I have some radical advice for buying your next car — PAY CASH FOR IT. I know, I know, nobody does that, who has $xx,xxx, sitting around, etc. What most people don’t get is this: If you can’t afford to pay cash then you really can’t afford to buy the car. Over a lifetime car purchases can significantly reduce your net worth. When I work on plans for my clients, I find that a $25,000 car purchase every 7 years or often reduces their net worth by over a million dollars! For those who lease cars and always have a payment it is even worse.
For most of us, if you cannot purchase a car for cash it means you cannot afford it. If you lease a car, it usually means you can’t really afford it. We are now geared to the whole idea of monthly payments vs. the total cost of the car. I recently gave a presentation where I asked the audience how many of them would buy a Mercedes Benz for $199 per month. Almost every hand went up. Then I said its $199 for 50 years, now no one wanted the deal. Stretching out payments for something that decreases in value does not make it affordable. Long payment periods means that you will owe more on the car than its worth for most of the loan period.
Buying a car for cash has several benefits:
- You know what you can really afford.
- You will probably buy a less expensive car that you can afford.
- You will probably buy cars less frequently when you have to write a big check for one.
- You are never in debt and you earn money on the money you save for your car vs. pay interest on a car loan
- When you buy a car you can then start saving for the next one.
Next time: How to purchase a car for a good price.