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Your Car Payment Can Delay Your Retirement By 14 Years

The following is a guest post from The Finance Twins.

A CNBC headline from earlier this year touted that the average car payment in the U.S. is now a staggering $523. It says the average total amount borrowed is a whopping $31,453. Both are record highs.

At the same time, there are also a record high number of people who are unable to make a $400 payment in case of an emergency. If so many people are living paycheck to paycheck, but the average car payment is $523, then clearly there is a huge problem.

America has a new-car addiction, and the problem is only getting worse.

Everyone wants a *new* car.

The cost of a new car is much higher than simply $523. But it doesn’t make sense. Growing up, my mom drove a 1997 Ford Escort station wagon for 15 years. That car took our family on the road from Florida to Minnesota to New York City. It took the transmission failing for her to give the car up in 2012. It has nearly 200,000 miles on it. All with her behind the wheel.

If a car built in 1997 lasted for 15 years without any major problems, I would think that a car built 20 years later would only be more safe and reliable. Yes, there are now more digital enhancements and less analog parts, but surely there have been engine and quality improvements in that time.

One reason for the increase in price is that everyone not only wants a new car, but they want a bigger car. Crossover cars, which are essentially mini SUVs, are booming. The days of wanting a small sedan with great gas mileage has shifted to hoards of consumers opting for a larger car with more space. With the increase in traffic and congestion, perhaps consumers are looking for a more comfortable commute to work. I’d rather have a comfortable retirement.

The increase in purchases of hybrid and electric vehicles may also be driving prices upward since those newer technologies are not cheap. But the all-in cost of a $523 payment might be higher than you realize.

The true cost of the $523 car payment.

Paying $523 a month for a vehicle seems a lot for the average car payment. Take into account the fact that the average household owns 2 vehicles, and that figure jumps to $1,043! But I am not here to tell you that driving a car is a bad idea. Having lived in both central Minnesota and NYC, I understand that a vehicle is a critical part of everyday life in the majority of the country.

But let’s put that $1,043 of monthly auto payments into context. On an annual basis this totals $12,516. Over a 5 year period this adds up to $62,580. The numbers are starting to get very ugly. This doesn’t even take into account the fact that your new car has higher insurance premiums. A higher end car may also require higher octane (a.k.a more expensive) gasoline.

A double whammy.

Keep in mind that this isn’t for a Mercedes or a Range Rover. This is the average monthly car payment for the people in the U.S. But would getting a used auto really make that much of a difference? The numbers will shock you.

Add in the fact that money is a leading cause of stress and anxiety and the average car payment starts to make even less sense. Don’t forget to take care of your health. Few things are more important. Especially not driving sexy cars.

What A Used Car Would Cost You

The good news is that you don’t have to cram your family into a 2002 Mazda Miata to have a more reasonable payment. A quick search on a major auto price comparison led me to a 2014 Honda CR-V, which is one of the most popular crossover SUVs in the market.

At a price tag of $19,498, it’s not cheap, but the monthly payment of $276 is nearly half of the U.S. average. It’s possible to go much cheaper, but this is a reasonable choice for this comparison.

2018.10.19 Honda CRV

If you had two of these cars, your total monthly auto payments would be $552. Over a year, you’d be paying $6,624 for both cars combined. Again, this doesn’t even consider that you’d have lower insurance premiums and potentially lower gas payments at the pump.

Spread over 5 years, you’d be paying a total of $33,120, which is still a pretty penny. However, the real savings kick in if you decide to keep the car for an extended period of time without trading it in for a newer car. The same applies if you switch from leasing to buying.

If you keep the used car for 10 years, you’ll essentially pay the car off after a standard 5 year repayment period, for a total of $33,120, and then have 5 year with no payments. However, if you bounce from car to car, constantly keeping a $523 payment, you’ll pay $125,520 for both expensive cars combined over a 10 year period. And remember, that is for an average car payment.

Do that for 20 years and you’ve paid a quarter of a million dollars for a depreciating asset.

If you have your sights set on financial independence, then the expensive car payment is holding you back. Way back. So let’s compare how much wealth you are losing by making the “average” car payment.

How Much Longer Do You Have To Work To Keep The Nicer Car?

For our comparison, let’s choose a 20 year period. Let’s assume that you have two options, to keep things simple and easy to compare. Option 1 is to buy two used Honda CRV’s every 10 years, for total out of pocket expenses of $66,240. Option 2 is to always make an average car payment of $523 for two autos for 20 years, for total out of pocket expenses of $251,040.

Let’s make a table comparing the cash outflows. The first column shows Option 1. Column 2 shows Option 2. Easy enough. However, column 3 is where the magic happens.

Column 3 shows how much money you’d save if you went with Option 1 and invested the difference at an annual return of 4%, which is a reasonable (if not conservative) annual return on your money.


Remember, that the easiest way to invest is via passive index funds. They are great for 401k investments or IRAs. If you don’t know what is an IRA, make sure you learn.

The results are staggering. This says that even AFTER making the $66,240 payments for the used Hondas, you would still have saved a whopping $265,510! In other words, a monthly payment of $276 for 2 cars will save you enough money compared to the average car payment, that you’d have an EXTRA $265,510 in investments after 20 years.

At the median household salary of nearly $60,000 (let’s assume a generous 30% savings rate) this means that you’ll have to work an extra an extra 14 years to retire with the same amount of money, all things equal!

Would you rather retire at 51 or 65? I know what my answer is. You can use this easy retirement calculator to see how much you should be saving monthly.

Maybe, that “average” car isn’t worth it after all.

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