“Cars are an expensive blind spot,” says Ryan Frailich, a New Orleans financial planner.PHOTO:FORD
Buying a car is probably your first big-ticket purchase. The good news is that if you’ve got a job and a decent credit score you’re not going to have much trouble borrowing to finance a purchase.
But it’s on you to make sure you nail a deal that not only gets you a car today, but also doesn’t shortchange your future. “Cars are an expensive blind spot,” says Ryan Frailich, a New Orleans financial planner. “People tell me they can’t save for retirement or save more for retirement, yet they don’t think anything of the fact that they are making a monthly car payment of $400 or $500, when they could have bought a less expensive car with a smaller payment.”
For example, while you may have no problem qualifying for a 60-month deal that costs you $450 a month, let’s say that you instead opt for a bit less auto bling that costs you $300 a month, and you re-direct the $150 in monthly savings into retirement savings.
At the end of the five years, you own your (five-year-old) car outright either way. But with the cheaper payment you’ve also managed to jumpstart a nice retirement fund of nearly $10,500, assuming a 6% annualized gain. If you then just leave that stash growing for another 35 years it could be worth $80,000 come retirement. And that’s just for your first car; follow this routine for every car purchase in the coming decades and you are buying more than a car, you are buying financial freedom.
“It’s not about theStarbuckslatte you don’t buy in your 20s or 30s that sets up your future,” says Allan Roth, founder of Wealth Logic financial advisory in Colorado Springs. “It’s buying a modestly priced car that you keep forever.”
Okay, maybe not forever. But certainly for a lot longer than the loan term.
For instance, after making the last $300 monthly car payment you now have $300 the following month — and for many months after — that can go toward other financial goals. Maybe plumping up an emergency fund? Three years of saving $300 a month in a bank account would leave you with nearly $11,000 tucked away. Stick with your car for a full 10 years and you will be able to save up more than $18,000 after making the final payment in month 60. Sure, some of your savings might be needed to pay for auto maintenance — if you can’t handle it out of your monthly cash flow — but you’re still likely to come out way ahead.
Yet none of that is doable if you opt for a high monthly loan payment. Even worse is if you fall into the leasing trap, which seems to be happening all too often. The car data experts at Edmunds.com say young adults are the most voracious leasers. More than one-third of millennials in 2016 were opting for leases.
The allure is understandable. The payments are lower, so you can “afford” a nicer car. But with a lease you are basically just renting a car for three years. You have the option of buying it after the initial lease period, yet few people go that route, opting instead to return the car and lease a new model with the latest tricked-out tech.
That’s setting you up for the auto equivalent of the gerbil that can’t break away from the treadmill. You just keep rolling over into a new lease, which means you will never be without a monthly car payment. You’ll be renting a car forever.
That should drive you crazy now that you understand the financial cost.
In addition to avoiding leasing, here are some tips for keeping your car costs in check:
Recognize that a car may be a necessity but it is also a lousy investment.Cars are the classic example of a depreciating asset. A new car loses about 20% of its value the moment the wheels leave the dealer lot. And its value keeps falling from there. Given that bleak return on investment, you goal should be to minimize your costs.
Buy Used.Let someone else be the sucker who buys new and absorbs the steep loses that come from depreciation in the first few years. Engineering advances over the past few decades means cars that are five or 10 years old — or even older — are still plenty reliable. (Bonus: your insurance costs will also be lower.)
Aim to Be Below Average…on Your Loan Term.The average new-car loan term is 68 months. FWIW, that’s nearly double the time it took your parents or grandparents to pay off a car in the 1970s. Stretching out payments over longer periods — which reduces the monthly bill — is how the financing world entices you to buy too much car. Choosing a car you can pay off in 36 or 48 months will free up more cash flow sooner that you can put toward more important financial goals.
Drive the Best Possible Rate Deal.Your credit score plays a leading role in determining the loan rate you are offered. FICO credit scores range from 300-850. Loan interest rates are sliced into score tiers. For example, moving from a score between 660-689 to a stronger score that falls between 690-719 can land you an interest rate that is two percentage points lower basedon recent rates. Over the life of a 48-month, $25,000 loan, you would save more than $1,100 with the lower rate.
Get a Loan Offer from Your Bank or Credit Union.The dealer will be almost as happy to finance your purchase as he is to lease you a car. But you can gain negotiating leverage by getting approved for a loan from your bank. If the dealer can offer a lower rate, great, go for it, otherwise take the bank’s deal. Or the dealer might come down to beat your bank’s offer. Either way, you come out ahead.
Author:Darik Steinbach Phone: 952-239-4290 Dated: November 8th 2017 Views: 59 About Darik: I have been selling residential real estate in Minneapolis full time for 10+ years.
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