Casey F.

Next we’ll look at your automobile expenses, because for many folks it’s an opportunity to make fast progress with big reductions in spending.

We all like shiny new cars that shout out to the world what kind of personality we want to project. Who do you want to be: rugged, elegant, edgy, rich? But if you have a large car payment that you can barely afford or a car that requires huge repair bills to keep it running, believe me, most people will know. You aren’t rugged or elegant, or edgy or rich; you’re foolish.

By getting a reliable, economical care within your means, now is your chance to shout out to the world that you are frugal. You’re on a mission to become financially independent; why not let the world in on that?

Before we go on, I understand that for some folks your car is your nicest, most prized possession. For many it is the only “luxury” they have, their only respite from feeling poor.

The trouble is, your luxury car is what is keeping you poor. Your luxury car is what keeps you from being able to afford other luxuries in your life. You think you’re taking a step up when you buy your first new car, but for many folks that first step up is actually a trap that will hold you down.

Being willing to make changes in this area requires a huge attitude shift, and requires you to embrace a completely new set of priorities. You’ll need to replace “looking good” with financial stability, and eventually financial independence.

So let’s examine how you can reduce your automobile expenses dramatically.

If you have a lease, get rid of it if you can. The low lease payments are simply a way to suck you into mortgaging your future. Nobody will let you defer paying them unless they’re going to get a lot more out of you. Trust me, no one does this.

If you own your car and are making payments, find out if you can sell the car and buy something much cheaper, preferably with cash, but at least with significantly less financing if possible.

If you are upside-down on your car loan (you owe more than the car is worth) you may have to dig into your savings to buy yourself out of the loan. If you can, it’s probably worth it.

Now let’s compare the costs of an average new mid-sized car to that of an average used economy car. We’re going to use average costs to compare two different categories of car, using interest rates and loan terms that are typical today for the two different types we’re considering.

A $40,000 car loan (typical today) at a screaming deal of 3.9% interest for 7 years requires a payment of $544.91. (WOW! I can afford that!)

A $10,000 car loan for a good clean older used car at 5.9% interest for 4 years would require a payment of $234.39.

The used car would require payments of less than half of the new car, despite the higher interest rate and shorter term.

On the new car you would pay $45,773 over 7 years.

On the used car you would pay $11,251 over 4 years.

They will both get you where you’re going. The used economy car will probably cost less in gas, registration fees and maintenance, too.

Ask yourself “Is it worth $34,522 (the difference in cost between the two) to drive the nicer car? If you have zero credit card debt, comfortable savings and are on track to retire well, maybe it is. If you are carrying credit card debt or don’t have savings and are not on track for retirement, please rethink this.

When you’ve figured out what your priorities are, reduce your automobile expenses accordingly. Chances are, if you are like most people, there is a lot of room to cut down in this category.
We’re not finished, though. Today many people are doing without cars altogether according to recent studies. Being car-less is not for everybody, especially in light of America’s love affair with the car. (The U.S. is third in the world in cars per capita, behind San Marino and Monaco, two enclaves for the rich and famous.)

If you are in truly serious difficulties or have very lofty financial goals and want to make a big impact on your financial health quickly, consider going without a car. Public transportation is getting slowly better in urban areas in the U.S., and is a viable option for getting where you need to go. The cost of public transportation is a very tiny fraction of that of owning even an economy car.

If, on the other hand you live in the country, consider getting a horse. It actually won’t be any cheaper than owning a car, but your quality of life will improve and it will give you something to do to keep you from blowing your budget on entertainment and eating dinners out.

Sara Colley, Staff Writer
Financial Help Desk