Cars are bad investments. They are depreciable assets—that’s what happens as soon as you drive it off the lot the very first time—it depreciates and you can never resell it for what you paid for it. .If you do this say every two or three years (as in when you lease a car), the cost of those cars can easily sabotage your retirement plans. Kelly Blue Book reports those buying new cars paid on average $32,000 for that new car in 2014. Yet the National Institute on Retirement Security reports that 45% of working-age households did not have anything in their retirement account. Does that seem backwards to you?
The average monthly loan payment on a car in 2014 was $474 with an average loan life of 5.5 years as reported by Experian Automotive. Retirement planner Peter Bohr states that if you bought a less expensive car and cut your payment in half and saved the difference you would have $16,000 when you paid off the car. Invested at 7% in a retirement account would return about $120,000 to the car owner over 30 years. See the difference between spending money on a depreciable asset (Car) and an appreciable asset (investment).
When you do decide you need to trade in your old car for a new model here are some things to think of: 1) Buy Used. Really is there that much difference between a new car and the year or two old previous model year version of that same car? Make sure low miles are part of the specs of your used car search. 2) Don’t be tricked by sales people that lower your payment by extending the life of the loan or rolling a previous amount due from a lease into a new car loan such that you are buying a car you really can’t afford. You may end up with an old car you know longer like that has an extremely high loan balance that’ll take you many more years to pay off. 3) Avoid upsells to higher premium package—put the monetary difference into a savings account instead. Most base packages come with plenty. Really you can do without that spoiler or moon roof. 4) Resist the urge to buy another car every few years. Hang on to that car for 7 years or longer--as long as the safety features are present. A repair here or there, while inconvenient and maybe a little scary at the time, is a lot cheaper than the depreciation on a new car.