A Key Way to Drive Toward a Financial Life That Works

Sometimes I come across financial articles that give such bad advice I have to read them twice to make sure I read what I thought I read. Such was the case when glancing at one of the many “What To Do With Your Tax Refund” articles that are so common this time of year. The Chicago Tribune suggested using a $3,000 refund to make a 10% down payment on a $30,000 new car, explaining that low interest rates are leading to “good deals” on financing new or used cars.

Umm, no.

A $27,000 five-year loan at three percent interest means monthly payments of $485. If you’re going to live generously, build an adequate emergency fund, invest for future goals like your kids’ college costs or your retirement, and live with some semblance of financial margin, a $485 monthly car payment doesn’t fit in your budget. And if it doesn’t fit, you must quit (sorry) — financing cars, that is.

When I teach financial workshop, I ask participants to fill out anonymous surveys to get a sense of where people are at financially. On average, 70% have a vehicle loan. It’s the normal thing to do, which a big reason why it’s normal to struggle with money.

There are probably 10-15 major financial decisions that make a huge difference in our financial lives, and how we pay for vehicles is one of them.

Redefining normal

I’m not preaching from on high here; I’m just speaking from experience. I’ve made several big mistakes with vehicles in my life. I bought my first car at age 16, which is something I would never recommend. I encourage young people to wait as long as possible before buying a car—at least until they’re out of college, preferably even longer.

Cars eat. Even fully paid-for cars eat gasoline and maintenance and insurance and repairs and fees and sometimes tickets. That makes it really hard to save money as a student, and yet when you graduate you’re going to need some start-up money for a deposit on an apartment, some new clothes, maybe some furniture, and more.

In my early 20s, I ruined the engine of a perfectly good, paid-off car through pure neglect. One of the most common financial mistakes I see is not budgeting for vehicle maintenance and repairs. I recommend budgeting $75 per vehicle per month. If you just keep up with the basics, today’s vehicles will last a long time.

I financed a car shortly after graduating from college, and then I leased one. I woke up financially in the midst of the lease, ended up paying off that car, kept it until it had over 180,000 miles, and have never financed or leased a car since.

If you have a financed car right now, make a commitment to keep it at least 10 years, preferably 15. Once it’s paid off, redirect your monthly payment toward savings and buy all future vehicles with cash. It’ll be a huge positive step toward a financial life that works well.

How have you paid for cars and how has that worked out for you?

Are you in a small group at your church? If so, why not tee up the idea of going through the brand new Money. Purpose. Joy. material for your next study?