Are your car payments sabotaging your retirement savings?

Saving for retirement should start from the first pay cheque. But, in many instances, planning for retirement is delayed and replaced by instant self-gratification. Buying your first car should be viewed as a necessity and not a luxury. The key to wealth and financial freedom is to live below one’s means, spend less than you earn instead of living above your means. Increase in income shouldn’t be viewed as an opportunity to splurge. “Luxury, once tasted, becomes a necessity”. Income generated from a part-time job or other opportunity should be budgeted to avoid overspending and allotments made for retirement and emergencies. We don’t know when emergencies will happen but one thing is sure, it is best to budget for unexpected expenses, especially when contemplating purchasing motor vehicles.

Pre-retirees and seniors who have car loans, should seek to pay down on the debt as much as possible. The earlier a car loan is paid off the more funds are available to invest for retirement, purchasing a home, or saving to purchase another vehicle in the future. It’s best not to keep up with the Jones’ when purchasing a vehicle.

Recently I had a meeting with an industry professional who wanted to sell her vehicle to purchase a new high- end motor car. When asked the reason for changing her vehicle at this time, she replied that her peers were driving high-end vehicles. She did not consider the significant depletion of her disposable income once the monthly payments are made. The recommendation was made to delay purchasing the new vehicle for at least another year and build up her emergency fund and long-term investment. In addition to the higher expenditure being contemplated, the insurance premium on a high-end vehicle will be more than the insurance currently being paid on the old vehicle.

At the same time, next to fuel cost, depreciation of a new car is the owner’s greatest cost. A new car loses 20 per cent of its value in three years and 60 per cent of its value after five years. Studies show that pickup trucks and SUVs depreciate the least in the first five years, in comparison to luxury vehicles that lose most of their value in the first five years of ownership.

The Honda and Toyota brands, known for their dependability and strength, have the distinction of holding value. For pre-retirees who intend to replace their old vehicles, it’s prudent to start saving to purchase the new vehicle without taking out a loan. It’s best to pay yourself than to pay the bank. Don’t spend your entire working life paying car loans or enter retirement with car loan debt. Studies have shown that there are retirees who unretire within five years of retirement because of debts. Some of these retirees were unprepared to cope with expenses, debts, and other financial obligations during retirement. A UK study revealed that more new cars are purchased by retirees than any other category of purchasers. This is not surprising as some retirees are no longer working and deservedly enjoy the gratification that a new life in retirement brings. In retirement, own your vehicles, don’t let your vehicles own you.

Grace G McLean is financial advisor at BPM Financial Limited. Contact her gmclean@bpmfinancial. and visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. Email her at livingaboveself@gmail.com