I frequently hear people say that they will probably always have a car payment. They buy a car, finance most or all of it, and then trade it in sometimes as early as 2 or 3 years later.

Dealerships will tell you that you can get a better trade-in value that way. Maybe you’ll get a few thousand dollars more for your trade in, allowing you to get a nicer car the next time.

I’ve alway felt that this kind of thinking is rubbish — something promoted by the car companies and banks. But lets analyze this situation. Keep in mind I’m rounding some of the numbers slightly.

If you start buying cars when you are 22 (when you get out of college), and you purchase a car every five years, on five year loans, and do this until you are 72, that means you’ll buy 10 cars over 50 years.

We’ll assume a moderate, small car – $19,000 per car.

First, that means without interest, you’ll be spending $190,000 on cars over those 50 years. Thats a lot of money. If you buy big cars or SUVs, you’re of course looking at even more.

A $19,000 loan (I’m going to ignore trade-in value and down payment on your car), at 6%, has a monthly loan payment of about $367.

Over 50 years, that is 600 payments. For a total spent of $220, 200.

If you bought a car, payed it off in 5 years, and the drove it for 5 years before buying another, here is the breakdown:

5 cars purchased

Total purchase price, without interest: $95,000

Total money payed including interest (300 payments): $110, 100

I guess that is obvious — half as many car purchased, half the expense. But what’s the additional cost? Once you have payed off that car, you can then invest that $367 every month. So every alternating 5 years, you can invest $367 every month.

So, after car 1 is payed off, you start investing. Assume a 6% return. You will invest a little over $22.000. At the end of that 5 years, the account is worth $25,501. So you would have $3501 in those second five years. Now, if you leave that money invested for the remaining 40 years, in the end it will be worth (and this is scarey): $262,296, for a gain of $236,795

So to sum up, the money you invested for the second 5 years, and leave invested for 40 years afterward, makes you a total of $240, 296 of EARNINGs.

I’ll do the same for the next 4 investment periods.

Period 2

Earnings during investment period $3501

Earnings over 30 years: $120,964

Period 3

Earnings during investment period $3501

Earnings over next 20 years: $56,284

Period 4

Earnings during investment period $3501

Earnings over next 10 years: $20,167

Period 5

Earnings during investment period $3501

After this investment period you have hit 50 years.

Total earnings by investing for every alternating 5 years: $451, 715

So not only have you spent over $100, 000 more on cars over that 50 years, but you’ve cleverly avoided $450,000 in earnings on that money — for a total loss of over $550, 000. Over half a million dollars.

Now consider if you are in a 2 car family. If you got married at 22, and stayed married for 50 years, and did that with 2 cars — your family has lost over $1 million. And THAT is assuming a very, very modest 6% rate of return.

THAT is $1 million dollars of your family’s money that the bank and its investors get, rather than paying for your retirement.

Still think the idea of always having a car payment is smart or inevitable?