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Financial Freedom

Are car loans worth giving up $1 million dollars?

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Ferrari 458, Ferrari, 458, Spider, Red, Sports Car

If you have seen the news headlines recently, then you know many people are in debt up to their eyeballs.

What you may not have known is that car loans are starting to become an even bigger drain on finances than people ever thought possible.

It was reported that 7 million Americans are 90 days delinquent on auto loans. It was even in the news that in the UK financing is become all the norm and putting lots of people in debt. Similar to American consumers, British consumers are driving themselves into the red.

It makes you wonder if financing or leasing a vehicle the fast lane to debt?

Many seem to think so. Myself included.

If you have been reading my posts, you know how I feel about cars. They put you on the fast track to bebtville, if you are not careful.

So, how can financing cars cost you $1 million dollars?

I’ll show you.

A LOOK BACK THROUGH TIME

Image result for back to the future gifs

I may not be able to take you back in time by going 88 miles an hour like in the movie Back to the Future, but I can give you a glimpse into what things cost by providing you the data here.

Back when Henry Ford was working on the Model T vehicle for the Ford dealership, he believed in pricing his vehicles at a rate that even his employees could afford. He said to pay a fair wage good enough so that his factory workers could afford to buy his car. Oh how things have changed.

CEO’s used to make 20 times their employees wages on average, now they make 300 times more.

As wages have stagnated since the 1970’s, but the cost of everything has gone up, it has made it very difficult for people to afford the price of a vehicle today.

Let’s talk about the average cost of a car in 2019.

COMPARISON SHOPPING

I will give you a quick rundown of the average cost of homes and cars over the last few decades.

This is a comparison of prices over the last 70 years.

Average Cost Of New Home Homes
1930 $3,845.00 , 1940 $3,920.00, 1950 $8,450.00 , 1960 $12,700.00 , 1970 $23,450.00 , 1980 $68,700.00 , 1990 $123,000.00 , 2008 $238,880 , 2013 $289,500 ,
Average Wages 
1930 $1,970.00 , 1940 $1,725.00, 1950 $3,210.00 , 1960 $5,315.00, 1970 $9,400.00 , 1980 $19,500.00 , 1990 $28,960.00 , 2008 $40,523 , 2012 $44,321 ,
Average Cost of New Car Cars 
1930 $600.00 , 1940 $850.00, 1950 $1,510.00 , 1960 $2,600.00 , 
1970 $3,450.00 , 1980 $7,200.00 , 1990 $16,950.00 , 2008 $27,958 , 2013 $31,352 ,
Average Cost Gallon Of Gas 
1930 10 cents , 1940 11 cents , 1950 18 cents , 1960 25 cents , 
1970 36 cents , 1980 $1.19 , 1990 $1.34 , 2009 $2.051 , 2013 $3.80,
Average Cost Loaf of Bread Food 
1930 9 cents , 1940 10 cents , 1950 12 cents , 1960 22 cents , 
1970 25 cents , 1980 50 cents , 1990 70 cents , 2008 $2.79 , 2013 $1.98 ,
Average Cost 1lb Hamburger Meat 
1930 12 cents , 1940 20 cents , 1950 30 cents , 1960 45 cents , 
1970 70 cents , 1980 99 cents , 1990 89 cents , 2009 $3.99 , 2013 $4.68

Prices retrieved from http://www.thepeoplehistory.com/70yearsofpricechange.html

If you focus just on the average cost of new cars, you will notice that a car that was $600 in 1930 is now $31,352 in 2013. The cost of a car has gone up over 5000% in 90 years. Wages have gone up 2250% in the same amount of time.

According to the U.S. Census Bureau, median household income in the United States is $56,516 in 2015. The price of cars have outpaced the increase in wages.

That’s something to think about right there.

WHY SHOULD I FINANCE OR LEASE A CAR?

People used to get around by horse and buggy until the combustion engine was invented around 1885. Before that, people would rarely go more than 10 miles from home. That meant you worked, lived, and played within a 10-mile radius of home for your entire life.

Once the automobile was introduced, people were then able to work further from home. This provided more opportunities.

However, the price of cars has become so inflated that people are having to decide between paying for utilities or car payments.

If having a car was so great, then why have wages not kept up with inflation enough for people to truly be able to continue to afford and enjoy them. I feel the same way about clothes. If your job wanted you to dress in couture, then they should pay you couture wages.

My sister once said that if a job wanted you to dress in suits, then they would pay you enough for that. If they want you to wear designer clothes, but only pay minimum wage, then they get Target and Walmart. Haha. I laughed so hard at that. Cause it’s true.

When you find yourself needing a car, why not buy what is affordable?

You could finance a car that you plan to own or lease a car you plan to trade-in and trade-up in a few years. Either way, it’s going to cost you.

I say finance to own. Actually, if you can, I prefer you pay cash for all appliances and that includes a car.

HOW TO SAVE $1 MILLION DOLLARS BY NOT BUYING A CAR

Let me tell you story.

I’ll paint you a picture, like Sophia would in Golden Girls.

Image result for golden girls picture this gif

Picture it: Washington DC 2003…

It was a brisk day in early Spring. A car salesman was trying to sell me a more expensive model of the car I wanted, but I declined.

While I waited to sign on the dotted line, I was so nervous my hands were sweating. It took all day, but I finally got my new car. Sticker price: $24,000.

I was informed that I would be paying $450 a month. I walked out and was happy to have a brand new car. Skipping merrily along my way before reality would sink in.

A mere three years later, as I wrote out that check, I was sick of writing it by then and told myself NEVER again!

I finally paid that car off in 2009. And am happy to report I have not had a car loan since. I spent about 6 years of my adult life paying car notes. I promised myself never again. I have not had a car payment in a decade. I used that money to pay off debt, save, and invest. I turned that car payment into $100,000 in the stock market.

See my post How I turned a $450 car payment into $100,000

And check out my other posts on cars.

A car and nothing more

I won’t stop now, cause it’s Ford cars for life

If you want to be wealthy, drive a Ford

I also started saving thousands of dollars in a rainy day fund.

Check out my ebook and See my post How Millennial Money inspired me to start saving $13,333.06 a year

After doing some math, I found out that $100,000 invested in the stock market could turn into $1 million dollars in 30 years. In addition, if you were to put $5,500 in a Roth IRA for 35 years at an 8% return, you could net a $1 million-dollar portfolio.

Don’t think you can swing that? I think you can. I’ll tell you why.

You could spend a couple hundred grand on cars in a lifetime.

Let me show you how.

The average car payment is over $500 a month. According to Nerdwallet, the average is $530 a month for a car note. That is $6,000 a year. If you are paying that, then that is your retirement money right there.

If you buy a new car every 5 years, at $34,000, then over 30 years you would have spent $204,000. And that is just the sticker price! That does not include interest, gas, maintenance, car washes or accessories like a steering wheel cover.

If you can just save a few thousand dollars and buy a car for cash, then you can save yourself thousands of dollars in interest and more. You could slowly trade up every couple of years as you save more cash and upgrade your car.

Do not give up potentially $1 million dollars on cars because no vehicle is worth giving up that.  

Automobiles, Financial Freedom

I won’t stop now, cause it’s Ford cars for life

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If you have been reading my posts, by now you know I think the worst waste of money by far is a car.

Money and relationships 3-2-1

A car and nothing more

If you want to be wealthy drive a Ford

Life is good without a car payment

This is my latte factor. I call it the fancy car syndrome. If it’s shiny and new, people want it. Especially, if it’s a car. People can waste a couple hundred-grand just to be able to drive from the corner store and back home. I think people should examine the amounts spent on buying and leasing cars over a lifetime not just over the next 36 to 72 months.

What I drive. I personally own a Ford. I have driven one for over 13 years. My car has over 150,000 miles. It has a dent in the side and costs a minimum of $1500 to fix a year, but I still drive it. Why you ask? It’s simple. I used to spend $450 a month on a car note. Now I don’t. That’s $5400 a year. I was able to direct that money into savings and debt repayment.

Let me give you something to think about it. Two people walk into a car dealership. Customer A decides on a low-cost model car with great gas mileage for $15,000. Customer B goes for the fancy BMW that costs $50,000.

Two customers. Customer A is frugal, cuts expenses and pays off the car in 3 years. The money they were paying per month got rerouted to savings. After 2 years, they save $10,000. This is added to the additional $5000 that was in emergency savings. Approximately, $5000 is used as a down payment on a FHA home loan. They have over $100,000 in a current 401(k). Within a few years, including making extra payments on the mortgage, the home has $15,000 worth of equity. Customer A has a net worth of $125,000.

Customer B likes to live for today, increases expenses, and takes 6 years to pay off their car. No money is going to savings and they have $500 in an emergency fund and $7000 in an old 401(k). The warranty on the BMW runs out as soon as the car is paid for and repairs cost $3500. This expense goes on plastic. After a 2 years, the credit card debt has been repaid. They take out a personal loan to go vacation and pay for additional auto repairs. They have to treat themselves for denying themselves a vacation while paying off the car. Carpe, diem! However, because of high fixed expenses, they continue to rent and are unable to afford to save for a home down payment. Customer B has a net worth of -$10,000.

Over a decade with my Ford. Over the years, a few people have laughed at me for driving an old Ford. Those same people have had money issues for years. Not that I have not had any but because I do not have a car note to worry about my money goes toward other things like vacations, retirement savings or an emergency fund. I have been growing my nest egg for years. While I have watched some of those same people go broke. Now, I’m the one whose laughing, all the way to the bank.

Not only are Ford vehicles affordable, but because they are American made, it is easier to find parts and cheaper to fix. My average repair bill is $500-$700. The lady I knew whose spouse’s BMW was sitting on bricks because he couldn’t afford the repairs had a repair bill of $8000.

Since, my car is relatively inexpensive to fix, I can save more. I also was able to lower my insurance due to not needing full coverage. However, I would not go this route with an expensive car. If the cost of repairs and the value of the car is a high variance, you could end up with a totaled car and still have a balance owed.

Let’s say my Ford had this issue, then I may owe a balance, but it could be more like $1500 I have to pay out of pocket. In contrast, the Beemer might be something like $7000.

My car may be getting older but at least I own it and can afford the repairs without having to go into a ton of debt to fix it. So, if a car salesman walks up to you and tries to push you toward a fancy expensive car, by saying things like just try it out and if you don’t like it you can stop. Just say no. And walk towards the Ford vehicles instead. They may not get as high of a commission, but you get to keep your shirt and the house does not win.