Car Payments – Are They Holding You Back from Building Wealth?

Many people believe car payments are just a way of life. Did you know the average new car payment is now $515 per month?!

Interest rates are rising. The prices of new vehicles continue to rise and are up almost 10% since 2013. Has your income risen that much? The average interest rate on a new vehicle has risen to 5.2% and the average loan on a new vehicle is $31,099.  Yet, Americans continue to purchase and finance new vehicles in record numbers, often extending the life of the loan to seven years. In addition, a new vehicle will lose about 60% of its value over the first five years.

“I think we’re certainly at a point where affordability is a question,” said Melinda Zabritski, Experian’s senior director of automotive finance solutions. “When you look at how much income you need to support that payment, it certainly is higher than your average individual income.”

Americans are spending a huge proportion of their income, about 12% each year on new cars that will only go down in value. The worst accidents truly do happen on the showroom floor!

What’s wrong with this picture?

The average new car payment is $515 per month financed at 5.2% for 69.5 months. Almost 20% of auto loans are financed for 73-84 months.

But what if you invested a car payment every month? Here are the results of investing $515 per month:

The S & P index has returned just under 10% over the last 90 years. Investing a car payment in an S & P index fund will make you a millionaire over the course of your working life. When a substantial portion of your income isn’t going to someone else, you will actually have some money left over to save, enjoy, give and invest.

There are currently 126 million households in the U.S. and 11 million are millionaire households. In his amazing book, “The Millionaire Next Door,” Dr. Thomas Stanley found that almost 40% of millionaires buy used vehicles. He went on to say that most of these millionaires’ high income, low net worth neighbors make the wrong assumption. They focus all of their energy into earning a higher income. Most people think that if they earn a higher income, they will become affluent. The higher the income they earn, the more money they spend on cars, homes and consumption just to look the part of affluence. However, it’s not what you earn, it’s what you save! It’s easier to earn a lot than it is to accumulate wealth.

Before you say that you need to purchase a new car because you need something reliable, many reliable vehicles can be found through private sellers. Of course you have to be diligent when purchasing a used vehicle. I recommend having any used vehicle looked at by a mechanic before committing to purchase. This has saved us several times from purchasing someone else’s problem. Over the past eight years we have purchased four vehicles through Craigslist, one from a referral and one from a dealership and they have all proven to be great purchases. We currently have four vehicles, two of which are driven by two of our children. These are our total repair expenses for the past twelve months on these vehicles:

I will attest that one of the biggest reasons we’ve had over an $850,000 turn-around in net worth in less than ten years is due to what we choose to drive. We have found reliable, used cars that have already been depreciated by someone else and paid cash, leaving us to utilize our most powerful wealth-building tool…our income.

 

6 thoughts on “Car Payments – Are They Holding You Back from Building Wealth?”

    1. We haven’t had any car payments since 2010. All consumer debt was paid off in 2010 and finally paid off the mortgage in 2017.

  1. I managed to get a nearly 0% loan from my local credit union when I bought my (very) used car. The way I see it, it makes more sense for me to be investing that cash with what is currently a 13% ROI and pay the tiny amount of interest on the car loan than spend the cash outright.
    That being said, if the interest rate were anywhere higher than, say, 1.5% I would have a hard time letting that go. If not for mathematical reasons, then for psychological ones.

    1. Makes sense and props to you for getting such a great rate. Have you invested solely in index funds or do you have some real estate or single stocks mixed in?

  2. Will be paying off car this month instead of making the payment and already have another vehicle paid off.
    The only thing now is that I’ll need to take that payment and put in savings to pay property taxes (mortgage does not include taxes).
    Hoping to refi once more to include taxes and insurance.
    Paying off a little over 9,000 in debt so we can exhale a little.
    Need part-time work from home to put money back in retirement and emergency savings.
    Help!

    1. P,
      Paying off 9K is amazing! Congratulations.
      Have you ever tried budgeting or utilizing any budgeting software such as YNAB or Every Dollar? That could help with property taxes/insurance.

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