Your Car is Making You Poor

Hows Cars Affect Your Financial Freedom

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The day I realized that my vehicles were costing me my financial freedom, I stopped caring what I drove or how my car looked. That’s not to say that I’m okay driving a 1970’s junker, but I also don’t need to be driving around a Lamborghini either.

If I said that going to a dealership and buying a brand new car off the lot wasn’t tempting, I’d be lying. The shine, the new car smell, that 70,000 mile warranty — it’s all so tempting. But financial freedom is infinitely more important to me.

First, an embarrassing story

During college, my parents loaned me the family car — a 2003 Honda Accord. While it was a little older, and had 150,000 miles on it, it was very reliable and got me from point ‘A’ to ‘B’. Upon graduating, my parents took the car back and essentially said, “You’ve got a big-boy job now. You can afford something on your own.”

I searched online for a couple weeks, and found a good, reliable replacement. It too was a Honda Accord, only a few years newer, with many less miles. I really enjoyed that car. It was reliable, had all the options I wanted, and I got compliments on it everywhere I went.

One day about a year later, my girlfriend at the time, pulled up in a brand new car. Seeing her drive a new vehicle gave me an itch that I just had to scratch. I pulled into the Toyota dealership a couple days later “just to look”. I left the dealership that day in a shiny red Camry. Not only had they taken me to the cleaners on my trade-in, I also paid $4,000 over book price for that car.

Are you feeling sorry for me, yet? Just wait. It gets worse.

Six months after driving the Camry, another friend of mine pulled up to my house in a gorgeous Ford F-150. Can you guess what happened next? You got it — I sold the Camry, with $6,000 in negative equity, and rolled it into a beautiful F-150 just like hers.

I loved that pickup. I got compliments on it everywhere I went as well, and that felt good. Deep down, however, I always knew that it was too much — both vehicle wise, and from a financial perspective too. By the time I finished paying insurance, gas, and payment each month, my wallet was almost $800 lighter.

No car is worth throwing away your financial freedom

Please don’t take that story to mean that driving a brand new pickup truck is a bad thing. However, for my personal situation at the time, I could not afford that vehicle. It was making me more and more poor with each passing month. Luckily, I had a realization before it was too late, and ditched the pickup.

Sadly, I think this is all too common for most Americans. Too many people are giving up financial freedom their entire lives because of the vehicles they choose to drive.

For most people, a house is the biggest purchase you will ever make. Second to that is your car. The difference here, however, is that even if you make a foolish decision on the house you purchase, it will (most likely) appreciate anyway. A car will always depreciate (with the exception of classics), regardless of whether it is new or used.

Here at SaneCents, we’re in the business of making you money, not throwing it away. If you purchase a car new off the lot, it will lose about 20% of its value within the first year. That means that if you were to buy a brand new car today for $30,000, it would only be worth $24,000 next year. You can expect to lose an additional 15% for years two and three after that.

Pride

For me, my vehicle purchases were based purely off emotions rather than head knowledge. Whenever I saw something different that I wanted, I rationalized it. And because of that, I ended up paying dearly (both literally and figuratively). I also realized through my various purchases that I like change. I get tired of the status quo and liked trying out something new. What I should have done is take a different route to work that week, or tested out a new restaurant. Instead, I threw thousands of dollars down the drain.

I had to step back and mentally ask myself why I was making all these rash decisions, and it came down to one thing — pride. I loved the way I looked in a new vehicle, and I loved the comments that I would get as I was leaving the parking lot after work. “Man, that’s a nice truck. Maybe I’ll be able to afford one like that someday.” The thing, however, was that I couldn’t afford it either, but I looked like I could.

The problem with our society is that we look down upon others so much because of what we drive. Why should that matter? Instead of looking up to people with a shiny new car, we should be cheering on those that are driving their 25-year old junker because it’s still running.

When I realized that what I was driving was a status symbol for me, I quickly sold the pickup.

I sleep better at night

I never thought that a good night’s rest would be a byproduct of getting rid of my car payment. Had you asked me a few months prior whether or not my auto loan was stressing me out, I would’ve honestly told you “no”, but once it was gone, I felt rich.

I once again had a disposable income. I stopped stressing about the $25 spent here, and the $40 there. This alone was worth ditching the car payment. Rather than meticulously trying to get my checkbook to balance and make the paycheck stretch the rest of the month, life just felt better. The sun quite literally shined brighter on my life.

I downgraded to a 20-year old pickup, which cost me $3,000. It had dings, it had scratches, the body was rusting out on one side, the paint was sun-faded, and the clear coat was chipping. But you know what? I owned it free and clear. No car payment was so liberating.

The day I bought it, I drove to the gas station to fill up. As I was getting out, I accidentally opened the door too wide, and slightly bumped it against the cement barrier at the pump. I grimaced for half a second, then realized, “Oh. This isn’t my nice pickup.” My truck was already covered in dents and scratches, what’s one more? Previously, it would’ve irritated me the rest of the day and every day forward.

Should you never buy a new car?

I wouldn’t quite go that far. There are a lot of pros to having a brand new vehicle. But I would highly recommend having your finances in order and be well established before doing so. To me, having an additional $400-500/month to throw into an investment account or pay off debt is a much better use of money.

If a new/newer vehicle really is that important to you, instead of pulling out a massive car loan, set aside the money you would be spending on a car payment, and dump it into a savings account. When the time comes, you’ll be able to pay for that car entirely with cash.

How much car should I buy

Many will scoff at this, but a general rule of thumb is to spend no more than 10% of your gross annual income on your vehicle. That means that if you bring home $50,000/yr, you should spend a maximum of $5,000 on your car. This is the rule I try to abide by. Critics might say, “You can’t buy a reliable car with $5,000”, but I completely disagree. Both of my vehicles are worth less than $4,000 and have been very reliable.

“If you will live like no one else, later you can live like no one else.” -Dave Ramsey

The great thing you’ll find, too, is that cars in this price range don’t depreciate very quickly. You may buy a vehicle today for $4,000 and then be able to turn around and sell it for just the same, if not more, two to three years from now.

I work with a guy who has driven a 1998 Ford Taurus for as long as I’ve known him. He bought it for $1,200 with 180,000 miles on it. This past week, he just sold it with more than 240,000 miles on it. He sold it for $1,500. Not only did he get a free car for all those years, he also made $300 (excluding maintenance, etc, but you’ll have that on any vehicle). I don’t know about you, but to me, that’s a pretty good return.

When you begin to realize that a car is simply a means of transportation, it becomes easier to stomach the thought of driving something less-nice. A $5,000 car will get you to the grocery store the same that a $50,000 car will.

Break the car-payment cycle

The key takeaway from this article is to know that you can be free from a car payment for the rest of your life. Many Americans believe that a car payment is simply a way of life, and they’ll have one forever. Pay off your cars as quickly as possible (or sell it if you can’t pay it off relatively soon). From there, begin saving for your next car with cash, start plugging the difference in investment funds, and see your wealth multiply exponentially.

3 comments

  1. SaneCents | Making Sense Out of Cents

    […] The car you drive is making you poor. If you buy a brand new car off the lot, it will lose 20% of its value within the first year. Years two and three, it will lose an additional 15%. I don’t know about you, but that doesn’t sound like a great investment to me. Cars are NOT investments, and should not be treated as such. […]

  2. SaneCents | Making Sense Out of Cents

    […] example, a mortgage payment should be no more than 25% of your gross monthly pay. A car should be no more than 10% of your gross annual salary. When it comes to honeymooning, however, I know of no such […]

  3. SaneCents | Making Sense Out of Cents

    […] that were the case, then, why do we spend so much money on depreciating assets? Cars, restaurants, consumer debt. All of these things take money out of our pocket, not add to […]

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