Best financial advice from my dad
Today is father’s day and I’d like to share some of the best financial advice I received from my dad. These advice struck me like lightnings when I first heard from him and until today, these are still the guiding principals for my personal finances. I am very glad that I listened to him decades ago.
Do you really need this car?
Back in the time when I was attending college, I purchased a used car from an unknown dealer. Since my dad was living very far away, I went with a friend of mine to buy the car instead. It was my first car and I didn’t know anything about cars. Later on, I found that the car was salvaged. Within a month, I had to replace the transmission. Not too long after, the engine needed to be replaced as well.
So, after graduated from college, I purchased a very decent car as soon as I got a full time job. The cost was almost half of my gross annual income. Of course, I didn’t pay for it in full. I was lucky enough to get a loan with no down payment and no interest. However, the monthly loan payment was more than a thousand dollar a month. It was a lot of money because the rent for a master bedroom in a single family house was about $350 a month only in Silicon Valley.
I told my dad about it and his response was like “Hmmm…. Do you really need this car?”.
His point was that cars are only tools that get people from one place to another. What value does that spoiler bring you? What benefit do you get from the V6 engine if you get stuck in the traffic most of the time? Those were really good points. A person who lives a lavish lifestyle often looks for something that gives them instant gratification. The car made me happy because I could brag about it. But honestly speaking, I made a very bad financial decision. I was chasing gratification but not value. Luckily, my dad pointed it out very early in my career.
Asset vs Liability
When I purchased the car, I was under the impression that I was acquiring an asset. So, I thought it was ok even if I paid more for extra features. Ironically, the truth is that cars are just liabilities. No matter how much you pay, the useful lifetime is limited. The worst of it is that the value of the car will never go up. At best, owning a car is owning a depreciating asset. As I get older, my viewpoint changes a little bit. Now, I see that owning a car is owing a liability. The more you pay for it, the more liabilities you get. For example, paying more for insurance, for maintenance, license fees and etc.
Buy this instead
Another great advice my dad told me was to buy a house. Real estates are usually great investments because they are appreciative assets. Of course, it is not always the case. For example, when the outlook of the community is not great, like Detroit, the housing prices go down with it. In the future, I will dedicate a few articles on this topic. It is true that a building also has limited lifetime and it requires insurance, maintenance and taxes. However, land is limited, especially in a good community with good schools, low crime rate and high paying jobs.
But, I was paying so much for the car and how could it be possible for me to buy a house? Here is another advice from my dad: reduce spending and save as much as possible. I was not born into a wealthy family. But I am lucky to have a great dad (and mom of course).
He gave me a challenge that “He will help me with the down payment of my first home if I can pay off the car in 2 years”. I thought about it and the conclusion was that it was total possible if I made some adjustments and sacrifices in my spending. So, I made a promise to pay it off. I became very frugal and monitored my spending closely during that time. Saving money became my habit.
“What you can’t see is what you can’t spend” is the trick for me to save money. I set up automatic payment to pay my car loan. To speed up paying off the car, I paid a few hundred dollar extra each month. It didn’t cut down interest because the rate was 0%. But it certainly helped preventing me from spending the money on something else. I also withheld more money each month for tax so that the only way that I get to see the money is from tax return. This trick may not be the best because I couldn’t earn the interest while Uncle Sam holds the money temporarily for me. However, it worked really well in terms of cutting down my spending.
I won! I paid off the car in less than 2 years. I even saved a little bit of money to buy my first home. With my dad’s help and the money from my tax return, I was able to buy a small condominium with 5% down payment. Unlike last time (when I bought the car), this time my dad was super proud of me. It was not because I did what he said, but because I learned to value what is important to me in life. After many years living half the globe away from him, his advice is still very fresh in my head and I benefit every day. Thank you dad and happy Father’s day.