Wednesday, August 13, 2014

Are Car Payments Inevitable?'m probably in the minority when it comes to attitudes about car payments. I hate them. I try to get them
paid off as soon as possible. I'm not one of those persons that advocates paying cash for cars, but I also am not one of those that figures a car loan to be an expense that you pretty much always have, like a rent or mortgage payment.

My wife and I bought new cars at the same time back in 2010 - we each got a new Prius. (Aw, hubby and wife have the same car - how adorable is that?) This was nice in that buying two cars at once helped us get a better price from the dealer, but it did produce some additional strain on our budget that we wouldn't have had otherwise. We took on two new cars loans at once, with payments due the same time each month. And because we bought them at the same time, our license renewals are due at the same time each year. All in all, I'm not sure I would buy two cars at once again for those reasons. (Although I probably could have requested the loan payments be due on different days, had I thought about it.)

As soon as we had the cars, I concentrated on paying off the car loans. I paid off the loan on my car first, simply because my trade-in was worth more, so that loan balance was smaller. I think I paid off the original 5 year loan in a little under two years. Last month, I paid off the loan on my wife's car, so we are now car-loan free.

A Life-Long Loan...

I ran across this blog post a while ago about car loans. The article advocates avoiding new cars and saving money to have as small a car payment as possible. I don't agree completely with the part about avoiding new cars, but really, that's just a personal opinion. I'm well aware that buying a new car means you take the brunt of the depreciation expense. There's nothing wrong with the approach the article advocates. What struck me, though, was the title - "Car payments: 'Til death do us part." That's the attitude I think some people have and I don't understand it.

My In-laws buy a new or used car every two years, like clockwork. I've known them for about 12 years and they have purchased more cars in that time than I have in my entire life. I find that amazing. Clearly, they are people who figure a car payment is one of those expenses you will always have in your life and they have no problem with that. That's fine.

...Or A Lost Opportunity?

To me, however, a car payment represents a lost opportunity. That's a big chunk of change every month that is going towards something that is depreciating in value. It is money I could be put to some other use, particularly investing. As the blog post I mentioned states, if you invest $471 a month (the average new car loan payment) in a savings account paying 4%, you'll have over $31,000 after five years. And I know I can invest at more than double that rate, so I'd have an even bigger lump of cash after five years.

This view of car payments is more or less the whole basis for this blog. My goal is to buy a Tesla and to do so by investing enough money that the income from that investment will cover my car payment, so clearly, I'm not completely anti-car payment. I do however, want to stop spending money on a depreciating asset. I'll let my money work to pay for the car and, when the car is paid off, that money will still be working to pay for something else.

Now that my car loans are paid off, I'll be putting some of the money that was going toward the loan towards investing, but I'm also going to start up a new car fund (besides my Tesla fund) and put some of that cash there. There will come a day when we will need to replace a Prius and I'd like to have some cash on hand for that.


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