Is your car driving you to the poor house?
By Chuck Bentley
According to a recent article in the Wall Street Journal called How Rich and Poor Spend (and Earn) Their Money, the middle class wage earners spend a much higher percentage of their income on transportation than any other wage earners, rich or poor.
Analyzing data from the Consumer Expenditures Survey gathered by the Department of Labor, middle class folks spend nearly 20 percent of their annual income on transportation. That is about 5 percent more than the rich or poor spend as a percentage of their income. In other words, the middle class is the one spending too much on expensive cars.
This cost could actually be much lower using my advice, which is always to drive a used car that you pay for with cash. If you purchase a quality used car that is 3 to 5 years old, has been well maintained (preferably by one owner), and has low miles, you will get a much better overall value than buying new. Further, if you are able to pay cash for your car, you will save much of the cost of financing or leasing your car.
Many cannot imagine paying cash for a car, so let me give you a strategy. First, if you are currently making payments on the car you drive, accelerate the payments so that you can own the car as quickly as possible and eliminate the cost of interest payments which average around 3 percent right now for a 60-month loan. As soon as you pay off your loan, continue to make payments to your own savings account as if you were still making car payments. Do this for 3 to 5 years, or long enough to accumulate the cash you need to make your next purchase without borrowing. This plan will save you lots of money and create more financial margin in your budget.
Originally posted 6/25/2015.