This is the first post in a series of posts on how to buy a car. I won’t give you tips for haggling with salespeople, but I will tell you how to pay for the car and which cars you should look for.

In the United States of America there is an unwritten law that says every car commericial must end by telling the consumer about the APR (Annual Percentage Rate) on the car loan -or- the cost to lease the vehicle. I have not seen a commercial in years, if ever, that advertised either a dealership or a specific brand of car without mentioning auto financing. This is endemic of the mindset of American car buyes; which states, “No man, woman, or child can purchase a vehicle without first obtaining a loan or a lease.”

In America, you’re weird if you pay cash. It’s just unheard of. My wife drives a fairly new car (2006 model year) and when she bought it, the most common question we had was, “did you get a good interest rate?” Needless to say, they were blown away when we said that we paid cash for it. While not paying cash is one of the worst sins that most people make when shopping for a new car, it isn’t the only one.

The Rules Of Buying A Car

A coworker of mine purchased a brand new Minivan not too long ago, and they managed to break every rule in my car buying book. The first rule that they broke was that they bought a vehicle the first time they went looking. Except in very interesting circumstances, I would never recommend buying something as expensive as a car or a house the first time you go out looking. I especially would not buy at the first dealership I visited, as there are many others that might offer a better price.

The second rule they broke, which is more like a guideline, is that they purchased a new car. In his brilliant book The Millionaire Next Door Dr. Thomas Stanley surveyed and interviewed thousands of millionaires living in the United States to determin what qualities they had in common. One of his most surprising discoveries was that the average millionaire is not who you think he is. He doesn’t flaunt his wealth by spending a lot of money on material goods, which is probably how he became a millionaire in the first place. The average millionaire buys used cars with cash, and doesn’t drive a recent model car. They don’t behave like this because they have poor taste, it was this behavior that made them rich in the first place.

The third rule they broke, was they did not read their contract. They had a verbal deal with the salesperson to purchase the van for one price, lets say $25k, but when the salesperson brought them the contract it was for $32,000. Honest mistake or ruthless trick, I have no idea- but it doesn’t matter, because it cost my coworker $7,000 either way. I believe that people spend less time and energy researching and purchasing their car, than they do their HDTVs. People get the idea that they need a new car (usually when their existing 2-year old car is still working fine), and then let the salesperson talk them into buying something they don’t need and can’t afford. It is just the wrong way to operate. Always do your research, and always read the contract.

The fourth and final rule they broke was that they financed the entire thing. They didn’t really care how much they paid for the vehicle because it didn’t cost them a dime when they left the store. Sure, they’ll have $500 car payments for 7 years, but it didn’t cost them a dime that day. It’s a pretty sweet racket for the car dealers, signing people up for long term financial commitments with practically no short-term consequences, all while showing them beautiful new cars. Who could resist? The truth is that getting a loan on a car is way more expensive than buying it with cash, because the dealership doesn’t make much money on the sale of the car - they make money on interest. Leasing is just a more profitable method of loaning money for a car. In a future article I will break down the cost differential between buying with cash, getting a loan, and getting a lease.

Realign Your Expectations

A big part of shopping correctly for the right car, is to realign your expectations to something reasonable. If you make $40,000 per year, then buying a $20,000 car is probably not the right move. In this situation, you can get a very nice used car that will last 5 or more years for less than $10,000. Today I saw a car for sale for $4000 that had only 60,000 miles on it, and appeared to be in great shape. If you are desperate for a car, one like that would last you many years. Changing your expectations for your next car could be the best financial decision you’ve made in a decade.

Who Should Use A Credit Card?

Credit cards are not for everyone. Some people do not have the self discipline required to control their spending with a credit card. I recommend that these people only use debit cards. If you recognize that you have a problem with controlling your spending, then the last thing in the world that you need is a line of credit.

Step 1: Picking Your Card

Don’t bother filling out the credit card offers that come to your mailbox, go straight to the source- the bank. If you need help looking for a card, click here to read a SmartMoney article about the best rewards credit cards. Personally I like the Discover Card program because it gives me cash, but make sure you like the rewards program for the card you select.

Step 2: Using Your Card

Now that you got that fresh new card in your hand, go and run up a big balance at Best Buy. Just kidding, that’s the last thing you want to do. Credit cards are not free money, so get that idea out of your head. Credit cards are a tool to use when making purchases that you would make anyway. I personally use my credit card for every single purchase that I can get away with. I normally don’t use it when splitting a restaraunt bill with friends or for purchases that are less than one dollar. By using my credit card for every purchase it enables me to easily track all of my expenses online. This is important for easily establishing a budget and keeping track of your monthly expenses.

Step 3: Paying Your Bills

So now you have used your card for about one month and you just got your first statement. The first thing you should do is quickly check over all of the purchases and make sure they’re legit, because you want to catch someone illegally using your credit card as soon as possible. I check my account several times per week to stay on top of things, and I check more often when I’m expecting either large purchases or many smaller ones. Because I check so often, I don’t normally spend much time on the monthly bill, but I always check to make sure I haven’t been charged any interest or fees by the bank. The next step is the most important, and the one that makes the whole concept of credit cards a financial tool rather than financial suicide, and that is to pay off your balance in full. I do not care if your card has a low APR or a zero percent APR, you must pay off your statement balance at the end of every month. By paying in full at the end of each month you will avoid all interest and finance charges, and you should start building points in your rewards program.

Step 4: Be Smart And Be Careful

Now that you have a credit card, do not abuse it. Use it as a way to help you take control of your finances and to give yourself some fun rewards (I recommend turning points into a Nintendo Wii if you can), but be careful. There is at least one study out there that says using a credit card will increase your spending over using cash. I suspect this is true because most people are using a credit card to live beyond their means and they never intend to pay their bill off at the end of the month; however, there might be some truth to the fact that using a card instead of cash desensitizes you to the pain of giving someone your hard-earned money. Just use some common sense and only purchase things that you can afford to pay for with cash.

I know what you’re thinking. Who is this clown? Why should I listen to him?

Well, let me tell you why I think I am a personal finance maven, and why I think my method works. But first, let me tell you about my current situation.

My wife and I are pretty young (mid-twenties), but we are completely debt free. We own two cars that are paid for, we do not carry any credit card debt, we have well funded retirement funds, we max out our roth IRA accounts every year, and we are paying cash for my wife’s MBA from Georgetown University. On top of that, we have saved up a 20 percent down payment for a townhouse in the expensive Northern Virginia region, and we plan to purchase a house in the very near future (we submitted an offer today- wish us luck). I don’t tell you these things to brag or to be elitist, I just want to show you that our methods have worked for us and we consider ourselves to be pretty well off for someone our age.

I am not formally educated in corporate finances, investment banking, accounting, or economics, but fortunately I don’t plan to teach you anything about those subjects. I want to teach you about personal finance, which I consider myself to be very well educated in. It started with my parents, who were pretty good with their money. They weren’t perfect, but nobody is (not even me). From them I had a strong foundation in common sense based personal finance, but the rest I had to pick up on my own. I learned from books, personal experience, radio, tv, magazines, my friends, my family, and my wife. My personality combined with my interest in personal finance has always pushed me to talk about money with whoever I could get to listen. I found myself trying to help as many coworkers and friends as I could, and I feel a great sense of accomplishment over some of the advice I have been able to give. This sense of accomplishment has pushed me to try to reach a wider audience on the world wide web, where I could potentially affect the lives of many more people. By writing this blog, I am also stepping away from the intimacy of face-to-face communication, which should allow me to delve into much more personal subjects that might be too invasive to discuss with friends.

Personal finance can be intimidating to a great many people, and instead of trying to deal with it they might ignore it all together. Everywhere I go I see people making mistakes with their money, and it isn’t always because they don’t know any better. Sometimes it’s because they are following social norms, the crowd, or conventional wisdom. My method works because it breaks down personal finance into pretty simple ideas that require a little bit of discipline and the guts to reject social norms and conventional wisdom. In America, there is a negative saving rate, which means that the average American spends more money than he makes. If the average American is in debt and spends more money than he makes, then do you even want to follow the crowds? My method, which isn’t really a method at all, but more like a philosophy based around the idea of living on less than you earn.

The most basic tenets are:

1. Live on less than you make. Easy to say, difficult to do, and absolutely crucial to building wealth.
2. The only acceptable debt is house debt. Yes, that means car debt is no good, student loans should be avoided, and credit cards should never carry a balance from one month to the next. Home equity line of credit is also a terrible idea.
3. Don’t make stupid decisions. This one is harder to qualify, but this is where common sense really comes in. Example, don’t buy a $30,000 car when you make $30,000/year and have $5,000 in the bank. I don’t care how good the APR is, it’s still a stupid decision!
4. Compound interest is your friend. And so are online checking and savings accounts.

This blog will strive to help you identify the stupid decisions you make with money today, and help you avoid them in the future. Don’t be ashamed, everyone makes stupid decisions with money, but you don’t have to keep making them over and over again. Use your noggin’ and think about what you want to accomplish financially in your life. If you keep it simple and follow these four tenets, you will be blessed with more wealth than you can shake a stick at. Even a large multi-branched stick.