Buying used just isn’t cool—that is, unless you’re a wealth builder. Many of them look upon buying used as more of a badge of honor than an embarrassment.

Certainly, there are many items that are best purchased new. Toothbrushes, toilet paper, and underwear come to mind. Yet there’s one thing that’s almost always better to buy used—a vehicle.

Let’s look at a few common myths around buying a new car.

1. “Buying a used car is just buying someone else’s problem.” That can certainly be true if you don’t do your homework. When shopping for a used car, be sure you research the model’s repair record. The best place for this is Consumer Reports. An inexpensive online subscription will give you loads of detailed information about every year, make, and model. Narrowing your search to the top used car values will significantly increase your odds of buying a great used car. Before writing a check for even a top-rated used car, take it to a trusted mechanic for an evaluation. The money you spend will be well worth the future headaches you save.

2. “Never own a car that is out of warranty.” This is a good idea only if your heart is set on owning one of the many cars ranked as the least reliable. The warranty will come in handy because the car will spend a significant amount of time in the shop. Also, the value of a new car drops rapidly in the first few years. If instead you buy a used vehicle with a high reliability rating the warranty become less important, especially when you consider you’ll be getting a third to half off the sticker price. If you buy a low-mileage, late model car, your savings will be enough to more than pay for the few times you may need to take it into the shop.

3. “When a car hits 80,000 miles it’s time to get a new one because it will start costing an arm and a leg to maintain.” Once again, a top-rated used car will often run reliably for well over 120,000 miles if it’s maintained. Yes, the maintenance will increase, but the rapid depreciation of a new car will cost much more than maintaining an older car. Wealth builders routinely buy late model cars with low mileage and own them for 10 years or more.

4. “I can get a lower interest rate and longer term loan on a new car.” Here’s my rule of thumb: If you need a loan to buy a new car you are probably buying too much car. Those who manage money well create a savings account for replacing their vehicles. That way they can pay cash for a car and drive the best deal. If you must get a loan, borrow as little as possible and pay off the loan quickly. A higher interest rate on a shorter term loan on a used car is still a much better deal than what you would lose in depreciation on a new vehicle.

Americans have a love affair with their cars. Still, for most of us a new car is a luxury, a big splurge best purchased after we’ve attained financial independence. The best way to travel the road to that financial independence is in a used car.

This week we will look at a few more creative ways to use reverse mortgages, as suggested by financial planner Michael Kitces.

While most of us think of a reverse mortgage as a way to unlock equity in a current home without having to sell it, Kitces points out that another use for a reverse mortgage is buying a new home. While the buyer will need a larger than normal down payment due to the lower lump sum limits of a reverse mortgage, this technique can be used to increase cash flow while downsizing a home.

Here is how this might work. A couple owns a house worth $300,000 with a $125,000 first mortgage. The monthly payment is $800. They would like to downsize to a smaller home costing $200,000. One option is to sell the current home and use the proceeds of $175,000 to buy the new one, obtaining a traditional $25,000 loan with a $200 monthly payment.

Another possibility would be to use $100,000 of the sale proceeds as a down payment on the new home and finance the remaining $100,000 via a reverse mortgage. The balance of the proceeds of $75,000 could go into a portfolio and generate $300 a month for life.

This eliminates the house payment and also increases their monthly income. The result is an increase in available cash of $1,100 a month over staying in the current home and $500 a month over selling the home and obtaining a traditional mortgage. The owners would get to live in the property until death or they moved out. They also would still have $100,000 of equity in the house if they did need to sell it.

Still another option, which I touched on last week, is to supplement your monthly cash flow with a reverse mortgage long before you’ve depleted all your assets. By using a reverse mortgage early on, homeowners may be able to preserve and extend their liquid reserve.

Here is an example Kitces gives of how it might work. A 72-year-old couple spends $6,000 a month and collects $3,500 from pensions and Social Security. The remaining $2,500 a month comes from their $400,000 portfolio, which is an unsustainably high withdrawal rate of 7.5%.

They have a $400,000 home with no mortgage. By obtaining a HECM Saver reverse mortgage they could receive $1,300 a month for life. This would reduce their withdrawal from their portfolio to $1,200 per month, a sustainable 3.6%. This could conceivably preserve their investment nest egg for the remainder of their lives..

Because payments from a reverse mortgage do not increase with inflation, and because they use up home equity for current living expenses, a reverse mortgage is always a strategy to be evaluated carefully. Thus you need to be careful not to begin receiving reverse mortgage payments too early. The youngest you can be to apply for a reverse mortgage is age 62, but in most cases it may be best to wait until you are in your 70s or 80s. The longer you wait, the higher the monthly payment.

A reverse mortgage is not for everyone. Used wisely and appropriately, however, it may make a difference in extending your standard of living for many more years and possibly for the rest of your life.

Lenders which are FHA-approved can offer Home Equity Conversion Mortgages, or HECM‘s. These are insured by the U.S. government and allow homeowners age 62 and older to borrow against the equity in their homes. When the homeowner dies or moves out, the property is sold to repay the loan. Any equity left over belongs to the owners or their heirs. Any outstanding loan balance must be forgiven by the lender.

Reverse mortgages may be useful for elderly people in good health who have limited income or assets but who are living in paid-for homes. Until now, I have viewed them as options of last resort. A report by financial planner Michael Kitces has given me some cause to re-evaluate that position.

One major disadvantage of reverse mortgages is that the income uses up the equity in the house. Seniors who take out reverse mortgages too early risk spending most of their home equity to cover living expenses. As long as they can stay in the house, that’s no problem. If they have to move, however, they will have to pay rent or long-term care costs. Without income from the sale of their house, they may be left with little except Social Security to pay their bills.

A second disadvantage has been high upfront fees. A new option described by Kitces, however, significantly lowers those costs. The HECM Saver option eliminates the upfront mortgage insurance premium of 2%. This would drop the costs of a reverse mortgage on a $500,000 home from $17,000 to $7,000. The tradeoff is a lower lump-sum or monthly payment.

The most typical use of a reverse mortgage is to tap into home equity to pay the bills when all other means of support become exhausted. Instead of selling or refinancing, the homeowners can choose to stay in the home and receive monthly payments for life. They don’t have to sell the property until they can no longer continue to live in it.

Another way to use a reverse mortgage is to refinance an existing mortgage. This can not only eliminate the monthly payment, but if there is enough equity in the home it can also provide a monthly income or a lump sum payment.

Kitces uses the example of a 70-year old couple paying $1000 a month for a $175,000 traditional mortgage on a $450,000 property. A $175,000 reverse mortgage would eliminate the $1,000 payment. Assuming the net principal limit for the borrower was $250,000 on the property, they could use the reverse mortgage to extract an additional $75,000 of equity. They could receive this in a lump sum payment, create a $75,000 line of credit, or receive lifetime monthly payments based on the $75,000.

Let’s assume this couple’s monthly expenses, including the mortgage payment, are $5,000. They receive $1,500 a month from Social Security and withdraw $3,500 a month from their $600,000 investments. The total $42,000 annual withdrawal is an unsustainably high 7% of their portfolio.

The reverse mortgage would eliminate the $1,000 mortgage payment and reduce the investment withdrawal to $2,500 a month. This totals $30,000 annually, a more sustainable withdrawal rate of 5%. Investing the $75,000 of excess proceeds would produce additional monthly income and reduce the withdrawal rate even further. Using a reverse mortgage in this way makes sense if the lost home equity is offset by an increase in investment assets.

We’ll look at other reverse mortgage options in next week’s column.

Usually this trend indicates “happy days are here again” as the decline in savings means consumers’ confidence is rising. That is not the case today. Consumer confidence is just half of what it was at the peak of the “good old days” of 2007. That year our national savings rate was 2.1%, just above its post-WWII low in 2005 of 1.5%.

As millions of jobs disappeared and consumers hunkered down during the 2008-2009 recession, our savings rate almost tripled. In 2008 it was 6.2%. This thriftiness didn’t last long; by the fall of 2011 our savings rate was back to a paltry 3.6%.

We were not always such spenders. During the four years of WWII we saved over 20% of disposable income annually. Between 1974 and 1992 the savings rate often bounced between 7% and 11%. Since 1992, the beginning of the unprecedented 18-year bull market in stocks, our personal savings rate reflected the good times in the economy and averaged just 4%.

One possible reason for the decline in the savings rate in the past three years may be that we’re paying off all the consumer debt that got us into trouble in the first place. In 2000 our individual debt load (including student loans and mortgages) was $19,750 per person. In the fall of 2011 it was $36,420, 8.6% less than the 2008 high but 85% higher than the 2000 amount.

While Americans are not substantially reducing their debt, their equity in home ownership plunged from $12.9 trillion in 2006 to $6.2 trillion in 2011. No wonder consumer confidence is so low.

It appears our return to low savings rates isn’t the result of renewed optimism, paying down personal debt, or a surging economy, but rather that Americans are running out of money in the face of staggering personal debt and declining net worth. This leaves them incredibly vulnerable to another downturn in the economy.

Ironically, Americans’ personal finances are a reflection of our government’s fiscal woes. Washington also finds itself compromised to respond to a national emergency because of a debt that exceeds our national income.

There isn’t much you and I can do about our government’s over-debting and overspending except to vote for politicians that promise to end the insanity and hold them accountable. But we can take better care of our own affairs with a three-pronged approach.

1. Get out of debt. We may not be able to earn more or work harder, but I’ll guarantee you that we can spend less.
2. Start saving for emergencies. You need one savings account for periodic expenses like medical deductibles and car repairs. A second is for bona fide emergencies like losing your job or the death of a spouse. It should represent six to 12 times your monthly expenses.
3. Start investing for financial independence. Ideally, you need to put aside 15% to 35% of your income for the time you no longer can or want to work.

The hardest part of this approach is becoming willing to downsize your lifestyle. Too many of us say we are willing to cut spending and economize until it actually comes time to do it. In the two decades before the recession, Americans got out of the habit of making hard decisions in our own best interests. However, as our historical patterns show, we’ve treated ourselves with “tough love” in the past. When we have to, we can do it again.

In a January 18 article at CNBC.com titled “How the Financially Disorganized Can Budget and Save,” financial writer Dinah Wisenberg Brin has some suggestions for keeping track of your spending without a detailed budget. She cites Rick’s suggested strategy to “remove everything of importance — taxes, insurance, car and house payments, vacation and emergency savings, retirement funds — from the paycheck before it hits the bank.”

You can read the entire article here.

The secret? They don’t budget.

Your first reaction might be, “Of course these people don’t budget! They have so much money, they don’t need to.”

That may be true for some of those who have money today, but I’m referring to people who want to remain wealthy or those who are “wealth accumulators.” These are people who don’t start out with money, but who build up significant wealth over time.

Many successful wealth accumulators don’t follow a detailed budget in the traditional sense. Instead, they develop the habit of living on less than they make. They do this by setting clear priorities. Here is how it works:

1. Out of every dollar earned, take taxes out first. If you receive a paycheck from an employer, this is done for you. On any earnings where taxes aren’t withheld, estimate the amount of tax you’ll owe and stick it into savings.

2. Take out 15% to 30% to invest for your future. When you’re just starting out, you may have to begin with a much lower percentage, but begin and be consistent. Research tells us if you have 30 years until retirement and you plan to live for 30 years after retirement, you need to save 17% of your salary to maintain the same standard of living upon retirement. When you get a raise, contribute two-thirds of it to your investments and use one-third for increasing your lifestyle. If you want to become financially independent, this step is essential.

3. Save another 10% to 20% for emergencies and short-term needs like vacations, Christmas, and replacing vehicles. Again, you may have to start with a lower percentage, but begin with whatever you can, and be consistent.

4. Take out 5% to 10% for giving.

5. Live on the rest. Pay the bills as they come in, and use what’s left over for discretionary lifestyle spending.

Sounds simple, right? Of course, “simple” isn’t necessarily the same as “easy.” By now, if you’ve done the math, you can see that following this plan means living on as little as one-half to even one-third of your gross earnings.

If you’re living from paycheck to paycheck, just barely managing to pay the bills, the financial advice to live on half of what you make goes beyond absurd. It probably seems impossible. It may, in the short term, be impossible.

Yet there are ways to live on less than you earn, even if to begin with it’s only a little less. Share a cheap apartment with a roommate. Drive an old car that you don’t have to make payments on. Eat at home. Buy used furniture and second-hand clothes. Get a temporary second job solely for the purpose of building up some savings.

What is most important is developing the pattern of living on less than you make. Fostering a frugal mindset is absolutely essential if you want to achieve financial independence. When you commit to saving first—even if you can only save a small amount—you have made one of the wisest financial decisions you can ever make.

This non-budgeting spending style takes away much of the pressure of trying to follow a rigid budget. There’s no need to keep track of envelopes or categories. You’ve made the hard decisions first, and you get to spend everything in the checkbook.

Budgeting without a budget can turn you into a wealth accumulator. It works because you take your future off the top.

Read the entire article here.

This time of year, the spirit of giving gets a serious workout. For some of us, it can quickly turn into a spirit of frustration as we feel overwhelmed by requests and obligations.

Maybe one answer to make the season more manageable is to become more conscious about your giving by creating a “giving portfolio.”

As regular readers know, one of my constant themes when it comes to investing is diversification. Don’t put all your eggs in one basket. More than that, don’t put all your resources into eggs in the first place. It’s essential for a portfolio to have a good mix of investments in a variety of asset classes.

Thinking along those same lines, what are some of the “asset classes” that might be part of a diversified portfolio of giving? Here are a few:

Family. Giving to family could include direct gifts for birthdays, Christmas, and other occasions. It might also involve financial support to family members, such as helping elderly parents with expenses or paying part of kids’ college costs.

Charities. Pick any cause, and there’s probably an organization for it. You can give locally, nationally, or internationally to organizations such as food banks, homeless shelters, the Red Cross, Save the Children, and others that help provide basic help for the poor and victims of disasters. Local groups do everything from buying school supplies to providing help for individuals with serious illnesses.

Arts Organizations. In Rapid City and the Black Hills area, as an example, we have community theatres, summer theatre, the symphony, concert associations, and fine arts centers.

Religious Organizations. This isn’t limited to churches, but might include retreat centers, mission organizations, and other ministries.

Community Organizations. This might include service clubs and other groups that aren’t primarily charities but that support their communities in various ways.

Educational Organizations. Everything from baking cookies for the PTA bake sale to sending money to your alma mater would fit here. So might supporting agencies that provide tutoring, summer camps, or scholarships.

Health Organizations. You might donate to groups such as the American Cancer Society that fight specific illnesses, support efforts to eradicate diseases like malaria, give to research organizations, help with housing for family members of hospital patients, or support a local hospice center.

Just reading this list is probably enough to give you a strong urge to grab your wallet and run. Trying to choose among so many worthy causes can feel as overwhelming as trying to pick the right mix of mutual funds for your investment portfolio.

Well, here’s something that might make you feel a little better. Unlike investing, wise giving doesn’t require you to be diversified.

You certainly can give in a diversified way if you wish, selecting a mix of giving asset classes just as you might choose investment asset classes. Maybe you want to allocate half your giving dollars to family, 20 percent to your church, and 10 percent each to a health research agency, a food bank, and your community theatre.

Maybe, on the other hand, you want to dedicate all of your giving budget to family. Or 75% of it to a local homeless shelter. Or give primarily through your church.

All those are perfectly valid options. The key is to make your giving choices deliberately, not impulsively or out of guilt. Creating a conscious giving portfolio helps you give in ways that match your values and support the causes you care about.

Sometimes, however, “early retirement” can throw us a curve ball before we’re prepared for it or ready to become financially independent. This often comes in the form of a job layoff, termination, or health issues that require we no longer work for an income.

Here are some action steps for an unexpected early retirement:

1. Immediately become aware of your monthly expenses. If you don’t track expenses, now would be a good time to go back over the last 12 months of expenditures and set up a cash flow tracking program like mint.com or quickbooksonline.com.

2. Create a spending plan for the next 12 months. Don’t forget to include savings for large purchases (cars, repairs, travel, Christmas, etc.) as a part of your annual expenses. Make sure you reduce or eliminate past expenses related to your work life and add expenses that come as a part of retirement, like increased travel or health care.

3. Estimate your sources of income. Include Social Security, employer pensions or severance packages, and your personal investments. For personal investments, use an income estimate of 4% of the principal. One million in investments will give you $40,000 a year in income.

4. Match your estimated annual retirement income with your spending plan expenses. If the expenses exceed your income, begin deciding where you can cut your spending. It is often helpful to enroll another person to help with ideas on reducing expenses. This is an area where we all have “blinders” on, and others can suggest creative cost savings we would never have thought of ourselves.

5. Don’t give up on finding part time employment. There are many opportunities to create some income in retirement, and even a little paycheck can go a long way to preserving your investment savings. Check your ego at the door—this is not the time to let false pride keep you from taking a part-time job that’s less “professional” than what you’ve been doing.

6. Consider reducing monthly expenses by using savings or investments to pay off debts like car loans or credit card bills. Often your best investment is paying off debt. This can be especially true when your savings is earning 0.5% and your credit card is charging you 15% on the outstanding balance.

7. Consider downsizing by selling your house. This can be an especially good move if you have enough equity to pay cash for something smaller or at least end up with no mortgage or a smaller mortgage payment.

8. For couples, talk seriously about what both of you want, separately and together, in the next few years. Brainstorm creative ways—volunteering at state parks, for example—to carry out retirement plans inexpensively.

9. Take time to deal with the emotional side—anger, fear, depression, etc. It’s especially important to surround yourself with supportive friends and family and to talk about what’s going on.

Unexpected retirement can be a life-changing blow, both emotionally and financially. Coping with it will require resiliency, courage, persistence, creativity, and support. You’ll be most successful when you take advantage of not just your financial resources, but all the resources at your disposal.

Start with finding out what your current interest rate is on your mortgage loans. Let’s assume you currently have a mortgage with a balance of $200,000, with principal and interest (P&I) payments of $1264 at an interest rate of 6.5%.

Next, do a little shopping. Call two or three mortgage brokers and find out the interest rate you could obtain on a new loan. You will need to give them your household income, the value of your house, and the current balance on your mortgage. If you don’t know the current value of your home, call your county Director of Equalization and find out its assessed value.

Ask the broker to give you the interest rate and payments on a mortgage that is almost equal to the number of years you have left to pay on your loan. Also find out what the interest rate and payments are on a shorter-term loan than your current mortgage, maybe comparing 15-year and 30-year mortgages. Usually, a shorter term has a lower interest rate.

Next, get the broker’s estimate of your closing costs. These are the expenses you will need to pay to close the loan, such as title insurance, the cost of an appraisal, closing fee, points, and other various fees. Lenders sometimes charge points, also known as origination fees, which are included in your closing costs. One point equals one percent of the loan’s value. Mortgages described as “no-cost” or “zero points” do not carry this cost, but the interest rate may be higher, thus increasing the long-term cost of the mortgage.

Now you are ready to analyze whether getting a new loan makes financial sense. Let’s assume you find out you can obtain a new loan with a similar term at 5%, with monthly payments of $1,074 and closing costs of $1,900. The new payment is $190 less than your current $1264. Dividing the closing cost by the monthly savings ($1,900 / $190 = 10) gives you the number of months—ten—you need to keep the house in order to “break even.”

If you intend to sell your home in the next few months, it may not be advisable to refinance. I also typically advise against refinancing if the months to break-even are much over 24. Few of us know what curves life may toss us, and looking two years ahead is my comfort level. If your break-even point is 24 months or more, either wait for interest rates to fall further or shop for a loan with lower closing costs.

When shopping for a new mortgage, you may be tempted to reduce your payment even more by lengthening the term of your new loan. While the benefit is more short-term spending money, the downside is many more years of having a house payment. You will also pay more in both points and interest rate. My strong suggestion is to obtain a new mortgage that is equal to or less than the number of years you have left to pay on your current mortgage.

Remember that a lower interest rate doesn’t automatically mean refinancing is in your best interest. The amount of money you save monthly, the amount of your closing costs, and how long you plan to live in your home are key variables that influence whether you should refinance your mortgage.