Don’t let car loans sabotage your retirement savings – Jamaica Observer

The sooner a car loan is paid off, the more funds there are available to invest for retirement, buy a home, or save to buy another vehicle in the future.

Are your car payments sabotaging your retirement savings?

Retirement savings should start with the first paycheque. But, in many cases, retirement planning is delayed and replaced by instant personal satisfaction. Buying your first car should be seen as a necessity, not a luxury. The key to wealth and financial freedom is living below your means, spending less than you earn instead of living above your means. Increasing income should not 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 allocations made for retirement and emergencies. We don't know when emergencies will happen, but one thing is for sure, it's best to budget for unexpected expenses, especially when considering the purchase of a motor vehicle.

Pre-retirees and seniors who have auto loans should seek to pay off as much of their debt as possible. The sooner a car loan is paid off, the more funds there are available to invest for retirement, buy a home, or save to buy another vehicle in the future. It's best not to follow the Joneses when buying a vehicle.

Recently, I had an encounter with an industry professional who wanted to sell his vehicle to buy a new high-end car. When asked why she changed vehicles at that time, she replied that her peers drove high-end vehicles. She did not take into account the significant depletion of her disposable income once the monthly payments were made. The recommendation was made to delay the purchase of the new vehicle for at least a year and to build up its emergency fund and long-term investment. In addition to the higher expenses envisaged, the insurance premium on a high-end vehicle will be higher than the insurance currently paid on the old vehicle.

At the same time, after the cost of fuel, the depreciation of a new car is the most significant cost for the owner. A new car loses 20% of its value in three years and 60% of its value after five years. Studies show that pickup trucks and SUVs depreciate the least in the first five years, compared to luxury vehicles which lose most of their value in the first five years of ownership.

The Honda and Toyota brands, recognized for their reliability and solidity, have the particularity of holding value. For pre-retirees who intend to replace their old vehicle, it is prudent to start saving to buy the new vehicle without taking out a loan. It is better to pay yourself than to pay the bank. Don't spend your entire working life paying car loans or entering retirement with car loan debt. Studies have shown that there are retirees who do not retire within five years of retirement due to debt. Some of these retirees were unprepared to deal with expenses, debts and other financial obligations during retirement. A British study found that retirees buy more new cars than any other category of buyer. This is not surprising since some retirees are no longer working and are rightly enjoying the gratification of a new life in retirement. In retirement, own your vehicles, don't let your vehicles own you.

Grace G McLean is a Financial Advisor at BPM Financial Limited. Contact her at [email protected] and visit the website: www.bpmfinancial.com. She is also a podcaster for Living Above Self. Email him at [email protected]