For middle class America, car payments are a normal way of life, everybody has one! I’ve even been told; “a car payment is a sign of being an adult”.
Yes most of us were raised to believe that this is the norm and that every car we own comes with a car payment! This does not have to be true! In fact, today more than ever before it shouldn’t be true! It has to change!
We all know that excess credit card debt is a bad thing and that student loans are outrageous today! But for some reason car payments (as crazy expensive as they are these days) get a free pass when talking about debt and money smarts.
There are many reasons why this is, for one it is because of the way it is constantly advertised to us. Second it’s because cars are necessary (yes for most of us a car is necessary, but not the payments J) and third is that we feel the value when driving a car and physically using it. That all being said, no car is worth what we lose when we have a car payment!
Car payments are stealing your money and here are 5 reasons WHY YOU SHOULD NEVER HAVE A CAR PAYMENT:
Depreciating in Value
When something depreciates it reduces in value with time. Cars depreciate in value faster than almost anything!
We all pretend like spending $36,000 on a new car is acceptable! However; if we had that racked up on a credit card we’d be banging our heads against the wall!
Here’s where the problem lies in thinking the car payment is okay: What’s the big difference?
This means that half of the new cars purchased were more expensive than that!!!!
If I bought $36,000 worth of clothes on a credit card people would say that I have a spending problem (and they’d be right). Also, after some time of wearing those clothes (hopefully a long time for that price) they would no longer be returnable. Sure I could sell them in a garage sale and get some money out of them but never the full amount that they cost me when they were brand new.
Now let’s look at cars. If I spend $36,000 on a new car (below average) most people would find that perfectly acceptable. However the same thing happens to the car as it did with the clothes; each time I use it, the value of it goes down. I could never sell it for what I paid for it and as time goes on the value keeps going down.
In the meantime, I’m making payments each month (with interest) on something that I am wearing out faster than I am paying off.
Cars should be looked at as a necessary expense, but the payment isn’t. We spend enough on car maintenance and repair to not have a car payment to add to it! And it’s never worth it to buy a new car for how fast they depreciate in value.
The opportunity cost of money is basically the missed opportunity of what you could do with your money if you had not been spending it on car payments. Basically what are you giving up in order to make those car payments, 401k, vacation, investment, savings, buying a house etc.
Our car payments are robbing us from being truly wealthy and successful with money! The average new car purchased in America is $36,270 according to Kelly Blue Book and most people who take out a car loan and make payments on that for many years to come.
According to Edmunds.com: “In 2014, 62 percent of the auto loans were for terms over 60 months. And nearly 20 percent of the loans were for 73- to 84-month terms.”
So not only are car prices getting bigger, but we are paying for them for a longer amount of time! Therefor taking away all opportunity that we had to put that money to better use! Also here’s a thought, after 60 months (five years) you have an “old” car on your hands…time to go get a brand new car and repeat the cycle.
-Leases are no better, you are just making a car payment for something that isn’t and will never be yours (again charging you an opportunity cost of that money).
Breaking down the car payment:
The average interest rate on an auto loan was 4.21% in 2017. That means many rates are higher than that! So not only are you making outrageous payments on something that is tanking in value but you are paying interest to do it!
So we have the average new car price of $26,270 and the average loan rate (remember this is average so half of them are higher! Scary!) of 4.21% over the average car loan term of 60 months….putting that into a payment calculator (google it) comes out to
$670 per month!
That is what the “average” American is spending per month on a new car! If you are not shocked by this think of this –according to the census bureau for 2016 the average household income was between; $57,000-$59,000 annually.
That is a take home pay after taxes of $3,900 per month! Are we killing ourselves with car payments here? Not to mention student loans, house payments, credit cards, and putting money away for when you finally get to retire!
What could you do with that extra $670 a month that is being wasted on a car? Is it really worth it?
Interest Working Against You
The average interest rate on an auto loan was 4.21% in 2017. Sure that’s not as bad as some credit cards but it does add up over time, especially on $36,000. Instead of paying someone to spend money we don’t have in the first place we should be getting interest paid to us!
How do we do that?
What if we live with the car we have for a few years or buy a cheap car and start putting a “car payment” worth away in a money market or mutual fund account? This would mean that the amounts we are saving to buy our next car would actually being growing interest FOR us!
On top of this, when you go to a car lot with cash, you can always negotiate a better deal than if you are asking for a car and begging to be accepted for a loan in the process. Doing the latter puts you at the mercy of the car dealer (and they aren’t known to be merciful).
Check out Dave Ramsey’s 5 Tips When Buying A Car.
See exactly how this works:
Save Your Payments
As explained above; if you were to save or invest your car payments rather than let the bank do it, you are gaining interest rather than paying it.
If you can be proactive with your money rather than reactive. You can live without ever having a car payment.
Being proactive would be saving your money for a car realizing that cars have a limited lifetime before they fall apart. Being reactive would be to wait until your car breaks down to think about needing to get a new one and not having any money to do so. This is what most people do.
Instead, be a proactive person! Think of your health:
A proactive person exercises and eats healthy in order to keep his/her body from getting sick.
A reactive person does nothing until they are laying in a hospital bed about to have an operation due to not proactively taking care of themselves.
The same is true about our financial health. We should be PROACTIVE in all our financial matters! It is how we are able to pay bills on time, take a vacation, and eventually retire!
Why should cars not fall under the category of things we save for? Because it’s easy to get a car loan? Because it is considered normal?
Being normal is being that reactive person on the hospital bed. Normal people do not run marathons and normal people do not become wealthy.
It is something that must be proactively worked on! It takes time but it is worth it! Financially successful people know these reasons why you should never have a car payment and they avoid them like crazy!
Which brings us to #5 which is one of the most important points about car payments that financially successful people always keep in mind:
Time Adds Up
Spending 60 months on a car payment kills 5 YEARS of potential investing or doing ANYTHING else with that money. Instead you are left with a $5,000 dollar car and nothing in your savings or retirement from those car payments.
5 Years of paying someone else with interest is a long time! Not to mention the actual principal payment amount! Imagine putting that money into an investment every month or just under the mattress! You would have around $40,000 to do whatever you want with!
When it is spent on a car payment for that long, it is wasted on something that is really a luxury. If you can afford it and still put money towards everything else you want to in order to reach you goals (for example if you are a millionaire) than go for it!
For most of us however; it is foolish to waste that money over such a long period of time on a new car. And as stated before, after 5 years…you are left with no money and an old car, only to repeat the cycle again.
As explained in the video above; save your payment and start making time work for you! Ask anyone over the age of 50 and they will tell you that they wish they would have started putting money towards retirement earlier than they did…because time plus compound interest works miracles! But that’s another topic all together.
When it comes to money and looking back on what we “should have done” time flies by! Think about how you could have saved more for college or not spent so much on that last….fill in the blank. The same goes for your car payments.
The time will go by no matter what you do with your money, so do the thing that will benefit your goals and dreams the most!!!
So to recap 5 reasons why you should never have a car payment:
Your Car is Rapidly Depreciating in Value
It Robs You Through the Opportunity Cost
Don’t Let Interest Work Against You
It’s Better to Save Your Payments
Time adds Up –Have Something to Show For It
For middle class America, car payments are a normal way of life, everybody has one! Is it our goal to be like everyone else? Do we want to achieve normal?
No if you are like me you have dreams and goals that sound scary when you mention them out loud! They get you tingly and excited when you think about them for 5 minutes! Don’t let the excitement of a new car rob you of what you really want for your life and your future!
I wish you all the success and happiness in your daily life!