Mike Earl, CFP®, CPWA®
I’m still amazed at the number of vehicle commercials I see when watching a sporting event on TV. The automotive industry is projected to spend more than $15 billion on digital advertising alone in 2019. Advertising works. That’s why auto companies are spending more money than ever on advertising. What the auto companies are selling, Americans are buying.
While you hear a lot about the student loan crisis in America, you don’t hear anything about the auto loan crisis. There is now $1,274,000,000,000 of auto loan debt in the US. That’s more than 1 trillion dollars. Yes, trillion with a “t”.
While student loan debt is even higher at $1.45 trillion, auto loan debt is not far behind – and it’s well above total credit card debt in America.
We wrote recently about Financial Competition. For many of us, there is a major temptation to make financial decisions based on what our peers are doing. We look around the neighborhood and the office at what folks are driving, and we tend to buy similar cars/trucks. But if we know the average American is spending more on vehicles than he is saving for retirement, we know that can be a destructive pattern to follow.
The average new car monthly payment in America is up to $530 (as of 3rd quarter of 2018), with the average car loan being just shy of $31,000. In fact, Experian notes that 20% of borrowers are taking out loans of $50,000 or more. That’s a lot of coin for a motor carriage.
Auto Trader notes that “research has shown the average length of time drivers keep a new vehicle is 71.4 months – around 6 years.” If the average person buys their first car at age 25 and their last car at age 85, they’re looking at 11 vehicle purchases per person (and 22 purchases for a married couple).
We will ignore inflation for the moment. If the average person makes 11 vehicle purchases at an average price of $34,000, that’s $374,000 of vehicle purchases over a lifetime (in today’s dollars). For a married couple, that’s nearly $750,000 of lifetime spending on vehicles.
So yes, vehicle purchases really do matter.
The dollars at stake here are massive. We have written before about the fancy vehicles you can get for less than $15,000. You aren’t missing out by driving vehicles that cost less than $15,000.
We aren’t even into analysis about the ancillary costs of vehicles: gas to fill up the tank; auto insurance; maintenance; and repairs. I’ll save that for another day.
If we annualize that $748,000 spend number, we end up with about $11,333 per year (based on 66 years of car-owning years).
What if you lowered your vehicle purchases to “just” $15,000? And if you drove your cars for 8 years instead of 6 years?
That would equate to 8 vehicle purchases per person, or 16 purchases for a married couple over a 66-year time horizon.
16 purchases x $15,000 per purchase = $240,000
Annual vehicle purchasing cost = $3,636
Annual savings vs. ordinary American = $7,700 per year! What if you put that annual savings into your investment portfolio for long-term growth?
For any American family, increasing their annual retirement savings amount by $7,700 may bring about a massive increase in their retirement nest egg:
$1,700,000 of increased wealth from optimizing vehicle purchases!
Over a 40-year period, investing $641 per month into your portfolio at 7% growth would yield nearly $1,700,000. Just from changing your car-buying habits! And if you’re buying a Honda or Toyota, there’s a good possibility you could drive a vehicle for 10, 12, or even 15 years. Doing so would make the long-term numbers even more astounding.
What does this mean to you, our client?
Think about what your car-buying pattern has been. Is this an area in which you could improve? Let’s have a conversation about it. We are here to provide thoughtful advice about how your car-buying habits impact your long-term financial health.
Because The Wealth Group, Austin B. Colby & Associates is independent of Raymond James, the expressed written opinions above are our own and not necessarily reflective of Raymond James’ opinions.