Bottom line: Buying a depreciating asset that requires constant monetary support to utilize and maintain is a financial anchor.
I am not going to argue that motor vehicle transportation isn’t convenient, or even necessary in some circumstances, but it certainly is a bad investment in most cases. As someone that focuses on the importance of cash flow, unless you have tens of thousands in credit card debt, having a car payment is quite possibly the next worst debt you could have.
Let’s Examine Vehicle Ownership
A car loan is typically amortized over anywhere between 4-6 years. So, for half a decade you are making loan payments on a car that also costs you money in fuel and maintenance. Even if you have a warranty, you still need to replace the tires, filters, fluids etc.
From a cash flow perspective, depending on where you live, it is quite feasible that a vehicle loan plus the additional costs of ownership could eat as much of your monthly cash flow as a mortgage payment would. Yes, there are the associated costs of home ownership as well, but with a home you are making payments on what is (in the vast majority of cases) a long term appreciating asset that will also have utility long after your precious car has driven it’s final mile.
My household does use two vehicles, both 10 year old Hondas, that are owned outright. I do commute to work from the suburbs, so I am not as hardcore as some others, like Mr. Money Mustache, who bike almost everywhere. However, I do own a functioning bicycle and view it as an excellent means of transportation when the weather allows. I digress.
If you do need, or want, a vehicle I highly suggest buying a safe, reliable used vehicle for cash and driving it for as long as possible.
Limiting your vehicle expense will allow you to focus your cashflow on gathering appreciating assets like investment real estate, dividend paying common stocks, and businesses. Don’t concern yourself with keeping up appearances with your vehicle. If it is -30 degrees outside and someone needs a ride, trust me, they aren’t going to care what kind of car you drive as long as they aren’t walking!
Imagine how quickly your investment account will grow when you put the equivalent of a car payment on top of your regular savings each month!
This advice is especially true for new college graduates. Even though you’ve done a great thing by graduating college and landing that new job, please don’t go out and get yourself committed to six years worth of car payments on top of trying to pay back your student loans and save up for a down payment on a house… it just isn’t worth it in the long run.
Remember – you can have anything you want, you just can’t have everything you want!
(At least not right away)