While leasing my Toyota 4Runner was probably the worst financial decision I’ve ever made (so far…), my purchase of a brand new Honda CBR 600F4i motorcycle back in 2003 was the straw that broke my financial back.
I never considered myself the “motorcycle type”, but as more and more of my friends began purchasing and riding their bikes around, I thought it would be a cool thing to do.
The first hurdle in my quest for my motorcycle was to get my motorcycle permit. In Maine, all that is required to obtain a motorcycle learner’s permit is an 8-hour course. Ironically, the course is held in a class room and no time is spent actually riding motorcycles. The class was easy and I think I scored a 100% on the written test (multiple choice).
The next hurdle was acquiring a motorcycle. For me the choice was easy, three of my friends already had similar Honda CBR600 motorcycles and I was 99% sure I was going to purchase that same model as well.
Based on my experience of buying new vehicles, I wanted to do the smart thing and buy a used motorcycle. Unfortunately, after calling several banks, I was unable to find anyone who would approve me for the amount I needed.
“We’re sorry sir, but your debt to income ration is too high” they kept saying.
In hindsight they were right…between rent, my 4runner lease, another car payment, student loans, a wedding loan, and credit cards, my debt to income (DTI) ratio was approaching 40%! The warning signs were right in front of me, but I needed that bike and I was determined to make it happen.
After a few more days of frustration, a buddy tells me that Honda Financial Services (Honda’s in-house financing company) is very lenient with their financing standards. The only problem was that I would have to purchase a brand new bike if I wanted to finance with them.
That’s right…the traditional banks found me financially incapable for a $5000 used motorcycle loan, but Honda was willing to finance me for a brand new one at $8600.
I should have known better but there is not a rational thought that goes through a man mind when he’s staring at a shiny new toy!
I filled out my application and was approved on the spot, I couldn’t believe it.
Not only was my decision to buy an expensive motorcycle unwise given my current financial situation, it was also unwise because I had never ridden a motorcycle in my life.
Essentially, I was purchasing a top of the line performance bike (and paying for it with money I didn’t have) without ever having ridden one in my life.
As the warm summer season turned to fall, I cold temperature forced me to put my bike into storage. Unfortunately, that motorcycle bill kept coming in and I found myself putting more and more things on the credit card. It wasn’t just the purchase of a new motorcycle that eventually brought me to my financial knees, but it was the last purchase that I ever made on credit. Since that fateful day in the summer of 2003, my family and I have paid off over $90,000 in consumer debt and are debt free with the exception of our mortgage.
In retrospect, I’m glad that I fulfilled the urge to buy a motorcycle. Had I not done it I’m sure I would still be carrying that urge today. Another important note was that I eventually did pay the bike off and then sold it to get my debt snowball rolling in my eventual path to debt freedom.
Who knows; had I never bought that bike I may have never actually gotten to the financial bottom where I decided that what I was doing was not working and that I needed to change.
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I “pre-bought” my home heating oil for the 2009/2010 winter season and this is why:
One year ago today I wrote about the different heating oil payment options available by oil delivery companies across the country. At that time, heating oil was approaching $5.00 a gallon and many people were worried oil prices would continue to rise.
I explained the difference between “pre-buying“, “budget plans“, and “spot delivery prices” and what I thought was the best option given the current economic situation. Many people were pre-buying their heating oil at this point to lock in heating oil at the cheapest prices possible but I warned about the consequences:
“In my opinion, its just not worth the risk of being locked in if oil prices subside even a little bit. I like having the price protection that the “Budget Plan” provides”.
-Easing the Pain of Home Heating Costs, June 27th, 2008
I argued that the flexibility offered by a “budget plan” was a much better option for consumers especially given the historically high price of oil.
Before I go any further, here’s an explanation of the three basic payment options available by my local oil delivery company. Your company should have something similar:
Spot Delivery Plan: This plan means that you pay whatever the current cash price is for heating oil for the day it was delivered. This plan is excellent is you know for sure the price of oil will remain unchanged or even drop over the course of the heating season. Unfortunately, the price of oil has been so volatile over the last few years that making this prediction with any level of confidence is nearly impossible.
Budget Plan: This plan has been my favorite over the last few years. You sign a contract for the delivery company to deliver oil to your home for the entire heating season. The best part about most budget plans is they offer a “cap” or “price ceiling” on the price you pay per gallon, but unlike “pre-buying” contracts, if the price of a gallon of oil goes below the price per gallon you budget for you get the advantage of paying the lower price. As an added advantage, your payments are spread out evenly over a 10-12 month period so that you are not faced with gigantic heating bills during the coldest months of January and February.
Pre-Buy Plan: When you pre-buy your oil, you pay for your home’s total estimated oil usage for the entire winter season upfront. The price you pay is usually competitive with the current spot delivery prices on the day you sign your contract. Pre-buy plans are excellent if you have the funds available, and expect the price of oil to rise over the winter season.
Last week I received a letter from my local oil delivery company with the payment plans available for the 2009/2010 heating season. After successfully picking the most advantageous plan last year I was pretty sure that I was going to go with the budget option again but then I had second thoughts.
These were my options:
Spot Price: The spot price for oil delivery was currently $2.39/gal. If I agreed to this plan there would be no contract, but I wouldn’t have any protection if the price of oil were to suddenly (or gradually) rise.
Budget Price: The 10 payment budget plan was $2.64/gal if I wanted protection from the spot price of oil rising higher than $2.64/gal.
Pre-Buy Plan: Finally I had the option of pre-buying my oil for $2.29/gal if I paid with cash or check (credit card payments were slightly higher due to ridiculous credit card interchange fees).
Alternatively I could pay $2.59/gal if I wanted insurance from the price of oil dropping below $2.29/gal (essentially you are paying an extra 30 cents per gallon for “downside price protection”). In other words, the price of oil would actually need to drop below $1.99/gal before I would see any benefit of paying the extrac 30 cents per gallon for the price protection.
In the end I decided that the price of oil was unlikely to dip below $1.99 per gallon for the 2009/2010 heating season so I opted to pre-buy my oil for $2.29/gal.
I cannot guarantee this is the best option for you, but I am comfortable with the decision we have made for our home. With oil price rising back above $70 per gallon, the sooner you act, the better pricing options you will have!
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