The Financial Impact of Car Buying Decisions

Manny the Mutant chooses discipline over temporary happiness, securing his financial future while Average Allen succumbs to car debt.

### Avoiding Financial Quicksand: Smart Car Buying Strategies
* 🚗  Many Americans face the challenge of purchasing a car, often leading to **financial difficulties that can suffocate their financial lives**.
* 💔  The auto industry promotes **temporary happiness** through financing options that can lead to **long-term regret**, as the excitement of a new car quickly fades.
* 💰  The average American now pays **$735 monthly** for car loans over **67 months**, with an average interest rate of **7.18%** and a loan amount exceeding **$40,000**, often including **negative equity**.
* 📉  To avoid falling into this trap, it's crucial to adopt the **"238 rule,"** which recommends a **20% down payment**, a **three-year payoff period**, and ensuring the car payment does not exceed **8% of gross income**.
* 💡  Surprisingly, while **35% of millionaires finance their cars**, **71% financed their first car**, illustrating that many successful individuals have navigated similar financial situations.
* 📊  Comparing two individuals, Average Allen, who follows the typical American path, ends up with **no investments after 68 months**, while Manny the Mutant, who adheres to the **238 rule**, accumulates **nearly $43,000 in investments**.
* 🏦  This difference can lead to a **staggering potential of $700,000 in retirement savings**, highlighting the importance of making **wise consumption decisions** rather than succumbing to **short-term desires**.
* 💪  Ultimately, it’s vital to ask yourself if your car purchase is worth **sacrificing your future wealth**, encouraging a mindset shift towards **long-term financial health**.

[Music] all right Brian so we talked about student loans that's one that a lot of people face that's something that a lot of people navigate let's talk about the next one because I think again every American is faced with this decision I need Transportation how do I think about buying a car yeah this is I I like to talk about this in terms of this is broke quicksand because you get into this and then you can't get yourself out and it ends up just suffocating your entire Financial life and unfortunately most folks are really bad at this they're really awful at doing this consumption decision well you have to take you have to take control of your financial life because unfortunately most people are caught into the emotional of what's going to feel good in this moment so they choose temporary happiness meaning that yes for the Auto industry has set it up that if I'm willing to finance the car for forever essentially even roll in negative equity we'll cover that in a little bit more I

can afford this thing that I perceive will make my life better, will impress my neighbors, but that's temporary happiness. Because I can go ahead and tell you, I've been on this journey before, and I've seen it for other people. The new car smell wears off after just a few months. The payment keeps coming, but that car gets a little curb rash on all those rims that you have. You start seeing a ding on the side, and before you know it, you're kind of really mad that you got yourself in this pickle of a situation. I don't want you to fall into that temporary trap. I want you to think more Perpetual if you can think deferred gratification if you can think discipline like a financial mutant. There is a better way. So let's talk about how bad the average American is. When you look at the behavior of the typical American, the average monthly car payment right now is $735 a month, and there are a lot of people who have $1,000. That's disgusting. $735.

and then not only that when you look at the average loan term, it is over 67 months. So, we are borrowing money for cars for over five years, almost twice what we like, which is 36 months. That's exactly right. Then, when you look at the interest rate, the average interest rate on auto loans right now is 7.18%. And when you look at the average loan amount, the amount of money people are borrowing for an automobile, it is over $40,000. This is what the average American is doing. But Brian, it's even a little bit worse than this. Yeah, wait, there's more. Because that $40,000 number on new cars, unfortunately, contains over $5,000 of negative equity. Meaning that this, when I talk about Perpetual, these people are making Perpetual car payments. Meaning that you go and you make one bad decision with this car, and then you drive it, it depreciates, and then you realize, I don't like this car anymore, but you didn't pay it off. You roll all

the negative equity meaning you still owe money on this car into the next bad decision. You see how you're going deeper and deeper. Remember when I was talking about that this was broke quicksand. This is proof that this is what the typical American is failing on right now. But we believe there's a better way to do money. And so when it comes to buying cars, obviously cash is King. If you can pay cash for your automobile, that is the best scenario. That's the best outcome. But unfortunately, not everyone is in a situation where they can do that, or you might not be at the stage of your financial journey. That's me. I fell into that where paying for cash is a realistic opportunity. So we came up with a solution. We came up with a rule that if you cannot pay cash for your car, if you can follow this rule, it will make sure you don't fall into that average American trap. So let's talk about what 238 is. Remember, this is because cars depreciate rapidly. We want to make sure

you put down at least 20% on the vehicle because we know these cars depreciate rapidly, and we want to make sure you pay it off pretty quickly. Also, to keep you from getting big eyes and trying to impress your neighbors, we want to give you a payoff period of three years. This is going to make the payments big enough and sting enough that you'll actually keep yourself pretty honest on this. And then we don't want your car payment to exceed 8% of your gross income. And remember, this is for affordable transportation to get to your first wealth builder, which is your job. This is not to buy a luxury vehicle. If you start thinking about anything that's European or luxury or has like BMW in the name, I want you thinking pay this thing off same as cash. This is not a 238 purchase. So you may be sitting there thinking, Okay, guys, yeah, paying cash, that sounds great, but that's not what successful people do, that's not what millionaires do. We actually do an annual

survey of our clients, and we say, Okay, tell us this: when you go to buy a car, do you finance it or do you pay cash? And when we look at it, millionaires right now, only 35% of them finance cars. That means that the remainder, the other 65%, are paying cash. You said, Okay, well, this is a rich person's game. That's just what wealthy, successful people do. However, we flip the script, and we asked this question of our current millionaire clients: Hey, when you started out on your financial journey, when you first began, when you bought your very first car, how'd you pay for it? Of our millionaires, 71% of them said, Hey, in the beginning stages, I had to finance. I had to borrow money. I could not come up with the cash. So, if you find yourself in the situation where you are having to borrow money or are having to finance, it's okay. You're not alone. A lot of people are there today, and a lot of people have been there. But you want to make sure that you have an accurate representation of how

to do it the right way, even if you are going to finance. So, let me go ahead and give you a head start on this whole wealth-building journey and how to avoid this quicksand. In the case that we've laid out, I want you to go to money.com/resources and look at how much car can I afford. Don't just start test-driving and going to dealerships. These guys are masterful at the emotional manipulation of telling you because they're going to say, Hey, what do you want your monthly car payments to be? That's the number question. So, let's go ahead and get out in front of this. Go to money.com/resources, figure out how much car you can afford, so you're actually on the front end of this versus being manipulated into a bad consumption decision. Okay, so now let's look at our two individuals. Let's look at our case study that we're comparing. We're comparing Average Allen and Manny the Mutant. Average Allen goes and finances the average American amount of car debt.

$440,000 finances a brand new car for $4,634.00. He can finance average. Allen is going to do it over 68 months, so that means that average Allen's payment is going to be $735 a month. Manny recognizes that 238 will keep him inside the guardrail, so he finances for 36 months. His monthly payment is $399 a month, which leaves some margin to where, while he's paying off his car, he can still be investing $336 a month. This is the part now, hear me out, Financial mutants. This is the part where you're going to feel a little different because outside looking in, Allen's going to look like the successful one because he's going to be driving the fancy new car. You're going to be driving the used car that's right around $20,000. From the outside looking in, you have to realize you get joy out of driving a paid-off car and knowing that your wealth sits on your net worth statement, that your money is going to work harder than you can with your back.

your brains and your hand in the future. You got to work on this but fall because that's why we try to educate you because in the temporary moment it's going to feel better to be Allen but I'm telling you in the long term watch what this happens. This is what empowers US Financial mutants Allan because he's doing what the average American does. He has no margin for saving and investing so he's going to have all of his discretionary Capital going towards his automobile but Manny after he gets his car paid off in 3 years. He's going to keep investing. He was already investing some. He's going to begin investing $735 a month. So when we do the progress report we look at the report card. Let's see how this looks after 68 months. Guess what they both have paid for cars. Allen did pay off the car. It just took him longer. They both have paid for cars but that's only part of the story. Allan has zero dollars invested. Remember everything went into that automobile but Manny because he was

disciplined after the 68 months because he was saving the whole time, now has almost $43,000 working for him, in addition to a paid-off automobile. Do you see how I mean? This is so interesting to me. It's the same sum of money, once again, same sum of money. There's nothing different except one looked fancier because they got the new car, the other one is driving around the used car. And you look at the results of this, and you like, Yeah, okay, Manny's got $43,000 likely in a Roth IRA 'cause that's one of the early steps that you're going to start saving and investing in that tax-free growth Roth IRA. But Allen's got the cool car. But what's interesting when we get 68 months in the future, that brand-new car is going to look a lot like Manny's used car. It's going to look like a used car. It's going to have the blemishes and everything else. So let's now see the rest of the story because we already see $43,000 is

nothing to just throw away. That's a chunk of money. And then if you put that money to work, it actually has the potential to grow into that $43,000. Letting it grow for another 35 years turns it into $700,000. And by the way, we didn't get crazy with the assumptions here. We used 8%. And we could have done $1,000 car payments because there's a lot of people on YouTube or TikTok telling you about their $1,000 car payments, and they're so proud of it. Guys, literally this one decision was close to seven figures. This is your retirement that you're riding around in. The question you have to ask is when you make these consumption decisions, when you go to buy that car, I want you to actually physically think to yourself, Is this decision I'm making worth three-fourths of a million dollars? Am I willing to rob my future self of nearly seven figures of wealth so that I can look cool today and drive this fancy car around today? We

hope that you will fall into the Manny the mutant camp and not be like average Allen.

Think a $20K Car Upgrade Is Cheap? It Could Cost You $700K!

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The Money Guy Show

Many Americans struggle with the decision to buy a car, often falling into a cycle of temporary happiness and financial strain.

The average monthly car payment is now $735, with loan terms exceeding 67 months and interest rates around 7.

Many borrowers are also dealing with negative equity, leading to a perpetual cycle of car payments and financial instability.

Negative equity from car loans can lead to a cycle of debt, causing financial struggles for many Americans.

Paying cash for a car is ideal, but if that's not possible, a rule of 20% down, a three-year payoff, and keeping payments under 8% of gross income can help avoid common pitfalls.

Interestingly, while 35% of millionaires finance their cars, 71% of them started out by borrowing money, showing that it's a common struggle on the path to financial success.

Smart Car Financing: A Wealth-Building Approach

It's important to determine how much car you can afford before visiting dealerships to avoid emotional manipulation.

Average Allen finances a new car for $4,634 over 68 months, with a monthly payment of $735, while Manny the Mutant opts for a used car, financing it for 36 months with a $399 monthly payment and investing the leftover money.

Ultimately, Manny's approach allows him to build wealth and enjoy the benefits of a paid-off car, while Allen's flashy car may give a false impression of success.

The Impact of Financial Choices on Long-Term Wealth

Two individuals, Allan and Manny, have the same financial situation but make different choices regarding their cars.

Allan prioritizes a new car, leading to no savings or investments, while Manny opts for a used car and invests his discretionary income.

After 68 months, both have paid off their cars, but Manny has $43,000 invested, demonstrating the long-term benefits of disciplined saving and investing.

Car payments can significantly affect long-term wealth, with a $500 monthly payment potentially growing to $700,000 over 35 years at an 8% return.

The decision to spend on a luxury car can rob individuals of nearly seven figures in future wealth.

It's important to consider the long-term financial impact of consumption decisions, like buying a car.