New cars & number crunching

Do you ever wonder if your getting the most out of your money? If you are like me at all, then you are probably well aware of the fact that you waste lots of money, but have intentions of tightening up your personal finances in the near future. The problem is that the "the near future" never arrives. Once you dig a hole, no matter how small, there will be some amount of pain associated with climbing out of it. In my opinion, one of the worst holes you can dig is financing a vehicle.

When did it become normal to finance automobiles? Didn't most people used to pay cash for cars, or at least put up a respectable amount of money as a down payment? Not only do most middle class people finance their vehicles now, but they finance them with nothing down. Talk about your all-time horrible ideas - this one tops the list. You are purchasing an item on credit that loses value extremely fast. To be blunt, you are paying thousands (if not tens of thousands) of dollars for the gratification of having a new car, right here, right now.

Consider a new car that costs $30,000. Its shiny, clean and has that new car smell. Oh, it also gets your from point A to point B. You finance the car for 72 months at 6% interest (if you have decent credit). You make payments of $497/mo for 6 years and end up paying $35,797 for the car. You spent an extra $5797 in interest for the privilege of not having to wait and save up your money.

Now consider the alternative. Instead of financing a $30,000 new car, you do your research and find a nice used car for about $10,000 with under 50,000 miles on it. This is easy to find because I have done it. This car isn't quite as shiny and doesn't have that new car smell, but it does get you from point A to point B reliably. Instead of financing this car you spent the past 20 months (less than 2 years) saving $497/mo in your savings account. You simply pull out the $10,000 in cash and pay for the car.

So you still have a car, but you just freed up about $500 per month for the next 6 years. If you continue to put this money into an online savings account yielding about 3.5% interest (ING Direct, HSBC, etc) you will have about $40,000 in your savings account after 72 months.

With $40,000 in your savings account, now you can buy another used car (perhaps even nicer if you want to treat yourself) and pay $20,000 cash. For $20k cash you could purchase a pretty nice used car with under 50,000 miles on it. Now you still have $20,000 in your savings account and you can still afford to put away $500 per month. Another 6 years goes by and now you have over $65,000 in savings.

So after only 12 years (seems long, but its not like you are suffering in your $20,000 used Tahoe) you have $65,000 just sitting in a savings account and all you had to do was not finance brand new vehicles that you didn't even need to begin with.

The problem for most people is, of course, that they either already have car payments - or they don't have car payments but need to buy a vehicle soon and don't have time to save up to pay cash for one. Unfortunately the solution is one that involves some pain. Not physical pain, but the pain that comes with driving a vehicle that you can actually afford. Reassess your situation and realistically determine if you truly "need" a new vehicle right now, or you just "want" a new vehicle right now. What your peers think of your vehicle and what you think your peers think of your vehicle are drastically different. Suck it up and start saving today. Get your vehicle serviced or repaired or cleaned up - and keep on driving it for a couple more years.

The thing is, once you break the cycle you will forever be ahead of the curve, it will be a simple plan to follow and you will surely be happy you did it.