Have you taken out a mortgage on a new car lately?

Have you taken out a mortgage 

on a new car lately?

by Ken Morris

The Business Channel recently reported that the average price of a new vehicle is more than $50,000. There’s nothing magic about that number; it’s just a whole lot of money. And since $50,000 is the average, that does mean you can buy a car or truck for less. Or, for even more.

I mention this because the cost of purchasing and maintaining a new vehicle has forced many people to finance their loan over an extended period of time. Some as long as 72 months. And that will likely result in far too many vehicle owners being upside down on their loan in the coming years.

That $50,000 figure is also a sign that many consumers are doing quite well, and that the automakers are selling high-end vehicles. Luxury brands seem to be doing quite well not only in the auto industry, but also in other segments of the economy, such as fashion and jewelry.

Many economists believe our current economy is shaped like the letter K, and I agree. In that analogy, the downside of the K represents consumers who are, at best, treading water and at worst, seeing their standard of living decreasing. These consumers are actively seeking bargains and are likely trading down a bit. For example, they buy generic brands at the grocery store and dine out selectively. Studies indicate that sales in this demographic are generally flat.

Consumers represented by the upside of the K have likely benefited from recent economic growth and a rising stock market. They are the driving force behind the strength of our economy and tend to purchase top-of-the-line vehicles that cost more than $50,000. They also buy more expensive items and designer fashions and tend to dine at upscale restaurants. In other words, they’re doing just fine and contribute substantially to the strength of our economy.

Why are some consumers doing just fine while others struggle? It’s debatable. But in our economy an upscale consumer can fall and a struggling consumer can climb the economic ladder. Our nation is full of rags to riches stories. Anyone’s current economic status can change with good fortune and hard work or with apathy and bad decisions.

We live in a constantly changing world, where politics and economics are becoming more and more intertwined. For example, referring to the auto industry again, there used to be a federal tax credit to incentivize Electric Vehicle sales. The federal tax credit has expired, but Michigan recently increased the annual registration fee for both hybrids and EVs by a significant amount. The elimination of the federal credit combined with the increase in the state fee is a pretty big financial swing.

That’s why you should never get too comfortable with government tax credits, grants or subsidies, especially at a time when local, state and federal governments never seem to have enough cash for operating expenses.

Regardless of your income and current economic status, it’s important to be aware that things can change quickly. That’s why I encourage households to establish and maintain a rainy-day fund. When it comes to spending, go ahead and enjoy. But be judicious. In this ever-changing economic environment, you can’t be sure what’s next. Well, there is one exception. I can almost guarantee that the cost of living will keep on rising.