Owning a home may be the American Dream, but owning a car seems to be the American Way. It's estimated that 95% of U.S. households own a vehicle, with 85% relying on their cars to commute to work. But given the number of affordable alternatives to vehicle ownership -- think public transportation, Uber, or even a bike -- it may be time to consider unloading that automobile, or refraining from buying one in the first place.
The cost of owning a car
There's nothing like the convenience of having your very own vehicle to use when and how you please. But how much are you willing to sacrifice for that luxury? According to AAA, it costs $8,700 a year, or $725 a month, to own a vehicle. And when you think about the expenses involved, like car payments, insurance, registration fees, and maintenance, that number makes sense. Still, it's a lot to pay for the ability to get around town, especially if you live somewhere that offers lower-cost alternatives.
IMAGE SOURCE: GETTY IMAGES.
Take Washington, D.C., for example. Our nation's capital has the dubious honor of sporting the country's most expensive public transportation commute. But if you were to take that cost -- $237 a month -- and subtract it from the $725 a month a vehicle would run you, you'd have precisely $488 in monthly savings, or close to $6,000 in extra disposable income per year.
Of course, it's easy to give up a vehicle when you live in a city with adequate public transportation. But even if you're a full-fledged suburbanite, you may have some wiggle room for unloading an automobile, such as carpooling with a partner or spouse. It pays to explore your options before writing off the idea, as you stand to save a pretty substantial chunk of money for letting that vehicle go.
What else can that money do for you?
When you think about the money you could be saving by not owning a vehicle, it's important to consider how that cash might otherwise serve you. We just saw that the most expensive public transportation option in the nation would still shave $488 off your monthly budget, but if you're willing to forego that vehicle on a long-term basis, you stand to save even more. Specifically, if you invest the money you pocket by not owning a car, and your portfolio does well, you can grow that cash into an even greater sum thanks to the power of compounding.
Imagine you're willing to give up a vehicle for just a single year, during which time you sock away an extra $488 a month. Even if you don't save another dime after that 12-month period, if you leave that money alone for 30 years, you'll have amassed close to $45,000, assuming your investments deliver an average annual 7% return (which is a couple of points below the stock market's average).
Better yet, imagine you go without a vehicle for what basically amounts to the bulk of your adult life. If you save that $488 a month for 30 years, you'll have a whopping $553,000 to your name, assuming that same 7% return. In fact, giving up a vehicle could spell the difference between accumulating a respectable nest egg for retirement or walking around perpetually cash-strapped as a senior. Now that's a good reason to take the bus.
Be smart about buying
While giving up a vehicle might offer you some solid savings opportunities, you will be sacrificing a degree of freedom in the process. So if you are going to buy a car, go about it strategically. First, consider the merits of buying a certified used vehicle from a reputable dealer rather than purchasing a brand-new model. It's a known fact that new cars drop steeply in value the second they're driven off their respective lots, so even if you're being showered with incentives, it often still pays to buy a car that's been previously owned.
Getting a handle on your credit score can also make car ownership more affordable, as the lower the rate you pay on your auto loan, the less it'll cost you month after month. If your credit isn't stellar, consider postponing your vehicle purchase until you've had a chance to build it up. You can boost your credit score rather quickly by paying off a chunk of your existing debt, or reviewing your credit report for errors and correcting any mistakes you spot.
Finally, be prepared to sink some time into finding the right vehicle, and don't be afraid to shop around. Tempting as it may be to go with the first dealer you visit, the more offers you gather, the better your chances of getting the best deal.
While there are plenty of good reasons to own a car, those benefits will ultimately come at a price. It's up to you to carefully consider what you'll be giving up for the privilege of vehicle ownership and decide if it's really worth it.
