The other day I was speaking with a friend of mine who told me that she had just paid off her auto loan for a car she had purchased a few years back. She told me now that she has it paid off she is looking to trade the car in toward a newer car. My first thought was “Who am I to tell someone what to do with their money BUT…. she is a close friend so I’ll do it anyway”
I asked her why she needed a new car? Is something wrong with the old one, or do you need a bigger car or something different? Her reply was “No it works fine, in fact, I just want a newer year of my car” Now again, it’s not my money, but when she asked me “Why? Should I not” I shared my thoughts.
Having made your last $300 monthly payment you now own an asset and in essence, increased your income annually by $3,600. Why would you give up your free and clear asset as a credit toward a newer version of the same car (which is in perfect shape) and create a new monthly liability payment? If you are able to buy everything you need, pay off debt, contribute to retirement, save for a home, and fund all your other goals, then why not. But if that’s not the case (which it isn’t) I would look at it from this perspective…
As a child I always remember my parents telling me “A penny saved is a penny earned.” When cash flow is tight, there are two ways to alleviate the pressure… Raise income or lower expenses and one is usually easier to do than the other. I told her its not about what you make its about what you spend.
I would present this point… Do we have as good of a grasp on our annual expenses as we do of our annual income? How much do we spend on certain categories of expenses? How much do we spend on automatic monthly charges that we don’t even use? If we know the answer to these questions great, if not, how much income are we giving away?