Driving Ourselves Broke
- Megan Pacheco Chief Learning Officer, Lead Like Jesus
- 2013 6 Nov
So we are back at it.
In a recent report released by Experian, Americans are back at car dealerships buying new cars again. This time, however, we are willing to pay higher monthly payments on a lower credit score while extending our loans beyond 5 years.
That’s plain crazy!
Did you know that the average new car payment amount is $452? That’s almost 50% of our monthly mortgage payment (according to LendingTree, the national average mortgage payment is $1,061 on a 30-year mortgage at 4 percent.)
So while we take out 30-year mortgages, we turn around and take out another 6-7 year loan, this time on our new ride.
There is no question that most of us need a car and that transportation is a key component of our daily life. We need it to commute to work. We need it to drive to the grocery store. We need a car. But the question is, do we need to leverage ourselves for a period of 5-7 years while paying enormous car payments and an a 4-5% interest rate?
I would argue that not only do we not need to, but we shouldn't.
So let’s do some basic math. What if you decided to get a used $10,000 car and paid it over a period of 36 months? That would put your payments at around $280/month. Now, what if you set aside the remaining $172 (the difference between your used and new car payment) for the period of 36 - 60 months? You’d have $6000 - $10,000 in your car replacement fund, and you could purchase your next car with cash, leaving you the entire $452 a month to invest, save, prepay your mortgage, etc.
There is another benefit to purchasing a car with cash – it’s the insurance cost. As soon as you own your car outright, your insurance premium will drop, freeing even more funds monthly.
“Debt is the slavery of the free” – Publilius Syrus
If asked, most of us would likely admit that we don’t like debt. We don’t want to owe someone something for the large part of our life, yet at the same time, we make financial decisions that put us in a position of volunteer slavery.
Learning to make smart purchases takes time, patience and self-control. Passing up new shiny toys is not easy for 5 year olds, and it doesn’t get any easier for 20-40 year olds neither!
Next time you’re about to make a major purchase, if self-control fails you, at least run some basic math. Numbers alone should be convincing. Take a step back, look at the long-term consequences of your decision, and determine if making that purchase puts you in a better or worse financial position 5 years from now.
Here are few basic checkpoints for making a major purchase, like a car:
1. What will be my TOTAL cost after paying the price and interest rate combined? Don’t be fooled by JUST your monthly payment amount.
2. How will the payment impact my monthly cash flow?
3. What if I lost part or all of my income tomorrow? Can I still afford to pay for that item at a lower income rate?
4. How will this purchase impact me long-term?
Megan Pacheco is a writer and content manager for Finicity (provider of Mvelopes and Money4Life Coaching). She comes with 13 years of experience in the area of personal finances and her tips on budgeting, debt, saving, giving, money and marriage and more have been published by Yahoo Finance, AllParenting, FoxBusiness, DailyFinance, REDBOOK and others. You can contact megan at: [email protected]
Publication date: November 6, 2013