Should you pay cash for a car? You probably did when you were 16!
Do you remember your first car? Over the weekend I went to a BBQ at my brother’s house. His grandson, who just turned 16, was there. He just landed his first job at Whataburger. I reminded him that I am a financial coach. So I asked, “What are your plans with the money that you make this summer?” He shared that his plan is to make $2000 by the end of the summer, and that grandpa was going to match his savings giving him $4000 to spend on a car. It is important to know that he also agreed that Uncle Jim, a mechanic, will be inspecting the vehicle prior to purchase. This is so important when buying a used vehicle. If you do not have a mechanic in the family, you need to have a mechanic inspect the vehicle prior to purchase. You do not want to purchase a low-cost vehicle with high cost mechanic bills. That is a mistake that many people make, completely unaware of the fact that they can pay a mechanic to do an inspection up front.
I know that having an inspection prior to purchase is effective because my own two teenage sons purchased used vehicles at a low price point under $2500. My brother did an inspection on both vehicles. No repair bills in the last 2 years!
This conversation with my nephew brought me back to the time when I was 16. My grandfather was a mechanic, and he helped me purchase my first car. The picture is me at 16 with my first vehicle. I worked all summer, saved up my money and bought this car. It lasted me all the way through college with no major repairs. However, my practical mindset of purchasing a car with cash unfortunately changed as I matured into adulthood. I graduated from college and one of the first things I did was purchase a brand-new vehicle with a car payment. Really, three months out of college I bought a car with a $239 a month car payment for 5 years. I have no idea what the interest rate was at the time. Nissan was running a special for college graduates. I could get a loan by showing my college degree. I ended up paying over $14,000 for that car. While in today’s terms it doesn’t sound like a lot of money, between paying rent, gas and insurance, and of course, food, I eventually HAD to work 3 jobs because I fell behind on payments! According to the internet the base price for a 1988 Nissan Sentra was just under $10,000. WOW! I ended up paying over $4000 in interest! I just wonder… if we all thought the way we did about purchasing a car back when we were 16, would our financial life look different? I believe mine would look different.
We learn too quickly to take on debt. How much do we really think about how much interest we pay? Were we smarter when we were 16? I went on to share with my nephew that you should always try to strive to purchase vehicles with cash. He asked why? Why would I do that once I get a real paying job? Why wouldn't I just go out and make a purchase and have a car payment? After all I'll be working hard for my money, and it’s my money, and I should be able to do whatever I want and get whatever I want? I asked him, do you know what interest is and how it works? He naively said no but explain it to me. I said, you see, the bank charges interest; you must give them money for the benefit of borrowing their money. So, imagine for a minute, someone came knocking on your door (it just so happened that we were standing outside at his front door). Let’s say the guy asked you to give him $1000, would you? My nephew said, well no, of course I would not do that. So I explained to him that whenever you borrow money you have to pay interest. That's exactly what you're doing, maybe not in one lump sum but in small little bites every month. You are giving your money to the bank instead of keeping it for yourself. His response was, so I will be paying more for the car. Ding, ding. ding, ding! Yes, he got it! His reply, “Well, I'm not going to do that.”
Do you want to give your money away or do you want to have the approach of a 16-year-old and pay cash for your next vehicle?
Start a car fund today. Think like you are 16 again: Decide on a dollar amount each month to throw into savings so that one day you can purchase a more expensive car for less. Do the math and know the exact amount you are giving the “person that is knocking at your door.” You can find an online car payment calculator to determine that amount.
These are the numbers for a car that cost $25,000 at 13.9% interest.
***Keep in mind that at a dealership you will incur other costs such as: documentation fee, vehicle registration, state sales tax, etc.***
The point here is to make sure that you know exactly what you are paying with special attention to the interest that you pay. I want you to be fully aware of the money that you are giving away and ask yourself, “Does this make sense?” Stay clear of focusing on the monthly amount that you are paying. Instead focus on the total cost. Maybe paying some interest makes sense for you. I just cannot wrap my head around giving away over $1000, or in my case over $4000. My nephew will have to work more than 100 hours to give that kind of money away! Not only is it about the money, it is about your time! You work hard for your money. Keep it, spend it on what you really value in life, and ask yourself: how much do I want to give away?