U.S. automobile sales in 2018 are expected to reach about 17.5 million vehicles this year, roughly flat year over year. At the same time, U.S. household debt is back at an all-time high of $13.2 trillion. Despite a few years of belt tightening by consumers, they are back spending – and racking up plenty of debt to do it.
The same person that is financially in neutral, at best, still manages to trade in their lightly used car for a shiny new thing every few years. The justification being that they can afford the $300-600 monthly car payment.
There’s probably not much analysis at all at the time of purchase, but little thought is given to the total cost of the purchase, interest paid on the loan, depreciating asset, and most importantly: opportunity cost of that money. Instead, the usual scenario includes trading out of the used car into a newer car every few years and effectively locking into a big car payment in perpetuity.
But what’s that car really costing you? At a reasonable going forward equity return of 7.5% annualized over 20 years (hopefully do better, but who knows), investing $500 per month into a diversified stock mutual fund would compound to over $276,000.
A quarter of a million dollars for a mid-sized sedan.
But what about the cost of the used car, repairs, and maintenance?!
I’ve been driving used cars for years. Yes, there is periodic maintenance costs, but never have they exceeded a few months car payments if I had been driving a new car year in and year out.
This is simply to show you what you’re potentially missing out on. It’s not a car payment. It’s a quarter of a million dollars over time.
Your used car will cost money, of course, but keeping it as low as possible will pay off in the future.
There’s a cost to that new car feeling. And its a big hit to your net worth over time.