evaluating their portfolios because there are a lot of good companies out there doing good things,” Mullin said in an interview.
Mullin said research published by her firm examines the “great rotation,” referring to a move in the markets from cash and bonds into areas of potential growth, including housing, and back into equities.
If you look at individual companies, you’ll find several with strong balance sheets and profitability, she said. “A lot of companies have cash on their balance sheets and are paying strong dividends or are increasing their dividends,” Mullin said. “We’re also seeing signs of life in the housing market, which brings consumption that goes around that.”
So what are some investment themes that Mullin is looking at as she advises her clients?