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Why Your Car Shouldn’t Drive Your Finances:

Why Your Car Shouldn’t Drive Your Finances:

| September 26, 2023

5 Questions to Ponder

Tens of millions of Americans could have their retirements comfortably funded to at least cover the basics if it weren’t for car payments throughout their lifetimes.

Let that sink in for a moment.

I’m not saying you should ditch your ride and always opt for the bus, but the decision as to what car you buy (and how you pay for it) has an enormous impact on your long-term wealth. This choice has the power to determine whether people have enough food in the fridge, ample cash to pay for home expenses, and strong financial peace of mind versus constant anxiety about money.

The problem lies with how much we allocate to vehicles, often at the expense of other more important financial goals. In general, there are higher priorities to consider: saving for retirement, planning for your kids’ college, or even taking that much-needed family vacation. Still, the allure of a slick new set of wheels is sometimes tough to resist. If you’re not careful, however, it is all too easy to see your financial plan veer off the highway. As financial planners, we see it too often.

Now that I’ve guilt-tripped you into the right mindset , let’s craft a roadmap of how to make a financially smart choice between buying or leasing a car.

Question 1: How long do you plan to keep your car?

If you’re like me, you value a car that can just reliably start every time, with the lone frill being a radio that connects to a phone. My current SUV, a used 2015 model with more than 120,000 miles, has been with us since the 70,000-mile mark. It comfortably seats our family of six, and purchasing it used meant someone else took the big depreciation hit. Of course, repair bills can add up for older vehicles, so we hedged some of that risk by paying up for an extended warranty.

 Some people may scoff at the idea of a 2015 car being “old.” Indeed, the longevity of vehicles is a game-changer for folks strategizing their way to financial freedom. The average life of a car in 2023 is around 12 years – up from just 8.4 years in 1995. And the thrifty among us can almost certainly squeeze 200,000 miles out of a well-maintained vehicle these days.

Moreover, inevitable repairs are often routine, not requiring owners to put the old ride out to pasture. (If only maintenance on our hips and knees were so easy.) In general, it’s usually better to keep a car until they get terminal, or the wear and tear is finally too much to touch up. If that’s the case, then you should feel secure about spending on a new car since you got the most out of the old one – but be sure your financial priorities are secure.

Question 2: Is a new car threatening your financial independence?

Vehicles can be a significant financial drain if not managed wisely. Despite the relentless and enticing ads, we must cast aside the temptation to spend tens of thousands of dollars on an “asset” that rapidly decays in value. It’s imperative that you remain focused on money goals that truly matter to you and your family. In the end, you will remember that summer adventure with your family or the day you helped a child move into their first dorm room – those indelible moments should come before a hunk of metal. Still, it’s all too easy to muck up the priorities, especially when you have a few extra bucks in your pocket and see those neighbors with a new car.

Your financial independence is unique to you. For some, a car is a necessity, not a choice. Owning a vehicle just to get from point A to point B is common for so many Americans, particularly at certain stages of life. Maybe you’ve been there. Maybe you are there. This article is meant for those just emerging from tighter financial situations who may just now have the means to afford a nicer, newer car. That's a time when the potential pitfalls of excessive vehicle expenses become more pronounced. Be strong and be wise today to ensure a secure tomorrow.

Even if your income has increased significantly, resist the urge to upgrade your ride unnecessarily. Whether you have gone from making $50,000 to $75,000, or from $100,000 to $175,000, remember that there’s no rule saying you must look the part via a brand-new car. In fact, that shiny Audi calling your name will likely spend more time in the shop than your boring old Honda. The bottom line here is to not let lifestyle inflation rear-end your financial priorities.

Question 3: New or used?

Are you leaning towards buying new because you rarely splurge? That’s understandable but given current market imbalances and risks associated with preowned cars , the decision isn’t so straightforward. Financing options often tip the scales.

Locally, I am a fan of Wings Credit Union, and most other credit unions will offer competitive rates compared to the big monster banks. For non-Minnesotans, Penn Fed Credit Union is highly reputable, too.

A word of caution: Don’t get talked into an inferior loan product at a dealership – ensure you are getting an interest rate as good as what you would receive at a credit union. Trust me – it's not hard, and they are kind and helpful.

Question 4: To buy or lease?

Interest rates play a crucial role here. While leasing might seem attractive due to potentially lower monthly payments, remember that you won’t own an asset at the end of the term. Buying, especially if your credit score is in tip-top shape, can be a more financially sound decision in the long run.

Question 5: Can you deduct it?

If you own a business or use your car for work other than commuting, there could be tax implications for leasing. The deductibility of the lease payments or other structures may impact what the best option is for your circumstance. It may be worth a call to your tax advisor if you think that could apply to you.

Enough Questions, Let’s Run the Numbers

To make this analysis relatable, let's consider a real-world example: buying or leasing a $50,000 car in California. Here are the assumptions we used recently in a client scenario:

  • Lease Term: 36 months for each lease cycle
  • Down Payment: $3,000 for both buying and leasing for each cycle
  • Interest Rate for Buying: 6% APR
  • Initial Monthly Lease Payment: $900
  • Initial Cost of Car for Buying: $50,000
  • Residual Value after 3 Years: 60% of the car's initial cost
  • Sales Tax: 9.25% (CA)
  • Inflation Rate for Car Prices: 2% annually
  • Estimated Maintenance Costs for 12 Years (Toyota): Approximately $6,282


Crunching the numbers:

Buying and Replacing Every 3 Years

  • Long-term cost: Approximately $122,000
  • Asset at the end: $30,000 (last car)


Leasing Every 3 Years

  • Long-term cost: Approximately $155,000
  • Asset at the end: $0

Buying and keeping for 12 Years

  • Long-term cost: Approximately $43,098
  • Asset at the end: $10,000 (estimated)


The Impact of Your Choice:

Opportunity Cost and Long-Term Impact

Age 25 to 37 (12 years):

  • Initial Savings: $0 (At the start of this period)
  • Savings during this period
  • Investment Growth: After 12 years at a 6% annual return
  • A ≈ $80,902 * (1 + 0.06)^12 ≈ $166,547.91

Disclaimer: The $80,902 savings figure is based on the assumption of saving $545 per month at a 6% annual return over a 12-year period. This isn't a lump sum available at the beginning but accumulates incrementally over time. In a more precise scenario, you'd use an annuity calculation to future value each of these incremental savings by 6% annualized. For the sake of this example, the approximation is probably close enough for you to grasp the overall impact.

Age 37 to 49 (12 years):

  • Initial Savings: $166,547.91 (At the start of this period)
  • Savings during this period: $80,902
  • Investment Growth: After 12 years at a 6% annual return
  • A ≈ ($166,547.91 + $80,902) * (1 + 06)^12 ≈ $344,094.44

Age 49 to 61 (12 years):

  • Initial Savings: $344,094.44 (At the start of this period)
  • Savings during this period: $80,902
  • Investment Growth: After 12 years at a 6% annual return
  • A ≈ ($344,094.44 + $80,902) * (1 + 06)^12 ≈ $566,221.58

Age 61 to 73 (12 years):

  • Initial Savings: $566,221.58 (At the start of this period)
  • Savings during this period: $80,902
  • Investment Growth: After 12 years at a 6% annual return
  • A ≈ ($566,221.58 + $80,902) * (1 + 06)^12 ≈ $847,618.36

Age 73 to 80 (7 years):

  • Initial Savings: $847,618.36 (At the start of this period)
  • Savings during this period: $80,902
  • Investment Growth: After 7 years at a 6% annual return
  • A ≈ ($847,618.36 + $80,902) * (1 + 06)^7 ≈ $1,205,189.11


Age Range

Initial Savings

Savings During Period

Investment Growth

Total Savings



























This table breaks down the initial savings, savings during each 12-year period, investment growth, and the total savings for each age range.


$1.2 million is a nice chunk of change, right?


It’s a lot snazzier than a chic sports car, at least in my opinion.


Seriously though, this discussion should help demonstrate that the decision you make regarding your car has a profound impact not only on immediate savings but also on your long-term financial well-being.

By making prudent choices throughout your life, you set yourself up for long-term financial freedom, potentially securing a more comfortable retirement. And, you’re not missing out on anything along the way.

Note: These numbers are based on assumptions and can vary greatly depending on individual circumstances and current market conditions. Feel free to run your own numbers – make it a game! This type of financial tweaking is a good exercise, productive, and academically valid endeavor!

Thanks for taking a look.

-Your ISC Advisors Team