BLUF: New military members often make the bad financial decision of taking a loan out for a new vehicle. Instead, you should pay cash. Only take a loan if you absolutely must. Your vehicle’s value should not exceed 10% of your net wealth.
Do Not Buy That New Vehicle
Congrats on finishing bootcamp or OCS. It is an awesome feeling to complete such intense training. Mixed with those feelings are the unknowns of what is next and the desire to build your future. The pay will soon begin and more options will open up. There is no need to live super frugally or save every dollar you make, but it is also important to start your life making good financial decisions.
Thousands of people have done what you just did (join the military) and unfortunately many make the same bad decision; take out a loan and purchase a new vehicle.
I will go one step further and say that new members should also not purchase motorcycles as their only vehicle.
Why It Is A Bad Decision
Of course there are a lot of people who will tell you that you deserve it and you can afford it (especially car dealerships). To car dealerships, you are an excellent source of income. PERIOD. The fact that you have a reliable paycheck and a set contract, usually four years, makes you an excellent buyer. Dealerships do not care about you or your future.
Here are the numerous reasons why purchasing a new vehicle is a poor decision.
- You likely can not afford it with cash, so you need a loan
- Now you have an additional monthly bill that will last 2-4 years
- You do not have much credit history, so your interest rate will be high
- New cars depreciate quickly
- Therefore, you will pay more than the price of the vehicle while it decreases in value
- New vehicles have higher insurance
- Since you are new, you may deploy soon and the vehicle will sit for 7-14 months
- I have seen brand new vehicles destroyed due to animals and the elements (have fun with your insurance claim)
- You may get assigned overseas and will likely need to store or sell your vehicle
- Storing it for many years = depreciating loss while still paying the loan
- Selling = will likely take a big loss since new vehicles depreciate quickly
My note on motorcycles, they can not:
- Carry gear
- Problems with picking up or taking gear to the IIF / CIF
- Coordination issues with unit events (unable to carry full pack with flak and kevlar)
- Problems with going TAD since your only ride is not capable of carrying much
- Ride in inclement weather
**Important note: I am not saying to do not get a motorcycle, I am saying that it should not be your only vehicle, especially in the military.
10% Of Your Net Wealth
Rule of Thumb: Your vehicles’ value should not exceed 10% of your net wealth.
Therefore, if you have $20k to your name (assets – liabilities), then you can easily own a $2k vehicle. If you have $300k to your name, then you can afford a $30k vehicle.
Examples of this rule.
I often seen young Marines purchase a new truck or sport / luxury car and then they are unable to afford the maintenance and running costs. A tire goes on a large truck, and that tire replacement cost is closer to $400 verses the standard $150 for a standard size vehicle. An oil change on a BMW costs more than a normal oil change on a standard size vehicle; therefore, maintenance is delayed and problems occur. The cost of a vehicle goes well beyond the initial purchase price.
It is simple, for new military members, buy a used vehicle with cash preferably, or a loan if you absolutely must. Use military banks to shop around for the best interest rates.
Planning Your Next Vehicle
Ok great, now you have something to drive. You should be planning for the next one already.
Start paying a car payment to yourself!
Start by putting away $300 a month away in an index fund, treating it like a car payment. It will slowly grow every month as your put more in and you are using the power of the stock market. In three years you will have put in over $10k and it will likely to have grown to $12k due to the market.
This method has worked for me
I have purchased many vehicles over the past 15 years and have never taken a vehicle loan. My “car fund” has grown significantly over the years, what began as a way to buy cars has quickly grown into a “house down payment fund,” and much more.
Happy car buying.