4 Financial Black Holes to Avoid

blackhole

A black hole, according to Wikipedia, is “a region of spacetime from which nothing, not even light can escape.” It is called “black” because it absorbs all the light which hits the horizon. Financially speaking, beware of these four black holes which will absorb your money and never, ever give it back:

1. Credit card debt

If you ever carry a balance on your credit card, you are throwing those interest payments into a black hole. According to creditcards.com, the average American family has $15,800 of credit card debt. Assuming an APR of 14.99%, that black hole is absorbing $2,368 of Mr. Average Family’s money every year.

2. Rent to own

When you pay rent to eventually own something (instead of saving the money in order to buy that item outright) you are feeding the black hole. For example, if you opt for the Toshiba 40” LCD TV at Rent a Center, you will be paying $19.99 a week for 78 weeks — a total of $1559.22. The very same TV is advertised on Toshiba’s web site for MSRP of $549.99. So…here’s the deal: If you can afford $19.99 a week rent, you can afford to set aside that same $19.99 for 28 weeks in order to buy the TV outright. Your impatience is costing you $1,000 … sounds like a black hole to me.

3. Financing a new car

New cars are black hole items, not only because of the high depreciation rate, but also because of the interest paid on borrowed money. Of course used cars also depreciate, but at much lower rates. The way to minimize that black hole money is to plan for the less depreciation while paying cash for the vehicle. I realize that new versus used is not comparing apples to apples, but stick with me. Research found at Edmonds.com indicates that new cars will lose 60% of their value in the first five years of ownership. A $30,000 car, therefore, will be worth $12,000 in five years — a depreciation of $18,000. If this car is financed at 8% for five years, the buyer has also paid $6,500 in finance charges. Total black hole money for those five years? $24,500.

If one bought the five year old vehicle instead of the new one, assuming 40% depreciation over the next five years and zero finance charges, total black hole expenses come to $4,800. Again, we are not comparing apples to apples, just comparing black hole money of new versus used: about $20,000 more for the new car, or $333 a month. If you have $333 every month to pitch into a black hole for the privilege of driving a new car, go for it. Otherwise, you might consider a used car.

New $30,000 car (8% APR)

Five year old $12,000 car (paying cash)

Five year depreciation

$18,000

$4,800

Five year finance charges

$6,500

0

Total black hole money

$24,500

$4,800

4. Long term use of storage units

I have been amazed by the proliferation of storage units in our rural Southern Illinois community. These units make sense for a family who is relocating and needs temporary storage, but, because ours is a very non-transient community, I assume the vast majority of these units are being used for long term storage. Doing so is throwing money into a black hole. Why? Because storing stuff just to be storing it is pointless. They either need to find a use for it, give it away or sell it.

Finding some common black hole traits

In case you didn’t notice, the common thread of the first three black holes is impatience.  Instead of taking the time to save up for a purchase, the consumer succumbs to the “have it now” mentality.  Interestingly, our fourth black hole is a logical consequence of this impatience: people buy so much stuff that they have to pay to store it.

We live in a crazy world … a world where black holes abound.

Readers: Have any of these black holes devoured your money? What other black holes should we be avoiding?

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25 Comments
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  1. Jennifer May

    What, no “bachelor’s degree”??? That’s my personal biggest black hole. 39 years old and STILL $25,000 in debt. The ONLY debt I have right now. What did I learn in 4 years @ university? How to run a KILLER scam… there were oh so many of them. For example: tell students that they HAVE to buy new books to the tune of hundreds… sometimes THOUSANDS of dollars a semester (instead of used) because “it’s a new version” then refuse to buy them back at the end of the semester because they’re “outdated”. Here’s another scam: keep jacking up tuition for American citizens and legal residents, yet give illegal immigrants a free ride. What I learn in one month on the job far outpaces what I learned in 4 years of college – every time.

    • Jennifer,
      I wouldn’t necessarily categorize a bachelor’s degree as a black hole expenditure, but student loan debt for decades after graduation could be.

    • Jennifer: SO TRUE. Especially how unfair it is that illegals get plenty of help, while citizens are often left to flounder. :(

      Plus, so many college degrees are really useless. Unless your degree is in something math-related or science-related or something that is in high demand, then it’s hard to justify the cost of a college degree (especially in the arts).

  2. Good points! I think the new/used car debate is worth a much closer look. I think the real black hole is wanting a new or new-to-you car every 3-5 years. I bought new with the expectation of driving my car for 10-12 years. I’d have to crunch some numbers, but I suspect my total cost of ownership after 12 years will be lower than or comparable to people I know who have gone through 2-3 used cars during that time period. (I carefully chose a model reputed to stay in good shape for that long, so I probably did pay more at the outset.)

    • Beth,
      I agree that the new/used car debate is worth a closer look. Buying new and driving it till it drops would negate much of those black hole depreciation costs of those first few years. Myself? I will never buy ANY car unless I pay cash, so that one criteria pretty much rules out ever buying new.

      • It is possible — i just wish I’d known to do it. If after I finished paying off my new car I had made car payments to myself for a few years, I would be able to buy new anytime! Instead, I put the extra cash towards paying off my student debt in half the time I originally planned.

        My next car will probably be used because I have a lot more savings goals now than I did ten years ago — home downpayment, retirement and emergency fund. The car isn’t a big priority — I’d even consider a bus pass and car share membership instead.

  3. I think, along with impatience, is a lack of discipline to save. I see rental trucks in my neighborhood and am amazed at how much money is wasted each week on items that generally don’t last for the duration of the rental.
    I have a friend who has a storage unit. He’s had the unit for years. He was given a lot of toys for his adopted children, and he and his wife could never get rid of old furniture–they saved it in case someone needed it. Now, the children are in their teens and some adults; the toys are useless. The furniture should have been donated somewhere if it was in good condition. By hoarding possessions in a storage bin, people are missing their opportunity to give as they have received.
    Speaking of buying new items, I bought used bikes, skates, tennis rackets, etc. when my children were younger. My mother purchased used musical instruments for them. I recently purchased a used vehicle. People are amazed when I leave town in a vehicle that is more than 5 years old. It is in good condition, it has low mileage, I give it a “check up” before leaving town, and I have coverage if anything happens. It does the same thing as a new vehicle, I treat the same as a new vehicle, but I don’t have the payments of a new vehicle :)

    • jjy,
      I like the way you think! Why pay new price when “used” will do the job and save huge chunks of money? Besides, a new car is no longer new once it is driven away from the dealer.

  4. Great post Joe! I agree with new cars being a huge black hole. But I actually look at this as an opportunity. I let other people fall prey to the black hole of used cars and let them take the big D (depreciation, that is). We did this very thing and paid 50% of what the previous owner paid on a 3 year old car with only 8,000 miles.

    • Tim,
      Wow. A 3 year old car with only 8,000 miles for half the price of new! Really punctuates the big D factor doesn’t it?

  5. Great post! What puzzles me is the current mentality that the credit card companies are the bad guys. Don’t we get ourselves into our own messes? Did we not spend that money? Yet I’ve witnessed several people declare bankruptcy over credit card debt and blamed Visa for all their problems. Something is wrong with this picture for me.

    • I see the Blame Game so many times!

      Especially in my area with homes. Because the value hasn’t gone up (“I purchased this as an investment – not a place for my family to live), many are walking away that have the means to continue to pay on their loans.

      Now with the idea of forgiving all student loan debt? Was every single student dubbed into borrowing? Or were they not thinking about the payments 4-6 years down the road? The latter probably.

      • Cherie,
        I too see that blame game all too often. When I wrote a post on why people should not do “strategic defaults”, I was blasted by several readers who blamed the bank, the market, etc, etc, but never accepted the responsibility of buying a home with no guarantee that it would rise in value.

        Good point too about forgiving student loans. It seems to only enable those who create debt without considering the consequences.

    • Carol,
      How true. While I DO believe that credit card companies are bad guys, I also understand that they never held a gun to anyone’s head and forced them to sign up. People who find themselves in credit card messes need to look in the mirror to find the real culprit.

  6. My husband and I are almost debt-free and considering a used car for our next vehicle. My major concern is why does someone let a 3-year-old car go if it’s in good running order? I bought a used BMW motorcycle that physically appeared to be a gem and yes, I paid half the price of new, but the bike is a lemon! I’ve had all kinds of trouble that a bike this age shouldn’t have. Currently it’s in my garage because it overheats and, short of an engine tear-down, they can’t figure out why. If I add up what I have paid in repairs both past and pending it equals at least the cost of this bike new (and in warranty). I borrowed the money for the bike (pre-intro to Dave Ramsey) so I have that black hole to factor in as well.
    We will save a significant downpayment on our next car/truck to reduce the loan amount and agressively attack that debt, but I’m gun-shy about used.

    • Julie,
      Clearly, as you well know, buying used brings with it some degree of risk. I always like to know exactly why the seller is getting rid of it. Also, having a qualified mechanic check it over before purchasing is a good idea. Even purchasing an extended warranty (a lot cheaper than a new car price) may be an option to give peace of mind.

      In the end, it boils down to doing what is best for you and your family. I would add that IF you buy new, you should consider keeping whatever you buy for many, many years.

  7. annie pirkle

    Wow! Clear, concise, and to the point. Delaying gratification can put and keep you in the black. Instant gratification can put and keep you in a big black hole. When we decide to be grown-ups and to delay getting everything we “want,” until we can afford it, we are able to live a much more secure life.

    • Haha. I like your play on words — contrasting staying in the black vs creating a black hole. And yes, instant gratification is childish while delayed gratification is a mark of maturity.

  8. I never got the storage unit thing. I know a lot of people that have these things and rarely get anything from them. It just slowly siphons off cash.

    I think I would set a time table on the entire content of any long-term storage unit. After a year everything goes on eBay or Craigslist.

    And rent to own…that goes in a category with pay day loans in my book.

    Thanks for the great post Joe!

    • Bill,
      Storage units and rent to own stores are two businesses that I never, ever thought could succeed. In my mind, no one would fall for either of them, but how wrong I was! The fact that they thrive is a black commentary on the mindset of our average American consumer. How sad.

  9. Good ideas…although with cars, it sometimes depends on the car you buy and how well it was taken care of by the previous owner (if it is a used car).

    I have owned several used cars over the years that were of mixed quality. With one used car, however, there seemed to be a new major repair every other month. Eventually, we caved and bought a new car (a Saturn) and it did not have any repairs on it until it went over 100K. Another new car (paid off) is still running great and has 215K on it. Again, though, a lot of it really depends on whether the owner follows the recommended maintenance schedule or not.

    • Yes, it does depend on the previous owner’s care of the car. I also had a Saturn–they are just good cars!

    • Yes, buying a used car does require lots of research and, as I mentioned earlier, a check up by a reliable mechanic. Even then, one can still get a lemon. But there are lots of new car lemons out there too. I like the fact that, even though when you bought new, you drove those new cars for lots of miles!

  10. Hi Joe,

    I am certainly experiencing the black holes of 1 and 3. It really requires monumental efforts to climb out of these holes. I am working on it as hard as I can.

    I would consider two other black holes – subscription on things that you do not really need (like the extra internet line or online subscriptions that you hardly use and forget. I once signed up for a ecard service and forget about it. Every month it cost me about 10 bucks) and even some forms of insurance. Over insurance for that matter. It is crucial that you really figure out what you really need and not over sunscribe things.

    • Jimmy,
      I wish you well as you climb out of the credit card and vehicle black holes. The good thing is that once you get on top of these debts, you will never, ever go back.

      Good call on the other black holes: unused subscriptions and unneeded insurance.

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