America is the land of the automobile. We often associate driving with freedom, so much so that Dodge released a commercial a few years ago that featured George Washington driving a Challenger to scare off approaching Redcoats, complete with the American flag proudly waving out the passenger side window. Despite the cleverness of the ad, our automobile habits are actually one of the biggest roadblocks to financial freedom.
Somewhere between the desire for convenient transportation and the perils of consumerism, Americans allowed automobiles to take precedence over their future needs. Instead of building wealth or saving for retirement, millions of drivers showcase faux wealth by financing expensive new cars that are beyond their true budgets. In fact, TrueCar.com reports that the estimated average transaction price for light vehicles in the United States hit $32,957 in October, up $778 from a year earlier, and more than half of the annual income of the median U.S. household.
Many drivers are clearly purchasing more car than they should. Let’s take a look at three ways your car is wrecking your wealth accumulation and retirement dreams.
1. Monthly payments
The financial burden of monthly payments is lasting longer than ever. Experian Automotive found earlier this year that the average auto loan increased to a staggering 66 months, the highest level since the company began reporting the data in 2006. Even worse, a quarter of new vehicle loans had terms extending out 73 months to 84 months.
Although people looking to rationalize these longer loan terms are quick to point out that interest rates are at historic lows, the average rate on new and used cars are much higher than people realize. Experian reports that interest rates on new vehicles reached an average of 4.54% in the first quarter, while interest rates on used vehicles averaged 9.01%. Furthermore, average monthly payments for used and new vehicles were $352 and $474, respectively. That is quite the monthly drain for someone trying to build wealth.
2. Never-ending expenses
Purchasing a car is only the beginning when it comes to expenses. Considering Americans typically use their vehicles for every transportation need, miles can rack up to thousands of dollars each year. A recent analysis from Bankrate finds that the average driver spends $2,223 on gasoline, insurance, and repairs each year. Due to driving 68% more than the national average, drivers in Wyoming spend an average of $1,588 per year on gasoline alone.
Between monthly payments and maintenance costs, you could be spending $8,000 or more each year just in car-related expenses. While it may not be practical for you to reduce this amount to zero, it’s certainly within reach for most Americans to reduce costs by purchasing cheaper — yet still dependable — cars and reducing their maintenance costs through public transportation or alternative methods such as bicycling. After all, a car is not the only method to get from point A to point B.
3. Opportunity costs
Ironically, spending more than you should on a car in order to appear wealthy actually breaks the mold of a typical millionaire in America. Most millionaires understand the value of not wasting money on trying to appear wealthy. In The Millionaire Next Door, authors Thomas J. Stanley and William D. Danko find that millionaires were more likely to drive a Ford than a Lexus or Mercedes.
“Many affluent respondents take joy in driving vehicles that do not denote so-called high status. They are more interested in objective measures of value. Some millionaires do spend considerable dollars for top-of-the-line luxury automobiles. But they are in the minority.”
Spending $474 per month on a brand-new car payment for years on end brings the opportunity cost of not putting at least some of that money to work in a more productive way. Lower payments on a dependable used car will allow you to invest the difference and also save money on property taxes. If you skip payments altogether and pay cash for used cars costing $15,000 or less that you keep for 10 years at a time, you’ll have an even easier time building wealth for your future self.
Follow Eric on Twitter @Mr_Eric_WSCS
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