3 ways new car payments can kill your retirement dreams


Holly Johnson

Holly Johnson

Blog author Holly Johnson

Published August 23, 2017 | 4 min read

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No matter who you are and how much you try to save, some of life’s bills are completely unavoidable. Unless you live with friends or relatives, you have to pay rent or fork over money for a mortgage. And you’re pretty much stuck paying for food, clothing, utilities, and transportation ( and, hopefully, life insurance! ) regardless of how thrifty you are.

Transportation is one cost that can easily shape your fortune (or kill your dreams) depending on how it’s handled. As cars become more expensive, consumers continue to face larger car payments with loan terms that never seem to end.

As Experian’s Q1 State of the Automotive Finance Market reported recently, the average new car loan surged to $30,534 at the beginning of the year. This brings the average new car payment to $509 per month. Even crazier, the average new car loan term lasts 69 months! And while used cars come with a slightly smaller average loan ($19,126) and average payment ($364), they still last an average of 64.84 months.

While that might not seem like a big deal now, falling into the trap of perpetual new car payments can absolutely kill your retirement over the years. Not only do perpetual car payments diminish your buying power, but they make it much more difficult to hit your retirement savings goals.

Here are three reasons why your new car payment could be the death knell for your retirement dreams.

1. You’ll have $122,160 less to save or invest

Let’s imagine you take out one new car loan after another with an average monthly payment of $509. Since you always trade your old car in as you buy new, the cycle of monthly payments is perpetual.

You do this for twenty years straight, not realizing that you’re paying $6,108 per year for the privilege of having a new car. Over 20 years, the total amount of payments you’ve made balloons to $122,160.

Now imagine you invested that money instead. You drove older paid-off cars, and threw an extra $509 per month into a retirement account or post-tax brokerage account. If you earned just 6 percent on your money over 20 years, you would wind up with an extra $224,684 for retirement! If you earned an 8 percent return, you would have an extra $279,514 stashed away.

Investing fees and the costs of maintaining older, paid-off cars would cost you money along the way, but you get the idea. At the end of the day, forking over more than $500 a month for 20 years or more can mean having a much smaller retirement portfolio.

2. You’ll pay more for car insurance and plates

While buying new cars can help you save on maintenance and repairs, they also come with their share of other, hidden expenses.

For example, car insurance for new vehicles tends to cost more than for used cars. First, new car repairs are usually more costly and the replacement value of a new car is obviously significantly higher than used. Second, insurance companies require you to buy collision and comprehensive coverage for new cars with a car loan – and this coverage is easily the most expensive component of any auto insurance policy.

Other costs associated with driving that you may not think of may also be higher. Depending on your state, you could pay a lot more for license plates and your registration if you buy a new car.

While these expenses may not seem like a big deal, costlier insurance, license plates, and fees can really add up over the years. Added to the cost of just buying a new car, they can leave you with less money to save and invest.

3. You’ll spend on one depreciating asset after another

When you go through new car after new car, you’re basically setting money on fire. You may enjoy each car while you have it, but you’re not building wealth. In fact, each new car you buy will be worth less every single day you drive it.

According to Edmunds , the average new car will lose $7,419 in value during its first year on the road. Over the next three years, you’ll lose an average of $5,976. After that, your new car will continue to drop in value after that until it’s finally worth, well, almost nothing.

Of course, you could just trade it in and start the entire process over. But, should you?

If you want to build wealth that lasts, the answer is simple: Keep driving your car until it’s paid off, then drive it as long as you can. After that, consider buying a used car that requires a much smaller financial obligation.

Then, take your extra money and stash it somewhere it has the potential to grow.

If you want to retire one day, don’t forget to consider how your everyday spending could ruin your plans. Car payments especially have a way of creeping into our lives and staying there, many times to the detriment of our financial well-being.

The transportation choices you make today - and in the future - could mean the difference between a comfortable retirement and no retirement at all. Don’t let anyone - especially a new car salesman - tell you any different.

Image: Ivanko_Brnjakovic