In this article listed in Daily Finance the author expresses how he used his emergency funds to cover a big car repair bill for a 2002 Honda Accord. He spent 5 grand on an 11-year-old car that is probably not even worth that much if he were to trade it in. If this person understood the value behind his money he would have used his 5 grand in a much better fashion aka value based spending. Keep reading to understand how not to use emergency funds.
If it were me I would have used the 5 grand to use as a down payment for a 2009 or 2010 new to me used Honda or Toyota. The reason is because the 2002 Honda is an inch away from having another major problem. Engine failure would cost another 4 grand to fix, so I say why take such a big big risk. Buddy you’re putting 5 grand into an 11-year-old car that is probably getting rusted from the inside out. Also if you multiply the 11 years times 12, 000 miles on average, this would give you about 132,000 miles on the odometer. This really doesn’t make any sense to me financially speaking. After a quick internet search I found a few certified used Honda accords for around 15K. After the down payment, he would only have to pay down 10 grand with a 1.9% financing directly from Honda.
The article definitely shows what the average person should do and that is to continue to save up the original car payment amount in a savings account to help with car replacement issues. But this example right here would have been the perfect scenario for a car replacement, now the account has taken a major hit. It will take him at least a 1 or 2 years to save up that type of money again.
If he would have donated the 2002 Honda he could have gotten about 2-3 grand tax write off for next year’s taxes, then he could have upgraded his beater car to a 2009 certified used Honda. This would have given him more peace of mind and the 5 grand would have been better utilized giving the family a more reliable car with 5-8 years of mostly regular maintenance and hassle free major problems.
In conclusion the point of this post is to use your emergency funds wisely. Never spend more to fix your car than what it is worth. Once the car reaches 10 years then you have already saved and utilized it well financially speaking. Instead of trading up cars every 3-5 years which is considered not smart. Granted this person might be emotionally attached to their car, but when you let emotions get in the way of things, that is the reason people get burned. By not weighing his options he wasted his hard-earned emergency funds in the worst way.
How not to use Emergency Funds:
http://www.dailyfinance.com/2013/01/30/emergency-fund-savings-tip/
Comment to let us know how you feel about this post and the link to the article above.
Rich Uncle EL
