Today we have a guest post from Nate over at Reaching the Crest. He is a father, a husband, an Army Veteran, and a 6 time (working on number 7) Ironman/Long Course triathlon finisher. Nate currently holds a number of professional certifications in Program and Project Management, and his blog is a great personal finance resource. Enjoy the read!
One of the simplest ways to increase your savings and ultimately your net worth is by keeping low standards when it comes to what car you drive. If you are driving high-end in your twenties, it will be really hard to dial it back when you are in your thirties or forties.
For most people, the total cost of car ownership from the time you are in your twenties until the day you retire will have a direct and significant impact on your savings. Even if you can afford a high-end luxury car, keeping low standards will benefit you greatly as you plan for your retirement.
Spending an excessive amount or even just slightly more than you really need on a depreciating asset like a car is not a great way to achieve financial excellence. In fact, it can cause your financial life great strife.
By fighting the urge to buy higher-end more expensive cars you will speed up your progress towards establishing a secure financial footing – secure financial footing meaning no debt, lots of savings, retirement on track, and college savings for the kids is in place.
What I have experienced recently is that you may just get used to that lower standard. By doing this you can redefine what you consider an upgrade.
If you do decide to upgrade in the future, at least consider spending a few years in the trenches driving around a modest vehicle. Knowing that the longer that you delay driving that “dream car” the better off you will be.
Impacts To Your Greatest Financial Asset
For most people, your greatest financial asset is your paycheck. A lot of people don’t view it that way. But if you think about it, your earned income truly is your greatest asset. It provides you with regular income. However, as you add additional required monthly payments, you dilute the impact of your paycheck, minimizing the value of that asset.
If you make $5,000 a month and have $5,000 a month worth of payments you’re not really getting anywhere. The car loan is one of the biggest offenders of this paycheck diluting. It is also one of the easiest to avoid. Having a large ongoing car payment robs you of your ability to feel the full impact of this asset.
As your paycheck becomes diluted with more and more items, it steals from your ability to establish many basic financial planning essentials – things like an emergency fund, and saving for a child’s college education. And most importantly, it robs you of the ability to save for your own retirement.
How Much Is That Car Loan?
As car prices have continued to rise over the years, Americans are borrowing more money to afford those new cars. Experian credit bureau, which tracks millions of auto loans, reported in 2016 that the average car loan in the first quarter of 2016 was $30,032. This was the first time the number had ever crossed the $30,000 threshold. Another milestone came with this larger loan amount, which was an ever-increasing monthly car payment.
With an increased loan amount comes an increasing monthly payment. This averaged at $503 per month during the same time period. This is the first time it had ever topped the $500 mark. The interesting thing about that increased monthly payment is that it increased despite an ever-expanding loan duration.
The typical auto loan of the past has been three or four years in length. Now it is well over five years with the average being 68 months. 68 months for a car loan! And that was just the average. There are seven-year car loans available, as well.
Having a $500 a month car loan for five years and sometimes up to seven years means you will most likely be paying on a vehicle with a loan amount that equals more than the value of the car. This is where people can really get themselves into trouble.
If you decide to trade in that car after a few years, you might just be upside-down on the loan. Meaning you owe more than the car is worth. Oftentimes, a seller will then reassure you that the difference can simply be rolled into your new loan for your new car – ever increasing your car loan amount and monthly payment. It becomes a vicious cycle that is hard to get out of.
Why Does This Happen? The Status Symbol
The car is a huge status symbol. How often have you assumed that the person you see driving a nice car must be “doing well?” Images of nice cars in music videos, television shows, and social media gives an impression of financial success. Have you ever seen that advertisement on YouTube that opens up with the speaker standing in front of his fancy sports car? Really? That’s about as cheesy as it gets.
But there is a reason he is doing that. People assume that if someone advertising one of those “proven systems” for financial success is standing in front of a nice car, they must be successful themselves. Somehow the nice car means that the person knows what they are talking about.
It’s So Easy To Look Good
The reality is usually much different. Obtaining a high-end car is extremely easy. Easy financing, leases, and dealers all pushing you to get into an expensive car makes having one, well, easy. So why is it then a status symbol?
If you change your perception when you see that nice car drive by, your financial life can change. Or at least it will have a much better chance of changing.
I have trained myself to actually assume the opposite of success when I see someone driving an expensive car. When others are saying, “Oh wow, they must be doing well,” I’m thinking, “Oh man, they must be broke.” I know this isn’t always the case, but it is a lot of the time.
When I was stationed at Fort Knox, KY, there was an ongoing joke about driving past a trailer park where the cars sitting adjacent to the trailers were worth more than the actual trailers. Nothing against someone living in a trailer. There are plenty of good people in this situation and this is what they can afford.
But if you are driving a $50,000 car, to park it in front of a $30,000 trailer, you may have your financial priorities mixed up. The lure of the status symbol is strong.
Embrace What Is Old
Me, I love BMWs. There is just something about the way they look and the sound that they make. I would love to get one someday. In the meantime, I would really just love to have a car that had a CD player that worked and headlights that are less foggy. Those are some pretty low standards. When you drive something older, it changes your perspective on what you might appreciate in the future. As soon as you upgrade, it’s really a lot harder to go the other way in terms of expectations. My expectations are very low for performance and comfort when it comes to my car.
For example, my car’s CD player only works in the summer. It’s like Memorial Day hits and I finally get to play that Dave Matthews CD I’ve been waiting for all winter long. As the fall approaches I have to decide if I’m going to eject the CD or try and play it one last time. I misjudged it this past summer, so the CD has been stuck inside the player all winter long. Maybe I’ll eject it next time.
There is a strong possibility that whoever gets my car when I turn it in one day will also get a Dave Matthews CD.
Fighting The Urge
A few years ago I seemed to go through a “I need to buy a new car” phase every couple of months. I wasn’t really liking my car anymore. However, I wasn’t really looking forward to buying a new one either. My current car has been paid for since 2010. I could certainly afford something nicer but choose not to.
To me, buying a new car seems hard. At the time, I didn’t want to spend the time going through the options and certainly didn’t want to spend the money. Instead, I opting to spend about $2,000 on my own car for new brakes, a timing belt, an engine solenoid, and a few other things I don’t remember.
All of that was preventive maintenance. There is nothing like walking into a mechanics shop and volunteering for services. After spending that money on maintenance, I felt like I needed to keep my car a few more years to make up for the cost of that investment.
But what has happened since I invested that $2,000 has surprised me. I actually enjoy my car more now than I did when it was newer.
What Is That Car Loan Costing You
Although $2,000 seems like a lot of money on car maintenance, that is a drop in the bucket compared to what Mr. Fancy Car with a $500 a month car payment is paying. Five hundred dollars a month over the course of a year adds up to $6,000. If you invested that money and earned even just 5%, you would have over $50,000 after seven years.
And just think of what this will continue to add up to if Mr. Fancy Car trades that car in for a new car after seven years and starts the loan cycle over again. Fourteen years of paying $500 a month earning 5% is close to $125,000.
That is a significant amount of money to pass up because you enjoy the smooth ride and new car smell.
It’s Not Always Easy to Drive an Older Car
It hasn’t always been easy to like my car. There was that period of time when my door wouldn’t lock. Somehow that just fixed itself.
My check engine light is constantly on because my fuel gauge sensor is broken. Oh ya, and my fuel gauge pretty much registers empty all of the time.
It takes a certain level of confidence to drive a car with a check engine light on and a fuel gauge reading empty.
There were a few times two summers ago when the air conditioning wasn’t working. This was really a test of my commitment. But the same fairy that fixed the door locking issue fixed the air conditioning issue as well. Surprisingly, the A/C worked flawlessly last summer. Fingers crossed for this summer.
The Freedom of Driving an Old Car
Despite all of that, I just put four new tires on my car. And my older car has practical value, too. I could care less about the seats getting stained when I climb in all sweaty after working out or wet after a swim.
Once while driving home from work someone rubbed up against my car in his truck while we were both going about 45 mph leaving a nice scratch mark. (And rubbin is racin’!). I was mad about it, but I could have cared less about my car.
We just got a basketball hoop for my daughter and my car serves as the back-stop, preventing the ball from going into the road. I’m fairly certain that I would not let a basketball bounce off the front hood of my BMW – if I had one. With my current car, that is not an issue. I don’t care.
Those Around You
When I walk into work from the parking lot I typically walk past several really expensive cars. I’ve had my older car for so long now that I simply can’t fathom why someone would drive such a nice car just to have it sit in a parking lot at work. The thing about having an older car is it changes your perspective on things.
I’m not some poor college student with a beat up car. I’m a guy with some means who is driving an older car by choice and I’ve embraced it.
Eventually my beloved car will die and I will be forced to buy something better. My next new ‘dream’ car is one that has a CD player that works in the winter. And maybe one that has more powerful the air conditioning. Oh and my foggy headlights. Yah, it would be so awesome if those were clearer. How about a car with a USB port so I can plug my phone in? Those types of more modern low standards would be great.
If you have made it to the end, I thank you for reading. Thanks also to Mustard Seed Money for giving me the opportunity to guest post. Reaching The Crest