Are We Driving our Retirement Plans into the Ground?
“Too many people spend money they haven’t earned to buy things they don’t want to impress people they don’t like.” -Will Rogers
Auto sales in the US show that we Americans just love new cars. The $35.5 billion dollars spent on advertising in 2014 by auto manufacturers per Borrell Associates has paid off well. New car sales are up, we’re buying more expensive cars and the average length of an auto loan has jumped over 30%. Edmunds reports, “Since 2002, the average car loan term has slowly crept past five years, and is now inching past six-and-a-half years. In 2014, 62 percent of the auto loans were for terms over 60 months. And nearly 20 percent of the loans were for 73- to 84-month terms.”
The longer the loan, the lower the monthly payment. However, the total amount paid is larger because of the interest. The average new car loan was $28,381 at the end of 2014. Financing $28,381 over 4 years at a 4.5% interest rate requires a monthly payment of about $647. That same loan stretched over 7 years at the same interest rate only costs about $395 a month. While the monthly payment of the 7 year loan is a lot lower, the total cost is $2,073 more than the 4 year loan. That’s almost 77% more. Compounding that, how will we feel still making big new car payments on a car that is over six years old?
When someone can’t really afford a new car, stretching out the loan does not make it more affordable.
It just makes them spend even more, compounding financial problems for the person who is already stretched thin.
If we were spending a bit more on cars to reward ourselves for meeting our retirement savings goals, that would be one thing. But that’s not the case. Per US News, Americans are not even close to saving enough for retirement. At the same time we are falling very short on this critical task, we seem to be putting money into other things first, and a big one appears to be cars.
Clearly our priorities are out of whack here. A dollar saved now is worth far more than a dollar saved later thanks to the power of compound interest. But we’re choosing to put our precious dollars into something that doesn’t go up in value: a car. In fact, cars do the opposite, they drop in value over time. There’s a term for that: depreciation. That’s why paying longer on a car as it drops in value is formula for disaster. The loan might outlive the car!
When we invest money for retirement, we are adding to an “appreciating” asset: our investments. That’s just a fancy way of saying we are making our money workfor us. Our goal should be to consistently add money to appreciating assets and minimize what we pay for depreciating ones. That way, while we are working at our day jobs, our money is working for us at the same time. That is how we will set ourselves up to be financially secure later in life.
It’s time for some serious deprogramming. We’ve been bombarded with advertising about new cars and what they can do for us for all our lives. It’s time for all of us to brush up on our self-defense skills against the billions spent on advertising to us each year.
Instead of making the emotional decisions advertisers want us to, let’s force ourselves to think rationally. Realistically, how does a new car benefit us? Hopefully, it gets us safely and reliably from point A to point B. But if you look at any TV ad or billboard, you would think that a car changes our lives – or gives us a life! Thanks to all those “Mad Men”, we are overwhelmed with messages that we need a certain type of car to complete our image.
We need to stop letting advertising set our priorities. Instead of getting emotionally attached to the idea of buying a car, let’s get emotionally attached to the idea that we deserve a secure retirement.
Buying a new car isn’t the only option for solving our transportation problem. Let’s take time to consider our alternatives:
- Buying a car that is “like new”. You would be surprised how much cheaper a car is even when it only has 20,000 or 30,000 miles on it. This happens because a car depreciates the fastest in the first few years of ownership even if it still works fine. In fact, the more expensive the car, the bigger the savings you can usually get by buying something that is a few years old. Then, negotiate! Any dollars saved represents money we can put to work for us, so we should always assertively negotiate any large purchase.
- Buying a car that is a bit older. This option offers an even deeper discount. It requires more investigative work to ensure the car is functioning properly, but with a little extra work, it can work out very well.
- Avoiding car ownership altogether. While this may seem like a radical idea to some, alternative forms of transportation have never been more widely available than they are today. Public transit, car-pooling, walking, and bicycling are some possibilities. Why not either get some exercise, or leave the driving to someone else while you catch up on email? For those who still want to step inside a car, the latest tech companies allow you to do so only when you really need to. From Uber to Lyft to ZipCar, you can now find a ride at even the strangest hour of the day. The amount of savings can be enormous. After all, most of the time, your car is probably just sitting in the parking lot, depreciating in value.
So we have a choice to put money into a new car before savings – to choose immediate gratification over long term financial wellness. While “everyone’s doing it”…and advertising shows us that a shiny new car will magically improve our lives…let’s not fall for the bait. Instead, let’s consider scheduling a call with our financial advisor to get on track for the retirement we want. The amount we save by reducing auto costs can painlessly go directly toward retirement savings. Our future self deserves no less!
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