Monthly loan payments can be a retirement killer. Vehicle loan expenses may be the worst of all because you are paying for a depreciating asset. Americans have become so accustomed to making car payments that they don’t know how to stop. When their once-new vehicle shows signs of age, they trade it for something newer and the payment cycle continues. Vehicle payments become a permanent part of their financial life. That’s almost certainly going to delay your retirement or make your retirement lifestyle less comfortable.
Early in our marriage we had car payments. We quickly learned that the borrow-and-drive strategy was a loser. This is the plan we used for ending the car payment cycle.
1. Pay cash for your vehicles. This is the obvious part. The next steps explain how to prepare for car purchases.
2. Buy and hold. I buy used cars for my use. My current vehicle is 12 years old. We have purchased three new vehicles for my wife over 33 years of marriage because she was the primary transporter of our three children. The first two vehicles were minivans, which we drove for over 140,000 miles each and then donated to charity. Her current vehicle is also 12 years old. Both of our vehicles have been well maintained, look fine, and run great.
3. Buy style and quality that endures. Don’t spend what could be your retirement money on superficial technology and trendy vehicle designs. Often that fancy dashboard technology becomes a costly maintenance burden. Instead, buy vehicles that are well-designed from the inside out, are built to last well beyond 100,000 miles, and have classic styling that sustains beyond three or four years. There are brands and models at all price points that consistently provide enduring design and quality. Those are the vehicles you should buy and hold.
4. Acknowledge to yourself that a vehicle is not a status symbol. Many owners stay on a car payment treadmill because they believe their vehicle represents their status in life. That is a huge mistake. I’ll bet you cannot name a single friend or family member that you appreciate more because of the vehicle they drive. Don’t sacrifice retirement savings in favor of money envy and conspicuous consumption.
5. Maintain your vehicle. People tend to rationalize the purchase of a new vehicle by complaining about the maintenance costs of their present vehicle. Most of that is illogical. It is almost impossible to pay more to maintain a quality vehicle than to buy and depreciate a newer replacement. Do the math.
6. Save for the next vehicle. To stay out of a car payment cycle, you must save for the next vehicle purchase. It is a lot easier to do this when you are driving your existing vehicle for ten years or more. Plan from day one of vehicle ownership for buying a replacement. Start a CD ladder or use a similar 5 to 10 year savings strategy for vehicle replacement and repair. Use a standard savings goal calculator to determine how much you need to set aside each month.
Whenever I think about the age of our vehicles or get upset over a needed repair, I think of what it would cost me to buy something else. I also think of the retirement assets we have been able to accumulate over the years with money we have not spent on car purchases. I feel better and keep driving.
Mark Patterson is an engineer, patent attorney, baby boomer, and author of The Failsafe Retirement System. He blogs on matters of personal finance and retirement planning at Tough Money Love and Go To Retirement.