Archives For July 2011

One question I often get is, “Should I buy a new car?”  We love our cars.  There’s no better way to let the world know you’ve “arrived” than by pulling up in a brand new car.  This time the new car scent isn’t coming from an air freshener. Oh no, it’s authentic.  The car was made for you, and you were made for it.

Only there’s one small problem.  You owe more on the car than you make in an entire year!  This is why I think you should seriously question if you should buy a new car.

We can easily justify our need for a new car.  Benjamin Franklin said it best,

“So convenient a thing it is to be a reasonable creature, since it enables one to find or make a reason for every thing one has a mind to do.”

Why do you need a new car?  Well, you tell yourself it’s dependable and your old car isn’t.  You might say, “I don’t like buying used items from other people.”  “I don’t know what I’m getting with a used car; they may not have taken good care of it.”  “I need a bigger car for the family.”  “I need a new car!”  The list of excuses goes on and on.

You may think I sound bitter toward new cars. Well, I am, and I think new cars suck!  And, I bet you’re wondering why.

I fell into the trap one year after I graduated college.  My old Chevy Lumina was running fine, but I deserved so much better than the red interior and the bobble head alligator staring at me from the dash board.  After all, I had worked hard for a full year!

The used car lot wasn’t appealing – I didn’t even question why I shouldn’t buy a new car!  I spent $28,000 on a 4×4 Xterra, but I didn’t have the money for a down payment.  You can read more about my struggle after I bought the new car here.

So, what does a $28,000 loan look like in real life?  My loan payment was $508/month for 60 months at 4% interest.  I thought I pulled one over on ’em when I walked out with a great APR.  But little did I know at the time, if I would have kept the car for the loan term, I would have paid over $31,000 after interest payments!

Do you think at I would have paid $28,000 in cash for a new car if I had it saved up?  No way!  I would have agreed with my current self in the opinion that new cars suck :).

First, I didn’t have that much saved up at the time, and second, paying a huge chunk of cash would have hurt a lot more! It’s always easier to write a small check than a big one – that’s why loan payments change our perception of reality and make us think we can afford more than we really can.

It’s a lot easier to pay a $500/month loan than to pay $28,000 in cash.

So, how do you keep yourself from getting tricked into buying more than you can afford or taking on a large car loan?  Buy a car you CAN AFFORD with cash!

Your probably won’t be able to afford nearly as much, but that’s a good thing!  It will keep you within your limits and keep you out of debt.  Before you decide if you should buy a new car, consider my recommendation to spend no more than 20% of your annual salary on a car.

If you make $40,000/yr, then you could spend $8,000 on a car.  This doesn’t sound like much, but we’ve all lost our sense of reality when it comes to cars.  See if you can stick to 20% and convince yourself that new cars suck.

If you can’t afford it with cash, don’t buy it at all.  When you buy a new car, it’s estimated that you lose 25% of the value as soon as you drive it off the lot.  It’s a horrible way to spend money.

Dave Ramsey calls a car payment the “mantra of the middle class”.  People think they will always have a car payment and it becomes status quo in life.  They always call Dave Ramsey and ask him if they should buy a new car… his answer is typically no (unless they are worth millions).  After I sold my car, I learned that I can live without a car payment.

What would happen if you invested the same ‘normal’ monthly car payment amount in the stock market instead?

If you are 25 years old, you have 40 years until the normal retirement age of 65.  If you invest $500 per month for 40 years with a 10% return, you will have around $2.9 million dollars!!  In the end, that’s what your car payment costs you!

I bought my used car in 2007; a 2002 Volvo S60 with 83,000 miles on it.  I plan on driving it as long as I can. I now fully believe new cars suck – well, at least until I’m worth millions!

I make a lot more money now than I did in 2007, and I’ve had a few promotions.  BMW says I’m finally ready to join their new car club.  No thanks BMW, I’ll stick with my used car.

My car now has over 126,000 miles on the odometer, and I’ve had to pay a few big repair bills.  However, they’ve been a lot cheaper than a monthly car payment.

Don’t believe the myth that a new car is better.  The only thing that will make you is broke.  I’d rather have money than drive around in a new car.  Besides, that ‘new car smell’ is from the plastics and glue that are probably toxic anyway!

What do you think, should you buy a new car?  Is a new car worth it?  I would like to see your thoughts in the comments section.

John D. Rockefeller amassed over $1 Billion dollars in his lifetime. Today, that would equal almost $315 Billion and you have to combine the current top 9 richest people in the world to surpass his total!

When a reporter asked him how much money it would take to make a man happy, he said, “Just a little more.” Can you relate to that?

It’s common for most of us to think we’d be happy if we had more money. If we were rich, we could make our problems go away. If our money was limitless, we could do what we wanted in life.

The only problem is as we get closer to our original idea of rich; the bar gets a little higher. When I was young, I thought $10,000 could make my problems go away.

Now that number has grown. If we’re lucky, we’ll someday hit our old definition of rich but only to realize we don’t feel rich! It’s always just outside of our reach, no matter how much we make!

Are people who win the lottery rich?

People are always amazed how lottery winners and professional athletes can receive huge amounts of money and can go bankrupt a few years later. They don’t have discipline with money and soon they blow it all.

We swear this would never happen to us. We would manage it and live a life of ease.

Unfortunately, most Americans would blow the opportunity. Much like the Swedish study in 1981 where 93% of drivers said they had above average driving skills, a majority of us think we have above average money skills but we actually don’t!

Since this is the case, it’s hard to describe rich as a dollar amount.

In David Landes’ Wealth and Poverty of Nations, a merchant banker of the Persian Gulf described rich as something more than a sum of money.

He said:

“Rich is education..expertise…technology. Rich is knowing. We have money, yes. But we are not rich. We are like the child who inherits money from the father he never knew.

“He has not been brought up to spend it. He has it in his hands; he doesn’t know how to use it. If you do not know how to spend money, you are not rich. We are not rich. Without this knowledge, this understanding, we are nothing. We import everything. The bricks to make houses, we import. The men who build them, we import.

“You go to the market, what is there that is made by Arabs? Nothing. It is Chinese, French, American… it is not Arab. Is a country rich that cannot make a brick, or a motorcar, or a book? It is not rich, I think.”

So how does that apply to us?

It should alert you that rich is not an amount of money or a total net worth, but a whole different mindset.

If you have tangible skills that are transferrable to an occupation or activity that creates money for you, you might be rich.

In fact, you are probably richer than the lottery winner who holds his wealth in a bucket full of holes.

Rich is better measured as future potential than a current snapshot. Rich is also a mindset.

Maybe you’re rich if you have everything you want in life. This could include a great job with a salary you can live within, the ability to serve others, or a happy and healthy family.

Maybe being rich is having what you need and not longing for what you don’t. I’m sure the lottery winners who went broke prayed for a lottery win many times. However, as Oscar Wilde said, “When Gods wish to punish us, they answer our prayers.”

I defined my money philosophy to help me prioritize what’s important in my life and to put money in its place. I stress the importance of goal setting so you don’t just continually increase your definition rich as you make more money. You can also use the money tools to help you track your spending and create a budget.

When you orchestrate your life plan, you should identify how much money you’ll need to accomplish your goals. This will help you keep financial perspective.

Has your definition of ‘rich’ changed throughout the years? I’d like to hear your story in the comments.