Why Poor People Who Buy Used Cars, End Up Rich

The Neighborhood Finance Guy writes about financial literacy topics, main ideas, investment strategies, and retirement tips to help you make effective decisions and set S.M.A.R.T goals with your money. The information is free but the struggle is not sold separately.

Table of Contents

How Many Cars Do You Need?

Back in 2018, I remember driving through poor areas in Miami. Five things were apparent; fast and terrible food was plentiful, check cashing stores were draining the community, liquor stores were rampant, public storage were everywhere, and there was no end to Dilapidated homes with 4-5 cars parked in the front.

My simple guess was that people were mismanaging time, destroying their health and blowing money.

According to a survey by Experian, the average household currently owns two cars. 35 percent of households own three cars or more. Based on your location, car ownership can be vital for school and work. It’s one thing to say that you don’t know how to drive in the city, but it’s unthinkable particularly in the South (US).

While car ownership rates might vary, prices are going up sharply.

Since March 2020, the Federal Reserve Consumer Price Index on new and used vehicles shot up 30%. In some cases and this will sound crazy, consumers found that the value of their used car is going up.

Average life, Expensive Cars and Going Broke

The average household unit brings in $82,352 presumably as a dual income family, they end up spending $63,036 from housing to transportation.

About $7,250 per year in savings (less than 1%) and pension (about 8.2%) is no where near enough to retire comfortably. Imagine working for over 40 years just to struggle for the next 20 years, all because most were more concerned with driving while poor.

According to Kelley Blue Book, as of September 2021, the average transaction price for a brand new car was over $42,802. The price broke $36,000 as of September 2020, an increase of almost 20%.

With chip shortages spurred by the global pandemic, used car prices hit a record high of over $25,000 with an average of 68,000 miles, according to Cox Automotive. See table #1

Just in case you need the tips on how to buy a new car;

Get pre-approved for an auto loan (likely with your bank) before you set foot in a dealer’s lot
Don’t Buy while hungry (metaphor). While it’s more applicable for groceries, it’s the same here.
Don’t buy the add-ons
Beware longer-term five- to seven-year (it’s insanity).
Don’t buy too much car

Table #1. Average New Car Loan

		Prices
Deposit		$4,734
New Car Loan		$35,373
	Car Payment for 70 Months @ an Avg. 4.6%	$581 Per Month
	Total Interest Paid Over the course of the Loan	$5,026

Well What’s the Price of Something Used?

According to Kelley Blue Book, as of September 2021, the average transaction price for used car hoovered around $30,972.

Auto experts say the lowest price for a reliable used car is about $2,500. I started out with $2.5k; those aren’t bad but they can run about 3 years before you find major issues.

Don’t expect those cars to hold up for long without adequate maintenance for the long haul and serious coinage.

It’s likely better to aim for fewer miles; sub 100,000 would be optimal. See table #2

Not sure who needs this but New Jersey has the smallest used car price increase at 18.1 percent, which amounts to $4,470. Pro-tip: You could go to NJ for once, buy a car and drive it back if you are on the east coast. Turn that into a cheap summer or fall travel option.

There is no playbook when it comes to making your money go further, in any given year. Every bit of creativity counts.

Table #2. Average Used Car

		Prices
Deposit		$3,283
Used Car Loan		$27,689
	Car Payment for 70 Months @ an Avg. 4.91%	$402 Per Month
	Total Interest Paid Over the course of the Loan	$3,708

Buying a Used Car over a New Car is Worth Almost $275,000

The difference between buying used car vs a new car is about $179 per month plus an initial deposit difference of $1,451 (see Table #3).

Table #3. Difference Between A New or Used Car Purchase

	New Prices	Used Prices	Savings Difference
Deposit	$4,734	$3,283	$1,451
Car Loan	$35,373	$27,689
Car Payment for 70 Months @ an Avg. 4.91%	$581 Per Month	$402 Per Month	$179 Per Month
Total Interest Paid Over the course of the Loan	$5,026	$3,708

While I’m not adding maintenance fees for the used car or insurance premiums for the new car (to keep the math streamlined), turns out an investment for 70 months comes damn near $20,000 (see Table #4) . This means that buying a used car and spending the extra cash is costing you at a minimum an extra $20,000.

You can even buy a car with that amount.

To make matters worst, if the $20,000 was invested for another 34 years at the historical average of 8%, it will become $273,802.67. Kinda wild to consider that one decision can lead to so much money. Or less money, considering the route you decided to take.

Table #4. Investing under the Used Car Scenario

		Earning More through Investing after 70 months
Initial Contribution	$1,451
Total Investment Contribution for 70 Months	$179 Per Month	$12,522.82
Total Interest Earned Through the Investment		$4,052.29
Total Balance at 70 Months		$18,026.11

Buying a new car which ends up being the old car parked outside

Buy it Used. Every new car ends up being an old car, the moment it drive off the lot. No one who matters cares what you drive, learn to park instead especially in the big city. And for all that is good, try not to break the personal finance cardinal rules.

It’s way more lucrative to bank on your future today buy investing more into it. You would ultimately end up being able to buy a new car cash later based on all your wealth growth. And no, this is not to say that you have to be pushing 80 to enjoy life.

Instead, it’s just having perspective enough to know that you will be able to enjoy more of your life through it vs being scared of missing a payment and having your precious new car repossessed.

Flex Less, Buy Used, Park and Invest on the Side

You can drop transportation cost down by 8% and you won’t know the difference. The Money Guy show shares the 20/3/8 approach when taking out an auto loan: put 20% down, pay the car off in 3 years, and your monthly payment should not exceed 8% of your monthly gross income. Save up to $859-$1000 and you will be in better shape financially.

For those with no need for a car in your area, try to watch the Uber and Lyft micro transactions. Those can eat up your fun money and your investing potential. For me, this was an interesting thought experiment.

Unfortunately, our decisions today and how we use our money will work for or against us in the future. I did a write up about 2040, check out how much our expenses might cost.

Disclosure: This post is brought to you by the Neighborhood Finance Guy. We highlight financial literacy information, resources, and more on your way to money management goals and personal wealth. Our goal is to help you make S.M.A.R.T decisions with our money. We do not give investment advice or encourage you to adopt a certain investment strategy. Your personal finance is up to you. If you take action based on one of our recommendations, we don’t earn a dime as of 5.2021. We operate independently.

Receive a selection of my favorite finds every week by subscribing to the newsletter. Make the Neighborhood Finance Guy website your trusted source for great content that will audit your life and rebalance your happiness wealth.