It’s become a fact of life for many families that there should be at least one car for each adult member of every household. Often, that arrangement includes late-model cars. And with late-model cars, that more often than not includes a car loan. While we might think about it as the new normal in our culture, it’s also very expensive way to live. This is why your second car should be a “beater.”
What’s a beater? It’s an older car – generally more than 10 years old, and one that typically has a low market value. Because of that low market value, there won’t be a car payment attached to it. You can get to that status either by holding onto your car long enough to pay it off, and to drive it for several years after, or by buying an older car to start with.
The point is, two new cars in the same household can be a massive drain on a couple’s budget. The cost of living today is deceptively high, and carrying on with two car payments prevents money from being invested to earn more money. Having at least one car that’s a beater can avoid that problem.
Avoiding a second car payment
Having just one car payment can be a problem all its own; adding a second is magnifying the problem. Let’s say that you have two car payments, each at $500 per month – which is hardly a stretch, given the fact that the average price of a new car is now $32,086. That’s $1,000 per month.
Though we may think of paying that kind of money each month for car payments as being normal, we should step back and compare it to other expenses. When doing so, we may decide that it’s not at all desirable.
$1,000 per month is more than a lot of people pay for rent. In some parts of the country, it can even be the size of a house payment. It’s probably more money than a married couple without children would pay for health insurance – and everyone complains about that expense.
If instead of having a payment on both cars, you had one late model car with a $500 per month payment, and a beater with no payment, you cut the overall expense in half.
Think of what an extra $500 could do. You can use it to build an emergency fund - fast. You can use it to payoff credit cards. You could use it to prepay your mortgage. Or you can use it to increase funding for your retirement plan or other investment plans.
Sure, having two new cars in the family is exciting, but over the long run, building greater financial independence is even more exciting.
Keeping your car insurance and ad valorem taxes low
A car payment is just the most obvious expense associated with a new or late-model car. Because of the higher replacement cost, car insurance is also much more expensive on newer vehicles. In addition, you’ll have to maintain collision coverage on a late-model car, an expense you wouldn’t even need to pay on a beater.
Another expense is ad valorem taxes. Not all states impose this fee, but it is something like paying a sales tax on the value of the car each year that you own it. Obviously the higher the value of the car, the higher the ad valorem taxes you will pay. On a beater, the ad valorem tax may be only a few dollars per year- after all, the car has minimal value.
A lot of people think that owning an older car is a trade-off on repairs. They reason that the money that you save on car payments, insurance and taxes, is largely given back in the form greater repairs. For the most part, that concern is exaggerated.
New cars require expensive new replacement parts, which is particularly true if your vehicle is leased. It may also require the use of the dealer’s repair shop, which is just about the most expensive repair option of all.
When you own a beater, you can use used and rebuilt parts. You can even make your own repairs, or find a reliable backyard mechanic do it for you. You probably won’t spend more than a couple thousand dollars per year on average for repairs, which is still whole lot lower than what you would pay for car payments on an annual basis.
How much money do you want to have tied up in your cars?
This is a question from a big picture financial standpoint, and one that people seldom ask when it comes to buying a new car. But truly, how much money do you want to have tied up in the cars that are parked in your driveway? If an average new car costs $32,000, having two of them means that you have $64,000 sitting in motor vehicles. Those are depreciating assets at that.
Considering the amount of capital that owning new cars requires, think about how much better some of that money would look sitting in mutual funds or retirement accounts. That may cause you to rethink the whole idea of new cars of all. Like virtually all other consumer goods, a car is a capital trap. The more you pay for one, the less money that you have available for productive assets.
Working from home or close to home
Owning a new or late-model car is certainly socially desirable. Financing it has become something of habit these days, especially with car dealers falling all over themselves to offer advantageous loan packages. But times are changing, and car buying habits are not necessarily keeping up those changes.
Consider the fact that a lot of people today have jobs that enable them to work at home. Consider also the fact that computers and the Internet have enabled many people to start home-based businesses. What is the need for a new car if you don’t even need to leave the house to earn a living?
If a car is a capital trap to start with, how much more true is that for the person who works from home? If you work from home, and own a new car – with all the expenses it carries – it can be a complete waste of money.
One of the real financial advantages to working from home is be able save money. That becomes possible because you are in a position to downgrade your transportation. If you work from home, do you take advantage of that benefit?
Photo Credit: Mike Lee