1/4/2013 7:45 PM ET|
Your car is wrecking your retirement
If you are having trouble saving for your golden years, take a look at the wealth destroyer parked in your driveway.
Val W. emailed me because she was “finally out of ideas and energy.” The 27-year-old was cutting expenses wherever she could -- axing cable, vacations and new clothes -- but she couldn’t make progress on her debt or save for her future.
Val’s big problem is the $678 monthly car payment eating up a third of her $2,000 monthly income.
“I have three years left to pay,” she explained, “and can't refinance because of my credit and (because) the car has negative equity.”
Val’s payment certainly is outsized, but big car expenses aren’t all that unusual. American households spend more on their wheels than on anything other than housing.
The average household shelled out $8,293, or 13% of its $63,985 pretax income, on transportation costs in 2011, according to the Bureau of Labor Statistics. That average includes purchase costs and car payments of $2,669; gas and oil charges of $2,655; and $2,454 for other expenses including insurance, maintenance, repairs and registration. (The average household also spent $516 on public transportation.)
Moreover, earning less doesn’t necessarily mean spending less on your ride. In fact, the less people earn, the larger the percentage of their incomes goes to cars. Transportation costs ate up 23% of gross incomes for those who made $15,000 to $19,999, but just 10% for those making over $70,000.
At the same time, most Americans are failing to save enough for retirement:
● Half of Americans aren’t contributing to retirement plan at all, according to a survey last year by LIMRA, a trade organization for financial services.
● Most of those who are saving haven’t saved much; 60% of workers polled by the Employee Benefit Research Institute had less than $25,000.
● One researcher estimates that half of workers who are now middle class will be near or below the poverty line in retirement. Teresa Ghilarducci, a professor of economics at the New School for Social Research, said research from the school’s Schwartz Center for Economic Policy Research shows that three-quarters of adults ages 50 to 64 have so little saved that the money won’t provide a significant supplement to their Social Security checks.
Once you see the numbers, it’s easy to conclude that our cars are robbing our retirements.
Let’s say that instead of spending it on vehicle expenses, you invested $8,000 every year over the course of 40 years. You’d wind up with $1.2 million, assuming a 6% average annual return. If your returns averaged 8%, you’d have more than $2 million.
It’s unlikely that households could entirely eliminate auto expenses, of course. But there’s ample evidence to suggest that plenty of people are spending too much on their cars. For example:
- Many people aren’t paying off their current car before buying the next one. In November, nearly one out of four car sales with a trade-in involved negative equity, according to car research site Edmunds.com. That’s up from one in five in 2010.
- The vast majority of car loans are for more than 48 months, an indication that borrowers are stretching too far to buy cars. In November, 90% of new car loans and 85% of used car loans stretched for more than 48 months.
“For many, getting qualified for a new car purchase is easy even with bad credit,” said Steve Rhode, the founder of a credit counseling firm who now helps strapped borrowers at GetOutOfDebt.org. “When the dealer is hanging easy financing right in front of you for the car you want, it's easy to forget one basic rule of the financial world: Just because a lender will approve you, doesn't mean you can afford it.”
Even if you are able to resist, your monthly payment is only part of the story. Once insurance, maintenance, repairs, fuel and depreciation are factored in, the real cost of owning the car is typically doubled. (Edmunds.com has a “True Cost to Own Feature” that breaks those expenses down by car make and model.)
More from Liz Weston:
VIDEO ON MSN MONEY
Cars can be thrown away.
I gave a long thought to this retirement savings thing. After seeing the government incapable of controlling itself, now taxing everything that could be, decided it is foolish to be left with any savings by the time I retire. It will be taxed and I will be denied benefits because I will fail the "means testing". The best way to deal with that is to not have any means!!
Went and bought myself a beautiful black BMW 5 series. caouldn't be happier!!!
(My) Personal Finance rule #1:
Never spend a lot of money on a depreciating asset.
If that $2,000/month income is take-home, I estimate that Val is grossing mid 30's annually. Why on Earth did she buy a car that had a new value at or exceeding her annual gross income?
Cars are generally necessary money sinks, nothing more. I'm 53, senior engineer's income, 7-figure net worth, paid-off a 30 year mortgage in 18 years, and I drive a 1999 Ford Contour with 120,000 miles, my wife happily drives a 1996 Mercury with 180K miles, both were bought new and I do 100% of the maintenance on them. Our total transportation expenses are well under 5% of our take-home income. I'm not trying to impress or attract anyone with what I drive, just trying to retire as early as possible and fund a decent lifestyle to my dying day.
Val needs a cheap, reliable used car and some serious financial counseling.
This article highlights how many Americans mistakenly equate stuff with wealth. No, stuff is spent wealth.
The problem with a lot of people in this country is that they have developed a live for today attitude. And if you look at the way things have been going over the last 3 decades you should understand why. People have this creeping suspicion that the deck is stacked against them if you are an average working person. Wages have not kept up with costs, and the rights of working people are being eroded at an astounding rate. So they could scrimp, save, and deny themselves all the luxuries of this life while trying to keep up and save for some far off retirement that corporate America ie the real rulers of this country are going to make damned sure they never see, or they could enjoy what little they have while they can and **** the rest because no matter what they do it isn't going to save their way of life.
It is condescending, presumptuous and cruel to insist people save when their wages barely cover enough to live. Why should they give up the little luxuries that make life bearable when the corporate thieves are stealing their way of life right out from under them.
Lets see...I suppose I could give up my car and maybe buy a horse, because I live in rural America, twenty miles away from any kind of shopping, work, school and NO bus service here.
The example of 678.00 per month car payment on a 2000.00 income, an extreme example. what does she drive a BMW ?
Face it, if your a contributing member of society and your not living under the bridge, you probably have a job and if there are NO public transportation options available, then you will probably need a car to get to work.
By the way RETIREMENT is a JOKE for the working class, CAR OR NO CAR. I am 61 and I will be working until the day I die and I am NOT the only one in that situation.
I bought a 1997 Infiniti 9 yrs ago from a repo company for $8000.00 I have only put maintinence costs into it. I would say max cost to me is no more than $2000 a year for insurance, gas\oil and repairs. Car runs great. I do not however look like im rich driving around in a new sports car when I'm actually broke as a joke. LMAO
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Saving just a single month of expenses may take longer than you think. See how your savings rate affects how quickly you can build a solid emergency fund.
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