How long should you keep your car, and how much should you spend on new car? These are questions we all ask ourselves.
American overspend on automobiles at the expense of other financial priorities:
Americans have always loved new cars, which is probably why the average family overspends on automobiles at the expense of other financial priorities (and often rack up a significant amount of automobile debt). Many people buy the most expensive house and new car they can afford, but then they fret over dozens of much smaller expenses. This is interesting considering that research shows we derive significantly more happiness by spending our money on experiences (e.g., vacations) vs. things (e.g., new cars).
Researching a new car purchase:
My friend Yeremy was recently in the market for a new car. His wife had lamented that her minivan is nine years old and “No one keeps a car for 10 years.” It turns out the average car on the road in the U.S. is 11.4 years old, but there is no reason to get bogged down with facts. Yeremy’s wife was thinking that it was also time to upgrade her image. The minivan was not cool enough so she wanted to get an SUV. Yeremy, who is not cool at all, just wanted his wife to be happy, but he also wanted to see how much more an SUV might cost. Initially, it is relatively easy to compare how much different cars cost. However, it is harder to compare the rate at which they depreciate, the different costs to insure and maintain them, etc. Yeremy turned to Edmunds’ True Cost to Own calculator, where he could compare all the costs of owning different vehicles.
Yeremy found that over the course of the first five years, the large SUV would cost somewhere between an extra $12,000 if he bought a Chevy Suburban or as much as an additional $47,000 for the Cadillac Escalade. Depreciation (decrease in the value) is the largest expense of owning a vehicle, but it only accounts for approximately 48% of the cost of ownership. Check out this infographic from Consumer Reports to see the breakdown of other expenses.
Luckily, Yeremy’s wife was convinced by this research and opted for another minivan. 🙂
The wealth-maximizing new car strategy:
In general, the wealth-maximizing strategy is to buy vehicles based on reliability and fuel efficiency and to drive them as long as possible. Replacing vehicles every few years adds considerably to the cost. For example, the median cost of car ownership drops to $7,800 per year from $9,100 if you just keep your car for eight years instead of five. That represents a $1,300 difference per year, ($110 per month) that can be spent on other items you enjoy or saved for your retirement. Buying a new car every two to three years is the least cost effective strategy and not at all conducive to building wealth.
Another important decision is how to finance your new car, which we discussed last year in this blog post: Automobile expenses: Better to Buy or Lease?
Have a great week and happy driving.