New cars. We all love them. We want them, we envy those who have them. That new car smell is quite intoxicating don’t you agree?
Auto dealers know this and they use the power of our weakness for new cars to make us completely lose our minds. If you think about it, cars are not cheap. They are one of the largest purchases we make. Unlike buying a home, a car does not increase in value. In fact, it looses value significantly before the ink is dry on the purchase contract.
The average new car costs over $29,000 and the average monthly payment is $493 per month. That is quite a bit of money for a depreciating asset. After 4 years, that $29,000 car is only worth $14,000. Most payments are amortized over 5-7 years. Many people find themselves upside down on their cars for much of the life of their auto loans. That means that your car is worth less than you owe. If you wanted to sell it and pay it off, you would not be able to.
Does this sound like a sound financial decision to you? I hope not. It’s a horrible decision actually. Did you know that most millionaires do not buy new cars for this very reason? There is a better way to buy a car.
Lets make some assumptions. The average car payment is $493 per month and you can pay that otherwise you would not be able to buy a new car in the first place.
If you put $493 per month into a cookie jar for 10 months you would have $4,930. You could go out today and buy a 2008 Nissan Altima. It may not be as sexy as a new car but it is great transportation and comes with no payments.
If you are not satisfied with that then simply keep paying yourself $493 per month for another 10 months. You could sell your car and add your savings to help you buy a 2014 Ford Focus or a 2015 Nissan Versa. Both are very sensible cars only a few years old that will serve you well. If you wanted more you can keep going. Repeat this for another 10 months and you could purchase a 2016 Volkswagen Jetta. That is practically a brand new car but with no payments.
If you follow this plan, you and your friends would be making auto payments of $493 per month. The difference is that your car is getting better, newer and nicer every year while their car is getting older and worse.