The average car payment is $500 per month. Most people live with a car payment their whole lives, and besides housing, it’s their largest expense.
A Multi-Millionaire or a New-Car Owner?
If you invested $500 per month from age 25 to age 65 in a mutual fund averaging 12 percent (the eighty-year stock market average), you would have over $5 million, says Dave Ramsey, best-selling personal finance author and host of the Dave Ramsey radio show. That is why Ramsey thinks that “taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth.”
I have just finished reading Ramsey’s Total Money Makeover and I was inspired. I love how he spells out a plan of attack for getting out of debt and then saving money for the future.
Buying a new car or leasing a new car seems pretty normal these days, but since Ramsey is passionate that new cars are a bad deal, I thought it could be a good topic for discussion.
But Who Can Buy Cars with Cash?
So how do you buy a car if you don’t finance it? You could put $500 in a piggy bank for just ten months and you would have enough for a $5000 used car, says Ramsey. Or 20 months for a $10,000 used car (which happens to be the kind of car I drive). You can read more about my car in this article I wrote at Parentables: How I Saved $11,000 on My New Car (and You Can Too).
Granted, Dave Ramsey is an anti-debt zealot. But even though he is now a multi-millionaire and he clearly loves cars, he refuses to buy a new car. If you’ve read The Millionaire Next Door, you’ll know that the average millionaire drives a second-hand car.
Ramsey thinks it’s because people who are smart with money are not going to buy something that loses over half its value in the first four years. That is almost $100 per week in lost value, and to understand the concept, Ramsey suggests we open our window on the way to work once a week and throw out a $100 bill. So even if you are not paying interest in a car loan, the new car deal is still costing you dearly.
What about Leasing?
I looked into leasing the last time we needed a car, because I didn’t really get if it was a good deal or not. Consumer Reports and Smart Money magazine think that leasing a car is the worst way to get a car, and Ramsey shows us why.
Leasing is the car industry’s largest money-maker because, even though you are technically renting the car, the dealer is also charging you interest. So your monthly lease payment not only covers the loss of the car’s value as you drive it, Ramsey explains, but it includes hefty interest that you pay for that new-car smell. “The auto industry lobbyists are so powerful that the law does not require full lender disclosure,” according to Ramsey, but he estimates that the average interest rate is 14%.
Then there are the charges for going over the allotted mileage and the penalties for “excessive wear and tear,” which they supposedly get you for every time.
You Can Still Have Fun with Cars
There’s something with men and cars. From the age of one, my son Mark has been obsessed, and his little brother is equally fascinated. J.D. Roth of Get Rich Slowly is very open about his obsession with Mini Coopers. Ramsey still loves cars but he pays cash, and he buys (expensive) used cars.
I agree that if something gives you great pleasure, you should either make room in the budget or save up (not go into debt). My husband drives an Audi TT, a darling little sportscar, which he got for a great price used from eBay. It was eight years old when he bought it, but in great condition, and it continues to make him happy.
So I’m not saying that love of material things is bad. But there are smart ways we can satisfy our desires.
And after all this talk, I can see the writing on the wall. One day we will have more (I hope a lot more) money, but if we’re smart, we’ll still be buying used cars. Oh well, that’s OK. I’m one of those weird people who doesn’t even like the new car smell.
For more on how to save money on cars, there is Dave Ramsey’s video Drive Free, Retire Rich. Or if you are thinking of saving even more money by bypassing the car completely, J.D. Roth recommends How to Live Well Without Owning a Car.
So what about you? Do you love new cars? Do you think you could be swayed into buying a used one if you could get rich slowly? Let us know in the comments!