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It’s a Terrible Time to Buy a New Car

Why are people addicted to making payments?

One of my BE SMART podcast listeners wrote in with a telling anecdote:

My wife’s co-worker got her car paid off a couple of months ago and now wants a new car. I don’t know what’s wrong with people, but I think I they’re literally addicted to making payments. Now she wants a new car in literally the worst new car environment in anyone’s lifetime. She tells her she’s decided on a higher-end, more luxurious car, and took a second job to start saving for it.

Wow. Let’s get one thing out of the way: This is not a good time to buy a car. There’s a shortage of cars, for reasons we won’t delve into today. Suffice it to say, people are paying through the nose, and dealers are negotiating prices up. You want to avoid the car dealership right now unless it’s absolutely necessary.

I’ve said this before—the car you can afford is the one you can pay cash for. And if you do take out a car loan, it should be for a gently used car, with the shortest term possible. Then, once you pay off the loan, drive that car for as long as it will get you from point A to point B. And sock the money you were spending on payments into your savings account. That is how you win the personal finance game.

  • Here's a crazy statistic: 90% of people finance their cars. Almost no one is paying cash.

True confession—I have had two car loans in my life. I took out the first one in college, when I was at the Coast Guard Academy, and bought a Toyota Tercel. USAA gives cars loans to first class cadets, and it automatically deducted the payments from my paycheck. Four years later, I’d paid off the car, and suddenly I had an extra $250 every month.

It never occurred to me to turn around and get a new car. Instead, I immediately started saving that money. And I immediately felt richer. I ended up driving the Tercel for eight years, putting about 120k miles on it.

Then I got another car and paid cash… then I got another car with a five-year loan. $32,000. And when those five years were up, I drove that car for another two years. Then I got another car and paid cash.

  • The most beautiful thing in the world is when you stop making payments and start getting that money back.

And yet, people have a weird psychological need to make payments. I don’t get it. Whether it’s a car payment, a student loan payment, a credit card payment, they need to have a payment—all the time. It’s like they have Stockholm Syndrome with their debt.

  • The #1 question I get is whether you should pay off debt before investing.

The answer is yes. If you have debt—whether it’s a car loan, student loan, or credit card debt—you should pay that off before investing. Because the lender is charging you interest, and that interest is shrinking your wealth.

The one exception here is your mortgage. Few people can pay all cash for a house—especially their first house. You do not need to pay off your mortgage before you invest. In fact, in most circumstances you shouldn’t. But even then, you want to prioritize paying down your mortgage as quickly as possible.

I’ve heard people say, “But I only pay 3% interest on my mortgage, and I can earn 8% in the stock market.” Think again. There is no guarantee you will earn 8% returns. What happens if the stock market drops, like it has this year? (It’s down around 10% YTD.) Then you have payments and losses to grapple with.

Investing is fun. It’s exciting. Everyone wants to make a lot of money. But if you have any kind of debt outside of a mortgage on your primary home, you need to tackle that first. I know it can feel daunting… overwhelming… downright scary. But debt is a solvable problem. If you’re motivated to do it, I can show you how. Click here for more.

Jared Dillian
Jared Dillian

 

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