We are a society that loves their toys! Whether it is a car, boat, motorcycle, camper, or RV, we love the freedom and comfort these items bring to our lives. While we love to own nice things, we don’t want those items to own us. How do we balance the need for reliable transportation and a little fun in our rides without forfeiting our financial future by paying too much?
Having guidelines in place BEFORE we walk onto a dealership lot or approach an individual seller can help keep emotion out of the purchase equation and keep us from making a costly mistake. Since vehicles are typically depreciating assets, meaning they go down in value, a good rule of thumb is to not have more than half of your household’s annual income tied up in this kind of asset. For example, if you made $85,000 a year, all of your vehicles (cars, boats, etc.) would total LESS than $42,500. Since the vast majority of a car’s decline in value occurs within the first few years (an average 30% decrease in value in the first two years alone*), by buying a slightly used vehicle you can avoid most of this depreciation and still get a reliable car.
Many people consider if they can afford the monthly payment on a car, but the real challenge is to consider if you can really afford the entire purchase price of the vehicle. This is counter cultural, but by always paying cash for a car, you are ensuring you won’t buy more car than you can afford. If driving a slightly older (and even uglier!) car doesn’t get you excited, think of the opportunity costs! The average monthly payment for a used car in 2024 was $525.** If you were to invest that amount each month for 20 years, given an 8% rate of return, you would have over $300K! That is a great incentive to pay cash, even for a much older car.
*https://www.kbb.com/car-depreciation/
**https://www.nerdwallet.com/article/loans/auto-loans/average-monthly-car-payment#:~:text=The%20average%20monthly%20car%20payment,Several%20factors%20determine%20your%20payment.
Disclosure: Investment returns are based on hypothetical situations. Readers should not take this article as advice but general information. Reach out to your advisor for specific advice for your situation.