Buying a new car every couple of years has become a common practice, and along with this habit, having monthly car payments. What if more people decided instead to invest that money and keep their old cars for a little longer?
The High Cost of Car Payments
A 2017 Career Builder survey revealed that as high as 78% of Americans live paycheck to paycheck and almost 9% of them earn over $100,000. This kind of lifestyle can result in overdrafting on bank accounts, and the risk that your paycheck will not cover your predictable expenses.
Many people live paycheck to paycheck not because they don't earn very much, but because they have incredibly high monthly expenses and expensive car payments can contribute to this. In 2017, Americans owed more than $1.1 trillion in car loans, according to Automotive News. And national credit bureau Experian’s "State of the Automotive Finance" report revealed that monthly car payments hit an all-time high of $523 per month in 2018. (For more, see: How Interest Rates Work on Car Loans.)
The average new car loan also lasts 69 months or roughly 5.5 years, and most cars are purchased with borrowed money. As many as 107 million Americans (or roughly 43% of the entire U.S. population) has car loans, according to data from the New York Federal Reserve in May 2017.
It should come as no surprise that many Americans struggle to meet their car payments. As high as 6 million people are 90 days or more behind. This means that they could have their vehicles repossessed, or suffer other credit and financial hardships.
If you buy a new car for roughly $30,000, you will end up paying significantly more for that car by the time you finish making car payments. And when you finally own it, it will be worth less than $12,000. This is a rough estimate (it does not take into account any accidents or damage to the vehicle). By the time you have paid off your car, you have to start the same process again.
Investing the Equivalent of a Car Payment
This depreciating asset cycle means that you do not have any cash value to show for your monthly payments. However, if you took that same money instead and invested roughly $500 per month into either a Roth IRA or 401(k), you could grow your money faster and enjoy the peace of mind of having a good savings nest.
Over a period of 30 years, this investment would result in a retirement of over $1 million. It does take some discipline and a little personal sacrifice, but you can enjoy peace of mind and get out of the monthly cycle. (For more, see: The True Cost of Owning a Car.)
Saving the Equivalent of a Car Payment
Looking at our previous example, if you have bought your car and own it outright with a $12,000 value and are ready to sell and purchase your next one, consider holding on to it longer. Save the extra $500 per month payment and put it into a savings or investment account. Just holding on to the same vehicle for two more years can help you save $12,000. Then you can use that cash upfront and get the trade-in value for your vehicle.
Or, if you can keep driving your car, put that extra cash into savings. Over a period of five years, you would have enough cash to buy a new vehicle outright as well as the trade-in value of your existing vehicle without any loans, interest payments, late fees or the monthly headache.
Whether you choose to hold on to your existing vehicle a year longer or more is up to you. But you can benefit from the savings and the peace of mind of having enough money for any emergencies or other expenses. It requires some patience and persistence, but you have the satisfaction of completing a financial plan for your security. (For more from this author, see: Are You Living Paycheck-to-Paycheck?)