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There are a lot of people I know who are car poor, fortunately for me,  I’m not one of them. Sad reality is that none of these people are aware that they are car poor. Instead they live on this high of driving a fancy set of wheels, while they allow the fancy set of wheels to define them and who they are. Anyone who defines them selves by the car that they drive are a shallow fool, who is hiding their insecurity behind the car. A car is meant to get you around and should never put your financial present or future at risk. If you’re new set of fancy wheels is dictating your life in terms of where you spend your money and how much, than you are a hostage to your own car. In other words, car poor. Here are a few examples of how you might be car poor.

Extended Financing Term

Up until about 7 years ago, standard financing terms used to be 3 years, with the odd 4 year financing. If you could not pay your car off within 3-4 years, you simply could not afford it.  Fast-forward to today and you can get 4, 5, 6 or even 7 year terms on financing. If you finance over 7 years, you are just becoming part of a vicious car financing cycle What might that be? It’s simple, you finance over 7 years and on average you drive 25,000 km annually. If my math serves me correctly, you would end up with roughly 175,000 km on your car after 7 years, which in turn could mean you are due for a new car, therefore entering into another ‘new’ financing contract. If you keep think it’s normal to keep financing a new car every 7-8 years, there might be something wrong with you.

Any new car financing should not be more than 4 years, its that simple, so next time you go car shopping, do your self and your future a favor, don’t finance over 4 years. If it takes you any longer to pay the car off, than the car is simply too rich for your wallet.

Playing the Percentages

I wrote a post not too long ago called Can You Afford a New Car? and talked about how a new car payment should not be greater than 20% of your net monthly income. On average, Canadians spend roughly 17% of their income on transportation, which is slightly higher than what industry professionals recommend of spending 15% of your income on transportation. Judging from some of the comments I got in the previous post, some might think that 20% of your income is high to spend on transportation, but within that 20% I’ve included the cost of gas and insurance. I firmly believe in spending a little more for quality. Sometimes upping the ante and spending a little more on your car, could serve you well down the road.

Negative Equity

Is such even possible with owning a car? Sure it is! If you’re the type who likes a new set of wheels every few years. They got one payment on the go, but want a new car or the new mode, so what to do? Trade in your current car and take on a new financing loan. The sad part of the reality is that you are getting hosed by the dealer on the trade in.

For example, you have $9,000 left on your financing deal. You trade in you car and the dealer gives you $6,000. Now you finance a new car for $20,000 + the difference of the trade, which in this instance is $3,000. After all is said and than, your new car is costing you $23,000, plus not to mention the double interest you will be paying on that $3,000. After all you will be paying off that $3,000 for 8 years, instead of the initial 4 years.These are the type of fools who care more about the car they drive and their ego, rather than their current and future financial situation.

True Story

A few months ago, I got talking with some family friends at a BBQ, who raved about how their son (who’s 23 by they way) purchased a new set of wheels. He landed his first big job and momma’s boy got him self a new set of wheels. He purchased a new 2011 Mazda 3 GT. Not bad, for a first car. As the story continued, which was being told by his mother, one thing that did not make sense to me was the monthly payment of $420 (all in). How could a car, which roughly costs $26,000 after taxes, have such a low payment? Than it dawned on me and it all came together.

While she continued to rave about the car and the options included, I ran the numbers in my head quickly and followed with a brief interruption by asking; “Is this car financed over 6 years?” She replied; “Yeah, it is. Something wrong?”. “Nope, nothing wrong” I said. How could I say something? If they didn’t see an issue with financing a car over 6 years and they were ecstatic for it, than who am I to ruin their parade?

Do you know anyone who is car poor? and Why do some allow them selves to be defined by their car?

Eddie