Several years ago, a friend asked me why I was still driving an old Chevy Suburban with 240,000 miles on it when I could easily afford something newer. My answer was simple: “There are two key financial words in life: ‘paid for.’” To me, “paid for” means my income isn’t being sent to the finance company for my car payments. Instead, my money stays in my pocket. I believe in driving what I can afford in cash and saving up for my next vehicle to pay for that in cash, too. Cars aren’t status symbols—they’re tools to get you from point A to point B.
A perspective shared by a CPA friend who is incredibly wise about financial matters resonated deeply with me. He called buying a personal car a “Steel Debt Trap,” and I couldn’t agree more. Here’s why buying a new car can be one of the worst financial decisions and how to avoid this costly trap.
The Steel Debt Trap
Buying a personal car is often a disastrous investment from an accountant's viewpoint. Here’s why:
Staggering Initial Cost: A new car typically costs more than most Americans earn in 10 to 12 months of work. This hefty price tag becomes even more burdensome when you finance the purchase.
Immediate Depreciation: When you drive a new car off the lot, it begins to lose value. This depreciation continues as you own the vehicle, making it an ongoing financial liability rather than an asset.
High Maintenance and Operation Costs: Owning a car involves more than just the purchase price. You’ll need to spend money on maintenance, fuel, and repairs, adding to the overall cost of ownership.
Registration and Insurance: You’ll also have to pay annual vehicle registration and insurance costs, which contribute to the financial burden of owning a car.
Long-Term Loan Obligations: Many people finance their cars for five, six, or even seven years, trapping themselves in a cycle of debt and interest payments. This long-term commitment often leads to a perpetual state of owing money.
The Psychological and Social Influences
Cars are often bought not just for their practicality but also as symbols of status and success. In our culture, a new car can be seen as a reward or a social statement. However, is it worth sacrificing your financial future for a status symbol? Consider how much better you could use that money for retirement, education, family trips to make memories, or other meaningful investments.
The Bad Investment Definition
A bad investment is guaranteed to decrease in value, and cars fit this description perfectly. They depreciate quickly, making them a poor choice compared to other investments that can either retain or appreciate in value.
Breaking Free from the Steel Debt Trap
Here’s how you can avoid falling into the Steel Debt Trap and make smarter financial choices:
Pay Cash: Buy a car that you can afford to pay for outright. This avoids the costs and stress associated with car loans and interest payments.
Save for Your Next Car: Instead of taking out a loan, spend money regularly for your next vehicle. This approach allows you to buy your next car with cash, avoiding new debt.
Choose Practicality Over Status: Select a vehicle that meets your needs without splurging on unnecessary features or brands. Remember, a car is a tool, not a status symbol.
Maintain Your Vehicle: Keep your current car in good condition to extend its lifespan. Regular maintenance can help you avoid needing a new purchase sooner than necessary.
Educate Yourself: Understand the true costs of car ownership and make informed decisions. The more knowledgeable you are, the better choices you can make.
The Steel Debt Trap is a financial burden many people face due to the constant cycle of buying and financing new cars. You can break free from this cycle by understanding the actual cost of car ownership and making conscious financial decisions. Paying cash for your car, prioritizing practicality, and saving for future purchases will lead to better financial health and a more secure future.
Remember, a car should be a tool to get you where you need to go, not a reflection of your worth or success. By adopting these strategies, you can keep your finances in check and achieve greater peace of mind .... and have more dollars to spend with family!
Another CPA Dad's perspective: Back in the '90s, I went from feeling like I needed to file bankruptcy to deciding to get out of debt. I was able to do it, and it made me wiser. I decided I would never owe anyone anything again. After getting rid of the credit cards and automobile payments, I was out of debt. It wasn’t easy, but I attacked our mortgage and got it paid off. It was a great feeling the day we burned the mortgage on the home.
I fight with financial advisors every year when I tell clients to pay off their homes, and the advisor tells them they are making more than the interest they are paying. Once convinced to go ahead and pay it off, without exception, they all come back the next year thanking me and telling me what it has done for them psychologically not to have any debt!
While I don’t always agree 100% with everything Dave Ramsey advises, I agree 1000% that no one should carry any debt other than a mortgage.
Our biggest challenge? Now, Dads and Granddads, teach this to your children and family who will listen. They, too, can experience a different life if they are living debt-free.
Blog Contributions by multiple Dads
CPAs, Charles Wilson, Keith Jowers,
Dave Ramsey
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