Financing a New Car: A Bad Investment

If you have ever read the book “The Millionaire Next Door” (Longstreet Press, 1996) you are probably already familiar with the piece of advice I am going to give you here – never finance a new car! Financing an expensive new car is one of the worst investments you can make. It is the only asset that will you will ever own that decreases in value from the minute you sign your name to the loan papers.

Today cars can cost in excess of $40,000 and will undoubtedly be traded in or sold after a few years. Yet millions of Americans stand in line for the privilege of paying interest and a high sticker price for that month-long “new car smell”. They gladly will fork over hundreds of dollars a month to drive around in something that they can show off to the neighbors or co-workers. To quote a famous television commercial, “Stop the insanity!”

Sam Walton, the founder of Wal-Mart, drove his old pickup truck to the day he died. When asked why a man in his position didn’t drive something more suitable he replied, “It’s paid for and it’s mine.” People who are serious about maximizing their savings and being able to retire early know that a new car is a poor choice when every dollar counts when building a retirement portfolio. They have specific goals in mind and know what they have to do in order to achieve them – and those goals don’t include a car payment.

Maintaining the car you already have, or purchase a good, used car will help you save a monthly car payment – a payment that can go towards other things such as your 401(k) plan or IRA. Just ask yourself this, would you rather give you money to someone else to get rich off of or would you rather keep it and make yourself rich? I think we both know the answer that!

Thanks to services like CARFAX (www.carfax.com) buying a used car isn’t the scary proposition it used to be. In fact, many people find out they can afford to buy a more luxurious car with the money they have available when they buy used than they could if they bought new. Thanks to advances in technology and manufacturing cars are staying on the road for upwards of 300,000 miles compared to cars that just 10 or 20 years ago could barely make it to 100,000 before serious mechanical problems would start to appear.

Click and Clack, the Cartalk guys (cartalk.cars.com), give this advice to their weekly listeners who call in to their syndicated radio show, “It is cheaper to maintain a car than to buy a new one”. Just look at it from a purely financial point of view, if you have a car that is paid for even if it needs a major repair, let’s say a new transmission for $2,000, that is still cheaper than a $600 a month car payment over 5 years.

If you take half the amount of money you would pay in monthly car payments and put that in a savings account then you will be prepared for any major repairs, or for the inevitable task of purchasing another car. However, unlike many others, you will be able to buy a low-mileage used car with cash and walk out the door knowing that all that money you are saving is going directly into your other investment choices and actually earning you money instead of earning the finance company additional profits.

So the next time you need to purchase a car look at sides of the puzzle. You may find that putting your money into a used car can be one of the best financial decisions you ever make!

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