Why Cars are the Worst Investments
Growing up, I was taught by my mother that having a car payment is normal. And instead of fixing the car when it needed mild repairs, you should just trade in the old car for a new one. Problem solved right? Wrong, wrong, wrong!
This lead me down the path of switching cars every 2-3 years causing my car payment to increase 30-40% each time I traded a car in since I was upside down on the previous car loan.
At one point I was paying $600 for a car that was worth maybe $25,000. And this didn't include insurance, gas or maintenance!
At just 20 years old, this car payment put a damper on my life, specifically with how I made social and financial decisions. Thankfully I become aware of the implications I caused myself, and never made these mistakes again.
Since I want to make sure you don't make the same mistakes as me, I have outlined below just how bad of an investment a car is in the long run.
Let's Look at the Numbers
Research shows that the average American purchases 9.4 cars in their lifetime and the average purchase price is about $34,000.
Based on your credit, you can expect to get approved for a new car loan with the following interest rates below. Assuming you have decent credit, you can expect a ~5% interest rate for your new car.
Also note, that most people will extend their car loan for 72 months. The reasoning is that since they are paying a smaller monthly payment, they are saving money. This could not be further from the truth since you now are paying more in interest throughout the life of the loan!
So where does that leave us? A new car that costs $34,000 paid for with a loan over 72 months at an interest rate of ~5% results in a $548 monthly payment. Guess what? That's not all you can expect to pay! What about insurance, maintenance, gas and devaluation?
According to AAA, for an average sedan that’s driven 15,000 miles a year, other costs of ownership — including finance charges, but not the principal portion of the monthly car payment — added up to $8,558 a year in 2016. You're looking at an additional $713 per month.
On average you can expect to pay $1,261 per month for a new car.
If you are like the average person and purchase ~9.4 cars in your lifetime, with just the cost of the loans you can expect to pay $370,595. Add in additional costs for insurance, gas and maintenance, you're looking at an additional $250,000+ with a total lifetime spent well over half a million dollars.
And the shocking part is that not once did money flow into your bank account from owning these cars.
Imagine if you could save even half of that and invest into the stock market? You no doubt would be a millionaire multiple times before you retire.
So what can you do about reducing the amount of money you put into a depreciating asset?
Saving on Car Costs
If you don't have unlimited income, chances are you shouldn't be spending 20%+ of your monthly income on a car. Remember: what is the purpose of a car? To get you from point A to point B. If you want to reduce one of the biggest expenses in your lifetime, keep in mind the following when looking at purchasing a car:
- Drive a fuel efficient vehicle. You might even be eligible for tax credits with your state.
- Purchase a car that is dependable and does not require a huge amount of maintenance throughout the life of the car. Here are some cars that could last forever.
- Purchase a car that you can pay for with cash, but take out a loan to build your credit.
- Use public transportation if you're within city limits and it's convenient for you. You might actually meet a new friend ;).
- Carpool with friends or coworkers.
- Purchase a car with low insurance premiums.
- Drive a scooter. I did for 5 years and saved an incredible amount of money!
In Conclusion
The numbers will make your head spin, but it really just comes down to simple math. The less money you are spending on your car every month, the more money you have to put into other more important things: your kids’ college fund, your retirement, and paying off any other debt you might have.
Make your money work for you. Not the other way around.