Point A to Point B
Have you ever run a big stack of $100 dollar bills through your shredder? No? Then why would you buy a new car? We’ve shared the basics of how to save on top expenses like food and housing. Transportation is the remaining top 3 topic. If you can use public transport, walk, bike, or carpool, do it! If, like me, you use a car to get multiple children around snowy, spread-out suburbs, here’s how to do it without debt.
The average new car payment for Americans is $470 per month according to Time Magazine. That’s $5,520 a year. For a household with two average loans, that’s more than a quarter million dollars over 25 years. The average used car loan isn’t much cheaper, at $368 per month.
The car companies and lending agencies have sold us on needing new cars, or at least a car payment. It’s considered a fact of life, as normal as taking a mortgage. But car loans aren’t necessary and are one of the worst forms of consumer debt. The vehicle depreciates greatly while you pay excessive amounts of interest. While it would take a really really long time to save enough cash for most houses, it is very reasonable to save up a thousand or few needed to buy a car. Most people don’t want to drive a $1,000 car forever, but if that is all you can afford right now, you certainly can’t afford to pay hundreds a month in a car payment. So open a savings account and call it Car Fund. Put the amount you would have spent on a car payment in there until you have enough to buy a decent used car. Let someone else take the big hit of initial depreciation.
But won’t you spend tons in repairs if you buy older cars? This myth has become a mantra for those who accept car payments as necessary. Obviously you need to take along a savvy friend or trusted mechanic when purchasing a used car. However, the repairs you might run into with a used car will very likely cost less than the amount of interest you will pay with a new car payment.
Let me illustrate. When Neil’s college car died (I’ll share its story in upcoming post “Free and Broken”), we bought a 1990 Dodge Shadow for $750 and drove it for four years. At the end we sold it for $500. So he drove it for about $5/per month during that time. You can afford a lot of repairs at $5 per month! And we had fewer problems with this beater than our 2002 Ford Focus (which is still going strong).
Car repairs should be viewed as an inevitable part of vehicle ownership, though, so wouldn’t it be good to learn a little about car innards? If you are very unhandy, make friends with someone who is and ask Handy to teach you. The handy are typically looking for any excuse to spend a day in the garage. Some jobs are for the pros but being able to fix things is a huge financial advantage. Why not take up a pastime that saves money instead of costing money? (Borrow Handy’s tools until you’re ready to invest in your own.)
What about gas mileage?
Another common myth states buying a more fuel efficient car will save you money in the long run, even if it costs more up front. But the difference in fuel costs simply can’t make up for the huge disparity in price point. And let’s not pretend we’re too concerned about the environment when we’re creating a demand for the production of giant new vehicles.
What about safety?
Speaking of fuel, do we all really have to drive gas-guzzling over-sized SUVs just to feel safe? While Hummer is bound to beat Beatle in a crash, automobile advertising pushes consumers’ panic buttons rather than providing real evidence that we all need a pricey new Land Rover to survive the week.
What about keeping a new car for a long time?
Making a new car last would certainly be preferable to the alternative but few have the discipline to drive a car for 20 years. Not to mention the depreciation and paying interest on something that will have little to no value at the end.
What about buying a new car and paying it off really fast?
Again, this is better than taking 5-6 years to pay it off but if you have the resources and discipline to do this, why not just save up until you can buy it? You’ll avoid the interest and the risk of not paying it off as expected. If you already have a car loan, this is exactly what you should do, unless you simply can’t afford your vehicle and need to sell it.
So kill the car payment and reduce your yearly expenses by $4,000-10,000, on average. Together with switching grocery stores, you could free up as much as $15,000 without even suffering.
Where do you stand on the new vs. used car debate?
Car Shopping? Brace Yourself For This Shocker. White, Martha C. 3 Dec. 2014. http://time.com/3615281/car-shopping-loans-borrowing-risk/