Do you currently have a car payment? How long have you had been making payments on your car in your lifetime? A few years ago, I had a neighbor that insisted that her car payment was a necessary expense. After all, in order to go to work and make money, you have to have a dependable vehicle to get there! So, a car loan is just one of those things that you have to have! As you may have guessed, I strongly disagree.
How Much Is Your Payment?
What is the typical car payment for the average person? If you buy a modest, new vehicle, you’re most likely paying around $300 a month. For most people, they just assume that they’ll have a car payment for the rest of their lives. Do you have any idea how much that equates to over the course of 60 years? $300 times 12 months, for 60 years means that you’d dish out $216,000 over the course of your life! Do you realize that with this money, you could buy 21 cars that are worth $10,000! That sounds like a better deal to me.
You’re Paying Extra
For the most part, vehicles have a fairly low interest rate if you have excellent credit – typcially something like 2.9%. But, over the course of 4 or 5 years, you’d still be paying an additional $1,500 or so in interest alone. It doesn’t sound like much, but if you repeatedly finance a car for the rest of your life, that’s $20,000 that you’re just throwing down the hole!
Financed and Brand New
Now, it’s one thing to finance your used car. I can understand if you are in desperate need of transportation and finance a $3,000 vehicle to get you to and from work each day. However, when people purchase new vehicles AND finance them, it becomes an entirely different story!
Let’s say your brand new car costs you $20,000. Over the course of 5 years, you’ve paid a total of $22,000 after interest, and your car has now depreciated to a value of $8,000. You’ve paid almost $3,000 per year on this car, and that doesn’t even include the typical repairs and maintenance costs (not to mention the car covers that you had to buy to keep it in mint condition)!
The Cheap Dependable Used Car
I have to admit, I do enjoy driving sporty cars – and sure, it would be fun to speed around town each day in my awesome ride, but I have to face reality! I’m in debt and if I don’t control my emotions, I will stay in debt for the rest of my life! So what did I do recently? I sold my Altima and purchased a highly dependable but cheap Honda Civic. It cost me $2,500 and it purs like a kitten each time I fire it up!
Invest Instead of Waste Your Money on Interest and Depreciation!
I recently heard a story about a salesman that set a goal for himself to earn $100k in a single year. If he succeeded, he was going to purchase a brand new Mercedes – and he was going to do it with cash. Well, he did in fact hit his goal. However, even after taking a test drive in his dream car, he decided to take his money and put it into a mutual fund. After 15 years, his awesome Mercedes would have been valued at $4,000, but guess what his mutual fund was worth? $256,000. Now, which would you rather have?
What if we did that same calculation? What if, instead of paying for a $20,000 over the course of 5 years, you put that money into an investment that earns you 10%? Do you know what that would be worth in 40 years? $807,000! I’d say that’s a heck of a lot better than having a brand new car once in your life…
Be Smart. Buy Only What You Need
Honestly, nobody really needs to buy a car that costs more than $5,000. Sure, you might not be able to buy an Infiniti like your next door neighbor, but who cares? Your next door neighbor is probably sinking financially! I respect people with modest cars far more than the Beemer that is financed for the next 6+ years. Be smart and purchase only what is necessary. You will be far happier in both the present and certainly in the far-distant future.
As a side note, you should also seriously consider donating your old car to charity. It may seem more financially sound to sell your old car for parts, or to have it scrapped, but there are a surprising amount of benefits associated with donating a car for charity. First and foremost, it can be used as a significant tax write-off, and just about everyone can use some help when it comes to taxes. Furthermore, it also gives you the opportunity to give something back and support a myriad of great causes. Not everyone necessarily has the money to donate to their charity of choice, but a car donation allows you to give something back.
Have you ever financed a car, or do you finance a car consistently? What do you think of it now?
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.