Dear Dave: I’m self-employed, and I travel about 30,000 miles a year in my van. I’m three payments away from having the vehicle paid off, but it has 170,000 miles on it. Do you think it would be a good idea for me to buy a new van and have the tax advantages that go with it?
Dear Doug: There are two things you can do on taxes when it comes to your automobiles. You can straight line depreciate them, which is what you do with expensive vehicles, or you can write off the mileage. That’s a good idea if you drive a lot. The thing is, you get the mileage whether you have debt or not.
Let’s say you bought a $25,000 van. If you depreciate that over five years, that’s $5,000 a year. If you made $65,000, and take $5,000 from that, you’d pay taxes on $60,000. If you didn’t have that, you’d end up paying $1,250 in taxes. In other words, you’d be spending $25,000 over five years to save $1,250 a year on taxes. That’s a trade I don’t think you want to make.
You have to think of your vehicle as overhead. So, you’re going to destroy a $25,000 van or a $5,000 van all in the same period of time. As a businessman, which would you rather destroy? The answer is whatever is the least expensive and gets the job done!
Dear Dave: I have two credit cards. One charges me an annual fee of $79 and the other a fee of $39. Should I cancel these and not worry about my credit score? I’d like to buy a house in the next two or three years.
Dear Ken: In my mind, there’s no such thing as a good credit card. My advice is to go ahead and cancel them.
When you stop borrowing money and don’t have any open accounts, your credit score will slowly disappear. The big thing is that you don’t want to be caught in no-man’s land in terms of a credit score. You want either a fabulous one, which means you’re in debt all of the time, or you want no score because you don’t have any open accounts.
By the way, did you know that you can still qualify for a mortgage, even with no credit score? There are still mortgage companies out there that will do manual underwriting. It takes a little extra effort, but in my mind that’s a small price to pay.
Cancel the cards, Ken. I’ve never met a millionaire who prospered thanks to credit cards and their gimmicks!
Dave’s latest project, EveryDollar, provides a free online budget tool. Follow Dave on Twitter at @DaveRamsey and on the web at daveramsey.com.