Could Driving a Used Car Save Your Retirement?
Consider investing the money you save from driving a used car instead of a new one. Learn how this can go a long way toward helping you build a nest egg.
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Buying a car isn't optional for many people who need to commute to work or use a vehicle to fulfill personal and family obligations.
Unfortunately, it's expensive to buy a vehicle so you'll probably have to borrow -- and when that monthly payment comes out of your checking account, it can leave you with too little money for other expenses. That becomes a big problem if you're not saving enough in a 401(k) or brokerage account for your retirement.
The good news is, there's a simple change you can make that may make all the difference in your ability to save for retirement. Just buy a used car instead of a new one.
How buying a used car could help you build a secure retirement
While you probably need to buy some kind of car, you most likely don't need to buy a brand-new one. And there's a big difference in price between a new vehicle and a used vehicle.
According to Edmunds, the average monthly payment on a brand-new car was $733 in the second quarter of 2023, and was $569 on a used vehicle. That's a difference of $164 a month. So, let's say you purchase a used car instead of a new one and you invest the difference -- $164 a month -- in a 401(k) or other retirement savings plan, like an IRA.
Leaving aside any 401(k) matching contributions that would result in extra money invested beyond that $164, the table below shows how much this monthly investment could turn into depending on how many years you take this approach (assuming a 10% average annual return on your investment, which is in line with the stock market's long-term performance).
| Investing $164/month for 10 Years | Investing $164/month for 20 Years | Investing $164/month for 30 Years |
|---|---|---|
| $31,367.45 | $112,723.93 | $323,741.69 |
Considering the fact that the median retirement savings for American households is $87,000, ending up with as much as $323,741 extra in your investment account just by switching from a new car to a used one could make all the difference in how financially secure you are as a retiree.
As you can see, the sooner you make the switch to a used car, the more this move will benefit you. And if you can buy a cheaper used car than average and save even more, you can make even more progress in setting yourself up for a secure future.
Don't let your car put your future financial security at risk
Driving a new car is an expense many people just don't need to incur -- especially since brand-new vehicles lose their value almost immediately, and you can often find reliable late-model used cars you can drive without worry for a long time. Since you don't have to personally pay for upgrades and special packages that dealers put a big markup on, you can usually get way more for your money buying used than buying new.
Seriously consider making your next car a used one. As soon as you do buy, set up an automatic transfer of the money you're saving on car payments right into your retirement account. When you have a lot more cash than your fellow Americans as a retiree, you'll be glad you opted for cheaper wheels during your working years.
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