It’s amazing how quickly transportation costs can add up. Car payments, fuel, insurance, and regular maintenance can all add up to be a huge chunk of your budget. My ideal budget recommends that your transportation costs stay within 15% of your take-home pay. But a look through your own finances may show that you are paying significantly more than 15% per month. A few weeks back I covered this subject in my Indy Star column. I’m always fascinated by how much people can spend in this category without even realizing it.
“You can buy the wrong car, pay too much for it, finance it the wrong way and then pick the wrong company to insure it. All the while, you are trying to keep your final monthly expenditure under the prescribed 15 percent of your monthly take-home pay. A poor car buying (or leasing) decision can leave you in the lurch for years.” (courtesy of the Indy Star)
Vehicles are a depreciating asset meaning you may buy a vehicle for $20,000, end up paying $22,000 by the end of your loan, and then sell the vehicle for $15,000. Vehicle math rarely works in your favor.
“In a perfect world, you’d have no car payments. I’ve personally enjoyed this phenomenon for years now, and I can tell you, there’s nothing better. Yet, as crazy as this sounds, always having a car payment might be the solution to a transportation budget issue. Going over your 15 percent transportation budget can create a major cash-flow crunch that hinders your ability to make financial progress in the other areas of your life.” (courtesy of the Indy Star)
What about leasing a car? Rarely will anyone in personal finance recommend that you lease a vehicle, but I’m not like everyone else. I don’t want to only offer you technical advice, sometimes you need practical advice. I think there is a time and situation where leasing makes sense and that’s when you have a major cash flow crunch. If you can’t afford to buy a vehicle with cash (best option) or you can’t afford a short-term car loan (second best option), then leasing a vehicle may be a good option for you. Here’s what having a car lease can do for you, it gives you time to clean up your financial life. If you get a three year car lease then you have three years to aggressively pay down debt and build your cash reserves. Your goal for the next three years is to save enough money to pay for a car in cash. Leasing will only help you if you put in the effort, otherwise you’ll just be spinning your wheels.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.