Buying a Car – Test Drives (1)

So instead of just blogging about the financial aspect of buying a car (see New vs. Used) I figured why not have a little fun and write about the test drives as well. If nothing else it will help me keep a record of what I liked or disliked about each car and ultimately help me chose what to buy.

Dodge Challenger RT – 2009

Now, I drove this car over a year ago (I wasn’t lying when I said I had been thinking about buying a car for a looooong time) so my memory may be a little rusty but I’ll do my best.

What I liked: The power, this guy had a kick! With a V8 hemi it would certainly be fun to drive. The exterior styling, this is one mean looking car, I especially like the front.

What I disliked: The interior styling, it’s just very bland, all one color, and nothing really to get excited about. No additional features beyond the standard power windows, locks, and a CD player. It might have had an AUX (iPod) input but I can’t remember, I’m sure it’s at least an option. The price, you are paying for great power and exterior styling in an otherwise ordinary car.

Other notes: The test drive was lackluster and I pretty much was only able to drive in a straight line, I would need to drive again to judge handling and overall drivability

BMW 328i Coupe – 2010

I was looking for a 2008 or 2009 model but, unfortunately the dealer did not have any in stock. However, he told me the 2008 – 2011 models of the 328i were all pretty much the same except for some options and small exterior styling cues.

What I liked: This is one sexy machine, I am a huge fan of the exterior styling of both the coupe and convertible 3 series models, the sedan is OK until you see its backside (wtf happened…). The interior was very nice, leather seats, nice trim, dual zone climate control, sunroof, power everything, etc. It just felt good to be sitting in the drivers’ seat, and actually got me excited about the car. The car itself just felt solid, I don’t know how else to explain it, perhaps it’s the build quality, but when you shut the door there is a solid thud, opposed to an echoy slam like some other cars. Immediate power when the gas was pressed, no waiting for the engine to rev up for the power to kick in.

What I disliked: For some reason I couldn’t figure out the damn radio, I kept turning it to AM and couldn’t switch back, I’m sure the sales guy was laughing at me in his head. Actually the whole control panel for the A/C – radio was a little confusing…maybe I’m too used to my simple controls. I thought the car would be a little peppier than it was, I didn’t feel the umpfh of being pushed back in my seat when I punched it. It was hard to tell how fast I was going.

Other notes: At first I wasn’t too impressed with the test drive but the more I think about it the more I like the car, I would certainly need to give it another test drive before I could say I would buy one.

Buying a Car – New vs. Used Part Un

I have been playing around with the idea of buying a car for probably over a year and a half now. I still own my very 1st car – a 1998 Saturn SC2 with approx 105,000 miles on it. I just hit the glorious 100k mile mark a few months back. I took pictures and all! I purchased the car in 2003 and will have owned it for eight years come October. My delay in purchasing a car hasn’t been affordability, it’s that I can’t justify spending tens of thousands of dollars when I have a car that still runs. The name of my blog is 100% true; I really am bad at spending money.

However, over the past six months I have come to terms with the fact that I will eventually have to buy a car, as much as I don’t want to spend the money. I have also decided that it is better to be prepared and know what I want to buy and actually buy it before my current car dies. So, I have begun the long process of researching potential replacement cars, thus commencing the whole car buying process. In the midst of all of my research, I have come across many articles on new vs. used cars. The general consensus from a financial stand point is that a used car is always a better choice than a new car – this is something that I also agree with. Mainly because a new car, once driven off the lot, immediately begins losing value; where a used car already took that deprecation hit allowing you to buy it at a discount. Well, at least that used to be the general consensus. Over the past few weeks, I’ve seen a few articles from “financial pros” (looking at you Clark Howard) stating that now it is actually better to buy new. This doesn’t quite make sense to me, but the logic behind this idea states that due to the crappy economy, buying new is actually cheaper than buying used. They claim that the demand for used cars is at an all time high (because of low supply), thus driving up the prices.

I don’t buy it. So I decided I am going to do my own pricing research and post the results here. To keep myself accountable, I will be posting this before completing any price specific research so my opinion is loud and clear. I shall conduct my research over the next few weeks or so; then, I will either claim victory over the “pros” or walk home humbled.

So what do you think, will the finance pros be right, are new cars currently a better bargain than used?

Your Paycheck – After-Tax Deductions

Why this should interest you?

It can lower your take home pay!

After-tax deductions are subtractions from your income after taxes are computed, therefore lowering your net income. An example of an after-tax deduction is a contribution to a Roth 401(k) retirement plan or buying into a company sponsored share purchase program (ie, buying the stock of the company you work for automatically each month).

I will use the same example from my before-tax post but change the retirement plan contribution to a share purchasing program. Again assume no other tax except federal withholding, no social security, medicare, state, local, etc.

Joe, a single male, is a video game tester and has a gross income of $2,000/month, this also happens to be his taxable income. In this instance Joe has $238.33* withheld from his pay check each month for federal taxes, leaving him with a net income of $1,761.67 ($2,000-238.33).

Next month Joe’s boss announces the company will begin offering the option to contribute to a share purchase program. Joe decides to take part and contribute $100 a month. His gross income is still $2,000/month which is still his taxable income. Federal tax withholding remains $238.33* but net income has now decreased to $1,661.37 ($1,761.37-$100) prior net income last month less the $100 contribution to the share purchase program.

After-tax deductions as you can see are fairly straight forward.

*Federal tax withholding computed using the federal tax withholding table in the post Federal Tax Withholding. Remember to convert monthly gross income to an annual amount 1st.

Your Paycheck – Before-Tax Deductions

Why this should interest you?

You could pay lower taxes!!

Before-tax deductions are subtractions from your gross income before taxes are computed, therefore lowering your taxable income. An example of a pre-tax deduction is a contribution to a 401(k) retirement plan or payment for benefits such as health insurance.

A simple illustration (assume no other tax except federal withholding, no social security medicare, state, local, etc)

Joe, a single male, is a video game tester and has a gross income of $2,000/month, this also happens to be his taxable income. In this instance Joe has $238.33* withheld from his pay check each month for federal taxes, leaving him with a net income of $1,761.67 ($2,000-238.33).

Next month, Joe’s boss announces the company will begin offering the option to contribute to a 401(k) retirement plan. Joe decides to take part and contribute $100 a month. His gross income is still $2,000/month but his taxable income has now decreased to $1,900 ($2,000 – $100). Contributing to the retirement plan lowers Joe’s federal tax withholding to $223.33* a month, a $15 reduction from the previous pay period. Joe’s net income is now $1,676.67. It is lower than last month, but remember, he keeps the $100 contributed to his 401(k), and when you add the contribution to net income, total income equals $1,776.67 which is $15 higher than last month.

As you can see pre-tax deductions are generally good, as they allow you to contribute or spend money before it is taxed, saving you money.

Other examples of pre-tax deductions

  • Retirement programs in addition to 401(k) such as a 403(b)
  • Employer benefits such as medical insurance, dental insurance, etc
  • Flexible spending accounts
  • Healthcare spending accounts

For more information specific to your pre-tax deductions contact your employers HR department.

*Federal tax withholding computed using the federal tax withholding table in the post Federal Tax Withholding. Remember to convert monthly gross income to an annual amount 1st.

Your Paycheck – State and Local Income Tax Withholding

State and local income tax withholding is the portion of income the state or local government withholds from your paycheck. Not every state or local government assesses an income tax so there is no general rule for how such a tax is administered. Some states such as Michigan have a flat state income tax (4.35%) while others use a graduated scale similar to the federal government. For states that use the graduated scale the logic used when calculating your state withholding is the same as calculating your federal withholding (reference: Federal Income Tax Withholding)

State income tax withholding is based upon your taxable income. The definition of taxable income on the state level can seem confusing because each state has its own regulations outlining what constitutes taxable income, and there is a chance it will differ from federal taxable income. In reality determining state taxable income is just as simple as calculating it on the federal level, take gross income and subtract any allowances or dedications permitted by the state, for example, some states allow any payments to a state college tuition fund to be deducted.

Since the laws regarding state income tax vary so widely across the US I will post general information below and some useful links for those who would like a more in depth look at a specific tax rates and information by state.

The lucky ones! States with no individual income tax (states in red tax interest and dividends)

  • Alaska
  • Florida
  • Nevada
  • New Hampshire
  • South Dakota
  • Tennessee
  • Texas
  • Washington
  • Wyoming

States with a flat individual income tax rate

  • Colorado – 4.63%
  • Illinois – 5%
  • Indiana – 3.4%
  • Massachusetts – 5.3%
  • Michigan – 4.35%
  • Pennsylvania – 3.07%
  • Utah – 5%

All other states not listed use a graduated scale, reference links below for details.

The top link this is a great compilation of every state’s individual income tax rates for the years 2000 – 2011, also the key at the bottom is helpful in determining if your state has any special circumstances. The bottom link is an interactive map, just click on your state to see income, property, estate, and other tax rates.

Unfortunately, I could not find a complete list of all local tax rates by state for 2011, but below is a link that shows local tax rates by state from 2008. The link can be useful to see if your city levies a local tax but, be cautious, there has probably been many changes made to the tax code since then. If you are interested in knowing if your local government assesses an income tax I would recommend checking your city or county website.

Some important notes:

Tax law can change frequently, the percentages shown here are for 2011 only (2008 for local), however, the logic behind the calculations tends to remain constant, a quick Google search should provide the latest tax rates.

Taxes withheld from your paycheck do not necessarily equate with taxes paid. If you usually get a refund this is because more tax was withheld during the year than what you owed and vice versa, if you owed money not enough tax was withheld.

I am not a tax accountant; this post is only meant to be a quick informative overview of state and local income taxes covering the basics. For detailed questions or concerns please consult a tax professional.

What is – A Federal Withholding Allowance?

A Federal withholding allowance is the governments way of allowing you to adjust your taxable income, the basis for the federal tax withholding seen on your paycheck. Allowances are claimed on IRS Form W4, (it is one of the forms you must fill out when starting a new job). Some examples of federal allowances are:

  • Dependents you claim on your tax return (ie children)
  • If no one else can claim you as a dependent on their tax return
  • If you plan to file as head of household on your tax return

In the tax year 2011 each federal allowance claimed reduces your taxable income by $3,700.


Mark is a single male with no children and has a gross income of $50,000/year; he has no pre-tax deductions, making his taxable income also $50,000/year. A few months later Mark gets a new job and needs to fill out his W4, he realizes he was claiming no allowances before, (being just out of college when he filled out his first W4 he didn’t quite know what he was doing) and adjusts to claim 1 (no one else can claim him as a dependent on their tax return). This lowers Mark’s taxable income by $3,700 to $46,300, which also reduces his monthly federal tax withholding, boosting his monthly net income or take home pay.

An important note

You can claim as many allowances as you want on your W4, but this does not change the amount of federal tax owed in a given year. Claiming an allowance only lowers federal income tax withholding, come tax return time if you claimed ten allowances but only two actually apply (the government will check, so will any tax prep software) you will be stuck with a big fat tax bill, owing big Sam all that money which wasn’t withheld from your paycheck. On the contrary, if you receive a large refund you may want to consider increasing the number of allowances claimed, instead of waiting an entire year for that money you will receive a small piece of it every month because of reduced tax withholding.    

What is – Taxable Income?

Taxable Income – The monetary base from which you are imposed a tax. Taxable income for the federal government is usually any income received over the course of the year (gross income) less deductions (such as a federal allowance or 401k contribution) and expenses as deemed allowable by the IRS. Taxable income at the state level is determined by the state’s taxing authority and can differ from the federal government and from state to state.

Simple example: John has a gross income of $50,000/year he contributes $5,000/year to his 401(k) retirement account and has claimed one federal allowance on his W4. In this case John’s taxable income would be $41,300.

Gross Income: $50,000

Less 401(k): $5,000

Less Allowance: $3,700

Taxable Income: $41,300 (this is the number you would use when referencing the IRS withholding tables to determine withholding)

Bottom line, taxable income is the number used to calculate the taxes you owe, whether it is to the federal, state, or local government.