Transportation is generally the 2nd largest annual expense for Americans, after housing, and you can likely cut car expenses more than anywhere else.
This necessary expense can range from less than $1000 of annual expenses a year all the way up over $20,000. How much you spend (or save) depends on how you define wants vs needs in a car, and a smart decision here can make you a millionaire in 30 years.
The question FI pilgrims should ask is not how much car can I afford, but how much car do I need.
What you probably don’t need? You probably don’t need the Dodge Charger that you never race, the Lincoln Navigator SUV to transfer your 2 kids to soccer practice, the shiny chrome Dodge Ram that never hauls anything , and the Harley you ride maybe 10 or 12 times a year that lands Midwestern mosquito guts in your sweet hipster beard on a hot summer day.
Many American families that make modest salaries own some combination of or even all 4. They have no emergency fund in the bank, little in 401k, no IRA, and no brokerage, but they do own a mountain of debt they’ll never get out of.
So what does the average American family need? Certainly a reliable car to commute to work and to fetch groceries. Maybe a minivan, if you have 4 kids.
Anything beyond that is likely an example of lifestyle inflation and a symbol of luxury – luxury that is costing you carloads of potential early retirement cash. That luxury might even cost a million bucks.
What the FI community recommends
On the other extreme end of the spectrum, many FI gurus advocate for living in small commutable distances and buying small, gas efficient used cars to minimize travel expenses.
The idea is to buy only used cars as a way to pocket the difference and invest rather than sign up for 7 years of payments. Which is sound advice! Especially if buying new holds no special cultural and functional significance to you, and you are more interested in putting your money to work for you in the stock market.
Though the market can change, and though the type and value of used cars vary widely, FI-minded shoppers can save 50% or more by buying used as opposed to new, saving anywhere from $5K to $15K. Certainly not chump change as an upfront cost, and worth potentially a million over a longer period time in eliminating car payments over time.
Is a new car fiscally irresponsible?
Are used car purchases necessary for a middle income family to reach FI and retire early? Can you still reach Financial Independence early and buy new?
Yes you can! Sometimes you actually can have your cake and eat it too.
And I really love cake, especially Better than Robert Redfield Cake, a velvety chocolate cake covered in caramel, whipped cream, and crumbled toffee candy. Delish!
Good news. If you really have your heart set on a new car, Mr. FI says this indulgence can still align with your early retirement goals (as long as you aren’t buying a new Tesla or some premium brand that is 3X the cost of the Chevy).
The decision to buy new or used will not have much impact on your ability to retire early if you follow Mr. FI’s advice to simply resist the urge to trade in every 3-5 years, locking car ownership forever as a fixed expense.
In fact, both of my current automobiles were purchased brand new when I made a median American salary. Despite a career of negotiating cost at work, I paid no better than market price at that time of purchase for both vehicles.
Our Corolla was purchased in 2008 for $21K, and we bought our Chevy Traverse in 2013 for $30K. The FI family still owns both today (writing as of July 2022) and both are still running like champs. Take a look at old Betsy.
Over 100K miles and still chugging along, missing hubcap and all.
Resisting a trade-in is more valuable than buying used
The real question FI adherents should ask and measure is how much it costs in lost investment opportunity to trade in a car with 3-5 years of age on it, in perfect running condition no less, for a new (or newer used) one. This is what most Americans do, even those who buy used.
But whether you buy new or used is irrelevant over the long haul, as long as you plan to hold and maintain your car long term.
That saved my family about $250K over 15 years (this figure does not even include the 66% savings on insurance in dropping to liability). If I keep that $250K invested today, it would be worth $1M in 15 years. That’s right, you can earn your 4 person family $1M in 30 years even with buying new cars, as long as you don’t buy luxury, don’t trade them in, and invest the money in the total stock market. Amazing, no?
Let’s run through math. The 2022 average car cost is $47K. The average loan is 7 years. Most American trade up every 5 years. On a $47K loan, you would still owe about $12K, which is equal to the car’s trade-in value. You are net worth neutral at 5 years on your new car.
In effect, most Americans’ monthly car payment is a fixed recurring expense. The average family owns 2 vehicles (one car $30K and one SUV $47K) and has $13K in yearly payments. My family pays $0, and instead invests the $13K in early retirement. Save on your car payments for ~15 years, and then let the savings grow another 15 years, and you’ll be a millionaire because you could stomach driving a car with a missing hubcap.
Maybe you have a longer commute or a car that didn’t last. Or maybe you are just not willing to drive a car with a missing hubcap. Fear not, you can still save carloads of cash.
You don’t have to hold a vehicle for 15 years. You DO however have to possess your car longer than 5 years (and you can also buy used).
Do you or your spouse have a remote job? If you do, you could also go down to a single vehicle family. My wife and I began working at home 100% after COVID hit, and the only reason we kept both cars is because they were paid, and eliminating liability insurance would have only saved $400 a year. (Hence, our 3 hubcap queen is still with us and still fetching groceries on a weekly basis).
But if you owe money on both cars (or a 3rd with a sweet convertible top), it may be time to ditch the one that sits 9 out of 10 times and invest the cash elsewhere. It could just make you a millionaire in 30 years.