I’m not a money expert, but I play one on the interweb. I’ve made a lot of money mistakes in my day from trying to time the market (it doesn’t work) to not keeping up with my credit card payment (late fees!) but the worst money mistake I’ve ever made was buying a new car when starting my first job out of school. After receiving a little over $5,000 in graduation gifts (I have a generous family), I didn’t know what to do with myself. I should have taken that $5,000 and bought a quality used vehicle but instead, I used it as a downpayment on a $15,000 Toyota Corolla and financed the rest. Instead of starting my new life in the real world on solid financial footing, I started off in debt. Sure, I got a low interest rate and yes, I ended up with a quality automobile that still has many good years left in it, but I could have used that $272 per month car payment for more productive purposes. I could have stashed it in my 401k, saved it for a down-payment for a house, or just put it in my emergency fund but instead I wasted it on a car I didn’t really need. Had I invested that $272 in my 401k and earned an average 8% per year over the 3 years of the loan term, I would have ended up with approximately $11,025, or over $1200 more than I invested to begin with. Furthermore, my used car would have retained its value far better than my new car assuming I had taken care of it. It’s not at all a stretch to say I could have come out almost $4000 ahead by buying used and investing rather than financing a new car. A full year’s ROTH IRA contribution (at the time), that’s not chump change.
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3 responses so far ↓
1 Cory // Jul 24, 2008 at 3:51 pm
I too bought a brand-new car when I started work full-time last August. A 2007 Honda Civic SI. I put 7k down, borrowed 3k from my brother, and financed 13k. Expensive? Yes. Would buying used have been a better financial decision? Yes. But honestly I’ve never regretted it for an instant. I. LOVE. MY. CAR.
BTW I’m paying down the loan double-time so instead of 36 months it will be paid off in 18. Consumer debt is teh suck.
2 Curt // Jul 24, 2008 at 9:54 pm
It’s very hard not to treat yourself after getting through college, I know about that. I bought a house right after graduation, but luckily it increased in value so I paid off. But, I just as easily could have bought a new car. 10 years later, I still haven’t bought that black BMW that I’ve been looking at.
3 Slinky // Aug 15, 2008 at 11:45 am
I just graduated this year and am about to buy a new car. Maybe I’ll regret it later, but from where I’m sitting it makes a lot of sense. I’m also contributing to my 401k, Roth IRA, emergency fund, non retirement investment fund, and saving for a wedding at the same time. It’s amazing how much you can accomplish when you’re suddenly making more than 4 times what you’ve been living on.
The key is to not let your expenses get crazy.
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