May 21, 2024
Did you know one of the biggest obstacles to building your net worth may be sitting in your garage right now?
Whether you opted for a shiny new vehicle or a practical used one, your car could actually be standing in the way of you getting rich.
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At least, that’s what financial adviser and social media star Humphrey Yang recently explained to his followers on his YouTube channel recently. As Yang explains, thanks to the culture of car ownership in America, most people may not even realize they’re getting in their own way.
But fortunately, he has a few tips to get you back on track.
Your car costs more than you thought
When you bought your car, chances are good you focused on whether the monthly payments were affordable. But, as Yang pointed out, costs go beyond loan payments.
Depreciation is a big one. As soon as you buy a car — especially a new one — your investment loses value. “You're putting your money into something that’s bound to go down,” Yang explained. While depreciation rates vary by vehicle, cars often see their value decline 20% in year one and 60% in the first five years, analysis from Kelley Blue Book shows.
There's also gas, maintenance and insurance. With all those things factored in, the annual cost of ownership is staggering. Yang offered the example of a 2018 Honda Civic, a practical car that he projected would end up costing you $43,993 over five years.
Perhaps the biggest issue, though, is opportunity costs. All the money you're spending on your car is money you can't invest in assets that go up in value instead of down. Despite this, as Yang explained, most people celebrate getting a new ride without considering the long-term financial consequences.
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Car ownership is only getting more expensive
The problems Yang described with vehicle ownership have only worsened in recent years as transportation costs have skyrocketed.
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Prices may have fallen from their post-pandemic highs, but the average new car cost $46,992 in the first quarter of the year, reports Edmunds.
Meanwhile, over the same time frame, interest rates remained stubbornly high, averaging 7.1% of new vehicles and 11.7% for used cars — near a record high.
Persistent inflation has seen drivers’ daily costs shoot up as well. Gas prices average $3.59 as of mid-May 2024, compared with an annual average of $2.61 in 2019. And drivers got no brake over the last year as auto insurance costs climbed 22.6% since last April, according to Bureau of Labor Statistics data.
Many people are also financing their cars for longer. The average car loan term is now 68.3 months for new cars and 69.7 for used cars, with typical payments totaling $735 and $546 for new and used cars respectively in the first quarter of 2024.
With all this factored in, AAA's estimate of the average annual cost of car ownership was $12,182 at the end of 2023 and it's only growing. Investing that much annually at 10% average returns over five years would leave you with $74,360 instead of a car likely worth 60% less than you paid for it.
Keep your car from driving away your wealth
So, what can you do? Yang has a few ideas.
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“I'd suggest not buying a new car.”
However, that strategy may not work for all households. If you really do need a new ride, he’d recommend opting for a vehicle that's about three to five years old instead. Most of the depreciation will have happened before it becomes yours, but it won't yet be so old you'll need to worry about major repairs.
Doing a few things for yourself can help cut costs — especially when it comes to maintenance. Changing your own oil can save you up to $100 every few months. And although insurance in general has been on the rise, there’s always a chance you could be missing out on a better deal. Shopping around every six months can ensure you’re always paying the best rate.
Finally, you may consider some more extreme measures, like moving closer to your office to reduce your commute or reducing the number of cars in your household.
All of this is good advice, and there's also one more helpful tip: Drive your car into the ground. Keeping your vehicle as long as possible means you'll lose less due to depreciation over your lifetime and pay less interest on auto loans — and it doesn’t hurt that it leaves you with more to invest instead.
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Christy Bieber has 15 years of experience as a personal finance and legal writer. She has written for many publications including Forbes, Kilplinger, CNN, WSJ, Credit Karma, Insurify and more.
