Monday’s MST: How CARS Can Help You Pay Off Debt

Let me start by saying, “Don’t shoot the messenger!”  As you know, we followed Dave Ramsey’s “Total Money Makeover” to pay off all our debts, and he did not steer us wrong.  So hear me out when I tell you that if you want to pay off your debt, you HAVE to look at your car situation! 

Here are a few quotes from Dave Ramsey regarding cars and payments:

“Staying away from car payments by driving reliable used cars is what the average millionaire does; that is how he or she became a millionaire.”

“Consumer advocates, noted experts, and a good calculator will confirm that the car lease is the most expensive way to operate a vehicle.”

“A new car loses 60% of its value in the first four years”

“The average millionaire drives a two-year old car with NO payments.”

“Taking on a car payment is one of the dumbest things people do to destroy their chances of building wealth.”

Now before you close this blog, keep reading!

As you can see, if you need or want a new car, you really need to SAVE for it in order to afford it.  Think about it…if you finance a car, it’s really not even yours.  Just because everyone else does it, does not make it smart.  No offense, but there are more uneducated consumers out there than educated.  Again, I can say that because I was uneducated!  We all start there. 

The reasons you should save for your car instead of take on payments are:

• Most people’s largest monthly payment is a car payment (excluding their mortgage)
• Most people keep a car payment their entire life (that made me throw up a little in my mouth).  As soon as they’re sick of the car or it’s paid off, they get a new one.
• This one’s my favorite – If you have a $378 car payment (which is normal) your entire life, you just gave up $4,447,084 in investments!  Is a car really worth that much money!  Here’s what Dave says – “If you invested $378 per month from age 25 to age 65 (a normal working lifetime), in the average mutual fund averaging 12% (the 70 year stock market average), you would have $4,447,084.01 at age 65.  Hope you like the car!” 

So how might you go about getting a car without making payments?  SAVE your money!  You don’t even have to invest it.  If you simply put it under your mattress for several months, you would have enough to buy a car.  For example, take that $378 and save it for ten months and you will have $4,000 for a cash car!  No debt!  Then (since you’re not making a payment), you can save the same amount for another ten months and upgrade to an $8,000 car.  Do it again and get a $12,000 car.  That’s less than three years and you have a paid for car.  Obviously, you keep saving until you have your desired car.  And of course, always buy used. 

I love what Dave says about this: “Will your broke relatives and friends make fun of your junk car while you do this?  Sure they will, but that is a very good sign you are on the right track.”

*We are doing this technically with my car right now.  My car is paid for, but when we have two older kids (and especially if we have three), we will buy an SUV for space purposes.  So we’re slowly saving for a new car in a few years.  I’m bummed though because I love driving a car – gas is so cheap.  I fill up on $30 about 1-2 times a month (my job was close and now it’s even closer – haha).  I can’t imagine paying over $50 for gas!

Also, as I mentioned above, NEVER lease!  I won’t go into too much detail because Ramsey says it better in his book, but here are a couple of points regarding leasing a car:

• Since you’re renting, the industry doesn’t legally have to give full disclosure, therefore they are not required to show you the actual effective interest rate – the average interest rate on a lease is 14%!!!! 
• The value of a car decreases so by the time your lease is up and you can buy it, it’s not worth what you would have to pay for it.
• Here is an example from Ramsey’s book – “If you rent (lease) a car with a value of $22,000 for three years, and when you turn it in at the end of that three year lease the car is worth $10,000, someone has to cover the $12,000 loss.  You’re not stupid, so you know any of the auto giants aren’t going to put together a plan to lose money.  Your lease payment is designed to cover the loss in value ($12,000 spread over 36 months is equal to $333 per month), plus provide profit (the interest you pay).  Where did you get a deal in that?  You didn’t!  On top of that, there is the charge of 10-17 cents per mile for going over the allotted miles and penalties for ‘exessive wear and tear,’ which takes into account every little nick, dent, carpet tear, smudge, or smell.  You end up writing a large check just to walk away after renting your car.”  What a mess!

So whatever you do, don’t rent/lease!

Once you get rich and pay off all your debts, buy that very expensive, nice car and enjoy it!  You deserve it.  Plus those broke friends of yours will still be paying for a car and you’ll have a nice, expensive one that you actually own!  Therefore, you can use that money for other desirable things.  Yay!  I think so many young people fall into this “I deserve to have this and deserve it NOW” mindset!  We see our parents with it when we’re younger so we believe that is how we should live.  We don’t realize, they worked their butts off for it!  Plus, like I’ve said before, go to another country and see how ridiculously spoiled we are.  It’s almost sick.  Don’t get me wrong.  It is really hard to have that mindset when you live in America because so may people are living OUTSIDE their means and seem to “have it all.”  I struggled with it SO badly when we first got married.  Thank goodness my husband is strong and kept pushing and encouraging me!

You may not be able to refinance a house, go out and buy a house, or even start making extra payments next month, but you CAN do something about your car!   If you’re paying for a car right now, make a plan and sell it so you can buy a cash car and have NO payments (except for the “payments” you save for your next, more improved ride)! 

Ryan signing for his “baby”….3 years of saving and he gets his dream car!  Driving it up!