I've read a number of articles recently claiming it would be a bad idea to buy a new car in 2023. Reasons include higher interest rates, supply chain shortages driving up the cost of new vehicles, and the high price of new vehicles driving up the price of used ones.
Meanwhile, people in my area seem to persist in buying what to me are show-offy, oversized vehicles. And that's no problem, except if it is—for instance if those impressive vehicles might be more expensive than the new owners can really afford, which sometimes seems to be the case as far as I can tell. Why would people buy cars they can't afford? The most obvious reason is that they want a nice car to tool around in. Sometimes it's to display wealth and status. But a vehicle, of course (I'm just going to call them "cars" even though most of them aren't) is for many people an asset. And it's a poor investment: it requires maintenance and debt servicing at the same time as it's depreciating...in the case of new vehicles, depreciating ferociously. The more money you put into a bad asset, the more you will lose. So we arrive at a very strange situation: citizens being actively impoverished by the very possessions they hope will make them look cash-fat and flush to their neighbors.
Transportation budget as a percentage of take-home pay
Consider a few of the strange numbers. First of all, budgeting guides usually recommend that you spend no more than 20% of your take-home pay on your vehicle. But that includes all vehicle expenses:
- Car payment
- Insurance
- Gas
- Maintenance
- Registration, licensing, and fees
It also should include your regular monthly saving plan for your next car down payment, but not very many people try to make that fit into their 20%. According to Triple A, the average of all those costs now amounts to $10,700 annually—pushed over $10k for the first time this year because of the sudden rise in fuel costs. Meaning, your personal take-home pay needs to be $53,500 per year, or about $1,029 a week, just to hit the average cost of owning and operating a vehicle.
Vehicle cost as a percentage of gross salary
Let's look at it a different way. As a percentage of their gross annual income, most working people pay somewhere from 10% to 50% for their motor vehicle. However, the standard recommendation from many budgeting advisors is that you shouldn't pay more than the equivalent of 35% of your gross annual salary for a new car. Here's where that gets dicey. Kelley Blue Book says the average price of a new car in November 2022 was $48,681. Well, unless my arithmetic is wrong (and Lord knows it could be), for that to be 35% of your gross salary, your yearly pay needs to be more than $139,000. And if you earn $140k to $144k—enough to sensibly afford that average new car—you're in the top 9.03% of Americans in terms of earnings.
Meanwhile, the average household income (which includes two-earner families) in the US is a little less than $71,000, according to the Annual Social and Economic Supplement from the US Census Bureau. That means that the average household can comfortably afford one car that costs about $25,000. Even with the percentage of salary maxed out to 50%, the average household should only be paying $35,500 for a new vehicle or a new-to-them used vehicle. As you perceive, neither of those numbers are reaching up to the average new car price.
The conclusion of both these ways of looking at the situation is: the average American can't afford the average new car.
The ugly truth
This would seem to mean that a lot of people are paying more than they should for their cars. One thing I've been tempted to photograph around here are truly shabby and run-down houses with large, gleaming, late-model pickup trucks parked next to them. Social relevance of that sort isn't really my thing, though, because it feels like it would be insulting to the actual people who own the houses and the trucks, and I try not to go around putting that kind of negative energy into the world. Holding real people up as negative examples isn't my thing.
My son worked selling good- to excellent-quality used cars part-time for a while after he moved to Illinois. (He's in graduate school now and got straight A's last semester <—parental brag.) He enjoyed the job generally, but told me that the most interesting part about it was getting to peek into customers' finances. I imagine it must have put him into an awkward position sometimes: he was supposed to sell cars—that was his job—but, because he was objective and hard-headed about it when his customers themselves weren't, he could see clearly when they really shouldn't have been buying the cars they were trying to buy.
The worst situation was one he estimated that all the salesmen at the dealership, averaged across the entire year, encountered maybe two or three times a week. A customer would come in needing a lower car payment. They wanted to trade in their existing car, for which they were paying far too much. They were having trouble meeting the payments, or they were one to several payments in arrears, and urgently needed to eliminate that car payment and replace it with a more manageable one. But they also owed substantially more on the vehicle they were trading in than it was worth. So their idea was to roll that debt into a more favorable new loan—without realizing that the bank would want a large down payment to cover the shortfall, a down payment which those customers almost never had. This was often worse if they were buying a cheaper car, because the amount they wanted to roll over would then become a larger percentage of the price of the new car. It's one thing to roll $5,000 of debt into a $60,000 car, but quite another to roll a $10,000 debt into a $15,000 car.
So they wanted a new car, a lower payment, and a minimal down payment. And, in some cases, he said they also somehow expected to be able to get a nicer car than the one they already had! I guess they thought they'd just sign on the dotted line for a 12-year loan with 0% APR despite their history of non-payment and a lousy credit score. He said some of them were financially literate enough to understand when he explained to them why the dealership wasn't going to be doing that, but that others were mystified as to why it wasn't possible, even when he tried to explain it to them over and over again.
It must be a tough situation, to own a car you can't pay for and yet can't get rid of, when you also, well, need a car. Because a car has an appliance factor along with all its other meanings. Presumably the people who thought they were going to get those magic loans needed some sort of transportation to get back and forth to work, pick up and drop off kids, do errands, go to appointments, etc., etc. They couldn't live without a car, but they were between a rock and a hard place when it came to paying the piper for bad decisions they had already made in the past.
I feel for them. I wish there were a way to optimize the necessity of car ownership, but it doesn't seem possible—unless you really are rich, and don't need to optimize it! I know a retired executive who simply paid cash for a Toyota Corolla with a stick shift and a service plan. I asked him about it, and he shrugged and said, "it gets me around." But I can also name not one but two friends who had huge, gleaming, late-model pickup trucks, both of whom traded their trucks in for even huger, even more gleaming, even newer pickup trucks. I was perplexed. The deciding factor seemed to be truck-love, something to which I am personally utterly immune. And then there's the friend who bought a new pickup truck and couldn't even bring himself to get rid of the old one. He acts like he's collecting vehicles—has quite a few, including motorcycles. To me it's like an open sluice on his bank account that he keeps wide open. But it's his business, and not mine to say.
A motor vehicle is sometimes—often?—the second-biggest asset that a poorer working person might own. And it is almost always an exceptionally poor-performing one, far more likely to diminish our prosperity than to increase it. It's a losing proposition that we must accept we need. Unless you really are rich, it pays to be conservative and realistic when it comes to ownership of these appliances, and to ignore whatever it is you think your car says about you. Because, really, you're probably the only one who cares what you drive.
Mike
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Featured Comments from:
Eric Brody (partial comment): "I live in a well-to-do town where Maseratis are common and there are even a few Lamborghinis. Given their reliability records in Consumer Reports, there are a surprising number of Jeeps, very few Cadillacs, tons of Mercedes and BMWs though. Me? I like red cars."
James: "I used to work as the law clerk to a bankruptcy judge, so I would read all of the motions that came through. There was always a thick stack of motions for permission to borrow—the debtors had declared chapter 13 bankruptcy, so were working repayment plans, and needed permission to take out new loans. Stacks and stacks of these motions. This was in Chicago, with one of the better mass transit systems in the country. The motions had the loan documents attached, so I could mentally map where these debtors lived. At least some could have done without the cars. Sometimes, the motions included where the debtors worked as a justification for needing too drive. One wanted to drive what would have been a 25 minute train ride downtown. These motions were routine, and were routinely granted. So, the great wheel turns."
Hélcio J. Tagliolatto: "Wow! Excellent text. Cars as a desire to display power and status seem like a worldwide plague. It seemed to me that you described the average Brazilian!"
John Camp: "Maybe people who don't have much money are looking for a little status and happiness in their lives?"
Tex Andrews: "Yes, folks do tend to pay more than they have to...and especially today, when lower end cars are packed with features that used to be high end. For us, the sweet spot was/is the Subaru Crosstrek. We got one in 2017 (Volkswagen diesel buyout), our youngest daughter has one, one of my nephews has one—and my oldest daughter has the related Impreza from 2012. Just a great car. Gas mileage could be better, but rain, snow, ice handling is great. And they last. And the parts aren't expensive."
Geoffrey Wittig: "Spot-on, Mike. It really does blow my mind how many otherwise sensible working class folks drop a huge fraction of their yearly income on a huge shiny new pickup truck or SUV, when they would be far better served by something like a Corolla or Civic, or a Prius. And then they complain bitterly about the cost of fuel required to move their giant beast back and forth to the grocery store and on a 50-mile commute to work every day. I don't get it."
Henri van der Sluis: "For me a car is a transportation tool, not a showcase…I look at fuel consumption and reliability when buying a new one, and use it as long as is economical to use it."
Gaspar Heurtley: "I agree 100% with your post, but…
"When I got my first job (a crappy, underpaid one, off course), for months I spent almost everything on payments for a brand new DSLR and two lenses. I remember one of my father’s friends lecturing me about savings and the 'right way' to spend my hard-earned money. Some people save for buying a house, some people keep traveling; we spend money on cameras, or cars, or…you get the idea. My point is, everyone spends a lot of money on something, yet everyone thinks other people are wasting it."
Robert Roaldi: "What irritates me is that small low-end models have disappeared in North America. No more Honda Fits, Toyota Yarises, etc. Here in Canada, you can't get a regular Golf anymore; they only sell pocket rocket GTIs now. I come from a (minor) motorsport background and I just laugh when I hear phrases like 'North America's love affair with the car.' It has become pretty obvious that what North Americans want is living rooms on wheels. If we truly liked driving, we wouldn't be driving three-ton pickup trucks to the grocery store and we wouldn't be spending time and money on self-driving features. What we want are taxis."
Gary: "This is a great analysis. You have a future as an accountant or financial analyst! :-)
"Here are two links for people who want some training re: effective financial management.
Money Smart
MoneySkill
"Money Smart is an FDIC site. MoneySkill is a program designed by the American Financial Services Association education foundation. I'm familiar with MoneySkill; I think it's an excellent program."
Dave Levingston: "There are two ways to maximize your car financial situation. 1.) Buy cheap junkers. When one dies, get rid of it and buy another. In my younger days when money was in short supply I drove a bunch of $700 cars. Some of them lasted several years. 2.) Buy new and keep it until the wheels fall off. I like to take road trips, so that's what I do now. I usually get more than 200,000 miles out of a new car. I have gotten as much as 320,000. We are a two-car family, so I stagger the purchases so we always have a newer vehicle for our trips. More often than not this means we have no car payment since we pay them off well before we have to buy another. And we do save for the next purchase, although with 0% loans having been available we've just been financing them in recent years."