If you were to guess what the average new car price is nowadays, what would you guess? I guessed $23,000, since my Honda Fit is sweet and only costs $19,600 new. Given I’m frugal, leaving a 20% upside pricing buffer seemed logical. Too bad I was way off!
According to Experian, one of the big three credit scoring agencies, the average car price now tops over $34,000 in 2019! Holy moly that’s ridiculous. All-time best selling family cars such as the Honda Accord and Toyota Camry only cost $26,000 fully-loaded. So how on Earth can the average car price now be 31% higher than these two?
Take a look at 12 of the most popular sedans on the market today and their prices. All are under $30,000, even if you add 10% to account for bad negotiating or a nicer model. Something is up, and I’m going to get to the bottom of things.
But wait a minute. Why am I adopting a welfare mentality where I’m denying the reality of the $34,000 average new car price just because $34,000 seems expensive to me? Who am I to deny Experian’s millions of data points? It’s what so many people who read my 401k by age chart do when they aren’t on track. They go in denial.
I’ve come to accept the reason why the average new car price is so high now is because of strong demand. The economy is booming and people have money to spend. If people weren’t cashed up, prices would fall instead of rise to astronomical levels.
Given everything is rational, we can also assume the average new car buyer makes around $170,000 a year, or 5X $34,000 based on a 50% discount to my 1/10th rule for car buying. If all new car buyers followed my 1/10th rule, they’d all be making ~$340,000 a year. But, I’ve still got a long ways to go to convince people not to throw too much of their money down the toilet, despite Financial Samurai being around since 2009.
With so many people from public train janitors to 26 year old programmers to food bloggers making $250,000+ a year today, $170,000 a year for the average new car buyer can’t be too far off.
There’s a bull market in the stock market and real estate prices have recovered to pre-crisis levels and then some in some cities like San Francisco, LA, and New York City. To spend more than 20% of your gross salary on a car when you could be making mega bucks investing is completely irrational. Nobody I know would choose owning a new car over being able to retire years earlier.
Besides, those who don’t make $170,000 a year will simply buy a used car for less. That’s what I did for all but one of the previous cars I’ve owned. Everybody knows that a car is one of the worst financial independence inhibitors.
Therefore, it’s clear that all new car buyers are making around $170,000 a year. Used cars buyers make much less because cars depreciate very rapidly. Take a look at the chart below. In five years, a $30,000 car is worth about $12,000 using an average depreciation rate. Therefore, one can rationally assume the average buyer of a $12,000 car is making ~$60,000 a year, very near the median household income today.
Average Auto Loan Size Is Absurd
Unfortunately, it turns out that most new car buyers are probably not making anywhere close to $170,000 a year. The reason why I know this is because the average auto loan is now $30,032!
Holy hell. Who on Earth goes out and buys a $34,000 car and then borrows $30,032 of it? Are consumers really that financially irresponsible? Borrowing lots of money to buy a depreciating asset is the best way to financial destruction. At least when you borrow money to buy a house, the house has a chance of appreciating long term.
The last salvation of hope for Americans is that maybe the $30,032 loan is paid back over a very short period of time, like 1-2 years. Nope. The average term for an auto loan is 68 months (5.7 years) – the longest average term ever! In case you’re wondering, the average auto loan payment per month is $503, for a total payment of $34,204 over the 5.7 years.
The $30,032 borrowed today for a car would be worth ~$50,293 in 10 years based on a 5.3% annual growth rate if invested in the S&P 500 instead. If we use a 7.2% growth rate for the S&P 500, the $30,032 invested would be worth $60,140 in 10 years.
Even if the borrower decided to invest his average auto loan monthly payment of $503 in the S&P 500 for 68 months, he would probably have over $40,000 invested given 68 X $503 = $34,204.
Is there any wonder why those who are frugal or follow my 1/10th rule for car buying end up much farther head financially than those with zero financial discipline? In 10 years, the $34,000 car will be worth less than $10,000 due to a ~70% depreciation schedule. The investor of the $30,000, however, could have investments worth 5-6X more!
If you had invested $30,000 into real estate or the stock market 5 years ago, you would now have $52,870 today
What’s Bringing Up The Average?
I still don’t get why the average car price is so high. Take a look at these small size and midsize luxury sales. Most of these cars all cost over $34,000 a year fully loaded. The charts say volume is down YTD June 2016 year over year.
Undeterred, I kept on looking for a reason for such a high average new car price when I came upon the SF Bentley dealer and their new Bentayga SUV for $235,000 MSRP, $250,000 nicely equipped.
The car sales people told me they can’t keep them in stock because demand is off the charts. It’s the same for their colleagues at the Ferrari, Lamborghini, Mercedes, BMW, and Maserati dealers. In other words, forget about the top 1% who can barely afford a $250,000 vehicle, it’s the super rich who have gotten super richer due to the raging bull market!
The top 0.1% are converting more of their funny money into real assets before it all goes poof like the last downturn. The super rich are also seeing folks like George Michael die at 53 with mega millions. As a result, they’re telling themselves to live it up while they still can.
Perhaps more people are truckers now?
Money Out The Tail Pipe
So there you have it. The super rich and the middle class who don’t read Financial Samurai are spending like there’s no tomorrow. The super rich don’t care about rising interest rates because they pay in cash or lease vehicles as a business expense. The middle class don’t care if they’re spending a lot for a new car because they don’t know any better. Eventually, the middle class will get crushed again, but for now, let the good times roll!
Check for better auto insurance. Auto insurance is the second biggest expense to owning your car. Esurance is one of the leading online market place to help you find the most affordable and reliable auto insurance. It is very important that everyone gets at least basic liability car insurance. You can total your car and be fine. But if you total someone else’s car and injure them, they can go after you for ALL your assets and wipe you out!
If a car cost 50k. And I have 50k in cash, I’d still lease it for 3-5 years. If my I retest is 4% and I take the rest of my money and invest it, I’ll get a return of 8% which will be used to pay off my car and interest with an extra 4% to spare.
So when it comes to buying or financing, financing is the way to go.
Return of 8% is far from guaranteed. And is taxable. You’re interest on a car loan is after-tax money being paid to the creditor. If financing was the obvious way to go, people would borrow money just to invest it. And that is rarely the smart move.
Just found this, and I have a couple quick notes.
– Some of us lack a family support structure / mechanic skills / etc. For folks in that situation, it’s advisable to spend a little more over the length of a loan to get something in better condition / less miles / more dependable. It only takes a relatively minor incident to burn one’s savings on a repair-and-rental situation.
– All too often, a car is needed in order to even attempt to gain financial independence. Especially if you’re in an area in which public transit is garbage, like the vast majority of the mid-west. Alas, that usually means getting something that doesn’t make sense financially, because no one is going to write a loan for a 1995 Jeep Cherokee Sport.
– A great alternative right now, if you have a manageable commute (<50 miles round trip) is to grab a used mid-tier electric car. I bought a 2013 Nissan Leaf in 2016 for $8,500. It had 27K miles on it, but it really doesn't matter. In terms of fuel costs, it's the equivalent of paying $0.29 per gallon for gas, it doesn't need oil changes or basically any other maintenance outside of tires, wiper blades and a cabin air filter every 2 years… I don't even have a quick charger- I plug it in via a standard 3-prong outlet, and it's like plugging your phone in at night.
I drive a couple of 80s Toyotas I paid next to nothing for. They’re such simple machines that I can do most of the repair work myself. Heck, I could put in an entire motor every single year for less than most people pay in car payments, but the savings go straight into the ol’ mutual fund.
I feel like crying as my 2009 Hyundai Sonata bought with 19000 miles for 16900 dollars drive off the lot price in 2009 had 130000 miles when it was totaled last week by a moron at a stop light who rammed into my back at over 60mph. I wanted to drive that thing to 300k miles, I serviced at the dealer with my own synthetic Mobil one oil for 25 dollars by the clock, bought my tires from Costco, had blue tooth from Amazon connected via the aux cable for 15 dollars, and this car ran like a spring chicken never gave me problems, now I need a new car, well I chose to upgrade, to the 2015 sonata limited with all the luxury gadgets with 20kmiles for 18830dollars, I am really scared, hope this one will stay true, but am scared of all those electronics breaking down, and oh did I mention the 39k bumper to bumper warranty left or the 80k powertrain warranty left? if I ever win the lottery, am buying a Mercedes AMG, brand new, until then, am stuck with my fairly used old cars. My 2009 Hyundai stickered for 23000, current car stickered for 31000
Hi Sam,
Perhaps I can answer the question as to why the average car price is so high. It’s all of the bells and whistles they add on, along with the absurd packages they anchor to desirable features. Want to be able to see what you’re backing into since they designed your rear window to be too small? You’ll have to pay for the premium tech package to get an overpriced back up camera that will fail in two years. Do you want to get a model better suited for long road trips? You’ll have to upgrade to the touring package and tack on another 5K. Want a moonroof/sunroof? Add the luxury package and all the junk you don’t want with it at another 4K.
Dealers also love to claim some of the technological features, such as emergency braking, will reduce insurance rates, but they don’t tell you that you have to confirm it with your car insurance agents first. Then you deal with lemon cars too. My small SUV had great crash test ratings, but at just ten years old they’ve stopped making replacement parts! Car manufacturers aren’t just ripping people off with inferior, overpriced products that are so defective they regularly kill people – they’re making disgusting profits off of it.
I’ll never buy American again because my Chevy Equinox wasn’t even made in the USA! If you think that’s bad, wait, it gets much worse. I had a letter in the mail warning that my SUV had the defective ignition switch and the dealer’s response was to buy a new “American” SUV – from him no less! Then I decided to look up and see if there were other recalls. Apparently the transmission is iffy! Oh, and due to electrical problems caused by yhte rodent plague my area has – I spent three hours troubleshooting my electrical system and reading diagnostic codes only to call my Dad in for reinforcements.
My crappy “American” SUV wasn’t even wired properly in the damn factory! Gee, and people wonder why I’m driving the same SUV after 12 years! Sure guys, I’m in a huge hurry to get ripped off again after doing all of that research. I have an older car that’s older than I am by a few decades and yet I can find parts no problem. It’s pointless to me to keep myself in debt for a junky, overpriced auto that the manufacturer couldn’t be bothered to design it to not kill people. Chevys fall apart, Jeeps are the new Pinto, GM is being called coffins on wheels, and trucks have fragile truck beds.
I used to claim we had to buy American and now I’m quitting the brands that kill people and will get a used German car. I’d rather have superior design from a a German automaker than die in an American junk heap that’s riddled with defective parts and recalls. All the Germans did was cheat the emissions tests and yet they were fined more heavily than the serial killer American auto manufacturers.
That’s my two cents Sam from my own personal experience and from what the news won’t cover.
Putting on my economist hat, I’d be a fool to not max out payment window when interest rates are at all time lows. You can without much effort get a 5-6 yr car loan for <3%, and average age of car on road now 11-12 yrs, new cars can likely break that record, pushing 15-20 yrs lifespan. A 35k Tesla 3 electric car would make hella lot of sense given record low maintenance and parts cost, 1/4 the cost to power, and OTA updates that make it a souped up iPhone on wheels always new and current. So from a value-add Pov, the analysis ain't so black and white.
I’ve paid off both our nice and comfy Korean SUVs had at 60k total, 6-yrs later and plan to drive those into the ground, We’re nowhere near the 100k mile bumper to bumper warranty that we bought – expect some repair event around 60k as has been case in past with Nissan and Mazdas we drove in our 20s but right now at 45k, it’s paid for, with record low interest to boot. Now we’re tempted to buy a Tesla 3 or X (I know, only advice, just don’t test-drive one like I did), and frankly the math works out for us if we do it soon when our used vehicles still have residual value to speak of before the market gets flooded with trade-ins as peeps trade up to electric cars in a few years. Think LCD and iPhone stampede a decade ago.
Anyway, interesting times we live in.
The average car buyer is a complete moron. Pure and simple. They look 2 feet and 2 hours in front of them. Instant gratification trumps all. It’s all about the car payment.
I make $110K per year. I splurged a little and bought my 2014 VW Jetta for $19K+tax brand new. I love cars and have been stupid in the past buying/selling too many too often.
I could have paid cash for the Jetta no problem but financed a small chunk of it at a low rate just so I’d keep it. When I pay in cash, I’m more tempted to sell it for something else. I owe less than $4k on it with a payment of $170/mo and the car only has 26K mi on it.
It feels good to have a car I can totally afford, that I love, and will paid off pretty soon. In fact I may just pay it off in full at the end of the year.
But I see people all the time making probaby half of what I do, all driving new BMWs. It doesn’t take a genius to realize these people have fat lease or car payments and probably very little savings.
Hi. I lived in Singapore for years but failed to really save. It was too easy to go out every night and get bottle service to impress hot Asian and Russian chicks. I had great fun but saved little. I really missed driving too. In 2015 I moved back to the US. With flights, rental cars to get around, hotels to sleep in, and the need for a huge deposit on apartment I blew most of my savings, which was close to $20,000, just to move back.
After a month, I bought a brand new car for $28,951 on a 72 month loan with no money down (I KNOW). The thought was that I couldn’t live in the US without a car, which in my case was really true (I am from Montana). I drove it all over the US in a serious of road trips. I put 35,000 miles on it in a single year. That was great but left me yearning for something. I decided that the US was actually not for me and moved back to Singapore last month. The car did not come with me.
My monthly payment is $506 with 7% interest. Insurance is $99 a month. My loan is now down to $24,655. The car, which is now worth just $17,500, is parked in a friend’s garage. No one is using it.
So here I am. What do you think I should do? If I just give it back it will crush my credit for years, right? But should I really pay thousands more to catch up while the car continues to lose value? With the car payment and insurance I will end up paying another 30,360 on the car over the remainder of the loan. At the end I will have something to sell, but you’re talking another 5 years and I’ll only have a car worth maybe $10,000.
If I had the lump sum to make up the difference I would just pay it to the bank then sell the car for value and get out of the deal. But I don’t. I’m only able to save about $1000 a month right now, and over 600 goes to the car that I don’t use.
Look forward to your advice!
Since you can’t afford to sell it since you’re upside down and can’t pay the negative equity, you’re best bet is to pay it down as fast as possible. Maybe paying a bit extra every month if you can.
There are a lot of parallels between the auto market and diamond market. Through brilliant marketing over long periods of time, society has been largely convinced that cars are status symbols, etc. There monetary value is much higher than their true worth.
On the flip side, people spend tons of money on travel, which is obviously not an asset at all. They do it because they derive pleasure from it. Same thing with a car – purely looking at it as an asset or a functional tool doesn’t paint a full picture.
I am both a car guy and frugal, and it’s been tough to reconcile those two things. I worked in the car business for 10 years (the Doug DeMuro reference above made me chuckle as I worked with Doug), and I take great pleasure in driving (…says the guy who just paid $6600 for a 2.5 year old Nissan Leaf with 20,000 miles on it). I don’t care about cars as status simple (which is why if I splurge on a performance vehicle in the near future, it would probably be a Subaru WRX), but I do love driving performance vehicles.
The real question is how do you value pleasure? I could have saved 100% of my discretionary income and been comfortably retired by 40 – with enough money to do things I enjoy, but not over the top. Would it have been worth it? Maybe if I absolutely hated what I do for a living. But if I hated what I do, I’d do something else. Point being, the notion that the goal of getting to retirement as quickly as possible trumps everything is a grossly oversimplified way of looking at it. And if driving isn’t something you derive pleasure from, more power to you, and a bit of me envies you as cheapness vs car loving is a tough inner battle to fight!
The key is getting a car you love to drive that is affordable. Today that is possible. I love cars too. But fast performance cars while fun, the novelty does wear off over time. And FAST doesn’t always mean more fun as you can only go so fast on the streets before you get paranoid of cops all the time and exercise restraint.
On the flipside, for low $20s, you can get a VW GTI which is plenty fun. My Dad had one which he traded in for a much more potent and expensive BMW M235i. The BMW is a real rocket but after getting accustomed to the power, he said it’s really no more “Fun to drive” than the GTI was. He misses the GTI and would have kept it if he could do things over.
My grandfather owns several apartment buildings in San Francisco drives a 1980 Chevette. He drives it to collect the rent and does not ever worry about the car when he parks it. He grew up poor in Chinatown and knows the value of the dollar. He is more concerned about savings and investments. Unfortunately for me that I grew up with a distaste for rental units after witnessing how much work goes into it. I was always painting, tiling, repairing electrical outlets, windows, drywall and clogged drains. Most people do not care about the units they are renting and upkeep is a pain. As a child growing up I always felt poor due to our frugal lifestyle. I did not even know that the buildings that I was working on belonged to us. I just did the repairs to earn an allowance. I received $5.00 each day on the weekends. Little did I know that I was learning invaluable skills while it also allowed me to spend time with my grandfather. To my grandfather a car is something that he uses to collect rent. He does not want the tenants thinking that he is charging them too much if he were to drive up in a Cadillac. I just so happen to really like vehicles, but I can appreciate his point of view.
I have honestly stopped looking to the baby boomer generation for logical financial/life guidance. Many of them (my parents included), but not all, just ignored their parent’s teachings and advice as a thing of the past while they took their good fortune for granted. I started looking to my Greatest Generation Grandparents for financial/life advice and lost 30lbs and had $25k in the bank within a year.
So he owns property and makes a ton of money but lives like he is poor anyway. What’s the point? He lives the same lifestyle as a guy working at McDonald’s who has less stress.
I purchase all of my cars from friends who are returning their leases. I am usually able to pick up the vehicles for half price and with low mileage. I also have the luxury of knowing the service history and if it was involved in any accidents. We purchased an Acura MDX with 23,000 miles on it for $10,000 below blue book this way. We also use this vehicle for our business and write off the mileage. I did splurge 10 years ago and purchased a BMW M3 the same way for half price with very low miles on it. I still drive the car on the weekends and it is considered my “fun” car. I happened to grow up liking sports and muscle cars. We tend to be frugal with our expenditures and will splurge on our yearly vacation. We own a house in San Francisco and send both of our children to private school. I do see a lot of people driving around in expensive vehicles. I have a coworker who rents a house, but has three new cars. He does not have any savings and he does not contribute to a 401K. He also does not have a pension as it was eliminated before he was hired. He takes lavish vacations each year and eats out daily. He is part of the YOLO mindset.
Being in the south, pickups are a priority. With a new cost avg 39k you will see many on the road. I always ask how does the avg person (not) afford one? In fact, Ive seen many truck go for north of 70k. This is why I drive a 17yr old truck that I paid cash for, used it for work and got paid to use it, therefore “paying for itself”… Is it pretty? No. Is it comfortable? No. Does it have all the bells n whistles? Nah… It runs, it tows and it gets one from point a to point b. Did I mention that I gave 3k for it? Maintenance runs about 500 a year (tires, brakes etc(Im able to do most repairs myself)). When I get ready to get another one, Ill sell it for about the same and put that towards a nicer one but still well below the 10k mark. Oh and uh, thats still below the 10% of 170k avg salary you mentioned… crazy
I always enjoy your vehicle posts… :)
Howdy Whiskey,
Sounds like you’ve got a great truck that keeps you going from point A to point B just fine!
Int he south, are a lot of people in construction or businesses that require a lot of hauling? Or is a truck more of a status symbol type vehicle based on the remnants of the good old agricultural days?
It’s hard to have a truck in the big city due to parking. And most folks just go to work in an office and stare at the computer screen all day.
Sam
The northeast has a significantly different economic “climate” than California – California is really its own economy. It’s difficult for anyone outside of California to really directly relate to the example salaries and cost of living.
Based on your chart, it is best to buy a 1.5 – 3 yr old vehicle based on the “drecreased” slope of the linear depreciation (i.e. new car purchasers take the brunt of the cost, but owners of 1.5-3yr old vehicles still get some warranty)
Regarding the 1/10th rule, is this assuming there is still substantial time (2-3yr) left on the loan and the individual is still paying $400+ a month for a car worth 10% of their income (heavy depreciation)? Doesn’t this contradict spending 1/10 of your income to “get out”? Isn’t that basically saying to lower your monthly expenditure by floating the risk of potential repairs instead of a monthly payment by trading down?
Can you elaborate on new vs lease vs used – when is it OK to “splurge” and get a used car you like (other than turning 40)? With current interest rates, it doesnt make sense to prepay the mortgage and the tax deduction is great. (Convince me otherwise please!). 401k maxed, comfortable debt-income ratio, no student loans, no kids, comfortable “emergency” and savings buckets. Is there a “checklist” of priorities for the “millennial”? I know it’s kind of spread out across your website, but i think it would be cool to make a thread that focuses on millenials. There is considerable disparity in this group, but for the ones “on track”, some samurai advice would be insightful.
I highly doubt your average new car buyer is making around $170K a year. Do you have data to support that assertion?
I’ve always argued that a used car is a better deal than a new car, mainly in that you are not paying the initial depreciation which is most significant. Some members of my family argue otherwise saying the warranty of the new car is is worth it especially if you drive it into the ground. They also like being the only one who has touched it and believe all used cars are ripoffs. However, the make and model of the car among other factors can significantly impact depreciation, expected depreciation and reliability ratings which impacts the “current” value of the car. This article is highly insightful, and I agree with the main theme of ideally paying the minimum for transportation. In reality, the middle class doesn’t think like. Earlier in my career, about 3 yrs ago, i bought a new hyundai that after taxes came out to maybe 40% of my current salary then. After depreciation it is now worth about 10% of my current salary and is serving its purpose of transportation. A few months ago I was set on upgrading to a used luxury – like a c300 or similar A3. Then I started reading this blog, and it swayed me not to. I’m just going to use this hyundai for a long time and develop financial strength rather than take a hit on my financial health. Thanks for this article!
Question:
I lease my car and as much as i’ve crunched the numbers, I cant see why it would make more sense for me to buy instead? (yet the consensus is that leasing is for suckers).
Yes, I will have a lease payment forever. But, I will always have a car under warranty so repairs will be limited to oil changes and maybe changing the front tires. Lease costs $275/month for an Accord EX with 15k miles/year vs. $450 to buy it new.
If I bought it would be 8 years until I broke even. Then i’d have a car with 120k miles on it that I could maybe trade/sell for $7-8k (vs having nothing if i leased). That said, i’d likely have spend a few grand on repairs over the years so perhaps i’d only be ahead $2-3k. In my eyes it’s worth the extra $2-3k over 8 years to always have as new/reliable/warrantied car.
Thoughts? What am i missing?
I would love to hear a response to this question. I am a believer in leasing the family car and buying a beat up old used car as my personal work commute car. That gives me the best of both worlds.
That’s why I’m happy driving my 2010 Mazda 3. It’s fully paid. Maintenance up to date. 105K on the clock. Hope to drive it another 100K payment free!
When looking at average cost of a car they are throwing in Trucks and SUV’s into that number and that is going to screw up the averages. A new SUV is going to cost you over $70,000! You probably don’t see as many Yukon, Tahoe, and Suburbans in San Fran as I do in Arkansas, but they are extremely popular. I am always baffled at people who spend $70k for a brand new Yukon, but aren’t saving enough for retirement. Last car I bought was a used Ford Taurus for less than $10k it had $60,000 miles and works great. I was also able to pay cash. This car also comes with low taxes and low insurance. I wouldn’t own a car if Uber was more reliable, but that day is coming.
Others have already mentioned it, but it can’t be stated often enough – one of the easiest “life hacks” in this area is to simply BUY USED. You can pick up a still-very-good-shape “luxury” car that may be 5-7 years old, but is still MUCH nicer than a brand-new car at the same MSRP sticker price.
I’m gladly rolling around in a 2009 Audi Q7, fully loaded trim package. I paid $16,000 for it. Cash, no payments. Low insurance cost. It’s perfect for a family guy needing to haul kids around, with enough of the bells and whistles that come with a “luxury SUV” – *without* paying the ~$85,000 it’d cost to drive a 2017 model. Every time I see a 2017 Q7 that looks VERY much like my 2009, I smile a little knowing how much less I paid for almost the exact same car.
Buy high end if you want, but buy used. You may forgo some of the latest and greatest tech, but you’re still driving a very capable vehicle – enjoying ~90% of whatever “prestige” you’d get from driving the current year model – without paying too much.
Agreed completely. Only problem is outside of enthusiasts or people who properly research these decisions, many people can easily get screwed over with the maintenance costs of a highly depreciated luxury vehicle. As the saying goes, the most expensive car to own is a cheap Porsche or something along those lines…
When buying a used luxury vehicle that is out of warranty it’s a good idea to research common issues thoroughly, know what you might be getting yourself in to, and have a healthy buffer in your budget for maintenance. Or you could offload the risk on to someone else by paying for it upfront like Doug DeMuro’s infamous CarMax Range Rover. Honestly for certain high end cars it’s a pretty great option to consider.
I agree that dropping the equivalent of the downpayment on a house for a car seems ridiculous. But I do see some merit in weighing features and safety/track record against the fiscally responsible approach of finding a reliable, older car. I bought an Altima in 2011 for about $17,000 after my trade-in (my first car, a Civic, probably had another 10 years in it, though), and there is something I can appreciate viscerally about the feeling of a brand new car. Echoing the sentiment of your post on the super wealthy’s decision to buy high end cars, what’s the point of having the money if you never do anything with it but save? I know that my next car will be used, but I will be looking for something with all wheel drive, good carrying capacity, and maybe a few other features that will drive the price up (but even then, I’d balk at anything that cracked $25k before trade-in/selling my car)
My Dad took the philosophy that once one car is paid off, it’s time to buy a new one. While he can still rattle off every car he’s ever owned, it hasn’t been good for the family finances. His latest desire was for a lease on a $45k SUV, and it took a fair bit of cajoling to get him to settle on a ‘modest’ lease on a Hyundai SUV for him and my mom to use. There’s no convincing some people what makes sense for their finances, and while I’d have preferred them to buy out their 3 year old lease, they get to make their own decisions. :-/
the auto industry is the reason the poor and middle class cannot level up
+1
My take is the average is skewed up because of SUV and full size pickup sales. It’s pretty easy (not for me however) to spend $50K on either of those two.
Then you have the car enthusiast crowd that will drop $55K on a BMW M2 or $75K on a M4. I’ll leave the Porsche folks out of this since that is a pretty small crowd.
Cheers.
This just makes me sad. Compare this to the recent research that shows 71% of Americans have less than $1,000 in savings. I had to stop reading when I got to the $30K+ average auto loan. The future value of that money is just absurd. It’s just sad that the strength of the American economy is so linked to the auto industry. Our government should be making saving mandatory (and not in the social security sense which prob wont be around when I’m 62+). They shouldn’t encourage people to go out and buy these cars. Thanks for sharing Sam. Even if 1 person reads this and doesn’t buy a car it’s well worth it. Have you ever checked out Metromile? It’s there in SF and I’ve been using it for 3 years now – my car insurance is $29/month full coverage. Just an FYI.
It’s outrageous but I’m married to the perfect example of why it happens.
We’re about to have our 3rd kid so we’re going to get a minivan. I’ve looked and researched (just like I did for my wife’s first car) and found a couple good certified pre-owned minivans of the model she wants. She’s not having any of it. She likes the “new car” feel. The neighbor just got a new car. My best friends wife got the brand new fully loaded version…etc etc. There’s no real reasoning and this is with an educated generally intelligent person. It’s visceral and that’s it and people hobble themselves to make it happen.
I myself drive an11 year old corolla. Thing runs great, good gas mileage. I can’t think of a reason to get rid of it so I don’t. Ive had it since med school and I’ll have it till it dies. I actually take some joy in squeezing between 2 100k cars in the doctors parking lot that are owned by anesthesiologist that I know make less than me. I like to tell them to be careful not to ding my doors, my cars paid for and I’d like to keep it nice thanks.
I don’t think everyone should be driving a beater but people need to get over the whole social status thing. It’s a car. If it’s able to safely make the speed limit, the AC works and it doesn’t break down then it’s perfectly fine.
Ha ha, that is awesome! I loved having my 10+-year-old car as well because I didn’t give a crap if someone bashed into it. The one thing that I’m thinking more about his safety. Newer cars have more accident prevention technology. Luxury cars Joey have more reinforced armor. This is the topic of my next auto post next month. I go to space them out!
I have thought about the safety aspect. It does make sense in that regard certainly to update. I’m a good driver (but then everyone thinks they are) so I feel pretty safe regardless, but you never know about the guy in the other car. When my kids are driving age I will bump my standards up a bit. Still pre-owned but they’ll be driving the closest version of a tank I can find with decent gas mileage.
Sam,
I always wonder why people spend so much in a car when they don’t make anything. There probably a few things at play here. Most of the reason why people want to own expensive cars is for the prestige and status they assume they’ll gain. In places like Miami and Ft. Lauderdale, a nice car is something that people care about and it conveys the drivers individual style to others. I’ve always been into nice cars and have been working on and driven cars my entire life so I can see why people break the bank on buying a new car. That being said, after getting older I find that people don’t see your car, they don’t really know what you drive or don’t care most of the time. You can say this about CA because in places like SF, status is determined by what company you founded. In other places, you won’t get laid if you’re driving around a beater.
There are probably other factors to consider like the 0% apr loans. They’re giving them away these days and distributors don’t make anything on a car due to the interest. Back in the day it was hard to tell what the cars are worth. With buying used cars you need to worry about repairs more often so most don’t go that route. I personally think that leasing or actually not owning a car is looking more attractive these days. You could lease a 3 series Beamer for $350 a month. When the lease is up you have a new car (you start leasing a newer one). So you’re basically paying for the depreciation on the vehicle which for these bmws is high.
Rob
It’s always dumfounded me to drive through lower income apartment complexes where 75% of the parking spots are filled with nicer cars than I drive. You did a great job at putting stats and numbers to what I’ve observed.
I think most people would balk at your 1/10th rule, thinking it’s unrealistic. I love it. It may have been answered and I just can’t find it, but would your 1/10th rule apply to a couple with 2 cars as well? (I.e. should a 200k/yr household each drive a 10k vehicle?)
My wife and I lease a 2016 Corolla at $142/mo and 2016 Camry at $179/mo. We analyzed it, and felt leasing was actually the best financial decision so we could utilize our capital to buy 4-plexes rather than paying cash for vehicles. Just the cash flow from those could pay for 10 leases, so it seemed like a no brainer.
Sam –
Good post. I am 29 and had my 2006 accord since initial purchase. I think a couple more years it may be considered a beater. My friends and people in my network have opted for new luxury cars or newer cars, but I am trying to grind out my car for at least 2-3 more years before a new purchase.
I can probably purchase an entry level luxury car so I do not have live in shame when the valet pulls up my car in front of friends or colleagues, but I will probably opt not to and purchase a Prius because I am weird/crazy and not normal :)
Hope I am making the right decision for this delayed gratification that I have adopted!
This article is spot on. It is unbelievable how expensive new and even some used cars are now. And even crazier that so many people buy them! Such a waste of money on a depreciating asset. Exactly one year ago my wife was rear-ended in an accident. Her car was paid for so we had to go purchase another one. We ended up finding a great deal, in our minds, on a used SUV. We found a 5 year old Mitsubishi Endeavor with only 50K miles on it. We ended up getting it for only $14,500. Still up there but so much cheaper than every other SUV out there. We actually got a deal on it because Endeavors were discontinued in 2011 so they were drastically cheaper than every other SUV out there. So just trying to say there are deals out there, even on SUVs, and you don’t have to spend $20K or $30K+.
Early last year I had to convince my wife that it made more sense to buy a less expensive car ($49 a month less) by doing a graph chart showing the time spent in the car and the time spent parked. It turned out that (annually) 5.16% of the time she was going to be in or using the car the other 94.84% it was going to be sitting in a parking lot or in front of our house. After seeing the chart she immediately was convinced.
This is a great post, and one of my favorites…combining finances and cars. This is my first post to FS and mainly because I feel I have a different view and approach to this then most people. All my life I have been conservative, from savings rate to investment risk tolerance. However, one passion I have always loved that did not align with my conservative life style was cars. What’s more…I love unique cars (and that usually leads to higher prices). It was a hobby and passion that I couldn’t let go. What’s a man to do?
I got it…build a company from the ground up that would “force” me to buy a new car every several years, make them unique, and somehow still make money from it. After many long hours, weeks, months and years, what was created in 2005 was a company that designs and sells aftermarket parts and accessories for modern cars (we specialize in American muscle cars – sorry not much for your Honda Fit). So to showcase our products, every several years I buy a new car and design new products for it. The car has now become an asset, a marketing tool. I only buy the low end models and customize their looks. I respect performance, but am really passionate about design. Instead of spending money on the top of the line cars, we spend it on designing products for those cars.
As another contributor wrote, cars to some people are more than just a car. I understand that, and help make that connection even more unique. Similar to how you make the connection for people passionate on financial stability and independence. But I still believe in financial responsibility. I had a customer once call me for a greater discount on a hood because he could barely feed his kids. I kindly told him to go feed his kids and when he’s ready and able, we would be here to serve him.
And who knows, maybe adding a new custom part to your car would make you want to hold onto it little longer…helping postpone the purchase of a higher valued and faster depreciating car.
Hi Bruno,
Welcome to my site and GREAT idea combining your business with your love of cars! I would totally do the same. The first car I ever wanted was a 1989 or 1990 Mustang 5.0. It was modded up, and my friend in HS would have sold it to me “only” $13,000. But of course, I had no money then and was working for $4/hour at McDonald’s. He went on to sell his car and his parents bought him an Acura NSX that lucky kid.
I do the same w/ what you do by combining my love of travel and writing with my business. Feels like a win all the time, as I’m sure it feels with yours.
Sam
We’ve got easy access to credit in the U.S. If cars didn’t depreciate so quickly, getting a new car with a 0.9% lease would actually be a no brainer way to leverage using OPM. I walked off the lot with a 0% no money down purchase on a car financed by the dealer. Where else in the world can you do this?
That being said, I actually looked for reliable used cars that I was actually willing to own (meaning no used Chevy Impalas from the state auctions), and my area had none.
Can’t wait till you get your mid-life car!
The thing is to many of us a car is nore than just a mode of transport. Its an experience. Just as many of you will pay for a vacation, some of us will pay to experience a certain vehicle.
Hmm…
I bought a 2008 Accors EX-L V6 4 door sedan in 2008 for 28,000 out the door which was 2,500 below dealer invoice at the time. If Sam’s price is accurate, prices haven’t moved much at all in the last 9 years.
As us accountants like to say the devil is in the details. You mention that a new Honda Accord/Toyota Camry can be had fully loaded for 26k. In disbelief I immediately went to the Honda site to check this out. Turns out this statement is not accurate. Sure the absolute lowest base model LX-S can be had around that mark however upgrading to the V6 w/ some basic upgrages like navi/leather can easily eclipse the 35k mark. Notice Experian doesn’t specify trim levels, but my guess is most people aren’t buying the base model..
I’m actually at the Honda dealer right now and a fully loaded Honda Accord Sport V-6 is about $28,000. But I guess prices depend on where you go and how are you negotiate.
If people want to spend $35,000 on a Honda accord or Toyota Camry, they have every right to do so.
I can change the words “fully loaded and “to “well equipped” if you like?
I just ran a quick TrueCar …
17 accord 4dr v6 touring
MSRP $35.7k
TrueCar $32.0k
This is why I take public transportation. Why should pay all this money and go so far into debt to not just own a depreciating asset that doesn’t increase my happiness, but to drive MYSELF around? That sounds like something I should receive a discount for when compared to public transportation, not pay a premium for!
You can’t just focus on the car price and loan balances. The intangibles are also huge costs. Everything from the frustration of not being able to parking, to digging your car out of of snow, to the risk of running over someone and killing them accidentally!
Yup, I’ll just hop on the bus, throw on my headphones, and let the driving (anything from costs, risks, and the actual act of it) be somebody else’s problem.
Sincerely,
ARB–Angry Retail Banker
2 years ago I bought my first car- a 2000 Toyota Avalon for $3,500. My yearly insurance on the thing is $800. Because of this unbreakable japanese beauty, I am paying off my student loans and investing like no one else. Do I plan to buy a new car in the future? Yes, but it will all be paid in cash, the car will be 2-4 years old AND I will have to have a net worth of at least $500,000.
Having a car payment is the worst and the most annoying freaking thing to have. Funny thing is, I am 24 and as I get older, I care less and less about what I drive and even what I wear. Other priorities kick in such as- being healthy, wealthy, free and being able to travel and enjoy my hobbies. Life is a funny thing
I meant tax-write it off. Also forgot to mention thats its a lease.
Sam. To follow up on your A7 question, i am closer to 205k a year in income. Yes, in fact, we are a family of 4. Work in a nursing and see people becoming ill or dying all the time. I figured I might as well enjoy some fruits of my labor before i am unable to do so. Not everyone in a nursing home is old. Got a 30 yrs old with amputation of right leg and a 40 something who succumbed to cancer fee weeks back just as examples. So everything in perspective. Besides, i can tax right it all off as a 1099 P.C.
Working in nursing must definitely put things more in perspective. It’s the same way the rich are spending more of their money now after hearing about so many deaths at young ages.
Only one pass at life. Moderation is the key. You want enough funds to be comfortable.
Many of my friends did something a LOT of people here will disagree with, but I’m thinking about doing it too. They went through this dealer who buys and fully repairs salvaged cars (late 2014-2016 models with low 5-10k miles and usually luxury fully-loaded) and sells them for basically half…YES HALF the KBB dealer price! He issues a rebuilt title for DMV purposes. He shows the pics of where the damage was and if you like something and he’s not comfortable selling you that, he’ll straight up say no you can’t buy that because I can’t fix it to a satisfactory level.
Everyone who’s bought from him has had no problems with their cars (apart from regular maintenance of course). Yes there is a higher risk, but he’s built a reputation over 15 years cause I know people have bought from him. Just wondering what your thoughts would be for this type of a situation?
If you have someone that you trust and you can see before/after pictures I’d feel more comfortable going that route. Yet, I don’t (and probably) most people don’t so they try to stay away from those types of purchases.
This post is too much truth to handle. I’ve got many college friends who financed 20-30K brand new cars post graduation, effectively blowing away their head start at creating wealth early on in their lives.
I didn’t know that the rich were simply purchasing them up to get hard assets, I figured they would all prefer real estate over vehicles, but then again, I guess that’s diversification.
Well, my rich friends have been methodically purchasing real estate, art, gold, rare watches, etc with the funny money they’ve created since the 2009 downturn. They have crazy amounts of wealth and are all going through this “life is short, let’s live it up more” moment.
Seriously, everything right now feels like funny money. Wealth accumulation has been much quicker this time around than during the last bubble. But this time around, people are planning to NOT lose a bunch again.
I can completely relate to this article. Finally in the mid/late 20s and starting to have more disposable income really makes you want to splurge on housing and transportation!
I catch myself reading through new car sites and yearning for a sweet crossover Audi or Lexus, but I just can’t get over the fact that my now 4-yr old car is just fine, and even if I traded it in, I’d probably have to pay another $15-20k to get it!
I still think the lightly used (1-3 yr) range is a great time to buy cars. You miss the big hit in depreciation up front, get a new-ish car, and save a lot of dough! Additionally, if you feel the urge to trade in after 3-5 years, you won’t have to sell your first (or second) born to make up the difference since depreciation on the vehicle should have moderated.
I was shocked when I was looking around that the new Cadillac XT5 crossover was priced at $60k (fully loaded) for a new car, while the exact same model year, trim, and content with 5k miles was selling at $50k. A $10k discount just for someone else who broke a lease (or sold at a big loss)??? Even that’s a huge savings compared to buying new, and it probably still smells like a new car!
Sure, it requires a bit of research, and you also won’t always get to buy the EXACT car with the EXACT specs you want (color, trim, miles, etc.), but saving 20%+ off a new car price just by being flexible seems like a win to me. Better yet, wait ~3 years and get it for 2/3 of the new value.
Let the suckers pay!
I agree. Cars are so much more reliable nowadays. I like buying after 2-3 years of a newly introduced model with less than 8K miles a year. Save on depreciation, still years away from a new model design, and don’t have to worry about the car as much.
You are looking at MSRP vs negotiated price though … That $60k sticker can be had easily for $54k and likely $50k if negotiated well. 5k is low mikes, but if it had 10-20k mikes in it, I’d pay an extra $2-5k to have brand new with a full 4yr warranty, new tires, brakes, etc.
I bought my last new pickup truck in 2011 for $19,000. GMC 1/2 ton with zero options. At that time a used truck with 40,000 miles was going for $14,000. At that point I was glad to pony up the extra cash for a 3 yr complete warranty and a new truck!
Summary: More number of Pickups/SUVs are being sold – which sells for higher prices (and a whole lot more Profits – cha-ching!!) compared to cars! Cars which can achieve higher-mpg are sold at very low-profits or dare-to-say, at subsidy by some manufactures to achieve CAFE mpg numbers across their fleet (or incur recently tripled-up EPA penalty). High-number of Pickups/SUVs which sell for much-higher average selling price – are pushing the average selling price of the vehicle mix to ever increasing average transaction prices. Manufactures have luxury of offering low-rate financing to sell their vehicles (as their profits and profit-margins have increased due to ever-increasing higher-prices !). On the high-amount of loan-balances — its evident – as average vehicle prices increase, the loan-balances increase too !! Worse yet – due to ever increasing prices, and high-depreciation., god forbid if you ever trade your recent-model car/vehicle., you will most likely be upside-down on your new loan — leading to further-increase in loan-balance as reported by Experian!! Leasing has also increased to nearly 1/3rd of all new-auto transactions to combat ever increasing monthly payment battle for average consumer (loan payment of $503/month vs $406/month for avg lease – a saving of $100/month if you lease – but expect no equity in a lease though!).
Sam – would it be ‘more’ applicable and realistic to tweak your 1/10th formula to accommodate payment model ? Say: approximately no-more-than 1/20th of your monthly income (5% of monthly income) should go towards car-payment(s) ?
To meet/achieve/exceed CAFE fuel-economy fleet standards – auto manufactures have to have/sell sufficient number of “high” mpg autos in its fleet. Guess – truck/SUV mileage barely budged up from 18 to 22 mpg in the last 5 years? Current combined mpg is about about 25.
(pdf:
Trucks/SUVs are selling nearly 60% of market-share compared to only 40% ‘car’ share!!
(https://www.trucks.com/2017/01/04/trucks-record-2016-auto-sales/)
What gives ?
In reality – it costs less to build/manufacture a pickup truck, slightly more-so for an SUV (the extra metal/weight/hulk/volume doesn’t cost all that much more, if you are thinking along those lines). Auto manufacturers definitely love selling you ‘more’ trucks/SUVs to make more profit per ever-increasing SUV/Truck volume! No wonder auto manufacturers are making record amounts of revenues, and profits ! If you ever see ‘largest profit’ by vehicle type – Top-10 profit-making vehicles list is gobbled-up by high-volume Trucks/SUVs, followed by low-volume luxury-car models.
Cars achieve higher mpg – this can be attributed to car’s relatively lesser weight, streamlined shape, lesser coefficient of drag, relatively lesser engine size, less number of cylinders, and less hauling/towing capability compared to SUV/trucks; In-addition to these: Hybrid, turbo and CVT technologies are mostly incorporated in to cars, which doesn’t suit hulking Truck/SUV’s very much — also contributes to higher mpg.
Back to the topic of CAFE fleet economy standards to be achieved by auto manufacturers across its fleet: auto manufacturers have to sell certain number of ‘high’ mpg achieving cars to compensate for low-mpg of its more-profitable SUV/trucks ! In a way – some auto manufacturers are just fine to get rid of ‘cars’ at near-cost (or at loss at times!). This “low-profit or loss per car” becomes ‘more’ of a necessity if that particular manufacturer sells high-volume, ‘highly profitable’ (but low-mpg achieving) SUV/Pickup trucks – as each manufacturer is held liable to meet CAFE mpg numbers across its fleet – or incur EPA penalties ! BTW – the EPA penalties have nearly tripled for 2016 for not meeting the CAFE standards! Would you incur penalties – or instead dump/sell high-mpg achievable cars at low profit-margin (or even at minimal loss but lesser loss than EPA imposed penalty – which is better trade-off!) ? Average selling prices of cars, small-cars have barely budged or in-fact decreased year over year – where as pickup-truck prices have increased to over 5% in a single-year !! Take a look at Kelly’s article (Mar 2016 — but you get the gist):
https://mediaroom.kbb.com/new-car-transaction-prices-up-2-percent-march-2016
OK, as a collective, we’ve come to the conclusion that SUVs and pickups are on fire, and are bringing up the average price. It’s pretty cool Americans are doing more with their hands: farming, construction, moving. Or wait, is that another wrong conclusion?
I can’t tweak the 1/10th rule. It’s so effective for its beautiful simplicity. Change one’s financial habits instead of changing the rule to fit one’s behavior.
I’m confident that so long as a car’s purchase price is 1/10th your gross income, whatever happens to the car or to you, your car won’t become a financial anchor. Just remember to have insurance!
Never underestimate how irresponsible people will be with their money, especially when it comes to a status symbol like a car. However, you can take solace that most new car buyers are older and better off than average. Younger, poorer people buy used, although the loans on those cars would probably terrify you even more.
One of the main factors contributing to higher transaction prices is the popularity of trucks and SUVs, which automakers are able to charge more for.
We have a pricey, gas guzzling SUV ($60k’ish) that my wife drives. I do wonder why we paid this much vs a $40k’ish SUV … $20k invested would be a year of college for one of our kiddos. We make the money to afford it (no loan) but we are not FI yet. I’d do differently if buying today.
I got a really good deal on my German sedan lease and must have a new car for work (car plan). I could have saved $100-150/mo going w a 3series or accord. I’d probably do that one differently as well.
So, I’m one of the families significantly bringing the average up on 2 cars.
The top 3 selling cars in US are:
1. Ford F-150 PU
2. Check Silverado PU
3. Dodge Ram PU
… these three have to be close to 10% of all sales (1.5M of the 15M cars … I’m rounding) and definitely bring up the average.
Well, your post was begging for a comment from someone in the Motor City, so I had to add this…
I was actually surprised that the average new car sale is only $30,000ish. Cars are incredibly expensive to build because of all the labor that goes into design, manufacturing, legal costs, etc. It’s definitely true though that certain cars subsidize the costs of other cars. I possibly should add a disclaimer here that my husband is employed by the auto industry so we’re major car people.
What I DO find appalling is the average car loan. That’s the real problem here in my opinion. We’re definitely going to spend more on cars than another family in a similar situation because 1) we love cars 2) my husband is in a position where he is required to drive a car newer than 3 years old. However, we don’t have a car loan at all and don’t spend as much as a similar family on other types of things like extensive traveling, entertainment, etc.
I think your 1/10 rule needs a little tweaking. First starting with whether or not you live in Metro Detroit (haha). Then adjusting for your cash financial situation and not just income level.
Can you explain why cars are almost twice as expensive as they were 15 years ago? Surely they had the same design, manufacturing, legal costs, etc back then. I’d assume some materials costs have increased, but at the same time maybe not since they have gotten better at using much cheaper materials and they have robots doing a lot more work these days than they used to.
Your husband is required to drive a car less than 3 years old and the people requiring him to do so aren’t footing the bill?
Hope you guys get a discount at the auto company he’s working for! Does he? If so, how much? Does he get like one of those discounted company leases?
If I worked for an auto company and got a discount, I would own one of my company’s car for sure with pride. Maybe I’d fudge things a little and spend up to 1/5th my income, but no more!
It’s like the teenager working at a clothing store to spend all she earns on the clothes she’s selling! Ain’t gonna build wealth that way!
My recent car purchase is the topic of an upcoming post…So spoiler alert! ;). I had gambled and purchased a new transmission for my 2009 GMC Acadia (family of 6, and apparently it’s illegal to throw kids in the trunk). My gamble didn’t pay off…Water pump died…And then 6 months later, I was facing another $1300 repair and had intermittent brake lights…No one could figure out why. Crap. So I dumped the money pit in favor of a used and decidedly unsexy minivan.
My convo with my boyfriend when I got home went like this:
Him: Does it have…
Me: Nope
Him: But does it have…
Me: Nope.
Him: But I’m sure it has…
Me: NOTHING! OK? IT HAS NOTHING!
Him: But why didn’t you invite me to help you pick out a car?
Me: Because of this conversation!
(I can’t bring myself to tell you what he drives. I just can’t.)
Ha! Sorry about the GMC Arcadia. I have never heard of the GMC Arcadia win any reliability or value awards. What made you bring yourself to buy that one?
I also think this random thought to car designers, “Why don’t you just design a beautiful car instead of an ugly car? The cost is the same.”
Hmmmm
Unfortunately this will happen whenever people can borrow money for something. The borrowed money becomes like Monopoly money in their minds – they just forget they have to pay it back.
The same can be seen with house prices over the past decades as mortgage lending increased.
Crazy prices compared to what I’d be willing to pay second hand for a car. I tend to stick to a “1 Paycheck after tax” rule for car purchasing which is similar (slightly stricter) than your 1/10th rule) and it has worked out great for me every time :)
It’s interesting to see how much people are willing too pay for there cars, and there are probably numerous reasons as to why people do this. If someone wants to buy a luxury car, who are we to tell them they can’t? It might be different when their financial situation is at risk. However then it’s not about the car itself, but about people spending more then they have available. It’s a psychological thing that people always want to own better, nicer looking or comfortable products because it makes them feel good or they think they need it.
We owned a luxury car not too long ago (and is still for sale actually). We loved riding it and have absolutely no regrets as to buying it a few years ago. At that time we had the opportunity (and financial assets) to do so. And yes, based on all the reactions we got it sure is about status to most people. The funny thing is that a lot of people didn’t grasp why we would ever want to sell such a car. But when talking about our goals and how much money we would save, everybody understood. People know cars aren’t a good investment. I think the ‘problem’ is that people buy out of emotion, not out of ratio.
What was your luxury car, how much did it cost, and why are you selling it? Are you buying a new luxury car? If so, what?
Seriously eye opening numbers. And this is all discounting the fact that most people get a new car every 5-6 yearsSo let’s get one quickly depreciating asset, trade it in to the dealer who will lowball the value making that asset worth even less, and roll it into another depreciating asset. Insane! Even if you realize the mistake of overpaying for a car, at least hold onto it as long as you can by taking care of it so you can drive it for a decade or more. Or sell it and get a used Corolla. They’re a dime a dozen.
The SUV and minivan market is crazy and every new couple thinks they need one if they are having a kid. Minivans easily run into the $30K range for base models.
I’m one of those! haha. Better a bigger car for a kid than a smaller car. I wish EVERYBODY drove a smaller car so I can happily keep my Fit. But everybody is driving a beast, hence I need to drive a beast to, to increase my chances of survival if I have a kid.
I’ve said this in the past, but here’s my take. Per the comments above, there are three kinds of people when it comes to cars:
– Those who see cars as transportation. They may pay extra for features they care about (safety, convenience, etc), but will generally not buy expensive cars. Many FS readers fall in this category, as do my in-laws.
– Those who see cars as status symbols. They will trend toward certain makes and models, they will load them up with options, modify them with aftermarket cosmetic upgrades, and they will frequently trade them in for something newer and better. A lot of my friends fall in this category.
– Those who are true vehicle enthusiasts. They, too, will buy expensive cars, but will often skimp on options, or do stuff like pay extra to custom order a vehicle WITHOUT a moonroof, to lower the weight and add lateral stiffness. They do things like order cars with manual transmissions, detail their own cars, take them to tracks / autocross events, and do their own maintenance. They will often become very attached to their cars, and own them a long time. This is me.
Cost of ownership is driven by a lot of factors: purchase price, financing terms, insurance (driver record, shopping around, coverage choices), fuel (miles driven & MPG), maintenance, repairs, and general upkeep.
Purchase price is only one component, and can be ameliorated by owning the vehicle farther into the depreciation curve. It can also be ameliorated by BUYING the vehicle farther into the depreciation curve, but you’re taking a risk on whether the vehicle was properly maintained / not abused at the beginning. Who wants to spend $50k+ for a BMW M3 where a 17 year old abused the clutch, over revved the engine, and drove over speed bumps at 40mph for the first 20,000 miles? Further, the more people that do that the less beneficial the option is; I’ve seen cases where the cost of a used car otherwise identical to a new car was actually higher due to supply and geographic issues.
If you live in an area with low insurance rates, take advantage of strong manufacturer discounts and promotional financing (I got .9% on my last car loan), maintain a good driving record, buy a fuel-efficient car vs a gas guzzling SUV, drive less (ie. bike to work or to pick your kid up from pre-school occasionally), do your own maintenance, and keep your vehicle a long time, you can buy something quite expensive (perhaps something in the $40k-$70k range), and enjoy a reasonable cost of ownership.
In short, you can have your cake and eat it too, which is what our family does with BMWs and Audis.
The economy is not booming, people are not making tons of money. You need to get out of SF or Honolulu and come to my neck of the woods which represents typical America. People who can’t afford new cars buy them. People who can afford new cars buy used unless they own their own business and can lease or write off depreciation.
Whenever I buy a car (used) I have a long conversation with the salesman. His first question is “what do you want your payments to be. We have 60 month low interest payment plans available” The salesman is shocked when I say, “I’m buying cash after my trade-in. My last purchase, I took out a 3 year loan on a one year model only because the rate was 0.9% APR. (I paid it off early anyway) The salesman said to me that he had not seen a $129/month payment in 15 years!
The point is the majority of people walk out of dealerships with $400+ a month payments and they make $60-$75k per year. One third of car trade ins are under water. That tells me people have no patience to own a car long enough to be payment free. They simply roll the old loan into the new one which means the cost of a new car is even more expensive when you factor in they are paying for the old car with the new one!
I know people like this and they are not making money. They have little saved for retirement and simply live week to week.
The $175k executives I know are frugal much like the people portrayed in “The Millionaire Next Door” .
Actually, half of America lives on the coastal cities. Why is half of America not typical America as well?
I’ve used real data in this post to highlight the numbers. Even folks who do not live in the coastal cities or commenting about the rise of trucks and SUVs.
Are you saying that most Americans are spending too much and are illogical with their finances? I’ve gotta imagine that most people are like you and research hard before buying a car and then negotiate further as well.
Just make sure to read until the conclusion of the post.
I was curious how much a Corolla was these days and the damn thing has a base price of over $19k!!! Years ago the same car was almost half that price!And the only thing different is that it’s a bit larger, gets worse MPG, and has some phone connectivity. That’s it.
My dad bought a new Accord fully loaded a few years ago for $32k!!! Insanity!
Thanks for this insight new reader only 20 years old and this is exactly the past push of knowledge I needed to sell my 25,000 jeep and only making about 50,00 a year thank you!
The only reason I may buy a newer (still used) car is to go for an electric car. I drive an hour into San Francisco once or twice a month and am tired of 1) paying for gas and 2) not riding in the HOV lane. With an electric car in Cali you can get a pass to ride in the HOV lane as a single person….
I will only be doing this if my job ends up requiring a weekly commute into town. Otherwise my commute is 3 miles each way and I figure I can make my current 6 year old car last another 15….or at least until I retire…so 24?
That’s true. Yikes, 1 hour commute EACH way? Tell your boss, “I QUIT! LIFE IS TOO SHORT TO COMMUTE!” Do it. You’ll love it.
Why not live closer to work or find a closer job? Are you driving into SF to meet clients? Commuting makes me very unhappy.
I am a physician and had been coming into town to help cover some shifts and also meet all of the docs at the main campus (we send a lot of patients from up here in Santa Rosa to San Fran)….I have 2 more shifts in January and then am done. After that it is a 3 mile commute daily from my home to the local hospital. I have thought about biking it but I live up a 700 ft mountain and have not gotten over the mental block that has kept me from biking it yet.
The only caveat may be if I start to set up a regional program. If that is the case, then I may need to come to the city 2-4 times a month. If I do need to do that, hello electric vehicle and HOV lane.
Commuting does blow, particularly during rush hour. One day it took me 3 hours to go 70 miles. Terrible.
– EJ
Man, that’s awesome you’ll no longer have to do the mega commute after January. Every time I’m stuck in traffic, I get mad. But then I think to myself, all this traffic must mean the economy is good. Then I think about my investments. Then I think about all the people working to make a profit for my investments. Then I’m kinda happy again.
I never book anything around rush hour anymore. It’s always 10am – 3:00pm meetings for me. Life changer.
Exactly! If I do have to do the mega commute in the future I am going to negotiate a 10 am arrival and a 3 pm departure. That way my work day remains 8-5 still…as opposed to leaving at 6am now, staying in town until 7pm and getting home at 9…
Regarding the commute, I wanted to come to your event on Feb 1st, but won’t be in the city. I am there the day before unfortunately (January 31st). Maybe the timing will work out in the future so we can meet.
-EJ
Hi Sam,
I’d lean towards these factors:
1) Most cars are even more reliable and lasting longer, leading to higher prices from the manufacturer.
2) Less maintenance required. The more efficient models need 1/2 as much regular maintenance, that’s less trips to the service department, where more profit is made.
On the consumer end, I purchased my vehicles (20k) with 0% financing, so it’s not so much the interest as opportunity cost. In the meantime, money that would have gone to the car instead went to my retirement accounts. I run pretty lean on the budget, so it’s nice not having a lot of money immediately shipped into the car.
Why not stick with the old ones? I’m not a mechanical mind. Our first two cars were about 15 years old and driven into the GROUND (almost literally). Commuting 120 miles round trip will do that.
Getting a new car that I maintenance but never worry “will it start” was worth it. Not getting a large car and stuffing my family into a four door sedan is totally worth not spending twice as much for a Justice Van. I’ll admit I was tempted. If only to call it that daily and annoy those I love most. ❤️
I’m really happy that reliability and maintenance has improved on cars. The only bummer is when your aluminum frame gets a ding. It’s impossible to get out!
Wow, that’s crazy!
Another factor would be people trying to one-up one another by having a newer and more fancy model. They lose a lot of money when they trade-in their existing vehicles for a model that’s only 1 or 2 years newer!
If the average consumer had excellent credit (>720), they could even qualify for a 0% interest car loan! That would be much more beneficial as they could then slowly pay off the loan while keeping their money in the markets.
It’s a shame really, but what can we do until we have a better financial literacy system.
Is trying to one-up someone really that common regarding cars though? There’s literally an endless amount you can spend on a car.
Perhaps b/c I don’t drive to an office with colleagues with cars, why I don’t feel any of that. I mean, I’d much rather be free and NOT have to go to work in a nice car than go to work in a luxury automobile and be stuck in an office for 10 hours a day!
I would echo that one-upping is pretty strong in the bay area.
I agree with the one-upping in the Bay Area.
I would often see people switching cars every 6 months to 3 years, depending on their level within the company.
Most of them actually go for leases too, which are must worst than financing or even buying a car right-out.
It’s more commonly seen in the larger metropolitan areas like New York, San Francisco, and Los Angeles.
I agree with you, I’d rather be free and not have to go to work in a nice car as well!
Sam,
I’m curious as to your thoughts on the ‘mid-life crisis’ vehicle given this post. Although not yet a millionaire, I’ve got a good income (~$400k), and have recently been meeting my savings/investing goals. I did recently take out a low interest loan for the bulk of my mid-life crisis car, a new Audi S6, with a completely redone aftermarket audio system. The thing that pushed it for me, rather than continuing to run my 12 year old Passat, is that this will likely be the nicest car I’ll ever own- with several chronic illnesses, I’m uncertain that I’ll ever need to buy another.
I agree that spending a large amount of money on a depreciating asset doesn’t make any financial sense- clearly the emotional impact of driving a nice car and the fun in driving it counts as a positive life experience that is worth some amount of premium, especially if it’s likely to be a one-off purchase and not a recurring event.
Howdy Andre,
Congrats on your income. The bigger question is: why aren’t you a millionaire yet? Did you just start making this kind of money?
See: https://www.financialsamurai.com/how-much-should-my-net-worth-or-savings-be-based-on-income/
I hope the reason why you are not a millionaire yet on a $400K salary is because you started late, and not because you are spending $80,000 on an Audi S6!
My son is going to college next fall and received enough scholarship to cover a significant portion of his undergrad. Feeling generous I told him I would buy him a car…..with a $5000 budget he hasn’t been able to buy a car in the last 2 months. All for the simple reason that he can’t decide which one….there are simply too many choices if you want something with a manual and know how to work on cars.
this is why buying used is where it’s at. because of high car prices, a lot of people lease to get the fancy car they can’t afford to buy. you can get great lease returns of fully loaded cars, especially with sedans. my family will eventually need a 6+ passenger vehicle as we live with my mom and have a kid, so the 5 passenger car is already cramped with the car seat and the stroller in the trunk. if we have to do shopping or bring other people with us, it usually requires a second vehicle. so we’re looking at the used market for minivans, but are willing to drive far for a good deal. sometimes deals for great cars are in the least likely places–I saw a certified pre-owned no-accident toyota hylander hybrid with low miles for a crazy good price in Manhattan, possibly because that dealer had trouble selling and the area wasn’t a big market for that used vehicle. but out in the philly burbs where I am, that car has a much higher resale. it’s all about doing your research and scouring for car deals when it’s time to buy.
Thanks for making me throw up, Sam!
Those numbers are truly insane. It’s definitely a shame that the middle class don’t know any better on this stuff… those are going to be the people who are in trouble in a number of years.
In the meantime, I’ll just keep happily driving my ’09 Malibu until the thing dies.
— Jim
SDnerd wrote:
“As a California resident – “Tesla’s, Tesla’s Everywhere!”
I love that car. It’s amazing. I want one. But it’s a $90-100,000 car + a couple grand in home power installation. I’m blown away by how many I see on the road. Everyone I know who owns one is a multi, multi, multi millionaire but there’s got to be a fair number of people out their taking out huge loans to own that car (or leasing it for their crazy rates).”
I’m the type that buys a new car and drives it until it dies. I figure it’s cheaper to repear than a new car payment and I have more important things to save for than a stupid car. Currently driving an ’01 and ’08 truck and sedan. Purchased both on 0% credit cards before low interest financing was introduced before the recession. Never paid any interest. Actually, I have made a lot of purchases in my life on 0% cards to avoid finance charges. Toyotas and Hondas seem to go forever. Also, purchased a nice ’07 with low mileage for my daughter for 8K when all her friends are getting new.
That said, I’m one of the many that put the 1K deposit down to hold a Model III Tesla. Simply too cool to pass up if it really ends up being anywhere near 35K like they promise. It has the potential to be another 20 year car written all over it with the “million mile motor.” As long as the battery lasts it seems like a no brainer.
You know that when the Model III comes out, the version you will want will cost close to $60,000! It’s just the way it is once you add everything up.
I wouldn’t count on the the battery lasting more than 10 years.
As of today, the base price of a Tesla EV is $44,500, but with
tax credits/rebates in San Francisco ($3750 federal credit, $2500
state rebate, $800 PG&E rebate) that reduces to $37,450.
With the average new car price at $37,577 (Dec. 2018, Kelley Blue Book),
I say hmmm …
Of course, folks pay another $10-15K for things like non-black paint,
better sound and navigation, more battery range, AWD, fancier
autopilot function, etc. Also, we acknowledge that the median price
of a mass market car makes for a better comparison.
That said, I only drove beater cars throughout life with kids + house as
distractions, plus maxing out the retirement account. After paying for their college, I retired early taking the advice similar to that of Financial Samurai. So, only now the Tesla.
(Correction). I had the price of the base model mistaken —
it’s actually $5K lower without better autopilot, at $39,500
as of this writing. So the comparisons with average car price
including tax credits/rebates is even better.
if you are buying a car under a lease, the cost to you is depreciation + interest + running costs. So for a 3 yr lease with 50% residual value depreciation is roughly $17k, which turns out to be $472 per month + running costs. Hardly the end of the world.
If you are a “buy and hold” guy, and you keep your car for 16 years (as is the current stat); then you fully amortize the costs of the car and that’s $177 per month + running costs.
In the modern world, cars are more reliable than before (hence they last longer and cost less to replace parts) and they use less fuel. So can afford to buy more expensive cars than before (inflation notwithstanding).
I know in an ideal world you would spend nothing on a car, but in the real world you would be paying train, Uber, metro pass for at least $ 300 per month.
if you are really cheap – buy a 1998 Civic for $700 and run it for another 5 years. Even then, you’ll be spending money.
I’m not against leases. In fact, my Honda Fit is a lease that costs my business $235/month. I like the convenience of a lease now that I’m older. However, I’m happy to buy a car for cash if I know I plan to own it for ~10 years. Gotta be a nice one that’s also safe or else I’ll get sick of it.
Oh man, that’s crazy. I’m not looking forward to getting a new car at all. We got a Mazda 5 (small minivan) for $18,000 in 2010. We paid cash and didn’t get a car loan. Pretty much everything is more expensive than that now. We’ll probably go with a used car when we need a new vehicle. Then again, we might get a big recession and a big discount when the time comes. :)
Luxury vehicles are great, but they are a big hit to your wallet. Maintenance is a huge expense with luxury brands.
Wow that is so high! I wouldn’t have guessed that price. I’m in my mid 30s and I still have never bought my own car. I don’t drive much so when I do need to go somewhere I take Uber, public transit or borrow a car.
Perhaps a lot of people who aren’t following your 1/10th rule of car buying think they deserve better than an older used vehicle to fit in with the Joneses and just lease or get a loan because that’s “normal.”
Cars can be really expensive but they certainly don’t have to be when there are still so many used cars out there for sale and certified pre owned too.
Those are some mind-blowing statistics! Then again, it’s sad that when you stop and think about it, they sound about right.
I try not to judge, but when it comes to cars, I can’t help myself. There are far too many nice and new cars on the road. Even though I don’t know everyone’s financial situation, your statistics back me up. I make this point out of true concern rather than jealously.
My hope is that these people buying new cars will at least hold on to them for awhile to lower their cost per mile (although ideally they sell and buy a cheaper, more affordable vehicle).
I’ve spent a lot of time recently putting together car related posts because of the concern I have around people buying cars ninjapiggy.com/cars/
Thanks for all your doing Financial Samurai to educate us all! I wish they would pass a law, where people had to read a few of your car buying posts before buying a car. They still may make the same, dumb decision but at least they could no longer claim ignorance.
Perhaps they should track the median price in addition to the average.
I’m afraid I don’t ‘get’ cars. I know there are people out there who get all drooly about them, but to me they have always been a means to an end – getting from point A to B when my legs aren’t good enough. And once drool inducing emotions are in play, rational purchasing decisions don’t stand much of a chance.
I personally don’t think that a high average new car price is a problem. The high car loan value is. Especially because I think those 30k loans are used for buying 35k cars. Average Joe just goes to the car dealer, sells his old car for 4-5k and gets loan for the remaining amount because he only sees that he can afford paying $500 per month for it. It’s the same story everywhere…
Just got a 2017 audi A7. Umm. Not sure how I should feel, but love the car.
Nice car. I think it’s cool so long as you’re making $700,000 a year, or at least $350,000 a year. Do you have a family? Definitely a great car for a family of 4.
Another interesting statistic would be the number of car “owners” who are underwater when comparing the value of the vehicle to the size of the loan. I’ll bet it’s scary high.
When I finished residency in 2006, I bought a used Chevy HHR that had been a rental car. As I contemplate winding down my career a decade later, I’m driving a used Chevy HHR. No regrets.
Thank your for the snarky, yet informative article.
Cheers!
-PoF
We’ve discussed the rising costs of new cars for a few years over at The Cheat Sheet. We just did an article discussing underwater conditions. Get this, an estimated 32% of all trade-ins toward the purchase of a new car through the first three-quarters of 2016 were underwater. That’s the highest rate on record!!! It’s absolutely madness.
cheatsheet.com/money-career/more-americans-than-ever-cant-afford-their-cars.html/?a=viewall
Bought a new SUV for $19,000 last year; which was cheaper than you could get a 2-3 year old model for. Prior car had airbag go off and insurance called it a total loss and gave me $7K. Financed the car for 3 years at a 1.4% rate because at that rate why wouldn’t you.
As a California resident – “Tesla’s, Tesla’s Everywhere!”
I love that car. It’s amazing. I want one. But it’s a $90-100,000 car + a couple grand in home power installation. I’m blown away by how many I see on the road. Everyone I know who owns one is a multi, multi, multi millionaire but there’s got to be a fair number of people out their taking out huge loans to own that car (or leasing it for their crazy rates).
I went into the Tesla dealer to check out the Model X, and the version they had on the floor was $140,000. I mean come on. That’s ridiculous. But you’re right, they are everywhere here. Neighbor four houses down has one and parks it on the street. Maybe my quaint hood is getting fancier!
How many millions does a multi, multi, multi millionaire have? Just curious…
Nice post and a lot of thoughts popped in my mind:
First, Auto Industry Marketing – how many $billions do the auto makers drain to convince us we need that shinny new vehicle? How much psychology do they employ to induce me to lust after what the Jones’s have OR consider what my car says about me?! I want to throw-up every time I see that Lincoln commercial with Matthew McConaughey…but I digress.
My father in-law (car nut job AND at any point in time has 4 cars in his driveway) – made a comment to me once stating “You treat your car like an appliance.” Now he wasn’t giving me a compliment and actually was more of a diss because I don’t wash it weekly like he does….but he’s right. I view my vehicle as TRANSPORTATION – getting from point A to point B….i don’t view it as any extension of myself….it seems to me Americans have a lot of self worth tied up in this possession and want to put their best foot forward (about themselves and to the world) – hence paying up for that car.
Another point is the amount of actual time people spend in their vehicles, so they want the comfort and the newness. I am definitely an outlier at my corporate gig – meaning I actually live in the city and less than 5 miles from where I work. The majority live out in the burbs and ex-burbs – driving 30, 40, 60 minutes plus. I guess if I were to spend that kind of time wrapped in steel and plastic, I might consider a ride that was able to pound the BASS!!!!
Ideal vehicles sitting in a garage for 23 hours a day on average is why there’s been a proliferation of ridesharing companies like Getaround, and of course Uber and Lyft. I’m going to sign up for Getaround and see what they’re about and share my experience.
My dad commented on how dirty my Honda Fit was when he visited a couple months ago. I thought it was just fine. Different strokes for different folks I guess!
Sam,
I definitely agree with Apathy. The truck and SUV are what are pulling up the average price of the car in america. Look at the F-150 best selling truck in America for 40 years starts 26,750, but thats just the base model used by landscapers and contractors. The “Lux” trucks go for 50k-70k and are all over the country.
Another quick point. The one thing you may not have thought about is the increase in overall quality of all vehicles today compared to the past. Cars and trucks can easily put 200-400k miles on themselves now numbers that were unthinkable 20-30 years ago. Modern manufacturing techniques and newer and better motor oils have made this very possible. This does make the upfront price of the car or truck worth it if you intend to own it for 10-20 years (which almost nobody does anyway). This increased quality does also make the case for the used vehicle much stronger as well.
links below illustrating sales number differences between popular car and truck
accord sales stats: https://www.goodcarbadcar.net/2011/01/honda-accord-sales-figures.html
F-series sales: https://www.goodcarbadcar.net/2011/01/ford-f-series-sales-figures.html
P.S.
Found this site about 3 months ago absolutely love it very interesting takes on a variety of topics and consistently well written and hilariously open to criticism compared to the rest of the internet, even your comment section is educational and rational 99% of the time which is a real unicorn these days. Keep up the good work
Howdy Dave, welcome to my site!
Is the surge in pickup trucks because many more of us are becoming contractors on heavy load haulers?
I like to ask my neighbor who drives a Chevy Suburban whether she’s part of the off roading club of San Francisco. She didn’t find it funny.
Sam, I think that last paragraph is a euphemism for something else…
-Mike
That’s fine, because trucks and SUVs are more profitable than smaller cars and I own automotive stock ;)
It’s a classic “everyone is buying it” syndrome. You are the sum of five people around you. I was flabbergasted when I visited the US for the first time. The number of cars, and their sizes, were daunting. I guess anyone from another country would feel the same way.
After more than a decade of traveling in and out, I still get surprised looking at those long lines of big cars carrying just one soul.
I now know my net worth is far more than most of those people but I still can’t get used to those big bad cars! I guess it’s a cultural thing.
Are you from Europe? I love all the small cars there. So efficient and useful. Too bad the risk of death is higher in the US due to highways and massive cars. I’m gonna make a change to protect my family out of necessity.
When I was in college, they came out with the Camaro concept car, and I wanted one. A lot of days, I only stayed in college so that I could get a good job and buy a Camaro, and I did in 2012. I paid $31,500 all cash. People kept telling me I must be rich, even though they were driving $40,000-$50,000 pickup trucks and SUVs. My car still looks new, and most of them have gone through one or two new cars since then. I spend less than they do, less often, and they think I’m the one that wastes money. My flashy car costs less than their tricked out pickup. Come on, guys.
Oh man, I wish I bought lots of stock or another house in 2012! Property prices in SF went up literally 70% since 2012. On a 20% downpayment, that’s like a 350% cash on cash return!
You would have been better off investing the $31,000 and financing the car at low interest. Cash is not always the best way to purchase a car…
I blown away by this stat as well, I thought I was spending a bit much when I bought a 2012 Focus for 9,800 last year! Cars and houses are the biggest savings helping me to get ahead. I think the average is so high b/c of trucks, when chatting with a plumber helping me at my last rental property, I told him I bought the house for 40,000, and he remarked that his truck cost more!
I agree with the comments on SUVs and Trucks, here in Texas they make up a pretty big slice of the car population, and they tend to sell for a higher premium than standard cars. That probably has an impact on the average, especially since low oil prices have driven people back to those inefficient types of cars. I on the other hand took advantage of low oil prices by leasing an electric car a year ago when my 10+ year old car started giving me problems. When I factor in the gas savings & electricity costs, my lease is only costing me $200/month, and that’s for a $55K car! I definitely got lucky and will not likely find another deal like that when my lease ends at the end of this year. The best part is I sold my car for more than the lease period cost me.
there is no way you pay $200/month for a lease on a $55K car, unless you gave a pay a big chunk of down-payment (over $6K) …
Great post – I hope more people read you r blog and take a hard look ate their vehicle purchases before making the plunge.
I wish I had read about your 1/10 rule before I bought my car 4 years ago. Had I known, I would have bought a slightly used Honda Civic instead of the brand new one I bought. BUT, this car was only $18K, which is far below the average, and only a couple thousand over the 1/10 rule budget.
I will drive this car until it no longer runs, hopefully at least another 10 years. I get asked all the time why I don’t buy a nicer car and my response is my car works just fine. It does everything I need it to do. A car loan for $30K is unacceptable in my world. I am also of the opinion that if you can’t afford to buy it in cash (comfortably), then you shouldn’t buy it…or lease it! Don’t get me started on car leases…
I’ll make the pitch for car leases.
If you effectively negotiate the imputed interest rate @ 0-2% on a lease, you have the OPTION to buy the car at the end of the term (usually 3 years). As long as you do a good job negotiating the purchase price at the end of the 3 years, you are always better off going with a lease even if you want to buy the car as the option value of tossing the car back is worth something.
Put another way – if you negotiate a lease right, it costs you nothing extra to buy the car if you like the car at any point during the lease but if the car has mechanical issues, your family size grows or shrinks, or otherwise just hate the car, you can hand the car back to the dealer for free.
eg: new car costs $20k after negotiating the price down.
Option #1. Borrow at 0-2% and pay $21k with interest over 5 years
Option #2. Pay cash (not a great option with hopefully better returns than 0-2% out there)
Option #3. Lease the car at $200/month for 3 years with the option to purchase the car for $13,100 at the end of the lease term.
With option 3, If you like the car, pay $13,100 in cash at the end yielding total payment of $20,300 ($13,100 + $7,200 in lease payments). Basically means you paid $300 in interest over the 3 years on the car, which is actually less than if you had financed it, and you had the option to turn the car in if you didn’t like it for whatever reason. (ps this is a real scenario I had a few years ago)
You do make a lot of good points Rob. It is nice to have the option to turn the car in if it no longer meets your needs. If you use the car for 2 years, then decide it no longer meets your needs, you have just paid $4,800 ($200/month for 24 months) for use of the car. However, if you buy the car, use it for 2 years, then decide to sell it, you will likely lose about the same amount of money.
Personally, I like the thought of owning my vehicle outright. It makes me feel safe. To each his own!
As an accountant, I have to point out that the IRS definition of useful life of a car is 5 years and I find it absurd that the average term of the auto loan is greater than the useful life of the asset itself. Granted, you can usually stretch the life of the car past 5 years if you take care of it correctly, but on paper your car becomes fully depreciated before you pay it off. Yikes!
Depends on how many miles you drive. I drive about 7k miles a year. Given a new car today should last around 150k-200k miles, that’s over 20 years of life! My father on the other hand that drives around 30k miles a year – 5 years seems about right. I believe the average is 15k miles per year, so 10 year life is probably more accurate.
I too am amazed at how much regular people with regular income spend on vehicles though. I make ~300k/year with bonuses and RSUs and I drive a 2014 Hyundai Sonota that I got for ~$20k brand new with basically every feature/option they had.
Great article….agree, we need to see the median new car price, not the average.
In the Midwest – Trucks are definitely pulling that average up. Base models are over 30k and can sky rocket from there as you add on features and they get bigger.
They are everywhere – people overestimate how much vehicle they need and pay loads of $ for it. No rational and definitely not making 150k (especially here)
I have a feeling with electric cars, automated cars and uber that car ownership will be a thing of the past and we’ll all be owning fractional time shares or treating it like semi-public transportation.
In some ways the only people that will own them are the rich will then treat them as their own money making fleet.
So the car manufacturers should try to charge as much as they can before they become disrupted in 10 years like the music industry was.
I’m very interested to see what car ownership will look like in 10 years. A lot of it will depend on where you live. People I talk to on the coasts seem to be more receptive to the idea than people in the middle of the country. Of course, self-driving cars are more practical in highly populated areas, and it’s hard to envision the more rural areas quickly adopting them.
For me it will come down to cost per mile. I’m open to self-driving cars but it has to make sense on a financial basis. I am excited about the possibilities.
I have seen couples who were clearly over extended have 2 luxury cars although only – person is working. I have never understood having a $1000 a month in payments with added car insurance as well. Why not go with 1 car (a cheaper one but let’s say they keep 1 luxury car) and use Uber for the odd times when the car would not be available?
The reason is because of appearances. Many want the 4 bedroom home with the long driveway and having the 2 expensive cars announces that they are somebody. I am not sure how to change that mindset.
From my own observations, nearly everyone I know drives an SUV rather than a sedan or minivan. Maybe I missed it, but if that average car price also includes SUV in the definition of a ‘car’, I think that may contribute to the mystery of the enormous average car price. Some of those monstrosities cost more than my first house.
Also, I can’t help but point out that many people just want the status symbol or experience the enjoyment of driving a certain new vehicle and will gladly fork out the money.
I can speak from experience. After getting a new job several years back, I ran right out and traded in my trusty compact car for an entry-level luxury model. Worst mistake I ever made. I love the car and it is great fun to drive, but the payments are brutal and a constant reminder of how dangerous an impulse buy due to extra income can be.
That’s the thing with payments. The enthusiasm for your car goes down over time, but the payments stay the same.
I do not think the average buyer makes $150K- there is no way. I think two factor driving car consumerism are 1) fear of missing out- getting a new car seems like such a deal (at the stealer-ship). For just a few thousand more, you can have that new car smell. This is rationalized by 2). People believe cars are an asset. They don’t think they are spending the money, because they come out with a car they “own” and could sell back at any time. While I can at least follow that logic, I don’t understand those who enter into long term leases.
Also, I appreciate the plural “feet.” This is really more of a problem than a single shot foot.
-John
It’s definitely the average car buyer. My own mother had to buy a 33k Honda Odesey minivan. Mind you I’m an only child. My family and two kids ride around in a tiny Mazda 3. I tried to talk her out of it, but it didn’t work. I have a hard time believing she’s an outlier and she’s definitely not a top earner.
However, I will admit I have a car in my driveway that I bought for 45K when I made a lot less then 170k. I bought a new Corvette over 9 years ago. It wasn’t bought as a transportation device, it was bought as a hobby and outlet. An expensive one at the time, though as luck would have it a better deal then buying a house at the time. That was pure luck and I’d never recommend such a course of action, but it worked out. So I guess I’ll throw in a caveat to your number. The amount of time you intend to own the car has a part to play here. Buying a 34k car every three years is not the equivelent of doing so every 13. It’s still not the best financial move.
True. And I’m sure you loved your Corvette! No regrets using any of that $45,000 9 years ago to invest in 2009 and onwards though?
I plan to hold my next car for 5+ years. Technology is now moving so fast that maybe in 5 years, they’ll have affordable electric vehicles that have 300+ mile ranges so I can go to Tahoe.
A Model X costs $100,000 – $140,000.
Given I’m a certified car nut I know that if I didn’t have the Corvette I’d probably be driven to buy something else or spend more on the beaters we drive around daily. Its kept me satisfied so it’s mission accomplished.
I probably could have sold it in 2009 for close to the same amount it would have been worth after a market crash. I still have the car so that says something as well. These days I save and invest a consistent 50% of earnings so the marginal value of an additional 25K investment is also a little muted.
This was a fun read, Sam. When I read the title to your post, my initial thought for the average price was $27,000. $34,000 seems crazy! My first thought when seeing this figure was it’s being caused by low interest rate financing deals that are attracting consumers to buy more car. The same thing has happened in real estate with nearly a decade of super low rates.
I found some interesting info on a US News Best Car Deals article.
“This month’s purchase deals even include some offerings from luxury brands. You can get low-interest financing for up to six years on the 2017 Mercedes-Benz C-Class, and BMW is offering low-interest financing for five years on the 2017 3 Series.
Our best car deals include purchase deals for Toyota, Nissan, Ford, Honda, Chevrolet, Hyundai, Kia, Dodge, Ram, Jeep, Mazda, Buick, GMC, Subaru, Volkswagen, Acura, Cadillac, Porsche, Mercedes-Benz, Audi, BMW, and Lexus vehicles. We also feature this month’s best lease deals and best used car deals. There’s a great deal out there for you, and we’ve done the research to help you find it.”
You know people can’t pass up a good deal, even if it’s not a good deal for them. Make them think their getting a steal on a Porsche, Mercedes, Audi, BMW, etc. and they’re more likely to go for it, especially with low interest rate financing available. With the longer term loans, it appears more people are falling into the classic sales trap of being led to focus on the size of their monthly payment instead of the total amount they’re paying over those 6 years.
Always interesting to read an automotive related article here! Though I have always strived to be “above average” of the above average person, I’ve always find it difficult to comprehend the 1/10th rule. With income around $100k a year, or $10k to work with, that is a good amount of money for a reasonably reliable used cars. But what about the median household with income under $60,000 needing 2 cars (either 2 working parents or 1 parent works and the other take cares of young ones)? Would be very difficult to find reliable cars at $3,000 a piece!
I don’t think there are any disagreements that buying a car is a terrible financial move, but at the same time when the cost of a new Toyota Corolla starts at $18,500, my feeling is that a lot of people feel “trapped” by the raising cost of even a no thrill barebone vehicle, similar to the rising cost of rent in most major cities! Besides, people who are not as mechanically inclined, might be worried that buying an older used car will come with problems and end up costing more in the long run. The fear of the lack of warranty with an older car may be irrational in a financial sense, but isn’t that the some reason why people buy insurance? For the peace of mind and coverage that something may go wrong and will cost a fortune, even if the likelihood of happening is slim?
Maybe I am in denial, but when my girlfriend got a base trim used Rav4 for $14,000 in good mechanical shape. I am not sure how I can consider it a frivolous purchase even though she does not make $140,000!
Nothing wrong with a $6,000 car for a $60,000 a year household. Moose, my old Land Rover Discover II was purchased for $8,000 and driven for 9.5 years.
Carpooling is cool, and so is taking the bus. Gotta love saving money on car maintenance, tickets, and hassle!
I think you’re leaving out the fact that the sedan market is collapsing because small SUVs and crossovers are trending, which drives the average new car price up while the sedans offer lower prices and better incentives in order to move them at all.
I’ve highlighted in two charts towards the end the drastic YoY decline in a bunch of sedans. I’ll go back and emphasize the figure to help readability.
Remember not so long ago when everyone was whining and crying about high gas prices and not being able to afford driving around in their big SUVs anymore? The poor Hummer even died out. (boo hoo) Now – sales of SUVs, trucks, and large vehicles are on the rise again. and as you point out, most of the people who drive them can’t afford them. In fact, if their so sensitive to gas prices, why the heck aren’t they feeling sensitve to those huge price tags on the vehicles themselves! Many in the middle class continue to dig their own graves because they refuse to learn.
I have a relative who makes $30-40K a year and is in 6 figures of debt. He gave his car (a Honda Fit coincidentally) to his teenage daughter and went out a bought a brand new one – so he wouldn’t have any maintenance to pay for. Another relative spoke to this person and clearly explained the advantages of keeping their Fit and getting the teen a used “starter” car. I talked to this person over the holidays about this teenager going to college too. She’s applied to college but the parent had not checked into prices of the schools – at all… I asked about the “net price” calculator on the college websites and why they hadn’t run the numbers. No response. These are educated folks – they are in total denial about their financial situation. And how they got a car loan? No guess on that one either.
As law enforcement THANK YOU to that family member for talking about a “starter” car. I hate, hate, hate, standing next to a crying teen at a traffic collision and seeing parents show up and realize that the second largest investment most people have outside a house just got wrecked because their beloved was texting or reading Financial Samurai while driving. (Fun, but Contra La Ley!)
I wouldn’t spend much on a car myself. That said, getting an auto loan is not automatically stupid. Current rate at my credit union is 1.79% . Why put down cash when you could keep your liquidity at low cost? If nothing else you could invest the money in bonds and pocket the difference.
Agreed. Just bought a new car at 0.9%. Still plan to pay it off early, but why cough up a ton of cash up front with that low of a rate.
Ryan,
See this post to measure whether you’re on track. https://www.financialsamurai.com/the-average-net-worth-for-the-above-average-person/
The new car is 12% of income and I could of paid for it with cash, but again at such a low rate, didn’t make sense to.
We’re right at the average net worth of above average person if those values are doubled to account for wife and I ($500k for 30 year old).
You can get an auto loan if the car is 1/10th your income or less. But at that point, you might as well buy it out right or keep things easy and lease it. The goal is to make the cost of your car as negligible as possible so you can not worry about it and grow your wealth.
Does anyone know if there is any data out there that indicates a cash buyer gets a better price than a borrower? Is there any relationship?
If that is fact, it may affect my decision even if I could get a “deal” on an interest rate. I would have to run the NPV for each scenario.
Cars are not an emotional purchase for us. We have only purchased 5-6 in 30 rs of marriage and only one of those was new. We keep two around and tend to run them into the ground (or when one of the kids wrecked them).
Currently running a 12 yr old Pontiac and 15 yr old Ford F150. They still look really good and drive just fine. A few squeaks but hey every month our $ stay working for us is better than working for car dealer.
Always negotiate the price of the car before discussing financing.
Sam – In 2010, we bought a new Highlander. My wife wanted something that could get through snow and she wanted to be the Mom that drove all the girls around. For intel purposes. At that time we paid 29K in cash. Loaded for that time period. Went through AMEX purchasing program. Saved about 4K from Edmunds true value for the car. Paid cash because we had it. Now, 7 years later we still have the car. Only 80K in miles and minimal maintenance so far. As long as that remains the case, the car is paying for itself.
2 years ago, I leased an Infiniti Q50. My company had a deal with Infiniti which allowed us to buy near employee cost. The end price was about 3K lower than Edmuds listing. I have 10 payments left and will pay in cash to keep this car because I really like it.
Now that I am semi retired, I will take a different point of view for future car purchases. My point is that new cars aren’t necessarily a bad thing if you make a good deal. Early in my career, I bought a 1 year old car for 10K and it lasted 10 years. I am not against used cars at all. My goal now is to have several years where both cars are paid for and with luck our maintenance costs are low. That is another factor that needs to be considered. The time and money to continually repair older vehicles.
Appreciate this site. Always great information.
Unbelievable! At least some of it has to do with the economy, however, I don’t believe car buyers are rational. I’d imagine some people are making over 150k+ and buying new vehicles, but for the most part, people are probably not living within their means.
I bought a used 2014 Jetta through Enterprise Auto Sales (The Rental Car Company) last February. 35k miles for $13k. Runs like new and was a great deal. I financed $8k but ended up paying off the loan in 4 months because I had cash and didn’t see the point in making payments month after month.
I’m with you Erik! I bought a 2014 Prius with 38k for $14k from the same group! I financed the car even though I could pay cash, but I invested the money instead in LendingClub and the interest I receive makes the payments on my car for me.
A lot of people are really irrational when it comes to cars. I was having an argument with my friend the other day. he wanted a brand new Prius, and I kept showing him prices for 2016 models for $14,500 with 35k miles from Enterprise, but he would just keep making silly excuses like “but I want a sun roof and navigation included, I don’t want to use GPS on my iphone.” The best excuse was “I’ve worked hard to get to where I am today, and I’m usually cheap and save my money (he doesn’t) and I’m tired of having to settle for used! I deserve this!”
you drive a Prius, and your friend wants one to, are you good, sell the car and drive a real car, I beg you. My stomach is dying
I absolutely agree. It’s crazy how expensive many new cars are anymore – and crazy that people buy them when they really shouldn’t. Just because you CAN do something doesn’t mean you SHOULD. Affording a low monthly payment (because the terms have stretched so far) isn’t the same as being able to really afford to buy something (the total cost) nor does it mean it makes financial sense for you.