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Why Your Car Is Keeping You Poor-Part I

The New Car Smell

What kind of car do you drive? Your car may say a lot about you, but what you don’t want it to say is that you wasted your future retirement in owning cars. According to AAA Research, the average American spends close to $800 on a car payment monthly, that’s $9600 a year. If you are married, you are likely spending $1,100-1,500 per month. They are also likely buying a brand new car, which typically cost $40,000 and financing it for over 7 years, that’s 84 months of car payment. These are 2019 figures and are probably a lot higher in 2021.

Your net worth shouldn't be reflected in the value of your car. There are a lot of people that are driving in cars simply because they want to project a certain image. If you subscribe to that theory, you are likely investing far less than you pay in car payment. Ask yourself how much sense does that make? Seriously! There is so much wrong in owning a car where your payments almost look like a house payment or where you can't even afford the maintenance cost, but it looks good parked in front of your apartment, in Front of church, or gets you nice looks when you visit your friends and family. Buying such a car is a sure way to stay in debt and decrease your wealth building opportunities.

To be fair, I did the same thing back in March 2009. I purchased a brand new Land Rover LR3 2008. I thought I was being smart by buying the previous year model and shopping relentlessly online for the best price. It took weeks to find the car with the price I wanted to pay, and I even drove 2 hours from Pennsylvania to Virginia to get the car. I paid $30,000 for the car and put a $10,000 down payment. I still had student loans and a credit card bill that I just wouldn’t pay off (that’s another story on financial infidelity), but I wanted that shiny new car.

Change your mindset to build wealth

Instead of spending $800 or more on car payments, invest the money instead and buy a cheaper car. I recommend you buy a used car that represents 1/3 of your family’s annual income. For comparison, Dave Ramsey recommends not owning more than ½ of your family annual income in cars. I believe if you own more than 1/3, you are wasting money that could be used to pay for debt, buy a home or invest towards FIRE. Now, if you’re already at FIRE or if your net worth is well over a million, then you can buy whatever car you want. However, if you’re trying to build wealth, I highly recommend you stay within the 1/3 rule. And if you're trying to get to FIRE as fast as possible, then ditching the car payment will do you a world of good. Here’s a simple way to look at it the 1/3 rule.

There are lots of places to shop online for used cars, from, local dealerships, to Carmax or even Carvana. I do recommend you figure out how much you want to spend, the type of car you want, the number of years and mileage, and then search for the car. Be patient and wait for the right car that meets most, if not all, of your criteria before buying. Lastly, be willing to drive a few hours to buy your car.

Be willing to drive a cheaper car if it means meeting your financial goals.

We sold the 2008 Land Rover in 2011 because it no longer made financial sense. Over the three year period, the car had lost $10,000 in value and we sold it for $18,000. My wife got a new job as a sales manager which required her to do a lot of driving. Adding those miles on a LR2 would have incurred too much maintenance and lost in value for it to be feasible. Instead, we sold the car and purchased a 2004 Honda Accord LX for $2,500 at an auction. This car was 7 years old, had a broken radio screen, the passenger sit would not go up and down, and had a slight odor. After a week, we were able to fix the passenger sit at no cost, and cleaned it thoroughly where the smell was not noticeable (but having smelled it initially, it irritated us, when we did go in the back sit and could get a slight hint of it). My wife drove this car for 2 years before she got a used 2011 VW diesel Jetta. I gave my car to a family member and started driving the 2004 Honda.

Car as an investment?

Here’s the kicker. In 2017, we sold the 2004 Honda Accord for $2,000, that’s $500 less than what we paid for it and after we had kept the car for 6 years.

Today, I’m driving a 2015 Honda Accord Hybrid that I paid cash for after we sold the 2004 Honda. In 2018 VW gave diesel owners the choice of getting some cash or turning in their vehicles for a cash offer. We took the cash offer and purchased a 2013 Acura ILX for cash. We have since sold the 2013 Acura after my wife was offered a company car as part of her sales position. We then used the money from the sale of the car to put towards paying off our first rental property. Within our subdivision we have lots of neighbors with Mercedes-Benz in their driveway and they are probably wondering why we live in this neighborhood while my wife is driving a Ford Fusion and I have a Honda Accord.

My Dream Car

For the longest time I wanted to drive a BMW 530i. I had picked the color, all the accessories and everything. I even started putting money in an account I called a “car mutual fund account”—so I was definitely serious. But as I got closer to getting that car I realized that the money wouldn't be well spent if I went out and bought that car. I choose to delay gratification and wait. I wanted to wait until I reached my 20-year point in the military and once I got there, I decided to postpone it again and wait for my official military retirement and to get it as a retirement gift to myself. But now we’ve decided to postpone the purchase of our dream car, a Range Rover HSE, to when we’ve paid off our house!!

Rich dad poor dad wrote something that resonates with me when he said poor people buy things to try to look rich, while rich people just buy things they can afford. Seriously, why are you going in debt just so you can try to look rich?

3 Steps you can take to get from car poor to building wealth:

1-Sale your car. If you are over the 1/3 ratio, have a high car payment or still have 3 or more years of payment remaining, consider selling your car and getting something within the 1/3 rule.

2-Start saving now so that you’re able to purchase a car for cash or within your 1/3 ratio and lower your overall car debt.

3-Invest the difference and watch your wealth grow. To learn more, see Part II.

As always, if you need help, feel free to drop us an email.

It’s time to stop acting rich on a poor man's budget


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