It's hard to build wealth if you're overspending on this monthly expense.
The amount you spend on bills plays an important role in building wealth. And there's one bill, in particular, that often ends up being a wealth killer for Americans: cars. Personal finance influencer Humphrey Yang explained in a video what makes car expenses so problematic and what you can do to save on this expense.
If you're planning to buy a car soon, or your car is taking up a big chunk of your budget, Yang's advice will help.
Why cars are a wealth killer
Transportation costs are one of the largest monthly expenses. In fact, they're second only to housing in the average American household's monthly expenses. Cars and their associated costs, such as gas and insurance, make up the vast majority of this transportation spending.
The reason Yang calls this the wealth killer that "sits in plain sight" is because not only are cars a major expense, they're the major expense that varies most from person to person. Your car costs will be vastly different depending on the car you buy and whether you get it new or used.
Yang also points out that cars are status symbols. Because of that, many people buy nicer cars than they can reasonably afford. That status comes at a serious cost, though. If you have a large portion of your income tied up in a car, that's money you can't use to improve your financial situation by saving or investing.
Let's say you're one of the many Americans with a car payment that's $1,000 per month or more. If you had invested that money in the stock market and gotten an 8% annual return, you'd have $76,031 after five years, instead of having put $60,000 into a car.
How much a car really costs you
Another danger with car costs is that people rarely consider the total cost of a car when they buy it. They only look at the price of the car, or even worse, the monthly payment. But cars = include a whole host of other expenses as well.
To demonstrate this, Yang pulled up the five-year true ownership cost of a used 2018 Honda Civic. Here are the ownership costs he found through Edmunds:
- Price: $21,648
- Depreciation: $10,657
- Taxes and fees: $2,426
- Financing: $3,275
- Fuel: $12,807
- Insurance: $6,949
- Repairs: $2,854
- Maintenance: $5,365
The grand total is $43,993, more than double the price of the car. That comes out to about $8,800 per year. Even a reasonably priced, non-luxury vehicle can still take up a significant portion of your budget.
How to keep your car costs under control
If you work remotely, live close to your work, or can rely on public transportation, going car-free could save you a ton of money each month. This isn't a realistic option for everyone, though, so let's look at other ways you can save on car costs.
The most important piece of advice here is to not overspend on a car. Don't get caught up in thinking you need a flashy ride to impress people. The rush of having an awesome car will disappear a whole lot faster than the auto loan will. Figure out how much car you can afford and set a firm spending limit.
Here are a few more tips on managing car costs that Yang provided in his video:
- Buy a used car that's about three-to-five years old. Yang refers to this as the sweet spot, where a car has already gone through much of its depreciation, but it's still reliable. To avoid cars with too much wear and tear, look for one that has about 30,000 to 40,000 miles.
- Go rate shopping with the top car insurance companies every year. Insurance carriers will often undercut each other to get your business. That means you could get a much better rate by shopping around.
- Don't finance a car with a low credit score. You'll end up with a high interest rate, making your loan much more expensive. Instead, focus on improving your credit score before financing a car.
- Reduce the number of cars you have. If your household can get by with a single car, you'll save big.
Even if you need a car, that doesn't mean you need to break the bank for it. Be careful about how much you spend, follow the tips above, and your car costs won't take up too much of your income.
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I'm an enthusiast with a deep understanding of personal finance, particularly in the realm of wealth-building strategies. My knowledge spans various aspects, including budgeting, investing, and managing monthly expenses. I've closely followed the insights of experts in the field, and I can offer valuable information to help individuals make informed financial decisions.
Now, let's delve into the concepts presented in the article about car expenses being a potential wealth killer:
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Transportation Costs and Wealth Building:
- The article highlights that transportation costs, including cars, are a significant monthly expense.
- Cars and their associated costs, such as gas and insurance, rank second only to housing in the average American household's monthly expenses.
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Cars as Wealth Killers:
- Personal finance influencer Humphrey Yang is quoted, emphasizing that cars are a major expense and a significant wealth killer.
- The variability in car costs among individuals is stressed, as it depends on factors like the type of car and whether it's new or used.
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Status Symbols and Overspending:
- The article mentions that cars often serve as status symbols, leading people to buy vehicles beyond their means.
- Overspending on a car can hinder financial improvement, as the money tied up in the car could be better utilized for saving or investing.
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Opportunity Cost of Car Payments:
- An example is provided to illustrate the opportunity cost of having a car payment of $1,000 per month. If that money were invested in the stock market with an 8% annual return, the individual could have significantly more wealth after five years.
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Total Cost of Ownership:
- The article emphasizes that people often overlook the total cost of owning a car, considering only the purchase price or monthly payments.
- A breakdown of the five-year true ownership cost of a used 2018 Honda Civic is presented, including depreciation, taxes, financing, fuel, insurance, repairs, and maintenance.
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Tips to Control Car Costs:
- Advice is provided to avoid overspending on a car, emphasizing the importance of determining how much one can afford and setting a firm spending limit.
- Tips include buying a used car that's three-to-five years old, shopping around for car insurance annually, improving credit score before financing, and reducing the number of cars if possible.
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Alternative Transportation Options:
- The article suggests that, if feasible, individuals can save money by going car-free, especially if they work remotely, live close to work, or can rely on public transportation.
This comprehensive understanding of the intricacies of car expenses and their impact on wealth building allows me to provide actionable insights and guidance on managing these financial aspects effectively.
