It’s a Trap! How car payments prevent wealth building

I still remember the day when I purchased my shiny slightly used 2008 Cadillac CTS. After taking a short test drive and contracting “NewCaritis” I was sold! It wasn’t the reliability, value, or price that sold me…. It was a status purchase. I don’t let prior mistakes shape my life, so CarMax won that battle and I am happy for the 30k lesson. Without experiences, we cannot grow. So here is my attempt to help you grow. Don’t finance a car, it’s a trap!

Why is a trap you ask? Because your brain is great at rationalizing poor decisions, and your wants often get placed in the”needs” box. Most people who purchase cars, finance them and accept the $300 to $500 car payment because it is the norm. They would be correct in labelling it normal to have a car payment. I don’t want to be normal and because of your reading this you don’t either. Normal people are drowning in debt, have awful credit, no savings, and living paycheck to paycheck. Stop emulating broke people and you won’t end up broke!

I usually ask those who I aid in restoring good financial practices what is the total balance left on their car and it is usually somewhere around 15k with 3 years left of payments. The new car smell has worn off, coffee stains are on floor mats, and food from your daughter’s car seat is sprinkled all over your back seat. This isn’t the gem you remembered, it no longer seems like a good idea to fork over $500 for the next 3 years on a purchase from 2014. It is a trap!

The major reasons car payments are a trap are listed below:

  • It destroys your ability to generate cash flow “how does a $500 monthly pay cut for 6 years sound?” That is exactly the commitment you are making.

 

  • You aren’t buying the car for you; you are buying a badge of status. Look at me in my shiny BMW when I make $40k per year, that’s a recipe for “Broke Stew”. The problem is that you are attempting to look rich by driving the opposite car choices of the rich. Thomas Stanley’s research has proven that 86% of luxury car purchases are by non-millionaires.

 

  • The key to building wealth is to save 10% of what you earn, earn interest on investments, and be frugal. Car financing eliminates cash flow causing an inability to save. To make matters worse, you pay interest rather than making it! No one can claim to be frugal while paying car payments, frugal people would not borrow to buy something. Borrowing is admitting you cannot afford something.

 

  • Car payments create a long-term contract that locks you into a multiyear obligation that leaves you broke and underwater.

 

  • Check out this video and let me know if this changes your mind on why a car payment makes no sense! Free Cars For Life!

If you are looking to finance a car take some advice from someone who has walked both paths. I haven’t had a car payment in many years and it was the largest raise I have ever given myself. Don’t finance a car, it’s a trap!

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    13 COMMENTS

  • LaShuan
    / Reply

    Great read! As someone who desperately wants a new car right now, you have caused me to pause because even more than I want a new car, I want to be financially stable. & right now I’m not in a position to save 10% of my salary… Why? Well partly because of the $550 a month I’m using to pay my car note each month.

  • Shawanna
    / Reply

    Awesome advice! I 100% agree. I too have had to learn this lesson the hard way. I am currently on the road to paying my car off. Guess what?! I won’t purchase another one til the one I have now is in the grave. I NEED a car, but I don’t need to be committed to a car loan for several years just to keep up with the stays quo. Lesson learned!

  • Felicia
    / Reply

    I have been saying this for years. Although I had to recently acquire one I made sure it was as inexpensive as I could get it and will be sacrificing shopping and eating out to pay it off in a years time. Great read. Looking forward to reading more.

  • Josh
    / Reply

    Love it Ron! Great logical foresight. I really like the “how does a $500 monthly pay cut for 6 years sound?” . I always learned to buy cars you could afford outright, and I’ve got to say, getting a car loan would destroy that positive cash flow.. I actually bought a (cheaper) BMW without a loan and now it costs me a fortune to maintain :/ Rookie error right? Now I’m trying to figure out if I should try to switch cars, or just put up with it. Fees for buying a new car are costly, and it is nice to drive.

    • ronprestonjr@gmail.com
      / Reply

      Thanks for the comment, If I were you I would probably save towards the day u decide to swap it out. Like you said the fees are costly and u have a sweet ride!

  • Psychic Nest
    / Reply

    Hi Ron,

    I remember when my parents bought their jeep and they almost went broke after it.. Paying 400$ per month was not fun..

    I swore not to make that mistake. There is a big difference between looking rich and being rich. Thank you for the great post!

    Zaria

    • ronprestonjr@gmail.com
      / Reply

      You are correct about the difference of looking rich and being rich. I find that when people are looking to finance cars they simply look at the payment only. When you pay cash you are a much better shopper who is looking for value not style. Thanks for the reply!

  • Jason
    / Reply

    I have been browsing online more than 3 hours today, yet I never found
    any interesting article like yours. It’s pretty
    worth enough for me. In my opinion, if all site owners
    and bloggers made good content as you did, the web will be much
    more useful than ever before.

    • ronprestonjr@gmail.com
      / Reply

      Jason your comment really motivated me to continue posting sound content. If you want to receive posts when they are posted please subscribe. I am also always looking to post on topics of interest, so if you have any questions or suggestions feel free to let me know!

  • Dividendsdownunder
    / Reply

    Hey Ron, we definitely agree – a car is most people’s biggest destroyer of wealth (houses/land tend to increase in value). 99% of people should see a car to get you from point A to B comfortably, safely and efficiently. Everything on top of that is unnecessary expenses,

    We bought our car 2nd hand fully with cash on the day we bought it. We’re glad we did that.

    Tristan

    • ronprestonjr@gmail.com
      / Reply

      Thanks for the comment, I have made the commitment to never to have a car payment again. The concept of paying cash isn’t easily grasped by others because saving money is a lost art.

  • Tia Cunningham
    / Reply

    Hi Ron,
    Awesome article! I bought my SUV with cash at half market value over two years ago off of Craigslist. I live by buying my vehicles with “cash only.”
    In the meantime, I keep up the maintenance, keep the mileage as low as possible & keep my cars as clean as possible–to ensure they lasts me as long as possible.
    Great practical advice!

    • ronprestonjr@gmail.com
      / Reply

      Thanks for stopping by and sharing your story! The longer you stay in the same vehicle the better! I’ve been in my current vehicle for 7 years.

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