16 February 2018
This topic is currently hitting close to home as I am shopping for a personal vehicle for the first time in almost 11 years. All of the research, the emails from dealers, the internet tree-shaking has reminded me of a widely held myth in many financial circles……Car payments are just a way of life. You’ll always have a car payment or the need to spend the equivalent of a car payment for maintenance.
The actual truth is…….. Car payments are NOT a way of life. In fact, they’re a really, really bad idea.
Car payments are not a fact of life. The average millionaire drives a used, paid for vehicle.? Don’t think they bought it new or paid cash for it because they have millions of dollars. They have millions of dollars because they pay cash for cars and avoid payments like the plague. We will talk more about the purchasing habits of millionaires in a minute.
Why would you finance a car? Because you want more car than you can afford. Because car marketers have taken much of the friction out of car purchasing. (As well as many other purchases we make.) Because car payments are a bad idea. Loans in general are not smart, but they’re an especially bad idea on something that drops in value so quickly. A new car loses 50%-60% of its value in the first four years. So we rationalize our bad choices with statements like, I bought a good vehicle that holds its value, or, I need a dependable car so I have to have a new one. Even if a car doesn’t depreciate as fast as other cars, it is still depreciating and losing value!
So, buying a brand new car doesn’t make a lot of sense, and it makes even less sense to make payments on a new car that’s dropping in value like a rock. If you need a dependable car you can easily find one that’s only few years old. A three- to four-year old car has already taken the big hit on depreciation and is still pretty reliable. Paying cash for a slightly used vehicle makes so much more sense. It’s not a status symbol.? It’s a transportation tool.
In the book “The Millionaire Next Door”, author Thomas Stanley writes: “The typical American buyer of a new motor vehicle today spends about 78% of what the typical self-made millionaire does for his most expensive vehicle.” That guy. Our millionaire friend who drives a paid for car? They figured this out early in life, and didn’t worry about keeping up with the neighbors. In fact, the average millionaire lives next door to you and you don’t even know it! They’re likely the neighbor that everyone else laughs at because they aren’t driving the newest car or borrowing money to impress everyone else. If you want to be a millionaire, do what real millionaires do – pay cash for your cars and only buy used.
Jeff Tucker is a certified financial coach and budget teacher helping clients to live on less than they make, get and stay on a budget, pay off debt, and modify financial behavior. Learn how to avoid car payments by scheduling your complimentary coaching session at www.lighthousefinancialcoaching.net or calling (512) 971-6739