Jonathan Pond remembers the note a neighbor stuck on the windshield of his clunky old Oldsmobile: “Your car violates this neighborhood’s standards of good taste.”
Instead of getting mad, Pond gets smug. That car doesn’t just get him around town cheaply. It will get him into retirement sooner. By buying cars with cash, hanging onto them 10 years and investing the money that would evaporate in car loans or leases, he figures consumers can accelerate their retirements five years.
“That person-whoever it is that put that sign on my car-in another 10 years, I’ll sit on my porch, retired, and I’ll wave to him as he drags his 62-year-old butt to work,” said Pond, a Boston-area financial planner and author of “The New Century Family Money Book.”
Pond knows his methodology is subject to criticism because it relies on numerous assumptions about the price of cars-inflation, investment returns, auto repairs, depreciation, insurance, finance charges and taxes. That’s why, he said, he slanted assumptions in favor of the frequent car buyer.
Regardless of the accuracy of his calculations, debt experts say Pond’s point effectively illustrates fundamental-and for many people, distasteful-lessons about what happens when consumerism and personal finance collide:
– Whether it’s a car, a vacation, holiday gifts or a simple bauble, you’ll spend substantially less money if you pay for it immediately rather than over time.
– As you rush to satisfy your emotional needs to keep pace with fashion and your friends’ standard of living, you are postponing other financial objectives such as buying a home, retirement and putting your kids through college.
“It’s a value thing,” said Judy Lawrence, author of “The Budget Kit.” “I think many people really have to stop looking at this as an entitlement-that we have to have these expensive things . . . . It’s OK not to have the very best.”
Pond bases his conclusions on his calculations of car-buying and ownership costs for two prototypical consumers borrowing 80 percent of an $18,000 car at the start of their 40-year working careers.
The first person buys a new car every three years. The monthly payments fit snugly in his budget, but he never breaks out of the car-financing cycle.
The second buyer hangs onto her first car for 10 years, saving enough to buy each subsequent car with cash. More important, she invests her savings and turns them into a $385,000 retirement fund by 2035.
That total sounds bigger than it is because of the effects of inflation. But in today’s dollars, it still translates into a hefty $99,000, assuming 3.5 percent annual inflation.
Though consumers might intuitively understand Pond’s point, it’s another thing to put it in practice. It’s hard to be that disciplined. To break the financing cycle, experts suggest you take it in steps:
– Buy only as much car as you can afford. For many people, that will mean buying a used car. You can save substantially by doing so because that means someone else swallowed the depreciation.
“Sometimes, I’ll ask people the quickest way to lose $2,000, and they’ll say, `Bet on a horse that finishes out of the money.’ I say that takes about a minute and a half,” Pond said. “Driving a car off the dealer’s lot takes about two seconds, and you lose $2,000.”
– Cut your interest costs by taking a maximum of a three-year loan. Anything longer is a sign you can’t truly afford the car. People who stretch out their loans to make their monthly payments affordable “really have cement between their ears,” Pond said.
For example, a $15,000 loan charging 8.8 percent interest over five years will cost you more than $3,600 in interest. That’s nearly $1,500 more than you’d pay for a three-year loan charging the same rate (and many lenders charge lower rates on shorter-term loans).
– When you pay off the loan, fight the urge to replace your car immediately. You probably wouldn’t automatically shop for a new home when you burn your mortgage, so why should you rush to replace your car as soon as you repay the loan? If the urge is especially powerful, take a 30-day breather so you can evaluate whether a new car is a “need” or a “want.”
– Continue making the same payments to yourself. You’ve proved you can survive without the money, so stash it away for your next car, and the one after that. If you can’t pay cash on your next car, you’ll at least have a bigger down payment to cut your financing costs.
“Once you pay cash for a car, you should always be able to pay in the future with cash,” Pond said.
– And all the while, evaluate your car-buying needs in context with your other financial goals. If a new car is your No. 1 goal, put windfalls, such as an income-tax return, into your car savings.
By looking at the big picture, you won’t feel as if you’re continually denying yourself something. Instead, you’ll be choosing to spend your money on a goal you deem more important. After all, you can’t afford everything at once.
“My philosophy is that we have no unrealistic goals, just unrealistic timetables,” said Carol Parks, a San Jose debt counselor.
