How Your Car is Making You Poor
Over the years, as I learn more and more about personal finance, I grow more and more convinced that there is no force more destructive to wealth building for most Americans than the way we buy cars.
In fact, I think the average American could generate over $2 million more in wealth for themselves by changing the way they buy and use their automobiles.
Let me show you how.
New vs Used
Obviously, there are a few ways one can approach the purchase of a car. The first major decision we’ll discuss is buying new instead of used.
Depending on which survey you believe, around 60% to 75% of Americans buy new cars instead of used cars.
This difference is important to note because the cost of the average new car as of January 2025 was $49,740 versus $25,571 for the average used car.
So, already we’re talking about a near 50% difference in the overall cost before we even get into financing.
Clearly, buying used is a quick and easy way to save quite a bit of money, but price is just one important factor.
Another is depreciation.
You are probably aware that nearly all cars “depreciate” or decrease in value over time. It’s important to note that new cars do this much faster than used cars.
According to Kelly Blue Book, new cars lose 60% of their value in the first five years after they’re purchased.
The average lifespan of a car is 12 years, which means 60% of the value is gone in only 42% of the car’s life. The remaining 40% of a car’s value stretches out over the course of 7 years (or more if you take good care of it).
Put another way, if you were buying a car worth $50,000, would you rather pay $30,000 to drive the car for 5 years ($6,000/year) or pay $20,000 to drive it for 7 years ($2,857/year)?
Yes, it will smell better the first five years, but is the additional cost really worth it?
Finance vs Cash
Another major factor in the overall cost of car ownership is whether or not you use financing to make a purchase.
Toward the end of 2024, the average interest rate on a new car was 6.7% with a term of 68.5 months (5 years, 8.5 months).
The average interest rate for a used car at the end of 2024 was 11.74% with a term of 67 months.
There are two things about this data that I found shocking.
First, lower income households are more likely to buy a used car, which is ironic because they’re also having to pay much higher interest rates on their car debt.
The second thing is how similar the term of the loans is. People are basically borrowing money for 5.5 years, whether the car is used or new.
Obviously, a new car has a much better chance of making it through a 5.5-year loan, but for used cars to have loan terms that are nearly the same seems so strange to me.
It’s as if the average consumer believes the useful life of a used car is the same as that of a new car. That makes zero sense.
Clearly, consumers are not thinking about the long-term implications of how they buy cars.
Let’s take a look at the overall cost of each approach to buying a car to capture the full cost of that decision.
The Impact
On the table below you’ll see four different approaches to buying a car given the options we’ve discussed so far.
For the scenarios that include debt, I’ve assumed a down payment of 20% which is the national average.
Overall, you may look at this and think to yourself, “what’s the big deal?” If I buy a car with debt, I’m only going to pay about $8,000 more over five-and-a-half years versus paying cash.
That’s true enough, but it’s only part of the picture.
Looking at the total cost of the car alone fails to account for the opportunity cost of investing and saving the value of your monthly car payment instead.
And before you roll your eyes in disgust, this is exactly the sort of behavior most millionaires use to propel them to that status.
It’s rarely inherited or the result of a winning lottery ticket.
And it’s not because they have massive incomes. Most millionaires in the United States have had average incomes below $100,000 over their working lives.
About 75% of millionaires say they reached the seven-figure mark by consistently saving and investing a portion of their income over a long period of time.
So, how much of an impact could a monthly car payment have on your long-term net worth?
A Better Way
If you invested $417.70 every month instead of making monthly car payments with it, you’d have $34,718.23 after 5.5 years.
If you invested the $701.50 value of a new car payment, you’d have $58,306.10 after 5.5 years.
These may not seem like very exciting numbers, and I have to admit that if you compare them to the purchase price of the cars, then you’re right.
But remember, we’re taking the long view here.
What if you bought all of your cars this way over your working lifetime?
The average American owns a car for 8.4 years before moving on to a newer one.
So, it’s conceivable that, on average, Americans repeat this cycle at least 5 times (45 years) between when they buy their first car and when they retire.
If you kept up this method of investing your monthly payment for 45 years instead of paying off a car note, you’d have $1,604,768.93 from the used car payment value ($417.70/month) and $2,661,084.03 based on the new car payment value ($701.50).
That’s a life-changing amount of money obtained through the power of compounding interest that you can achieve by investing consistently over time.
Some Exceptions
Okay, now that I’ve gone to all the trouble of showing how powerful investing can be, there are a few things this analysis doesn’t account for.
1) I did not calculate the value of monthly payments that would no longer be necessary after the end of a loan (5.5 years) and the next car purchase (8.4 years).
To be sure, there is value here, but that assumes the car owner invests the money instead of spending it elsewhere. Based on my experience, people tend to spend more after they retire debt, but don’t normally focus on investing instead.
Besides, you’re talking about a cumulative 12 years that won’t have car payments versus 45. It’s not as if 12 years of investing will remotely reach the value of 45 years’ worth.
2) I did not account for the resale value of the car after 8.4 years in either scenario.
That’s because the depreciated value of the car is not dependent on how much was borrowed to pay for it in the first place. The resale value would only be different if you were comparing the value of a new car after 8.4 years versus that of a used car.
3) I did not account for the cash paid for the cars bought with cash.
Actually, I did. The investment value of the used car payments was reduced by $127,855.00 to account for the purchase of 5 used cars over that period and the new car total was reduced by $248,700.00.
4) I did not account for inflation.
The fact is I don’t normally account for inflation because it’s difficult to think in terms of dollars 4 decades in advance. It’s easier to just leave it out of the math in my opinion.
If you want a much more detailed analysis, I did a video last year that takes a bit of a deeper dive into the value of buying cars with cash. Please feel free to check it out.
My Experience
The final thought I want to convey is to those of you who may doubt that this is possible or legit.
I can tell you from experience that buying cars with cash and investing the money you’d normally be spending on a monthly payment, can have a significant impact on your net worth over time.
Below is a list of the 4 vehicles I’ve owned in my life. They are relatively modest and, aside from the Ford Ranger (which was bought before I learned all this stuff), I paid cash each time.
None of these were very flashy, but buying used, moderately priced cars with cash has provided significant freedom over the years for me to invest a portion of my income instead of making monthly payments.
My general practice is to buy a lightly used car with cash and drive it as long as I possibly can.
It has required thoughtful planning and saving for a few years as I anticipated the need for a transition to a better vehicle, but it has paid off.
Naturally, I encourage you to do the same.
Currently, only 29% of Americans buy cars with cash and I imagine many of those people are very wealthy.
As a result, I see an abundance of opportunity for Americans to make a change in the way they make one key purchase and harvest significant rewards from it.
