Car Credit – Don’t Be Like Those Human Batteries in The Matrix Movie….
Here's a quick point for you ponder as you think through your savings and managing your finances. If you are financing your car, you can't afford it.
This is a real shocker for many Americans because 80-90 percent of new vehicles are financed these days. There are a ton of Americans out there loading up on debt to purchase an asset that depreciates about a third in the first two years after purchase. Car credit is just dumb.
I could throw a bunch of 9th Grade Math at you showing the consequences of buying a new car on credit. I'm not going to bother. Instead, I'm going to give you another image to ponder.
Car Credit - Don't Be The Battery Powering Someone Else's Life
Have you seen the original Matrix? I loved that movie for its creativity and disturbing storyline. Two images stood out in my mind from that movie, one positive, and one negative. The positive image was of Neo Dodging Bullets. Wouldn't that be nice? That's you once you become a financial guru--financially independent, but still hustling and working towards whatever you are most passionate about. But that's not the image I want to focus on in this post. The second was of humans serving as batteries that powered a system in which they were unconsciously exploited.
When you finance a car you can't afford and watch its value plummet while you pay interest to some stranger for years and years and years, you are serving as the financial battery that powers someone else's lifestyle, likely a very wealthy person somewhere. If you take on consumer credit with credit cards, you are serving as this battery even more so. It's sad and pathetic, and a lot of people don't know better or can't discipline themselves enough to get out of this horrendous situation.
Get Hungry And Build Your Financial Buffer ASAP
Do you want to be that person? I don't. So get hungry. Get real. Skip the car credit, and buy a used car you can afford, and build your financial buffer as quickly as possible.
(Note: there is an exception to the above. If you need to take a loan to buy a used car so that you can get to your place of employment, it goes without saying you have to do this. But most of us can build up the reserves pretty quickly such that this is no longer an issue.)
(Also, see the comment on this post from Credit Cage. There are scenarios where you could choose to finance your car at a super low rate and invest the balance. But this is not for the feint of heart.)
While I agree with the idea of buying a used car versus buying new 100% of the time, I don’t think financing a car is a bad idea. If you have good credit and you can get a good interest rate, then it makes sense to finance a car and invest your savings elsewhere. For instance, say you want to buy a $15,000 car, and you currently have the $15,000 in savings. If you can get a loan for 2% (I have a car loan right now at 1.74%), you’re looking at paying only $780 in interest on a 5 year loan. If you drop just $10k of that $15k into a ROTH IRA, like VTSAX from vanguard, and get just a 7% return (I’ve gotten 12.9% over the past 2.5 years) then you’d end up with an ending investment balance of $14,025.50 at the end of 5 years. Which means instead of buying a $15k car outright, you’ll have financed it and ended up with an extra $3,245.50 in your pocket. I like your blog. Keep up the good work!
Credit Cage. Thanks for your comment. I don’t disagree with anything you have said. Basically what you are describing, however, is using leverage to buy stocks. Just making sure you are comfortable with that scenario. If so, go for it. Personally, I don’t use leverage as an investor.
I might add that if you financed (at a low rate like you locked in) or purchased a slightly used car, you would come out way way way ahead and be able to invest the money saved on purchase price, sales taxes, yearly registration fees, and insurance costs to dramatically increase your financial position.
For most people, they won’t finance a car and put the money in a Roth. They will just be sucking wind trying to keep the ship afloat. But for those with your level of sophistication, your approach would work. The final kicker, though, is that with leverage people almost always buy a fancier more expensive car than if they forced themselves to put down cold, hard cash…..