I love my car. It gives me the ability to do things I used to do by feet, bike, or bus much quicker, along with a lot of things I had to rent a car for. But let’s call it like it is: a car is a money hole. If we want to be wealthy some day, we’d better be get our car-buying mindset in shape. Let’s look at why you should pay cash for a car and five classes of cars you can afford depending on your situation.
There are two tried and true ways to stay poor: buying things you can’t afford, and taking on debt for consumer goods. Most people buy cars they can’t afford and pay for them on credit.
A personal car is not an investment, it’s a rapidly depreciating consumer good. A car loses 60-70 percent of of its value in the first four years, and then just keeps getting more worthless year after year. The more expensive the car, the greater lost in depreciation. Of course, a more expensive car may be more reliable, so there are pros and cons worth weighing.
You don’t want to hold debt on a depreciating asset. You’ll hear the argument that with a low interest rate you’ll make more investing the money now then you’ll pay in interest on the car. But be real, you won’t invest the difference now, you’ll spend it. Then you’ll be double worse off. If you want extra to invest, buy a cheaper car.
Here are five classes of cars to save and pay cash for depending on your situation:
- The “Beater” (under $3k) – You’re income is very tight and you’re buried in debt. You have the fighting spirit. You can hardly keep your head above the water and it’s time to sink or swim. If you’re going to swim, you’ve got to cut spending drastically, maybe sell the car you’re making payments on, and get something cheap until you climb out of the deep, dark abyss. Unless you or someone you trust has mechanical experience, I wouldn’t recommend a car under $1,000, maybe $1,500, but it’s not hard to find something that will make due for now in the $1,500 to $3k range. It is most critical to find a trustworthy seller. If he seems like a snake, move on.
- The “Economist” ($3-7k) – You’ve cut your spending down drastically and are chopping away at debts. In the meantime, you’ve been able to save some extra money for a car that doesn’t look like you could live under the bridge in it. It’s time to shop for a decent sedan you don’t have to worry about. There’s nothing wrong with being an Economist for life, even if you can afford to be a Millionaire. This works.
- The “Adventurer” ($7-12k) – You’re out of debt, have a comfortable emergency fund, and are putting money away every month. You need something you can find adventure in while you’re earning your way to financial freedom. It’s time for four-wheel drive… and perhaps, leather seats. You can find a great car with 100k miles on it, maybe 8-10 years old, that will serve you well for several years. We paid $8k cash for a nine-year old Toyota Highlander with 150k miles after clearing all our debt (my debt), paying cash for our wedding, and scraping by without a car for over a year.
- The “Millionaire” ($12-18k) – Once you’ve hit a net worth of $1,000,000, indulge. For $18k you should be able to find just about any car you want passed that has past the “rapidly depreciating” stage of the first four years. By now you’re sensible money ways are habit, so no need to throw them out the window and spend more.
- The “Idiot… or enthusiast” ($18k and up) – I can see no sensible reason to pay more than $18… maybe 20k for a car… unless cars are your thing. If you’ve made a million and just love cars, have fun. Otherwise, don’t be an idiot, leave someone else to lose the first 60-70 percent and then happily take it off his hands.
How much extra cash would you have every month if your car was paid off?