What does a car mean to you? What do you use it for? Is it purely transportation? Is it ego boost? Do you buy based on safety ratings and comfort for your big family? How much life fulfillment do you get by getting into your fancy car? Do you lease? How much research did you even conduct when determining to buy or lease, new or used? Finance or cash?

I examine spending habits for a living and have noticed that car spending is getting out of control.  It seems like every car I see on the road is a $50,000+ car and according to the statistics, only 2-3% of Americans should truly drive this price point car.

I typically do not tell people how to spend their money, but a common theme after having honest conversations with prospects and clients is that they realize their car does not provide the level of life value to justify the expense.  I believe we are all after the same thing, to be happy, and live a rich life.  This idea of living richly is more than just accumulating money.  It is doing the things that truly make us happy and spending our resources on the things that reflect our personal values.

Chew on some facts from LendingTree.

The outstanding auto loan debt held by Americans was more than $1.16 trillion in Q1 2019.

Average monthly payments are rising, too:

  • $554 for new vehicles, up 5.6% year over year
  • $391 for used vehicles, up 4.9%
  • $457 for a new vehicle lease, up 4.6%
  • The average auto loan term is 69 months for new cars and 65 for used

People are financing their cars for more than 6 years! By the time the car is paid off, it is 6 years old and what do you think they do? They go get a new one and start this debt cycle all over again.  What a rat race.

What blows my mind is that the AVERAGE payment for a new vehicle is $554.  So, if there is a family that buys two new cars and buys an AVERAGE priced car ($37,185) with an AVERAGE sized loan ($32,187) they are spending $1108 on their cars.  Let that sink in. This means some of you are spending MORE than this.  I personally see it in my own geography.

According to Business Insider, there are 25 great places that you can live where an average home cost less than $250,000.  This means that with a $50,000 down payment, your home MORTGAGE will cost roughly the same as your cars.  Okay, I am stretching, I know we all do not want to live in Ok City or Tampa, but seriously I hope you get my point.

There is a more efficient way of accomplishing your life goals.  If you come to the realization that your car is solely transportation, and that you should not waste more than necessary of your hard-earned dollars, follow me here.

Carvana allows you to search based on financing by monthly payment.  For less than $260 per month and $5000 down, you can buy 3-year-old cars, Chevy Traverse, Kia Sorento, Ford Explorer, Nissan Pathfinder, Nissan Altima, Hyundai Sonata, Volkswagen Passat or Jetta.  The list goes on.  New and used cars need tires and need maintenance so we are going to hold those costs steady.   See this exact search here if you are in the market for a car and agree with these beliefs.

To put these payments into perspective – If you make $200,000 per year as a household, after a 28% Fed/State Tax return you are netting $12,000/month.  If $1108 is going to your cars, that means you are spending 9.2% of your after-tax dollars on vehicles.

Here is my quick example of the new cars compared to the humble car that is just transportation and adds no life fulfillment value.  These exercises are purely cash flow-based and do not take the terminal value of the car into consideration.  The only importance is what you put out every month as an expense and an opportunity cost.

$1108 per month or $520 per month for two cars with annual and cumulative differences.  HUGE.

At an 8% return, compounded annually, keeping things simple, the difference is $62,959 just in these 7 years.  Here is what this looks like if like most Americans, you traded your tired car in and got a new one and started over.  After 14 years, $170,860 that you could have re-allocated to college savings and investments that could have financed future family vacations, educations, meals, entertainment, charitable giving or home renovations.  OR you could have just spent it in those 7 years on things that mattered more to you if you already have your savings covered.

This last example shows that you continued this vicious cycle for the 3rd time, or 21 years of new car ownership for 7 years at a time.

The goal here is to help you understand that your spending should match your values.  If you value luxury and getting into a beautiful car motivates you and helps you stay positive about your job so that you can go earn extra income, then consider that.  If you value freedom and family, but your ego keeps shining through to your car purchases, then be honest with yourself.

These are conversations that you should be having with your financial life manager.  If you use Betterment or Wealthfront, I am sure there is a 1-800 number dying to talk about your car goals with you.  If you like humans, and you value conversations like this and understand opportunity cost, we have people waiting to speak with you.

Follow @lifemanaged_ for more insight.

*Athanassios Panagiotakopoulos is an Investment Advisor Representative with Dynamic Wealth Advisors dba Life Managed. All investment advisory services are offered through Dynamic Wealth Advisors.

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