Auto Debt Trap

So, let’s take a few minutes to really talk about vehicles. It’s very troubling to me how much people spend on their vehicles. What’s even more troubling is all the reasons I hear why they have to get into so much debt for one and how they had to have that model. In today’s market, there are so many vehicles to really choose from. There are also so many that are priced very well and are super reliable.

According to CNN Money, the average loan is for $31,000 and with a car payment of $517. Yes, that’s right $517 a month for a hunk of steel sitting in the drive way. Not only that these loans are now for an average of 69.3 months! I’m still in a complete shock on why people are getting in such huge debt and for so long. Well, actually I’m not in that much shock.

You see not too long ago I too was the typical consumer seeking validation through my purchases and chasing happiness through debt. One could say I was the average consumer trying to keep up with the Joneses. It’s a crazy cycle that we get stuck in. Billions of dollars are spent every year in marketing to keep us thinking we need these items in our life. Or better yet that we “deserve” these items. Well, I’m here to tell you everyone can do better.

Everyone can build the life they desire if we are willing to realize we don’t need stuff in our lives. That we must sacrifice short term gratification for long term happiness.

Now let’s run some numbers on what could we turn that car payment into if we invested it. Let’s see what we would get if we invested that $517 for five years below. Then let’s look at that same car payment invested for six years.

$517 x 60months = $35,677 (assuming average of 7% return)

$517 x 72months = $44,379 (assuming average of 7% return)

Now just for fun let’s also use a 10% return rate on these scenarios.

$517 x 60months = $37,876 (assuming average of 10% return)

$517 x 72months = $47,867 (assuming average of 10% return)

As you can see if we simply invested that car payment we could potentially build a good concrete foundation to wealth. Now I will also point out I’m not saying the above return rates are guaranteed. Of course, they could be lower or higher depending on what you invest in and the current market. Yet with a good index buy and hold strategy this should be achievable. A vehicle is simply a depreciating liability.

I will admit I’m a huge car guy. Actually, this is one area I still struggle in on this journey. Yet luckily for me, I have yet to give into my desire for a sports car or big truck. I actually often get asked why not buy one if I can afford the payment. Funny enough I can afford to pay cash for one now. The reason is that I finally understand the power of investing money in buying assets. That by doing this I put more money to work for me, while I sleep my money earns me money. I realize my priority at this time is not a fun flashy car or truck, It’s investing for the long term so I can buy my freedom. To me having the ability to stop working or work for less money while pursuing passions is more important than any vehicle. I believe once I reach a certain point in my wealth I will buy a fun vehicle again.

Vehicles seem to be one of the biggest expenses I see people over spend on besides a house. They are a huge wealth killing tool when you buy more vehicle than you need. Especially when you start adding extra luxuries to them. Just for transparency, I own a 2006 Scion XB. I bought it in 2010 for $8,000. It now has 106K miles and still running strong. I plan to keep it until at least 200K-250K miles. Yet I might even keep it longer. There are tons of great vehicles out there for around $10K. Of course I recommend paying cash as well.

There is my beautiful 11-year-old “lunch box”. Some questions to think to ask yourself…

What is a vehicle worth to you?

Are you buying more vehicle than you need?

How much more could you invest with out a car payment?

 

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