How to Afford your Mid-life Crisis Car

by Adam on February 24, 2010

Imagine a few years down the line: You’re fat, working a dead-end job and divorced from the love of your life. Let’s throw into the mix that you’re losing your hair too.

The only solution? A midlife crisis sports car of course!

Hopefully you’ll not find yourself in this situation but it always helps to be prepared. What’s a prudent 20 something to do? For the purposes of this post I’ll ignore the fact that we all should be working to improve ourselves, developing and maintaining healthy relationships and finding fulfilling ways to spend our days on the planet.

Instead, let’s focus on logistics of being able to pay for the car!

For many of us, getting a car loan is the ‘normal’ thing to do. How else are we to afford one? When I explain to some friends that I’m saving up for my first car some of my friends really do say:

“But Adam, no-one can afford to buy their first car without help from their parents or a car loan right?”

Avoid your first major debt

Aside from student debt, a car loan is often the first major debt that young people beginning their careers sign up for: certainly a number of my friends bought cars after university using financing, many focusing on the monthly payment rather than the total cost of the loan.

However carrying debt can be costly and adds risk to your life: when you take out a loan you make a promise to pay it back over time but the future is never certain: you may not be able to pay back the loan in the event of a job loss, or you may not be able to afford other things that you need or would like because you are committed to making the payments on the car-loan.

In cases where you buy a brand new car, you could get in even more trouble as the value can quickly fall below the level of your debt so you would not be able to sell the car at a later date without first taking out another loan to cover the difference. With debt you lose both cash flow and flexibility –you are required to keep paying for your purchases even in the event of a change in circumstances.

So what’s the alternative? Here are 4 ways to either avoid or minimise car debt, putting you in a much better position to grow your pennies helping you afford your mid-life crisis car later on in life:

Do you need a car now?

Having a car can provide great personal freedom and for many, getting your own set of wheels is a ‘coming of age’ moment: You no longer need to rely on public transport or lifts from family or friends. However it can also be a financial burden and a commitment that stops you from being able to save money for your future self.

Admittedly it’s easier for some to decide against a car: for example, I love cycling and my trusty bike gets me to work and around my city quite easily. It’s not always convenient but the choice to not have a car makes a significant difference to the amount I’m able to funnel into my emergency, opportunity and future self accounts. Ask yourself:

“Is having a car at this stage of my life really worth it?”

Deciding to wait a little while for a car can mean the difference of tens of thousands of pounds considering how much the pennies you save in your 20s will grow in value over time.

Buy used and older

Most readers of Magical Penny are young 20 somethings just coming to terms with their finances, or at least seeing what all the fuss is about! We already have what almost everyone would pay millions for: youth! Take advantage of being young: you don’t need a shiny new car to enjoy the crazy adventure of early adult life. Not having a car payment (or a very low one) allows more flexibility to travel, visit friends or simply save for other things like a down-payment on a house.

Having an older car also lowers your insurance premiums and it is much easier to purchase an older, lower value car with cash (saved over a few months). Remember, it’s not about depriving yourself: it’s about getting yourself in a position to make a significant impact on your future self’s bank balance: the money you save by buying a old used car in your 20s compared with financing a new car or leasing a car  is not just a few thousand pounds: left alone and invested properly, we’re talking significant sums: tens of thousands of pounds; plenty to be able to afford that Ferrari when your hair starts to thin and you need that mid-life crisis boost!

Cheap(er) Financing

For some, having a new car is something that can’t be avoided: they require a new car as part of their job perhaps: it needs to be presentable for visiting clients or reliable for travelling to meetings and events. In these cases spending the time to find 0% finance deals is the best option. All debt has risk but 0% finance deals at least cuts back on the expense of borrowing.

Pay It Off ASAP

Even if the interest is at 0%, you need to work out a way to over-pay -not having debt has a huge phycological benefit of being master of your own destiny, rather than working for your creditors. Also, if you want to be ready to begin seriously growing you pennies through saving and investing, you need to have significantly reduced your car debt otherwise you are taking on too much risk. Find ways to cut back on your lifestyle and add any money saved into the ‘pay of debt’ category in your budget.

Many people feel liberated when they pay off their debts as 100% of their income can be spent on today’s and tomorrow’s needs and wants, rather than yesterday’s obligations. Sounds good doesn’t it?

Finally…

As you’re reading Magical Penny, the blog that evangelises the power of compounding returns, you may be eager to start investing before you finish paying off your car loan. However it’s not generally recommended as the stock market’ return is not guaranteed. The savings you will make when you pay off debt, however, are. The best plan is often to get the expense and risk of a car loan out of your life before you begin to seriously grow your pennies in the market.

Ultimately if you make the choice to lower your car-debt now when you’re still young and  still (relatively) cool,  you can afford that sports car just in time for your mid-life crisis!


This light-hearted but important post on paying off debt and reducing your lifestyle while you’re still young is part of Magical Penny’s ‘Debt’ series – making sure that you understand the importance of eliminating debt before you begin growing your pennies in the market. Don’t miss any of the action: get free updates by clicking here.

Further reading:

Carnival of Personal Finance #245 @budgetsaresexy
-Magical Penny as a featured ‘editors pick’:

#1) Magical Penny: Financial Lessons of a Cheese Pedlar. Cheese & finance?! AWESOME! :) If you frequent Subway a bit, and like keeping your money, this is a must read. Well done Adam!

Why you must get out and stay out of debt @Monevator

Get out of debt to unleash your inner money maker @Monevator

{ 12 comments… read them below or add one }

Clayton

Another great reason to walk into a car dealership with a wad of cash is that you can negotiate a better deal and completely avoid the hassle of getting a loan. Which saves you money, time, and makes you feel cool for saving lots of money

The other Adam

Great post again Adam!

I am totally for buying an older car (I needed a car because I am ridiculously lazy, and enjoy driving!). My first car was a present, and was only £500 (I realise it’s still a lot of money). A 12 year old Micra. But it still lasted me 4 years! And with some of the money I managed to save over those 4 years (plus £200 for the car), I was able to buy a 6 year old micra, but still only for £2000. No car loan needed! And I’m pretty certain it will last me for a good few years yet. A lot of people use the excuse that they want a new car because they need it to last. If you do your research there’s no reason why an old car won’t last a good deal of time too! And It’s a lot cheaper! I’ve now managed to get from 18 to nearly 24 without having to spend loads of money on insurance as well, which is the most expensive period for a young male.

Sean

Okay, good post. But I’m gonna play devil’s advocate again, and not just because I’ve got a loan on my car (albeit a 0% one, and leaving aside the fact the government paid £2000 towards it as well).

Let’s assume you’re in your 20s, and you’ve decided that you want a new car to last you well into your 30s and perhaps even until you get that mid life crisis car. First of all, unless you happen to buy a Toyota, you’re going to save significant money on maintainence over a used car over the 10 years you might have it. If you’re sensible, you’ll also buy a car with low CO2 emissions, saving you more money per year in car tax.

Now let’s look at the purchasing, taking some of your advice and finding a new car with a 0% deal. Person A decides he doesn’t want to get into debt. He’s going to put the equivalent monthly repayments into an average savings account, paying say .5% above BoE base rate. Person B says ‘stuff it’ and takes the loan out on the car. Who’s going to be better off in 2 years time?

Thanks to the wonders of inflation, it’s Person B! Not only does he have a car which is paid for, he’s had two years use out of it. But surely Person A can buy his new car now right? Wrong! inflation means the car company has put the cost of a new car up by £1000. So person A has another few months of saving, AND ends up paying more for the same car as Person B. What a loser!

Obviously the real winner is Person C, who likes to cycle. But do you see my point?

Sam

Its nothing to do with whats better, new or used. it is entirely down to who owns the car. Maintenance is a key area. A used car, properly maintenance (and by that I dont just mean taking it to a garage, that means weekly maintenance by the owner which costs absolutely nothing! and sometimes only 10 minutes of your time a week!) will last longer than a new car that is not properly maintained. I can give multiple examples, (even about bikes) where cost has been incurred through the owners inability to comprehend the need for weekly maintenace.

Before buying a car, you need to work out how it fits into your lifestyle. you could save a lot of money by buying a cheap used car, running it into the ground and buying another in the near future. Also, taking Sean’s 10 year timescale, buying a used car thats 3 years old saves on cost instead of buying new (still with reasonable emmissions and running cost ratings), but then selling it in 7 years and buying another 3 year old car, as when the car reachs the 10 year mark, expensive components will be in need of attention and significant cost can be avoided by simple trading it in and getting a newer model.

Of course with all big purchases, you need to understand the product, be it a car, a house etc, to really get the best deal cost wise. You shouldnt just think of ways to save money for a purchase in the future, when you’ve left whats you’ve already got outside to rust. Cause then your pennies go on replacing what you already had but couldnt be bothered to care for.

Adam

@Clayton: I’ve never bought a car myself but having cash for anything puts you in a very good position. Thanks for commenting.

@TheOtherAdam -I love this strategy, thanks for sharing -it is exactly what I think is the best way to go about owning a car for those of us in our 20s, particularly for young male drivers whose insurance is incredibly high. We have the whole rest of lives to work towards better cars -it can be a real strain on your finances if you move up in car too quickly and you’re not going to want to move back down.

@Sean -I love that you’ve brought some debate to this post. I see your reasoning but you’ve not included any mention of risk: having a big car loan that needs paying off could put your financial life in risk if something happens to your source of income. You also lose flexibility -someone saving up for a car by making the same payment into a savings account could always stop paying themselves the payment if they needed to, but you can’t stop a car loan as easily.

You make a great point about savings and interest rates though -currently you’re not going to earn much on your money, but bigger picture, having it there puts you in a position to do more ‘risky’ things with your other money, like investing, for even bigger returns: see my other post:

Why it’s great to lose money in a savings account:
http://magicalpenny.com/saving-money-and-losing-it/

Lastly, whilst I love your car and admit the UK government scrappage scheme (the UK version of Cash4Clunkers in the US) muddies the waters a bit on this debate, I feel that for most of us, on modest incomes, having a shiny new car sets a dangerous precedent. And if we hold back from buying new until later on in life, the rewards far far outweigh that great new car smell.

@Sam. Another high quality comment. Thank you. You make a great point on maintenance as it can make a huge difference. That said, I’d be the first to admit that maintenance can, for many, seem too complicated (even if it’s not) or not be much fun. As with all things, it’s a matter of finding a healthy balance: for some, replacing a part every few months might be worth it if it means they don’t have to go out into the cold and oil or clean something at the end of a long day. But similarly, I’m sure if you take the time to learn how to do even basic maintenance you can save more than most people think.

Also, both you and Sean make good arguments for and against in the new Vs used debate: a new car does indeed need less maintenance and have good fuel efficiency, and yes Sam, a newer but used car is a great alternative. Both points reminded me of two great posts at The Simple Dollar that I think are worth a read:

http://www.thesimpledollar.com/2009/10/01/how-the-traditional-rules-of-frugal-living-often-vastly-undervalue-time/
http://www.thesimpledollar.com/2008/06/17/twelve-ways-to-make-your-car-a-better-investment/

Ultimately though, stripping away all the other points, I hope you take to heart that lowering your auto expenses in your 20s can have a massive impact on the choices available to you later on in life. To me, controlling car costs is a ‘big win’ when it comes to growing your pennies.

Sean

Okay, so I didn’t take risk or flexibility into account and assumed a fixed income, which is probably a scarce thing these days.

But I do think that in evangelising saving even in the face of losing money (e.g. in a savings account with a pitifully low interest rate) is failing to take account of the concept of opportunity cost (http://en.wikipedia.org/wiki/Opportunity_cost).

In the case of my example, Person A doesn’t just lose out monetarily. He loses the opportunity costs of 2 years of fault free motoring and the pleasure of owning a new car.

The problem with opportunity cost is that it’s very open to personal interpretation, but I hope that you can see that there will be some situations for everybody in which spending is preferable to saving once opportunity cost is accounted for (granted, being new to this personal finance malarky I’ll be happily corrected if I’m wrong).

Going back to motoring, a perfectly valid point we’ve missed is the concept of the car-share, which removes a lot of purchase cost and initial outlay.

Jon

The ‘flexibility’ allowed by a debt-free, second hand car, is not always exactly that. Our family has only ever bought one; it ran fine for a year, but the necessary repairs soon mounted up (not through poor maintenance, but because it was a Fiat from the late 1990′s and therefore shite). Nobody likes to spend a high % of the initial outlay on keeping a car running through repairs, but you are almost obliged to at first due to the investment you have made in it. New cars with warranties negate such issues, and lack the costs of the MOT at first.

Best deal on the market at the moment: buy a Kia Ce’ed on 0% finance, pay it off ASAP, sell it on while the 7 year warranty is still valid (highly likely, in truth, and a massive incentive to second-hand buyers) and you could end up with a much more efficient investment. Plus the MOTs will almost never cost you anything providing you do the basis maintanence.

I wouldn’t argue that you may grow some pennies given the tips suggested, Adam, but motoring is going to be one of those subjective areas where I can see the potential immediate ease, and benefits, outweighing an opportunity to invest.

But I can’t comment directly as I have been damn lucky with acquiring vehicles so far!

Jeremy Gekko

How do Adam. You’ve got a lot of content now, cool!!!!

You picked an interesting subject to talk about. Reading some of your posts from the US it occured to me how we look at things from a UK perspective.

I would say we have a car culture here. If you go somewhere like Switzerland, they don’t like cars at all, bikes are king…. and they have all the money… hmmmm… perhaps your pro-bike stance holds water… dunno :-)

Anyway, I largely agree with your points. As an IT guy, you hear loads of stories about people going out to buy a sports car and end up selling them within a few months. Buying a nice car is very easy, keeping and running it (ongoing costs) is another ball game. This will probably have a greater impact on your finances, more so than taking the loan out to buy it in the first place.

However, mobility is very important in modern life so you should never underestimate the importance of owning your own car. The sooner you get driving the quicker you get experience and the better the insurance premiums will be.

I think the key is to pick the right car for you. If your a high flying marketing guru with tons of cash why not buy a Bugattie Veyron and dump the bike. After all, the ladies appreciate a a good car and it beats giving them a croggy (I’m not being rude).

People can be quite emotional about cars and they are often more than just transport, they are a hobby as well, and in some cases, ah ha, even an investment.

Blue Horseshoe loves Anacott Steel. ;-)

Adam

@Sean -Thanks for elaborating your point. I felt my response deserved a full post:
http://magicalpenny.com/lifestyle-inflation/

@Jon -Thanks Jon your perspective. It gave me food for thought. On the whole though, I disagree.

For most 20 and 30 some-things a new car cannot be called an efficient investment. The difference in cost, even with 0% finance is huge. Yes you avoid maintenance costs and repairs but in most cases these maintenance costs are tiny compared with the amount saved by buying used. I think your example was more down to poor car choice (by your own admission), and bad luck.

If the decision is made consciously there’s nothing wrong with buying a ‘better’ or ‘newer’ car -but I wanted to bring up in the article that it comes with a massive, life-changing price attached, especially compared with what you could have in a few years if you make a conscious effort to save and invest the money rather than purchasing a new car.

@Jeremy – mobility is indeed very important and perhaps I am underestimating it -but public transport is not so bad, and even with modest use of taxis I feel that the savings made have been worth the inconvenience. I encourage other 20 some-things to consider being car-less for a while: if you save wisely and do not squander the money saved on other wants you’ll find it much easier to accumulate pennies for your future self. And Jeremy, I’m sure ‘the ladies’ would appreciate that too!

Car Dealer Sheffield

I’m with Clayton on this, if you walk into a car dealers with cash you have a good position to deal with because they see you will spend that money with them if they give you the right deal. It is always a great feeling too if you pay for the car straight away and do not have to worry about paying back a loan . Used cars are a great way to save on buying too as they are considerably cheaper and as a young person insurance is normally high anyway so the money you save on a car can be used for insurance or for petrol for all the trips you would be taking as a new driver.

Minnesota Honda dealers

Hello, its not so true some times, if you are really interested to buy a car from dealers you should give him confidence that you are actually interested in buying car from them. nice reading. thank you for sharing.

Same day loans online

A used properly maintained car will last longer than a new car that is not properly maintained.

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