Monday, October 15, 2018
Auto Loans and Financial Freedom: Oil and Water
One common theme I have come across over the past 3 years of being a financial advisor is the crippling burden of auto loans on people’s monthly cash flow. It seems no matter the situation and no matter the income, a shiny new car is always parked out front. While we always justify in our heads the cost of housing, as we need a place to live, justifying this expense is a bit trickier. Getting around is important, but at what cost? It seems to me that sacrificing your immediate needs and long-term future for a luxury item is asinine, yet it is extremely common. Today I going to give you several things to think about when it comes to auto loans and transportation in general. Being on top of this might just save you from some dramatic financial decisions in the future.
If you can’t save, you can’t drive
Some of you might have to stop reading after this point. If you can’t save, you can’t drive. Let that sink in for a second. What does that mean? What I mean by this statement is that if you aren’t putting money into savings every month, you shouldn’t be financing a vehicle. There is a pecking order to your monthly budget. Housing is always first, then necessities, then savings, then your automobile. Savings before my car? Why is that so? The answer is simple: You can’t eat your car when you are 75, or right now. If you prioritize having a car before saving any money for the future, you are destined for financial failure. You may say: “Well Joe, I need a vehicle to get to work, so it’s a necessity.” That, in my opinion, is a flawed concept. What that says to me is that you have not explored other options or planned properly. I could write a whole post just on this point, so I will try to keep it short. Look at your monthly budget and if you own a vehicle but aren’t saving anything, you are messing up big time.
Automobiles < Freedom
Ever wonder why car commercials always show someone driving down an open road on some mountainside? It’s the same reason commercials show a person chugging a Pepsi and smiling instead of holding their stomach in agony? Trade that mountainside for the reality of city gridlock and fewer cars would be sold for sure. We’ve been lied to. A car isn’t freedom. Money is freedom and a car steals your money from you, therefore a car is the opposite of freedom. I love beautiful cars as much as the next person. I love flying down the freeway, blasting tunes, with the sunroof open. Let’s get real here though, if you bought the idea of a car equaling freedom, you are literally a sucker.
This is a major fear of mine. Owing more on something than it is worth. It troubles me because I hate taking a loss on anything. If you finance a car you will probably run into this situation. Try at all costs to avoid negative equity situations. How you do that is by not having a long duration of payments. If you stretch out a loan over six, seven or even eight years, you will run into negative equity. What this comes down to is the fact that you probably shouldn’t have bought it to begin with. If you have to stretch it out that long, it means the monthly payment is a burden, which means your budget can’t handle a car loan. Period.
Continuing along the lines of negative equity, the term of the loan is extremely important. Besides owing more on an item than it is worth, lengthy car loans are troubling in other ways as well. My main fear is that I will no longer be driving the vehicle, yet still paying it off. To assume you will keep a car for more than six years is risky. While you may have it for ten plus years, chances are you will only have it for about five. The amount of interest paid is also troubling to me. When you extend a loan for that length of time, you are approaching double-interest levels. That means you might pay double what the car is worth because of the interest involved. That to me is completely unacceptable.
Do you even drive enough?
I would argue that if the sole reason for owning a vehicle is to get to work, then you should not own a vehicle. There are exceptions, but many of them don’t hold water. I look at work as a means to make a profit. If right away you must pay $500-$800 a month just to get to work, you need to evaluate your situation. Commuting is a real thing, I get it, but at the same time, it doesn’t need to be that way. Living closer to work is a possibility. If living close to your place of employment costs you an extra $300 a month but owning a vehicle costs you an extra $800 a month, what have you accomplished? I think owning a vehicle should be necessary for more than just commuting. Truly analyze your vehicle usage and see if there is another way.
I understand not everyone has 20K lying around and owning a car can be necessary. Really understand the payment options if you take out a loan and make sure that loan has flexible payments. This includes making extra payments including double-up, lump sum, and complete payments. You should be aggressively attacking this loan as if it was consumer debt, which in my opinion it is. Simply paying the minimums makes the lender rich, not you.
2 cars for 2 people?
Is it that much of an inconvenience to drive to work together? I understand having conflicting work schedules with your spouse but having 2 cars for 2 people can be completely unnecessary. Calculate how much of the time one or both cars are in the driveway. If one car is in the driveway almost all the time, it is obvious that you don’t need 2 vehicles. Think of the cost of having 2 cars and calculate the cost of being inconvenienced by having only one. I am almost certain it won’t be as bad as you think it’ll be.
Insurance, Gas, Maintenance
These costs really add up and must be factored into the equation. Gas has become extremely expensive. This is especially true if you drive a tank, I mean SUV. Also know that a new vehicle usually means higher insurance costs, due to the cost of replacing the vehicle being greater. Keeping the car in good working condition is also a cost and it is not optional. Routine maintenance is necessary if you don’t want a massive repair bill down the line. It is not unreasonable to budget an extra $400-$500 monthly for these extra costs. Always take that into consideration.
A growing trend of younger people relying on public transportation is emerging. The absurd costs of owning a vehicle and the flight to the cities have made taking the bus or train an appealing option. I mentioned earlier that if you only use your car to commute, then you should rethink owning one. This is where public transportation comes into play. I think you should attempt to make getting to work as cheap as possible, so the bus might be right up your alley. As time goes on, this trend will become more and more the norm.
While I am all about positive returns on my money, I do leave a place in mind for the leasing of a vehicle. The reason for me is simple: Owning a car is not owning an asset. In fact, a car to me is more of a burden than an asset. If that is true, why not take less responsibility for this transaction. Leasing takes the burden of maintenance off your shoulders, which can be very important. The payments may also be cheaper than owning, which is nice. Also, it would mean you have a new vehicle almost all the time, which is also nice. The key is that all the stars must be aligned for leasing to be an attractive option. Do your homework on this one.
Auto loan debt is reaching crisis levels in our country. I see people with 600-800 dollars leaving their accounts monthly to pay off an auto loan. That to me is craziness. There is no need for this to be such a major part of people’s budgets. We must take a stand against owning a car ruining our chances at financial freedom. If you don’t, that beautiful car in the driveway might be the place you end up sleeping.
“Some people are just stuck in their ways and have been brainwashed into believing that credit cards and debt are an unavoidable part of life.” – Dave Ramsey
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