The status quo
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Next time you are out driving around town take notice of what vehicles other people are operating. Odds are you’re going to see a lot of shiny new cars and trucks that are probably less than 3-4 years old. You may be driving in a sweet new ride yourself, but when you do the math is it really worth it? 73% of vehicles on the road are financed. 3 out of 4 cars have a monthly drain on Americans’ monthly budgets.
The average cost of a new car these days is right around $30,000 (for a nice round number) and the average interest rate for financing a vehicle is 2.678 %. If you assume a $5,000 trade-in, a 5% sales tax and a 60-month term then you are looking at a nice monthly payment of $445.65. That’s a $445.65 ball and chain that you’re lugging around with you everywhere you go. And that’s with an optimal interest rate of less than 3%. When I bought my first car (when I was a financial train wreck) my interest rate was 18.54%!
Financing a vehicle commands that you have full comprehensive auto insurance as well, which will run you around $100 a month if you’re a decent driver.
$545 in monthly payments (and you haven’t even left the driveway)
Let’s say Mr. Needmoremoney purchased a bottom of the line 2012 Ford Edge, which he began making payments on in January 2012. After tax, tag and title and with a $5,000 trade-in from his previous vehicle the final sales ticket was $25,000. He was then steadily making the above $445/month payment for all of the 2012, and just into 2013. 13 payments in all. This reduced the principal balance of the loan to just under $20,000. As luck would have it, he kept the vehicle in pristine condition and it’s value is currently almost $21,000 (with 15k mileage on the odometer).
This is an optimal time to get rid of it.
With his $21,000 trade-in, Mr. Needmoremoney is easily able to pay off his existing loan with $1,000 to spare towards his new-used vehicle, which costs him exactly $10,000. This leaves him with a $9,000 loan on the new-used vehicle. Monthly payment: $160.43. Monthly savings: $285.22.
If his last name was Moneyseed he would take it one step further, and continue making the $445.65 payments, since he had already been used to it, to kill the loan as fast as possible. Doing this would leave him with 21 payments total. That is less than 2 years until: no more car payment.
In this example, Mr. Needmoremoney took my advice and is now easily able to become car loan free in 34 months (total) from the day he purchased his super expensive Ford Edge. That saves him from making 26 extra payments of $445.65, saving him a total of $11586.90. He was a smart dude too, so even after he paid off his new-used car, he kept making the $445.65 payment to himself!
He had adapted to being without that money for almost 3 years, so he knew he could live without it every month. He has over $10,000 in the bank now, just because he knew he could save money by getting rid of his gas-guzzling-super-sweet-SUV. The good thing is, if the car shits the bed, he has the money to buy a brand-new-used car, and he can pay for it in cash.
With cash in hand, you can basically name your price at the car dealership!
In an average family setting you would actually double every dollar amount on this page, since most families own ( and finance ) two cars. Would you rather have an extra $450, or $900 for two cars in your pocket every month and drive pre-owned vehicles? Or would you rather have new cars in your driveway and complain about money issues?
Buy used, be happy
Don’t give in to “New Car Fever”. When you feel the itch that you want something new, seriously weigh your options. A newer car may mean another brand new loan.
Instead, invest in yourself, let go of the 2-ton money pit, and hop into something a little less alluring with a way smaller price tag. Find a nice used vehicle for around $10,000. They do exist! I helped a co-worker buy a 2008 Ford Fusion about 6 months ago, and it came out to just about $10k after taxes.
You can manage to change your financial future in one long Saturday at the car dealership. It may be the less desirable road to take, but these are the differences that separate those that want to take control of their finances and become financially independent, and those who will need to work well into their 60s. If your vehicle is already paid off, drive it until the friggin’ wheels fall off. Your future self will be happy you did.
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Tax time is here! Go do your taxes!
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