How To Be Broke
“Low monthly payments!”, “Zero percent financing!”, Bad credit, or no credit, no problem”.
We’ve all seen the ads. And it is hard to resist. I mean, I work hard for my money. I don’t drink, smoke or gamble. “I deserve it!” This is the justification we come up with to part with our money.
And besides the people next door just got a new one. If they can afford it, so can I!
So what is the absolutely worst thing you can buy?
A car. Specifically, a new car. The salespeople and manufacturers make it so easy. This what they are trained to do. They play on your emotions. They whisper sweet nothings in your ear and your eyes light up. Before you know you have signed on the dotted line. Easy isn’t it?
The people who want to sell you a new car do everything they can to make it easy to take your money. It takes a great deal of self control to resist. Let’s face it: everyone deserves a new car every couple of years, and if you can afford it, why not?
Simple: because it costs you tens of thousands of dollars that you could spend on more fun, or even on better cars if you do your homework and buy used.
Folks don’t think about the insurance, maintenance, tires, fuel costs(yikes!) and the biggest kick in the head, depreciation.
How big a bite is this depreciation? On average, cars (and trucks, too) lose more than 20% of their value in the first year. Some vehicles lose as much as 40%. The second year isn’t much better, as they disintegrate another 15% or so in value. (Take heart, Fool. Each year the bite is a little smaller, i.e., 13% in the third year, 12% in the fourth, etc. And don’t forget we are talking averages here; your new SuckerMobile may depreciate by more, or less, in any given time frame).
If you paid $20,000 for a new car, then after two years of driving, it may be worth $13,000. Yes, ma’am, $7,000 vaporized in the thin air of depreciation. That’s $3,500 per year. Almost $300 a month! What if the $100,000 house you moved into just two years ago was now worth $65,000? How would that make you feel?
Yesterday’s post asked why are we so stupid about money? Well this one of the biggest ways we are stupid with money.
If you were given an opportunity to “invest” in something that you knew was going to lose money would you make the investment? I don’t think so. But millions of people line up every year at car dealerships to do exactly that.
Now if you feel that you just must have a vehicle, buy used. Someone else has taken the biggest hit on the depreciation. Find a 2 or 3 year old car with average mileage(20-25000 km per year) that is selling for half or less than its value when it was new. And there are LOTS of these vehicles around.
That great sucking sound, Sucker, is caused not by jobs heading south to Mexico, but by the rush of dollars draining from your bank account.
From the foregoing issues comes our first really big piece of fully Foolish advice with regard to car-buying, and it is simply… DON’T DO IT!
No, we’re not being slippery here, we’re not saying that leasing is the best way, either. What we are saying is, from an investment standpoint, “Don’t buy it new or used. Don’t lease it. Don’t finance it. Don’t even rent-to-own it. JUST DON’T DO IT!
Ask yourself these two litmus-test questions each time you are considering a vehicle purchase:
- Do I really need a vehicle change?
Answer them truthfully, each time, and you will come away with a much better understanding of what your needs really are.
Sit down with a sheet of paper in front of you and write down that first question. “Do I really need a vehicle change?” Or could I just use an oil change? If you feel that you really do need a new car, then write down the second question, “Why?” You might find that you have more than one answer. That’s fine. In fact, keep asking yourself the “why” question until you run out of responses.
Keep YOUR money in your pocket.
And don’t be a sucker.
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