Do you own your own car? According to a few different surveys, there is a 95% chance that you do! In fact, many households have two cars or more to get them through their day to day activities. So, it is likely that you own at least one vehicle. Do you have any idea what that vehicle is doing to your net worth? I bet it might have more of an impact than you think.
America's #1 Status Symbol?
I don't necessarily have any facts and figures to back this up, but I wouldn't think that too many of you would argue with me: Today, the status symbol of choice is your automobile. In fact, there is a saying going around that states, “You are what you drive”. If you like to live on the edge, you should be driving a new sports car. If you're a businessman, you should be driving an expensive luxury vehicle. If you are rough and tough, then you would likely be driving a brand new Ford F150. There's no doubt about it, what we drive definitely says something about us.
When people see us step out of our vehicle, we secretly want them to think, “Wow, I wish I was him” or “I wish I was her”. We want them to be envious of what we drive, and, sometimes more importantly, we want to feel good about ourselves with what we drive. More so now than ever, our vehicle is a status symbol that lets other people know that we are successful. For this reason many of us overextend on our auto purchase. And, in turn, this is killing your net worth.
Car Cost of Ownership and Net Worth
For many, due to the constant stresses of the world today, net worth is probably the last thing on their mind. However, it really shouldn't be discarded so quickly. In order to retire well later in life, you need to make sure that you are constantly increasing your assets and reducing your debts (thereby increasing your net worth). So which assets are helping you increase your net worth and which ones are hurting? For many, their home is helping and so is their 401(k) (at least I hope both of these are rising in value for you), but their car is absolutely hurting their net worth, mainly due to depreciation.
We all know that new cars decrease in value, but have you ever stopped to think about how much this is hurting you financially? And how is it impacting your net worth each year? I was able to find the infographic below from Edmonds.com. I believe that it accurately displays how much is lost each year when you purchase a new car. We'll later use these figures to calculate the impact on your net worth.
Source: How Fast Does A New Car Lose Value
How Your New Car Is Actually Impacting Your Net Worth
In order to show you exactly how much your new car is impacting your net worth, let's set up a scenario. Let's say that you are doing quite well for yourself. You own a home, a new car, a retirement fund, and you put away some cash each month for a rainy day. With the rising value of your home, your retirement fund, and your savings account, you would expect your net worth to rise right? Well, that all depends on your vehicle. If you buy a brand new car, I highly doubt that your net worth will be on the rise any time soon. Let me illustrate this.
- Your $100,000 home increases in value by 1% each year
- Your $20,000 401k increases by 8% each year
- You add $100 a month to your savings account
- Your brand new $30,000 is depreciating each year as outlined in the infographic
Let's take a look at what happens to your net worth over the course of 5 years.
So I have to admit, your net worth would not decrease given the scenarios above. But, with all of the things you are doing right, can you believe that your entire net worth did not increase by more than $3,000?! That's absolutely terrible over the span of 5 years!
Let's move to the next natural question then. What if you decided that status was not everything? What if you could feel completely confident in a $5,000 used car instead of a $30,000 new car? How would that impact your net worth? Let's have a look-see.
Just by changing the type of car your drive, you could improve your net worth by over $16,000 over the course of five years! Did you have any idea your car was hurting you as much as it is? For all you naysayers out there that still want your luxury car, you might say something foolish like, “Yeah, but think of how much that used car will cost you in repairs.” Even if something catastrophic happened and your entire engine needed to be replaced with a new one, you would still have a $10,000 higher net worth than if you bought that new car. And, if you continued to challenge me on this I would remind you how much you are currently paying in insurance on your brand new car – certainly a lot more than if you had owned a $5,000 car! No matter how you look at it, your new car is absolutely killing your net worth.
Did you have any idea how much your car was killing your net worth?
4 thoughts on “Your Car Cost of Ownership is Killing Your Net Worth”
Great post and it does not even account for how much interest added on to the payments makes it an even worse situation for most Americans. 1%-3% financing does not sound bad, but with 7 year car loans now, that adds up to a substantial amount over that time. Not to mention when you get to the end, your asset is nearly unusable and you go back into the same cycle.
That’s true. The interest payments can add another $1,000+ to the overall costs. It makes it even worse doesn’t it?
You switched your charts. You have the $5000 car before the $30,000 one.
Oops. Fixed! Thanks for pointing that out Ginger.
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