Mmmmm….new cars. The smell, the perfect feel, the virgin engine. Annnnnd, the price tag. New cars are fricken expensive, but that doesn’t stop us all from wanting one. Let’s face it, a new car makes you feel powerful, established, successful! But that new car high comes with a price. A price that very few of us fully understand. How much is that new car costing you? Let’s dig into the details so I can ruin your dreams of ever wanting a new car again. 😉
How Much Is That New Car Costing You?
According to Kelley Blue Book, the average price of a new car today is $34,000. There you have it. Article over.
Well….not quite. Actually, not even close.
This $34,000 price tag is only the beginning. Fasten your seat belts ladies and gentleman, we’re going to start digging into the true price of that new car.
When you want to buy a new car, you probably walk right into the dealer’s office and lay a duffel bag of cash, right? Oh…you don’t? What? You don’t have the money now, so you’re going to finance it? Sounds like your price tag just went up.
First of all, you have no money and therefore no bargaining power, so you’ll likely pay sticker price (which is already too much). Secondly, you’re about to sign up for interest payments on your new ride. The average auto loan interest payment is 4.25%. This bumps your new car cost up to $37,800.
2) Tax and Title…and Rust Proofing
Just like if you were to a buy a Tickle-Me-Elmo (do they still make those?) from your retail store for Jr., you’ll need to pay sales tax for your new car too. In my state, the sales tax is 6%. If your dealership is like all the others, you’ll also get hit with additional fees for processing the title and some other ridiculous add-ons (typically another $250 of so). With tax and title, your $34,000 car has now risen to $40,090.
3) The Necessary Insurance
NerdWallet says it best:
“…the pricier the car, the more expensive it will be to insure.”
It’s pretty simple really, the more costly the car, the more it will cost to replace. So, the insurance company is going to charge you more so they feel comfortable that they’ll still make money on you (after all, insurance companies are NOT charitable corporations).
So what’s the average insurance cost on a brand new car? Based on the NerdWallet charts, approximately $1,500 a year.
What would it cost to insure a used car? There are so many variables that no one wants to stick their neck out on an estimate, but my insurance is only $500 a year for my 2003 Pontiac Vibe, so let’s put the premium of a new car at $1,000. Your new car? Now 41,090.
4) Opportunity Cost
This is the biggie. This is the reason for this entire article.
What if you didn’t buy that new car? What could you do with that money instead?
If you know me at all, you already know what I’m going to say…. You could invest it!! Take that $650 car payment and invest it in some good ‘ol boring as heck index funds that yield a return of 10% per year (or you could invest with Wealthsimple!).
What if you did that for just 5 years and let it grow for the next 35? How much would it grow into?
The survey says…. “whoa”
Investing your car payment for just 5 years and letting it grow for another 35 will yield you $1,472,000! Holy crap. And how much will that new car be worth in 40 years? Let me help you — $0.00.
Is the new car REALLY that important to you? I think I’ll keep driving my handy dandy used Vibe thank you very much. Have a difference of opinion? Let’s talk again when we’re 70.
What is that new car costing you? Your entire retirement!
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.