I’ve written before how vehicle loans can be big source of financial misery for many families. It’s a problem that continues to get worse. According to a Bank of Canada report, one-third of consumers who trade in their old car for a new one owe more than their old car is worth. It’s a frightening statistic, but easy to see how this car trouble happens.
Car dealers attract new buyers by offering tempting monthly, bi-weekly, or even weekly payments (at “zero-percent” financing) that give the impression of affordability. Buyers finance the purchase over six, seven, or even eight years to keep their monthly payment low. After three or four years, the consumer gets itchy for another new car, whether through slick marketing from the dealer offering to buy back their old car, or to keep up with the Joneses.
The amount owing on the car loan at this point far exceeds the car’s resale value and so the dealer offers to roll the existing loan into the new one. The vehicle loan trap continues, and the consumer is far worse off – already upside down on the new car loan once they drive the car off the lot, plus the added burden of the old loan. And for what? A shiny new vehicle in the driveway that’s literally choking off your finances.
Over the years we committed two cardinal sins when it comes to car buying. First off, in 2007, we leased a new vehicle. Then, in 2012, we financed a new vehicle. But I was determined not to fall into the vehicle trap and so we bought out the first car when the lease expired, and paid off the new vehicle in just four years. Now we have two paid-off vehicles that are both in great shape and can hopefully be driven for another 5-10 years.
Do we get the itch to buy something new? Not really. While we were paying off our vehicles we couldn’t afford to make contributions to our TFSAs. Now that we’re car payment free we can afford to put $10,000+ into our TFSAs every year, and even catch up on unused contribution room from years prior. That gets me more excited than parking a new car in the driveway.
This Week’s Recap:
On Tuesday I explained how RBC’s new Payback with Points at Point of Sale now allows its customers to redeem their rewards points right at the cash register.
On Wednesday I wrote about kids and money and why we don’t tie their allowance to the completion of household chores.
And on Thursday I offered a renewed case for GICs as interest rates tick up. EQ Bank’s five-year GIC is at 3.50%.
Over on Rewards Cards Canada I reviewed the American Express Business Gold Rewards Card and how I got 40,000 Membership Rewards points for no annual fee.
The internet is full of “life hacks” to accelerate results without putting in the work. Morgan Housel tears apart this advice and lists some of the only useful hacks he knows. Two of my favourites that apply to saving and investing:
Investing hack: Give compounding the decades it requires.
Savings hack: Lower your ego and live below your means.
A Wealth of Common Sense blogger Ben Carlson has some fun with this as well with his listing of ‘useless hacks’. Example:
How to get your personal finances in order: Try to keep up with your peers in terms of vacations, buying expensive toys, and spending. Envy is a great way to prioritize your spending habits.
Nick Maggiulli (Of Dollars And Data) says that in a world where one-quarter of Americans don’t read books and some people can’t even name a book, those that go out of their way to keep learning have an advantage. Those advantages, while small now, will compound and become massive over time.
Jon Boorman, a thirty-year investment industry veteran, shares 30 lessons learned from his three decades of work in the markets. The last one is a gem:
“When you’re young, you have so much time but never enough money. When you’re old you have money but never enough time.”
Investor advocate Robin Powell uses a neat scotch analogy to ask investors if they can truly stomach the risk they’re taking.
This week Michael James wrote about how his sons invest their money with a low-cost, two ETF index investing solution. Well done.
Real Estate Investment Trusts are interest rate sensitive securities but Gordon Pape explains why REITs are defying the odds and outperforming the S&P/TSX Composite this year.
In his latest Common Sense Investing video Ben Felix looks at institutional investing (university endowments and pension funds) and explains why even with access to the most brilliant financial minds and exotic investing strategies these funds would be better off taking a passive approach with their investments:
Rob Carrick says parents can financially suffocate their kids by helping them buy houses.
Finally, Million Dollar Journey blogger Frugal Trader shares his own immigrant family’s success story – from arrival to retirement.
Enjoy the rest of your weekend, everyone!