Your Car is Making You Poor And What You Can Do About It

This country has an obsession over cars. It sort of makes sense considering how most of our cities are laid out and the desire for suburban living basically requires almost everyone to not only own a vehicle, but to spend a considerable amount of time in it while going from place to place.

While just having a car isn’t a bad thing, most people don’t fully realize how much of their wealth is getting flushed down the drain while owning a car. They are expensive, depreciate in value rapidly, you have to regularly fill them with gas, and insure them. That really starts to add up.

A Typical Cost Breakdown

So, just how much is that car costing you? Let’s take a look at a typical vehicle and scenario that would fit almost any middle class American household. We’re going to use a new Toyota Camry and these sell for anywhere from about $20,000 – $30,000 depending on features and your location. So, we’ll shoot for something right in the middle of the pack and assume for this example that someone finds one for $25,000. And let’s not forget about sales tax since that’s going to apply to most people as well. 6% is a fairly common state sales tax rate so if we tack that on to the price of the car we have a total sale price of $26,500.

It really doesn’t matter what kind of car we’re talking about or even whether it’s new or used. What’s important is the actual price paid.

Financing

Now let’s talk financing. Most people don’t pay cash for their new car and will typically finance it for somewhere between 3 and 5 years. In addition, most people don’t put a significant down payment down or will trade in their old car. For the sake of this example we’ll assume that we’re putting $5,000 down or getting $5,000 for a trade. That means we’re left financing $21,500, and let’s shoot for a 48 month loan. Rates on this type of loan right now are averaging around 7% so we’ll go with that. That ends up adding $3,200 in interest payments over the life of the loan and a monthly payment of about $512.

Insurance

Insurance is going to vary depending on a lot of different factors. The deductible you choose, your driving record, age, state, and so on. So the best we can do is ballpark an average rate for this type of car. Just keep in mind that you may be paying quite a bit more or even less depending on your situation. Running some quotes and looking online the annual insurance premium on about a $25,000 sedan will cost roughly $1,200 a year or $100 a month. Also be sure to check your CLUE Report.

Gasoline

Every car needs gas, and gas can be expensive. Luckily for this example we have a car that gets decent gas mileage and it’s rated for roughly 20 mpg city and 31 mpg highway. We’ll average it out and assume an overall mpg of 25. The average person drives 12,000 miles each year. Obviously, your own driving habits may differ. But at $3.00 a gallon that would mean you spend $1,440 a year or $120 a month on gas.

Maintenance

Cars need a little TLC and you will need to spend a little money to keep it running its best. The most common maintenance item is the oil change. At a quick lube place you can expect to pay around $30 for an oil change and you’ll likely need 3 of them a year. You’ll also probably need a few other odds and ends like new wiper blades, car washes, etc. So we’ll allocate another $50 a year to cover those miscellaneous expenses. Regular maintenance costs are going to be around $140 a year and you can probably expect to pay about $100 or so on annual vehicle registration.  Just to keep things simple, we’ll call these miscellaneous expenses $20 a month.

Total Monthly Breakdown:

  • Car Payment = $512
  • Insurance = $100
  • Gas = $120
  • Maintenance = $20
  • Total = $752

It’s amazing how fast that adds up, isn’t it? We’re talking $750 a month just to drive a middle of the road sedan. And that’s with a 20% down payment, a good credit score that gets you a decent interest rate, and a clean driving record that keeps your insurance premiums down. Just imagine if you can’t get a rate for 7%, don’t put any money down, or your insurance premiums are nearly double because of a few tickets on your driving record. You could easily be approaching $1,000 a month. If you earn $40,000 a year you’re spending nearly 25% of your gross income on a vehicle that only decreases in value each year that you own it.

Multiple Vehicles and Luxury Cars

In that example we just used a modest no-frills sedan and look at the true cost with that. Now, think about needing two of these cars because you’re married and you both work. Now you’re making a mortgage size payment just to have something to drive you around.

And what if you’re driving a luxury car or SUV that comes in at $40,000 or more? You can expect your total monthly costs for just one car to easily exceed $1,200. If you need two of these more expensive vehicles you better be prepared to shell out close to $3,000 a month.

Car Costs vs. Saving

I help people with their finances every day. That’s my job. That means I usually have to spend some time digging into a person’s finances to help uncover problem areas or opportunities. If there is one thing that I see more than anything, it’s people who are spending more on their vehicles than what they are saving for retirement or otherwise. Without fail, whenever someone says they don’t have any extra money to put into their retirement account or into a savings account, you can almost always count on significant car costs when digging through their monthly expenses. Whether it’s $300 a month or $700 a month, they can make those payments each month yet can’t scrape together $100 to put into a savings account or their retirement account.

Here’s a rule of thumb: if your total car costs exceed what you’re able to save, you have more vehicle than you can afford. That means if you’re paying $500 a month to keep your car on the road yet can’t come up with $500 each month to stick in your savings or retirement account, you’re in trouble. You will never build the wealth you want by throwing more money away on a vehicle than you can save or invest. That money you apply to a car payment, gas, insurance and everything else doesn’t come back. You do not make money and it is not an investment.

At the same time if you can afford to spend $1,000 a month on your vehicle and still save $1,000 a month, that’s great. Sure, you could still save more money if you cut down your car costs, but at least you are matching every dollar that goes out and putting it into something that is an asset and an investment. At the bare minimum that is how you need to look at it. You have to at least be saving as much as you’re spending.

How to Make Sure Your Car Doesn’t Make You Poor

As you can see a car can make you poor pretty fast. The costs add up and if you’re spending more money on a mode of transportation than what you’re setting aside for the future it’s going to take a long time to build wealth. Unfortunately, most of us need a car. That’s just the reality of it all. But you can take some steps to make sure that you’re keeping your car costs as low as possible so that you can focus on building wealth, not just maintaining a vehicle year after year.

Used vs. New

It goes without saying, but a used car is going to save you money. Remember, cars depreciate in value, often as much as 20% each year. If you can buy a used car even just a year old you could save thousands of dollars which translates to less interest when financing and a lower monthly payment.

If you are looking at a new car, that’s fine too as long as you plan on owning the car for a long time. When you get into trouble is when you keep buying a new car every 3 or 4 years without paying off the first one, or just barely paying it off before buying a new one. This creates a vicious cycle of constantly spending more than you need to. A new car can be a good deal if you know that you’re going to keep it well beyond the financing terms.

Size Matters

The larger the vehicle, the more it costs. Smaller cars are generally cheaper than full size cars, and cars are usually cheaper than trucks or SUVs. So, only buy as much car as you really need. Your situation and driving needs will dictate what kind of vehicle you need, but don’t go overboard.

As you increase in vehicle size and price, you’ll also typically get increased insurance premiums and fewer miles per gallon as well. So, there is more to size than just the initial cost. The higher costs often trickle down to all other areas and it will really start to add up fast.

Consider Depreciation and Maintenance

Not all vehicles are created equal. Some cars will hold their value over time better than others, and some cars have notorious maintenance issues. Do your research before buying your next car and don’t just buy something because it looks good in the commercials. You can not only save some headaches down the road by picking a reliable car, but if it retains its value you will take less of a hit when it comes time to sell.

Finance Wisely

If you need to finance your car purchase, be smart about it. Yes, you can keep your monthly payment low by stretching out the loan to 5 or 6 years, but you aren’t doing yourself any favors. All you’re doing is paying more interest on something that continues to decline in value. Would you borrow money at 7% interest just so you could invest it in a stock that was guaranteed to drop in value by 15% each year? Of course not, but that’s what you’re doing when you finance a car purchase. We know that the value of the car is going to go down each year, so the sooner you can pay it off and the less interest you pay, the more you ultimately save.

You Are in the Driver’s Seat

It’s up to you to decide how you want to spend your money. A vehicle may be a necessity, but it doesn’t have to negatively impact your financial future. If you aren’t careful, a vehicle can erode your wealth faster than anything else, but with some smart decisions you can make sure that it doesn’t.

Be smart about your vehicle costs. It might be nice to drive around in something a little fancy but is it worth the negative impact it may have on your long-term financial goals? That’s for you to decide.

Author: Jeremy Vohwinkle

My name is Jeremy Vohwinkle, and I’ve spent a number of years working in the finance industry providing financial advice to regular investors and those participating in employer-sponsored retirement plans.

41 comments
vilmateodoro5
vilmateodoro5

I was thinking about getting a car in the next year or two, but the more I see the cost, the less likely I think it will be that I get a car. I remember having a car in high school and having to pay so much for gas each month. Also, since it was a very old car, the cost of replacing the parts so often really took a toll on my budget as well. This article will help me consider my finances way more carefully before investing in a car. 

David
David

Everyone needs a car and it has to run well, hopefully cheaply, without costly repairs. IT took me a long time to decide to be a bit ahead of the game as far as unexpected costs go. Now I cover my car repair expenses, easily. We all need to keep our cars going as long as possible, in this economy. Check out-
http://www.MyFreeAutoRepair.com

Thomas Bailey
Thomas Bailey

I have never had a car, and could live perfectly well without one. A bicycle has served me well for the past 20 years and has taken me considerable distances. Before that, I usually walked.

Ned
Ned

New car smell is very expensive. If not financed correctly, you may find yourself upside down on your loan for the first three years.

Secret Squirrel
Secret Squirrel

@Freshly Frugal - The good news is your new car will be there for you when you persue your next job interview so you can get a raise! That or start delivering pizza or flowers to make a little more ;) as far as refinancing, I'd reccomend getting into a credit union their rates and benefits are much better than a car loan from their financer or a big bank. Glad to hear you got credit at all, just make those payments on time! =)

Freshly Frugal
Freshly Frugal

I recently financed a car as I needed transportation to get between home, work, and school. Now I wish I had read this article before I signed all those papers! I'm using my car to get to work and my earnings go straight back to the car. What a vicious cycle. In the meantime, I'm trying to maintain it best I can so hopefully still have it in good condition when it's finally payed off (even if that's eons from now). Does anyone have suggestions on how to go about refinancing? I'm just a student and have very little credit to my name.

Other unwanted expenses include license plate renewal ($250+ a year). That caught me by surprise recently. Yikes.

Secret Squirrel
Secret Squirrel

Don't forget to also include property taxes if you live in a state/county that charges for that = $50+ monthly to pay the yearly fees.

Savings Accounts Girl
Savings Accounts Girl

I totally agree with you Mortgage Joe. It's best to buy a brand new car and take care of it well. I've known people who have had their cars for 10+ years and never had any crazy car maintenance issues - except for the minor oil change and stuff.

Greg
Greg

Great article, I Tip'd it for you!

Here is to driving an 11 year old car. It's worth every penny I don't pay for it each month!

pays to live green
pays to live green

Owning a car cost way too much and the fact that mechanics and dealerships can charge almost whatever they want is ridiculous. I can't wait for electric cars become more readily available as they have much less parts that are on our current gas powered cars.

Mortgage Joe
Mortgage Joe

Bang On! I deal with personal finances every day and car expenses are out of whack for many. Leasing or financing a car every 4,5 years is madness. A couple of good books releated to this are THE MILLIONAIRE NEXT DOOR and DRIVER IT FOREVER... buy a sensible, reliable car and maintain it well...cars can look & drive like new a lot longer than people expect...even in our tough climate.

superd
superd

Great article! Well in my situation, I spend nearly $650 per month on a 2007 Infiniti G35 sedan and for a luxury car, it gives an average of 23 MPGs so the cost of fuel isn't that crazy. I choose this car because the depreciation is lower than any other car i've been shopping for. Yes, the cost total with insurance and fuel adds up to $850 a month but it's well worth it. The only reason that its was the best solution for me was that I was still able to save nearly $1000 in savings as well. Just as you stated in the article, its not worth spending money on a car if you can save dollar for dollar. For every one out there thinking of buying a car it's either buy used or buy new if you can save dollar for dollar in what you are spending on the car for savings!!

Metal Case
Metal Case

What do you do once you make the mistake of buying a car that is too expensive to finance or maintain? At what point do you give in and accept a loss to sell it? I made the mistake of financing a vehicle I thought I could comfortably afford. Unfortunately, my finances changed and I could no longer comfortably pay for it. Now I feel like I am stuck with it.

Savings Accounts Girl
Savings Accounts Girl

For me since I just started on my car payment - the best thing in general for most people is if they just bought a new car try to pay as much of the loan off as possible to help reduce the interest you have to pay.

Save Money Hound
Save Money Hound

Some great tips on how to save money on your car. Owning a car can certainly guzzle up your money if you let it.

FinanciallySmartServices
FinanciallySmartServices

Excellent article. A car which is not turning over an income is not an investment a lot of us failed to understand this. In most countries it is cheaper to owned a car than to depend on the public transportation so it depends on the culture one is living in then it can be expensive.

tall girl
tall girl

That's quite a bit of money for having a car. Love used cars, can find really good deals though.

Calvin
Calvin

I think it also depends where you live relative to access to public transit, etc. My church and friends all live in the suburbs, so a car is a must.

We bought a 2008 Honda Fit just before the new 09 model came out so we managed to finance for 3 years at 0.9%.

The main gripe I have is maintenance costs... yikes. I'm not a handy person so I can dinged there..

Chiko
Chiko

That is why choose to buy a used car that I can buy in full, that way I am only worried about the residual expense of insurance and gas.

Mark
Mark

Good article.

I live in Toronto and use a car-sharing network the rare times I need a car.

I did my own calculation and found that I can take a cab to work everyday, or rent a car every single weekend, and still pay less than if I bought a car.

Mark
Mark

Good article, and very straightforward.

For the reasons you outlined above, cars, trucks, etc. are one of the worst investments you can make. Actually, these things aren't investments, they are on-going expenses...

I wonder if many people realize this?

Stephen
Stephen

Well thought out article. Thanks very much!

Goran Web | NetAge
Goran Web | NetAge

Let's face it. Automobiles are not sound investments, and can place a crippling load on your cashflow if you spend too much on an ego purchase. I've spent far too much money on cars over the years to make foolish decisions again!

vbat
vbat

But for that new F-150 turbo charged, dual cam, twin jet engine, 2000 horsepower chargerhummerescaladethingamajig with chrome rims, 6 miles to the gallon, the ability to run over a prius, and a wolf painted on the hood, where do i sign up!!!

-Gee a little poetic license...

mapgirl
mapgirl

LOL. This post is hitting me at a time when I'm driving a 9yo car and considering a new one to keep for another 9 years.

The funny thing is I was planning on getting a loan with a $500/mo payment, but paying it down fast for $1000/mo. If I did that, my car expenses would easily exceed 25% of my take home pay.

Easily the worst part of 'total cost of ownership' is the cost of the car itself, which is why most people recommend getting a used car. (I'm inclined to get a new one so I am under warranty for the first 30K+ miles and drive the car till it's amortized into the ground...)

Rosa
Rosa

Thank you! Excellent post! I'd add one thing, though - if you are not dependent on the car, then you can wait til you have the cash to fix or replace it when something goes wrong - we've been a one-car or no-car family for a decade, before that we each had been mostly car-free.

Another key to not letting your car make you poor is ng the public transportation options and/or having a bike - then, when a tire blows, instead of putting the new one on credit you can just let the car sit til payday. A $0-$500 bike (my first two bikes were bartered) will save you thousands and thousands of dollars even if you only ride it part of the time.

Paul
Paul

The 2 cars I own now I bought on e-bay for about $4000 each. Both had about 100k on them - now one has 167k, the other 145k. I've averaged less than $1000 per year on maintenance in the 4 years I've owned them and don't pay for collision insurance.

Lots of people seem to think that you need a new car when yours gets "high mileage" on it (75 or 80k), but I've owned 8 cars now, each making it to 200k. It's always cheaper to buy a used car.

Stu
Stu

Good post. I know some people that probably pay more than $752 a month on their car, but would freak out if you told them the equivalent of $7.52 a month was coming out of their property tax bill to help fund a new light rail system or other mass transit improvement that they could take to work every day for $70 a month.

But for that new F-150 turbo charged, dual cam, twin jet engine, 2000 horsepower chargerhummerescaladethingamajig with chrome rims, 6 miles to the gallon, the ability to run over a prius, and a wolf painted on the hood, where do i sign up!!!

J. Money
J. Money

I learn this on and off every 4-5 years. Currently I'm in my No Payment phase ;) Sold my '05 SUV Highlander last year and picked up a 93 caddy deville to pimp around in...I now save $440 each month which gets me farther in life (no pun intended)

Single Dad
Single Dad

Wow. I can't believe how perfectly you summed up my feeling about people's spending on cars. I get sick sometimes seeing these money makeovers or people saying they can't afford to save for retirement, and they're driving luxury-brand cars or have two car payments.

By the way... I know you can't mention every little cost, but we pay property taxes on the cars where I live. It cost me about $300 a year for my 7-year-old Camry.

Nice job.

Jen
Jen

Heh... This is why I'm still driving a 13 year old car :) I bought it new, planning on driving it until it died. So far, it's given me a few scares, but it's still running. The surprise maintenance costs aren't fun - I've spent around $700 so far this year, but that's far less than I'd be spending in car payments. On the plus side, I can tak epublic transportation to work, so I drive around 5000 miles/year, so my gasoline costs are low.

I have started researching cars since I figure I'll be buying in the next few years. I want to have a good idea of what car I want before I go into the dealership.

MK
MK

I liek that you include the cost of insurance and gas and incidentals that people don't think of when looking at the purchase price for a car. Sure you can make that $500 dollar a month payment for JUST the car, but what about all those added (necessary) expenses? This is part of why I went for a less expensive car, full well knowing my job would entail a lot of driving, which means paying more anually for gas, possibly higher insurance, and obviously more on maintenance (oil changes every 2 months for me!)

Home Health Care Florida
Home Health Care Florida

Car like Slow poison, when car gets older our poor position getting started, car maintainance most costly thing, now deadly needed alternatives in cars.

chester moon
chester moon

I agree on most points. tying insurance to vehicle size though, is mistaken. smaller more fuel efficient cars carry higher insurance rates, because they have more accidents in general. Its best to figure out which cars you would like, then get quotes on their insurance costs and balance that against mpg.

Savings Accounts Girl
Savings Accounts Girl

can u imagine if we didn't use cars - we'd be using horses and animals to pull our wagons - it would definitely help our pollution issue.

anyway, car expenses are unavoidable so people should be more careful about the cars they buy - look for cars that are more reliable (doesn't break down) and need less maintenance.

dawn
dawn

You're absolutely right. Cars guzzle a lot more than gas. Just for kicks, I calculated my own car ownership costs in March, for my 10-year-old Honda. Over that time period, the purchase price, gasoline, repairs/maintenance, insurance and miscellaneous registration/emissions fees cost me: $37,025, or about $3,400 a year. Read my full account here: http://credit-blog.creditfyi.com/personal-finances/the-true-cost-of-owning-a-car.html

2008 Taxes
2008 Taxes

Can you discuss this with my wife? Thanks for trying to help.

me in millions
me in millions

My car costs me way too much money between gas, insurance and maintenance alone! And I own it outright. I think it might help if I wasn't such a crappy driver. Over the course of the last 5 years, I've gotten 3 new tires. Oopsies?

Moneymonk
Moneymonk

Good post. I remeber when I needed 4 tires, and my car registration was due along with my insurance and car note all witing the same month.

It had to be around $1200. I relize that the public transporation did not seem to bad.

This can also happen with homes. be careful of what you buy

SteveStruthers
SteveStruthers

Your transportation plan works OK in a place like Toronto mainly because it has a fairly decent public transit system that you can use as a fall-back, and because most places in the city are quite accessible via public transit.

 

I live in London, Ontario, which is quite spread out for a city of almost 400,000 and the public transit available here is terrible - with short service hours and 15-20 minute headways even on the major routes. Traffic problems in London don't help matters any. To travel cross town by car can easily take 30 - 45 minutes, and at least an hour by public transit when all the stops and traffic delays are factored in.

 

London's city government has no vision and will not consider light rail or other transportation  improvements beyond maybe widening a few major arteries.The most that they are promising is bus rapid transit (BRT) might be started (not completed, simply started) by 2024, and even then, the project is contingent on a senior level of government paying for it. By comparison, similarly sized cities like Kitchener are already well on the way with BRT and light rail.

 

The bottom line is that for most people in my city who want some kind of social life and a minimum of inconvenience, a car is pretty much essential.

 

It's too bad that London isn't large enough to support a car-sharing service. It could really come in handy for a boomer like me who hates the idea of being shackled to car payments.