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Ralphs. Fresh for everyone. ♪ Welcome to Radical Personal Finance, a show dedicated to providing you with the knowledge, skills, insight, and encouragement you need to live a rich and meaningful life now, while building a plan for financial freedom in 10 years or less. Today on the show, we're going to talk about the scenario of your having a broken car.

Should you fix it? Meaning, it's going to cost a lot of money. Should you fix it, or should you sell it and replace it? And this is a scenario that hopefully, I hope you don't face, but it's a really difficult one to face. And it comes in from a listener who was asking me for advice.

And the question was this, "Joshua, I have a 2007 Ford Explorer with a blown transmission. It'll cost about $2,500 to $3,000 to replace the transmission. It's worth about $5,000 or a little bit less if everything works. So the question is, should I sell it in its broken state, or should I try to fix it?" So I asked how much it was worth if you sold in its broken state, and the estimate was about $1,000.

And so this particular listener was leaning very strongly in the direction of getting rid of it, was frustrated with the fact that their transmission was broken, and just seemed like the best solution to them to just simply get rid of it. So in that situation, how do you analyze this?

What do you sit down and think about? Well, first, you deal with reality. And so you recognize a few things. First, you have a car, and the transmission has failed. So you can't change that fact. You also can't change the money that it's going to cost. If the car is working, it's worth about $5,000 to you.

With the car not working, it's worth, according to this estimate, maybe $1,000. And the transmission shop is going to charge you about $2,500 to fix the car. I also inquired with this listener. I said, "Other than the transmission, is the vehicle in good shape?" And they said, "Yeah, otherwise it's in really great shape." So how do you figure this out when you have a massive question?

Well, you have to practice zero-based thinking. You have to pretend that the bad thing that happened doesn't affect it, and you have to start with a fresh set of data. This is one of the most difficult things to do, and yet one of the most important things to do when making personal financial decisions.

This is try to insulate yourself from the emotion of saying, "I've got a broken vehicle. It's just not going to be junk." Try to insulate yourself and analyze it logically. And so in this case, this is a good car. It's a good vehicle, low enough miles. The person has had it for years.

It's a good car. It just has a blown transmission. So we start with the finances of it. You have in this situation, you have a broken car that's worth $1,000 in its current state. So your first question is, do you sell it in its broken state or do you fix it?

Well, you have a broken car that's worth $1,000. If you can spend $2,500 on fixing it, you should be able to sell it for $5,000 in the open market. $1,000 plus $2,500 equals $3,500. So if we rephrase the numbers, and I ask you the question this way, it should be a little bit more obvious to you.

The question is this, should I spend $3,500 in order to make $5,000? Would that be a good investment for me to make? Is it a good thing for me to spend $3,500 in order to make $5,000? My answer is absolutely. That's a great investment. If I had the chance to do one of those every Monday morning, I would do one every Monday morning.

Every Monday morning I would spend $3,500 to make $5,000. And so we can get a little bit of clarity on whether we should at least have it fixed. And that's the first thing. The answer is fairly obvious if we readjust the way that the numbers are and look at the actual data instead of dealing with the emotion and the frustration of it all, that yes, you should spend $3,500 in order to make $5,000.

So the answer to question number one, should I repair the car, is clearly and obviously yes. Now, question number two is this. Now that I have repaired the car, should I keep it, keep on driving it, or should I sell it and buy something else? Should I keep this car or should I sell it and buy something else?

Well, here you have to analyze the actual value of the car and have an idea of what's actually the fact of this particular car. It might be possible in some cases with cars that you do have a chain of breakdowns. So there could be causal problems. You could have a lemon.

That might be possible. But in this case, it doesn't seem to be that. For whatever reason, this transmission failed at an inopportune early time. And so it seems to be an isolated event. So now you say, I have a $5,000 used car that is, except for this problem, a pretty good used car.

One of the best advantages to a used car that you have used is you know the history of it. It is much better for you to have a $5,000 car that you have been driving for years than for you to buy a $5,000 car that somebody else has been driving for years.

Because a $5,000 car that you've been driving for years will be a known entity to you. You know its quibbles. You know its quirks. You know what's working well. You know what's not working well. You know whether you can have confidence or if you can't. So a $5,000 car that you own and that you have been driving is more valuable, I would say, even than a $6,000 car that was given to you, even than a $7,000 car that's given to you.

At some point in time-- or given to you doesn't make sense-- that you buy. At some point in time, you have to factor in and say, OK, buying a $10,000 car is probably worth more than my $5,000 car that I've been driving for years. But you have to add some numbers to a new car to make up for the things you don't know about it.

Was this car in a flood? Was this car taken care of? Is this person selling it because it's just not working all that well? Why are they getting rid of it? You don't know. Whereas your $5,000 car, you know all the good and you know all the bad. And so now when you look at it, you have to recognize that you actually probably have a pretty good car here.

And in fact, your car now has a nice new transmission. The great thing about catastrophic failures is you have to fix them right. So if your engine blows up or your transmission blows up, well, when you put a new engine in a car, it's going to have longer life than if the old engine was.

Or if you put a new transmission in, you got a nice new transmission. So you've got a $5,000 car and it has a new transmission and you know the person that did it. The other thing that you then look at is you look at the costs of swapping a car out.

So if you go and buy a new car, you first have to find a car. You have to find a car that's appropriate to what you need. Then when you buy it, there's a whole slew of new expenses to buy it. When you buy it, you have to pay tax on the purchase price of it.

You have to pay for new tag fees. Most likely you're going to need to put new tires on it. You're going to need to put new batteries in it. You're going to have to make a certain number of repairs to get it how you like it. And so you're going to have to buy a more expensive car and it's going to cost you some money to have.

So there's friction, there's transaction costs to getting the new car. Now, when you sit down and actually look at the numbers of your situation, the answer should present itself. But for this listener, I consider the answer to be fairly obvious. In his case, I said, "Get a new transmission and keep the car." He was happy with it otherwise.

It was a good vehicle otherwise. He was fine with it. So I said, "Get a new transmission and keep the car." It's unfortunate when you have major automotive breakdowns. It's unfortunate when your transmission blows up. It stinks. There are a lot more fun things you can do with the $2,500 than buy a new transmission in it and put a new transmission in it.

But almost every time that this happens, you're better off keeping the car. Or at the very least, you're almost always better off fixing the car and then selling it as a working vehicle. So keep that in mind. That's the way that you analyze it. You try to ignore what has happened.

You try to deal with the fresh information that you have. Try to downplay the emotion of it. Don't give in to your rationality. "I'm just so frustrated with this car. I'm going to go get a new one." Don't give in to that. Analyze it coldly, logically, and work it through in stages.

Number one, do we fix the car? Well, yes, you fix the car. Number two, most of the time, maybe the answer for you would be no, we don't fix it. But you ask the question, "Do I fix the car, write down the numbers, and then do I replace the car?" And most likely, if you're going to replace it, best to gavit, wait for a year, find a really good deal on something else so you have time to let this one and then find a really good buyer for this one, and then work it out.

But don't make these things in a rush. I've spent a lot of time with broke people, and I've mentally cataloged a lot of the things that I see people do that they don't stop and think about. And one of the biggest errors that broke people make is they respond impulsively and irrationally when a car breaks down.

And they're frustrated with the fact that the car broke down. They're frustrated with not having things that work. They don't have any money to fix the thing, and so they go out and buy a new car. And usually a cheap junky car, a new cheap car, they finance the whole thing in unfavorable terms.

But it's better for you almost every time to fix the car that you have, if it's a good car, than to do that. But you're going to have to learn to control your emotions to do that. That's the way that you analyze it. But control your emotions, make intelligent decisions, because here's what happens to broke people.

When they respond irrationally and they go out and emotionally impulse buy a new car, because that was what they could get financing on, because they couldn't get financing on another cheap car, so they had to go buy a new one. That decision stays with you for years, and it's very hard to recover from in less than years.

Whereas $2,500 for a new transmission, recognize that, yes, some of that money is going to be lost money, but some of that value is actually there in the fact that you now have a quality transmission in the vehicle. So it's not all lost. You can stretch that vehicle out a little bit longer.

So if you're ever in a situation, I hope this helps you analyze the cost of repair, figure out if that's a good thing for you to fix. And number two, then think about the seller replace decision later after it's repaired. As I go in my closing ad, I want to highlight my credit card course for you today.

And one of the reasons that I created that credit card course called How to Borrow Money Safely and Never Pay Interest Using Credit Cards is because credit cards are really an ideal tool for things like this. They are an ideal tool as an emergency fund to cover big expenses like this without wiping out all your cash.

Now, in a perfect world, yes, we would all have lots of money saved up in cash. But here's what you need to know. Even in a perfect world, if you only had $2,500 in cash and then you spent all that money that you had in cash at the mechanic to fix the car, that would wipe out your options of replacing a car.

It would still be safer to use a credit card and use that to fix the car while keeping your cash in reserve so that you could go and get another replacement car while swapping out this car. Cash in the bank is so, so valuable. And the ideal strategy is one that keeps cash in the bank and keeps your financing costs in life extremely low and keeps money available to you.

So if you have a credit card, you need to think a little bit about how to position that credit card so that it's available to you in circumstances like where your transmission blows up. Credit cards do not solve irrationality. If you're an irrational broke person, you shouldn't have a credit card.

You're going to get that you're going to be better off not having a credit card and learning how to save up money for things. But if you've solved your problems with irrationality and impulsiveness, then a credit card in the United States and much of the world is your absolute best solution to have as a form of bridge financing so that you can easily and inexpensively get through issues like the one I've just laid out here today.

So if you have a credit card or you think you'll ever have a credit card, come on by radicalpersonalfinance.com/store and sign up for the how to borrow money safely and never pay interest using credit cards. It's a great course and it will really, really help you. But here's the key.

You've got to do it today in the sense that it sounds really high pressure. Do it by today. Buy right now. You've got to do it three years before the transmission blows up because when you go out and apply for a credit card when you have a blown up transmission, then you've got problems.

I had a friend of mine that's broke all the time. And so his credit card that he maintains the credit card for the big kind of retail chain shop. Well, he doesn't ask me for advice, so I don't give it. But it's the worst credit card in the world.

High interest, always paying interest payments, etc. And really only useful at that large, expensive financing place. So the key is you want to have both. You want to have lots of credit available and you want to have cash. Because what I always do is I always waive a stack of 20 or $100 bills in the mechanic and get a nice 15, 20% discount, even what they would charge with a credit card.

But if you don't have the stack of bills or if you'd rather keep them available for something else, that's where the credit cards come in. Go to radicalpersonalfinance.com/store and sign up for the credit card course. I think you will really find it useful. Be back with you soon. Struggling with your electric bill?

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