Cars versus homes

[LivingAlmostLarge]

I've mentioned and thought this before, but people always ask can i afford to buy this home? How much home is too much? I think a lot of people actually consider home purchases and buying at 30% or 35% isn't necessarily a bad thing depending on where you live.

Yet pretty much everyone not on this website will tell you a car payment is a must have. That who buys cars without a payment? And what's the big deal about a $500/month car payment? That's about $100k extra in a home mortgage.

And $500/month doesn't buy much car. I hear of most payments between $800-1k/month. So why do people focus so much on the home versus car payments? Plus people keep getting new cars every 5 years or more. I've friends who buy every 7 years. Very few people keep cars a decade.

I guess my point is that why are we so focused on the home mortgage when I think actually it's car payments that really drive debt? That people making $50k are driving $20-30k cars? It feels like people are driving a lot more expensive car, something out of their price range than people buying houses they can't afford.

[cschin4]

Good points. We have lost sense of proportionality toward income. Seems like nothing to spend an entire year's income or two on a car! Think about it! It is absurd. If you make $40K, that $25+K car you are buying is requiring 1 full year of your labor. Then, turn around every 5 yrs and buy another. and every 5th year you work is a wash in a sense.

[disneysteve]

I totally agree. People really don't think. That pretty much sums it up. They make these purchases with virtually no thought to the overall effect it has on their financial well being.

And you are right that lots of people just assume they will always have a car payment. They don't see any other option. So they keep buying, paying off, buying again, paying off, etc.

I even know numerous people who replaced their cars before they were paid off, rolling the balance of the old loan into the new loan. Then they end up owing thousands more than the current car is worth due to tacking on the old loan balance.

And we haven't even touched on leasing. I just cringe when somebody tells me they leased their new car. I can't imagine renting a car for 3 years and thinking it was a good idea.

I've learned over the years, however, that trying to have an intelligent conversation on this topic with people who think otherwise is futile. They really don't get it and don't even want to hear that their way isn't the best way.

I've had my current car for 13 years and I bought it used. My wife has had her van for 9 years and we bought that used (for cash). We haven't had a car payment for many years. It is totally possible and I'm happy to explain it to anyone willing to listen. It just seems that most people aren't willing to listen.

[dancinmama]

When we were first starting out, we made the decision to never have a car payment. While all of our contemporaries were leasing BMWs, we saved to buy a Chrysler Cordoba from a private party for $5K. When you're first starting out that takes a while to do. We drove that car for 13 years and sold it for a couple hundred bucks. With the exception of one car that we bought new, we buy our cars used and drive them into the ground before we replace them. DH is currently driving an '03 with less than 70K miles and I'm driving a 2000 model with less than 85K miles. We'll have my car for AT LEAST another (3) years and his indefinitely. Both cars "look" like new.

This along with never carrying any credit card debt (well none over 0%) over our lifetimes has allowed us to do many things: max out DH's retirement account (done before we ever bought a home) and buy homes that otherwise would have been beyond our means and pay them off long before the 30 years on the mortgage.

[nick__45]

I made one bad car-related financial mistake and that was when I just got out of college. My car cost half of my income. Fortunately, I paid it off in 1.5 years, essentially dumping every penny I have each pay period into it. I had no EF, no vacation (driving that car was a vacation), no eating out. But I will keep it for at least 15 years and hopefully for as long as possible. My goal is to have it for 25 years then do a complete restoration. It is 9 years old now and show no sign of slowing down. It doesn't get good gas mileage, only 24 mpg, due to the fact that it is a big V8 and gas around here are ethanol diluted. On long drives of 200 miles or more, it gets 28 mpg.

Of course, I let my drive that fancy car and I drive a 19 years old Corolla with over 300k miles for commute, which has increased a lot since we moved to a nice area 40 miles from work. I'll never buy a new car again for myself until I get to be 40 or live in a state with no draconian property on cars. I can't see how people in big cities afford new cars when out here I can't justify paying 5% property tax for cars under 25 years old. If I get another vehicle, it will have antique plate and a big block V8 just to avoid the taxes.

[dancinmama]

Originally Posted by nick__45

I made one bad car-related financial mistake and that was when I just got out of college. My car cost half of my income. Fortunately, I paid it off in 1.5 years, essentially dumping every penny I have each pay period into it. I had no EF, no vacation (driving that car was a vacation), no eating out. But I will keep it for at least 15 years and hopefully for as long as possible. My goal is to have it for 25 years then do a complete restoration. It is 9 years old now and show no sign of slowing down. It doesn't get good gas mileage, only 24 mpg, due to the fact that it is a big V8 and gas around here are ethanol diluted. On long drives of 200 miles or more, it gets 28 mpg.

Of course, I let my drive that fancy car and I drive a 19 years old Corolla with over 300k miles for commute, which has increased a lot since we moved to a nice area 40 miles from work. I'll never buy a new car again for myself until I get to be 40 or live in a state with no draconian property on cars. I can't see how people in big cities afford new cars when out here I can't justify paying 5% property tax for cars under 25 years old. If I get another vehicle, it will have antique plate and a big block V8 just to avoid the taxes.

Do you pay that "property tax" on vehicles every year? What state do you live in?

[LivingAlmostLarge]

Here is an article talking about it being a great time to trade in your 3 year old car. trade-in-used-car-wsj: Personal Finance News from Yahoo! Finance

[nick__45]

Originally Posted by dancinmama

Do you pay that "property tax" on vehicles every year? What state do you live in?

Virginia. The tax is every year and my county is 5%. I think other counties can be higher or lower, depending on the social programs they provide and the typical people who pay it don't use. On top of that personal property tax, there is a licensing fee, registration fee, tag fee, and maybe one more fee on each vehicle. Don't get me wrong, people still drive new cars but I can't see how they could afford. And the state keep repaving the same roads over and over over again, making it worse sometime if I may add. They repaved my entire subdivision while ignoring the adjacent subdivision which shares one main street; the new pave literally stops right where after the last house in my subdivision. The streets were fine, just gray instead of tar-black. They repaved it and now there are cracks. On top of that, the utility company went in and did some work and messed up one area and it is now in a different color and looks out of place in a brand new road.

I could live with normal roads and lower taxes but somebodies need to make serious money from those construction bids that line both public and private sectors fat cats.

[nick__45]

Originally Posted by LivingAlmostLarge

Here is an article talking about it being a great time to trade in your 3 year old car. trade-in-used-car-wsj: Personal Finance News from Yahoo! Finance

What are you going to drive when you sell that demand-far-outstripped-supply used car? Are you going to buy a new car or a used car, which is also a demand-far-outstripped-supply item. That article along with others like it are just marketing gimmick to get you to sell your cars and buy another one. Dealerships make money when they sell and buy cars and the cheapest cars to own are the ones already in your driveway.

[dancinmama]

Originally Posted by nick__45

Virginia. The tax is every year and my county is 5%. I think other counties can be higher or lower, depending on the social programs they provide and the typical people who pay it don't use. On top of that personal property tax, there is a licensing fee, registration fee, tag fee, and maybe one more fee on each vehicle. Don't get me wrong, people still drive new cars but I can't see how they could afford.

nick: Wow, why have I never heard of that before. I would bet that the car dealerships hate it, but maybe people are just used to it. We have an (8) year old car and an (11) year old car. Both have been well maintained and have low mileage for their ages, so we'll be hanging on to them as long as possible.

I'm in CA and we pay an annual registration and have to pass a smog test every two years. The registration fees are based on the value of the car and so USUALLY decrease every year, however, they have gone up in the last couple of years.

[dancinmama]

Originally Posted by nick__45

What are you going to drive when you sell that demand-far-outstripped-supply used car? Are you going to buy a new car or a used car, which is also a demand-far-outstripped-supply item. That article along with others like it are just marketing gimmick to get you to sell your cars and buy another one. Dealerships make money when they sell and buy cars and the cheapest cars to own are the ones already in your driveway.

EXACTLY!!

[disneysteve]

Originally Posted by LivingAlmostLarge

Here is an article talking about it being a great time to trade in your 3 year old car

Originally Posted by nick__45

What are you going to drive when you sell that demand-far-outstripped-supply used car?
just marketing gimmick to get you to sell your cars and buy another one.

I agree with nick. What good is selling your 3-year-old car? Sure you might get a great price for it, but then what? That article makes no sense.

[wincrasher]

I think you are confusing issues.

One is whether it's smart money to buy a car - new or used. Or even if you should own one at all. There are lots of arguments which is better. As there are on how often you cycle thru cars. Personally, I put a value on having a new car. To me it's worth the depreciation. I trade every few years and have no remorse about it.

The other is how you finance it - cash or credit.

I personally don't have an issue with financing cars or houses. The rates are fairly low compared to other things people finance. So if your choice was pay down your credit cards or finance a car, then by all means pay down those cards.

For some business uses, leasing can be a smart option. I often look at the advantage of leasing a car for my business vs buying/depreciating. For my situation, with my high mileage, buying is the better option. For just personal use, I don't see the advantage, other than being able to drive something too expensive you couldn't own it. That doesn't sound smart to me. That's living above your means.

I'm sick of hearing that buying something new is stupid. Or changing something out that isn't completely worn out is stupid. No it's not. If something gives you satisfaction and YOU CAN AFFORD IT, then it's not stupid. Yes, you can argue there are better uses for your money. You could eat beans and live in a tent and pour every penny into investments. That may be the "smartest" way to live.

Yes, putting money into investments is a better use of your money than buying a new car. That is the wrong comparison. Cars and other toys should come out of your discretionary budget. So you are comparing the use of this money to what you blow on clothes, restaurants, bars, etc. So is spending $500 a month on a new car a better use of money than say spending that same $500 on new shoes, drinks with the guys once a week, or taking the family out to dinner once a week? To some people yes, to some, no.

[wincrasher]

Originally Posted by disneysteve

I agree with nick. What good is selling your 3-year-old car? Sure you might get a great price for it, but then what? That article makes no sense.

It makes perfect sense, in a way.

If you were in the market to sell your 3 year old Toyota Corolla and buy a brand new Hemi Dodge Ram 4x4 truck, then the universe is aligned perfectly and you can make a great deal on both ends!

Now if gas prices change next week, then the equation changes considerably, and you'd have to call the whole deal off.

[billioninvestors]

Good points thinks to thing further

[jpg7n16]

Originally Posted by LivingAlmostLarge

I've mentioned and thought this before, but people always ask can i afford to buy this home? How much home is too much? I think a lot of people actually consider home purchases and buying at 30% or 35% isn't necessarily a bad thing depending on where you live.

30% is pushing it. 35% is too much. 28% is supposed to be the max, not the suggested.

Anything much beyond that hurts your ability to build wealth. 35% means 7+% you could have saved for retirement.

Yet pretty much everyone not on this website will tell you a car payment is a must have. That who buys cars without a payment? And what's the big deal about a $500/month car payment? That's about $100k extra in a home mortgage.

You're looking at a much different timeframe. $500/month for 30 years @ 4% is about $100k. $500/month for just 5 years @ 4% is $27,150 - more than enough to get you a great car... and done 25 years sooner.

If you qualify at 4% on a home loan, you should be able to qualify for esentially 4% on a car loan.

And $500/month doesn't buy much car. I hear of most payments between $800-1k/month. So why do people focus so much on the home versus car payments? Plus people keep getting new cars every 5 years or more. I've friends who buy every 7 years. Very few people keep cars a decade.

Really? Who have you been listening to?

I really hope you're talking about combined car expenses for a married couple... if that's an individual, they're insane.

I guess my point is that why are we so focused on the home mortgage when I think actually it's car payments that really drive debt? That people making $50k are driving $20-30k cars? It feels like people are driving a lot more expensive car, something out of their price range than people buying houses they can't afford.

Becuase it's not the car payment that drives debt, it's the housing.

Housing payments can easily be $1000-2500+. Normal people get car loans for about $275-400/month.

So if there is overspending, which is easier to cut back on: $2500 or $400?

If you're spending $2000 on housing, and should be spending $1500 - that's a $500 difference.
If you're spending $450 on a car, even if you paid off the loan completely, you only save $450.

Focus on housing, because you should focus on reducing the largest number in your budget first.



........... but then you should immediately evaluate your car situation too. It's not one or the other.

Yes, look at the house first, but look at both.

[MonkeyMama]

I pretty much equate buying *new cars* with *crazy* but I admit I live in an extreme high cost area. So basically, the average person can not afford both. You learn early on that cars are a complete waste of money. (Though I love my cars and will buy them used so I have the luxury). I admit I have to remind myself on these forums that not everyone has such expensive housing, and the newer/more expensive cars are probably a fair splurge for many. But regionally, it is usually not a fair splurge to buy a new vehicle.

When it comes to a high cost area, it becomes the difference of dirt broke/hands tied, and being able to actually put 20% down on a decent home. OF course, knowing I am saving tens of thousands every decade with our own car purchases, and once our home is paid off or our income increases, etc., I think I will probably want to do a lot of other things with that extra money rather than buy more luxurious vehicles. After years of seeing the difference it makes financially.

For most people, housing is #1, but cars will be a very close #2 on largest expenses in your lifetime. In fact, I'd guess most people spend more money on cars over their lifetime - which makes it a quick #1 if you don't give it much thought.

[Joan.of.the.Arch]

Livingalmostlarge, I think you have a good point. I don't think anyone could disagree that people need to think about how much they really are spending on their cars and how it compares to a mortgage.

In the early 2000's it seemed like there were suddenly a lot more people driving luxury cars. I figured luxury cars were being bought with home equity loan money (whoa!). In those years, I think luxury cars became so common that they no longer even seemed exceptional to many.

I used to see these cars driving down the street, think of the purchase price of my little home and think, "Wow, that would be like driving my house down the street. Same price. Same utilities almost. Some entertainment systems. Cushier furniture." Those people were spending a small mortgage-worth of money just on this one car. Then how about their next car? And the one after that?

[disneysteve]

Originally Posted by jpg7n16

Becuase it's not the car payment that drives debt, it's the housing.

So if there is overspending, which is easier to cut back on: $2500 or $400?

It is much quicker and easier to downsize your car habit than to change your housing. And in some HCOLA, quality safe low cost housing simply doesn't exist.

Originally Posted by MonkeyMama

You learn early on that cars are a complete waste of money.

For most people, housing is #1, but cars will be a very close #2 on largest expenses in your lifetime. In fact, I'd guess most people spend more money on cars over their lifetime - which makes it a quick #1 if you don't give it much thought.

I totally disagree that cars are a waste of money. I consider a car to be a necessity, though it can vary based on where you live and work. In Manhattan or DC, you can get along okay without a car, but it most places, that isn't feasible.

I agree about the impact of the cars, though. Somebody buying a brand new car every 3-5 years may certainly spend more over a lifetime than they spent on housing.

Originally Posted by Joan.of.the.Arch

In the early 2000's it seemed like there were suddenly a lot more people driving luxury cars. I figured luxury cars were being bought with home equity loan money (whoa!).

Also, leases became much more popular. Years ago, personal leases were rare. Now, they've gotten to be 30% or more of all new car purchases. People use leases to get into cars that they couldn't otherwise afford. And it also locks them into eternal payments since the vehicle is never paid off.

[MonkeyMama]

I meant to say: *new* cars are a complete waste of money. (You pay a lot for name brand, luxury and appearances).

I am pretty pro-car, in general. I just don't see why you have to spend SO MUCH for a reliable/safe vehicle.