Should I Buy or Lease a Car? Should I Have a Payment at All?
A common question in personal finance is whether we should buy or lease a car. But I actually think this is the wrong question to ask. How much money should we even spend on a car anyway? Does a car payment or lease payment keep me from achieving my financial goals and supporting the church in the way I should be?
I was speaking to someone recently about their car situation and it prompted me to write this article. This person has over $600 a month going for just the car payment. $600! Now, this person has realized this is a heavy weight that is keeping them from investing like they want to so they are trying to get out of the car. However, they are upside down on the car and owe $4,000 on the loan than they can sell it for.
We talked about some ways to get out of this situation but its going to take some time and not be easy. However, I am not goint to focus on the process of getting out of a bad car loan, I want to focus on the car payment and how much money that is costing your future self. A large car payment is far too common and is a huge piece holding people back from investing as they are trying to gain traction in their finances. In fact, the average car payment is $712 according to the July Business Insider article. https://www.businessinsider.com/cost-of-average-monthly-car-payment-hits-record-712-us-2022-7?op=1
Now many will say, well I need a car so obviously I will have a payment. Really? Is that true?
There are a lot of things to consider when deciding what kind of car you should buy. Of course, you want something safe and reliable. But beyond that, is everything else just a luxury? Do you really need a certain brand, a certain color, a skylight or a backup camera? Probably not. Now, is a nice car bad in and of itself, not necessarily. But if you have a disordered attachment to the car where you would rather project a certain image rather than donate to the church or save & invest for the good of your family, then its probably time to rethink your priorities.
So lets do some math and determine what percent of your annual income is going towards your car payment. The average income in America is around $60,000( I have seen numerous stats in this area but it could be a little more or a little less) but lets say you are above average and have a $100,000 salary. If we estimate that you take home $80,000 after withholdings, the average yearly car payment of $8,544 is over 10% of your take-home pay! No wonder its hard to get ahead!
To make the point about how much you are hurting your future self, lets look at how that car payment would grow if it was invested instead of spent on a car. For this example, we will use $8,544 per year ($712 a month) and invest that amount every year for 30 years. How much money would you have? A lot.
If the $8,544 per year is invested and grows at hypothetical 7% annually, you would have $807,072.96 in 30 years. That's pretty nice! Now, if the stock market does very well over the next 30 years and you got a hypothetical 9% annual rate of return, you would have $1,164,611.61. Is the new car and monthly car payments worth it?
This example obviously assumes that you will have a car payment every year until you retire, and that is not always the case. The point of this article is to show how hard you are making your financial journey by having this car payment. Do you need a car payment? Probably not. If you absolutely think you have to have a car payment because you need a car so badly, how do you still find the safest, most reliable car you can find that costs the least amount of money and get the smallest loan you can? Because the car loan is not an investment. When you go to sell the car in a few years, it will almost always be worth less than what you bought it for, and sometimes significantly less.
There are a lot of different ideas briefly touched on in this article that I may need to expand on. How do we prioritize spending so we are still able to give? What is debt and should I have any at all? What is compound interest? And the classic question of whether should I buy or lease a car? I didnt even address that. Be on the lookout for more articles addressing some or all of these topics.
The investment returns discussed are hypothetical and not guaranteed. Investing always includes risk. This was for information purposes only, not investment advice.
Please reach out if you have any questions we can address specific to your situation.
Phil Francois CFP®
phil@foundationwealthplanning.com
Foundationwealthplanning.com