Cars and Money

Cars are great aren't they? There's just something we all love about them. Lots of folks see their car as a public statement about their lifestyle and status. Some of us rate our cars by how powerful the engine is and how good the car handles on the road. For others, cars are just transportation; simply a way to get from point A to point B. The neat thing is, there's really nothing particularly wrong with any of those viewpoints.

Unfortunately, many families make big money mistakes with their cars and there is definitely something wrong with that. Here's some interesting money facts about cars.

New Cars are a Money Pit
A new car will lose 60% (or more) of its value in the first four years! Don't believe me? Check out this recent article in Forbes. Kiplinger's Personal Finance Magazine quotes the same statistic. My own experience also says it's true. Back before I had a clue about money, I purchased a brand new 2001 Toyota Avalon for $27,200. I was so proud of my negotiation skills because the sticker price was $30,000. I thought that if ANY car would hold its value well, a Toyota would, right? Nope. When I sold that Avalon in 2005, it's value was just over $13,000. I might as well have flushed the $14,200 depreciation down the toilet.

All cars, with some extremely rare exceptions, depreciate in value. When we realize that cars are an incredibly large expense instead of an investment, it can be a major turning point in our financial lives.

Car Payments Stink
Even worse than paying $27,200 for a new car would be to finance the car and sink even more money into that extremely rapidly depreciating asset.

Let's look at an example. If you paid $27,200 for a car and financed the car for 60 months at 7%, your payment would be a whopping $538 per month. What's really detestable is that you would end up paying a total of $5116 in interest, making the real cost of the car $32,316. That stinks. Not to mention that $538 dollars of your income would be tied up each month. That's a huge amount of money to say "bye-bye" to every month.

Here's why car payments really stink. If you started at the age of 25 and invested $538 in a S&P 500 Index Mutual Fund each month instead of making a car payment, you could start an early retirement at the age of fifty as a millionaire.

Car payments are a horrible habit most Americans have gotten into. They are the ball and chain that weighs down most families and prevents them from having financial freedom.

Leasing Reaks!
The only thing I can think of that would be worse than financing a new car is to lease it. Leasing is the most expensive way to drive a car.

SUVs Have a Steep Price Premium
SUV's have become wildly popular in our culture. The law of supply/demand states that when something is in high demand the price goes up. That being the case, a late model SUV can be expected to come with a price premium on the initial purchase, the tag will cost more and the insurance typically costs more than a sedan of the same make and year model. If you can find a sedan that meets your needs, it will likely be much less expensive to own.

Gas Mileage Has Become A Huge Part of the Car Purchase Decision
A couple of years ago when gas was $1.75 a gallon, gas mileage used to be a fairly insignificant consideration. Now at $4 bucks a gallon, its a much bigger deal. For someone who drives 20,000 miles per year the difference between 20 miles per gallon and 30 miles per gallon represents $1333 per year, or $111 per month. That's a lot of cash to be throwing away in my book.

In summary:

• Don't buy new cars unless you're incredibly wealthy. Most of us can't afford to throw that much money away.
• Pay Cash! Car payments criple your cash flow and the interest payments rob you of your hard earned money
• Less is more. Since cars depreciate so fast, it stands to reason that the less you spend, the less money you lose.
• Never, ever, ever, ever, ever lease a car. Was I clear on that?
• Don't drive a gas guzzler. Gas is an ever-increasing percentage of our living expense. Don't blow any more cash through your tailpipe than you have to.