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Are You Broke? Could This be the Reason Why?
By JLP | January 16, 2007
Liz Pulliam Weston over at MS Money has written an interesting article that I think is worth sharing. She believes (and I do too) that a lot of people who are broke are broke because of their choice of car. I mean, look around. Have you ever noticed how many $30,000 + cars there are? You can’t tell me that ALL of those people can actually afford those cars.
I thought this quote from the article was interesting:
Credit counselor Bill Thompson of Jacksonville, Fla., estimates that one out of every four clients his agency sees has overspent — sometimes dramatically — on a car.
“They may be spending 15% to 20% of their (take-home) pay on just the car payment,” said Thompson, who supervises credit counseling for the nonprofit Family Foundations, “and that doesn’t include insurance, gas, maintenance and all the other costs of owning a vehicle.”
According to the Bureau of Labor Statistics and the Census Bureau, the average American Household spends $8,344 per year on transportation. This figure includes vehicle purchases, finance charges, insurance, fuel, maintenance and repairs, public transportation and other out-of-pocket expenses but not vehicle depreciation. Unfortunately, as high as that number sounds, it is probably right inline with what my wife and I spend each year. Of course, that number will go down in June once our car is paid off. It won’t stay down long because my wife’s car is due to be replaced within a year or so. Hopefully it will be the last car we have to finance.
It’s too bad that Americans don’t value their 401(k) as much as they value their car.
Topics: Budgeting |
January 16th, 2007 at 11:55 am
I’ve been observing this for years. JLP, you know my story. So, you know I could walk into any dealership, plunk down cash, and drive away with a car. But, I haven’t owned a car for at least 10 years. I live in NYC, which has one of the best public transit networks in the world (dirty yes, but very effective). Even before that, I have never owned a new car, always used and driven into the ground. As much as I would love a nice shiny new car, whenever I run the numbers on owning (esp in NYC), I freak out. I can rent nice new cars, pay far less money, and not have the headache of maintenance. Even with renting a limo & driver here and there, my total costs are still less than half that of owning a new car in the city.
Yet, all around me, I see people driving really nice, expensive, new cars. What gives? I keep asking myself, if I don’t think I can really afford a new car, then who are these people???
January 16th, 2007 at 12:00 pm
One other thought - cars are depreciating assets (obvious I know) which not only cost a lot to maintain but totally eat away at NW. And even if you lease, I’ve run the numbers and leasing is just outrageously expensive. Either way, it’s one of the worst NW drains ever invented.
January 16th, 2007 at 12:10 pm
Interesting, I just did some quick math and found our annual vehicle expenses for my wife and I and we are almost exactly at the $8,344 number. I actually thought our vehicle expenses were fairly low since we only have two cars we bought used (but had to finance a little over half on each amount).
Of course that isn’t close 15-20% of our take-home pay either, so all things considered I guess we’re still below average. But I never really thought to calculate all of our vehicle expenses annually like that. A bit shocking when you see that figure and compare it to what you are saving
January 16th, 2007 at 12:16 pm
I think vehicles are the biggest financial road block for Americans. For instance, my wife and I have have two vehicles. These vehicles are reliable, but we certainly did not go all out. We have a van and a sedan, and both were two years old when we bought them. Combined, they were bought for $20K, but we financed them. The car is $201/mo (for five years), and the van is $265/mo (for six years). Add on to that fuel/maintenance and auto insurance. Our auto expenses rival our housing expenses… and we have not gone to the lengths that others have (who probably aren’t in a better financial situation that we are).
Getting a new car, off the lot, you could probably expect payments around $400+ for a $30K vehicle. To top it off, most people have two vehicles, and many are just paying for their children’s vehicles, these days. With a more valuable vehicle, you have increased insurance costs… and if you have the really expensive vehicles, you probably have lower fuel economy.
I can see a dramatic change in my future. I am going to have my two modest vehicles paid off early. When they are paid off, we will begin saving for our next vehicles. In doing so, I never plan to finance a vehicle again. And not only that, I plan on using interest to my advantage to get my next vehicles. I will only buy vehicles that are two years old, or older, and I am will keep them for five to eight years. Using a high-yield savings account, I would be able to save about $50/month and pay for a slightly more expensive vehicle in cash… and I could invest the $150 difference every month… but I would have two vehicles where this could happen! Saving (and investing) an extra $300 a month is a very huge deal for just about anyone. $300/month has the potential to be about $125K in 15 years at a 10% return! Continue it for another 15 years, and you will be approaching $700K!
It is absolutely mind boggling!
And it really matters little the choice of car, but the choice of acquisition of the car. I mean, in order for me to buy a car that is two years old, someone had to buy it new. So, there will always need to be people who buy new cars. If you are in that position, leasing may not be bad… but what about applying the same logic to a new car purchase as a used car purchase.
People simply have their priorities messed up.
Case in point: I was talking with my state’s auditor. Last year, he pushed the state legislature to provide a state tax credit for savings to the state’s 529 plan. He had a discussion with a large group of union workers and they kept coming up with excuses as to why they still couldn’t save for their children’s education, even with a 20% credit on their state taxes (with a maximum credit of $1K). So, he asked them how many of them had flat panel televisions… you guessed it… over half of them. They were able to make it a priority to buy a luxury item… but not invest in their children’s education. Absolutely crazy.
I am fine with this craziness, however. I will just make it my mission to share what possibilities there are with those who inquire, and with those who I am close to. If they care, they may take some initiative to change their lives. I doubt many will, however, because they only think in the short term and need immediate gratification… even though a three-to-five year timeframe is all that is necessary to have it impact your life.
January 16th, 2007 at 1:28 pm
@ Dus10 - I recently looked into leasing vs. buying a $40,000 car (every year I like to look and day dream, & someday I will probably break down and do it, just not yet). Even on a two year lease, I calculated a difference of over $4000 between leasing over buying. I don’t remember how I calc’d the numbers, but it convinced me of what most PF experts have been saying - leasing is usually far more expensive (I hesitate to use the word rip-off).
January 16th, 2007 at 2:04 pm
I blogged about this at
http://extremeperspective.blogspot.com/2006/12/buying-car-new-or-old.html
My annual car expenses are less than half of those stated above.
January 16th, 2007 at 3:25 pm
Part of the problem is that cars, even more than other things, are items that start bad financial habits early on. How many people graduate from college, dump their klunker, and buy a hot new thing that they’ve been dreaming about through school now that they have “real” income? Cars are an extreme case of people thinking they “deserve” to “reward” themselves with a nice thing.
The problem is this sets a financial pattern that’s hard to break; if you bought an expensive car out of school, you’ll make big payments on it, which will hurt your ability to save money for other things. Also, you’ll get overly comfortable with the idea that you have ongoing consumer debt - how many people regard a car payment as a standard part of daily life? Most people, I’m afraid.
My strategy is pretty standard tightwad stuff, although I’m not so averse to buying new: we buy nearly new cars, pay cash for them, and drive them at least 150K miles (takes us about ten years) before considering the next car. We carry minimal insurance other than high liability, and drop to “liability only” after the car goes over 100K miles.
January 16th, 2007 at 5:11 pm
Our car expenses for 2006 were uncannily close to the figures listed — we paid a total of $8636 excluding depreciation, for four cars (click on my name above for a detailed breakdown).
One thing I’ve noticed is that once people get in the habit of buying nicer cars, they never go back to _less_ nice cars. If somebody decides to go all out and get an entry level 3-series BMW (which isn’t _that_ expensive), their next car will undoubtedly be a sportier version, and the next time around they’ll move up to a 5-series.
It’s pretty certain that they’ll never go back to a Hyundai.
The other thing I’ve noticed (from personal experience) is that the rush of new car ownership lasts all of about a week. Then you’re just driving an old car again.
January 16th, 2007 at 5:43 pm
I actually had a person tell me he couldn’t buy a Toyota because he owned - and couldn’t afford - a 5-series BMW. At that point, “what-freaking-ever!” is the only reaction…
January 16th, 2007 at 7:14 pm
I think the number is a pretty weird one for people to try to compare themselves to. I see one response of a person saying that they are half that (paul) and another saying that they are at that with four cars (samerwriter). In reality it depends a whole lot on how many cars are in the household. Also how many incomes are in the household. If you have one income the $8300+ might be bad, but if you have two it’s much easier to take.
Secondly, I wouldn’t count fuel as a car expense. Well maybe I’d consider it half a car expense. For most people the fuel use is due to their work commute. If you can live close to your work, you’ll have very low fuel costs compared to those who live far. For this reason, I consider it largely a housing cost. I can easily just move within a mile of my work, but that means my home will cost me an extra $150,000. Miguel (see comments) seems to experience this New York. I’m guessing that he’s close enough to his work that he can take public transportation and keep his car costs down to next to nothing. However, I bet his housing is several times more than what the average households’ is.
Sometimes it’s a trade-off, like many things.
January 16th, 2007 at 7:39 pm
“Miguel… I’m guessing that he’s close enough to his work that he can take public transportation… However, I bet his housing is several times more than what the average households’ is.”
@LazyMan - LOL, good point, you got me on that, what can I say. Still, I suspect that many of the folks I see driving around in shiny new cars are spending sums that are quite material relative to their income or NW. In NYC there is little need to own a car, as I am a prime example. So, my point was that if I feel that a car is a luxury I cannot really afford (given that I am still aggressively saving for retirement and I think I’m further ahead than most in the saving dept), then how do other people (in NYC) get comfortable with the expenditure. FYI, in my area, insurance alone on a new luxury car is $3000/year, garaging a car is up to $350/month, and parking tickets (really just another NYC tax) will run you $150/month no matter how careful you are. You get to a cost of $10K per year for a car in NYC before you’ve even thought about the acquisition costs.
January 16th, 2007 at 10:11 pm
MOST of the people who come into Navy Relief are paying for cars they cannot afford, both payment-wise and either gasoline-wise or insurance-wise. It’s a big part of the reason why their finances are screwed up. I’ve seen kids who are dropping a G a month on car expenses and who decide that they can drop their insurance to save money, then promptly crash into a guardrail or tree and are far worse off than they were before.
They’re green, easy targets, and the local dealerships absolutely prey on them. I’ve even blogged about it before.
January 17th, 2007 at 11:21 am
I think most people who are looking at buying a new car or a car in general completely underestimate the amount of money that is required to keeping one on the road. Aside from my living expenses such as rent and food my car is the next item on the list and I don’t have an expensive one!!
January 19th, 2007 at 12:39 am
Heh, I wrote up a little car buying guide because of this issue.
http://www.jongasm.com/car-guide.html
January 20th, 2007 at 8:53 pm
I went the first 22 years of my life without owning a car, but then I went to grad school and my girlfriend went to a grad school 600 miles away so I plunked down $2000, plus $4000 borrowed from my parents at 3%, on a nice six year old Toyota Corolla.
About a year later I finally did the math and realized I was paying $200 a month on insurance, $120 in car payments to my parents, $60 on gas and the occasional parking ticket. The only time I used it and really needed it was the once monthly trip to see the girlfriend. I sold the car back to my parents (who needed it since my sister had just gotten her license and one car wasn’t cutting it anymore), bought a $300 bike, and started paying $160 a month for a train ticket.
I consider myself pretty uninterested in material possessions and status symbols (I’m a grad student for crissakes), but even for me getting my own car was a symbol and a life event that totally blinded me to the real cost.
January 22nd, 2007 at 9:45 am
There are a couple of things that everyone can do to reduce their car ownership costs without requiring major lifestyle changes.
1) The next time you buy, get a less expensive car. That’s both in terms of the purchase price and expected maintenance. Do some research and buy one for about the same price that will cost less to take care of. You won’t feel like you sacrificed. You’ll feel like you did yourself a favor, year after year.
2) Wait. Hold on to your current car another few months, another year, another 2 years. Every month that you aren’t making car payments is a month during which you can save for the next one so that you don’t have to finance it.
3) Maintain your car properly. It’ll get better mileage, which will save you money. It’ll break down less often, or maybe not at all, which will save you money. It’ll last longer, which will save you money. And when you trade it in, sell it or give it to charity, it’ll be worth more.
4) Okay, you can’t pay cash for a car and you need one. Make a bigger downpayment and finance less. Pay it off quicker. Be careful. Some car loans apply extra payments to the end of the loan. To put it simply, the only way to pay off the loan early is to pay off the complete balance. That may be hard 6 months into the loan, but it should be much easier a few months from the end of the loan.
5) Plan your trips. Yesterday, I got haircuts for me and both of my kids in one trip. We picked up a gallon of milk on the way home too.