Financial Sombrero Car Purchase Experience:
My aging (seven year old) electric vehicle started to show battery degradation last week. I also noticed that the seat was less comfortable after 100,000 miles of commuting. So I found what I thought was a solid 2017 used electric car that had a driving range four times greater than my current first generation electric vehicle. This particular car was a one owner lease return, and it was a significant upgrade from my current car. It was also a premium model with leather seats, Apple car play and host of other modern options now available in newer electric cars.
Avoiding new car depreciation:
Buying a used car helps mitigate the significant depreciation that exists when you buy a new car. This 2017 year model was 40k when new, but was now selling for 19k. Yes, that was the price after my negotiation.
Driving the car home felt great, I had left a check for a little more than $20k, but I was now driving a much newer car. However I started getting warning lights on the dash and started hearing front suspension clunking sounds. After one dealer service visit that failed to resolve the issues I ended up returning the car for a full refund- again this only occurred after a uncomfortable dialogue and clear conveyance of my legal response if I was not given a full refund. Apparently the dealer wanted to keep my money as much as I did.
My interim solution
So what was my solution, I purchased a $10 dollar lumbar support pillow for my old car, which greatly improved the seats. I also determined that the 8% battery degradation that my car now shows is definitely not a game changer. I just need to check the range before my commute. By the way, if you see a first generation blue electric vehicle stuck on the freeway, be sure to honk twice and wave!
I also realized that I liked my money a lot more than a new car. Yes, the dealer will eventually fix the two issues with the car I returned, but I did not have the patience to wait. Now I have my money back, and more time to save and consider another purchase.
Middle class car financing woes:
According to Forbes, the average monthly car payment in the U.S. is currently around $500 dollars per month. If the average salary in the U.S. is $53,000 thousand dollars, and the average take home pay adjusted for taxes is $36,000 dollars. This means that the average American takes home around $1,384 dollars every two weeks.
Money into cars instead of investments:
Assuming that these numbers are correct, the average American is putting 18% of his or her take home monthly income into a car payment, a depreciating asset that will require maintenance and repairs, and eventual replacement. Take home income at nearly any income level is a powerful tool that when factored into long term investments can help to grow wealth.
This level of wealth building however will not be attainable to middle income earners who maintain a $500 dollar monthly car payment. Furthermore, If you buy a new car every six years (or 72 months, a popular car loan term) you will remain in a car loan, car depreciation cycle that will certainly limit your wealth creation opportunities. A much better plan for that $500 dollars is a monthly stock investment or savings strategy.
So what can one do to avoid car fever and simultaneously build wealth, here are a few solutions:
-Buy used cars with your own saved cash
Using your own cash will limit your car buying fever. Borrowing money to buy a car will always put you in a more expensive car, as you won't think about how hard you work for your saved cash. Future monthly payments never seem real when you sign the loan papers, although you will definitely feel the burden of debt when you repay the loan for six years.
-Buy less expensive cars than your neighbors and friends
When you drive through most nice communities there is a constant reminder that there are people who own nicer cars than you. If your neighbors are driving really expensive cars, then you may be motivated to match their perceived success. One good rule, drive the cheapest car in your neighborhood and avoid the keeping up with the neighbors mentality.
-Buy used electric powered vehicles and further save on maintenance and fuel costs.
Electric cars have little or no maintenance, no gasoline or oil costs with very low electricity costs. Yes, the secret is out- owning an electric car will save you money every month.
-Take advantage of new car electric vehicle incentives
Here is example of a colleague's recent new EV purchase that benefitted from the many incentives (California example):
2019 VW e-golf $33,000 dollar original price.
-minus 10,000 VW discount
-minus 7,500 Federal Credit
-minus 2,500 State credit
-minus 2,500 Employer credit
-minus 800 California Utility Credit
Pretax this new electric car cost $9,700. These types of deals are rare, and in this case limited geographically. However these great deals are available to the people who put the time and effort into finding them.
Car Fever Cure
Car fever is real, we all get afflicted by it. Before purchasing your next car I recommend running the numbers on investing your extra monthly take home pay into a brokerage or online savings account versus a new car loan. If you still maintain the fever, then save up the cash and stare at your bank statement to make sure you want to let go of your money. My lesson this week, I prefer my saved cash over a new car.
Building Wealth Knowledge Every Day
Note that I am not a financial or legal professional, nor am I licensed to sell securities, or any other financial instruments. Given this statement, I strongly recommend that you consider this blog as entertainment value. Although, I sincerely hope that I can motivate you to learn to build your own financial knowledge and wealth.
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