From my experience, cars are one of the biggest reasons people run into money problems. I am guilty of this. I've made some VERY stupid mistakes with cars in the past. But, I've learned my lessons. Here are some thoughts on what I've learned.
New Cars Suck
That is, they suck the money out of your wallet. I love driving a new car. They smell great, they shine, and they don't rattle. New cars are awesome! But they are a terrible place to put your money.
Everybody knows that new cars lose their value very quickly. But for some reason, we don't care. We still buy them knowing we are losing money on the deal. But the positive feelings that come from driving a new car buffer all of that pain.
But studies show that new cars lose about 40% of their value in the first four years. You might as well throw your hundreds out the window.
Millionaires Buy Used
Buying used makes good financial sense. If you buy a good, reliable, two-year-old car, you're letting somebody else take the hit on the depreciation. That's what most millionaires do. How do you think they became millionaires?
Roll Me Over
This is the one that killed us. Let's say you bought a new car a couple of years ago. And, like me, you wanted the best so you bought the top of the line model and financed it out 5 or 6 years so you could make the payment. Now, you're tired of that car. You work hard, so you deserve to drive a nice car. Besides, the car you have will need repairs soon anyway, so why not just buy a new one and get the new car warranty that goes along with it?
Believe me from experience: DUMB!!! You trade in your car, and you learn that the dealer will give you less than what you owe for it. That's okay. Just roll it into the new loan. Now, you are even more upside down on the new car!!! It's an endless cycle.
Soon, you're stuck in a car with a bloated payment and a huge debt.
I used to say it. How many times have you said it?
"You'll always have a car payment. There's no way to avoid them."
You have to be an adult about this. Don't let that new car fever get the best of you. Take your time, save up and pay cash for your cars. Avoid the dreaded car payment.
Snowball Your Car
If you currently have a car with a car payment, you need to decide whether to keep it or sell it. Here is a rule of thumb to help you decide:
- If it will take longer than 1-2 years to pay off your car, sell it
- If all of your cars together are worth more than half your take home pay, sell a car
If you love the car and you think you can get it paid off in a year or two, keep it and snowball the loan to get it paid off.
But, what if you decide to sell it but owe more than it's worth? Here's an example. You owe $22,000 on a car that is worth $18,000 (be sure to check kbb.com for your car's worth. Look at "Private Sale," not "Trade In Value.")
If you sold it for $18,000, you would have to come up with $4,000 to settle the note. So, you could either save up that money, or you could borrow it. What??? Borrow??? I thought we were getting out of debt!!!
We are. But a $4,000 debt is better than a $22,000 debt, isn't it?
But then what do you drive? Well, you have to be serious about getting out of debt. If you need to replace this car, then instead of borrowing $4,000, borrow $6,000 or $7,000 and buy a little $2,000 or $3,000 car.
Of course, you don't want to drive this little clunker forever, so GET MOTIVATED! Get your debt paid off, then save up some money! Put your old car payment in a cookie jar. In 10 months, you'd have around $4,000 (assuming you're saving $400 a month). If you then sold your clunker for $2,000, you'd have $6,000 to upgrade. In another 10 months, you'd have another $4,000. Sell your new clunker for $5,000 and you could buy a $9,000 car. Pretty soon, you're driving a decent car with no debt!
This is an extreme case. You have to be VERY MOTIVATED to work this plan. In our case, we couldn't quite muster the strength to do it this way.
I drive a lot for work, and so I wanted something that was comfortable and reliable. I traded my BMW ($20,000 debt) in on a Ford Taurus ($10,000 debt). That cut $10K out of our debt and reduced my car payment by about $200.
My wife's car is a different story. We are VERY upside down in it. We'd like to sell it, but we the deficit is so large, we can't make it work. So we are going to try to pay it off (or pay it down). It will take a while, but that albatross will either be out of our lives or paid for.
Either way, I'm drawing a line in the sand… No car payments!!!