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Paying $400 a month, should I get a beater?

Dear Dave,

I have been listening to you for about a year now. I have cut up all of my credit cards, I am doing my budget on paper every month before the month begins and I have paid off a $2,000 balance with American Express in the last five months. I have $1,600 left in credit card debt, and $7,900 on a car loan. I have $3,100 in the bank, and $2,100 of that is my three-month emergency fund. I am a college student and I make $1,200 a month.

My car payment is $400 every month and I was wondering if you think I should sell my car and use the money I have in the bank and buy a $2,000 car for cash, or should I use the money to knock out some of the credit card debt?

I want to get out from under the car payments, so I can move on and be debt free as soon as possible. What is your advice?

Aaron

Huntsville, Ala.

Dear Aaron,

My rule of thumb when someone writes me or calls in about a car payment is that if it is going to take you longer than 18 months to be completely debt-free except for the house, then it is most likely a good idea to sell the car and move down to a less expensive one. The reason is simple: your largest wealth-building asset is your income. If you didn’t have any payments you could be saving money, right? So if it takes longer than 18 months to clear up your debt, especially a car, it is as if you are trying to run a race with ankle weights on. It could take an extra two or three years to get out of debt.

I would probably sell the car, and then go buy a $2,000 or $3,000 car with cash. After that you’ve got the whole car payment amount to begin to attack the credit card debt. You’ve cut up the credit cards and you have stopped that way of living, so you are not going to get back into the mess. You are not going to spend more than you make in any given month. So, by the time you graduate from school, you could be virtually debt free. You won’t have a big, fancy car, but you also won’t have any payments. Then when you step out into a nice job after college, you will get to keep your money instead of having to make payments on your debts, like most of your classmates will be doing, unfortunately. What a good idea!

Dave


Cruise company going bankrupt – what about my trip?

Dear Dave,

After September 11th, some of my friends and I paid for a cruise to Hawaii because the rates were so cheap. The cruise is for this February so we had to wait a while, but we were still excited about going. I heard last week that the cruise line had filed for bankruptcy.

We paid $400 for insurance in case anything was to happen. The agency said they were fighting for us so that we could get our money back, but is there anything I can do or should do? I would really like to go on a cruise, but I don’t know what is going to happen.

Ann

Kalamazoo, Mich.

Dear Ann,

You can get your money back out of the insurance if the insurance covers you for bankruptcy, but if the cruise line filed for bankruptcy, and the insurance does not cover bankruptcy, then you have lost your money. The travel agency is not liable for this. You need to get a copy of the insurance policy through the agency and read every line of it yourself to see where you stand.

Normally the insurance is just trip insurance and doesn’t have anything to do with the cruise line or the vendor. It has to do with whether you go or not. If you get sick, or if you are somehow unable to take the trip, it covers you. But all that to say: it could possibly cover the event of the cruise line going belly up, but you just need to check into that.

If somehow this cruise line is going to continue to operate while in a Chapter 11 bankruptcy, then you will probably still get your trip. I can tell you that you are not going to see any money out of them, though.

And to be honest with you, I don’t know if it will be a real high-quality cruise at this stage of the game. They might get out in the middle of the ocean and just run out of gas from the way it sounds. Then you would have to help row back to shore. I am just kidding, of course, but I think you should pursue it all the way through, and read every word of that insurance. But you should keep your expectations low and you should investigate what kind of bankruptcy they have filed, and find out if they are going to still operate. Under a Chapter 11, it is kind of like a reorganization, so they may continue to operate, in which case I would jump on the first ship that sails.

Dave


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