How cars rob Americans of their retirement.
A few years ago, I heard a relative comment that since she would always have a car payment, she didn’t worry about it and just traded in cars when she wanted and drove what she liked. This got me thinking. Are car payments really inevitable? The answer of course is “no”.В Just because transportation is always going to be an expense of some kind, the decision to “always have a car payment” is just that — a decision.
However, since so many Americans seem to think this way, I sat down and did the following very simple analysis, whic am I reposting here as it is highly relevant to this blog’s overall topic.
My point here is this: Americans, by buying at least twice as many cars over a lifetime as they really should, are throwing away money that could and should be funding their retirements, paying off their homes, and otherwise enjoying life.
Anyway – here is my original analysis. You can change the numbers a bit here or there, assume lower rates of investment return, more expensive cars, or whatever, but the message is still very clear – you can improve your life, your future, and your finance by not buying many cars over the course of your working life.
I frequently hear people say that they will probably always have a car payment. They buy a car, finance most or all of it, and then trade it in sometimes as early as 2 or 3 years later.
Dealerships will tell you that you can get a better trade-in value that way. Maybe you’ll get a few thousand dollars more for your trade-in, allowing you to get a nicer car the next time.
I’ve alway felt that this kind of thinking is bunk– something promoted by the car companies and banks. But lets analyze this situation. Keep in mind I’m rounding some of the numbers slightly.
If you start buying cars when you are 22 (when you get out of college), and you purchase a car every five years, on five year loans, and do this until you are 72, that means you’ll buy 10 cars over 50 years.
We’ll assume a moderate, small car – $19,000 per car.
First, that means without interest, you’ll be spending $190,000 on cars over those 50 years. Thats a lot of money. If you buy big cars or SUVs, you’re of course looking at even more.
A $19,000 loan (I’m going to ignore trade-in value and down payment on your car), at 6%, has a monthly loan payment of about $367.
Over 50 years, that is 600 payments. For a total spent of $220, 200.
If you bought a car, payed it off in 5 years, and the drove it for 5 years before buying another, here is the breakdown:
5 cars purchased
Total purchase price, without interest: $95,000
Total money payed including interest (300 payments): $110, 100
I guess that is obvious — half as many car purchased, half the expense. But what’s the additional cost? In the second scenario – in which you keep a payed-off care for five year before buying another one, once you have payed off that car, you can then invest that $367 every month. So every alternating 5 years, you can invest $367 monthly.
So, after car 1 is payed off, you start investing. Assume a 6% return (I’m going to assume an average 6% rate of return on your investments over 50 years, which is probably based on history). You will invest a little over $22.000. At the end of that 5 years, the account is worth $25,501. So you would have made $3501 of investment profit in those second five years. Now, if you leave that money invested for the remaining 40 years, in the end it will be worth (and this is scarey): $262,296, for a gain of $236,795.
So to sum up, the money you invested for the second 5 years, and leave invested for 40 years afterward, makes you a total of $240, 296 of EARNINGS.
I’ll do the same for the next 4 investment periods.
Period 2
Earnings during investment period $3501
Earnings over 30 years: $120,964
Period 3
Earnings during investment period $3501
Earnings over next 20 years: $56,284
Period 4
Earnings during investment period $3501
Earnings over next 10 years: $20,167
Period 5
Earnings during investment period $3501
After this investment period you have hit 50 years, so I’m not adding any compounding of this money over time.
Total earnings by investing for every alternating 5 years rather than spending the money on cars:В $451, 715
So not only have you spent over $100, 000 more on cars over that 50 years, but you’ve cleverly avoided $450,000 in earnings on that money — for a total loss of over $550, 000.В Over half a million dollars.
Now consider if you are in a 2 car family. If you got married at 22, and stayed married for 50 years, and did that with 2 cars — your family has lost over $1 million. And THAT is assuming a very, very modest 6% rate of return.
THAT is $1 million dollars of your family’s money that the bank and its investors get, rather than paying for your retirement.
Still think the idea of always having a car payment is smart or inevitable?
March 25, 2010
В· 
Bob В· 
6 Comments
Tags: Cars, Personal finance, retirement planning, Transportation В· Posted in: Cars
6 Responses
There’s an even easier approach – don’t buy anything, car or whatever, on credit! Think of all the interest you’ll save, and the certainty of possession without reclamation.
An old-fashioned approach, perhaps, but then, I am in my 60s ;o)
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Or take 1 payment of $367 and buy a nice bicycle! Save lots more and even get rid of the gym membership since you’ll get exercise every day.
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