Kid I know is contemplating something he shouldn’t be thinking about doing at this point in his life – and it has nothing to do with girls.
He is thinking about buying a car. Rather, he is thinking about assuming car payments.
And not just them.
There is the car insurance payment to go with the car payment, which I pointed out to him will be a bigger payment because instead of the liability-only policy he’s got on the car he has – which is paid for – he will pay more to insure the car he takes out a loan to buy. Because he will have to buy a full-coverage policy; lenders require it because until it’s paid off, the loss becomes their loss if he wrecks it.
Figure another 20 percent, vs. liability-only, escalating with the replacement value of the car.
Then there is the property tax applied to the vehicle – in my state, at least. This is based on the average retail value of the vehicle and can easily amount to several hundred dollars annually, for years – until the vehicle depreciates to almost worthless.
I pointed out to my young friend that I am still being mulcted for almost $100 annually in property tax on my 17-year-old little pick-up truck. Imagine what the mulcting would be on a new truck – or even five-year-old truck that hasn’t yet depreciated to near-worthlessness.
But the main cost – the hidden cost – is the opportunity cost.
Teenagers and young adults tend to not have much money. Ergo the importance of not spending it. And of saving it, in order to have it and – ideally – more of it, as the years pass.
Which they do, quickly.
It is easy to become emotional about a car at 17 or 18 years old. I have been in those very shoes, I told my friend. But the shoes you don’t want to be in are debtor’s shoes, especially when you are all of a sudden pushing 30 and thinking how much you’d like to buy your first house but can’t because you’re broke – because you spent the past seven years making car payments.
Few things are more debilitating to your freedom than the loss of your economic freedom. If you are chained to a payment, you are far more chained to a particular job. You aren’t as free to do something else, just because you want to. Debt stifles your life. It is a trap – worse in many ways than getting a girl pregnant when you are 17 or 18 because in that case, at least you get progeny out of the deal.
With cars, what you get is a rapidly depreciating appliance. You will spend years making payments on something that will be worth less and less with each payment you make, until the finally day comes when it is worth next-to-nothing at all. That will be the day after you made your last payment.
And all the money you spent on those payments, as well as insurance and taxes, will have gone up in smoke. Plus, what have you got? An old, not-worth-much-anymore car.
The best advice I have for any teenager – or parent of a teenager reading this – is to buy no more car than you can afford to pay cash for. This will free up cash for other things which are of durable value, such as getting an education or learning a useful skill (something that will help you make money) or putting a down payment on your first place.
Or just having a fallback fund.
You will be able to buy the lower-cost, liability only insurance coverage, too – which is the only insurance coverage that makes any sense on any car worth less than $10,000 because of the disproportionately high cost of repairing any car made during the past ten years.
You are better off putting money aside for just-in-case, which may never come – which will mean you will still have the money for other things, if they don’t come to pass. Keep in mind that even with a basic, liability-only policy, if someone else wrecks your car, they will have to pay you – either to repair the car or to pay you for its fair market value.
You only lose whatever you spent on the car if you are responsible for wrecking it. Most “accidents” aren’t – and are avoidable. Be careful and responsible – and odds are, you will not have an “accident.”
At least, not one that’s your fault.
I gave the kid the same advice I gave myself when I was a kid. I drove the cheapest cars I could afford to buy – in cash – that got me from A to B, most of the time. Sometimes, they didn’t – but those times were part of the fun times of being 17 or 18 or even 25 years old.
And by living that way when I was 17, 18 and thereabouts, I got to a point in life where I could afford to buy nicer cars – still in cash. Plus other things, like a place to live.
Instead of having the ball and chain of debt hanging around my neck.
Those are my words, young man. I hope you will heed them!
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