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The auto industry has time lease payments with typical payroll schedules for a reason.
I went for dinner with my friend Ian the other night. We’d just done a performance of Love Letters for a local church and I hadn’t eaten since breakfast. I saw the half-rack and the full rack of ribs on the menu and my eyes said, “Yes!” But my eyes were bigger than my stomach and I ended up leaving three or four ribs on the plate.
I’ve met more than a few young graduates for whom the “eyes are bigger than their wallet” syndrome apply. Having lived like poor students for a long time, they get their first jobs and decide to catch up on the spending they haven’t been doing.
The first big purchase is often a car. I once met a young graduate who had just been hired at a pretty decent salary ($65,000 right out of school, not bad eh?) She was contemplating a lease on her dream car. “I can get it for $350 bi-weekly; that’ll be no problem to manage,” she said. With all that money going into her bank account from her new job, she felt rich, and that bi-weekly payment was peanuts, right? Not so fast.
The bi-weekly payment is the newest trick in the automotive industry. Since most people are paid more than once a month, they’ve made it more “convenient” for people by splitting the monthly payment over two pay periods. Never mind the added bonus of a $350 payment seeming much more reasonable than a $700 payment.
This young professional lives in Manitoba so of her $65,000 in gross annual income, she’ll take home just $48,681 or $4,057 a month. Her car payment of $700 a month works out to more than 17% of her net income. And we haven’t added in gas, insurance or maintenance yet. Assuming just another $300 for those costs and she is spending a quarter of her income on her vehicle.
So here’s how I responded: “Seriously? You’ve got a life to build, savings to establish, student debt to pay off and you’re going to blow 25% (at least) of your income on a car! Girlfriend, give your head a shake.”
She was a little taken aback. “Twenty-five per cent of my income, what are you talking about? The payment is just $350.”
I rolled my eyes, showed her the math and watched as reality dawned. Her eyes widened. Her smile faltered. “Guess it’s not such a good idea, eh?”
No. I guess not.
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Here's how this student saves for a good cause
You’ll likely spend about $7,000 a year on utilities, food and transportation.
You can live with the fear forever, or you can decide to face it and do something about it.
Mental math is the best way to remain delusional about your finances. Write it down instead.
The difference between taking CPP at age 60 vs. age 70 could be 78%.
Don’t forget that Bi weekly really means:
$350 X 26 then divide by 12 = 758.33 per month, not 700!
This is the essence of the trick played by car dealers to make the monthly cost look
smaller when you do a quick mental calculation.