The real reason you're broke

By Liz Pulliam Weston

If you're constantly broke and can't figure out why, the answer may be sitting in your driveway.

Americans are spending more on their vehicles than ever before -- more than $8,000 a year on average -- and it's driving some to the breaking point.

Credit counselor Bill Thompson of Jacksonville, Fla., estimates that one out of every four clients his agency sees has overspent -- sometimes dramatically -- on a car.

"They may be spending 15% to 20% of their (take-home) pay on just the car payment," said Thompson, who supervises credit counseling for the nonprofit Family Foundations, "and that doesn't include insurance, gas, maintenance and all the other costs of owning a vehicle."

And sometimes there's more than one whopping payment. Sandra McGeary, a counselor at Consumer Credit Counseling Services of Western Pennsylvania, says she regularly sees middle-class families struggling with two payments in the $400 to $500 range. The burdens are so big that it doesn't take a major disaster, like a job loss, to send them over the edge.

"This fall they started coming in saying, 'We were doing so well. We don't know what happened,' " McGeary said. "I'll ask, 'Where did you cut back in your budget when gas prices went up?' and they'll usually say, 'What budget?' . . . A lot of times they don't know how much they can really afford, and they didn't cut back elsewhere" when their transportation expenses rose.

Once they've bought, they're stuck.

With most other areas of the budget, you can find ways to trim. You can eat out less and shop more carefully to reduce your food bill. You can lower utility bills by adjusting the thermostat. You can cut your entertainment budget by canceling your cable service and borrowing movies from a library. You can even reduce your shelter costs by taking in a roommate or moving to cheaper digs.

Once you've committed to a car payment, though, your options are few, particularly if your loan is greater than the car's value. Whether you drive it or not, you've got to make the payments, and you've got to insure it.

What we spend on transportation

Income range	2005 spending
Less than $19,179	$2,742
$19,179 to $35,999	$5,330
$36,000 to $57,659	$7,437
$57,660 to $91,704	$10,504
More than $91, 704	$15,691
All households	$8,344

(Sources: Bureau of Labor Statistics, Census Bureau. Average transportation expenses include vehicle purchases, finance charges, insurance, fuel, maintenance and repairs, public transportation and other out-of-pocket expenses but not vehicle depreciation.)

We're prolonging the agony

The signs of vehicular overspending are everywhere:

• Average transportation spending grew more than 12% between 1999 and 2005, according to the U.S. Bureau of Labor Statistics, at a time when median income growth was basically flat. Even when adjusted for inflation, we're spending more: 8.3% more in 2005 than in 1995, with people in the lowest and highest income brackets accelerating their spending the most.
• More than 80% of car loans are for terms longer than four years (which, a couple of decades ago, was considered a long loan). The average loan term has grown from just under four years and seven months in 1990 to over five years and four months in 2006. Longer loan terms mean that people build equity in their car more slowly, which in turn means that borrowers will be "upside down" on their vehicles -- owing more than they're worth -- for three years or more on the typical purchase.
• One out of four -- 25.6% -- of cars that are financed include debt rolled over from a previous vehicle, according to vehicle research site Edmunds.com. By the end of last year, the average amount of negative equity in these deals was more than $4,000.
• Rolling debt from one car to another is, in case you didn't know, a terrible idea. You'll pay higher interest rates because so much of what you owe isn't secured by the car itself.

And being "upside down" can really leave you up a creek if the car is totaled or stolen. You can protect yourself somewhat with so-called gap insurance, which covers the difference between what you owe and what you get from your insurer, but that's another hit on your wallet.

What's going wrong

So why are so many people messing up so badly on such a basic purchase? There are plenty of reasons, including:

Viewing cars as a need rather than a want. Transportation is, indeed, a real need. We have to get to the grocery store and to work. But many of us have plenty of options, from our own feet to public transportation to car pools to shared car arrangements (read "Should you share a car?" for more details).

Owning a car does get pretty close to a need in rural areas without public transport or when your job doesn't allow for car-pooling. But you never "need" a new car. That's a luxury, not a need. There are plenty of safe, reliable, gently used cars on the market.

There's also no requirement that you get rid of your current car once it's hit a certain mileage milestone. Today's cars are better built and more dependable than ever, which means that unless you've got a real lemon you could keep driving it past 200,000 or even 300,000 miles.

Treating cars as a status symbol. You can't watch television for long without being bombarded by car commercials, and many of us have absorbed the idea that we are what we drive. It's complete BS, of course, but some people have been so brainwashed that they literally drive themselves into bankruptcy.

Failing to consider the overall costs. When buying or leasing a car, many people consider nothing more than the monthly payment. They're not seeing the whole picture -- far from it.

Once you factor in insurance, gas, maintenance, repairs, taxes, depreciation and other costs, most cars will set you back at least twice the initial purchase price over five years.

(Depreciation, by the way, is just a fancy word for the steady, day-by-day drop in the value of your car. You don't pay for it as it happens, but you do pay eventually, when you go to trade in your car for another.)

You can check out Edmunds.com's "True Cost to Own" feature for the breakdown on your particular vehicle. Or you can use AAA's estimate.

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