Could your bad investment auto loan be forcing you to drive your future wealth status off a cliff?
I live in an extremely, middle class, semi-suburban neighborhood with a good mix-up of demographics.
My neighbors are: young, old, white, black, Asian, business owners, trades people, professionals, factory workers, service workers, retirees, and college students. (Like I said, a good mix of hard- working Americans.)
A mind-boggling trend I have noticed is the younger adults are showing up with more and more temporary tags on the vehicles in their driveways.
And, I’m not talking 5-10 year old, rusted in spots, one window doesn’t go down anymore, point A to point B commuting cars.
I’m talking brand-new, shiny, low mileage, $30,000 to $50,000 sticker vehicles!!?!?
Yes, I know the car dealerships have been hit hard recently due to a lack of economic stability. And, yes I know they are working their marketing magic to get consumers on the lots to buy, buy, buy.
Taking out a loan for a vehicle creates the consumer ZERO leverage in a NO WIN investment situation.
Why are cars a bad investment?
Cars have forever been known as a bad investment because as soon as one is driven off a dealer’s lot, it drops in value. This is called DEPRECIATION. (Generally, this drop in value is around 4% on new vehicles.)
So, this means if you paid $24,000 for your brand new vehicle (multiply $24,000 X .04 to give you $960 lost . Your new beauty is worth $23,040 and you’re not even home, yet.) To add even more salt to this wound, CARFAX.com estimates the vehicle will lose an additional 6% in value (@$21,600) before the month is over.
And, generally will drop a little over 20% before you’ve had a chance to drive it for a full 365 days. (This particular car would only be worth, at most, $19,200 by the one year mark.)
Another fact I’m sure you are dying to hear is this~Most new cars lose 60% or more of their initial value within the first 5 years. (So, our fictitious car is now worth $9,600 after 5 years!!!)
If you factor in the cost of: sales tax, insurance, registration, dealership fees, etc. Your car has cost you a whole lot more MOO-LAH!
But, what if you financed this brand, new, shiny beauty?
This means you’re not only paying the principal on the loan (what the car “used to be worth”) but, also the interest on the loan (amount of money charged to you by a bank to borrow the money in the first place.)
Stretch this out over 3, 5, 7 years…. And, there’s a TON of money you basically have flushed right down the toilet.
Top 8 Things in Car Buying to Keep You From Flushing
Your Hard-Earned Cash Down the
- Drive What You Can Afford There’s a rule called the 1/10th Rule of Car Buying. According to this rule, we should only ever buy a car worth 1/10th of our gross annual income. So, if you are making $65,000 a year, you guessed it~Your car would only cost you $6,500. (Did I hear a “That’s crazy!” IKR???)
- Drive What You Can Afford- Part 2 If the 1/10th Rule was a little too steep for you, there is also a general consensus to purchase cars worth 50% of your annual gross income. So, using the example from above your new ride would set you back $32,500. (This might sound a little better to you.)
- IF YOU MUST BORROW, SHOP AROUND and KEEP TERMS SHORT If you must borrow money to purchase your new-to-you vehicle, go to several banks beforehand. You want the absolute best rate. Also, keep the terms of the loan as short and low as possible. If you have good credit, you can probably get a decent rate. But, pay it off as FAST AS POSSIBLE. Also, be sure to pay the “extras” in cash. (taxes, fees, etc.) You don’t want to pay interest on stuff you could have paid up front for.
- Buy for Good Fuel Economy-Another hidden cost of vehicles is gas mileage. You will be paying to fuel it/charge it on a monthly basis, too. Factoring this cost into your monthly transportation budget can help stay on track.
- Trade-Ins Help Keep Costs Down-If you have a vehicle to trade-in, do it. However, if you can sell it outright before approaching the dealer your cash will get you further. (REASON- Trade-ins are notoriously undervalued; and Cash is King.)
- Familarize Yourself With Certified Pre-Owned-Vehicles– Certified Pre-Owned Vehicles are given this mark if they are used, but still in good shape. Many have low miles and a decent warranty. So, they are definitely worth looking into, if your dealer provides them.
- Be Prepared to Purchase-Before going to any dealership to shop, know the: type, price range, models, features needed, etc you are interested in. Take a list of “Must Haves” with you on each shopping visit.
- Strategize your Timing-Car buying is most economical from late July through October as the next year models arrive on lots during this time. They are generally clearing lots of older models to make room for the new ones. (Just like that beautiful clearance rack at Hollister.)
How can you begin building wealth with the money you save by NOT financing your car?
If you have stuck with me this far, you know there is something to all of this car buying and making you wealthy in the future.
And, you’re right. There is!
Let’s go back to the original $24,000 car purchase from before. It lost money the entire time of ownership as-MOST vehicles historically do.
Well, since you know this will happen with most every vehicle you ever purchase, what is the best “plan of attack?”
You could save up $24,000 and pay cash. (No loan, drive it until the wheels fall off/until the costs to repair and maintain are not economically wise. This “non-economical situation” could look something like starting to be required to make monthly repairs at the rate of an average car payment. )
All of the money you save in interest payments, which could range on average from 3-10%, could be invested. These monthly investments could be into an : IRA, ROTH-IRA, 529 Saving Plan, savings account for a next car, or anywhere else you want to put YOUR money for future use.
If you think of doing this over your entire adulthood (22-90 years of age) every time you buy a car, (Rule of 72) you could SO EASILY become a member of the “Millionaire’s Club”.
Just think of the possibilities with all of the money you did NOT spend on interest and depreciating investments year after year after year…
Now here’s test, go out and look around in your neighborhood for temporary tags on new vehicles. Ask yourself, Do you want to be in “The New and Shiny RIGHT NOW Club” OR “The Millionaire’s Club” in about 25-30 years?
The choice is ALL YOURS:)
If you like this article and feel you could make some changes in your spending to get you where you need to be in: 5, 10, 15 years, go to: WHO DO YOU THINK YOU ARE and take our short survey. You really can get wherever it is you want to be in this life with a plan and some work.
Feel free to leave a comment below. I would love to hear your “Millionaire Club” thoughts.:)