Suze Orman says you are if you do this one thing.
THIS POST MAY CONTAIN AFFILIATE LINKS. PLEASE READ MY DISCLOSURE FOR MORE INFO.
When I graduated from college, I lived with a guy who was not very good with money. Since he hadn’t been able to graduate college in four years, his parents told him he had to pay for the last semester. Instead of getting a job, looking for scholarships, or applying for financial aid, he put his last semester of college on his credit card.
Right off the bat, he was paying 19% on over $10,000 in student loan debt. He only paid the minimum balance on his card while he was in school. From the time that I first met him to shortly after we both graduated from college and landed jobs at the same company, he has been plagued by that credit card debt.
Related article: Teaching Kids About Their Student Loan Options
The one good thing was that he quickly saw the mistake that he made. He soon became obsessed with learning as much financial information as he could in order to get himself out of that mess as quickly as possible.
His favorite TV personality was Suze Orman. He use to joke that he would never make a financial move without first consulting Suze’s infinite wisdom.
A Pointed Question
During this time, I was also trying to expand my personal finance knowledge. I figured that I would tune into Suze Orman as well. One time, she wanted to assess how serious a listener was about getting his financials in order. She asked him how long he planned to keep his current car.
She believes that question reveals a whole lot.
“If you , ‘As long as possible,’ you get an A+,” Orman writes in a recent blog post. “Any other answer earns an F.”
Her thoughts on cars are that they are “a lousy investment” and “only lose value” over time.
She continues, “One of the best ways to build financial security is to spend the least amount possible on a car that meets your needs.”
Her point being, why get a fancy car like a BMW or Tesla when all you need is a reliable car to get you from point A to point B?
“Forget about the bells and whistles you want. Paying less helps you pay off the car faster.”
So you may think, Suze is a financial guru. Of course she would advise staying away from expensive cars. Plus, she lives in New York, so she doesn’t drive.
Those assumptions are actually not true. Back in 1987, Suze leased a BMW 750iL.
“There was a time that I was in a relationship with a very, very wealthy person and I wanted to impress this person and I didn’t have money yet, so I went out and I leased a car.”
According to Edmunds, while millennials account for only 12% of all the leases in the U.S., they lease more than any other age group in proportion to sales. Nearly 1 in 3 millennials, who obtained a new vehicle this past year, opted for a lease.
Related article: Why Leasing A Car Makes Sense For Me
Below are the total number of individuals who leased vehicles between 2006 and 2016. Clearly, these numbers include more than just millennials.
Leased automobile sales grew for the 7th consecutive year in 2016. Over the past 5 years, lease sales have grown by 91%. Leases have actually been one of the major catalysts for the increase of new vehicle sales in the U.S.
Why are consumers choosing to lease over buying a vehicle outright? In 2016, lease payments averaged $120 less than the average finance payment. For large pickups, lease payments averaged $206, representing the largest difference in all vehicles.
While lease payments are typically cheaper than paying a loan payment every month, they still add up over time. The good thing about an auto loan is that once you pay it off, you won’t have to worry about another car payment until you have to buy again. While you lease, those payments never end until you return or purchase the vehicle.
If you can’t afford to pay cash for a vehicle, Suze recommends…
Instead of leasing a car, Suze recommends that you choose a car that you can fully own within 3 years of its purchase.
“A car loan longer than 36 months is a waste of money. I know, I know, there are all those great looking ads showing how “affordable” a payment will be with a 60 month or 72 month car loan. Don’t fall for it. For starters, we need to get on the same page: A car is the worst investment. Why? Because from the moment you drive it off the lot it loses value. You will never recoup what you paid for the car when you eventually sell it. Got it? Good.”
How lousy are cars as investments?
As most of you know, vehicles are depreciating assets that drop each year.
By how much?
On average, a new car loses 19% of its original value after the first year.
After 2 years… it drops by 31%.
After 3 years… it drops by 42%.
After 4 years… it drops by 51%.
After 5 years… it drops by 60%
Why do you think the car industry tries to continue vehicle payments 5, 6 or even 7 years after purchasing? It’s because they want you to buy more car than you can afford. Each year that the dealership adds on, your monthly payment may be lower. But in turn, you’ll pay more interest in the end, which on a depreciating asset is pretty unfortunate.
If you can’t afford to pay cash for a vehicle, I recommend…
First, I recommend looking at used vehicles. Look for a gently-used vehicle that is at least 5 years old or older. Try to stay within your price range so that you can buy the vehicle outright.
If nothing falls quite into your price range, then, like Suze, I recommend that you figure out how much car you can afford on a 3-year auto loan. Will it be a high-end vehicle? Probably not. But, you don’t need a high-end vehicle. You need a safe, reliable vehicle that will get you from point A to point B.
As Will Smith once said, “We spend money that we do not have, on things we do not need, to impress people who do not care.”
Instead of buying an overly expensive vehicle, save your money. You will impress your friends when you reach retirement first.