The biggest mistake you never knew you were making

Good news guys, you’re reading the most important blog post I will ever write. This is THE post. The post that actually shows you how to become a millionaire. If you and I can reach an understanding, and change one singular spending habit, everyone reading this gets to become a millionaire. I’m really not joking. But the catch is, it’s a sensitive subject and you aren’t going to want to talk about it. But I’m begging you, give me a chance.

Because we really need to talk about your car.

I know, I know, your car is sacred. We’re Americans, born for the open road. I get it, I’ve been driving since I was 16. I have always owned a car, and I love having access to a car. So if you’re thinking this will be a crazy person article where I say “Being a millionaire is as simple as giving up your car and riding a bike everywhere!” you’re wrong. Well, I mean, that’s true, but that’s not what we’re talking about today.

I want to talk about HOW we buy and own cars, and how changing our approach to that process in very small ways will literally make us MILLIONS of dollars over the course of a lifetime.

So let’s talk about car loans

I’m going to be honest with you, this was a horrifying article to research. Going into this article I knew we spend too much money on cars, so I expected the numbers to be staggering. But I didn’t expect that the numbers would be so horrifying! We spend OUTRAGEOUS sums of money on our cars!

Let’s give a quick summary of the average American and their car. 

The average car price was 33,560$ in 2017.

The average car loan for a new car is 30,032$.

The average car loan is financed for 68 months, or 5.67 years.

The average interest rate on a car loan is 4.53%

The average payment on this average car loan is 503$ per month.

503$ per month. Yeesh. But that’s…not too bad, right? You buy a new car and then that thing is YOURs. For like, 10 or 15 years if you take care of it. So if you average those car payments over 15 years…

Yeah, fucking nope. We hold on to our newly bought cars for an average of 6.5 years* before we run off and get a sexy new car.

That means that the average American gets to enjoy 10.08 months of no car payments every 6.5 years before they decide “Hey, do you know what I miss? That gaping, sucking financial wound called a car payment. I should go to the car dealer and financially disembowel myself on the showroom floor RIGHT NOW!”

Given the length of the average loan (68 months) and the average length of new car ownership (6.5 years) we can determine that, for every ten year period, the new car buyer is paying car loans for 8.7 years (104.5 months) out of every decade. At the standard payment of 503$ a month that means the this new car buyer spends 52563$ every single decade. And that isn’t even taking into account the down payment on these cars which is often several THOUSAND dollars each time.

And the worst part? That’s just for single people, living their one-car lifestyle. The average family owns 1.9 cars, so MOST American families are two car families and paying significantly more than this.

And that nightmare price is how much it costs just to OWN a car. Not to insure it. Not to fill it with gas, or do oil changes, or to fix it when it breaks down!

And this isn’t a small subset of wealthy Americans skewing these numbers. We sell around 17.5 million cars in this country. Given that the average new car is owned for 6.5 years, we know that around 113.75 million “new” cars are on the road, owned by their first owner. There’s around 250 million Americans over age 18 in this country, so these statistics represent 45% of all adult Americans and our car buying habits. If you look at just adults with licenses, this article applies to more than HALF of all drivers in the country!  

Well that was a whole lot of scary numbers, but how the hell is this going to make me a millionaire?

Going back to our rule of thumb about how much monthly expenses really cost, we can discover that our car ownership is literally costing us millions of dollars in a lifetime. If you decide to own a car like an average American, you’re committing to spending 438$ every single month on car payments (Our average spending of 52563$ every decade divided by 120 months in a decade).

Forever.

Using our rule of thumb for how much a monthly expense ACTUALLY costs, we know that if we opted NOT to have a car and instead invest that money we would end up with 537,000$ over thirty years. If you’re a two car family, congratulations, that’s over a million dollars. If you carry on this way your whole life, for 40 years of car ownership, that number actually rises to a million per person, and if you keep it up for 50 years of car ownership (Like my grandparents did) that’s about 2.4 million dollars per person.

That’s right: The true cost to own a car is 2.4 million dollars over a lifetime. And that’s literally just to own the car, that doesn’t include gas, insurance, maintenance, anything. 

But this isn’t an article telling you to give up your car. That would be silly, and super hypocritical because I own a car and I love being able to drive someplace at the drop of a hat if I so choose. But this IS an article where I literally beg you to modify your car ownership habits just a little bit to see your lifetime networth increase by hundreds of thousands to millions of dollars.

Let’s take a couple scenarios. Current surveys of automobiles in America show that the average car on the road is 11.5 years. That’s not the age at which we send our cars to the great parking lot in the sky, that’s just how old the average car you see on the highway is. If you buy a new car and hold onto it until it is 11.5 years old, which again is middle age for a car these days, you get an extra 5 years of no car payments compared to the average in this country. Instead of having an exciting 10.08 months of no car payments per car, you now get 70.08 months of no car payments, a 700% increase in the length of time you DON’T PAY ANYTHING TO OWN YOUR CAR. This drops the average monthly payments to own a car from 438$ every month to a more manageable 247$ a month. A savings of 191$ every month which, if we do something fun like invest it in a low-cost index fund, works out to a cool 234,000$ over thirty years of car ownership. Just by owning a BRAND NEW car for an extra 5 years before you buy ANOTHER BRAND NEW CAR you get nearly a quarter of a million dollars over a short, 30 year working career.

Hell, I’m almost willing to PAY a quarter of a million dollars just to avoid interacting with a car salesman. By holding on to a car for 5 years longer than the average person, you get a quarter of a million dollars AND you avoid going to the car dealership 2 extra times during that 30 year period. If you keep this up over a traditional working career of 40 years, that’s half a million dollars. For a 50 year career and a portion of your retirement, that works out to over a million dollars. And keep in mind, these numbers are just for one person with one car. If you’re a two car household, these numbers stack up twice as fast.

So there you have it, a million dollars over a lifetime of car ownership by deciding to hold onto a car for 5 years longer than the average American. I guess we’re done here, mission accomplished.

Just fucking kidding, I promised you MILLIONS of dollars, not MILLION of dollars!

That one decision was a goddamn BABY STEP! Let’s take our scenario to its natural conclusion! Instead of keeping your car until its as old as the average car in America, let’s take that car to its grave! Today’s cars are actually built WAY better than they used to be, such that you can get most cars to 200,000 miles before they die. Given the way we drive our cars, that takes us to about 15 years of car ownership. Doing our math from above, this means that if we take a new car from cradle to grave, our monthly payments to own that car go from 438$ all the way down to 190$ a month, a savings of 248$ a month. 304,000$ in your pocket every 30 years, 1.3 million dollars over a lifetime. Just to own your brand new car longer. Granted, as you make a car last 15 years your cost of repairs and maintenance go up, but not as much as you would expect if you take your car for regular maintenance AND if you buy a low-maintenance cost car.

Want to take things even further? Instead of buying an average car, with an average cost, let’s consider buying a slightly less expensive car. Let’s use a brand new Prius as an example. The total cost of an average new car is actually 33,560$ in 2018. This is higher than the average auto loan due to down payments. Compare this to a base model Prius, which costs 24,685$. Taking into account a similar downpayment (Bit over 10%), loan length (68 months), and interest rate (4.53%) that are the current averages in our country, our monthly payment on a Prius is 369$, which is 134$ cheaper than the average new payment. For a person owning their car an average of 6.5 years, this works out to a 30 year savings of over 140,000$ in car ownership costs just for purchasing a slightly cheaper car. This doesn’t even take into account the costs to own a Prius which are SO MUCH LOWER THAN THE AVERAGE CAR. If this Prius owner takes their car to 11.5 years, they save 314,000$ compared to a typical car owner in 30 years, 1.4 million over the course of a 50 year lifetime of owning cars. JUST FOR OWNING A SLIGHTLY CHEAPER BRAND NEW CAR FOR SLIGHTLY LONGER!

This is rip-out-your-hair-crazy levels of money that the average person is throwing away in their lifetime. This is “Retire with 1.4 million dollars more” just by buying SLIGHTLY CHEAPER BRAND NEW CARS and owning them for a REASONABLE AMOUNT OF TIME. I cannot emphasize this enough. This is not secluded-monk-in-a-monastery levels of deprivation to get millions of dollars, this is the type of habit change that DOES NOT ALTER YOUR LIFE IN ANY WAY BUT LITERALLY MAKES YOU A MILLIONAIRE.

But wait, I don’t WANT to own a Prius! I want the cooler car that costs more money!

Fine. We can still save you millions of dollars while accommodating this desire to own the cooler car. What about if we only buy slightly used cars? For example, cars coming off a two or three year lease?

Edmunds.com finds that the average new car loses 22% of its value the second you drive it off the lot. In its second year, that car loses 12% more value, and another 12% the year following. That means for our average new car (Sticker price 33,560$), it loses 7,383$ the second you drive it off the lot. Your brand new car just lost you a value of money equivalent to the full cost of a two week vacation in Paris with round trip tickets included. Did you really enjoy that new car smell the same amount as: Buying round trip tickets to Paris, booking a hotel for 2 weeks, and eating approximately 700 chocolate filled croissants? I fucking doubt it.

If you swap your new car habit for buying 3 year old, off-lease vehicles, the average vehicle now costs you 20,271$. Doing the same calculations as above, our monthly payments drop from 503$ for an average new car to 301$ a month with a similar 10-11% down payment as above. A 200 dollar a month savings to own THE SAME CAR but three years older. This car is still so new it’s covered under the manufacturer warranty. If you take this car out to an 11.5 year lifespan, 8.5 years of car ownership for you, you’re spending an average of 200$ a month to own a car, compared to 438$ for the average new car owner. This works out to 1.3 million dollars over a 50 year car career, or essentially the same level of savings as buying the cheaper new car, like a Prius.

We can go even further, though. If you take this car out to 200,000 miles or 15 years (12 years in your hands), this saves you 1.86 million over 50 years when comparing yourself to the average car owner.

1.86 million dollars is exactly how much wealthier the version of you is that buys 3 year old cars and takes them to 200,000 miles rather than the version of you that buys brand new cars and only holds them for 6.5 years. A.K.A. The Average American Human.

I was promised millions. 1.86 million isn’t millions. We must go further.

We’re nearing the end of this massive, mathtastic journey, I promise. Let’s take one more scenario. You’re going to apply these gigantic money saving tips to a cheaper car, like that Prius. Instead of buying the average car, brand new, you buy a 3 year old Prius (Or Corolla, Camry, Civic or…) coming off lease and you drive it to 200,000 miles. Using those rules of thumb about how cars depreciate, your car now costs 14,910$ upfront, or using the same loan we’ve been using, 222$ a month. Granted, the depreciation on a Prius is actually less than average, but this math still holds true since we aren’t even discussing how much cheaper these cars are to own, insure, and operate than the typical car. You take this bad boy to 200,000 miles which is EASY on a Prius, do the same math as above about car ownership costs, and you’re now looking at saving 2.1 million dollars over 50 years of driving. Congratulations, you’ve saved literally millions of dollars by making small lifestyle changes.

But used cars are expensive to maintain! Aren’t all my savings going to be eaten by all those 4,000$ car repair bills I always hear about?

It turns out that we all have this irrational fear about how much used cars cost. If you’ve ever owned an older used car you have this memory of a 500$ broken axle here, a 1,000$ engine issue here, a 2,000$ transmission repair here. And these memories aren’t fake by any means, but our estimation of the costs of owning and maintaining a used car often are no longer correct in today’s world. As I mentioned before, new cars on the market today are actually built way better than cars used to be. They are meant to last for 150,000 to 200,000 miles. Take a look at these charts here detailing the maintenance costs accrued for any given 25,000 mile stretch of car.

What stands out to me are car maintenance costs are relatively cheap for the right cars. For the average toyota, nissan, or honda you’re looking at 6 to 10,000$ in repairs for the first 150,000 miles or 12.5 years of driving at the average 12,000 miles a year. That’s around 44$ a month to own a Toyota Prius for 12.5 years. If you buy a three year old Prius and keep it for 9.5 years your costs rise to 58$ a month if you make the totally unrealistic assumption that you spent 0$ on repairs during those first three years. So our literal worst case scenario is committing to 14$ higher maintenance costs every month by buying a three year old used Prius, or around 76,000$ over 50 years. Not insignificant in total dollars but a literal drop in the bucket compared to the actual millions we are saving by holding on to our cars for longer than average!

I will spend a lot more time diving into the detailed cost/benefit analysis of owning different cars in a future article, but the take home message is that, aside from the MOST expensive cars to own (BMW, Audi, Porsches, etc) the maintenance costs over 150,000 or 200,000 miles is much less expensive than you’re likely imagining. As an example: Sorry BMW fans, the BMW maintenance costs are nearly three times as high as a toyota. To bring a BMW to 150,000 miles, you’re looking at dropping over 28,000$ in maintenance compared to about 10,000$ for a Toyota. 

Conclusions

My take home message from running through all this math is: Are you fucking kidding me? By making three slightly different decisions than the average person in this country, we end up 2.1 million dollars wealthier over a lifetime. We still have just as many cars as the average person. We still drive just as many miles as the average person. The only thing we have given up is having the nicest, newest, shiniest car on the road AT ALL TIMES.

I’m not joking or exaggerating when I say that your decision on what type of car to own, and how and when you buy it, is the difference between you being a multi millionaire and being literally dead broke in your retirement. We haven’t even gotten into graduate level savings on car ownership, where you go from being a two car family to a one car family or even a no-car family, and we are already talking about MILLIONS of dollars. For maintaining the EXACT QUALITY OF LIFE YOU HAVE RIGHT NOW.

So next time you’re thinking your 6 year old car is getting a little long in the tooth and you should consider getting a new car, just stop. Reflect back on the true cost to own a car as we’ve described it here. Think about what you’d rather have: A nicer, newer car or MILLIONS OF FUCKING DOLLARS.

*I have a suspicion this number looks worse than it is because a quarter of new cars are leased, and some surveys count leased cars as “New Car Purchases” and others don’t. I can not find anything on this topic, but full disclosure: The 6.5 year may be due to 25% of cars being leased for 3 years and the other 75% being owned for an average of 7.67 years. If this is true, this slightly reduces the savings we accrue by owning cars for longer, but we are still talking about buckets of money being saved.

3 Replies to “The biggest mistake you never knew you were making”

  1. I’ll back up everything you said. In my case I buy used cars with cash and have never had car payments. Drive them to 200 k miles and retired slightly early with millions. Car loans for expensive new cars traded frequently absolutely keep people from winning. Preach on!

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