Dear Debt Adviser, — For most of my life, I made very little money. I struggled with bad credit and had my car repossessed. Recently, though, my financial fortunes have changed for the better. I now earn more than $12,000 per month in my business, and that income is growing steadily. Despite the added cash flow, I think I'm still trying to overcome my poverty mentality.
For example, I know I need to purchase a car, but I'm afraid of getting another repo. I also don't want to be under the burden of having a car payment. And I'm worried about financing with a subprime lender. So here's what I'd like to know: I currently have $15,000 saved. How much more should I set aside for a car? Should I buy one with cash, or should I get a loan? Should I just continue to rent until I can afford to pay cash for a decent, newer-model car? What else should I do with the money?
I love your use of the term "poverty mentality!" When I was a kid, I remember people from the older generation talking about their "depression mentality." They lived through the hardships of the Great Depression, and I'll bet they'd know exactly how you feel. That era spawned a generation of Americans that valued savings. They used credit sparingly and rarely felt financially secure, even when, by most measures, they were.
A poverty mentality can be a positive in many ways since it tends to make people financially conservative and are less likely to get in trouble again. On the other hand, I don't want that mentality to keep you from improving your financial situation. What you need are some solid tools and guidance.
I'm a do-it-myself kind of person. And as a small-business owner, I'll bet you are, too. My first suggestion is that you get a copy of "Managing Your Money All-in-One for Dummies." Don't let the large size of the book put you off. It's arranged in such a way that you can just look up your questions and get quick answers. Plus, I co-authored a part of the book, so I know it's good!
As for your question about a car: You should be able to purchase a used car with the $15,000 that you will have saved. However, I suggest that you finance a small part of the cost to help your credit report and your credit score. With a huge down payment you'll have a tiny monthly payment that you can easily afford. Plus, you'll be offsetting the negative data on your credit report from the repossession. As you make payments, you'll add positive data that will build your credit and score. Find out how good your credit is at Bankrate.com.
Also, be sure to do your research and negotiate the purchase price on the car before you start a financing conversation at a dealership. In fact, you may want to secure financing for a car from a bank or credit union before you start shopping for a car.
As a new small-business person, I suggest that you save as much money as you can initially. You are in uncharted territory, and a big cash cushion may be your new BFF until you are established. Put the extra dough in a savings or checking account for the time being. Once you can see that your good fortune is likely to continue, check out a financial planner.
(Steve Bucci is the author of "Credit Management Kit for Dummies." Email him at @bankrate.com. See more Debt Adviser columns at Bankrate.com.)