You should seriously consider losing the car payment as soon as possible.
Whether you are planning for the future, saving for a wedding, or just making sure you have enough in savings – a car is a liability. In terms of present value a car depreciates 20% in it’s first year. Money in the market on average will double in 10 years.
Wealthy people drive cars they can afford!
The first thing Lauren and I did when we sat down with a trusted adviser in the area of wealth management and finances in February 2016 was present him with our budget, or spending habits. He quickly freed up money within our “budget” with a few small adjustments. The goal – extra cash flow. With the extra cash flow we could then appropriately make the debt snowball effective.
Lauren drove a 2012 Kia Forte and I drove a Hyundai Sonata 2011. I owed about $7,000 on my car with $185.00 payments, Lauren owed about $9,000 with $310 payments… or $500 a month that could go towards our future!
Dumb Financial Decisions
October 2014: I drove this beauty above, a $37,000 2014 GMC Sierra Double Cab, ego inflating, carbon fiber edition, decked out truck. I had been hired as an Assistant Athletic Director and I got a huge raise….$4,000 dollars!!! In all actuality I lost about $4,000 to take a “promotion” because I gave up the coaching money. So with my raise, I had to fit in, aka get a truck right?
So one day I went to the Honda/GMC dealership to see my buddy who was a mechanic. I had him fix the window motor on my paid off, 2007 Honda Civic Si with only a tad more than 100,000 miles reading on the odometer. While I was waiting I started looking at the trucks on the lot.
At this time I had about $9,000 in savings, and owed another $20,000 on student loans. Had I had any guidance when it came to finances, the fact I owed that much on my student loans, yet had money just sitting in a whopping .35% savings account literally earning nothing, I should have been focusing on the debt. Debt is always an emergency.
Impulsive Josh Wins Again!
Instead of using my savings on a ring I surprised my girlfriend of two years with a truck! But hey, I deserved a nice truck for all my hard work and I had good credit so my interest rate was undeniable. Wrong. Banks want your money.
So I bought a truck with no planning and I got $7,000 for my trade in (they sold it for over $10,000), I used another $6,000 of my savings, and I financed the remaining $24,000. My monthly payments were $368.00. My new insurance would be $87.00. The V8 engine got 18 city and 24 highway according to the window sticker. I was dumbfounded when that never occurred.
Drive around Northern Virginia and you quickly realize it’s stop and go, in fact NOVA has top 5 worst traffic in the country. I never got 18 city, more like 10-12 MPG. So monthly I was spending about $180 on average in gas.
Something I never even thought of – personal property taxes in Loudoun County. I got my bi-annual tax bill in December and I owed $330.00 for the three months I owned the truck. Or, $110 a month. So I had to make sure to save $660 for each June and December.
As you can see in the table above, I went from owning a perfectly reliable Honda Civic with the title in hand, to shelling out $532.00 more a month for a truck that I had to use $6,000 of my savings for. I could have paid $12,384 on my student loans in addition to the monthly payment over the duration of the next year owning the truck.
Two months later I picked up David Ramsey’s book and remembered the quote about buying a new car. He said it is the same as throwing $100 bills out the window of that new car. I immediately started regretting my decision. Sure $360 sounded affordable at first, but the monthly expenses added up quickly and I was quickly feeling the financial crunch.
I was spending 23% of my salary on a vehicle. I had student debt. Nothing in savings. In fact we did not even have a written out budget when I decided to buy a brand new truck (Only 32% of Americans actually have a budget written down). Ask 10 people how much money they spend a month on stuff and 7 can not answer you.
How we Acted:
Just like I decided to buy the truck, one day I decided I would sell the truck. Deciding to sell the truck after 9 months of ownership was not bad at all, I was relieved. To society, it may look like I was taking a step back. But people’s opinions will never pay your bills. So if you’re worried about what people might think, here is some advice: STOP.
Most of the time they are not thinking as it is, and we live life by this motto: You can not have any say with what I do with my finances because you do not pay my bills. Once you figure that out everything is a breeze. I traded the truck in for the 2011 Sonata. After the trade in value, the cost of the Sonata, and what I owed on the truck, in total I owed about $4,000 for the Sonata.
I laughed, I had essentially rented a truck for 9 months, forking over my paid off civic (7K), savings (6K), payments (4,000 I paid extra thinking I was doing something smart, really I was spraying my money) to buy a car that I still owed $4,000 on. Had I just kept my civic I would have been up $14,000 instead of down $4,000.
Result: Cash is King!
Paying off both vehicles in between February & November 2016 freed up over $500.00 a month of cash flow. Some people get wrapped up in interest rates. There is a science behind it, yes. Sometimes it depends on your situation to be frank. But paying off some lower balance student loans with higher interest rates rather than our cars was not going to free up $500.00.
That extra cash gave us more monthly cash flow to pay off my student loans which were $350.00 a month. Now we had $850.00 cash to attack Lauren’s loans. Just like that we had $10,000 a year to help us pay off our student loans (We paid off $57,000 in 2017 alone, read here).