The biggest destroyer of wealth in America (a humble opinion)

Let’s talk about cars, specifically car leasing

Average life of a car in the 60s – 6 to 8 years

Average life of a car manufactured today – 15 to 20 years

So what happened? Technology and innovation! Just like in the case of humans, this century has seen an exponential increase in the life of vehicles. Thanks to the convergence of various technologies such as computing, precision engineering and biomechanics. Also, regulatory requirements on automobile maintenance, such as the California Smog Check program, mandated and administered by the Bureau of Automobile Repair. Someone buying a new car today; you can expect the car to run smoothly in the 2030s. So why is the standard for car leases 3-5 years?

Welcome to how a car dealer makes money. Dealers do NOT make money on the difference between the purchase price and the sale price. Times are very competitive, plus the Internet has made searching for prices very easy for a buyer. That means the bargaining power is now in the hands of the buyer, not the dealer. This has led traders to reinvent ways to make money. They make money from repairs, warranty sales, and financing, with financing being the focus of this article.

Financing methods:

This works in one of two ways:

a) The buyer owns the car and finances the purchase price through a company affiliated with the dealer. Auto loans typically last 5-10 years (as opposed to a home mortgage which lasts 15-30 years, with 30 years being the most common).

b) the buyer NEVER owns the car; In essence, the buyer is paying “rent” for the use of the car. The leasing company owns the car.

Let’s look at the problem with leasing a car in a mathematical way:

Assumption:

Average life of a car 15 years.

Let’s say a consumer in his lifetime drives a car for 60 years.

Average price of a car $30,000.

cost of ownership

Cars ever owned = 60 divided by 15 = 4 cars

Cost of ownership = 4 multiplied by $30,000 = $120,000.

Leasing cost

Lifetime leased cars = 60 divided by 4 years per lease = 15 cars

Lease amount = 60% of full value = 60% of $30,000 = $18,000

Leasing cost = 15 cars multiplied by $18,000 = $270,000.

The $150,000 difference (leasing vs. owning) is what an average consumer spends extra. That means the average consumer spends more than twice as much to rent, rather than own! No wonder my car dealer was so keen to give me “special offers” to influence my decision towards a new lease J

Granted, leasing offers new cars every four years, but given the lifespan of a car, isn’t it wasteful?

Now, here’s where it gets really interesting: if you take the midpoint of savings ($75,000) and the midpoint of years (30 years); reinvest the money with an 8% compound annual return – you’d have an extra ~$500,000 in retirement!

Getting back to the topic of the article: America’s biggest destroyer of wealth, taking half a million dollars out of your golden years: car rentals!