Tough financial choices

| August 04, 2009

One variable not accounted for in this example is the expected downtime associated with any older truck, overhauled or not – the “wild card,” as Schneider Financial’s Dan Kleiser, lease portfolio manager, calls it. “You count on needing the overhaul, but you don’t count on the nickel-and-diming that comes along with an older truck.”

Twelve cents or more per mile in maintenance savings is the industry’s operative figure for trucks of this age. Considering that, a new or late-model truck starts to look pretty good, especially after an older truck’s extended period in the shop – or a $1,000 tow bill.

This comparison doesn’t include financials beyond year three, when in this scenario the powertrain warranty runs out. In the fourth and fifth years, you’ll still be making payments of $2,000 a month. Maintenance costs for the in-frame and other needs go on, but you could continue to run that truck for several more years. “If the truck remains in good condition,” says Chris Brady of Commercial Motor Vehicle Consulting, the owner-operator “can run it for another year or four years – he’s reducing his cost of ownership. The longer you own the vehicle, the better ownership becomes.”

In today’s economy, with investment return rates low and short-term interest rates high, it’s usually better to pay off high-interest credit-card debt before considering any new savings or investments.

“You’re getting very low return on your cash today,” Brady says. “Money market returns are only 1 percent.” Because credit card debt is often at double-digit levels, paying it down produces a far better yield for your available cash.

The average credit card debt held by owner-operators today, according to the 2009 Overdrive Owner-Operator Market Behavior Report, is $12,363. For a transportation business, the report’s author Brady suggests, where “guys might be throwing fuel bills on it monthly, and purchasing equipment,” this amount could be better managed at lower levels. Focusing on any excess short-term debt in lieu of extra saving or investing is by far the best choice. “First get your cash in a good situation,” Brady says, before hunting out any decent investment opportunities.

This one is something of a no-brainer, with one important caveat: that you pay the credit card balance in full monthly. Benefits from credit card use extend beyond discounts on credit fuel purchases. Some cards offer cash back on every purchase, credits for airline or other travel use, or other givebacks.

For instance, the average FleetOne fuel card, the company claims, will save you $400 a year on fuel at 20,000 gallons purchased via rebates granted in $15 increments. Add the $1,400 you’ve saved by getting the cash diesel price with the card, and that’s a total savings of $1,800 a year.

By comparison, consider the same amount of fuel purchased with the business/consumer Miles by Discover card, which offers credits for all purchases to be put toward travel expenses.

At $2.35 a gallon for diesel, the national average June 1, the $47,000 in fuel purchases would net you 47,000 miles at the base rate of a mile per dollar in purchases. With each 10,000 miles worth $100 in travel purchases, your fuel purchases alone would net you $470 in yearly travel benefits. Discover’s Miles and certain other cards also offer double-mile promotions, so annual benefits could be even higher.

Some users prefer straight cash-back programs because the benefit is not limited to travel or gifts.

You have a choice whether to begin receiving Social Security benefits early (age 62) or at full retirement age (at 66 if you were born between 1943 and 1959, at 67 if 1960 and later). Say you’re 62 and, like the average owner-operator, with a working income of $51,000 averaged over enough years to qualify, you would be eligible for $1,050 a month now or $1,393 a month in 2013, at age 66.

As illustrated in the graph, if you start now, by the time you turn 66, you’ll have collected $50,400 in benefits. If you start at 66, you’ll need to live through age 78 and a half to make up for those missed benefits; beyond that, the higher payments would be to your advantage. (SS payments are taxable at varying levels depending on your income, which can skew these calculations a bit; if you want to do this precisely for your situation, take it into consideration and get with your accountant. Or visit ssa.gov/planners for some good calculators.)

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