How a car payment affects our finances
A new vehicle is intoxicating!! It smells amazing, runs oh, so smoothly and has all the new tech features…. Then, the salesperson shows us the upgraded version (drool)….
How an expensive vehicle affects a pre-approval
Let's compare 2 couples…
Couple A: great credit, 400$ car payment and a $35K down-payment.
Couple B: same credit, same $400/mth car payment, same down-payment, PLUS a brand new beautiful SUV with a $700/mth car payment.
Couple B would get a pre-approval over $100,000 LESS than Couple A. Soak that in! The $700/mth payment actually drops their pre-approval by over $100K!!!! Check out my video about this here!
Lets geek out a bit...
Financially, the goal should always be to increase our net worth. (Net worth = If we sold everything we own and paid off all the debts, how much is left? That’s your net worth)
A good financial plan should increase our net worth, year after year. We start with a negative or zero net worth and slowly over our life, increase it. The cycle often looks like this (yes, of course, there are exceptions)….
University/college student: Negative net worth. We have debt & no assets (we don’t OWN much)
In our 20s: Low-ish net worth. We might have a car, maybe just got a house, but also have considerable debts (student loans, a car payment & mortgage…).
In our 30s, 40s, 50s: Net worth increases. As we pay down our mortgage & we invest (or build our pensions) for our retirement, we increase our net worth and build our assets (what we OWN).
Food for thought…
A vehicle does nothing to increase our net worth because it's not considered a strong asset. A good asset "should" increase over time. Typically, with car payments, we owe what it's worth, unless you pay cash. Even if you pay cash, it still loses value over time and eventually is worth basically nothing.
What is a “strong asset”? I’m glad you asked.
Houses are a great asset/investment because they normally increase in value over time. If you bought a house in 2010, it should be worth more today, in 2022.
By prioritizing the house, Couple A got a nicer home AND they’re taking care of their future-self by ensuring they have a valuable asset that will be worth more in the future!
I’m not 💩 -ing on vehicles
We need them!! It gets us to the job that pays for everything!! My point: the house offers more value! So, if there’s a debate between a house and vehicle, the house always wins!!! Once the house is “settled & solid”, enjoy the beautiful new wheels!!
What “experts” suggest
(I’m not an expert so of course, I asked Google)
The general recommendation is to keep total vehicle expenses (car payment, lease, fuel, insurance & maintenance) below 15%-20% of our take-home pay (after taxes). However, finances are never a one-size-fits-all... everyone has a different situation.
For a recent college-graduate who has student loans, is paying rent, saving for a down-payment and needs a car to get to work, it might be prudent for her to keep her car expenses less than 15% to achieve her goals.
Her parents are in a different situation… their house is paid free & clear, they have solid pensions and love luxury vehicles - they have more disposable income and can enjoy the expensive vehicle!
Final thoughts
You can 100% have both, a nice home & beautiful vehicle! Just prioritize the home before the car and you’re setting yourself up for financial success!
Hope that was helpful!
Nat