August 10, 2017
I have a one-question test on whether you are truly serious about achieving financial security.
How long do you want to keep your current car?
How you answer that question tells me so much about you, and your future.
If you said: As long as possible, you get an A+. Any other answer earns an F.
I think plenty of you just failed my quiz.
A recent report said that on average, drivers are holding onto their cars for just four years, compared to about seven years a few years ago. And the expectation is that by 2021 that might drop to just three years.
The main driver of this ridiculous trend is mistaking a car for a want, not a need.
There is no question that many of you need a car. But as I have explained many times, a car is a lousy investment. It only loses value. That should compel you to want to spend the least amount of money possible to fulfill your need. And one of the best ways to spend less is to drive a car as long as it is safe and reliable. Yet what is going on is that many people view their car as wish fulfillment. You talk yourself into the notion that you “deserve” to drive a newer, nicer car. Or you fall for the leasing offers, where you are all but hand-held into trading in a car every three years.
That is financially stupid. Yes stupid.
One of the best ways to build financial security is to spend the least amount possible on a car that meets your needs. Forget about the bells and whistles you want. Paying less helps you pay off the car faster. My advice is that if you need a loan, buy a car you can pay off within three years. Even if you buy a used car—and by the way, I think that is very smart-you will then likely have a few years more after the loan is paid off, when you can keep driving the car. In the meantime, all the money you used to pay for the car loan can be redirected toward other financial goals, such as retirement, or saving up for a home, or building a down payment fund for when you do need to get another car.
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.