According to this Wall Street Journal report, Americans reached a new record in 2015 for new car sales. All in all, over 17.5 million new cars were purchased in 2015, with a total purchase price of $570 billion being spent on new cars.
What’s Wrong with Expensive Cars?
So what’s so bad about buying a new or expensive car? Gas prices are low. The economy is recovering nicely, according to the experts. Why shouldn’t people be spending their money on expensive automobiles?
I’m going to share some statistics with you today that will answer that question. At the end of the article, you might still believe that it’s perfectly acceptable for the average consumer to spend their money on an expensive vehicle. Or, you might see the true danger in buying expensive cars.
But before you make up your mind, let’s talk about how much the average expensive car really costs.
The True Cost of a New Car
According to the report mentioned above, the average cost of a new car purchased last year was $34,428.
The 2014 statistics on car loans show a similarly startling story, according to USA Today.
- Average car payment? $482
- Average interest rate on a car loan? 4.56%
- Average car loan dollar amount? $28,381
So what’s wrong with buying expensive cars? Why is it considered to be a mistake by the people who can most afford it: the wealthy?
According to Thomas Stanley’s The Millionaire Next Door, the average price that millionaires spend for their cars is $34,000.
Given their net worth, why is it that most millionaires choose to spend so little on their vehicles?
Likely because they understand the problem of lost opportunity cost. What is opportunity cost? Let me explain.
What is Opportunity Cost?
When you buy a new car according to today’s statistics, you’re not just spending the average price of $34,428. If you take out a loan with an average rate of 4.56%, with an average loan term of 67 months (assuming you put 20% down), in reality you are paying $38,134 for the car.
If you put zero down (an “attractive” deal that many dealerships are offering these days), you’ll pay a total $39,062 for the car. But the nearly $5,000 in interest is not all you’ve lost.
Let’s assume for a moment that you chose instead to spend $5,000 in cash on a quality used car and chose to put the $583 a month you would’ve spent on your new car payment (assuming you put zero down on the car) into a mutual fund instead.
According to Investopedia, the average return on the S&P since its inception is 10%. However, for the purposes of this exercise let’s be conservative and use a 7% rate of return.
If, instead of spending $39,062 for that car with a 67-month loan, the buyer had instead put that money into the stock market each month, at the end of 67 months he or she would have a whopping $52,799 in the bank.
So not only did the new car buyer lose the $39,062 he or she spent on the car, they also lost the $52,799 they would’ve earned from investing that money into the stock market instead.
So we take that $39,062, plus that $52,799, minus the $5,000 they would have spent on the quality used car, and we arrive at the opportunity cost of the vehicle. The answer?
So, in essence, that new car just cost the buyer over $86,000. And what’s worse is that by the end of the 67 months, that new and shiny $34,000 car will be worth well under what they paid for it.
What’s Your “Why”?
So if you’re considering buying a new car, you have to ask yourself one question.
“Is this $34,000 car really worth $86,000 of my money?”
The answer to that question will depend largely on your “why”.
Most all people have a dream of having more liquid cash in their possession. So the question becomes “Why do you want to have more money?”
Is it to buy more stuff? Or is it to buy more freedom?
Would you rather have a new car? Or would you rather not be tied to your job?
Is living a paycheck-to-paycheck lifestyle okay? Or would the peace of not owning anybody a dime trump the paycheck-to-paycheck lifestyle?
Only you can answer that question. Everyone has different goals and dreams. But in three years of living in the world of online personal finance blogs, I’ve never yet seen anyone say things like:
- “I like not having any extra cash.”
- “I like being stressed and worried about whether or not I’ll be able to pay the bills.”
- “I like not having any extra money set aside and then freaking out when the water heater goes out.”
- “I like not knowing whether or not I’ll ever be able to retire.”
Those statements are a reality for 76% of Americans. And part of the reason why so many Americans live paycheck-to-paycheck is that they fall for the lie of the “affordable payment”. They fall for the draw of the “new and shiny” and forget about the possibility of the shiny future of financial freedom.
A Better Way
But there’s a certain peace of mind that comes with not owing money to any bank or credit card company. There’s a freedom that comes with having your money be your own instead of having to dole it out to lenders each month.
There’s a certain relief that comes when you know that your money is yours to do what you want with.
If you’re ready to buck the paycheck-to-paycheck lifestyle and start living a life of financial freedom, check out our Debt Free in 18 Months course. This online course will help you develop your own personal financial game plan for getting rid of your consumer debt in a short period of time.
What do you think: Is buying an expensive car worth the money?