Good morning friends, family, and everyone new who joined in for the fun last week!
I find it fascinating how this introductory section becomes harder and harder to write with each passing week of our Manitoban lockdown. Though we haven't been able to see friends and family, life hasn't changed too dramatically for our young family in the month since November 12th. During these school years, I'm always locked in my basement office reading, studying, and writing, and in general, missing out on all the squealing little girls running around upstairs.
But normally, that's not the only part of life I'm missing out on. Normally, the NHL is in full swing right now and I would have gone to a Jets game or two. Normally, there's Christmas shopping and planning to complete. Normally, there's a bustling schedule brimming with parties, events, and a celebratory feel in the air.
Not this year. This year, I'm not missing out.
So to a degree, I'm thankful I'm not missing out.
But it sure makes writing this opening introductory section a lot harder.
I hope you and your family are able to find some "normality" as this lockdown across North American continues.
(I just realized the word "normal" or "normalize" appears in here way, way too often.)
This week, I'm skipping out on the quick thought and the quick link. Quite frankly, my exodus from Twitter has left me with a lot less to read and a lot less to share.
How to Normalize Vehicle Payments and Have Enough Cash to Pay for a Vehicle Outright
Cars are the scapegoat for loads of personal finance gurus. If you can tell people not to buy expensive cars, you can make it as a personal finance coach.
I mean, it shouldn’t come as a surprise to anyone that vehicles are expensive, cars depreciate quickly in the first few years of use, and cars cost a lot to operate.
It also shouldn’t come as a surprise the 20/4/10 rule works quite well:
- Vehicle down payments for no less than 20%
- Vehicle loans for no more than 4 years
- Vehicle payments cannot make up more than 10% of your income
This is meat and potatoes stuff. And I can now call myself a personal finance coach!
But vehicle loans have this way of putting people into endless underwater debts that roll over into further underwater debt the next time a trade-in is made. Vehicle loans hinder a person’s ability to start building wealth, especially in the middle years where you can never truly get ahead of the underwater part of the loan.
So, to that end, here’s a tip I learned from my personal finance coach:
Pay that 5-year car loan off in 4 years, continue making payments to yourself, and drive the car for 6 years.
This little tip can be modified to suit your needs, but it will help normalize vehicle payments for a substantial portion of your life and will result in an effective way of having enough cash down the road to pay for a vehicle outright.
So like I tend to do here at Toonie, here’s the math:
Let’s say you’re purchasing a $30,000 vehicle. You put $6,000 down (20% down) and want to pay off the vehicle in 48 months. You’re going to pay at least 3% interest (likely higher, but bear with me). The monthly vehicle payment will work out to $615 (for round mathematics’s sake).
$615 will become the amount you need to pay every month for the next 6 years and beyond. Remember that number.
Now, setup the vehicle loan for 5 years, not 4 years. Why? I’m a big believer in using debt to provide cushion and buffer, and the extra year on the loan will provide a healthy little buffer in case emergency strikes. That same loan over 60 months brings the monthly vehicle payment down to $500 (again, rounded).
If you pay $615 a month ($115 of which is “extra"), you’ll have the loan paid off in 4 years. Boom. Done. See ya! If emergency strikes, pay the lesser $500 payment and use the buffer to pay for more important expenses.
The loan should be paid off in 48 months, at which time it is not the time to trade up to something new. Instead, it’s time to drive that vehicle for an extra 2 years.
And instead of quitting the world of vehicle payments, you’ll need to continue putting $615 a month into a separate savings account while you drive that payment-free vehicle.
In hindsight now, 6 years have past (the first 4 years you were paying the loan and the next 2 years you were paying yourself), and it’s time to trade in that vehicle. You’ll now have some equity in the vehicle, plus you’ll have $14,760 of cash ($615 x 24 months) to put against the new vehicle.
And then we’ll do it all over again. $30,000 vehicle for 60 months, but you’re going to pay it off over 48 months. Let’s say you receive a trade-in value for your old vehicle of $7,500 and you put $14,760 down. At 2.99%, you’re looking at a payment of only $191.59 over a 60 month term.
But instead of paying $191.59, you’re going to pay $615 a month and knock out that loan in right around 18 months.
Finally, once you’re done with that second car loan, you’re going to keep putting $615 a month into a savings account until you’ve driven the car for a good 5 or 6 years.
And then you’ll do it all over again.
You’ll quickly notice that the $615 monthly car payment never ends. And in reality, it never really does end — if you’re driving a vehicle, it costs a lot to operate that vehicle. Insurance, repairs, fuel, and payments toward the next vehicle will equate to a great deal of cash.
If you’re driving a vehicle, it’s imperative you get used to the reality of a vehicle costing a lot of money, whether it’s an old rust bucket that’s 15 years old or a brand new Lincoln Navigator worth more than your annual salary.
Once you lock in that monthly vehicle payment, keep making that payment for the next 10 or 15 years and you’ll have enough cash and equity in your vehicles to purchase your next vehicle upfront with no loan at all.
Of course, there are a thousand different circuit breakers that would enable you to skip this payment workflow. You could just drive a clunker for 10 years and save cash during that time.
Nevertheless, finding normality in personal finance is something to strive for. Automating your savings. Forcing yourself to make extra payments. And normalizing your monthly vehicle payments for long periods of time will help you get ahead of the dreaded "drive it off the lot" hit in depreciation.
Thanks again for reading through this week. Next week, I think I'm going to throw something together about registering for GST if you're just starting out on a new side gig or a small business opportunity.
In the meantime, I hope you and yours have a wonderful weekend and a prosperous week ahead.
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