I am often asked by my clients about car loans and credit cards. What is the best way to pay them off? Are they needed for a good credit score? What about leasing? Etc.
I have long believed that having consumer debt is not a good idea. Borrowing money for something that depreciates or is consumed is something that I have and will continue to advise against.
Tomorrow, we’re driving down to Florida to see my brother for a few days so I dropped my 1999 Chevy Suburban off at Midas in Okemos on Monday this week for a check up. I got a call later that day with the quote. I just wanted the front end aligned and I’m being told that almost the entire front end is shot – tie rods, joints, bearnings, struts, helsinki smash rods, the whole thing. $2355! Ouch!
Now let me start by saying that I trust the guys at Midas. There is no question in my mind about whether my car needs this service in order to be safe to drive. They have been treating me right for 15 years.
The next thing you need to know is that we bought the car used for $5000 three years ago. This car owes us nothing.
Lastly, we are saving for a larger van but don’t have the cash to pay for it yet. However, I do have an emergency/van fund set up for this kind of expense and soon for the purchase of the van.
What do I do?
If I spend the money to fix the old Suburban, am I throwing good money after bad? Many would say that it is.
But let’s say that the alternative is to go buy my next car this week – new or used – and sign for a loan. My loan would be $15,000 to $20,000 if I find a good used van and my payment would be around $500 per month if I wanted to pay the van off in under 5 years. I would have a nicer van and a big loan and a big payment.
Instead, I wrote the $2355 check. Today, I have an older truck that still works for us and runs great. I’ll put the $500 per month back into my emergency / van fund. The simple math says that all I need to get out of the Suburban is 5 months of driving. $500 per month for 5 months is $2500 – at that point I’m ahead of where I was before. If I drive the Suburban for 6 or more months then I’m ahead – if it runs for a year – then I’m closer to buying the van with cash. At that point I can start saving for the next one.
Most Americans buy [new] cars based on a payment and not the true cost of the car. Most Americans will not find out that they cannot afford the cars they have been driving until retirement when they either can’t retire when they wanted to or in the way they wanted to.
Even $400 per month saved in an investment account for 30 years has a real potential to add $1mm to a families retirement fund during that time.
I have ALWAYS eaten my own cooking even when it tastes bad going down. When it comes to borrowing money for cars or consumables, think twice, what seems easier up front could be very costly over time.