According to USA Today the average car payment in America is $551.00 for 69 months. A recent study by the Federal Reserve Bank of New York found that 7 million Americans are more than 3 months behind on their car payments. This begs the question; “Why are so many people willing to spend so much money on cars that they can’t afford?”.
Through much introspection, and many hours of research I think I’ve narrowed it down to THREE main reasons.
- Status
Unfortunately, I think this is the most common reason people overextend themselves to get a car. They want to impress people, they want to be perceived as successful, even if they’re actually up to their eyeballs in debt. As the saying goes; “people buy things they can’t afford, with money they don’t have, to impress people they don’t like.”.
2. Memories
You might buy a car simply because it reminds you of your dad’s old 1969 Camaro, that you two used to work on together on the weekends. While I would contend that you still shouldn’t buy it if you can’t afford it, I understand the inclination to do so.
3. Business/Work
I personally identify with this one the most. As many of you know, outside of my blog, podcasts, and YouTube channel, I have owned a few businesses and currently own a logistics company. While the majority of the time I subcontract my routes out, I still have to have my own fleet of vehicles. These vehicles must be both reliable and presentable, often times they are newer. However, I mitigate the cost by purchasing the vehicles used, and through the business, which has many advantages that we’ll discuss in detail another time.
Other than owning a logistics company or courier company, perhaps you’re an Uber driver, and your car makes you money. Or maybe you’re in sales, such as a real estate agent, where your car can directly affect your bottom line. If you roll up in a 1998 Toyota Corolla, the client may perceive you as a poor agent. Maybe they’ll assume you can’t close on enough deals to afford a nicer car. Conversely, if you pull up in a brand new Lexus, they’ll probably perceive you as a successful agent. Even if you’re not. The old “fake it until you make it” is a saying for a reason.
While the reasons why people make bad financial decisions is interesting. Let’s look at some data, and talk about what you can do as an alternative.
As mentioned earlier, according to USA Today the average car payment in America is $551.00 for 69 months. Not accounting for the fact that new cars typically depreciate by 63% in the first 5 years. Or the fact that you still have to pay for insurance, tires, brakes, oil changes, tune-ups, etc. And not accounting for the interest, that’s $38,019.00 on a car!
What If instead, you were to take that same amount and invest it at a modest 7% ROI, for 69 months? You would have $48,064.39! That’s $10,045.39 for free! You didn’t have to do anything. When you take into consideration that many people have a car payment their entire life (40+ years). If they took that car payment, and invested it for 40 years at the age of 25. By the time they were 65 years old. They would have $1,412,386.48! That my friends is how you become free…