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November 25, 2016
According to Experian, the percentage of consumers who chose a lease when purchasing a new car jumped from less than 27% a year ago to a record high of 31.4% in the second quarter of this year.
I can’t be clearer: leasing is a horrible financial move. It is the auto industry’s way to get you to buy a car you can’t really afford. I don’t blame the auto financing folks, that’s their job. But it’s your job to make smart decisions with how you spend your money. And leasing is just a lousy deal.
The big problem is that when you lease there’s the temptation to keep leasing forever. So every three years-the standard lease length-you turn in your car and lease another. That means you are signing on for never-ending monthly car payments, all because you want a fresh new car every three years? C’mon.
Let’s keep this simple: Needs v. Wants. I get you may want a new car every three years, but do you need a new car every three years? Of course not. And don’t tell me you deserve a nice car. Please. You deserve financial security. You and your family deserve a lot more than a fancy car.
Please Please Don’t Lease
Let’s say your car lease is $350 a month. I would much rather you choose a car that you could pay off with a 3-year auto loan. Yes, it will be a less fancy car. Good! Cars are a lousy investment; they never rise in value. The less you pay for a safe reliable car, the smarter you are.
With the loan you will no longer have any payments starting in year four. If you are leasing, you are likely looking at a new lease for even more money than your current lease.
Now let’s assume that you keep driving your car for another five years after paying off your loan. So that’s five years where you could redirect the $350 you no longer have to pay on your car, to something important: like building your emergency fund, or contributing more to your retirement. Or saving for a bigger home down payment. Drive your loan-free car for another five years and you will be able to save more than $20,000. That only happens if you skip the lease.
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.
I have checked all the beneficiaries of every investment account and insurance policy within the past year.
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.
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