Weekend Reading: Crushing Car Payment Edition

I’ve written before about how buying new vehicles every few years can be a major wealth destroyer. Indeed, next to housing costs, a car payment (or two) can easily be your largest monthly expense. 

A recent Globe & Mail article (subs) by Rob Carrick caught my attention when he wrote the average monthly car payment (for all loan terms) hit a record $781, while the most popular loan term was for 84 months (7 years!).

Canadians are stretching payments out to the max so they can afford new vehicles. Think about it. At $710 per month for 84 months you’ll pay a total of $59,640 for a vehicle. And that’s just the average.

The problems get worse when you consider that 0% financing deals have disappeared. Rates today typically range between 3.9% and 4.9%.

And, while the most popular term for a car loan is seven years, the average age of a trade-in is six years. Around 20-25% of people trading in their vehicles still owed more than the value of the car.

I get the appeal of wanting to drive a new vehicle every 3-6 years. New cars are safer, more reliable, often more fuel efficient, and come with the latest technology. If you’re the kind of driver who enjoys those advantages, consider leasing rather than financing. The payments are lower and the terms are shorter.

For me, I couldn’t care less about owning a new vehicle. We sold our second vehicle (’07 Tucson) last summer and drive our remaining vehicle (’13 Sante Fe) sporadically. I’ll happily take the savings from not having a vehicle payment and put it into our travel budget.

Where families can get into trouble is when they’re in a constant cycle of having two financed car payments. Imagine two payments of $700 per month – that’s $16,800 per year going towards your vehicles.

If you can break or split-up that cycle so that you only have one car payment at a time, you can free-up $8,400 per year to allocate to savings or travel or other financial goals. Even for a year or two that can make a big difference.

And, finally, try to avoid getting way over your head like this with monthly car payments in the $1,000+ range:

Does this dealership realize this makes them all look really bad???? pic.twitter.com/RGhOoMznXt

— Jessica Ray (@jessicaray0) August 27, 2022

This Week’s Recap:

I’m on the board at FAIR Canada and flew to Toronto this week for our first in-person meeting in several years. It was a great meeting, but the travel experience left a lot to be desired. It’s a reminder that it’s still incredibly challenging to fly within Canada without experiencing some sort of problem or delay.

My flight path home was Toronto to Calgary to Lethbridge, with the Lethbridge leg of the flight scheduled to leave at 11:10pm. I got a message from WestJet saying the Toronto to Calgary flight would be delayed by 90 minutes. Since that would cause me to miss my connection home, I quickly checked with Air Canada and booked a flight that would get me to Calgary on-time.

Or so I thought.

We boarded and sat on the runway for an hour waiting for the pilots to arrive. When they did, they needed another 30 minutes to get ready and in position for take-off. Crap! I missed that Lethbridge connection after all.

I booked the next available flight home (9:45am), booked a hotel room, and checked in at the in-terminal Marriott. An hour later I got a text from WestJet with a hotel voucher for one of three options (all off-site with no shuttle available). 

All-in-all the trip that should have cost about $1,300 ended up costing me $2,500, not to mention the lost time away from my family and work.

I’ll file the appropriate flight delay claims through WestJet and hopefully get reimbursed up to $1,000 for the “9 hours or more” delay. If that doesn’t work, I’ll go through my credit card’s trip interruption insurance process.

This past week I shared 5 retirement planning options to help you reach your retirement goals.

I also explained how to plan your own revenge travel year.

Next week, watch for a Q&A with CIBC’s vice-president of sustainable investments. I’ll also have a fun post to share about my investing journey had I made different choices along the way. Stay tuned for those!

Promo of the Week:

A shout-out to the American Express Aeroplan Reserve Card, and specifically the “other” perks that come with a premium card that often get overlooked.

I mentioned that I booked an Air Canada flight from Toronto to Calgary when WestJet informed me of the delay on my original ticket.

That meant being able to take advantage of perks like access to the Pearson Priority Security lane, where I breezed past the hundreds of people in line, access to the Maple Leaf Lounge to relax, eat, call my family, and finish making alternate travel arrangements, and priority boarding to ensure I had space for my carry-on luggage.

It’s those extras that make a stressful day of travelling more enjoyable. 

If you have a “revenge travel” year planned then you owe it to yourself to try one of these premium cards, at least for a year, and take advantage of perks often reserved for the super elite.

Weekend Reading:

One of the best business books I’ve ever read is Losing the Signal: The Spectacular Rise and Fall of Blackberry, by Jacquie McNish and Sean Silcoff.

That’s why I was excited to see that production has wrapped on a new film based on the events of the book. Can’t wait to see it.

Get ready for a new acronym. Details have been released on the proposed First Home Savings Account (FHSA). While there’s no specific date at this point, eligible Canadians can expect to be able to open and contribute to the new FHSA “at some point” in 2023.

Thanks to Tim Cestnick for quickly providing us with nine potential strategies for using a First Home Savings Account.

Dimensional Funds really puts out some terrific content. Here are four excellent articles worth your time:

• Tuning out the noise – how to avoid feeling overwhelmed by the relentless stream of news about markets.
• Active management hasn’t shined in volatile markets – in fact, traditional active investments may compound your concerns during times of market uncertainty.
• What drives investment returns? – why ingenuity will continue to reward investors, but owning a broad universe of stocks helps reduce the risk of betting on the wrong horse.
• The difference between a forecast, a wish, and a worry – and how to invest without doing any of those things.

One more Dimensional article deserves to stand out on its own and that’s this piece by professor Kenneth French on the five things he knows about investing.

A Harvard-trained economist says ‘early retirement is one of the worst money mistakes’.

A great piece by Nick Maggiulli on how retirees actually spend their money:

“For most retirees, spending money in retirement isn’t a financial issue, but a psychological one. It’s not about having the money, but convincing yourself to use it.”

Here’s why having enough money is just one piece of the retirement puzzle.

Now some advice for the younger generation:

Andrew Hallam says anyone who will be adding money to the markets for at least the next five years needs to try this test now.

And here’s why serious investors shouldn’t fall in love with growth stocks.

Here’s professor Meir Statman’s advice to young people on taking risks.

Finally, an interesting thought experiment by Ben Carlson on why people make dumb financial decisions on purpose.

Have a great weekend, everyone!