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It’s okay to stack, chill, and invest
Now, there is nothing wrong with buying a car when everything else is on track financially, but what are you doing if everything is not on track?
Let’s paint the picture of my friend’s financial situation:
They had no emergency fund.
They lacked financial education.
They only had one income source.
They had massive credit card debt.
The car equaled more than 1/3 of their income.
The new car added an extra $700 to their monthly budget.
They had less than $5,000 in the bank for their retirement.
In the case they lose their job, they’re kind of screwed unless they use their credit cards – if they aren’t maxed out.
Before You Buy A Car, Create An Emergency Fund
If your primary source of income is reliant on someone else, then you need an emergency fund, and if you’re an entrepreneur, you also need one because your income can sometimes be inconsistent.
No matter how secure your employer or business makes you feel, there is no guarantee of how long that opportunity will last.
When you work for a traditional employer, they can let you go at any time – as many of you have recently experienced or witnessed mass layoffs.
Before You Buy A Car, Read A Personal Finance Book
If you’re reading this article, you’re on the right track with your financial education, but if you have a friend, colleague, or family member who is about to make a car purchase, and you know they are not investing in their financial education, share this article with them, get them a book on personal finance, or encourage them to buy one on their own.
The reason many people buy brand-new cars before they should is not only for appearances but because they are financially uneducated.
Before You Buy A Car, Increase Your Income Sources
Never maintain one source of income. Always have a minimum of two, but it’s better to have three or more.
I can’t recall the last time I had only one income source, which has safeguarded me from financial worries, stress, and anxiety in case I ever lose one income source.
If you buy a car and don’t use cash to pay for it, you’ll be stuck with a car note for an average of 5–7 years, which means you need a consistent income to pay that monthly bill.
Before You Buy A Car, Pay Off Your Credit Cards
If you have credit card debt, pay these off before adding more debt to your life.
Credit cards and car notes are two of the worst types of debts to carry; they tend to have the worst interest rates, which cannibalize your bank accounts.
Before You Buy A Car, Ensure You Can Afford It
Financial Samurai recommends utilizing the 1/10 rule when buying a car, which states that one should only buy a car that will incur 1/10 of their gross annual income.
Following this car-buying rule will keep you out of financial hot water.
Before You Buy A Car, Get On Track With Investing
How much money do you want to have by x age?
Are you on track with this number? If not, then this should be prioritized over a brand-new car. I understand the brand-new car feels and looks great, but it’s also not going to safeguard you in the future financially.
Want to read more on the basics of managing money? Check out this list of curated articles.
This content is for informational purposes only — not professional advice. Consult a qualified professional before making any major decisions.