Cars play an important role in people’s lives. Today cars aren’t just seen as a mode of transportation, they emerged as a status symbol in people’s lives.
How car keeps you car poor?
Many people buy cars out of necessity because their home is located in the suburbs where there could be a lack of metro connectivity, and public transportation to travel back and forth to the workplace. Another group of people buy a car due to peer pressure, impressing the crowd, etc.
A rich driving a Ferrari does not make him/her car poor, but buying an automobile without the right financial planning makes you a car poor.
when your total savings is at $48,000, but buying a car with a price tag of $68,000 leads you to a negative net worth. Now, this scenario is called car poor.
You may drive & flaunt your latest car in the neighborhood, but only you know this expensive purchase lead you to a negative net worth!
Almost all the expensive purchase you make in your life is supported by a loan from the bank.
A car loan is one of the top three debts a person could have. (House loan, Car loan, Credit card debt).
If you are a person who upgrades your car every three years once, chances are well you can be a “car poor”
How cars keep you poor
People consider owning a car an asset.
An asset is something that should be able to produce returns for the owners i.e rental units, stocks, etc.
Even dead assets like gold or silver would appreciate in value after a while.
But the car does neither, it depreciates. Unless it its an antique one.
Do you know? A new car loses 20 percent of its value within 12 months of purchase.
By the time you finish your car loan repayment in five or six years, your new car would have lost 60 to 70 % of its value.
The value of depreciation is based on the initial car price, which is apart from the interest and other charges you paid.
If you are a guy/gal who changes your car once in 5 years, the money you keep losing would be astonishing!
The easiest thing you can get these days is Loan.
Banks made the process of giving loan so easy, so they can make money out of you.
The Loan to value ratio for a car loan is offered at 100 % or more of the car value (including the sales tax, title & license fee)
Bank charges around 5.5 percent as interest on an average and payment tenure can last from a minimum of 12 months to max of 84 months.
Part of your paycheck is committed to loan repayment for the next 60 months.
Car loan: $37,000
Interest rate: 5.4 %
Monthly car payment: $ 705
Loan tenure: 60 months
Using this loan calculator, you will end up paying over $45000 for a car purchased at $37000. Now the loss is over $8000.
It may not seem painful in the beginning as the captivating beauty of your new car makes you forget. After six months, the beauty evades, and now the car starts to get scratched, flat Tyers, etc. At this point, the pain of loan repayment can’t be avoided as before.
By the time you are done with the loan repayment, the nice flashy car turned into an old & outdated model with scratches & dents.
Read about: 13 Extreme frugal living tips to try
Apart from your loan repayment, to keep the car running you have to shell out money from the pocket.
The price of gasoline keeps increasing year after year. You are at the mercy of the government , where you have no control over gasoline prices.
How much you spend on gasoline depends on variables like your car mileage, how long you drive, etc. But people who own car spends an average $131 per month.
If you are planning that weekend road trip with your friends or family, again the figures gonna move up north.
Spending money on car never ends once you buy the car from showroom.
To keep the car in good condition, you need to take it to service center where you need to shell out your money again.
Cars are good at throwing surprises than family & friends, It gets flat tire, some part needs to get repaired or to be removed.
One nice gentleman dashed on your car on a busy traffic road. All these going to cost you dear money.
You may say I got insurance! Lets get in there too.
You need to insure your car. Its the best safe net for a car owner to tackle the unpredictable expenses.
Again insurance going to cost you money on recurring basis annually.
To get approved by the insurance companies for your car repair is an other hassle you got to face.
It won’t be nice and smooth.
I ain’t saying you should not own car.
- Your car loan repayment should not exceed 10 percent of your monthly paycheck.
- Frequent trading off cars can lead you to negative networth.
- A new car value should not exceed sixty percent of your annual pay.
If you consider all the above factors, chances are good you won’t be car poor by owning one.
Owning a car could be a necessity for you or it could be a matter of status, whatever the reasons could be but the cost associated with owning a car should not hamper your mental and financial well being.
Thank you for reading!