America’s Number One Wealth Killer: Cars
Who would have thought that cars, those shiny machines we love to flaunt, could be such a drain on our wealth? Many aspire to own the latest and greatest vehicles, often overlooking the long-term financial repercussions involved. Today, we’re diving into why cars are America’s number one wealth killer, with some eye-opening examples and practical guidelines to help you make better financial decisions.
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The Spark from a Viral TikTok
Recently, a viral TikTok video brought an interesting case to light. A woman shared that her car payment was a staggering $1,400 per month for a Chevrolet Tahoe. You might think a payment that high is for a luxury car, but no—it’s a family SUV. She financed this $84,000 vehicle at a 10.4% interest rate, starting during the low-rate period of the pandemic. After three years of payments, she’d only managed to pay down $10,000 of the principal. Still owing $74,000, she faced a massive debt burden.
But the story gets better. Her husband also had a financial whopper on his hands: a Silverado truck bought in 2022 with a 14% interest rate. His payment? $1,600 per month on a $78,000 loan. Combined, this couple was forking out $3,000 a month just for cars.
General Car Debt Statistics: The Bigger Picture
When we zoom out, the situation becomes even more troubling. Car debt in America is hovering around $1.6 trillion, spread across roughly 108 million auto loans. A shocking statistic reveals that Gen Z is spending approximately 20% of their after-tax income on vehicle expenses, a figure uncomfortably close to mortgage payment levels for some people. Clearly, there’s an issue here.
Why Cars Are Wealth Killers
Depreciating Assets
Cars are typically depreciating assets. Unlike homes, which can appreciate over time, vehicles lose value rapidly. Most cars lose up to 60% of their value within the first five years. This rapid depreciation makes them a dreadful investment if your goal is to build wealth.
The Endless Cycle of Upgrading
Tech improvements make newer models more appealing, turning cars into something akin to smartphones—always waiting for the next upgrade. This leads many to trade in their old cars for new ones, perpetuating a cycle of debt. Few people actually pay off their cars before trading them in, leading to carrying over old debt into new loans.
Technology Changes
The rate at which car technology improves leaves many feeling behind if they don’t get the latest model. However, as these tech-savvy cars get newer, they depreciate just as quickly, making every cycle of purchase and trade-in a financial pitfall.
Guidelines for Car Buying
So, how can you avoid letting your car become a wealth killer? There are a few guidelines you can follow to make smarter decisions.
The 25-35% Rule
One popular rule is the 25-35% guideline. This suggests that your car should not cost more than 25% to 35% of your before-tax income. If you’re someone who sees a car as merely a means of transportation, sticking closer to the 25% mark is advisable. On the other hand, if you derive pleasure from driving a fancy vehicle, you might push towards the 35% mark.
The 20/4/10 Rule
Another guideline is the 20/4/10 rule, which suggests a 20% down payment, a loan term no longer than four years, and monthly car-related expenses not exceeding 10% of your income. While this rule allows for a little more flexibility, it’s still a good measure to ensure you don’t overextend financially.
Total Debt Ratio < 36%
Financial planners often look at your total debt ratio, which includes your home mortgage, car payments, student loans, and any other recurring debts. Ideally, you want this number to be below 36% of your gross income, leaving room for savings and discretionary spending.
Opportunity Cost Examples
To bring these numbers to life, let’s look at some real-world examples comparing different vehicle choices and their long-term financial impacts.
Volkswagen Jetta vs. Infiniti QX50
Consider the Volkswagen Jetta and the Infiniti QX50. Over five years, the Jetta costs just shy of $33,000, while the QX50 comes in at over $50,000. If you chose the Jetta and invested the $17,000 difference at a modest 6% annual return for 30 years, you’d have nearly $100,000. That’s a substantial amount of money lost to choosing the more expensive vehicle.
Honda Civic vs. BMW 330i
Next up is the Honda Civic versus the BMW 330i. The Civic’s five-year cost is around $31,000 compared to the BMW’s $56,000. Opting for the Civic and investing the $25,000 difference at the same 6% return could yield around $144,000 over 30 years, more than the average 401(k) balance for many Americans.
Toyota Corolla vs. Range Rover
Finally, compare the Toyota Corolla and the opulent Land Rover Range Rover. Over five years, the Corolla costs roughly $27,000, while the Range Rover sets you back $118,000. The $90,000 saved by choosing the Corolla and investing at a 6% return for 30 years would grow to a staggering $521,000. Half a million dollars could be lost by choosing the pricier option.
The Not-So-Fun Truth
The purpose of these examples is not to car shame but to illustrate the massive financial implications of your vehicle choices. For average car buyers, these decisions could significantly impact your long-term financial health. Paying close attention to the numbers can help you avoid these common pitfalls.
Conclusion
Choosing the right car isn’t always about immediate satisfaction but understanding the long-term financial consequences. Cars are one of the largest wealth killers in America due to their rapid depreciation and the endless cycle of upgrading. By following guidelines like the 25-35% rule or the 20/4/10 rule and understanding the opportunity costs, you can make smarter car purchases that align with your financial goals.
Awareness is key. It’s crucial to weigh the numbers and think about the long-term impact of your car-buying decisions. This way, you’re setting yourself up for a future where you can afford those luxury purchases without compromising your financial stability.
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