Cars are the second-most-expensive things that most people buy, and can be one of the greatest impediments to achieving financial security. There are myriad traps involved in deciding whether to buy a new car, negotiating its price and financing and insuring it.
Falling into these traps can be extremely costly and drain resources that could go toward other things, like college savings for your children or investing for your retirement.
Here are some of the deeper traps and the best routes for steering around them:
• The gotta-have-a-new-car-now trap. Many people itch to have a new car as soon as — or even before — the old one is paid off or the lease expires. If they act on this compulsion and get a new car, they continue to make payments instead of putting money toward other financial goals. Making the decision to wait for a new car enables you to save the money that would have gone toward a payment (for most people, $300 to $500 per month). This fund can ultimately be used for a cash purchase or, if it grows large enough, it might generate enough earnings to make or substantially diminish your payment when you get a new car.
If you drive your car for five years after your payments end — which, depending on how much you drive, can be a golden zone of no payments and few repairs — saving the would-be payment could result in a car fund of $20,000 to $30,000.
Of course, this means having the discipline to drive your current car longer, but cars tend to last longer (and cost more) than they used to. Any repairs could be paid out of the new-car fund.
I have a client who first contacted me when she decided to trade in her 10-year-old car. As a stay-at-home mom and part time realtor, she had been saving every dollar she earned from real estate sales, resisting the urge to buy the big fancy car as so many of her colleagues did. For 10 years, she slowly but steadily built up her car fund. Finally, the day arrived when she was ready to pay cash for her dream car.
But a funny thing happens to many people once they've saved a lot of money. We think about the sacrifice it took to reach this goal, and this makes us reluctant to let go of the money. This is one of the less talked-about benefits of committing to the discipline of saving.
My client had started looking at new cars, but was thinking twice about spending her new-car fund and having to start all over again. She called me from the dealership and asked if there was any way to invest the money to generate enough earnings to make all the car payments. After we ran the numbers and created an investment plan, that's what exactly what she ended up doing. Once the car was paid for, she had the car and the money. She drove that car for the next 18 years, letting her car fund grow and then using it to buy another new car.
• The price trap. Before you go to the dealership, do some research into the fair price for the car you want and the true value of your car for trade-in. Values for used cars and trade-ins for your part of the country can be found in a book serially published by the National Automobile Dealers Association (NADA) and available in bookstores. Negotiate the price of the car you want independently of financing considerations. Sometimes the salesperson will earn a commission on the financing of the car as well, so don't depend on the dealer to give you the best deal on financing.