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The Car Payment Trap: Why "I Can Afford the Monthly Payment" Is the Wrong Question

I Will Teach You To Be Rich · ▶ 18:38 · 12 min read
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Overview

Ramit Sethi, host of Netflix's "How to Get Rich" and author of I Will Teach You to Be Rich, opens this video with the sentence he says he hates most: "I can afford the monthly payment." In his view, that sentence has cost people hundreds of thousands of dollars, because buying more car than you can afford is one of the fastest ways to stall your finances, and not enough people talk about it. His team collected videos and posts from people who regret their car purchases. He reacts to each one and builds toward one question that, he argues, would have stopped almost every bad decision in them.

12 min read

"Low-key buying a car young": the $800 payment that is really $2,000

The first clip is a man-on-the-street interview. Asked about a financial decision he regrets, a young man says it was financing a car young. He was trying to get a Dodge Challenger (the "392"). His monthly payment was about $800, and that was without insurance.

Sethi appreciates the honesty but uses the number to make his first main point. People rarely account for the full cost of a car. An $800 payment, he estimates, probably means paying around $2,000 a month all in. He then lists the costs people tend to leave out:

  • Insurance and gas.
  • Maintenance and repairs. Things will break around year four, and he says that cost should be spread across every month's budget from the start.
  • Parking. He paid $200 a month for parking in San Francisco. Street parking and parking tickets count too.
  • Speeding tickets, if you get them.
  • Rims and aftermarket accessories.
  • Opportunity cost. If the down payment was $5,000, $10,000, or $15,000, that money could have gone into a low-cost index fund and grown for five years instead.

His conclusion is that the quoted monthly payment is only the start. Realistically, the true cost is probably around $2,000 a month or more.

Repossession, 18% interest, and "that's where they get you"

In the next part of the interview, the same young man says his car was repossessed because he was late on payments. He says he is "bouncing back" because he now has a truck. Sethi jokes about the phrasing, then dismisses the claim: getting a truck is not bouncing back, and the man does not need one.

The interviewer asks about the interest rate. It was 18%, because he was a first-time buyer without a credit score. He says, "that's where they get you." Sethi disagrees: "No, they don't get you. You got yourself."

Sethi explains how he reads a high rate. He suggests that car contracts should carry a warning, like a thermometer that moves from "excellent health" to "danger," and that anything above about 6.5% should flag the buyer as making a foolish decision. If you are financing a car at more than 7%, he says, the lender is effectively telling you not to buy it. A lender charging 18% has low confidence that you will pay it back, so it raises the rate to cover its risk. Sethi says he has talked to people paying 13% or 14% who shrug and say "that's just what it is." He thinks they miss the signal: the lender is telling them not to buy the car, and when they buy anyway, the lender takes their money.

The interviewer's own advice is "Get the Corolla" and "stay down till you come up." The young man says he expects to get that kind of car again, "because it's all about belief." Sethi says he finds him funny and could see them being friends. His tongue-in-cheek advice to people with this pattern is to take whatever money decision they were about to make and do the opposite.

The Tesla at 27: a raise, a projection, and wanting to fit in

The next creator bought a dream car, a Tesla, at 27 and regrets it. They had recently gotten a raise and thought they were on track to make a lot more money. They also wanted to fit in with entrepreneurs in their community who earned more, and a nice car seemed like part of that.

Sethi calls the creator perceptive and points to two mistakes. The first is projecting a one-time raise forward. Many people, he says, get an extra $5,000 and assume it will happen every year. Then a $500 or $700 monthly car payment looks easy.

The second is buying to fit in. He says few people admit that many of their purchases are designed mainly to fit in, whether makeup, cars, or, as the ultimate example, a house, because of the stigma people attach to renting. He adds that he doesn't mind people buying things to fit in. We are social creatures. He values that this creator was honest enough to say so.

Not all or nothing: what the payment could have bought instead

The creator then lists what the car payment could have funded: taking the family to Disneyland every month, living in a nicer neighborhood, saving to buy property, investing in their own learning and education, putting money back into their business, or hiring help to reach business goals. Their message to other entrepreneurs is that fancy cars won't help you grow as a person or as a business.

Sethi calls this one of the best TikTok videos he has seen. He especially likes the range of alternatives. People often assume that not making a purchase means the money must go into the stock market. He says that isn't true. Without a fixed expense of $500, $1,000, or $1,500 a month, you could spend part of it guilt-free and invest another part. It's not all or nothing, and he credits the creator for recognizing that.

Sethi's ugly headshot, and luxuries vs. investments

The Tesla video reminds Sethi of the early days of his own business. His website started in 2004, and even then other people's sites looked much better, with better headshots. He shows his old headshot, an ordinary picture with unfashionable glasses, and jokes that it looks like he was hiding his identity. He decided early on not to focus on making the website beautiful. He didn't know how, and he wanted to put his effort into making strong content. He knew the site was ugly and assumed he would fix it someday.

He draws a broader principle from this. When building a "rich life," you should decide what matters to you now and what you will earn the right to do later. If you want a beautiful hotel stay or a $120 shampoo, he suggests setting a milestone for what you need to earn first.

He also warns against a particular kind of self-deception: telling yourself that a luxury is really an investment, for example that a shampoo will make you more productive and therefore earn you more money. "Your shampoo is not an investment. Your car is not an investment. Your mattress is not an investment." He says it is good to have luxuries to save for, as long as you are clear about the difference between a luxury and an investment.

"It's the fact that I have car payments": regret from the driver's seat

In the next clip, a creator calls their current car the worst financial mistake they have ever made. The issue isn't the car, which they love. It's having car payments at all. They wish they had waited about a year, saved roughly $20,000 in cash, and bought a used car. The new car lost value as soon as it left the lot, they are paying interest on top of that, and after two years it is no longer new anyway. They say at least they learned the lesson in their early 20s.

Sethi makes two observations. First, almost everyone making car-regret videos is recording from inside that same car. To him, this shows how "sticky" these purchases are: they are not easily reversible, so you should be very careful before making them. Second, this creator is filming while driving and looking at the camera much of the time. He tells them to watch the road.

The golden period: why you should drive it into the ground

Sethi agrees the creator could have saved a lot by buying used. His question is what they will do now. His answer is that they should keep the car for 15 or more years.

In his view, the mistake is not necessarily buying a new car. He bought a new car himself, a four-door Honda Accord, "eyes wide open." He could afford it, and he planned from the start to drive it for as long as possible. The reason is what he calls the "golden period": the years after the payments end, when total cost of ownership drops sharply.

His example: suppose you pay $500 a month for five years, plus the other ownership costs. Once the payment is gone, you mostly pay for gas. He recommends stretching that period as long as possible and redirecting the old payment amount, preferably to investments or savings, maybe partly to guilt-free spending, or, "if you're really smart," to saving for the next car. His point is that every extra year you drive a paid-off car saves you a large amount of money.

The Reddit post: a low rate, a maxed-out Roth, and still feeling tied down

The last example is a post from the personal finance subreddit. The writer bought a new car for $36,000 out the door, financed at 1.9% for 72 months. They live at home and pay no rent, take home about $3,500 a month, max out their Roth IRA, and still add to a high-yield savings account. They also still own a 2007 Prius with relatively low mileage. They bought the new car thinking it made sense to get something new while they could afford it and had few expenses. Now they feel tied down, with less room to travel or possibly move.

Sethi's verdict is that this was probably a financial mistake that the writer now has to accept. That means not only six years of payments but likely ten or more years of ownership, to spread out the total cost. Even with a very low interest rate, he says, the purchase will cost them dearly over time. The $36,000 could have been invested and grown, and part of it could have gone to travel, which he considers especially valuable when you're young.

He sees one upside. Learning this lesson early matters, because some people never learn it. He says he can "almost promise" this person won't casually make another $40,000 purchase without weighing it carefully, and hopes they will keep this car a long time and be more thoughtful from now on.

The two biggest levers are also the hardest to pull

Sethi adds a pattern from looking at how people spend. The two biggest areas people can usually cut are housing and vehicles. They give the most "bang for the buck," but they are also the hardest to change. Sometimes you can't sell your house, or you're tied to a school district, and cars likewise offer no easy way out. That is why he says the math has to be done before the purchase. His advice is to open the calculator app on your phone, slow down, and know the numbers "cold" before making one of the biggest purchases of your life.

The one question: total cost of ownership

Sethi then gives the question he promised at the start. The mistake everyone in the video made, he says, was buying based on the monthly payment instead of the total cost of ownership. He never asks whether he can afford the monthly payment, and says that framing is for people who don't know anything about money. He asks instead: What is the total cost of owning this car, and what is it costing me elsewhere in life?

His answer to that question includes the payment, insurance, gas, maintenance, repairs, registration, and opportunity cost, which he says almost nobody counts: what the money could earn if invested instead. Counting everything, he says, you are very likely spending over $1,000 a month on a car. By his figures, investing just half of that for 35 years would leave you with almost $900,000.

He also stresses that most cars lose value. Unlike an investment, the best outcome is a decent trade-in value, and for some of the cars people buy, he jokes, there will be nothing left. He adds that he never wants to hear about a Ford Taurus.

His closing message is not that people should never buy a car they want. It is to find a car that fits what you want and make sure your money is serving your own vision of a rich life. Getting there requires asking about total cost, not the monthly payment.

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