Your New Car: Wealth Killer!

Ah, new car smell. You may not know what’s in it, but who doesn’t love it? A new vehicle, fresh off the lot, is perhaps the number one symbol of American affluence. It’s a piece of the dream and a reward for hard work. However, it may be keeping you from real wealth.

According to a study conducted by consumer reporting agency Experian, the average American car payment is now at $499 per month. According to online auto seller CarsDirect.com, this will buy you vehicles like:

  • 2018 Kia Soul EV
  • 2019 Mazda CX-9
  • 2018 Hyundai Sonata Hybrid
  • 2018 Dodge RAM 3500
  • 2019 Toyota Highlander
  • 2018 GMC Sierra 2500HD, and many more.

You might be thinking, “wow, a brand new pickup for $500, while I’m driving an 8-year-old minivan?” It’s not hard to start daydreaming.

The Built-In Car Payment

Owning a set of wheels is so essentially American that we take it for granted. Mortgage, utilities, groceries, insurance, car payment… it’s almost a standard budget item that everyone accepts as normal. Yet, when it comes to planning for retirement, there are plenty of these same people who depending on skipping the occasional venti latte to finance their savings, five dollars at a time. The car payment as a standard expense category is, though, a piece of social conditioning. It’s a corollary, perhaps, of keeping up with the Joneses. Others in our socioecomomic class carry car payments, so too should we, so that our car reflects our status.

The Misdirection of Capital

Consider a 25-year-old college graduate in their first career position. The lure of the new car is irresistible, and they make room in their new budget for a $500 car payment, on an average car loan term of 68 months. That’s more than five and one-half years. That’s $34,000, or about $6,000 per year. Of course, by the end of the term, they’re driving a 6-year old car that’s likely out of warranty and starting to show its age. So, at the end of the term, they flip it over and buy another new car at the current average car payment and term. Already conditioned to carry a car payment in the same way they carry rent or a mortgage, the now-31 year old is into a pattern that keeps up for life. That’s $240,500 by the time they reach age 65, driving new cars a little less than twice a decade.

A similar 25-year-old who buys used cars with savings and puts aside $500 monthly into a simple daily interest investment paying 5% for the same length of time sees a balance of $771,800 at age 65, or basically a half-million dollars earned passively through the power of compounding interest. An investment offering a 10% return would grow to well over $3 million. Meanwhile, every new car the first 25-year-old buys depreciates 30% the moment it leaves the new car lot.

A Question of Values

There’s no question of course that these scenarios are simplified. Perhaps Person 1 drives each car for 10 years, or Person 2 suffers a layoff and can’t contribute at the same rate. However, when retirement savings are a priority for you, maintaining a car payment of any sort is something that you should examine carefully.

The catch is, of course, that you have to find the discipline to invest that recovered car payment. It doesn’t matter if you direct it to a work-sponsored 401(k), personal IRA or some other investment vehicle. Even if it’s not tax sheltered, you have a serious foundation for investment that produces significant earnings with low risk. The essential question to ask yourself is likely this:

“Is driving an occasional new car worth $3 million to me?” 

If it’s not, find a way to break the car payment habit.

About Paul Gaulkin CPA

Paul Gaulkin is a Certified Public Accountant and enrolled with the U.S. Treasury to practice before the IRS. Mr. Gaulkin possesses unique technical knowledge in the process of securing relief for taxpayers nationwide with IRS and State tax problems. With an accounting degree from Florida International University, he is able to transform complex tax and accounting problems into easy to understand solutions.

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