Don’t you love buying a new car? There’s something empowering about strutting onto the showroom floor and picking out your car. And any excuse will do. I remember one time telling my wife we should buy a new car because we would soon need a new set of tires!
A mindset like that leads to trouble. I learned you could buy your dream car even if your old one wasn’t paid off. The very nice finance manager would roll my excess debt from your old car into your new car loan. I took advantage of this privilege several purchases in a row. Before I knew it, I drove a car worth $8,000 less than I owed on it.
Here’s what I learned the hard way. NEVER NEVER borrow money on a depreciating asset. If you finance $20,000 to buy a car you just made the most tragic financial decision possible. You are paying interest on an asset that is plummeting in value.
As long as you have a car payment you will struggle to get ahead in your finances. [Click HERE to Tweet]
I’m going to do you a favor. I’m going to show you how to crawl out from under your car payment so you can get traction on your finances.
Here’s what I did. I sold my car for as much as possible but fell $8,000 short of the amount needed to pay it off. I went to the bank and got a signature loan for $8500 to clear the title. Then I went shopping for another car. I bought a very old rusted out Honda Accord for $700 with 145,000 miles on it.
I no longer had a $400 a month car payment but now I needed to pay back the signature loan. I used the monthly car payment money, added some to it, and paid off the signature loan in a year. Yes!
The beat up Accord? I drove it for three years and put 100,000 miles on it. Yes, it was my only car. The air conditioner didn’t work. The power window on the drivers side failed. And one time, while turning a sharp corner, the front wheel fell off.
You didn’t think this would be easy did you?
But think of what I accomplished. After one year I had no car payment and the note from the bank disappeared. Think of your car payment and multiply that by 12 months. Ask yourself this question, “What could you do with the money saved from your car payment?” In my case it amounted to an extra $5000 each year. Sure, there were repairs. But at the end of the year I had thousands of dollars to spend on other things.
You can do this. You must do this if you want to get ahead financially. And if you happen to be close to retirement it’s a no brainer. It’s not easy but you can make it happen.
Since buying that Accord years ago I’ve always paid cash for my cars. I keep a thousand or two handy in case my current car dies. Oh. That reminds me. This Monday I head to Michigan from Arizona in my rusted out minivan with 166,000 miles on the odometer. It should be an interesting trip.