On the day of this writing, new car sales are up 50 percent from a year ago, thanks to the success of the “Employee Pricing For Everyone” marketing campaign spearheaded by General Motors and soon followed by Ford, Chrysler and various other car dealerships. Employees generally receive a three to five percent discount off the dealer invoice price, plus whatever rebates and/or incentives are being offered.
As in most advertising, what the large print gives, the small sprint takes away. It’s true, car dealerships are giving you the same discounts they extend to their employees—but offset costs, rebates and other incentives are reduced while the interest rate is up on these employee pricing discounted cars. In the end, the savings are not much of a difference from the customary rebate and other incentives generally offered to entice consumers to buy.
There’s nothing in the way of price reduction or incentive that a car dealer will offer that makes up for the 25-percent depreciation hit (reduction in value) you take on a new car the moment you drive it off the car lot. The fact remains that cars are the largest asset we buy that go down in value. Unless you’re filthy rich, you should not be purchasing a new car. I learned this the hard way.
In 2003, I caught car fever; I just had to have me a new black, fully loaded SUV. As an expert in the area of mortgages and personal finances, I knew all the negative consequences with financing and purchasing a new car, but I found a way to justify the purchase in my mind. Only two years later, my $34,000 vehicle is now worth about $17,800, according to “Kelly Blue Book.” That’s a $16,200 loss in value over a two-year period. That’s like driving down the street and throwing $169 out of the window each and every week.
New cars lose up to 70 percent of their value in the first four years. Depending on how many miles you drive per year and the physical wear and tear, it could be more. Self-made millionaires drive slightly used, paid-for cars (2 years old). They don’t believe in car payments. I’m not talking entertainers, athletes or CEOs. I’m talking about common, everyday working people, who might be your next-door neighbor. They became millionaires by investing every month what the typical American pays in car notes.
The average car payment is $378 over 63 months. I tend to work with people whose car payment is over $500 per month. Let’s say that you invested $378 every month, instead of making car payments from age 30 to age 65 (35 years). If you average a rate of return of 12 percent (which is doable), your money will grow to $2.4 million. Do you still want the car?
I understand that a car is a necessity. That, however, does not imply that we need car payments or that we take the butt whooping on depreciation. Below are some guidelines you should follow when you’re in the market for a car, if you want to drive away from poverty and into wealth.
Never buy a brand new car unless you’re rich.
Purchase a slightly used car. You get a good reliable car that is 50 percent cheaper than it was two years ago.
Never take out a car loan with payment terms longer than three years.
The goal is to get you to a point where you’re paying cash for a car. If you take out a car note longer than three years, you’ll find your car value dropping faster than your loan balance, creating a negative equity position. This is commonly referred to as “downside balance.”
Total car payments should not exceed 12 percent of your net income.
Net income, or the money you take home, is what you really have to work with. You will find yourself not able to pursue other financial goals.
Cars, trucks, boats, motorcycles and other vehicles’ total value should be less than half your annual income.
If you’re making $30,000 per year, the total value of your vehicles should be less than $15,000. Otherwise, you have too much money tied up in things that go down in value.
(Damon Carr is the owner of ACE Financial. He can be reached at (412) 856-1183 or visit his website at www.allcreditexperts.com.)
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