Buying My First car

What I Learned From Paying Too Much for My First Car

In Financial Health, My Story by J Savvy0 Comments

Okay – so technically this isn’t about my very first car, but rather the first car I bought myself. The one I bought once I graduated from college and got that “adult” job with a real paycheck.

My actual first car was a ’01 Subaru Outback (thanks mom and dad) that I drove until it died. Literally. I was in college and driving home for break when, about an hour outside of my small college town, the engine started smoking. The cost to repair was about double the car’s value, so it was totaled. Loved that subie – drove it from age 15-20. I had a connection with it and was bummed to see it go.

And therein lies an underlying issue: the connection we feel with possessions. Not that it’s necessarily a bad thing; it’s human nature to feel connections. But when it comes to material possessions like a vehicle, we’d be wise to fight these feelings.

Unfortunately, fighting these feelings is easier said than done. Case in point: me, when I was buying my first car.

The first car I bought: a new Toyota Tacoma

Brand spanking new. It was awesome. I planned to buy used, but through a Toyota promo for recent grads I was able to get a new one for $1,000 more than one with 10,000+ miles on it. $1,000 is nothing to sneeze at, but when it’s spread over a 60 month finance period, it’s hardly noticeable.

With the new truck, my payments were a whopping $550 a month. But my rent was cheap and my paycheck’s were good, so I was cool with it. Yet after about 3 months I got tired of that high payment and went to get to it refinanced. My interest rate went from the mid 4% range down to 2% and I extended it to 72 months. My new payment was now $445. I noticed that extra $100 each month in my (near non-existent) budget, which should have been my first sign that I had gotten myself into something terrible. But, I was 22 and finally making money, so I didn’t.

So what did I use this truck for…

Now, if a truck is what I needed, specifically, a mid-size truck with decent mpg that could handle any road dirt road with ease, then this Tacoma could have been right for me. By need, I mean really need. Not want, need. Like your job requires it, or you’re a pro downhill mountain biker who needs to shuttle up and down access roads all day to make a living (side note – how fun does that sound). And even then, it’d be wise to look at an older, used model. Tacoma’s hold their value like crazy, so you’d have to search back to the early/mid 2000’s to find one worth it.

But I definitely did not need this truck. I spent 5 of 7 days a week commuting 40 miles a day getting 19 mpg out of that sucker. The 4WD was useful going over the mountain pass a few times during the winter to see family, and getting around town after a snowfall, but snow tires would have worked. I also moved once. I carried stuff in the back sometimes, too. However, it rains a lot here, so about half the time the back was useless for groceries or other items that couldn’t get wet.

“It was is awesome to drive, though.” That’s what I tell myself, at least.

…Yes, I still have it. I KNOW, I know. By the grammatical tense of this article so far, it would have been fair to think that I have sold it by now. Let me explain…

If it’s so expensive, and not at all practical for your use, why do I still have it??

By the time I had realized my error, it was too late. Too late because I was close enough to paying it off that it was worth it to just finish the payments. I despised the idea of paying any more interest on it, so I finished the last few payments in a single lump sum.

On the up side, I no longer have a car payment and remain debt free (minus rent). On the down side, that means I’ve paid full price for that truck + interest. Ouch. That’s about $35,000.

But, remember how I said Tacoma’s hold their value like crazy? Well, current Kelly Blue Book value is about $27,000 when taking the low estimate. So I’m literally driving around a $27,000 asset that will depreciate (albeit slowly) over time. $27,000 is A LOT of cash. I could do so much with that…

…But I have yet to decide what my next move will be. My most likely move will be to sell it. However, I am still figuring out the best way to do this since my fiance’s car is on it last leg. Chances are I’ll use part of the proceeds from this sale to buy a car with her, then save the rest.

Since I don’t have to drive to work that often anymore, a single car for both of us would be nice. I don’t know what this vehicle is yet, so if you have any suggestions, please chime in. In the mean time, I will continue to take my employer-sponsored vanpool to work each day (more on this later).

So, what did I actually learn from this purchase?

When I said I realized my error too late, I meant the error of paying so much each month just to own the damn thing. There is a lot of opportunity cost out the window from that decision. $35,000 invested in low-cost index funds over 5 years at a 7% return turns into $49,000; over 15 years it turns to $96,500; over 30 years it turns $266,500. First, there is a quick side lesson on the power of compound interest. Second, I didn’t have $35k to invest all at once at the time, but that isn’t the point.

The point is, new vehicles cost a lot of money. It’s not just the $500 a month coming out of your bank account, but the hundreds of thousands of dollars lost over time.

Anyway, here is a nice list of the lessons I learned from this experience:

  1. Figure out if you actually NEED a car. If you’re in a city with strong public transportation, don’t even think about buying a car. Rent one if you want to take a weekend trip. If you live in the suburbs, a smaller town or just far away from work, see if one vehicle works. If one can’t cut it for your family, then that second car should be paid for in cash, be fuel-efficient and have low maintenance costs. A third car is never really necessary.
  2. Determine what you’ll use your car for THE MOST before buying. Don’t decide on a car until you know what you’re using it for. If you commute 60 miles a day, don’t get a new F-150 or any SUV or Crossover or whatever, that gets less that 30 mpg.
  3. Don’t buy new. Period. Used versions a few years older work just as well at a lower price point.
  4. If you can, find a car that you can pay for in cash, and avoid financing.
  5. Ditch your car for a bike / take public transportation

Don’t let the connection you have to your vehicle continue to damage your financial health

Tying this whole thing back to the connection we have with possessions…

The average auto loan in the US is $30,032. The average monthly payment is $503. With the median household income at $55,775, a $30,000 car is 54% of a household’s income. That’s just crazy. Frankly, no one should be spending that much on a car unless you’re pulling in hundreds of thousands in income per year.

If we are honest with ourselves for a second, we would realize we don’t need the newest car on the market. Marketing gimmicks get us to spend money we don’t have on things that we don’t need, especially when it comes to cars. We put ourselves in debt, for what? Because it’s a status thing. If you drive a nice car, people know that you’re making good money. People know you’re successful. But only you know that the cars you have financed eat up half of your monthly budget, while the other half is taken up by a house that is too big. Since you have to spend so much on your cars, you’re not saving as much as you should. Thus, delaying another year before you’re able to reach financial independence and/or retire.

But it’s not all bad news. There is time to make corrections and stop the bleeding. Run through that list above and check how your current vehicle situation compares. If you’re like me and have some excess, it’s time to sell. If you’re also like me, you’ll have to fight the superficial connection you have to the vehicle and let it go. Even if you’re  underwater on the loan due to the car’s depreciation (another reason not to finance…), you’re better off selling the car and buying cheaper.

Final thoughts

I paid too much for my first car. It’s paid it off now, but it’s still $27,000 that I could use more effectively. If I sold it and bought a reliable used car for $7,000 in cash, I’d still have $20,000 left over to save and invest.

Paying, on average, $500 a month for a vehicle is outrageous. Especially if you’re using the car for something it’s not designed for. The point of this post isn’t to make you feel bad, it’s to bring to attention one of the biggest drains on our savings: car payments.

Buying a car should be about what you need, not what you want.

I know I’ve learned a lot since my first vehicle purchase, and I hope you have learned something as well. Remember, part of being financially savvy is to take action. So take the action to clean up your vehicle debt and drive more practical cars.

You and your bank account will thank me later.

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