You’re paying for something that Depreciates abruptly
The first thing to consider is how much your car will depreciate over time. According to Edmunds, the average value of a new car drops by about 50% after five years. That means that after you buy your new set of wheels, it’s almost half what it was worth when you drove it off the lot! Your vehicle will lose a lot of its value in the long term.
In addition to this incredibly steep depreciation rate over time, your car also loses value each year as soon as you drive it off the lot. When you sign on that dotted line at the dealership and take possession of your new ride, it starts losing value—neglecting the things that could make a difference in your life.
If you’re still paying off a car loan, you could miss out on the opportunity to invest in things that could make a difference in your life. Here are some examples:
- Paying for college tuition or graduate school
- Starting a business
- Saving for a down payment on a house
Saving toward retirement or building up your emergency fund so that if something unexpected happens, you aren’t forced to put it on credit cards and pay interest on top of all the other debt payments.
Put money aside for education savings accounts (ESAs) for your children’s future needs.
Your wealth Slipped through your fingers
Making a car payment is a huge commitment. You should not take it lightly because once you commit to it, your money is gone forever.
Think about how much time and effort earned that $500 each month. That money could have been invested in your future instead of being used to pay for a depreciating asset like a car. It would have been better spent paying down student loans or building up an emergency fund than going into the black hole of monthly car payments.
You need to decide what is more important: having an expensive new car or having the freedom from debt and spending habits that will allow you to be financially free later in life?
It’s no secret that cars depreciate as soon as you drive them off the lot. Most cars lose 20% of their value in the first year alone. And yet, we continue to make car payments monthly, year after year, without giving it much thought.
But what if you stopped making car payments? What if you sold your car and started investing that money instead? Over time, your investments would grow and provide you with a much larger financial cushion than your car ever could.
So don’t let your wealth slip through your fingers. Make a change today and start investing.
You’re using Credit to pay for the car
Every time you make a car payment, you borrow money and accrue interest. You could use this borrowed money to finance other purchases or investments, but instead, it’s used to pay for your car loan. In short, you’re paying for the privilege of borrowing money, which can negatively affect your future financial stability.
If you’re not careful, your car payment could put you in a difficult financial situation. It’s essential to be mindful of your spending and make sure you’re using credit responsibly. Otherwise, you could end up paying for your car long after driving it off the lot.
What does this mean for your Long-term financial picture?
The long-term effect of this is that you’ll be paying interest on your car payment, and that can add up to a lot of money. Interest payments make it so hard for people to get out of debt. Even if you only have $10,000 in student loans, paying 8% interest on them means you’re spending $800 per year just on the interest alone! Suppose we assume that your income stays the same throughout your lifetime and that no inflation occurs. In that case, we can confidently say that making monthly car payments instead of putting cash into savings or investments while young will cost you over half a million dollars by retirement age ($50k x 12 months x 20 years = 240k).