Who wants to work ’til they’re 75? Not me. That’s why I’m constantly thinking of ways to make a little more or spend a little less in order to save more for the future.
If you have the same priority, then there is one change that you can make in order to quit your day job five years earlier than you had planned. The secret involves the second biggest expense in your life: your car.
So here’s the scoop: The way to change those retirement fortunes is to either keep a brand new car for at least 10 years, or to keep your used car for at least five years. That is it. The secret is out.
According to Edmunds.com your car depreciates 11% the first second it is in your possession. Ouch! The only way to combat the rapidly depreciating value of your brand new car purchase is to hold onto it for a longer period of time.
By the fifth year of ownership your car is worth only 37% of the price you paid when you purchased it new. If you bail out now, you’ve locked in your losses. So hold onto that car for five extra years and you’ll finally start to get your money’s worth.
The second five years are where your fortune turns and fate smiles on you. Since depreciation is actually your largest expense, keep your new car for at least ten years. You’ll get to enjoy a payment-free life for awhile, and that depreciation free fall won’t hit you square in the jaw.
If you decide you are going to be savvy and buy a used car (good move), look for one that has already taken that depreciation hit and hold onto it for at least five years. This game plan will save you thousands of dollars a year over the average car owner. And while you might be wondering about factors such as gas, repairs, and insurance rest assured that an older car balances things out. You might pay more in repair bills but you will also pay less in taxes and insurance.
Let’s do some math. Obviously every car purchase is different and the sticker price for different models vary greatly. Let’s take the average cost of a new car these days — $47,000. If you spent that on your new ride and hold onto it for five years it would now be worth just $17,390. That’s a hit of almost $30,000 hit to the pocketbook.
I am kind of extreme but take a look at my last vehicle purchase. I bought my 2000 Altima in 2007 for $3200. It’s now worth about $2100. Since then I have lost only $1100 in depreciation even though it has cracked 200,000 miles on the odometer. That feels awesome! Spending less on my vehicle ensures that I can sock a lot more away for the future.
The massive money savings you accrue from making smarter choices about what you drive can do some great work for you in your retirement account. Think about socking an extra $25,000 or more away every decade. Doing that will drastically change your financial future and could easily allow you to retire five years earlier than you had previously planned.
So do the math before your next car purchase. Would you rather have a bit more comfort now, or the ultimate freedom that comes with not having to punch the clock when your peers still are?
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About the Author: Joel Larsgaard is the proprietor of Save Outside the Box.
Photo Credit: Tax Credits
I have only owed two cars for about two years in total, and am 32. Paid them cash for a gently used, reliable model. Having a car payment the size or a small apartment rent is something I can’t conceive. Sure a car can be a necessity but so is saving for retirement and you can do both by having an older car.
Bought an ’05 Ford in ’08 and plan to drive it until it stops being reliable. I will not drive it into the ground because I need a car I can count on and I want lots of time to shop for a car. I don’t want to be rushed in to deciding between an expensive car repair and a car purchase.
Depreciation is enormous for new cars, true, but I still think that the biggest expense is buying more car than we need. Yes, you can save $10,000 on a luxury car by buying it a couple years used; but you can save $30,000 by going with an economy car instead.
We just got a new roof and our next door neighbors will need one too. They were complaining about the cost, but I noted to my wife that they always have new cars. I think they lease them but that’s still two payments a month that they’re making that probably could have paid for most or all of the new roof had they bought the cars and held on to them.
If you want to really save, ditch the car altogether and instead combine carsharing, transit, walking, biking, taxis, and conventional rental car to get around. It works!
When I lived across the street from Kroger, I walked to the store. I’d forget I didn’t have my car, and would buy large amounts like the car was waiting out there. Many times I walked home with 8 heavy bags on each hand. I’d have to manually uncurl my fingers. lol
Our first two cars were bought used (4 years and older) and kept until they were 12 and 14 years old. I bought my minivan new because it was the first year side curtain airbags were offered, and it’s 10 years old next year. I plan to keep it until my kids are all at least 3 or 4, which is a minimum of 3 years from now, more if we have another. My husband got a “new” car, too, this time, but only because he paid used car prices for it. (The dealer REALLY miscalculated what people in the area were looking for in a car and couldn’t get rid of the car.)
Pauline – I totally agree. My use car has certainly helped me save for retirement. I actually just posted about that today on my site.
Jane – The consumer reports list of most reliable cars is very helpful. For instance, I wouldn’t buy an old Ford Probe. Those things were awful! But even a 20 year old Camry is a good solid purchase.
Debtlag – Great point. Luxury cars never factor into my decision when shopping for a car. The only luxury car that MIGHT be worth it is a much older model Lexus. Those things are reliable as all get out.
Money Beagle – Ain’t that the truth. Spending too much on a car can really strap you in other areas of life, and for what, the new car smell. It just isn’t worth it.
Kurt – Interesting you mention that. We are really contemplating becoming a one car family. I couldn’t ditch one all together. Do you not own a car at all?
I agree that it’s best to hold onto your cars for as long as you can, but I don’t think that the math is accurate, I have to say. I paid ~ $25k for my car five years ago, and just for kicks I’ve looked on craiglist and other places to see what my make/model/similar feature car is going for. Even for private listings, I can’t find anything close to what I have in-hand for $9250 (37% of purchase price) – the only listings for that price are older models with almost double the mileage of what I have. The bluebook value is also much higher than $9250.
Either way, it’s not any skin off of my back, since I’m happy with my own car-buying strategy….but I keep reading this advice from financial bloggers and I keep scratching my head because I’m not seeing supporting data in current listings. Maybe it used to be true, but not anymore? (I’m not saying that I doubt that cars depreciate…I just don’t think that they depreciate quite as quickly as everyone still likes to write about)
I have started to invest money in my retirement account. Before it was just cash. Starting in December 2012, I bought four mutual funds. The account is up by $1,500 in almost 6 months.
Great points. It is also helpful to keep in mind your reasons for retiring early, and if you will truly be better off with this goal in mind.
No doubt Mike. I think that the goal of saving and investing more should be relevant to all of us. I do agree though that not everyone wants to retire early. I’m not even sure if I want to – but I do want that option. And driving a beater car helps me get there!
You should be care to neither underbuy nor overbuy when you buy a car.
And a contarian way to asess how well a model will work for you is to rent for a week and save up all your annoying errands to do with that car. You will find out really fast what YOUR mpg will be, how easy it is to use it for the errands/chores you will use it for, how hard it is to park and drive and a few hundred small points that are the difference between having a vehicle you love and one you curse every time you struggle to fit car seats and groceries into it.
Hey Joel: Great post. We have 3 cars, a 2002, 2004 and 2006, so I understand your point. However, the big trick is getting my wife to buy into this as her car is the 2006 model year. She just made the announcement that she wants a new car. That’s it dude, game over cause she gets what she wants. But I do try to keep my end of the bargain with the other cars.
Not sure with the puny interest rates out there that this will allow me to retire early, but your points are very taken and right on the money.
I would also add, “don’t buy new” to this post. Let someone else take that first year hit when they drive it off the lot!
Transportation in general seems to be a place where many people overspend. We’ll need a new car soon and we’ll definitely be going the used route. And reliability will be the top priority. I’ve been driving a 95 HP Honda Civic for the past 11 years, so performance isn’t something I’ve felt any need for.
Age matters into all this, right? It seems 35 may be too late to start wishing I could retire by 50 years old.
It’s never too late to start, Nic.
Everyone drives a “used” car. Great advice. Buy fuel efficient reliable used vehicles. Save/invest every month. Five years into your tank!
I loved my first car. It was a small car, great gas mileage, super comfy, fancy interior, and the AC would freeze out someone having a hot flash. Unfortunately, after 7 years, it became unreliable. So, I got a truck. My note was $136 a month. I paid it off early. I kept it 21 years. I only got rid of it because it needed a repair that was several times the value of the truck. I got another truck. Paid cash. It’s now 7 years old. I’m too old to get in and out of a little car but I miss it.
I miss my truck. I had to sell it 25 years ago so I could have a big enough down payment to buy our new mini van.
Does anybody put a down payment on a car anymore?
Always. The first two vehicles I owned had huge down payments. My first car note was $129 a month for 3 years. I paid it off early. My second note was $136 a month for 3 years. I paid it off early. I HATE DEBT! It’s a prison. Solomon said that the borrower is a slave to the lender. I don’t like people having that power over me.
BTW, I had to retire 6 years earlier than I had planned. I’m fine. I haven’t really wanted for anything. I have what I need, and some extra. I am truly blessed.
I lived below my means. Saved over 24% in retirement accounts.
I have lived a simple life. I traveled on a shoe string a lot. I went to baseball games, and things. My current income supports my simple life.