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Image credit: https://cars.usnews.com / Car pictured is a 2007 Honda Accord
I get it. Most of us like nice things, especially nice shiny new things that get us from A to B. There is no denying that driving a brand new car sends a signal to the world that we are on the right track and can make us feel good about ourselves, but at what cost? Car payments are often the second or third largest items of expenditure on most people’s monthly household budget. If you are serious about pursuing financial freedom you will need to stop making ego-driven financial decisions.
I have noticed something, lots of people with immense wealth drive extremely ordinary cars. They often pick fundamentally sound cars that have good reputations but then they hold onto them. For them, impressing the neighbours is not a priority. They are more interested in increasing their wealth generating assets.
A Car is not an Asset
Money in the right savings account will be compounding for you, whereas money spent on a brand new car will evaporate day after day as your car depreciates. Let’s be clear, only the rarest of classic cars appreciate; most cars depreciate in value. Whilst you’re busy impressing the neighbours, your money is leaving you.
Similar to savings, property is also an asset that will appreciate over time. In most parts of the United Kingdom and many places around the world, property increases in value year upon year. If you are a homeowner, you can further increase the equity in your property by making additional payments against your mortgage. This means that you will pay off your mortgage in a shorter period and as a consequence will save thousands in interest on your home loan. You will be able to own your home outright many years earlier than originally agreed. Your mortgage provider would prefer that you do not do this because they will lose thousands of pounds. If you can afford them, making additional payments against your mortgage is one of the best financial decisions you can make in your life.
Trade Down Your Car
In many cases, a car is necessary; to get to work, or pick up the children from school, plus all the shopping trips and errands that you use it for. I’m not advising you to make do without a car; simply downgrade the latest model or forego the latest model to focus on your financial goals. In doing so you will be trading down your car to bring you closer to financial freedom. If possible, buy a much older car and pay cash for it. The money you save on car payments can go towards additional payments against your mortgage. You would be surprised how much difference an extra £200 or £300 per month will make.
I realise that for many people this kind of approach will require a mindset shift; choose this approach because it suits your financial goals and stop trying to keep up with the Joneses. You never know, the Joneses may be up to their necks in unsecured debt. By being disciplined, you will soon be far ahead of them anyway.
Making extra payments against your mortgage will increase your net worth. You should be tracking your net worth on a regular basis, this post explains the why and how, Why You Should Track Your Net Worth.
Have you considered buying an old car? Have you made additional payments against your mortgage? Let me know in the comments section below.
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My aim with each blog post is to help you move to a better financial future. I believe that there is not enough financial education in the national curriculum and I intend to share anything helpful that I have learned along the way. I am by no means a financial expert. None of the information on this website constitutes financial advice and is provided as general information only. This is my personal finance blog; my marketing blog is over here and I have been blogging there since 2010. I hope you have found this information useful. Thank you for reading.