Forget That New Car: How Cars Destroy Your Finances

December 7, 2017

How much do you think your car affects your finances? While we can’t drive without insurance, gas, taxes, or maintenance, we do have control over much of our automotive spending. And while all of those ancillary costs of car ownership add up, the biggest cost of all is buying or leasing a new car.

Keeping your car a long time is a smart financial decision

My car is 10 years old this year, and I bought it brand new in 2007 with a modest loan. I rushed to pay down the debt, the first loan I ever had, and made the final payment about two and a half years later. In the nearly decade since, I have never made a car payment. When I met my wife, she was in a similar situation and owned her car outright.

That got me thinking about what other people typically do with their cars. We have paid exactly zero dollars in car payments for so long, it is easy to forget that many people rush to get the latest model with the flashiest features. But those buyers pay a lot of money for the latest and greatest. The average monthly car payment on a new car is $504 per month for a new loan and $412 per month for a new lease, according to data from Experian.

What a new car every three years costs

If you want to get into a new vehicle every three years, you are most likely better off leasing over buying. But that means you will always have a payment. As long as you lease and don’t own your car, truck, or SUV, you have to pay every month, just like if you were renting an apartment or home.

With the average cost of a new lease coming in at $412, that is $4,944 per year in car payments. At nearly $5,000 per year, that is more than a couple of trips to Europe, almost enough to max your Roth IRA, or start a business. Me, personally, I prefer to put my spare cash in a combination of savings and retirement investments.

If you work 40 years and lease a vehicle for your entire career, that is $197,760 in car payments! But that doesn’t take into account interest you would have earned if you invested that $412 per month. If you factor that in, assuming 7 percent interest and monthly compounding, new cars cost you $1,081,423 over your career. That is not a typo. If you know someone who always has a new car, they are throwing away over $1 million to do so.

Keeping your car for 10 years saves big

I drive a boring but reliable car, a 2008 Toyota Carolla. I’ve never had to do more than standard maintenance and have very low insurance rates as a married father with no moving violations for nearly as long as I’ve owned the car. I always treat my car well and want it to last a long time, and true to the Toyota reputation it has held up very well. (I did have to go get new airbags due to a recall, but Toyota paid for that.)

I could easily see myself driving this car at least five more years, but let’s just say that 10 years is my limit. In that case, car ownership is still a lot cheaper than leasing and upgrading every few years.

At the start of 2017, a new car cost $34,968, according to averages from Kelley Blue Book. If you are able to buy your car outright with no loan, that is an instant $14,472 savings compared to leasing a new car every year or an average of $1,447 per year. It might not seem like much, but factoring in interest and the time value of money, we know that you ultimately save a lot more than $1,447 per year, not that nearly $1,500 is anything to sneeze at.

Forget about the Joneses

Everyone wants to drive a sexy, flashy car or have the best new features, but is that really worth the cost? Many people’s actions say no.

In high school, I was at an event with the Boy Scouts of America and we went around the room and said an interesting fact about ourselves. I’ll never forget the older gentleman, in his 70s, who shared that he still drove the first car he ever bought. I didn’t realize it then, but he was sharing a smart financial lesson with us younger scouts. The Scout Law includes the line, “a Scout is Thrifty,” and this Scouter certainly lives up to that law in his daily life.

Sure, the latest Bluetooth 5.0, in-dash touchscreens, and other fancy features are fun, but are they worth $1 million? I would argue no, and so does your bank account balance. If you can safely get from point A to point B, you have everything you need. America, stop wasting so much money on cars.

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