A primary rule about cars you must always remember is: Cars Are NOT Investments. Of course there are exceptions to every rule and there are a few exceptions here, but in general cars are depreciating assets. Again, forget what you see on television and completely disregard what the car salesman tells you. Each influence is just setting you up for an additional $20,000 in debt that you will be paying interest on for the next 4-7 years. Based on your interest rate that $20,000 becomes $26,000 or $32,000 over that time period. And what about your car? On average, cars and trucks lose more than 20% of their value in the first year. Some vehicles lose as much as 40%. The second year studies show that cars and trucks loose an additional 15% in value. Therefore if you paid $20,000 for your car, two years later that car may be worth $13,000 for a total depreciation of $7,000 or nearly $300 per month. If you had financed most of that $20,000 car, after two years the loan on your car may be far more than the car is worth! Don't get caught in this cycle.
The Option Of Public Transportation
Most people have cars because they've been brainwashed into believing they are a symbol of freedom. While this may have been true in the 1950s, this is no longer the case today. When you consider the fact that most brand new cars are in excess of $15,000, and the average American only makes about $33,000 per year, it is easy to see why so many people have to take on debt just to drive. If you are in a city that has quality public transportation, I highly advise you use it. This will save you thousands each year and public transportation in cities like New York and Chicago can be very convenient and highly beneficial to the user. Perhaps you made the mistake of leasing or financing a vehicle, or perhaps you work far from your home, and there are no public transportation facilities available. In this event, I can understand your situation. However, the numbers of people who fall under this category are in the minority.
The reason for this is simple: Since few Americans have $10,000 in savings or more, many can't afford to pay for a brand new car in cash. Therefore, many are suckered into leasing or financing a vehicle, and they spend the next four to seven years making payments on a car that won't be worth anything once it is paid off. In my opinion, you should not even buy a car if public transportation is readily available. Taking the bus or subway is cheap, and you don't have to be worried about the ever increasing cost of gas or insurance rates. Still, many people like to make excuses for why they spend so much on cars. While some are legitimate, others are not, and much of it basically boils down to manipulation by society as a whole.
Americans have been brainwashed into thinking that having a car is a symbol of wealth and freedom. In high school, some guys can't even pick up popular girls unless they have automobiles. This manipulation has been used for many years. If you travel to countries in East Asia such as China or Japan, public transportation is a way of life. Most people don't have the room, desire, or even money to purchase a car. In this part of the world, riding a bike is much more popular and healthy. Even then, buying a car wouldn't be so bad if it wasn't for the high prices we have to pay here in the United States. Between the 1930s and the 1950s, it was possible for an American to get a brand new car for less than $3,000. Today, you would find it challenging to get a quality used car for this price. We live in a day and age where the cost for a typical automobile is almost 50% of what the average American makes per year. The cost of automobiles has not kept pace with the earnings of Americans, and many people are in debt because of it. Despite this, there are times when you will want to have a car. Perhaps you have a family, or you work far from home, and there is not good public transportation available. This scenario is quite common for people who live in the Southern and Western states.
Rules For Buying a Car:
Always Buy a Used Car.
Never, ever lease or finance a new car from the dealer.
Buying a used car can save you tens of thousands of dollars.
Even when purchasing used cars do not finance them, save up your money and make a cash purchase of the car. It will take time and research to find the right car for you, but you will be saving thousands in the process. Only purchase a car that is less than 50% of your net worth. There are a number of reasons why leasing a car is a bad idea. First, if you don't have more money saved up than the car you're leasing, you are breaking the rule that I stated in Chapter 1, which is "don't borrow more money than you have saved up." Second, you will be charged a great deal of interest, and the car dealer is guaranteed to get back far more than the car is worth. One thing you must remember about cars is that they almost always "depreciate" in value. Unless you're buying a vintage Ferrari, after five years, the car will not be worth anything near what you paid for it. The dealer will get back his money plus interest, and all you will have is an old car that will eventually begin having mechanical problems, issues that will cost money to fix. Paying for the cost of a damaged transmission is enough to leave a lot of Americans broke.
If you choose to buy a used car, you will save money, and you won't have to go in debt. It will also be easier for you to deal with the repairs. I've watched many people lose thousands of dollars due to leasing cars, and they become truly “in the red,” owing the dealer or finance company tens of thousands of dollars. When the lease on their car is up, they simply enter into another lease and start the process of paying off debt all over again. Much of the money they earn from their jobs will have to go into the dealer's pockets. Don't put yourself in a situation like this. Save up for a "quality" used car, and make sure you have enough left over to deal with repairs. Notice in the last sentence how I put an emphasis on the word "quality." Many people make the mistake of buying used cars that are nothing more than lemons. I've seen people pay $1,500 for a car that broke down less than a few months later. Despite my warnings, my friend paid $700 for a car, and it broke down the night we drove it home. When you buy a lemon, you have basically been the victim of a scam. The person who sold you the car may have made hundreds or thousands of dollars on a vehicle that is a worthless piece of junk, and the victim will either have to pay for the repairs, or have the car moved to the junk yard. Before you buy a used car, do a detailed diagnostic check from a trusted source to make sure it works perfectly. Make sure you can trust the person who performs the diagnostic. Never allow the seller to choose the place for the diagnostic check. This ball should always be in your court. It is also a good idea to buy cars from older people. Senior citizens are excellent, since they don't put a great deal of wear and tear on their vehicles. Unlike clothes, you will also want to pay attention to the brand when you are looking at purchasing a used car. There are many resources online that will allow you to get consumer reports on the car, and you can find out which brands are the best. No matter what you do, never take the word of the seller at face value. They'll say anything to pull money out of your pocket.
Another thing you will want to pay attention to when buying a used car is the Kelly Bluebook value. The Kelly Bluebook is an online and offline tool you can use to measure the value of a make, model, and year of a car. Many people try to sell used cars for prices that are much higher than what they're worth. By using the Kelly Bluebook, you can find the true value of virtually any make and model, and if the seller is asking too much, you can ask them to lower their price. If they don't, decline their offer and begin looking for someone else.
You need to be very cautious when purchasing a car. The automobile industry is known for scamming their customers, and the bad reputation of many used car salesmen is justified. Never listen to their hype about how good the car is, and take all the precautions discussed in this chapter. Even a used car is often worth money that you can't afford to throw away because of a slick salesman. This money is much better left in your bank account. The rules regarding vehicles can be compressed in this one rule:
Never lease an automobile or buy a new car from a dealer.
Always pay in cash.
It is generally best to buy a quality used vehicle.
Additionally, the purchase of a car should not take up more than 50% of your net worth.
Only buy a car if you need it, and use public transportation as an alternative if it is available.
While most people want to be rich, few are willing to make the sacrifices necessary to obtain it. Perhaps you enjoy eating out a lot, or you like wearing expensive clothes. Maybe you're the type of person who can't stand driving a used car. If you feel this way, my response is very simple and straight forward: You will never obtain true wealth. Even if you make a high salary, you will inevitably end up in debt, because wanting to have the best of everything will cost more than what you bring in. For most people, it is not possible to have a cake and eat it to. If you're like me, and you wish to build wealth from nothing, you must accept the fact that there are sacrifices you will have to make. If it was easy to become wealthy, everyone would be millionaires and billionaires. No great victory was ever achieved without a large number of sacrifices. Many of the strategies I talk about in this book will require you to have discipline and determination. This book was not written for the faint of heart. It was written for people who are sick and tired of living in debt and never escaping the rat race. They are sick and tired of getting paid less than what they're worth, and they are tired of living paycheck to paycheck. This book is written for people who want to take control of their finances. Most importantly, it is written for people who want to build wealth. While the advice in this chapter may be hard to follow, executing them successfully will lead to a life of more money, and less headaches. So far in this book, we have discussed the basics. In the next chapter, we will discuss saving money on entertainment and healthcare.