The world spends a lot of money on cars. Over the past 12 months, the five biggest automakers -- General Motors (NYSE:GM), Ford (NYSE:F), DaimlerChrysler (NYSE:DCX), Honda (NYSE:HMC), and Toyota Motor (NYSE:TM) -- raked in a combined $840 billion. As in almost a trillion. As in 30% more than the gross domestic product of Australia.
Some may say, well, it figures. After all, we all have to get around somehow.
But then you consider the average price of a car, which, according to the Auto Affordability Index, is now $28,600 -- equal to 26.2 weeks of a median U.S. family's income. In other words, a whole half year's work went to buying some wheels.
That's just the cost of buying; once you drive the car off the lot, you have to start worrying about repairs. According to AAA, the average car costs $735 a year to maintain -- a cost that gets bigger as the car gets older. At some point, you'll be paying so much in repairs that you might as well just buy a new car.
Or should you?
Riding your jalopy into the sunset
Sure, it sounds like a good reason to get a new car. ("I have to spend $1,000 to get this heap up and running -- again? Forget it!") But looking at the cost of repairing a car is only half of the equation; the other is how much it would cost to buy a replacement. And unless you have to make several big-ticket repairs a year for many years in a row, then chances are you'd be paying less to keep your old clunker on the road.
The real answer, of course, lies in the numbers. At current rates, a four-year car loan for $28,600 would cost $684.20 a month -- $8,210.40 a year. So the simple answer is, unless your current car needs more than eight grand worth of repairs each year, you're better off forgoing the new wheels.
Of course, at the end of those four years, the payments end and you own the car free and clear. Ah, but then that formerly new car will need repairs of its own. Plus, this simple illustration doesn't factor in another cost of owning a new car -- higher insurance premiums.
More car today, less cabbage tomorrow
So let's see how this could affect your future net worth. We'll assume that instead of paying $684.20 a month in car payments for four years, you instead keep your current car and pay monthly maintenance costs. The money saved by not buying a new car is deposited in a retirement account and earns an 8% compound average annual return. Furthermore, that savings at the end of four years is permitted to grow another 20 years. Let's see how the numbers play out, given various average maintenance costs on your current vehicle:
|
Monthly |
Amount saved |
That amount |
|---|---|---|
|
$100 |
$32,920 |
$153,439 |
|
$200 |
$27,285 |
$127,174 |
|
$300 |
$21,650 |
$100,910 |
|
$400 |
$16,015 |
$74,645 |
|
$500 |
$10,380 |
$48,381 |
So even if your current heap costs you $500 a month, keeping it alive for another four years could add almost $50,000 to your nest egg down the road. And if repair costs run you only $200 a month ($2,400 a year), then you're looking at an extra $127,174 two decades hence.
Of course, nothing lasts forever. Every car eventually ends up in the junkyard. But unless your current car is a highway hazard, you'll have a much more bountiful retirement if more of your money goes to your retirement accounts than to the automakers.
Robert Brokamp is the editor of Rule Your Retirement , the Fool newsletter designed to help you take control of your golden years. Click here for a free 30-day trial and you'll get "The 8 Steps to Ruling Your Retirement" and "8 Ways to Supercharge Your Retirement," gratis.
Robert owns none of the companies mentioned in this article. He hopes his car will last to 500,000 miles. It's halfway there already and smells like it. Read about the Fool's disclosure policy here.
