Canadians spend a whopping amount of money on their vehicles. The drive to have a spiffy set of wheels, the cost of gas and car insurance and the rate at which some people turn over their cars all contribute to the car-poor phenomenon. I’ve actually worked with people who were spending more on their vehicles than on keep a roof over their heads. Wow!
On average, Canadians spend about 17% of their net income on transportation, slightly higher than the 15% I recommend. But that only tells part of the story. Since a lot of us have our transportation costs well in line, that means some of us are blowing our brains (and our budgets) out on our chariots.
One way we deal with the higher costs is to finance for longer. While three years used to be the average length of a car loan, terms are extending to four, five and even six years. Yet most people who are car junkies seem unwilling to keep a car for that long. So they trade. And they trade. And each time they trade, they take a hit. Auto financing has even created new language to deal with the residual debt that car-maniacs are willing to roll from one vehicle to another: negative equity.
Every week I get letters from people who have signed on for auto financing only to find that they can’t manage the payments. Sadly, once you’ve committed to a vehicle payment you have very few options, particularly if you owe more than your vehicle is worth. On TV, I’ve taken drastic steps with some people who put the car they are driving before their family’s financial security: I make those dopes live in their cars for a weekend. They usually get the message.
Hey, you can drive any kind of car you can afford. But you can’t afford the car you’re driving if:
• it’s costing more than 15% of net income for your total costs;
• you’ve extended your repayment beyond 4 years; or
• you have built up “negative equity.”
You need to seriously reconsider how important your vehicle is in your life. If you’re putting your financial future at risk by not saving, you’re an idiot! If you’re defining yourself by the kind of car you drive, you’re either pretty shallow or pretty insecure.