Beasts of Burden?
You should have seen the first car I drove when I was sixteen. It was something. Mainly yellow in color, though quickly receding to a more “rustic” hue if you know what I mean. I can’t even mention the nickname my friends gave to that puppy. But they still rode in it because I was one of the first kids with a license and it beat biking all over town.
About a month into my driving career, the car started to make this amazingly loud squeal every time I started it. It was LOUD. I could tell this was the beginning of the end for this machine and I wanted some new wheels, pronto.
Unfortunately, I was not the kid who had been saving lawn mowing money over the years to buy my first car. But I did have a couple part time jobs and some parents that wouldn’t let me take out a car loan. It was amazing how quickly I saved $3,900 for my first “real” car. This one did not squeal.
I wish we did not live in a culture that cares so much about cars. But since we do, we also seem to live in a society that thinks having a car payment is the norm. This mindset is a costly mistake.
I am convinced that having a car payment is among the worst decisions people make regarding their personal finances. Don’t do it. If you can’t pay cash for the car you want now, wait until you can. I have read that the average car payment is somewhere around $475/month for 4-6 years, give or take. Yikes. Here’s a quick idea for never letting a car loan crush your monthly income…
Let’s say the car you drive now is worth $3,000 and you desperately want an upgrade. Instead of buying a car now with a monthly payment of $475, start putting $475/month into your sweet money market account. Drive your car for 10 more months (you can do it!). Then go sell your car and use the money you’ve been saving to get a much nicer $7,500 vehicle. If this new car isn’t your dream car, keep saving that $475/month until you have enough to go get it. Chances are that in 18 more months you could be driving a $15,000+ car. And it’s all yours (and likely doesn’t squeal.)
The real reason I don’t like car payments is that, like most consumer debts, they eat your cash flow each month. When you are able to free up your monthly income from debt payments, you can really make some great strides in the right direction financially. So now when you don’t have that car payment, you can save a portion of that extra $475/month for your retirement or your kids’ college funds.
Here are a few other uses for money that, in my opinion, are more intelligent and pay bigger dividends than spending it to pay off a car loan:
- Date night. Invest in your relationship. Doesn’t it seem like a lot of folks grow apart during the kid-raising years? It may cost some money up front for the sitter, dinner, and event tickets, but I guarantee you it’s cheaper than a divorce.
- Family vacation fund. Pick some really cool place to take your family. Then drive there together in the car you bought with cash!
- Annual goal setting trip. Take some time each year to go someplace cool and set goals for what you want to accomplish. It will cost you to get away from life’s distractions for a bit, but I bet you’ll find it worth it.
- Monthly dinner or coffee with an expert on something that interests you. They say that in ten years, you will be the same person you are today aside from the people you associate with and the books you read. And I believe it.
Well there you have it! Doesn’t saving and paying cash sound much more rewarding than towing around a car payment for six years, and then another six years, and another, and another…
©Matt Atchison is a Financial Advisor with Raymond James Financial Services, Inc. Member FINRA/SIPC. He can be reached at firstname.lastname@example.org (402) 597-9229 13321 California Street Suite 320 Omaha, NE 68154. Any opinions are those of Matt Atchison and not necessarily those of Raymond James. Any information is not a complete summary or statement of all available data necessary for making an investment decision.