Tuesday, 5 November 2019

How Cars Keep You Broke

How Cars Keep You Broke

All over the world cars are like a prized possession, they're highly regarded, people love their car, so, what are some quick reasons as to why cars are so highly regarded.

1. Memory or Nostalgia

In my personal opinion, I think cars are linked to memory or nostalgia. Everyone remembers their first time either driving a car or owning a car. It allows them to get away from their parents, it allows them to get freedom if you will, and those memories are linked to parties, music, legal and illegal activities, which I will not mention on this article. But at the end of the day, the car is always linked to positive memories. 

2. Work

People obviously need to get from point A to point B in order to earn an income. Obviously, you can be an uber driver and your car can actually be a source of income. You can be a blue-collar worker to where you're a handyman with a pickup truck and you have all your tools and all your stuff and your supplies are in your car.

Read: Leasing a Car vs Buying - Pros and Cons

3. Status

People with nicer cars are perceived as successful whether it's true or not. They could be up to their eyeballs in debt and they could be just keeping up with the joneses, but hey, they got that nice Mercedes or BMW, so people perceive them as successful.

Quick Stats About The Car Industry

This is something that I found very interesting. In 2018, car manufacturers globally, spend $38.5 billion on marketing alone. And about $18 billion of that was in the United States.

Why do you think car manufactures are spending so much money trying to get you into the dealership and move metal. That's because it's a huge industry, it's a huge industry that supports a lot of people and a lot of jobs.

Let's Get Into The Meat of this article.

How Car Keep You, Poor

The way cars keep you poor is a combination of 3 things

1. Borrowing

Most people cannot afford to pay cash for a car, so they're borrowing, and borrowing comes to interest. 

2. Depreciates

You're borrowing money to get you into a car that depreciates over time, meaning, it loses its value. New cars on average typically lose 63% of their value in the first 5 years. And not only that, brand-new cars, the second you drive them off the lot, they typically lose 10% on average of their value.

3. Maintenance

You also have to maintain it. You're borrowing money, you have to pay interest to get you into depreciating asset that you have to maintain over time.

You're always going to have ongoing Maintenance with the vehicle. you insurance, tires, brakes, rotors, oil change, etc. And if you're someone reading this article saying, all that came with my plan, I prepaid all the maintenance upfront, blah blah blah. 

You're still paying for it, and not only that, you're paying for it upfront which is hurting your opportunity cost to invest that money and things that can grow over time. That's known as the time value of money.

How Much This Car Payment Cost You

  • According to the USA. In March of 2019, the average car payment in the United State of American is $551 at 69 months.
  • 69 Months = 5.75 Years

I don't know about you, $551 is a lot of money to me. Imagine paying $551 over 5.75-Years. Since this is a financial website and people want to see the math. 

  • Invested: $551
  • Term: 69 Months
  • Interest: 7%
  • Making: $8,324

If you invested this $551 over 69 months into an investment vehicle that makes you 7%. That is going to be worth $46,343.57. With you contributing roughly $38,000, and you're making $8,324 in interest alone over these 69 months.

  • Making - $8,324 | Saving - $46,343.57

What a lot of people do is they pay for the car with cash, and they invested the $551 that they would have in a car payment, they invest it, and when they need a new car in about 5 or 6 years, guess what they do? They sell the car that they currently own, and they go by pay cash for a brand-new car with the $46,343.57. Or you can choose whatever you want with that money.

Hopefully, you got some value in this article

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