Is Your Car Making You Money Or Killing Your Financial Freedom?
George Boelcke FCI
November 25, 2008
Last week I had to pay a $900 bill to repair my 99 Chrysler with almost 250,000 miles on it. Ouch is right – but once the shock wore off and I wrote the check, I was actually quite happy about it. Let me explain:
I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I´ve spent $2,500 on repairs and the car´s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today´s $3,000 value, the car has cost me $9,500, or $113 a month.
One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she´s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.
Compared to her $38,000 versus my $9,500 spent, I´m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I´d rather have the $28,000 in savings.
Another friend takes some of what I´ve been teaching and won´t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it´s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.
Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I´m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I´d rather have the money.
And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it´s gonna cost you a lot of money. After all, your vehicle is never worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you´ll never ever recover?
Your best game plan is to drive a vehicle without payments for as long as possible. THAT is the quickest way to save a huge amount of money. And you´d be amazed how much better your vehicle seems to drive after it´s paid for! Besides, it´s not your job to bail out Detroit. Let the government make that decision. Your job is to first become financially independent and debt free yourself and a new vehicle with all those payments will make that next to impossible.
If you´re still choosing to buy a new vehicle, there isn´t a credit crunch. But there certainly is a new reality of who gets to borrow. GMAC, for example, now requires a credit score of 700 or better. You´ll also need to have some skin in the game, because the average down payment is now around $3,100, and that´s up 42% from two years ago, according to Edmunds.com. But it´s quite misleading as those huge rebates can be used as down payment.
Still, average loans are now around 88% of the purchase price, yet that´s still a recipe for trouble when typical vehicles depreciate 20 to 30% in the first year! An average 12% down payment versus a 25% depreciation still has you $3,250 backwards the day you drive off the lot – never mind that most people are stretching their car loans way beyond a reasonable length of time.
I paid $10,000 cash for my car and have driven it for seven years now. Since then, normal maintenance aside, I´ve spent $2,500 on repairs and the car´s worth $3,000 right now. So with a $10,000 price, plus the $2,500 repairs, minus today´s $3,000 value, the car has cost me $9,500, or $113 a month.
One of my friends is in the car business. She gets dead cost, or less, for her vehicles and has leased around the same $450 a month payment, forever. When I bought mine, she had a three-year lease, then a second one, and is now on a third vehicle on a four-year lease. Seven years at $450 a month means she´s spent $38,000 as of today. Her lease balance on this one is way higher than the value, and when the lease is over she has nothing but the need for a cab ride home.
Compared to her $38,000 versus my $9,500 spent, I´m $28,000 ahead of her. Yes, she drives a cooler car, no doubt, but I´d rather have the $28,000 in savings.
Another friend takes some of what I´ve been teaching and won´t lease. He bought a new car about six years ago and just traded it for another new one. The first one was $25,000, taxes aside, and he sold it for $8,000. The new one was $27,000, and it´s depreciated at least 20 percent when his butt hit the seat. In about the same time-frame, he spent $17,000 on the first one, and the 20 percent depreciation on the new one of $5,400. So his two cars have cost him over $22,000, or $305 a month for the last six years.
Neither one of these friends is very rich, and neither one of them thinks they waste money needlessly. But I´m $13,000 ahead of one and $28,000 ahead of the other. Yes, they have cooler wheels but I´d rather have the money.
And you know what: Nobody in the world really cares what you drive. If cars are a status symbol, instead of reliable basic transportation, it´s gonna cost you a lot of money. After all, your vehicle is never worth more tomorrow than it is today, so why keep throwing tens of thousands of dollars of payments and interest onto something that you´ll never ever recover?
Your best game plan is to drive a vehicle without payments for as long as possible. THAT is the quickest way to save a huge amount of money. And you´d be amazed how much better your vehicle seems to drive after it´s paid for! Besides, it´s not your job to bail out Detroit. Let the government make that decision. Your job is to first become financially independent and debt free yourself and a new vehicle with all those payments will make that next to impossible.
If you´re still choosing to buy a new vehicle, there isn´t a credit crunch. But there certainly is a new reality of who gets to borrow. GMAC, for example, now requires a credit score of 700 or better. You´ll also need to have some skin in the game, because the average down payment is now around $3,100, and that´s up 42% from two years ago, according to Edmunds.com. But it´s quite misleading as those huge rebates can be used as down payment.
Still, average loans are now around 88% of the purchase price, yet that´s still a recipe for trouble when typical vehicles depreciate 20 to 30% in the first year! An average 12% down payment versus a 25% depreciation still has you $3,250 backwards the day you drive off the lot – never mind that most people are stretching their car loans way beyond a reasonable length of time.
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