For Americans, a car driving down an open road is a common symbol of freedom. But are we turning our cars into fiscal handcuffs? Experian Automotive, which tracks car statistics, reports that Americans borrowed $27,000 on average for their new cars in 2014. What’s more, their monthly payments rose over the previous year to an average of $470 per month. And with the economy in recovery and oil prices in free fall, the trend for big cars - and big loans - is likely to continue in 2015.
For a car writer, this might be reason to celebrate. But I write about money, and push people every day to top up their retirement accounts. In my eyes, these loans are giant oil derricks straddling Americans' homes, pumping out discretionary cash. A $470 monthly payment locks up cash flow that could, with modest market performance, grow to $33,000 if invested over five years (and continue growing until retirement). Compare this to buying a piece of bent metal that will always be worth less today than it was yesterday.
Of course, most of us need cars. But is there a better way? I think so. It takes some work, but I think it’s possible to own a lifetime stream of safe, reliable cars for no more than $30 per week. Here’s how:
First, start by putting $30 per week into a savings account. Make sure it’s a boring, vanilla savings account; we don’t want this money invested in anything risky. Create a separate savings account to create a wall between it and the rest of your cash – you’re less likely to spend it. Make the weekly transfer automatic and forget about it entirely. You’ll barely miss the cash, I promise.
Next, wait seven years. It sounds like a long time, but most cars last at least that long with proper maintenance. In seven years, your measly $30 transfers will have amassed into $10,920 plus a small amount of interest. At this point you can spend all or some of this money on a used car that will last you – you guessed it – seven years.
Hop on your local Craigslist page and start digging. My handy metric for used cars is 7-7-7. By this I mean: I try to target used cars that are seven years old, with around 70,000 miles on them, for around $7,000. Kelley Blue book values plenty of great cars in this category at $7,000: Honda Civic, Honda Fit, Hyundai Elantra, Toyota Corolla and Toyota Scion. And I didn’t even do a full search. With $7,000 spent for the car, you’ve still got an additional almost $4,000 to help with registration, maintenance, and insurance.
Speaking of insurance, during the last few years of each car’s life you can remove collision and comprehensive coverage. Your car isn’t worth much at this point, and you’ve saved enough to buy another, so you’re essentially self-insured. This will save you hundreds of dollars per year.
Far from being rigid, this system can flex to meet your needs. For example, if you drive serious miles for business, dial down the miles in your car search and dial up your weekly savings. The basics of the system will remain the same: be your own bank by saving ahead of time and letting someone else take the depreciation hit on a new car. And that $470 monthly payment all your neighbors are making? Bank that money. Invest it in whatever risk level you’re comfortable with.
If this sounds like more work than walking into a dealership and being gently escorted through the wickets of buying and registering a new car, that’s because it is. Saving money ahead of time is harder than taking a fat loan dangling out on a hook. Buying used cars on Craigslist can be a pain. The DMV, while much improved in my state, still feels like a bureaucrat’s idea of a practical joke. But for this extra work, you will save hundreds of thousands of dollars, which can shave years off of your working life. That’s real freedom.