When Thomas Stanley and William Danko began to research wealthy people for their book, “The Millionaire Next Door,” they found among other surprises that a high percentage of multi-millionaires did not buy brand new cars though they technically could afford them.
Reading that book sparked me into finding out why, and I definitely recommend it to anyone wondering what wealthy people are like as a whole. It’s in studying the behavior of successful people that you can follow the same path for yourself. Since cars are one of the most expensive purchases people make, it’s important to know how they can impact your finances.
With the exception of some rare and collector vehicles, you have to be careful about your use of the word “investment” with them. Traditionally, investment refers to putting your money into something that increases in value over time.
Unless they’re unique in some way, nearly all cars go down in value. The highest percentage of depreciation usually occurs in the first five years. It doesn’t make them bad things by any means. I personally like cars, and people should definitely enjoy them for what they’re designed to do. You just have to be reasonable about them from a financial standpoint if you want to succeed overall in your finances.
From a marketing standpoint the word investment has been used to refer to cars that go down in value slower than the average vehicle, also known as “holding” their value. This excites some people who wouldn’t be that excited to buy a piece of real estate or a mutual fund that drops in value slower compared to their peers. There are a lot of great reasons to buy a high-quality vehicle, but they’re very rarely assets in the financial sense of the word.
How you approach purchasing a vehicle can help or hurt your finances however. If you buy a car out of your financial range (for example, a car that costs 50% or more of your yearly income), the payments will strain the rest of your budget. Plus you’re paying interest payments on something going down in value-the transaction is hitting you financially in two ways. It’s better when you start out to have a less expensive but paid-for car and put aside the cash for your next one (that would have been your car payment anyway if you’d gone the other route).
When you can afford the upgrade car, you can sell the older one and put the money toward the next upgrade. I’ve personally known people who have nice cars and no payments by taking that approach for several years. The “one-payment” plan usually weirds out the car dealership, but it’s fun from a buyer’s standpoint. I look forward to doing that myself for all the future cars I buy.