November 2020

Let’s just come right out and say it: Your car is the dumbest thing you own, financially. Buying an Audi was easily the stupidest decision I’ve ever made, and I say that knowing I LOVE my car.

Welcome to America, home of the Lexus December to Remember Sales Event and land of the Ford Truck Month. Americans are f***ing obsessed with cars. Americans in cities like Dallas and Los Angeles are especially obsessed. We love our depreciating assets and we will go to bat for them, damnit!

I’m pretty sure if F-150 sales were a country they’d be, like, fifth in overall GDP.

An opening tidbit to laugh at my expense

When I bought my Audi, I had a serious identity crisis. On the deepest level, I consider myself a frugal person capable of making reasonable decisions. I knew the Audi was technically within my budget, but I also knew I could get a used Honda Accord for several thousand less that would probably be more reliable, last longer, and be far less expensive to maintain and repair (albeit less fun).

I got the Audi. Everyone told me they’re expensive to repair. I assured everyone that I’ve never been in an accident so this very basic and legitimate concern simply did not apply to me.

Then, as fate would have it, on March 15, 2020, exactly two weeks after I bought my car, I was stressed out driving home from Thomas’s – we had just canceled our Aruba trip because of Coronavirus and I had just heard the news that we’d be working from home because of the pandemic. I took the turn too tightly into my parking garage, and I heard a stomach-turning crunching sound.

It was the sound of my naiveté coming home to roost. I put a big dent in the rear passenger-side door and immediately did the two things I always do when shit hits the fan:

1. Cry

2. Call my dad

Long story short, a sizable door dent in an Audi costs $4,000 to fix. Yay!

Long story shorter, I kept the dent. And my $4,000. Adds character.

Now that you know I’m a hypocrite, let’s get into it!

My intention is not to tell you what to do

Instead, my intention is to get you to think critically about the decisions you’re making – to question how your values align with your spending decisions, especially in these big structural arenas like automotive loans. If you look at the examples and #math in this article and still feel as though your Hummer is the soundest choice, then by all means, Hum away – as long as you’re fully aware of the benefits, opportunity costs, and ramifications, you are entitled to financial decisions that serve you and your soul’s desires, baby.

Why are cars financially horrific?

There are two major things we’ll explore today:

• The long-term opportunity cost of a car payment

• The immediate short-term cost of owning a car and all the associated bullshit

The American obsession with cars creates a dangerous recipe

Simply put, most of us are driving around in cars we can’t actually afford.

And by that, I mean there are “best practices” and guidelines that help us understand how to best utilize our income. The rule of thumb for your cost of housing, for example, is that it shouldn’t exceed 33% of your take-home pay – in other words, if more than one-third of your income goes to the roof over your head, you’re going to feel squeezed.

It would always terrify me when friends would make comments like, “This is my rent paycheck!” because I knew they meant it literally – half their income was going to rent. That’s a really difficult state in which to save, because you simply don’t have the room.

Lowering your structural expenses is the biggest part of the equation. No amount of cutting back on lattes can compensate for high structural expenses.

So what’s the deal with the car?

The rule of thumb that I believe in says that your car payment + car insurance payment shouldn’t exceed more than 10% of your take-home pay. Again, this is a more conservative figure, but it’s conservative in the sense that I’m suggesting you get a regular Coke in a world of extra Super Size drinks deemed “value-sized.” The worst thing we can do is allow a consumerist society to define for us what makes sense in our own checking accounts.

Unfortunately, I know most people are going to do the quick, back-of-the-napkin math with their own situation and probably react like the “white guy blinking” meme. I know – hence the title of this article. I’m not telling you to sell your car, but… I might be telling you to sell your car.

Even my car – with an MSRP of $35,800 that I purchased three years old for $19,500 – costs $316 per month, and my car insurance is $111. I spend $427 per month for the sheer privilege to move around the same square 5-mile radius. That’s almost $15 per day.

Luckily, my interest rate is low (2.9%), and my total car expenses account for about 9% of my take-home pay, but still – it’s ridiculous.

What your car (a depreciating asset) is actually going to cost you over time

I recently spoke with a friend who’s considering selling his car. It costs about 18% of his take-home pay, and his interest rate is 7%. His total loan amount (as of right now) is somewhere around $30,000.

My friend will pay nearly $6,000 in interest for the privilege of owning this vehicle, with a monthly payment of $594.

And if you’re accustomed to the student loan or mortgage conversation, you may be thinking, “Hm, $6,000 in interest? That’s not terrible!”

But remember – the eventual value of this thing that costs $36,000 (minimum, since I’m not sure what his down payment was) will ultimately be worth zero. $0. Nothing. It’s losing value every single day.

This is why cars are a raw deal, man! And that’s not even considering insurance.

And I get it. I bought a red Audi, for Christ’s sake – I understand (and fell victim to) the allure of portraying a sporty, hot, and fun image of myself with my car.

So what about opportunity cost?

So the flip side to this short-term situation is opportunity cost. Most Americans (I don’t have the statistic handy, but trust me) have car payments, and as soon as they pay off one car, they let a year or two pass and then they sell it or trade it in for a new one and saddle up another one.

The average car payment for Americans is – I’m choking – $550.

Let’s break this down. Say you finish paying off your car after 60 months (5 years). Then, you take that same $550 and invest it for the next 10 years and drive your car that you’ve paid off instead of rushing into a new relationship with the next one.

At the end of those 10 years of driving your paid-off car and investing the payment instead, you’d have $95,160 (assuming a 7% rate of return).

You can do that, or you can buy a new car every five years, and spend $66,000 (minimum, since again, that doesn’t include your initial down payment).

This is the opportunity cost of keeping up with the Joneses. This is why the crux of your financial relationship with yourself ultimately comes down to one choice:

Do you want to be free, or do you want to impress people with your possessions?

It’s likely that we’ll all choose both many times. In fact, you can choose a car once that you think is going to impress someone! That’s fine! Just keep driving it. Drive it after it’s paid off. Otherwise, you’re throwing money at a sinking ship.

Now, it’s truly possible that some people don’t really care about having enough money to retire. If you think you’re going to work until you die, then I guess this is a moot point. Your G-Wagon can take you to work; I’m sure its seats are very comfortable for the geriatric crowd. And of course, if you have the income where it makes sense to do so, please, treat yourself. Nobody’s looking sideways at the person making $300,000 per year and driving a Carrera.

But most of us don’t make $300,000 per year, and most of us need a little help prioritizing our best bet.

Taking it one step further

Let’s say you only take this approach for the next 10 years after your car is paid off. In other words, you’re not going to drive a 1994 Honda Civic into the ground until the day you die – you’re just going to forego luxury for 10 years. That’s it.

Remember your $95,160 that you earned by not giving a shit about Kelly’s new Range Rover and staying the course?

Even if you never contribute another cent (literally – not one cent), in 30 years, you’d have $724,000.

So tell me – is it more important for the next 10 years that you drive a car that impresses the strangers on the highway next to you, or would you rather hit 55 with an extra quarter of a million in your pocket?

Reiterating: You’re driving your car for 10 years after it’s paid off instead of buying a new one. You invest the money instead. You have an extra $750,000 at 55. This should be a simple choice.

I know I’m erring on the side of preach-y right now so I’m going to ask you to extend me grace – I just feel passionately about this because I’ve seen so many young women push out their retirement date by YEARS because they chose to lease a $700/mo. BMW SUV on a $48,000/year salary.

I’m trying to drive home (ha, “drive”) the point that these are serious trade-offs – and (incoming: conspiracy theory) we’re manipulated by the powers that be to feel like it’s NBD because of these cutesy-ass sales tactics and the fact that every other 25-year-old you know is whipping around town in a $40,000 car, but I promise if you spend 3 minutes with a loan calculator and an investment calculator, you may begin to feel like you’re being taken for a ride (I am truly on fire) by the auto financing and car manufacturing industries.

Don’t let anyone else get rich on your hard-earned money. The amazing thing is, you actually CAN buy the flashy car eventually – I’m not saying never do it – just put it off for a little while.

What if we held off on the dream car until we’re 40?

Same example, except you’re pledging that for the next 15 years after paying off your current car, you’re going to make a responsible choice. Drive your car into the ground. Invest $550 a month instead.

In 15 years, you pull a big ole’ f*** it, and you buy a Porsche Cayenne. Great. You deserve it!

In the meantime, though, you’d invested $99,000, which turned into $172,000 thanks to compound interest.

So now we’re cruising down Easy Street in our Cayenne, and our $172,000 of Responsible Decision Money is compounding in the background. We’re done being responsible.

That’s fine. Your $172,000 will become about $500,000 on its own over the next 15 years. (Assumes between a 7% and 8% average rate of return.)

Do you see how insane this is? You can drive fancy cars for the next 15 years or have an extra half million when you’re literally 55 years old. These decisions matter.

This is not my opinion. This is math. You can have your Cayenne and eat compound interest, too. Just give it a minute.