Dorkfish
08-28-2007, 06:23 PM
And now, by popular demand from some seriously bored individuals: Part Deux of Fun Money Math Facts!! When we left off last time (roughly 8 months ago), I had promised to give you the real skinny on a few other subjects, including the stupidity of car payments, the real story on rental homes, who wins with credit cards, and how the most successful marketing campaign in the history of mankind has the majority of Americans believing they cannot have what they want if they don't borrow the money for it. So here we go:
Car Payments - "Everybody has a car payment"; "I'll always have a car payment so I may as well have a nice car"; "Zero percent is smart because I keep my money in the bank earning interest". Oof. The conventional wisdom surrounding the purchase of cars is astoundingly wrong-headed. This topic is so immersed in stupidity it deserves it's own thread.
TOO MUCH FOR TOO LONG: The average car payment in the United States today is $447/month. Car prices have inflated radically in the last 30 years, so repayment terms have gotten far longer just to keep the payments in that area. So right off the bat, that's 2 losses: paid too much for the car and stretched my loan term out to roughly the lifespan of the car (I wonder if that's a coincidence?).
LIKE A ROCK: That's how the value of your new car is dropping. New cars lose, on average, 60% of their value in the first 4 years. 4x52=208 weeks in 4 years. 60% of the average new car price of $28,500=17100/208=$82/week in lost value. Once a week, drive your pal to work. Stop at Starbucks and buy both of you a cappucino and a muffin. Pay with a $100 bill. Get out on the freeway and throw the change out the window. That's what's going on with your new car's value. Far from "Zero Percent", ain't it?
HOPE YOU LIKE THE CAR: "Opportunity cost" is a term pointy-headed academics use to describe what you lose by doing X instead of Y with money. $447/month in a decent mutual fund returning 10% over the average of your working life - age 20 to age 65 is $4,685,675.00.
ZERO PERCENT: First you're buying new, so you're taking a butt-kicking in depreciation. Second, you're very unlikely to get much of a deal on the car if you do get the Zero Percent deal. Third, only about 25% of buyers actually qualify for the Zero Percent financing deal. Finally, most of the other 75% go ahead and buy the car anyway at whatever loan terms they can get. There. The dirty little secret of how Ford, GM, and Chrysler stayed in business while giving away "free money" for all those months.
WHAT TO DO: Don't buy it if you can't pay for it. Period. Save up that $447/month. Quit rolling your eyes. You're prepared to believe it's easy to do as a payment but impossible to do as a savings plan. Stop that. Save the money up for 6 months and get yourself into a crappy-looking, hail-damaged, little $2,500 get-around car. Keep saving the money. A year later you're selling the little beater for $2,000, adding the $5,400 you've saved and buying a nice $7,500 car that you can drive comfortably for 3 years or so because it's actually about a $10,000 car you bought from a desperate seller. So now, you can sell your $7,500 car for $6,000, add your $17,000 of saved money and get into a genuinely nice 3 year old car. Start this plan at age 22 and by age 27 you're driving a very nice paid-for car while all your friends are hugely upside down in a car they hate and one job layoff away from a late-night visit from the repo man. Buy 2 year old and older cars. Let someone else eat the depreciation. Buy from individuals, not dealerships.
MYTHS AND GIBBERISH:
"We'll pay off your loan!!" - They're not paying off ANYTHING. They are paying you wholesale price for your car, and rolling the difference between that price and what you owe on your current car (how upside down you are) into the loan for your new car. This guarantees your are massively upside down for many years to come. A gerbil in a wheel.
"Leasing is smart!! Rich people lease their vehicles!!". Actual rich people drive paid-for 2 year old and older cars, normally domestic large sedans or pickups. People who want to LOOK rich lease their vehicles. It's part of the "I'll always have a car payment" mantra the lenders and dealers have sold you on. Payments, payments, payments and NEVER OWN ANYTHING. How could you possibly think that's smart? The dealers make 3-4 times more money on the sale of leases than they do on cash purchases which is why they push them so hard.
"What kind of payment are you lookin for?". They can make that number happen almost no matter what.
"I HAD to get a new car". Repairs, gas mileage, can't have a car seat in anything but a new minivan. It's all crap. You don't HAVE to get a new car. Spending $25,000 on a new car to avoid spending $1,000 on repairs every year is the kind of nonsense that surrounds car buying. Gas mileage is another one. If you buy a car that averages 20mpg more than what you've got (highly unlikely) and drive 15,000 miles per year, that's $100/month. Yeah, you can't affort NOT to spend $28,000 to save a hundred a month.
"Buying a used car is just buying someone else's problem". Big time bullcrap. Today's cars with their EFI, electronic ignitions, CAD designed engines etc., are virtually bulletproof compared to the points, condensers and carburetors of yesteryear. There are also near limitless resources like KBB, Edmunds, Consumer Reports, JD Power, Carfax and all the rest to compare reliability of cars. Look at autotrader.com and see how many different models of car are being sold with over 100,000 trouble-free miles on them, a good clue that a 50,000 to 70,000 mile example of the same car would give several good years of service.
"But Gixxers are $10,000!! That'll take me forever to save up!!". Waaaa. Quit whinin like a 3 year old on the cereal aisle. You can't have everything you want when you want it. Grow the hell up. If you don't have the money, you can't afford it. If you were really good with money - you'd have the money. If you make so much money you can "easily afford" the payment, then great, save the money and buy the bike. But please quit telling me payments are somehow easier than saving.
THE VERDICT: Cars (and motorcycles) are the single largest things we buy that go down in value. You should pay very close attention to making the amount of money you have in this rapidly-depreciating item as small as possible. Meanwhile, go build so much wealth that buying a car affects you financially about as much a normal broke American buying a pizza. I'm serious. You. You can be that wealthy. But you simply cannot do wealth building and car payments at the same time. So don't. Pay yourself that payment. Make that money your asset instead of promising the bank 5 or 6 years of income you haven't even earned yet.
Car Payments - "Everybody has a car payment"; "I'll always have a car payment so I may as well have a nice car"; "Zero percent is smart because I keep my money in the bank earning interest". Oof. The conventional wisdom surrounding the purchase of cars is astoundingly wrong-headed. This topic is so immersed in stupidity it deserves it's own thread.
TOO MUCH FOR TOO LONG: The average car payment in the United States today is $447/month. Car prices have inflated radically in the last 30 years, so repayment terms have gotten far longer just to keep the payments in that area. So right off the bat, that's 2 losses: paid too much for the car and stretched my loan term out to roughly the lifespan of the car (I wonder if that's a coincidence?).
LIKE A ROCK: That's how the value of your new car is dropping. New cars lose, on average, 60% of their value in the first 4 years. 4x52=208 weeks in 4 years. 60% of the average new car price of $28,500=17100/208=$82/week in lost value. Once a week, drive your pal to work. Stop at Starbucks and buy both of you a cappucino and a muffin. Pay with a $100 bill. Get out on the freeway and throw the change out the window. That's what's going on with your new car's value. Far from "Zero Percent", ain't it?
HOPE YOU LIKE THE CAR: "Opportunity cost" is a term pointy-headed academics use to describe what you lose by doing X instead of Y with money. $447/month in a decent mutual fund returning 10% over the average of your working life - age 20 to age 65 is $4,685,675.00.
ZERO PERCENT: First you're buying new, so you're taking a butt-kicking in depreciation. Second, you're very unlikely to get much of a deal on the car if you do get the Zero Percent deal. Third, only about 25% of buyers actually qualify for the Zero Percent financing deal. Finally, most of the other 75% go ahead and buy the car anyway at whatever loan terms they can get. There. The dirty little secret of how Ford, GM, and Chrysler stayed in business while giving away "free money" for all those months.
WHAT TO DO: Don't buy it if you can't pay for it. Period. Save up that $447/month. Quit rolling your eyes. You're prepared to believe it's easy to do as a payment but impossible to do as a savings plan. Stop that. Save the money up for 6 months and get yourself into a crappy-looking, hail-damaged, little $2,500 get-around car. Keep saving the money. A year later you're selling the little beater for $2,000, adding the $5,400 you've saved and buying a nice $7,500 car that you can drive comfortably for 3 years or so because it's actually about a $10,000 car you bought from a desperate seller. So now, you can sell your $7,500 car for $6,000, add your $17,000 of saved money and get into a genuinely nice 3 year old car. Start this plan at age 22 and by age 27 you're driving a very nice paid-for car while all your friends are hugely upside down in a car they hate and one job layoff away from a late-night visit from the repo man. Buy 2 year old and older cars. Let someone else eat the depreciation. Buy from individuals, not dealerships.
MYTHS AND GIBBERISH:
"We'll pay off your loan!!" - They're not paying off ANYTHING. They are paying you wholesale price for your car, and rolling the difference between that price and what you owe on your current car (how upside down you are) into the loan for your new car. This guarantees your are massively upside down for many years to come. A gerbil in a wheel.
"Leasing is smart!! Rich people lease their vehicles!!". Actual rich people drive paid-for 2 year old and older cars, normally domestic large sedans or pickups. People who want to LOOK rich lease their vehicles. It's part of the "I'll always have a car payment" mantra the lenders and dealers have sold you on. Payments, payments, payments and NEVER OWN ANYTHING. How could you possibly think that's smart? The dealers make 3-4 times more money on the sale of leases than they do on cash purchases which is why they push them so hard.
"What kind of payment are you lookin for?". They can make that number happen almost no matter what.
"I HAD to get a new car". Repairs, gas mileage, can't have a car seat in anything but a new minivan. It's all crap. You don't HAVE to get a new car. Spending $25,000 on a new car to avoid spending $1,000 on repairs every year is the kind of nonsense that surrounds car buying. Gas mileage is another one. If you buy a car that averages 20mpg more than what you've got (highly unlikely) and drive 15,000 miles per year, that's $100/month. Yeah, you can't affort NOT to spend $28,000 to save a hundred a month.
"Buying a used car is just buying someone else's problem". Big time bullcrap. Today's cars with their EFI, electronic ignitions, CAD designed engines etc., are virtually bulletproof compared to the points, condensers and carburetors of yesteryear. There are also near limitless resources like KBB, Edmunds, Consumer Reports, JD Power, Carfax and all the rest to compare reliability of cars. Look at autotrader.com and see how many different models of car are being sold with over 100,000 trouble-free miles on them, a good clue that a 50,000 to 70,000 mile example of the same car would give several good years of service.
"But Gixxers are $10,000!! That'll take me forever to save up!!". Waaaa. Quit whinin like a 3 year old on the cereal aisle. You can't have everything you want when you want it. Grow the hell up. If you don't have the money, you can't afford it. If you were really good with money - you'd have the money. If you make so much money you can "easily afford" the payment, then great, save the money and buy the bike. But please quit telling me payments are somehow easier than saving.
THE VERDICT: Cars (and motorcycles) are the single largest things we buy that go down in value. You should pay very close attention to making the amount of money you have in this rapidly-depreciating item as small as possible. Meanwhile, go build so much wealth that buying a car affects you financially about as much a normal broke American buying a pizza. I'm serious. You. You can be that wealthy. But you simply cannot do wealth building and car payments at the same time. So don't. Pay yourself that payment. Make that money your asset instead of promising the bank 5 or 6 years of income you haven't even earned yet.