I just finished reading an article on CNN Money's blog about two "millionaires in the making." The article lauds two young people, a married couple aged 23 and 25, for getting started so early in saving for retirement. However, in lauding their behavior, the article fails to point out a couple of major flaws in this couple's financial plan. Even the financial analyst quoted in the article seems to be off the mark.
Here's the rundown. The couple makes $56,000 per year. They live in a very low cost of living town in Arkansas. They own a home, on which their mortgage payment is only $570 per month. They have low credit card debt ($4500) and a low student loan balance ($5500). They have $25,000 in savings, almost all of which is in retirement plans. They are working on replenishing their emergency fund, which they recently used to pay down credit card debt. They drive a used car.
The crux of the problem is the used car, which is a four-month-old, $19,000 Mustang. These folks could have bought a very safe and very reliable used Honda for $5,000-$6,000 and used the $13,000-$14,000 that they would saved to obliterate their debt sooner and restart their emergency fund. To top if off, they would be paying auto loan interest for a much shorter period of time since they would be able to pay off a $5,000 loan much sooner than a $19,000 loan. (They lacked the liquidity to buy a car with cash and would have had to get a loan no matter what.) They would save even more money by decreasing the total interest paid when they shortened the length of time it takes to pay back their credit card and student loans.
Not to get too much into politics here, but it's amazing what the auto industry has done to convince consumers that they need a new car and that they need to take out a loan to do it. A new car is a luxury; a Mustang even more so. Getting to work may be a necessity, and I don't doubt that public transportation is limited in a small Arkansas town, but a fancy car is not the solution.
I guess this couple was not lucky enough to have my father teach them not to buy things they can't afford. It frustrates me to see a couple who obviously wants to build a solid financial future for themselves delay their progress substantially and burden themselves with extra debt with a large, unnecessary purchase. It frustrates me even more to see a website with a massive readership (CNN Money) fail to point out this major flaw in the couple's financial planning. True, the way the featured couple handles their finances is probably closer to the norm of how many Americans handle their finances, if not an above-average example, but it shouldn't be held up as a paradigm of sound financial planning.
Don't make the same mistake this couple did. If you're focused on paying down debt and saving for the future, don't get sidetracked by fancy toys. After all, how can you have the motivation to keep your eye on the prize when it's already sitting in your driveway? The sooner you get rid of burdensome debt expenses, the sooner you'll be able to comfortably afford the things you want without sabotaging yourself financially.
Photo by Paul Keleher
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