The average car payment currently stands at $700 a month over 70 months, which adds up over time. Society teaches us that car payments are a way of life and we rarely look under the hood to look at the freighting details. In fact, a $700 car payment costs $1.6 million ($700 invested over 30 years at a 10% return), which warrants some looking into.
Over-sized SUVs and Luxury cars are the American dream. We look cool driving around in expensive rides with digital displays, leather seats, cameras abound, and autonomous driving features. Perhaps we forget that a car is just a form of transportation as we push the fancy start button. Otherwise, we wouldn’t buy autos with the must have add ins (although the butt warming seats are nice).
Long ago as teenagers, we visualized owning a sports car and realized that the modest $7 in hourly wages at 15 years of age would not support the dream. So many of us did what any modest person would do and bought the used clunker from the parent of a spoiled kid who felt that driving this heap of junk was below them.
Of course there was a sense of pride in driving rusty blue that was paid for in cash even when some friends had brand new rides thanks to over extended daddy & mommy. A lack of air conditioning and the a-track that played Disco Inferno on repeat were minor inconveniences that were aspiration for comic relief. The paint job that started to rust did wonders for the tough image as no one wanted a ride unless they were desperate. Key lesson learned is that no one really cares what you are driving in the US image focused world we live in.
Unfortunately, new cars lose their luster fast while keeping most of us living paycheck to paycheck wondering why we are unable to get ahead in life. Yes, we eventually are enticed into trading up for the new car and here are a few key observations quickly learned:
- New cars are a depreciating asset with ~60% of value lost after five years. Ouch!
- Having a loan secured with a depreciating asset works against you for wealth building.
- Sunk insurance and maintenance costs that come with car ownership adds up.
- Gas / electric expense tend to be the cheapest part of care ownership depending on commutes.
New cars are a triple threat to wealth creation as the combination of owning a depreciating asset, paying interest, and the sunk costs associated with car ownership are all working against you. Here is a typical monthly cost scenario:
- $700 Monthly Car Payment
- $125 Monthly Car Insurance
- $140 Monthly Maintenance
- $100 Monthly Gas / Electric Costs
- Total $1.065 Monthly Expense
As you can see the financed cars in your driveway may be keeping you poor as the payment is the biggest factor that pulls cash flow month after month. If you own a financed car, you should consider mapping out a plan to pay the loan off early or sell the car to buy a good used car for cash. Depending on your situation, owning a paid for car keeps money in your pocket. Try now to be one of those families with two financed cars in the driveway if you can help it.
Focus on buying easy to maintain autos that are three to four years old and plan on driving them for another 10 years. It’s fun to joke about how good your used car looks while noticing expensive new purchases as walking through the neighborhood (Some of your neighbors are broke).
There is no problem with owning a new car if you are debt free, can pay for it with cash, and are financially independent. Sometimes a inexpensive new car is a must for those with long commutes along with other factors as well. However, do not proceed if the purchase adds an unnecessary burden to keep up with appearances while taking away the cash flow needed to build long term wealth.
Keep driving the used, ragged out SUV for now while dreaming about the luxurious SUV and tremendous wealth that is in store for your future.