03 Mar How we began paying cash for cars
I wanted to do a blog about buying new vs used cars, and I decided to hold off on that until next time. For those looking for some motivation and tips on getting out of debt, it almost always starts with the car. If you are like most Americans you have a car payment ($450 was the average last I checked). Three years ago my wife and I were in the same position.
Before listening to Dave Ramsey we thought it was a good idea to go out and buy a brand new 2007 Honda Ridgeline. We did the worst thing you can do when buying anything, and that is disregard the question “how much”, in favor of “how much per month”. They got our payments to $500 a month, which was completely ridiculous. In order to do that they made the loan for (are you ready?) 7 YEARS! That’s an eternity! We didn’t care, we wanted it now and we didn’t want to wait. Let me list the mistakes we made:
1. Accepted $13,000 for our 1 year old vehicle that was easily worth $17,000.
2. Disregarded the total amount being paid for the new vehicle, $31,000!!!
3. Did not even negotiate the price.
4. Bought the warranty, I believe for about $2000. Warranties you pay for are statistically rip-offs unless you get it for next to nothing. Think about it logically, warranty companies would only make money if they charged more on average than the typical customer will have in repairs. You may have problems, but most people do not have repairs anywhere near what they paid for the warranty.
So, why is buying a new car so dumb? New cars lose value at an alarming rate, try 50% over the first 4 years. If you never plan on paying it off, and just keep trading your car in every few years, then you will have a car payment all of your life, it never ends. One year later we realized our mistake and decided to fix it as best we could. This meant we were going to lose some money. But in reality, the value was already lost and would only have lost more. Cars are depreciating assets, unlike a home they will never go up in value.
Here was our situation, 1 year later.
2007 Honda Ridgeline-paid $31,000, still owe $25,000
It was worth anywhere from $20,000-$25,000. The only offer we received after several months was for $21,ooo, which we accepted. Which meant we had to take his $21,000 and come up with $4000 of our own to pay off the loan. We had cash to do this, but even if you do not you can still do it. It is better to be $4000 in debt than $25,000, so take a loan out for the difference to pay it off. You could take out another $1000 to buy another vehicle. I know what your thinking, $1000 car? Yes, but temporarily until you can save up enough to pay cash for a better car. This period is hard but well worth it.
What we did: we had the cash and decided to spend about $6000 on our next vehicle. We found a deal on ebay and purchased a 2001 Nissan Xterra, but it had to be shipped. There were issues with getting it shipped and it ended up taking a few weeks. We had to borrow my dads 97 Chevy Astro van with no A/C in the middle of summer. These are things you do in order to become financially independent.
Since then we have upgraded to a 2007 Toyota Camry. Being able to pay cash for what still looked like a new car is a great feeling. Why a 2007? Remember that little stat about cars losing half their value in the first 4 years? That makes a 4 year old car a great buy. After that the rate of depreciation is significantly lower, meaning the car will hold its value much better. With $500 a month now saved, it makes it easy to save up for that next upgrade.
For anyone who thinks they can’t do this, you really can’t afford not to. If you were to invest that $500 a month from age 25-65, instead of spending it on a car payment, you would be a millionaire.
Message to Claire: Be smart about purchases. Cars can be some of the most vain purchases there are. They also happen to be one of the most expensive purchases you make. People buy cars to impress people, many times ahead of being practical. Do not fall into this trap, whether it be cars, clothes, or anything else. Everyone does sometimes, but the more you can avoid it the better. You should not have to buy nice things in order for people to like you. Also, your mother and I decided you should strive to be a doctor, or engineer, or possibly a professional golfer. So shoot for something like that.