August 13, 2020
I can learn so much about a household’s commitment to building financial security by asking them about their car.
And from what I hear and see these days, plenty of you are not making the right moves when it comes to financing a car purchase.
The average length of a loan to buy a new car is close to 70 months. Are you kidding me? That is way too long. It is a big tip off you fell in love with a car you can’t truly afford when you have to take out a way-too-long loan to get the monthly payment down to where you could “afford” the car.
A 36-month loan is a sign of being financially smart. I will even give you a break if you decide on a 48-month loan. But anything higher? No way.
Fall in love with your IRA or your home. Those are assets that over time may increase in value. Your car will never, ever increase in value. It is a depreciating asset that loses about 20 percent of its value in the first year. And keeps on falling from there.
And don’t tell me that cars are just expensive, and you had no option but to take out a long loan. You are so not standing in your truth. The car you want may be too expensive. The car you need can be very affordable. All it takes is a willingness to only shop for cars that make financial sense. A new car or a used car that you can pay off in three years is living within your means.
And for all of you with a long car loan, you better keep driving that car for a long time. But that’s not what many of you are doing. Edmunds.com reports that 44% of cars that were traded-in had “upside down” loans. That is, people traded in a car that was worth less than their loan. So they had to come up with cash to pay off the loan on the car they are trading in, to finance the car they want to buy.
No problem says the auto loan industry: they will sell you a new car with a loan that includes the money you need to pay off the loan from the car you want to trade in.
That’s a very big problem if your ultimate destination is financial security.
Answer Yes or No to the follow statements.
I pay all my credit card bills in full each month.
I have an eight-month emergency savings fund separate from my checking or other bank accounts.
The car I am driving was paid for with cash, or a loan that was no more than three years, and I sure didn’t lease!
I am contributing at least 10% of my gross salary to a retirement plan at work, or I am saving at least that much in an IRA and/or regular taxable account.
I have a long-term asset allocation plan for my retirement investments, and once a year I check to see if I need to do any rebalancing to stay on target with my allocation goals.
I have term life insurance to provide protection to those who are dependent on my income.
I have a will, a trust, an advance directive (living will), and have appointed someone to be my health care proxy.
So how did you do?
If you answered yes to every item, congratulations. If you are working on improving on a few items, I say congratulations as well.
As long as you are comitted to truly creating financial security, I applaud you. If that means you are paying down your credit card balances, or are building up your emergency fun with automated payments, that’s more than fine. You are on your way!
But if you found yourself saying No to any of those questions, and you’re not working on moving to Yes, then I want you to stand in your truth. No matter how good you feel, you have some work to do before you can honestly know what you are on solid financial ground.